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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                               -----------------

                                   FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                      OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

            FOR THE TRANSITION PERIOD FROM            TO

                       COMMISSION FILE NUMBER 001-16707

                               -----------------

                          Prudential Financial, Inc.
            (Exact Name of Registrant as Specified in its Charter)

                     New Jersey                22-3703799
                   (State or Other          (I.R.S. Employer
                    Jurisdiction         Identification Number)
                 of Incorporation or
                    Organization)

                               751 Broad Street
                              Newark, New Jersey
                                (973) 802-6000
  (Address and Telephone Number of Registrant's Principal Executive Offices)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



           Title of Each Class            Name of Each Exchange on Which Registered
           -------------------            -----------------------------------------
                                       
      Common Stock, Par Value $.01                 New York Stock Exchange
(including Shareholder Protection Rights)
       6.75% Equity Security Units                 New York Stock Exchange


       SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [_]

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [X]

   As of March 21, 2002, the aggregate market value of the registrant's Common
Stock (par value $0.01) held by non-affiliates of the registrant was
$18,259,703,719 and 584,310,519 shares of the Common Stock were outstanding. In
addition, 2,000,000 shares of the registrant's Class B Stock, for which there
is no established public trading market, were outstanding and held by
non-affiliates of the registrant.

                      DOCUMENTS INCORPORATED BY REFERENCE

   THE INFORMATION REQUIRED TO BE FURNISHED PURSUANT TO PART III OF THIS FORM
10-K IS SET FORTH IN, AND IS HEREBY INCORPORATED BY REFERENCE HEREIN FROM, THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 11, 2002, TO BE FILED BY THE REGISTRANT WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A NOT LATER THAN 120 DAYS
AFTER THE YEAR ENDED DECEMBER 31, 2001.

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                               TABLE OF CONTENTS



                                                                                              Page
                                                                                             Number
                                                                                             ------
                                                                                    
PART I   Item 1.  Business..................................................................    1
         Item 1A. Executive Officers........................................................   55
         Item 2.  Properties................................................................   56
         Item 3.  Legal Proceedings.........................................................   57
         Item 4.  Submission of Matters to a Vote of Security Holders.......................   62
PART II  Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.....   63
         Item 6.  Selected Financial Data...................................................   66
         Item 7.  Management's Discussion and Analysis of Financial Condition and Results of
                    Operations..............................................................   72
         Item 7A. Quantitative and Qualitative Disclosures About Market Risk................  136
         Item 8.  Financial Statements and Supplementary Data...............................  141
         Item 9.  Changes In and Disagreements With Accountants on Accounting and
                    Financial Disclosure....................................................  217
PART III Item 10. Directors and Executive Officers of the Registrant........................  217
         Item 11. Executive Compensation....................................................  217
         Item 12. Security Ownership of Certain Beneficial Owners and Management............  217
         Item 13. Certain Relationships and Related Transactions............................  217
PART IV  Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........  218
SIGNATURES..................................................................................  S-1
EXHIBIT INDEX...............................................................................  E-1



   Certain of the statements included in this Annual Report on Form 10-K,
including but not limited to those in the Management's Discussion and Analysis
of Financial Condition and Results of Operations, constitute forward-looking
statements within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Words such as "expects," "believes," "anticipates," "includes,"
"plans," "assumes," "estimates," "projects," "intends" or variations of such
words are generally part of forward-looking statements. Forward-looking
statements are made based on management's current expectations and beliefs
concerning future developments and their potential effects upon Prudential
Financial, Inc. and its subsidiaries. There can be no assurance that future
developments affecting Prudential Financial, Inc. and its subsidiaries will be
those anticipated by management. These forward-looking statements are not a
guarantee of future performance and involve risks and uncertainties, and there
are certain important factors that could cause actual results to differ,
possibly materially, from expectations or estimates reflected in such
forward-looking statements, including without limitation: general economic,
market and political conditions, including the performance of financial
markets, interest rate fluctuations and the continuing impact of the events of
September 11, 2001; volatility 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 ratings; competition in our product lines and for
personnel; fluctuations in foreign currency exchange rates and foreign
securities markets; risks to our international operations; the impact of
changing regulation or accounting practices; Prudential Financial, Inc.'s
primary reliance, as a holding company, on dividends from its subsidiaries to
meet debt payment obligations and the applicable regulatory restrictions on the
ability of the subsidiaries to pay such dividends; adverse litigation results;
and changes in tax law.  Prudential Financial, Inc. does not intend, and is
under no obligation, to update any particular forward-looking statement
included in this Annual Report on Form 10-K.

   Throughout this Annual Report on Form 10-K, "Prudential Financial" and the
"Registrant" refer to Prudential Financial, Inc., the ultimate holding company
for all of our companies. "Prudential Insurance" refers to The Prudential
Insurance Company of America, before and after its demutualization on December
18, 2001 (the "date of demutualization"). "Prudential," the "Company," "we" and
"our" refer to our consolidated operations before and after demutualization.
The "Plan of Reorganization" refers to Prudential Insurance's Plan of
Reorganization, dated as of December 15, 2000 and as amended from time to time
thereafter, relating to Prudential Insurance's demutualization.

                                       i



                                    PART I

ITEM 1.  BUSINESS

                                   Overview

   We are one of the largest financial services institutions in the United
States. We provide a wide range of insurance, investment management, securities
and other financial products and services and have more than 15 million
individual and institutional customers in the United States and over 30 other
countries. We have one of the largest distribution forces in the financial
services industry, with approximately 20,800 sales people worldwide at December
31, 2001, including approximately:

  .  4,400 Prudential Agents, who are insurance agents in our insurance
     operations in the United States;

  .  4,100 international Life Planners and 6,100 Gibraltar Life Advisors, who
     are insurance agents in our insurance operations outside the United
     States; and

  .  6,200 domestic and international Financial Advisors, who are financial
     advisors and securities brokers in our Prudential Securities operations.

   We also distribute our retail products through a number of alternative
channels. We have a leading or significant market presence in most of the
markets we serve.

                   Demutualization and Related Transactions

General

   On the date of demutualization, Prudential Insurance converted from a mutual
life insurance company owned by its policyholders to a stock life insurance
company and became an indirect, wholly owned subsidiary of Prudential
Financial. On that date, eligible policyholders, as defined in the Plan of
Reorganization, received shares of Prudential Financial's Common Stock or the
right to receive cash or policy credits, which are increases in policy values
or increases in other policy benefits, upon the extinguishment of all
membership interests in Prudential Insurance. In the aggregate, eligible
policyholders received 457.1 million shares of Common Stock, the right to
receive cash totaling $3,487 million, including $340 million to certain former
Canadian branch policyholders, and policy credits totaling $1,042 million in
the demutualization. In addition, two closed blocks, as discussed below, were
established for the benefit of certain participating individual life insurance
policies and annuities issued by Prudential Insurance and its Canadian branch.

   On the date of demutualization, Prudential Financial completed an initial
public offering of 110.0 million shares of its Common Stock at an initial
public offering price of $27.50 per share, and on December 21, 2001, Prudential
Financial issued an additional 16.5 million shares of Common Stock as a result
of the exercise of the over-allotment option granted to underwriters in the
initial public offering. Also on the date of demutualization, Prudential
Financial completed the sale, through a private placement, of 2.0 million
shares of Class B Stock, a separate class of common stock, at a price of $87.50
per share. The Common Stock reflects the performance of the Financial Services
Businesses, and the Class B Stock reflects the performance of the Closed Block
Business. Collectively, the Financial Services Businesses and the Closed Block
Business are referred to as the "Businesses." In addition, on the date of
demutualization, Prudential Financial issued 13.8 million 6.75% equity security
units for gross proceeds of $690 million, including as a component thereof
redeemable capital securities of Prudential Financial Capital Trust I, a
statutory business trust that is consolidated in our financial statements.
Furthermore, Prudential Holdings, LLC ("PHLCC"), a wholly owned subsidiary of
Prudential Financial that owns the capital stock of Prudential Insurance,
issued $1.75 billion in senior secured notes (the "IHC debt"), a portion of
which were insured by a bond insurer, as discussed below.

   On the date of demutualization, we also "destacked" or reorganized the
ownership of various subsidiaries of Prudential Insurance so they became direct
or indirect subsidiaries of Prudential Financial.

                                      1



The Closed Blocks

   Under the Plan of Reorganization, Prudential Insurance's liabilities for
certain participating individual life insurance policies and annuities issued
in the United States were segregated, together with assets which will be used
exclusively for the payment of benefits and policyholder dividends and taxes
with respect to these products, in a regulatory mechanism referred to as the
"Closed Block." The policies that are included in the Closed Block (the "Closed
Block Policies") are specified participating individual life insurance policies
and individual annuity contracts that were in force on the date of
demutualization and on which we were paying or expected to pay experience-based
policy dividends. The purpose of the Closed Block is to provide for the
reasonable expectations for future policy dividends after demutualization of
the holders of the Closed Block Policies. The operation of the Closed Block is
subject to ongoing review by the New Jersey Department of Banking and
Insurance. The Closed Block will continue in effect until the date that none of
the Closed Block Policies are in force unless the Commissioner of the New
Jersey Department of Banking and Insurance consents to an earlier termination.

   We also established a separate closed block for the benefit of the owners of
participating individual life insurance policies issued by our Canadian branch
that we did not transfer to London Life Insurance Company in 1996 in connection
with the sale of most of the Canadian branch operations. Our objective in
establishing a separate closed block for these Canadian policies is to maintain
consistency with the way we managed the U.S. and Canadian blocks of business in
the past for pricing and dividend purposes and to simplify the implementation
details related to the funding calculations and cash flow tracking of the
respective groups of policies. We operate this closed block, which, because of
the substantially smaller number of outstanding Canadian policies, is
insignificant in size, in a similar manner to the Closed Block and reflect it
in our Corporate and Other operations of our Financial Services Businesses; it
is not included in the Closed Block Business.

   The Plan of Reorganization provides that we may, with the prior consent of
the Commissioner of the New Jersey Department of Banking and Insurance, enter
into agreements to transfer to a third party all or any part of the risks under
the Closed Block Policies.

   See Note 9 to the Consolidated Financial Statements for financial
information relating to the Closed Block.

The Destacking

   In connection with the demutualization, Prudential Financial became the
ultimate holding company for all of our companies. The destacking established
Prudential Financial's ownership of Prudential Insurance and the destacked
subsidiaries in parallel ownership chains, rather than "stacked" ownership
through Prudential Insurance. The destacking was accomplished as an
extraordinary dividend concurrently with the demutualization. To effect the
destacking, Prudential Insurance distributed to Prudential Financial, directly
or indirectly, the following subsidiaries, together with certain related assets
and liabilities:

  .  our property and casualty insurance companies;

  .  our principal securities brokerage companies;

  .  our international insurance companies;

  .  our principal asset management operations; and

  .  our international securities and investments, domestic banking, and
     residential real estate brokerage franchise and relocation services
     operations.

                                      2



   The following chart illustrates the principal elements of our organization
after the demutualization and the destacking.

                                  [FLOW CHART]


                                 [FLOW CHART]

Separate "Businesses" and Capital Structure

General

   The Common Stock reflects the performance of our post-demutualization
Financial Services Businesses. The Class B Stock reflects the performance of
the Closed Block Business, including the Closed Block Assets and Closed Block
Liabilities and the Surplus and Related Assets, each as defined below, as well
as other related assets and liabilities noted below, including the IHC debt.

Separation of Financial Services Businesses and Closed Block Business

   In order to separately reflect the financial performance of the Financial
Services Businesses and the Closed Block Business since the date of
demutualization, we have allocated all our assets and liabilities and earnings
between the two Businesses, and we account for them as if they were separate
legal entities. All assets and liabilities of Prudential Financial and its
subsidiaries not included in the Closed Block Business constitute the Financial
Services Businesses. Assets and liabilities allocated to the Closed Block
Business are those that we consider appropriate to operate that business. The
Closed Block Business consists principally of:

  .  within Prudential Insurance, the Closed Block Assets, Surplus and Related
     Assets and deferred policy acquisition costs and other assets and, with
     respect to liabilities, the Closed Block Liabilities;

  .  within PHLLC, the principal amount of the IHC debt, the related
     unamortized debt issuance costs and hedging activities and a guaranteed
     investment contract; and

  .  within Prudential Financial, dividends received from PHLLC, and
     reinvestment thereof, and other liabilities of Prudential Financial, in
     each case as attributable to the Closed Block Business.

   The Closed Block Assets consist of (i) those assets allocated to the Closed
Block as of July 1, 2000, (ii) cash flows from such assets, (iii) assets
resulting from the reinvestment of such cash flows, (iv) cash flows from the
Closed Block Policies, and (v) assets resulting from the investment of such
cash flows. The Closed Block Assets include policy loans, accrued interest on
any of the foregoing assets and due premiums on the Closed Block Policies. The
Closed Block Assets do not include assets included in the Canadian closed
block. The Closed Block Liabilities are Closed Block Policies and other
liabilities of the Closed Block associated with the Closed Block Assets. The
Closed Block Assets and Closed Block Liabilities are supported by additional
assets outside the Closed Block that Prudential Insurance needs to hold to meet
capital requirements related to the Closed Block

                                      3



Policies (the "Surplus Assets"), as well as invested assets held outside the
Closed Block that represent the difference between the Closed Block Assets and
the sum of the Closed Block Liabilities and the interest maintenance reserve
(the "Related Assets" or, together with the Surplus Assets, the "Surplus and
Related Assets"). The interest maintenance reserve, recorded under statutory
accounting principles, captures realized capital gains and losses resulting
from changes in the general level of interest rates. These gains and losses are
to be amortized into investment income over the expected remaining life of the
investments sold.

   On the date of demutualization, the majority of the net proceeds from the
issuances of the Class B Stock and the IHC debt was allocated to our Financial
Services Businesses. On the date of demutualization, PHLLC distributed $1,218
million of the net proceeds of the IHC debt to Prudential Financial to use for
general corporate purposes in the Financial Services Businesses. PHLLC
deposited $437 million of the net proceeds of the IHC debt in a debt service
coverage account maintained in the Financial Services Businesses which,
together with reinvested earnings thereon, constitutes a source of payment and
security for the IHC debt. The remainder of the net proceeds, or $72 million,
was used to purchase a guaranteed investment contract to fund a portion of the
bond insurance related to the IHC debt. To the extent we use the debt service
coverage account to service payments with respect to the IHC debt or to pay
dividends to Prudential Financial for purposes of the Closed Block Business, a
loan from the Financial Services Businesses to the Closed Block Business would
be established. Such inter-business loan would be repaid by the Closed Block
Business to the Financial Services Businesses when earnings from the Closed
Block Business replenish funds in the debt service coverage account to a
specified level.

   We believe that the proceeds from the issuances of the Class B Stock and IHC
debt allocated to the Financial Services Businesses reflected capital in excess
of that necessary to support the Closed Block Business and that the Closed
Block Business as established has sufficient assets and cash flows to service
the IHC debt. The investors in the Class B Stock and the bond insurer agreed to
this allocation and usage of issuance proceeds. The Closed Block Business was
financially leveraged through the issuance of the IHC debt, and dividends on
the Class B Stock are subject to prior servicing of the IHC debt. It is
expected that any inter-business loan referred to above will be repaid in full
out of the Surplus and Related Assets, but not the Closed Block Assets. Such
loan will be subordinate to the IHC debt.

   The Financial Services Businesses will bear any expenses and liabilities
from litigation affecting the Closed Block Policies and, as discussed below,
the consequences of certain adverse tax determinations. In addition, prior to
demutualization, a reserve of $144 million was recorded for death and other
benefits due and related expenses with respect to traditional participating
policies for which we have not received a death claim but where death has
occurred. Upon demutualization, $134 million of this reserve became a liability
of the Financial Services Businesses and any subsequent reestimation of this
liability (upward or downward) will be included in the results of the Financial
Service Businesses. The foregoing items would therefore be reflected in the
Financial Services Businesses, and not in the Closed Block Business. In
connection with the sale of the Class B Stock and IHC debt, we have agreed to
indemnify the investors therein with respect to certain matters, and such
indemnification will be borne by the Financial Services Businesses.

   Within the Closed Block Business, the assets and cash flows attributable to
the Closed Block inure solely to the benefit of the Closed Block policyholders
through policyholder dividends after payment of benefits, expenses and taxes.
The Surplus and Related Assets inure to the benefit of the holders of Class B
Stock. The earnings on, and distribution of, the Surplus and Related Assets
over time will be the source or measure of payment of the interest and
principal of the IHC debt and of dividends on the Class B Stock. The earnings
of the Closed Block are reported as part of the Closed Block Business, although
no cash flows or assets of the Closed Block inure to the benefit of the holders
of Common Stock or Class B Stock. The Closed Block Assets are not available to
service interest and principal of the IHC debt or dividends on the Class B
Stock.

                                      4



   The following diagram reflects the allocation of Prudential Financial's
consolidated assets and liabilities between the Financial Services Businesses
and the Closed Block Business:

                                  [FLOW CHART]



   You should understand that there is no legal separation of the two
Businesses. The foregoing allocation of assets and liabilities did not and does
not require Prudential Financial, Prudential Insurance, any of their
subsidiaries, or the Closed Block to transfer any specific assets or
liabilities to a new legal entity.

Common Stock and Class B Stock

   The Common Stock and the Class B Stock are separate classes of common stock
under New Jersey corporate law.

   Holders of Common Stock and Class B Stock will be entitled to dividends if
and when declared by Prudential Financial's Board of Directors out of funds
legally available to pay those dividends. To the extent dividends are paid on
the Class B Stock, shares of Class B Stock are repurchased or the Closed Block
Business has net losses, the amount legally available for dividends on the
Common Stock will be reduced. In addition, payment of dividends will be subject
to the following additional conditions:

  .  Common Stock will be entitled to receive dividends, if and when declared
     by Prudential Financial's Board of Directors, only out of assets of the
     Financial Services Businesses legally available for the payment of
     dividends under the New Jersey Business Corporation Act as if the
     Financial Services Businesses were a separate New Jersey corporation; and

  .  Class B Stock will be entitled to receive dividends, if and when declared
     by Prudential Financial's Board of Directors, only out of assets of the
     Closed Block Business legally available for the payment of dividends under
     the New Jersey Business Corporation Act as if the Closed Block Business
     were a separate New Jersey corporation.

   Dividends declared and paid on the Common Stock will depend upon the
financial performance of the Financial Services Businesses. Dividends declared
and paid on the Common Stock will not depend upon or be affected by the
financial performance of the Closed Block Business, unless the Closed Block
Business is in financial distress. Dividends declared and paid on the Common
Stock also will not be affected by decisions with respect to dividend payments
on the Class B Stock except as indicated in the following paragraph.

   Dividends declared and paid on the Class B Stock will depend upon the
financial performance of the Closed Block Business and, as the Closed Block
matures, the holders of the Class B Stock will receive the surplus of the
Closed Block Business no longer required to support the Closed Block Business
for regulatory purposes.

                                      5



Dividends on the Class B Stock will be payable in an aggregate amount per year
at least equal to the lesser of (i) a "Target Dividend Amount" of $19.25
million or (ii) the "CB Distributable Cash Flow" for such year, which is a
measure of the net cash flows of the Closed Block Business. Notwithstanding
this formula, as with any common stock, we will retain the flexibility to
suspend dividends on the Class B Stock; however, if CB Distributable Cash Flow
exists for any period and Prudential Financial chooses not to pay dividends on
the Class B Stock in an aggregate amount at least equal to the lesser of the CB
Distributable Cash Flow or the Target Dividend Amount for that period, then
cash dividends cannot be paid on the Common Stock with respect to such period.
The principal component of "CB Distributable Cash Flow" will be the amount by
which Surplus and Related Assets, determined according to statutory accounting
principles, exceed surplus that would be required for the Closed Block Business
considered as a separate insurer; provided, however, that "CB Distributable
Cash Flow" counts such excess only to the extent distributable as a dividend by
Prudential Insurance under specified (but not all) provisions of New Jersey
insurance law. See "Market for Prudential Financial Common Stock and Related
Stockholder Matters" of this Annual Report on Form 10-K for the definition of
"CB Distributable Cash Flow." Subject to the discretion of the Board of
Directors of Prudential Financial, we currently anticipate paying dividends on
the Class B Stock at the Target Dividend Amount for the foreseeable future.

   The shares of Common Stock will vote together with the shares of Class B
Stock on all matters (one share, one vote) except as otherwise required by law
and except that holders of the Class B Stock will have class voting or consent
rights with respect to specified matters directly affecting the Class B Stock.

   If shares of Class B Stock are outstanding at the time of a liquidation,
dissolution or winding-up of Prudential Financial, each share of Common Stock
and Class B Stock will be entitled to a share of net liquidation proceeds in
proportion to the respective liquidation units of such class. Each share of
Common Stock will have one liquidation unit, and each share of Class B Stock
will have 2.83215 liquidation units.

   On December 18, 2001, Prudential Financial's shareholder rights agreement
became effective. Under the shareholder rights agreement, one shareholder
protection right is attached to each share of Common Stock but not to any share
of Class B Stock. Each right initially entitles the holder to purchase one
one-thousandth of a share of a series of Prudential Financial preferred stock
upon payment of the exercise price. At the time of the demutualization, the
Board of Directors of Prudential Financial determined that the initial exercise
price per right is $110, subject to adjustment from time to time as provided in
the shareholder rights agreement.

   The Class B Stock is exchangeable for or convertible into shares of Common
Stock at any time at our discretion, at the discretion of the holders of Class
B Stock in the event of certain regulatory events or mandatorily in the event
of a change of control of Prudential Financial or a sale of all or
substantially all of the Closed Block Business. Commencing in 2016, the Class B
Stock will be convertible at the discretion of the holders of the Class B
Stock. Upon exchange or conversion of the Class B Stock, the Businesses would
cease to be separated, and the effects of the separation noted above would also
cease.

Absence of Legal Separation of Businesses

   Even though we allocate all of our consolidated assets, liabilities,
revenues, expenses and cash flows between the Financial Services Businesses and
the Closed Block Business, there is no legal separation of the two Businesses,
and holders of Common Stock and holders of Class B Stock are common
stockholders of Prudential Financial and, as such, are subject to all risks
associated with an investment in Prudential Financial and all of its
businesses, assets and liabilities. This means that:

  .  holders of Common Stock have no equity interest in a legal entity
     representing the Financial Services Businesses;

  .  holders of Class B Stock have no equity interest in a legal entity
     representing the Closed Block Business; and

  .  holders of each class of common stock are subject to all of the risks
     associated with an investment in Prudential Financial and all of our
     businesses, assets and liabilities.

   The Closed Block Policies will continue to be the obligation of Prudential
Insurance, and Prudential Insurance will remain obligated to pay guaranteed
policy benefits on these policies in accordance with their terms

                                      6



should the Closed Block Assets be insufficient to satisfy the claims. If we
were to make substantial payments for the benefit of Closed Block Policies from
outside the Closed Block Business, whether in support of the payment of
policyholder dividends or to satisfy claims, a lower amount of assets and net
income would be available to the Financial Services Businesses, and the holders
of Common Stock could be adversely affected.

   Financial results of the Closed Block Business, including debt service on
the IHC debt, will affect Prudential Financial's consolidated results of
operations, financial position and borrowing costs. PHLLC's assets, including
the net proceeds of the IHC debt initially deposited in the debt service
coverage account established for the security of the holders of the IHC debt,
and any reinvested earnings thereon, and any other assets of PHLLC allocated to
the Financial Services Businesses, could be used to satisfy such debt service.
This could affect the results of operations, financial position or borrowing
costs of the Financial Services Businesses or the market price of the Common
Stock. Repayment to the Financial Services Businesses of any inter-business
loan created upon use of the debt service coverage account to service the IHC
debt or to pay dividends to Prudential Financial for purposes of the Closed
Block Business will be subordinate to repayment of the IHC debt. In addition,
any net losses of the Closed Block Business, and any dividends or distributions
on, or repurchases of, the Class B Stock, will reduce the assets of Prudential
Financial legally available for dividends on the Common Stock. Accordingly, you
should read financial information for the Financial Services Businesses
together with the consolidated financial information of Prudential Financial.

   There can be no assurance that the market value of our Common Stock will
reflect solely the performance of the Financial Services Businesses.

Financial Reporting

   Commencing with periods ended after the date of demutualization, Prudential
Financial's GAAP financial statements are prepared as follows:

  .  audited annual consolidated financial statements and unaudited interim
     consolidated financial statements of Prudential Financial as would
     otherwise be prepared regardless of the issuance of the Class B Stock; and

  .  audited supplemental combining financial information on an annual basis
     and unaudited supplemental combining financial information on an interim
     basis, which separately reports the financial position and results of
     operations of the Financial Services Businesses and the Closed Block
     Business.

   Prior to the date of demutualization, our Closed Block Policies were
included in our Traditional Participating Products segment. Upon the
establishment of the Closed Block Business, we transferred $5.6 billion of net
assets previously associated with the Traditional Participating Products
segment, including the majority of the net proceeds of the Class B Stock and
IHC debt issuances, to the Financial Services Businesses, representing capital
in excess of the amount we believe necessary to support the Closed Block
Business. This capital was initially allocated to our Corporate and Other
operations in our Financial Services Businesses as of the date of
demutualization. As a consequence, results of the Closed Block Business do not
include returns on this capital, which was historically included in the results
of the Traditional Participating Products segment. To a minor extent, the
Traditional Participating Products segment included other traditional insurance
policies that were not placed in the Closed Block and that are now included in
the Individual Life Insurance segment in our Financial Services Businesses.

Inter-Business Transfers and Allocation Policies

   While all our assets and liabilities are allocated between the Businesses,
we are permitted to make transfers of assets and liabilities between the
Businesses in order to accomplish cash management objectives, to fund, if
necessary, unsatisfied liabilities of one business with the assets of the
other, to pay taxes and to achieve other objectives which we may deem
appropriate, subject to regulatory oversight. In addition, we retain discretion
over accounting policies and the appropriate allocation of earnings between the
two Businesses.

   Prudential Financial's Board of Directors has adopted certain policies with
respect to inter-business transfers and accounting and tax matters, including
the allocation of earnings. Such policies are summarized

                                      7



below. In the future, the Board of Directors may modify, rescind or add to any
of these policies. However, the decision of the Board of Directors to modify,
rescind or add to any of these policies is subject to the Board of Directors'
general fiduciary duties. In addition, we have agreed with the investors in the
Class B Stock and the insurer of the IHC debt that, in most instances, the
Board of Directors may not change these policies without their consent.

   Inter-Business Transactions and Transfers

   The transactions permitted between the Financial Services Businesses and the
Closed Block Business, subject to any required regulatory approvals and the
contractual limitations noted above, include the following:

  .  The Closed Block Business may lend to the Financial Services Businesses,
     and the Financial Services Businesses may lend to the Closed Block
     Business, in either case on terms no less favorable to the Closed Block
     Business than comparable internal loans and only for cash management
     purposes in the ordinary course of business and on market terms pursuant
     to our internal short-term cash management facility.

  .  Other transactions between the Closed Block and businesses outside of the
     Closed Block, including the Financial Services Businesses, are permitted
     if, among other things, such transactions benefit the Closed Block, are at
     fair market value and do not exceed, in any calendar year, a specified
     formulaic amount.

  .  Capital contributions to Prudential Insurance may be for the benefit of
     either the Financial Services Businesses or the Closed Block Business and
     assets of the Financial Services Businesses within Prudential Insurance
     may be transferred to the Closed Block Business within Prudential
     Insurance in the form of a loan which is subordinated to all existing
     obligations of the Closed Block Business on market terms.

  .  An inter-business loan from the Financial Services Businesses to the
     Closed Block Business may be established to reflect usage of the net
     proceeds of the IHC debt initially deposited in the debt service coverage
     account, and any reinvested earnings thereon, to pay debt service on the
     IHC debt or dividends to Prudential Financial for purposes of the Closed
     Block Business.

  .  In addition to the foregoing, the Financial Services Businesses may lend
     to the Closed Block Business, on either a subordinated or non-subordinated
     basis, on market terms as may be approved by Prudential Financial.

  .  The Financial Services Businesses and the Closed Block Business may engage
     in such other transactions on market terms as may be approved by
     Prudential Financial and, if applicable, Prudential Insurance.

  .  The Board of Directors has discretion to transfer assets of the Financial
     Services Businesses to the Closed Block, or use such assets for the
     benefit of Closed Block policyholders, if it believes such transfer or
     usage is in the best interests of the Financial Services Businesses, and
     such transfer or usage may be made without requiring any repayment of the
     amounts transferred or used or the payment of any other consideration from
     the Closed Block Business.

  .  Cash payments for administrative purposes from the Closed Block Business
     to the Financial Services Businesses are based on formulas that initially
     approximate the actual expenses incurred by the Financial Services
     Businesses to provide such services. Administrative expenses recorded by
     the Closed Block Business, and the related income tax effect, are based
     upon actual expenses incurred under generally accepted accounting
     principles ("GAAP"). Any difference in the cash amount transferred and
     actual expenses incurred as reported under GAAP will be recorded, on an
     after-tax basis at the applicable current rate, as direct adjustments to
     the respective equity balances of the Closed Block Business and the
     Financial Services Businesses, without the issuance of shares of either
     Business to the other Business. Internal investment expenses recorded and
     paid by the Closed Block Business, and the related income tax effect, are
     based upon actual expenses incurred under GAAP and in accordance with
     internal arrangements governing record keeping, bank fees, accounting and
     reporting, asset allocation, investment policy and planning and analysis.

   Accounting Policies

   Accounting policies relating to the allocation of assets, liabilities,
revenues and expenses between the two Businesses include:

  .  All our assets, liabilities, equity and earnings are allocated between the
     two Businesses and accounted for as if the Businesses were separate legal
     entities. Assets and liabilities allocated to the Closed Block

                                      8



     Business are those that we consider appropriate to operate that business.
     All remaining assets and liabilities of Prudential Financial and its
     subsidiaries constitute the Financial Services Businesses.

  .  For financial reporting purposes, revenues, administrative, overhead and
     investment expenses, taxes other than federal income taxes, and certain
     commissions and commission-related expenses associated with the Closed
     Block Business are allocated between the Closed Block Business and the
     Financial Services Businesses in accordance with GAAP. Interest expense
     and routine maintenance and administrative costs generated by the IHC debt
     are considered directly attributable to the Closed Block Business and are
     therefore allocated to the Closed Block Business except as indicated below.

  .  Any transfers of funds between the Closed Block Business and the Financial
     Services Businesses will typically be accounted for as either
     reimbursement of expense, investment income, return of principal or a
     subordinated loan, except as contemplated under "--Inter-Business
     Transactions and Transfers" above.

  .  The Financial Services Businesses will bear any expenses and liabilities
     from litigation affecting the Closed Block Policies, subsequent reserve
     reestimations (if any) with respect to specified incurred but not reported
     death claims recorded as of demutualization as noted above and the
     consequences of certain adverse tax determinations noted below. In
     connection with the sale of the Class B Stock and IHC debt, we have agreed
     to indemnify the investors with respect to certain matters, and such
     indemnification will be borne by the Financial Services Businesses.

   Tax Allocation and Tax Treatment

   The Closed Block Business within each legal entity is treated as if it were
a consolidated subsidiary of Prudential Financial. Accordingly, if the Closed
Block Business has taxable income, it recognizes its share of income tax as if
it were a consolidated subsidiary of Prudential Financial. If the Closed Block
Business has losses or credits, it recognizes a current income tax benefit.

   If the Closed Block Business within any legal entity has taxable income, it
pays its share of income tax in cash to the Financial Services Businesses. If
it has losses or credits, it receives its benefit in cash from the Financial
Services Businesses. If the losses or credits cannot be currently utilized in
the consolidated federal income tax return of Prudential Financial for the year
in which such losses or credits arise, the Closed Block Business will receive
the full benefit in cash, and the Financial Services Businesses will
subsequently recover the payment for itself at the time the losses or credits
are actually utilized in computing estimated payments or in the consolidated
federal income tax return of Prudential Financial. Certain tax costs and
benefits are determined under the Plan of Reorganization with respect to the
Closed Block using statutory accounting rules that may give rise to tax costs
or tax benefits prior to the time that those costs or benefits are actually
realized for tax purposes. If at any time the Closed Block Business is
allocated any such tax cost or a tax benefit under the Plan of Reorganization
that is not realized at that same time under the relevant tax rules but will be
realized in the future, the Closed Block Business will pay such tax cost or
receive such tax benefit at that time, but it shall be paid to or paid by the
Financial Services Businesses. When such tax cost or tax benefit is
subsequently realized under the relevant tax rules, the tax cost or tax benefit
shall be allocated to the Financial Services Businesses. The foregoing
principles will be applied so as to prevent any item of income, deduction,
gain, loss, credit, tax cost or tax benefit being taken into account more than
once by the Closed Block Business (including the Closed Block) or the Financial
Services Businesses. For this purpose, items determined under the Plan of
Reorganization with respect to any period prior to the date of demutualization
("Pre-Closing Tax Attributes") shall be taken into account with any such
Pre-Closing Tax Attributes relating to the Closed Block being attributed to the
Closed Block Business and all other Pre-Closing Tax Attributes being attributed
to the Financial Services Businesses. The Closed Block Business will also pay
or receive its appropriate share of tax or interest resulting from adjustments
attributable to the settlement of tax controversies or the filing of amended
tax returns to the extent such tax or interest relates to controversies or
amended returns arising with respect to the Closed Block Business and
attributable to tax periods after the date of demutualization, except to the
extent that such tax is directly attributable to the characterization of the
IHC debt for tax purposes, in which case the tax shall be borne by the
Financial Services Businesses. In particular (and without limitation of the
foregoing) if a change of tax law after the date of demutualization, including
any change in the interpretation of any tax law, results in the
recharacterization of all or part of the IHC debt for tax purposes or a
significant reduction in the income tax benefit associated with the interest
expense on all or part of the IHC debt, the Financial Services Businesses will
continue to pay the foregone income tax benefit to the Closed Block Business
until the IHC debt has been repaid or PHLLC has been released from its
obligations to the bond insurer and under the IHC debt as if such
recharacterization or reduction of actual benefit had not occurred.

                                       9



                         Financial Services Businesses

   The following table shows the primary products, primary sales channels and
other sales channels for each of the segments in our Financial Services
Businesses.



------------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES BUSINESSES                 Primary Products           Primary Sales Channels       Other Sales Channels
------------------------------------------------------------------------------------------------------------------------------
                                                                                          
U.S. Consumer Division
------------------------------------------------------------------------------------------------------------------------------
Individual Life Insurance                . Variable life              . Prudential Agents          . PruSelect
                                         . Term life                                               . Financial Advisors
                                         . Universal life
------------------------------------------------------------------------------------------------------------------------------
Private Client Group                     . Financial advisory and     . Financial Advisors         . Internet (securities
                                          brokerage services                                        transactions only)
                                         -------------------------------------------------------------------------------------
                                         . Consumer banking           . Direct sales               . Telemarketing
                                                                                                   . Internet
                                                                                                   . Financial Advisors
                                                                                                   . Prudential Agents
------------------------------------------------------------------------------------------------------------------------------
Retail Investments                       . Mutual funds               . Financial Advisors         . Independent financial
                                         . Wrap-fee products          . Prudential Agents           advisors
                                         . Variable annuities                                      . Independent registered
                                         . Fixed annuities                                          representatives
------------------------------------------------------------------------------------------------------------------------------
Property and Casualty Insurance          . Automobile                 . Prudential Agents          . Independent agents
                                         . Homeowners                                              . Workplace marketing
------------------------------------------------------------------------------------------------------------------------------
Employee Benefits Division
------------------------------------------------------------------------------------------------------------------------------
Group Insurance                          . Group term life            . Institutional sales force  . Prudential Agents
                                         . Group disability                                        . Independent benefits
                                                                                                    brokers and consultants
------------------------------------------------------------------------------------------------------------------------------
Other Employee Benefits                  . Retirement plans, incl.    . Financial Advisors         . Prudential Agents
                                          defined contribution plans  . Institutional sales forces . Independent benefits
                                         . Guaranteed products                                      brokers and consultants
                                                                                                   . Direct distribution
                                         -------------------------------------------------------------------------------------
                                         . Real estate brokerage      . Institutional sales forces
                                          franchises and relocation
                                          services
------------------------------------------------------------------------------------------------------------------------------
International Division
------------------------------------------------------------------------------------------------------------------------------
International Insurance                  . Traditional whole life     . Life Planners
                                         . Term life                  . Gibraltar Life Advisors
------------------------------------------------------------------------------------------------------------------------------
International Securities and Investments . International securities   . Financial Advisors         . Internet
                                          sales and trading           . Institutional sales force   (securities transactions
                                                                                                    only)
                                         . International asset                                     . Third-party distribution
                                          management
------------------------------------------------------------------------------------------------------------------------------
Asset Management Division
------------------------------------------------------------------------------------------------------------------------------
Investment Management and Advisory       . Institutional asset        . Institutional sales force
 Services                                 management
------------------------------------------------------------------------------------------------------------------------------
Other Asset Management                   . Proprietary activities     . Institutional sales force


                                      10



                            U.S. Consumer Division

   The U.S. Consumer division conducts its operations through four segments:
Individual Life Insurance, Private Client Group, Retail Investments and
Property and Casualty Insurance.

  .  Individual Life Insurance manufactures and distributes individual variable
     life, term life, universal life, and other non-participating life
     insurance products to the U.S. retail market and distributes investment
     and protection products with proprietary and non-proprietary investment
     options for our other segments as well as selected insurance products
     manufactured by others.

  .  Private Client Group offers full service securities brokerage and
     financial advisory services to U.S. retail customers.

  .  Retail Investments manufactures, distributes and services mutual funds,
     variable and fixed annuities and wrap-fee products, utilizing proprietary
     and non-proprietary asset management expertise, to U.S. retail customers.

  .  Property and Casualty Insurance manufactures and distributes personal
     lines property and casualty insurance products, principally automobile and
     homeowners insurance, to the U.S. retail market.

Division Strategy

   In our U.S. Consumer division, we have aligned our strategies around two
distinct customer markets: the mass affluent market and the mass market. In
general, we define households with income or investable assets between $100,000
and $250,000 as mass affluent and households with income and investable assets
of less than $100,000 as mass market. Our strategy includes the following
components:

  .  Grow our U.S. retail mass affluent customer base.  Our domestic customer
     base includes approximately 3.6 million U.S. retail households with
     incomes or investable assets in excess of $100,000. We believe that the
     mass affluent market offers the best opportunity for growth in revenues
     and profit margins, and we seek to expand our presence in the mass
     affluent market as well as in the emerging affluent and pre-retirement
     markets.

  .  Improve the profitability of our existing U.S. consumer franchise.  In
     addition to our affluent and mass affluent customers, we have an existing
     customer base of nearly eight million U.S. households which we refer to as
     the mass market. We seek to improve the profitability of this customer
     base by reducing the cost of our operations infrastructure.

  .  Expand distribution channels to meet customer needs.  In addition to our
     Prudential sales forces, we are expanding our distribution channels to
     allow U.S. retail customers to access us through the distribution methods
     of their choice. Our distribution platform now includes multiple points of
     access including PruSelect, which is our third-party life distribution
     channel, independent financial advisors, affinity programs, workplace
     marketing, and the Internet.

  .  Reposition Prudential Securities' domestic businesses to focus on
     investors rather than issuers.  In the fourth quarter of 2000, we exited
     Prudential Securities' lead-managed equity underwriting for corporate
     issuers and institutional fixed income businesses. We continue to provide
     fixed income products and services. We also continue to act as a
     co-manager for equity new issues and engage in underwritings led by
     investment banks to generate new issue market products for our investor
     clients. Our equity research group, which previously focused on supporting
     our investment bank, has been refocused to provide objective investment
     advice to both our individual and institutional investor clients.

  .  Reduce operating cost structures and overhead levels.  We have taken
     actions to reduce the operating cost structures and overhead levels of the
     businesses of the U.S. Consumer division. In the Individual Life Insurance
     segment, a program to restructure our field management and agency
     structure resulted in a reduction in the number of sales territories,
     establishing a smaller number of larger field offices, and eliminating
     approximately 1,700 management and non-agent positions. In the Private
     Client Group segment, we have taken actions in 2001 to reduce staffing
     levels, occupancy costs, and other overhead costs. We have also taken
     actions in the Retail Investments and Property and Casualty Insurance
     segments to reduce staffing levels and overhead costs.

                                      11



  .  Improve retention and persistency.  We have undertaken a number of
     initiatives to improve retention and persistency. We seek to contact
     policyholders in our Individual Life Insurance segment who wish to
     terminate a policy and offer alternate solutions to meet their needs. In
     1997 we implemented our Client Acquisition Process, which requires a life
     insurance underwriter to contact the purchaser to confirm the purpose of
     the life insurance purchase, verify the initial and ongoing source of
     payment and complete the medical portion of the application.

Individual Life Insurance

   Our Individual Life Insurance segment manufactures and distributes
individual variable life, term life, universal life and other non-participating
individual life insurance products primarily to the U.S. mass affluent market
and mass market through Prudential Agents and increasingly to the mass affluent
market through PruSelect.

Operating Data

   The following table sets forth premium, product mix and other information
for Individual Life Insurance as of and for the periods indicated.



                                                                          As of or for the Year Ended
                                                                                 December 31,
                                                                         ----------------------------
                                                                           2001      2000      1999
                                                                         --------  --------  --------
                                                                                    
Statutory first year premiums and deposits (in millions)(1)............. $    470  $    387  $    375
Average face amount per policy sold..................................... $234,642  $230,529  $205,563
Average annual premium per policy sold.................................. $  4,352  $  3,146  $  2,467
New policies (in thousands).............................................      108       123       152
Product mix by percentage of statutory first year premiums and deposits:
  Variable and universal life...........................................       49%       74%       80%
  Corporate-owned life insurance........................................       42%       11%    --
 Term life..............................................................        9%       15%       20%
In force face amount (in billions)...................................... $    240  $    236       224
Statutory in force premiums (in millions)(2)............................ $  2,152  $  1,999  $  1,897
Total policies in force (in thousands)..................................    2,022     2,064     2,070
Number of Prudential Agents.............................................    4,387     6,086     7,818
Prudential Agent termination or loss....................................    2,337     4,018     4,049
New hires...............................................................      638     2,286     2,999

                                                                         --------  --------  --------
Net change in Prudential Agents.........................................   (1,699)   (1,732)   (1,050)
Base force retention(3).................................................       64%       63%       63%
Prudential Agent productivity(4)........................................ $ 35,000  $ 34,700    31,300

--------
(1) Excludes life insurance issued with respect to Prudential employees of $277
    million for the year ended December 31, 1999.
(2) Total statutory first year and renewal premiums and deposits collected.
(3) The percentage of full-time Prudential Agents remaining with us at December
    31 who were under contract as of January 1 of that year.
(4) Average commissions on new sales of all products by surviving base force
    Prudential Agents. Excludes commissions on new sales by Prudential Agents
    hired or departed during the period.

Products

   Individual Life Insurance's principal products are:

   Variable Life Insurance.  We offer a number of individual variable life
insurance products that provide a return linked to an underlying investment
portfolio designated by the policyholder while providing the policyholder the
flexibility to change both the death benefit and premium payments. Each product
provides for the deduction of charges and expenses from the customer's
investment account. We also offer variable life products targeted to the estate
planning and corporate-owned life insurance markets. As of December 31, 2001,
our statutory in force premium for variable life insurance was approximately
$1.91 billion.

   Term Life Insurance.  We offer a variety of term life insurance products.
Some term products include a conversion feature that allows the policyholder to
convert the policy into a whole life policy. In November 2001, we repriced our
term insurance portfolio. As of December 31, 2001, our statutory in force
premium for term life insurance was $238 million.

                                      12



   Universal Life Insurance.  In late 2001, we introduced two new universal
life insurance products. Universal life insurance features a market rate fixed
interest investment account and flexible premiums.

Marketing and Distribution

   Prudential Agents

   Our Prudential Agents distribute variable, universal and term life,
investment and protection products with proprietary and non-proprietary
investment options as well as selected insurance products manufactured by
others.

   Prudential Agents accounted for 46% of individual life insurance 2001 sales,
based on statutory first year premiums and deposits, down from 75% in 1999. The
decrease in 2001 is primarily the result of a greater contribution to overall
sales by our PruSelect third party distribution channel, reflecting a single
large sale in 2001. The following table sets forth the number of Prudential
Agents, field managers, home office and field staff and field offices as of the
dates indicated.



                            As of December 31,
                            ------------------
                             2001  2000  1999
                            -----  ----- -----
                                
Prudential Agents.......... 4,387  6,086 7,818
Field management...........   416    542   811
Home office and field staff 1,202  1,173 2,051
Prudential field offices...    79     79   150


   Prudential Agents historically have sold life insurance products primarily
to customers in households with income ranging from about $20,000 to $80,000
per year and, to a lesser but increasing extent, to mass affluent individuals
as well as small business owners.

   The majority of Prudential Agents are multi-line traditional agents. Other
than certain training allowances or salary paid at the beginning of their
employment, we pay traditional Prudential Agents on a commission basis for the
products they sell. In addition to commissions, traditional Prudential Agents
receive the employee benefits we provide to other Prudential employees
generally, including medical and disability insurance, an employee savings
program and qualified retirement plans.

   PruSelect

   Our PruSelect distribution channel accounted for 54% of individual life
insurance sales in 2001, based on statutory first year premiums and deposits,
an increase from 25% in 1999. PruSelect sales in 2001 included a single large
sale as noted above. PruSelect sells products through a variety of channels,
including independent brokers, general agencies, producer groups and
broker-dealers. PruSelect has historically focused on serving the
intermediaries who provide insurance solutions in support of estate and wealth
transfer planning for affluent individuals and corporate-owned life insurance
for businesses. During 2001, PruSelect began to expand its target market to
include mass affluent individuals in addition to affluent individuals. The life
insurance products offered by PruSelect are generally the same as those
available through Prudential Agents. PruSelect has its own dedicated management
and underwriting, case management and post-issuance support staff.

   PruSelect is organized into a network of 17 regional brokerage directors who
make sales through independent brokers and smaller general agencies. It
directly manages relationships with larger wholesalers, such as producer
groups, broker-dealers and national general agencies.

Underwriting and Pricing

   Our underwriters follow detailed and uniform policies and procedures to
assess and quantify risk of our individual life insurance products. If the
policy amount exceeds a specified amount, we require the applicant to take a
variety of underwriting tests, such as medical examinations,
electrocardiograms, blood tests, urine tests, chest x-rays and consumer
investigative reports.

                                      13



Reinsurance

   We reinsure portions of the risks we assume under our individual life
insurance products. Historically, the maximum amount of individual life
insurance we may retain on any life is $30 million under an individual policy
and $50 million under a second-to-die life policy. At December 31, 2001, we had
reinsured $49.9 billion, or 21%, of the total face amount of our individual
life insurance in force. In 2000, we began to reinsure substantially all of the
mortality risk associated with our newly introduced insurance products, and for
new business in 2001, we reduced the maximum amount of individual life
insurance we may retain on any life to $10 million.

Reserves

   We establish reserve and policyholder fund liabilities to recognize our
future benefit obligations for our in force life policies. For variable and
interest-sensitive life insurance contracts, we establish policyholders'
account balances that represent cumulative gross premium payments plus credited
interest and/or fund performance, less withdrawals, expenses and mortality
charges.

Private Client Group

   The Private Client Group provides full service securities brokerage and
financial advisory services to individuals and businesses. At December 31,
2001, the Private Client Group served approximately 1.1 million households in
the United States through our domestic Prudential Securities Financial Advisor
force and network of branch offices. The foundation of our business strategy is
to provide sound investment and securities advice to affluent clients and to
achieve the highest level of client satisfaction. The Private Client Group
segment also includes our consumer banking operations.

Products and Services

   Most of the client assets in our Private Client Group are held in Command
accounts or basic brokerage accounts. The Command account, our primary retail
client account, helps clients manage their assets and is the cornerstone of our
asset gathering strategy. Through a Command account, clients can consolidate
their financial assets, obtain a range of financial services and invest in a
wide variety of investment products. Total Private Client Group client assets
in Command accounts were approximately $151 billion as of December 31, 2001,
representing 60% of Private Client Group client assets. Private Client Group
clients also can access account information, our research, market news and
other information and execute transactions through our on-line service,
PruFn.com.

   Through Prudential Advisor, we offer a sliding scale asset-based fee for
advice with a fixed fee for transaction execution. Clients have the choice of
executing transactions directly through PruFn.com or through their Financial
Advisor. Prudential Securities also offers clients two fee-based programs
providing for full-time discretionary management by the client's Financial
Advisor in addition to the wrap-fee products that our Retail Investments
segment manufactures.

   Clients may borrow from us to fund the purchase of securities using the
securities purchased or other securities in the account as collateral. As a
matter of credit policy, we generally require our clients to maintain higher
percentages of collateral values than the minimum percentages required by the
applicable federal and stock exchange margin rules. Interest on margin loans is
an important component of our revenue and is subject to change based on market
trading volume and volatility.

   In addition, this segment engages in sales and trading of government,
corporate, agency, municipal and mortgage-backed fixed income securities and
related products, primarily for retail customers. Finally, it provides domestic
securities clearing services to other brokers. Providing these clearing
services to unaffiliated correspondent brokers offsets overhead costs for all
businesses within the Prudential Securities legal entity, primarily benefiting
this segment.

Marketing and Distribution

   As of December 31, 2001, we had approximately 5,400 retail Financial
Advisors in our 271 U.S. branch offices. Our Financial Advisor force is the
primary sales channel for our mutual funds and wrap-fee products, and

                                      14



accordingly, the profitability of our Retail Investments business and the
Private Client Group is dependent on our ability to hire, train and retain
these Financial Advisors. Most Financial Advisors are licensed to sell our
annuity and insurance products. We compensate Financial Advisors with a
percentage of the commissions and fees they generate, supplemented by a
voluntary equity-market-linked, long-term deferred compensation plan introduced
in January 2000.

   The following table sets forth information about our domestic Financial
Advisor force and branch office network as of the dates or for the periods
indicated.



                                                                       As of or for the Year
                                                                        Ended December 31,
                                                                       ---------------------
                                                                        2001    2000   1999
                                                                       ------  ------ ------
                                                                             
Financial Advisors (end of period)....................................  5,383   5,906  6,072
Financial Advisors trained(1).........................................    307     652  1,202
Financial Advisor average client assets (in millions)(2).............. $   45  $   46 $   48
Average annual retail Financial Advisor productivity (in thousands)(3) $  336  $  401 $  367
Branches..............................................................    271     295    275
Client accounts (in millions).........................................    2.1     2.2    2.1
Client assets, including managed assets (in billions)................. $  251  $  272 $  288


--------
(1)Number of Financial Advisors that completed the retail Financial Advisor
   training program in the year.
(2)Private Client Group client assets at year-end divided by average number of
   domestic Financial Advisors for the year.
(3)Private Client Group total non-interest revenues, excluding revenues
   generated by the consumer bank and the segment's retail fixed income trading
   operations, divided by average number of domestic Financial Advisors for the
   period.

Consumer Banking

   We conduct consumer banking activities primarily on a direct-response basis
through two subsidiaries, The Prudential Bank and Trust Company, a state
chartered bank, and The Prudential Savings Bank, F.S.B., a federally chartered
savings bank. Our principal products are home equity loans and lines of credit,
secured lending products, personal trust services and deposits, including money
market deposit accounts and certificates of deposit. We have no branches for
our consumer banking operations. Our vision for our consumer banking activities
is to provide banking products and services that supplement other Prudential
offerings and facilitate asset retention and asset growth. At December 31,
2001, our banking operations had approximately $850 million of home equity and
other loan receivables and $600 million of deposits.

Retail Investments

   We manufacture, distribute and service investment management products
utilizing proprietary and non-proprietary asset management expertise in the
U.S. retail market. Our products are designed to be sold by Financial Advisors,
Prudential Agents and third-party financial professionals. We also provide
private label products for other financial services firms. We offer a family of
retail investment products consisting of 65 mutual funds, seven annuity
products, four wrap-fee products and over one hundred unit investment trusts as
of December 31, 2001. These products cover a wide array of investment styles
and objectives designed to attract and retain assets of individuals with
varying objectives and to accommodate investors' changing financial needs.

Operating Data

   The following table sets forth the account values of the Retail Investments
segment's products as of the dates indicated. Annuity account values represent
the amounts held for the benefit of policyholders or contractholders. For
mutual funds and wrap-fee products, account value is equal to fair market value.



                                             As of December 31,
                                             ------------------
                                              2001  2000  1999
                                             -----  ----- -----
                                               (in billions)
                                                 
                Retail Investments:
                   Mutual funds(1).......... $57.8  $57.8 $55.2
                   Wrap-fee products(2).....  17.9   19.6  16.7
                   Variable annuities.......  18.7   21.1  22.6
                   Fixed annuities..........   3.0    2.9   3.0
                   Unit investment trusts...   1.2    1.6   3.2


                                      15



--------
(1) Mutual funds includes only those sold as retail investment products. Also
    includes balances from sub-advised funds of $1.5 billion at December 31,
    2001 and $0.4 billion at December 31, 2000.
(2) Wrap-fee product assets include $3.1 billion, $3.4 billion and $3.5 billion
    of proprietary assets at December 31, 2001, 2000 and 1999, respectively.

   Since the 1990s, there has been an industry trend for products such as
variable annuities and wrap-fee products to include investment alternatives
that are managed by asset managers other than the product sponsor. Over the
last several years, we have been building investment management choice into
most of our variable annuity and wrap-fee products. We are able to offer
customers investment alternatives in some of our products that may be advised
by third parties with asset management styles that we may or may not offer.

Products

   Mutual Funds

   The following table sets forth the net sales (redemptions) of our retail
mutual funds, which include funds that we manage in third-party products
("sub-advised funds"), by asset class for the periods indicated. Net sales
(redemptions) are equal to gross sales minus redemptions. This data excludes
mutual funds sold through defined contribution plan products.



                                                                          Year Ended December 31,
                                                                         ------------------------
                                                                          2001    2000     1999
                                                                         ------  -------  -------
                                                                               (in millions)
                                                                                 
Equity.................................................................. $  642  $   985  $  (349)
Fixed income............................................................    (66)  (1,168)    (750)

                                                                         ------  -------  -------
   Total mutual funds net sales (redemptions) other than money market...    576     (183)  (1,099)
Money market............................................................  1,363    1,976     (812)
                                                                         ------  -------  -------
   Total net sales (redemptions)(1)..................................... $1,939  $ 1,793  $(1,911)

                                                                         ======  =======  =======

--------
(1) Includes net sales, commencing in 2000, from sub-advised funds of $1,187
    million in 2001 and $472 million in 2000.

   The following table sets forth our retail mutual fund assets, including
sub-advised funds, under management by asset class at fair market value as of
the dates indicated.



                                                 As of December 31,
                                                 ------------------
                                                  2001  2000  1999
                                                 -----  ----- -----
                                                   (in billions)
                                                     
             Equity............................. $17.7  $20.8 $20.0
             Fixed income.......................   7.0    7.1   8.8
             Money market.......................  33.1   29.9  26.4
                                                 -----  ----- -----
                Total assets under management... $57.8  $57.8 $55.2

                                                 =====  ===== =====


   We offer our mutual funds with a variety of sales charges or "loads." We do
not generally offer "no-load" funds. We generally do not charge a load for our
mutual funds purchased through wrap-fee programs offered by us or third
parties, our defined contribution products and in certain other circumstances.
In addition, most of our mutual funds charge ongoing fees for servicing and
distribution-related expenses as permissible under SEC and NASD rules.

   We earn investment management fees from our mutual funds based on average
daily net assets. Our mutual funds bear the expenses associated with their
operations as well as the issuance and redemption of their shares. These
expenses include those related to investment management, distribution, legal,
accounting and auditing

                                      16



expenses, transfer agent expenses, custodian expenses, the expenses of printing
and mailing prospectuses and reports to shareholders and independent directors'
expenses. We bear advertising, promotion and selling expenses, including sales
commissions, of our Private Client Group and Individual Life Insurance segments
and of our third-party distributors.

   Wrap-Fee Products

   We offer several wrap-fee products that provide access to mutual funds and
separate account products with the payment of fees based on the market value of
assets under management. Our wrap-fee products have higher minimum investment
levels than our mutual funds and variable annuities, and offer a choice of both
proprietary and non-proprietary investment management. Net sales of our
wrap-fee products were $1.4 billion in 2001, $4.8 billion in 2000 and $3.0
billion in 1999.

   Annuities

   We have a number of variable and fixed annuities with different options. Our
variable annuities provide customers the opportunity to invest in proprietary
and non-proprietary mutual funds and fixed-rate options. Our fixed annuities
provide a guarantee of principal and a guarantee of the interest rate to be
credited to the principal amount for a specified period of time.

   The following table sets forth our net sales (redemptions) of our variable
and fixed annuities for the periods indicated. Net sales are equal to gross
sales minus surrenders, withdrawals and exchanges.



                                          Year Ended December 31,
                                          ----------------------
                                            2001    2000   1999
                                          -------   -----  -----
                                               (in millions)
                                                  
   Variable annuities.................... $(1,085)  $(699) $  (5)
   Fixed annuities.......................     (96)   (140)  (265)
                                          -------   -----  -----
      Total net sales (redemptions)...... $(1,181)  $(839) $(270)

                                          =======   =====  =====


   The following table sets forth the gross sales of our variable and fixed
annuities by distribution channel for the periods indicated.



                                     Year Ended December 31,
                                     -----------------------
                                      2001    2000    1999
                                     ------  ------  ------
                                          (in millions)
                                            
   Variable and fixed annuities:
      Prudential Agents............. $1,144  $2,086  $2,907
      Financial Advisors............    230     421     678
      Third-party distributors......     17       4       2
                                     ------  ------  ------
         Total gross sales.......... $1,391  $2,511  $3,587

                                     ======  ======  ======


   The following table sets forth the total account values of our variable and
fixed annuities as of the dates indicated.



                                         Year Ended December 31,
                                         -----------------------
                                          2001    2000    1999
                                          -----   -----   -----
                                              (in billions)
                                                
   Variable annuities:
      Proprietary separate account...... $11.1   $15.1   $17.0
      General account(1)................   3.2     2.8     2.8
      Non-proprietary...................   4.4     3.2     2.8
                                          -----   -----   -----
      Total variable annuities.......... $18.7   $21.1   $22.6
                                          =====   =====   =====
   Fixed annuities...................... $ 3.0   $ 2.9   $ 3.0

                                          =====   =====   =====

--------
(1) Represents amounts invested in the fixed-rate options of our variable
    annuities.


                                      17



   We earn fees from the mutual funds in our variable annuity products based on
average daily net assets. We price our fixed annuities as well as the
fixed-rate options of our variable annuities based on assumptions as to
investment returns, expenses and persistency. Competition also influences our
pricing. We seek to maintain a spread between the return on our general account
invested assets and the interest we credit on our fixed annuities.

   To encourage persistency, all of our variable and fixed annuities, other
than our single premium fixed annuities, have withdrawal restrictions and
declining surrender or withdrawal charges for a specified number of years.

Marketing and Distribution

   To better meet the needs of the mass affluent market, Prudential Agents are
being transitioned to focus on offering advice on an array of proprietary and
non-proprietary products. Similarly, Financial Advisors are being transitioned
to focus on fee-based financial advisory services. To support these
transitions, we have instituted a research-driven approach to money management
across our mutual funds, annuities, managed accounts and wrap-fee programs.
Investment manager research and monitoring supports our Financial Advisors and
Prudential Agents positioning them as advisors and providing them with a wide
range of selected investment alternatives. We call this strategy "Advised
Choice" and believe it fills a need for many customers--better enabling them to
make more informed decisions about investment and insurance choices.

   In mid-1998, the Retail Investments segment began to develop and implement
plans for sales through third parties. Such sales were responsible for
approximately 22% of the segment's 2001 overall gross sales, excluding money
market funds. Net sales of mutual funds, other than money market funds, through
third-party channels totaled $2.3 billion in 2001 and represent the fastest
growing sales channel in this segment on a net basis. We have also launched an
initiative under which outside asset-gathering companies add our investment
options to their products.

Property and Casualty Insurance

   Our Property and Casualty Insurance segment manufactures and distributes
personal lines property and casualty insurance products, principally automobile
and homeowners coverages, to the U.S. retail market. We distribute our products
through Prudential Agents, workplace and affinity marketing, and independent
agents. We also distribute certain specialty coverages written by other
insurers through brokerage arrangements.

Operating Data

   The following table sets forth net written premiums and other operating data
for Property and Casualty Insurance as of the dates and for the periods
indicated.



                                                                                        As of and for the Year Ended
                                                                                                December 31,
-                                                                                       ----------------------------
                                                                                          2001      2000      1999
                                                                                        --------  --------  --------
                                                                                              ($ in millions)
                                                                                                   
Net written premiums(1):
   Automobile.......................................................................... $1,441.2  $1,149.8  $1,031.2
   Homeowners..........................................................................    450.8     414.6     436.1
   Other...............................................................................     33.5      32.7      33.0

                                                                                        --------  --------  --------
     Total............................................................................. $1,925.5  $1,597.1  $1,500.3
                                                                                        ========  ========  ========
Number of Prudential Agents authorized to sell Property and Casualty Insurance policies    4,023     4,705     6,106

--------
(1) Premiums written for the period, including assumed premiums and net of
    ceded and returned premiums.

   Historically, a significant portion of our property and casualty insurance
business has been concentrated in New Jersey. Our New Jersey automobile
coverages accounted for 24% of our property and casualty automobile net written
premiums in 2001. New Jersey law requires an insurance company to provide
automobile insurance to every applicant that meets certain minimum eligibility
criteria. New Jersey law caps profits on automobile coverages under an excess
profits law and also imposes limitations on the rates that may be charged in
certain territories regardless of loss experience. We refunded $25.2 million in
2001 to our policyholders as a result of the excess profits law based on our
experience for the years 1998 through 2000.

                                      18



Products

   Our primary property and casualty products are automobile and homeowners
insurance. We also offer watercraft, dwelling, fire and personal umbrella
policies.

   We segment our automobile customers based on their respective driving and
loss histories into preferred, standard and non-standard segments. In May 2000,
we purchased the specialty automobile insurance business of the St. Paul
Companies, THI Holdings, Inc., which writes policies in the non-standard
segment.

   We offer four main homeowners products: standard and premier policies for
owner-occupied houses, a policy for owner-occupied condominiums and a tenant
policy for renters. These policies all include coverage for personal property,
loss of use, personal liability and medical payments to others. Our
owner-occupied policies also include coverage for the dwelling and other
structures. To limit our catastrophe exposure we offer special deductibles in
certain states for hurricane, windstorm, hail and earthquake, when earthquake
coverage is purchased by the insured. We generally do not write coverage for
homes with replacement values of greater than $950,000.

Marketing and Distribution

   In 1996, we adopted a geographic market segmentation strategy that targets
various states for growth based on our assessment of the potential for
catastrophic loss, the regulatory environment and underwriting experience. At
that time, we shifted our focus to automobile coverage, which, over the last
decade, has generally produced more stable results than homeowner coverages.

   Historically, we relied primarily on Prudential Agents to distribute our
property and casualty products to the mass market. In 2001, Prudential Agents
accounted for 27% of first year direct written premiums, which represent total
annual premiums on new sales of our own property and casualty insurance
products before consideration of reinsurance assumed or ceded, and 73% of total
direct written premiums of the Property and Casualty Insurance segment.

   To supplement sales growth, we have developed other distribution channels,
including a career agent channel, workplace and affinity marketing, independent
agents and direct distribution. In 2001 and 2000, our alternative distribution
channels accounted for 73% and 62% of first year direct written premiums,
respectively. In October 2001, we announced we would no longer write business
through our property and casualty career agency channel except in a few
selected markets and suspended our direct distribution mailings. In 1998, we
acquired Merastar Insurance Company. Merastar offers individual property and
casualty policies to workplace groups and professional work-related
associations, a payroll deduction capability for the sale of its products and
pricing that reflects a group discount. In 1999, we also began offering
products through small- to medium-sized independent insurance agencies. Our
acquisition of THI in May 2000, which sells non-standard automobile policies
through independent agents and on a direct basis, has broadened the scope of
our mass market.

Underwriting and Pricing

   Our agents are responsible for field underwriting, and they must adhere to
risk selection guidelines developed by the underwriting department. The
underwriting department performs a final review of all applications other than
applications processed through an on-line automated underwriting system that is
now in place in many states.

   We seek to price our products to produce an adequate return on capital over
time, subject to adjustments reflecting our market segmentation strategy. Our
pricing considers the expected frequency and severity of losses and the costs
of providing the necessary coverage, including the cost of administering policy
benefits, sales and other administrative costs. State rate regulation
significantly affects pricing. Our property and casualty operations are subject
to rate and other laws and regulations covering a range of trade and claim
settlement practices. State insurance regulatory authorities have broad
discretion in approving an insurer's proposed rates. A significant portion of
our automobile insurance is written in the state of New Jersey. Under certain
circumstances New Jersey insurance laws require an insurer to provide a refund
or credit to policyholders based upon the profits earned on automobile
insurance.

Catastrophe Exposure Risk Management Program and Reinsurance

   Our personal lines property and casualty insurance operations expose us to
claims arising out of catastrophes, principally under our homeowners insurance
policies. Hurricanes, earthquakes, tornados, wind,

                                      19



hail, fires, explosions and other events may cause catastrophes, and the
occurrence and severity of catastrophes are inherently unpredictable.

   We have taken significant steps to reduce our exposure to catastrophic
losses since Hurricane Andrew in 1992, including:

  .  reducing the number of homes insured against wind in southern Florida by
     over 70%;

  .  increasing deductibles on homeowners' policies and offering separate
     deductibles for hurricane, windstorm, hail and earthquake in some states;

  .  participating in the Florida Hurricane Catastrophe Fund;

  .  withdrawing from business in Hawaii; and

  .  transferring our California earthquake exposure to the California
     Earthquake Authority.

   These activities have reduced our catastrophe exposure and the number of our
homeowners' policies in force. In addition to these risk management actions, we
rely substantially on catastrophe reinsurance and other reinsurance to limit
our catastrophe exposure.

   Our greatest exposure to catastrophe loss is during hurricane season, from
June to November of each year. Based on our policies in force as of December
31, 2001, we believe we have limited our pre-tax catastrophe exposure from a
single one-in-250 year catastrophe to approximately $400 million, or
approximately $260 million on an after-tax basis representing approximately
1.3% of our consolidated equity as of December 31, 2001. This limitation relies
significantly on our catastrophe protection reinsurance program. Catastrophes
are inherently uncertain, however, and the loss or losses from a single or
multiple catastrophes could exceed the foregoing amount, perhaps materially. It
is possible that catastrophes could materially negatively affect our results of
operations or cash flow in particular quarterly or annual periods. We believe,
however, that, based on our current estimated exposures, losses from
catastrophes, net of reinsurance, should not have a material adverse effect on
our financial condition.

   We periodically revise our reinsurance program to reflect what we believe
are our reinsurance needs. Our current catastrophe protection reinsurance
program, in effect until June 30, 2002, consists of an excess of loss
reinsurance contract with a a consortium of U.S. and international reinsurers,
including Lloyds of London syndicates.

   Future changes in our reinsurance programs will likely affect our assessment
of our exposure to a major catastrophe loss. There have been, and in the future
may be, periods when reinsurance is not available or at least not at acceptable
rates and levels. The loss of all or portions of our reinsurance program could
subject us to increased exposure, which could be material. We are also subject
to credit risk with respect to our reinsurers and other risk bearers, such as
the Florida Hurricane Catastrophe Fund, because the ceding of risk to them does
not relieve us of our liability to insureds. Our recovery of less than
contracted amounts from our reinsurers and other risk bearers could have a
material adverse effect on our results of operations. We seek to mitigate this
risk through diversification of reinsurers as well as maintenance of minimum
financial standards for their participation in our reinsurance programs.

   See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations for Financial Services Businesses by
Division and Closed Block Business--U.S. Consumer Division--Property and
Casualty Insurance" for a discussion of the impact of these agreements on our
earnings.

Claims

   We staff our property and casualty claims department with approximately
1,400 claims associates based in 15 offices throughout the United States. We
generally specialize our claims handling by type of claim, and our home office
claims staff is responsible for setting policies and procedures and overseeing
field claim operations. Whenever possible, we use our own staff to conduct
claim inspections. We use independent claims adjusters when necessary to handle
claims in remote areas and to handle overflow during catastrophes.

Reserves

   We establish reserves for payment of loss and loss adjustment expenses in
accordance with applicable regulations. Consistent with industry accounting
practice, we do not establish loss reserves until a loss, including a loss from
a catastrophe, has occurred. The following table sets forth a summary
reconciliation of our property

                                      20



and casualty beginning and ending reserves, determined on the basis of
statutory accounting principles for the periods indicated.



                                                                      Year Ended December 31,
                                                                      ----------------------
                                                                       2001    2000    1999
                                                                      ------  ------  ------
                                                                           (in millions)
                                                                             
Reserves for loss and loss adjustment expenses, beginning of the year $1,240  $1,439  $1,622
Loss and loss adjustment expenses:
   Provision attributable to the current year........................  1,440   1,271   1,249
   Increase (decrease) in provision attributable to prior years......   (113)   (165)   (150)

                                                                      ------  ------  ------
     Total loss and loss adjustment expenses.........................  1,327   1,106   1,099

                                                                      ------  ------  ------
Payments:
   Loss and loss adjustment expenses attributable to current year....    932     841     700
   Loss and loss adjustment expenses attributable to prior years.....    553     583     582

                                                                      ------  ------  ------
     Total payments..................................................  1,485   1,424   1,282

                                                                      ------  ------  ------
Acquisition of THI Holdings..........................................     --     119      --

                                                                      ------  ------  ------
Reserve for loss and loss adjustment expenses, end of year(1)(2)..... $1,082  $1,240  $1,439

                                                                      ======  ======  ======

--------
(1) Total reserves are net of reinsurance recoverables of $671 million at
    December 31, 2001, $608 million at December 31, 2000 and $330 million at
    December 31, 1999.
(2) Our Property and Casualty Insurance segment has limited exposure to
    pre-1986 mass tort claims as a result of its former interest in
    Prudential-LMI Commercial Insurance Company, which we purchased in 1986 and
    sold in 1992. Our total reserves held for these contracts, which we
    included in the reserve table above, aggregated $29 million as of December
    31, 2001, on both a net and gross basis. Based on currently available
    information, we believe approximately 80% of the liabilities on these
    contracts, representing $23 million or less than 3% of Property and
    Casualty Insurance's total reserves for loss and adjustment expenses, may
    be related to asbestos or environmental exposures. Reported claims activity
    levels to date for these asbestos and environmental exposures do not appear
    to be material. Estimation of ultimate liabilities for these claims is
    unusually difficult, however, due to outstanding issues such as the
    existence of coverage, the definition of an occurrence, the determination
    of ultimate damages and allocation of damages to financially responsible
    parties. It is possible that these claims might become material in the
    future.

   Our net reserves have declined over the past three years primarily due to
the net reduction in policies in force and the release of reserves from prior
years of $113 million in 2001 (including $7 million for the release of reserves
for prior years for group personal catastrophe coverage, which are reflected
only for purposes of results determined on the basis of statutory accounting
principles), $165 million in 2000 and $150 million in 1999.

   We establish loss reserves to recognize the estimated amount necessary to
bring all pending reported, and incurred but not reported, claims to final
settlement. Many factors can influence the amount of loss reserves required,
such as changes in laws and regulations, judicial decisions, litigation and
settlements, medical care costs, rehabilitation costs, the costs of automobile
and home repair materials and labor rates, and other factors. We review our
loss reserves quarterly. We record our loss reserves at their full undiscounted
value. We do not make an explicit provision for the effects of inflation on
loss and loss adjustment expense reserve calculations. The establishment of
loss reserves is an inherently uncertain process, and we cannot assure that
ultimate losses will not exceed the Property and Casualty Insurance segment's
reserves.

                          Employee Benefits Division

   Our Employee Benefits division consists of two segments: Group Insurance and
Other Employee Benefits.

  .  Group Insurance manufactures and distributes a full range of group life,
     disability and related insurance products through employers and other
     groups in connection with employee and member benefit plans.

  .  Other Employee Benefits manufactures, services and delivers products and
     services to meet the retirement needs of employers of all sizes. These
     products and services include full service defined contribution plans and
     various guaranteed products. We distribute these products through a direct
     sales force, third parties and Financial Advisors. As part of our employee
     benefits business, we also offer real estate brokerage and relocation
     services and workplace marketing services.

Division Strategy

   The Employee Benefits division, currently known in the marketplace as
Prudential Institutional, seeks to be a leading non-medical employee benefits
provider to companies throughout the United States. Our goal is to help

                                      21



employers attract and retain employees by providing a competitive array of both
employer-paid benefits and employee-paid voluntary benefits and services. We
help companies and their employees grow and protect retirement plan assets by
providing a broad array of qualified and non-qualified retirement vehicles.
Currently, we do business with over 24,000 institutional clients of all sizes,
including 83 of the Fortune 100 firms, representing over 30 million employees
and members with over 12 million participants.

   We offer WorkingSolutionsSM, a web-based platform, to deliver a broad array
of proprietary and non-proprietary voluntary benefits to help employers meet
the diverse needs of their employees. This platform is designed to extend our
relationship beyond the institutional client directly to their employees. We
have also established a relationship with Rewards Plus of America Corporation,
an Internet-based employee benefits service provider, through which we plan to
broaden our distribution of Prudential products and services.

Group Insurance

   Our Group Insurance segment manufactures and distributes a full range of
group life insurance, long-term and short-term group disability insurance,
long-term care insurance and corporate- and trust-owned life insurance in the
United States to institutional clients primarily for use in connection with
employee and membership benefits plans. Group Insurance also sells accidental
death and dismemberment and other ancillary coverages and provides plan
administrative services in connection with its insurance coverages. Group
Insurance has its own dedicated sales force that distributes through the broker
and consultant market. Group Insurance also uses the Prudential Agent
distribution channel and third-party general agencies to sell group life
products to smaller clients.

   In 1997, we separated our group life and disability products from our
healthcare business. We recruited experienced personnel to build a dedicated
sales force with members who have a record of sales success and established
relationships with brokers and consultants. In addition, we have refocused
group life on improved persistency and refocused group disability on improved
risk selection and reduced benefits ratios. We have commenced pricing
adjustments in 2001, when contractually permitted, effective in 2002, to
improve the benefit ratios for group life products. We expect that the
implementation of those adjustments, given the competitive marketplace for our
products, may result in a decline in persistency and some slowing of our sales.

Operating Data

   The following table sets forth certain operating data for Group Insurance
for the periods indicated.



                            Year Ended December 31,
                            -----------------------
                             2001    2000    1999
                            ------  ------  ------
                                 (in millions)
                                   
Group Life Insurance:
Gross premiums(1)(2)....... $2,284  $1,913  $1,872
New annualized premiums(3). $  483  $  321  $  262
Group Disability Insurance:
Gross premiums(1)(4)....... $  534  $  472  $  413
New annualized premiums.... $  147  $  162  $  105

--------
(1) Insurance premium before returns to participating policyholders for
    favorable claims experience. Group disability amounts include long-term
    care products.
(2) Includes $23 million in 2001, $23 million in 2000 and $24 million in 1999
    from Prudential employee benefit plans. Also includes $ 198 million in
    2001, $136 million in 2000 and $165 million in 1999 from the Serviceman's
    Group Life insurance program, which is available to members of the U.S.
    armed forces through a contract with the U.S. Veterans Administration. We
    reinsure all but approximately 20% of our premiums and risk exposure from
    this program to a voluntary reinsurance pool comprised of other U.S. life
    insurers, which participate in accordance with their market shares. While
    this business produces substantial premiums, the Veterans Administration
    limits profitability to 0.2625% of premium.
(3) Amounts do not include excess premiums, which are premiums that build cash
    value but do not purchase face amounts of group universal life insurance.
(4) Includes $ 21 million in 2001, $23 million in 2000 and $28 million in 1999
    from Prudential employee benefit plans.

                                      22



Products

   Group Life Insurance.  We offer group life insurance products including
basic, supplemental or optional, and dependent term and universal life
insurance. Commencing in 1998, we also began offering group variable universal
life insurance and supplemental accidental death and dismemberment insurance.
Many of our employee-pay coverages include a portability feature, allowing
employees to retain their coverage when they change employers or retire. We
also offer a living benefits option which allows insureds who are diagnosed
with a terminal illness to receive up to 50% of their life insurance benefit
upon diagnosis, in advance of death, to use as needed.

   Group Disability Insurance.  We offer short- and long-term group disability
insurance, which protects against loss of wages due to illness or injury.
Short-term disability generally provides coverage for three to six months, and
long-term disability covers the period after short-term disability ends.

   Other.  We offer individual and group long-term care insurance and group
corporate- and trust-owned life insurance. Long-term care insurance protects
the insured from the costs of care in the community, at an adult day care
center, a nursing home or similar live-in care situation or at home by
providing a home health or a personal care aide. Group corporate- and
trust-owned life insurance are group variable life insurance contracts
typically used by large corporations to fund benefit plans for retired
employees. These latter products also may be used as vehicles to deliver
deferred compensation or non-qualified benefits to active employees.

Marketing and Distribution


   Group Insurance's dedicated sales force is organized around products and
market segments and distributes primarily through employee benefits brokers and
consultants. In 1997, we established our Group Life Sales Director force to
sell our group life products in the large and jumbo case markets (2,000 or more
employees) and our Life and Disability Sales Manager force to sell our group
life and disability products in the small and medium case markets. Group
Insurance also distributes group life products through Prudential Agents,
primarily to the small case market (less than 250 employees), and individual
long-term care products through Prudential Agents as well as third-party
brokers and agents. At December 31, 2001, Group Insurance had field sales
offices in 36 major metropolitan areas.

Underwriting and Pricing

   Group Insurance's product underwriting and pricing is centralized. We have
developed standard rating systems for each product line based on our past
experience and relevant industry experience. We are not obligated to accept any
application for a policy or group of policies from any distributor. We follow
uniform underwriting practices and procedures. If the coverage amount exceeds
certain prescribed age and amount limits, we may require a prospective insured
to submit to paramedical examinations.

   We determine premiums on some of our policies on a retrospective experience
rated basis, in which case the policyholder bears some of the risk associated
with claim experience fluctuations during the policy period. At December 31,
2001, approximately 59% of our group life insurance premiums and 18% of our
group disability insurance premiums were attributable to retrospective
experience rated policies. We base product pricing of group insurance products
on the expected pay-out of benefits that we calculate using assumptions for
mortality, morbidity, interest, expenses and persistency, depending upon the
specific product features.

   Our other policies are not eligible to receive experience based refunds. The
adequacy of our initial pricing of these policies determines their
profitability. Long-term disability, in particular, involves a commitment to
insure disability that continues potentially over a person's lifetime and,
accordingly, contains the risk that loss experience is affected by
circumstances we did not expect when we issued a policy and substantially
exceeds pricing assumptions. In addition, the trend towards multiple year rate
guarantees for new policies, which are typically three years for life insurance
and two years for disability insurance, further increases the adverse
consequences of mispricing coverage and lengthens the time it takes to reduce
loss ratios.


                                      23



Reserves and Reinsurance

   We establish and carry as liabilities actuarially determined reserves that
we believe will meet our future obligations. We base these reserves on
actuarially recognized methods using prescribed morbidity and mortality tables
in general use in the United States, which we modify to reflect our actual
experience when appropriate. We calculate our reserves to equal the amounts
that we expect will be sufficient to meet our policy obligations. Reserves also
include claims reported but not yet paid, claims incurred but not reported and
claims in the process of settlement.

   We reinsure portions of the risk we assume under our group accidental death
and dismemberment policies that are not eligible to receive experience based
refunds. In addition, we have catastrophic reinsurance on our group life and
accidental death and dismemberment products, with stated deductible amounts and
subject to contractual limits. We reinsure portions of our disability insurance
risks with third-party reinsurers. As of December 31, 2001, the amount of ceded
in force disability insurance premiums totaled $8.0 million, representing less
than 2% of our gross disability insurance in force.

Other Employee Benefits

Retirement Services

   Our Retirement Services unit distributes and services defined contribution
products for companies of all sizes. We offer products and services across the
defined contribution market--for example, the 401(a), 401(k), 403(b), 457 and
Taft-Hartley markets. We also offer products in the non-qualified retirement
market. Our flagship PruArray product includes proprietary and non-proprietary
investments. We also manufacture, distribute and administer guaranteed products
such as guaranteed investment contracts ("GIC"), funding agreements and group
annuities for defined contribution plans, defined benefit pension plans and
non-qualified entities.

   The following table sets forth the account values of Retirement Services'
products and the number of defined contribution plans and plan participants as
of the dates indicated.


                                                       As of December 31,
                                                 ------------------------------
                                                    2001       2000      1999
                                                 ---------- ---------- --------
                                                        ($ in billions)
                                                              
Defined contribution products account value(1):
   Proprietary.................................. $     17.6 $     19.1 $   20.5
   Non-proprietary..............................        7.0        6.9      5.3

                                                 ---------- ---------- --------
     Total account value........................ $     24.6 $     26.0 $   25.8

                                                 ========== ========== ========
Number of defined contribution plans............      7,842      8,127    7,868
Number of defined contribution plan participants  1,001,860  1,027,948  939,579
Guaranteed products total account value(2)(3):
   Spread-based products........................ $     18.9 $     19.2 $   20.0
   Fee-based products...........................       20.9       22.4     21.8

                                                 ---------- ---------- --------
     Total account value........................ $     39.8 $     41.6 $   41.8

                                                 ========== ========== ========

--------
(1)Includes mutual fund investments through defined contribution plan products.
(2)Includes $2.6 billion in 2001, $4.7 billion in 2000 and $4.6 billion in 1999
   of externally managed separate accounts.
(3)Includes $9.1 billion at December 31, 2001, $8.2 billion at December 31,
   2000 and $8.2 billion at December 31, 1999 of Prudential's retirement plan
   assets.

   Products

   Our primary defined contribution product, PruArray, offers plan sponsors
access to more than 500 mutual funds, 45 of which are sponsored by Prudential,
with the balance sponsored by more than 25 other mutual fund companies.
PruArray also offers stable value investment options. We tailor PruArray to the
various defined contribution product markets, as appropriate, and to suit
retirement plans of different sizes.

   We offer general account GICs and funding agreements, through which
customers deposit funds with us under contracts that typically provide for a
specified rate of interest on the amount invested through the maturity of the
contract. We are obligated to pay principal and interest according to the
contracts' terms. This obligation is

                                      24



backed by our general account assets, and we bear all of the investment and
asset/liability management risk on these contracts. As spread products, general
account GICs and funding agreements make a profit to the extent that the rate
of return on the investments we make with the invested funds exceeds the
promised interest rate and our expenses. Since 1998, we have offered our
credit-enhanced GIC, which has a triple-A rating, the highest rating possible,
as a result of a guarantee from a financial insurer. We also offer separate
account and synthetic GICs, through which we hold customers' funds either in a
separate account or in trust outside of our general account for the benefit of
the customer. We pass all of the investment results through to the customer,
subject to a minimum interest rate, and we do not earn spread income. As
fee-based products, separate account and synthetic GICs are less capital
intensive and produce lower levels of income than spread products. To the
extent that Prudential's asset management units are selected to manage client
assets associated with fee-based products, those units also earn investment
management fees from those relationships. A limited amount, $257 million, of
our in force GIC business at December 31, 2001 is putable to us at the option
of the holder prior to the applicable termination dates.

   We offer group annuities primarily to defined benefit plans to provide fixed
lifetime benefits for a specified group of plan participants. These annuities
are generally single premium annuities that provide for either immediate or
deferred payments. We offer fixed payment annuities backed by our general
account (spread products) as well as separate account annuities (fee products)
that permit a plan sponsor to realize the benefit of investment and actuarial
results while receiving a general account guarantee of minimum benefits. We
also offer group fixed and variable annuities to individuals taking lump sum
distributions from defined contribution plans.

   Finally, we offer structured settlement products, which are customized
annuities used to provide ongoing periodic payments to a claimant in
malpractice or personal injury lawsuits instead of a lump sum settlement.

   We set our rates for guaranteed products using a proprietary pricing model
that considers the investment environment and our risk, expense and
profitability assumptions. Upon sale of a product, we adjust the duration of
our asset portfolio and lock in the prevailing interest rates. We continuously
monitor cash flow experience and work closely with our Portfolio Management
Group to review performance and ensure compliance with our investment policy.
We perform cash flow testing on an annual basis using various interest rate
scenarios to determine the adequacy of our reserves for future benefit
obligations.

   Marketing and Distribution

   Historically, defined contribution plans have been sold through Financial
Advisors and, to a lesser extent, Prudential Agents. A high concentration of
these plans have been in the core and small plan markets, with less than $50
million in plan assets. To increase our market share, we created a distribution
network to include over 50 third-party distributors including brokers, regional
broker-dealers and others. In addition, in 1999 we created a small direct sales
force to develop sales among plans with greater than $50 million in plan assets.

   Because of downgrades of our claims-paying ratings in the mid-1990s,
including as recently as 1998, our ability to sell traditional guaranteed
products has been very limited, and we have focused our efforts on our
credit-enhanced GICs. Using a small direct sales force, we place most of our
traditional, separate account and credit-enhanced GIC business with clients
with whom we have an existing relationship.

Residential Real Estate Brokerage Franchise and Relocation Services

   Prudential Real Estate and Relocation Services is our integrated real estate
brokerage franchise and relocation services business. The real estate group
markets franchises primarily to existing real estate companies. As of December
31, 2001, there were approximately 1,571 franchise offices and approximately
43,000 sales associates in the franchise network.

   Our franchise agreements grant the franchisee the right to use the
Prudential name and real estate service marks in return for royalty payments on
gross commissions generated by the franchisees. The franchises generally are
independently owned and operated.

                                      25



   Our relocation group offers institutional clients a variety of services in
connection with the relocation of their employees. These services include
coordination of appraisal, inspection and sale of relocating employees' homes,
equity advances to relocating employees, assistance in locating homes at the
relocating employee's destination, household goods moving services, client
cost-tracking and a variety of relocation policy and group move consulting
services.

                            International Division

   Our International division offers its services through two segments:
International Insurance and International Securities and Investments.

 . International Insurance manufactures and distributes principally individual
   life insurance products to the affluent retail market in Japan, as well as
   Korea and Taiwan, and has commenced operations in selected Asian, Latin
   American and European countries. In April 2001, we acquired Kyoei Life
   Insurance Co., Ltd., now renamed Gibraltar Life Insurance Company, Ltd.
   ("Gibraltar Life"), which marketed four types of insurance products to the
   broad middle and upper middle market in Japan: individual life and indemnity
   health coverage; individual annuities; group life insurance; and group
   annuities. Gibraltar Life's primary business consists of individual
   protection products.

 . International Securities and Investments offers brokerage services,
   primarily in U.S. securities, asset management and financial advisory
   services to retail and institutional clients outside the United States.
   International Investments offers domestic and foreign proprietary and
   non-proprietary asset management services to mass affluent clients outside
   the United States, marketed through proprietary and non-proprietary
   distribution channels in selected international markets.

Division Strategy

   Our strategy is to grow our businesses in key international markets by
focusing on providing wealth growth and protection services for the affluent
and, in Japan, to the broad middle market. In executing this strategy, we
target those countries that we believe offer the opportunity and potential for
scale operations that will generate attractive financial returns.

   In International Insurance, our strategy has been to provide life insurance
products to affluent customers through a career agency force of well-trained,
motivated and predominantly university-educated professional representatives
known as Life Planners, using a needs analysis based sales process. We seek to
grow our established operations and to expand in selected international markets.

   With the acquisition of Gibraltar Life, we have expanded our International
Insurance strategy to provide life insurance products to the broad middle
market in Japan through a large contingent of Life Advisors increasingly
focused on needs analysis and customer service. Gibraltar Life has business
relationships with a number of affinity groups or "associations" that provide
us access to their members or employees.

   In our international securities business, we focus on delivering quality
investment advice and a wide breadth of product choice through highly trained
Financial Advisors to affluent individuals globally.

   In our international investments business we seek to expand our affluent
customer base outside the United States by increasing our global assets under
management, primarily by investing in asset management businesses around the
world.

International Insurance

   Our International Insurance segment manufactures and distributes individual
life insurance products to the affluent market in Japan and other foreign
markets through Life Planners. In addition, as a result of our acquisition of
Gibraltar Life, we now offer similar products to the broad middle market across
Japan through Life Advisors, which distribution channel we intend to operate
separately from our Life Planners. We commenced sales in foreign markets as
follows: Japan, 1988; Taiwan, 1990; Italy, 1990; Korea, 1991; Brazil, 1998;
Argentina, 1999; the Philippines, 1999; and Poland, 2000. We also have a
representative office in China.

                                      26



   We run each country operation on a stand-alone basis with local management
and sales teams initially supported by senior International Insurance staff
based in Asia and Newark. Each operation has its own marketing, underwriting
and claims and investment management functions. Each operation invests
predominantly in local currency securities, typically bonds issued by the local
government or its agencies. In our larger operations, we have more diversified
portfolios.

Operating Data

   The following table sets forth certain operating data for International
Insurance for the periods indicated.



                                                                                         Japan
                                                                        ---------------------------------------
                                                                        Excluding Gibraltar Life Gibraltar Life
                                                                        ------------------------ --------------
                                                                           As of or for Year      As of or for
                                                                           Ended December 31,      Year Ended
                                                                        ------------------------  December 31,
                                                                          2001    2000    1999      2001(3)
                                                                         ------  ------  ------  --------------
                                                                        ($ in millions unless otherwise noted)
                                                                                     
GAAP exchange rate basis(1):
Net premiums, policy charges and fee income............................ $1,526   $1,485  $1,244      $1,710
Annualized new business premiums....................................... $  370   $  359  $  302      $  110
Constant exchange rate basis(2):
Net premiums, policy charges and fee income............................ $1,526   $1,318  $1,160      $1,719
Annualized new business premiums....................................... $  370   $  319  $  282      $  110
Face amount of individual policies in force at year end ($ in billions) $  127   $  112  $   98      $  232
Average policy size ($ in thousands)................................... $  134   $  139  $  140      $   56
Number of individual policies in force (in thousands)..................    946      805     701       4,911
Number of Life Planners/Life Advisors..................................  1,992    1,811   1,681       6,121
Number of field managers...............................................    299      286     225         753
Number of agencies.....................................................     46       41      37          66




                                                                        All Other Countries          Total
                                                                        -------------------- ---------------------
                                                                         As of or for Year     As of or for Year
                                                                         Ended December 31,   Ended December 31,
                                                                        -------------------- ---------------------
                                                                         2001   2000   1999   2001    2000   1999
                                                                        ------ ------ ------ ------- ------ ------
                                                                          ($ in millions unless otherwise noted)
                                                                                          
GAAP exchange rate basis(1):
Net premiums, policy charges and fee income............................ $  408 $  287 $  178 $ 3,644 $1,772 $1,422
Annualized new business premiums....................................... $  212 $  150 $   96 $   692 $  509 $  398
Constant exchange rate basis(2):
Net premiums, policy charges and fee income............................ $  408 $  256 $  166 $ 3,653 $1,574 $1,326
Annualized new business premiums....................................... $  212 $  133 $   88 $   692 $  452 $  370
Face amount of individual policies in force at year end ($ in billions) $   38 $   26 $   16 $   397 $  138 $  114
Average policy size ($ in thousands)................................... $   68 $   66 $   62 $    69 $  116 $  119
Number of individual policies in force (in thousands)..................    536    376    261   6,393  1,181    962
Number of Life Planners/Life Advisors..................................  2,112  1,684  1,203  10,225  3,495  2,884
Number of field managers...............................................    491    448    364   1,543    734    589
Number of agencies.....................................................    105     88     68     217    129    105

--------
(1) When we show GAAP exchange rate information, we translate based on the
    applicable average exchange rate for the period shown.
(2) When we show constant exchange rate information, we translate based on the
    applicable average exchange rate for the year ended December 31, 2001.
(3) Amounts for Gibraltar Life are for the period April 2, 2001, the date of
    the reorganization, through November 30, 2001.

Products

   We currently offer various traditional whole life, term life and endowment
policies, which provide for payment on the earlier of death or maturity, in all
of the countries in which we operate. We also offer variable and
interest-sensitive life products and underwrite life reinsurance in Japan and
offer interest-sensitive products in Argentina. Generally, our international
insurance products are non-participating and denominated in local currency,
with the exception of products in Argentina, which are U.S. dollar denominated,
and some policies in Japan for which premiums and benefits are payable in U.S.
dollars.

                                      27



Marketing and Distribution

   Our Life Planner model is significantly different from the way traditional
industry participants offer life insurance in Japan and in some of the other
countries where we do business. It is different from the way in which we market
through the Life Advisors of Gibraltar Life as well. We believe that our
recruitment standards, training, motivation and compensation package are key to
the Life Planner model and have helped our International Insurance segment
achieve higher rates of agent retention, agent productivity and policy
persistency than our local competitors. In general, we recruit Life Planners
with:

   . university degrees, so that the Life Planner will have the same
     educational background and outlook as the target customer,

   . a minimum of two to three years sales or sales management experience,

   . no life insurance sales experience, and

   . a pattern of job stability and success.

   The Life Planner's objective is to sell protection-oriented life insurance
products on a needs basis to upper middle and upper income customers.

   The following table sets forth Life Planner retention, Life Planner
productivity and policy persistency information for the periods indicated.



                                       Japan
                             (excluding Gibraltar Life) All Other Countries     Total
                             -------------------------  ------------------  -------------
                              2001       2000    1999   2001     2000  1999 2001 2000 1999
                             ----       ----    ----    ----     ----  ---- ---- ---- ----
                                                           
Life Planner Retention:
   12 Month.................  90%        92%     91%     58%      66%   72%  66%  75%  79%
   24 Month.................  84%        83%     84%     49%      54%   60%  61%  65%  72%
Life Planner Productivity(1) 7.0        6.7     7.0     9.2      8.4   8.3  8.1  7.5  7.5
Policy Persistency(2):
   13 Months................  95%        95%     95%     90%      90%   87%  93%  94%  94%
   25 Months................  89%        90%     89%     84%      82%   74%  88%  88%  86%

--------
(1) Average number of policies issued per Life Planner each month.
(2) The percentage of policies issued that are still in force at the beginning
    of their second policy year or third policy year.

   Due to the recent acquisition and reorganization of Gibraltar Life, data as
to retention and productivity of its Life Advisors and policy persistency data
for 13 and 25 month periods would not be meaningful. In addition, a new
compensation plan was introduced in July 2001. It is designed to improve
productivity and persistency and is similar to compensation plans in our other
International Insurance operations. Life Advisor compensation, which was based
on a high fixed salary component in the past, has been changed to a variable
compensation structure. We have a transition plan in place that will last, for
some agents, until June 2003.

Underwriting and Pricing

   Our International Insurance segment is subject to substantial local
regulation that is generally more restrictive for product offerings, pricing
and structure than U.S. insurance regulation. Each International Insurance
country operation has its own underwriting department that employs variations
of our domestic practices in underwriting individual policy risks designed to
assess and quantify risks. In setting underwriting limits, we consider local
industry standards to prevent adverse selection and to stay abreast of industry
trends. We also set underwriting limits together with each operation's
reinsurers.

   Pricing of individual life insurance products, particularly in Japan and
Korea, is more regulated than in the United States. In Japan, premiums are
different for participating and non-participating products, but within each
product type they are generally uniform for all companies. The mortality and
morbidity rates and interest rates that we use to calculate premiums are
restricted by regulation on the basis of product type. The interest rates do
not always reflect the market rates we earn on our investments, and, as a
result, there have been periods when we have experienced negative spreads
between the rate we were required to pay and the rate we earned on investments.

                                      28



Reserves and Reinsurance

   We establish and carry as liabilities actuarially determined reserves, which
we believe will meet our future obligations. In Japan, we set reserves for
variable and interest-sensitive life products according to premiums collected
plus investment results credited less charges. We base other fixed death
benefit reserves on appropriate assumptions for investment yield, persistency,
mortality and morbidity rates, expenses and margins for adverse deviation.

   International Insurance reinsures portions of its insurance risks with both
selected third-party reinsurers and Prudential Insurance under reinsurance
agreements primarily on a yearly renewable term basis. International Insurance
also buys catastrophe reinsurance that covers multiple deaths from a single
occurrence in Japan and Taiwan and has a coinsurance agreement with Prudential
Insurance for U.S. dollar denominated business in Japan. The catastrophe
reinsurance market has tightened considerably since September 11, 2001,
resulting in significant increases in premium and additional exclusions from
coverage. As of December 31, 2001, the amount of ceded business in force
including Gibraltar Life totaled $15.8 billion to third-party reinsurers and
$46.7 billion to Prudential Insurance, representing 3.7% and 10.9% of
International Insurance's gross life insurance in force.

International Securities and Investments

   Our International Securities and Investments segment provides advice and
investment product choice to retail and institutional clients in selected
international markets. Our securities business offers financial advisory,
private banking and brokerage services, primarily in U.S. securities, as well
as sales and trading for a wide range of futures and forward contracts, on a
global basis, for retail and institutional customers. Our investments business
includes manufacturing of proprietary products and distribution of both
proprietary and non-proprietary products, all tailored to meet client needs in
the target countries.

   We conduct our securities operations through a network of 29 branch offices
in Europe, Asia and Latin America. At December 31, 2001, we had 633
international Financial Advisors and $20.2 billion of client assets under
management and administration. Our international operations also include a
private bank based in London with an office in Luxembourg and a private trust
company based in the Cayman Islands.

   We offer our international retail clients products and services similar to
the products we offer to domestic clients, including the Command account and
access to Prudential-Bache.com. In the United Kingdom and Hong Kong, we are
full service broker-dealers in local equities, supported by research and
securities clearing operations. We also provide our U.S. equity research
coverage and execution services to institutional clients.

   We manage our international Financial Advisors in a manner similar to our
domestic Financial Advisor force and compensate them using commission and
bonus. We generally recruit and train our own new Financial Advisors in our
international operations; however, our strategy of selectively entering local
markets through acquisitions also allows us to add Financial Advisors. In
September 1999, we acquired BH Matheson Holdings Limited, now named Prudential
Bache Holdings Limited, a London-based stockbroker, investment advisor and
asset manager with approximately $3.2 billion in institutional and retail
client assets at that time.

   Our futures operations provide advice, sales and trading on a global basis
covering a wide variety of commodity, financial and foreign exchange futures
and forward contracts, including agricultural commodities, base and precious
metals, major currencies, interest rate and stock indices. We conduct these
operations through offices in the United States, Europe and Asia, and we are
members of most major futures exchanges. We transact most of our business with
institutions. We conduct futures transactions on margin according to the
regulations of the different futures exchanges. As with any margin transaction,
the risk of credit loss is greater than in cash transactions.

   In our international investments business, we invest in asset management
businesses in targeted countries around the world in order to expand our mass
affluent customer base outside the United States and to increase our global
assets under management.

                                      29



                           Asset Management Division

   Our Asset Management division consists of two segments: Investment
Management and Advisory Services and Other Asset Management.

  .  Investment Management and Advisory Services provides investment management
     and advisory services primarily for the U.S. Consumer and Employee
     Benefits divisions of the Financial Services Businesses and the Closed
     Block Business. It also provides these services and related products
     across a broad range of asset classes directly to institutional clients,
     to whom it markets through its own sales force. This segment also engages
     in proprietary investments and syndications.

  .  Other Asset Management engages in equity securities sales and trading and
     investment research, and seeks to participate in securities underwritings,
     as a co-manager or other participant, where our research efforts are
     attractive to issuers and investment banks. This segment also includes
     commercial mortgage securitization operations and hedge portfolio
     investing.

Division Strategy

   Our Asset Management business strategy is to increase assets under
management and profitability by providing clients with consistently strong
investment performance, excellent service and a choice of quality products in a
way that uses our scale and breadth to their advantage. In addition, we seek to
earn incremental returns by extending our investment capabilities into
proprietary trading and investing in selected areas.

Investment Management and Advisory Services

Operating Data

   The following tables set forth the Investment Management and Advisory
Services segment's assets under management at fair market value by asset class
and source as of the dates indicated.



                                           December 31, 2001
                                   ---------------------------------
                                               Fixed    Real
                                   Equity(1) Income(2) Estate Total
                                   --------- --------- ------ ------
                                             (in billions)
                                                  
           Retail customers(3)....  $ 44.2    $ 52.3   $  --  $ 96.5
           Institutional customers    39.6      39.5    10.0    89.1
           General account........     1.9     110.5     1.4   113.8

                                    ------    ------   -----  ------
           Total..................  $ 85.7    $202.3   $11.4  $299.4

                                    ======    ======   =====  ======

                                           December 31, 2000
                                   ---------------------------------
                                               Fixed    Real
                                   Equity(1) Income(2) Estate Total
                                   --------- --------- ------ ------
                                             (in billions)
           Retail customers(3)....  $ 58.7    $ 48.7   $  --  $107.4
           Institutional customers    46.4      38.7    10.0    95.1
           General account........     2.2     105.6     2.2   110.0

                                    ------    ------   -----  ------
           Total..................  $107.3    $193.0   $12.2  $312.5

                                    ======    ======   =====  ======

                                           December 31, 1999
                                   ---------------------------------
                                               Fixed    Real
                                   Equity(1) Income(2) Estate Total
                                   --------- --------- ------ ------
                                             (in billions)
           Retail customers(3)....  $ 60.2    $ 48.3   $  --  $108.5
           Institutional customers    52.9      35.3     8.6    96.8
           General account........     3.1     102.8     2.0   107.9

                                    ------    ------   -----  ------
           Total..................  $116.2    $186.4   $10.6  $313.2

                                    ======    ======   =====  ======


                                      30



--------
(1) Includes private equity investments of institutional customers of $0.6
    billion as of December 31, 2001, $0.6 billion as of December 31, 2000 and
    $1.2 billion as of December 31, 1999, and private equity assets in our
    general account of $1.4 billion, $1.3 billion, and $1.2 billion as of those
    dates, respectively.

(2) Includes private fixed income assets of institutional customers of $4.1
    billion as of December 31, 2001, $4.2 billion as of December 31, 2000, and
    $3.4 billion as of December 31, 1999, and private fixed income assets in
    our general account of $45.1 billion, $45.9 billion, and $46.1 billion, as
    of those dates. Included in these private fixed income assets are
    commercial and agricultural mortgages for institutional customers of $2.6
    billion as of December 31, 2001, $3.0 billion as of December 31, 2000, and
    $2.1 billion as of December 31, 1999, and commercial and agricultural
    mortgages for our general account of $16.9 billion, $17.0 billion, and
    $16.6 billion as of those dates, respectively.

(3) Consists of individual mutual funds and both variable annuities and
    variable life insurance in our separate accounts. Fixed annuities and the
    fixed-rate option of both variable annuities and variable life insurance
    are included in our general account.

   Most of the retail customer assets reflected in the foregoing tables are
invested through our mutual funds and variable annuities described above under
"--U.S. Consumer Division--Retail Investments--Products," and the remainder is
invested through our variable life insurance products described above under
"--U.S. Consumer Division--Individual Life Insurance--Products.'' These assets
under management are gathered by the U.S. Consumer division. In addition, we
use the platforms that provide asset management for the institutional products
and services described below to provide asset management for our retail
customers' assets within this segment and for our general account. We discuss
our general account below under "--General Account Investments."

   The following is a description of Investment Management and Advisory
Services' institutional products and services.

Products and Services

   Institutional Public Equity and Fixed Income Asset Management

   Our institutional public equity and fixed income units provide discretionary
and non-discretionary asset management services to a broad array of
institutional clients. These units managed $74.4 billion of our $89.1 billion
and $80.3 billion of our $95.1 billion of institutional assets under management
as of December 31, 2001 and December 31, 2000. Of the $74.4 billion, $53.2
billion was gathered by the Asset Management division's sales force, and $21.2
billion was acquired by the sales forces of the Employee Benefits division and,
commencing in the fourth quarter, the International division. Of the $80.3
billion, $59.7 billion was gathered by the Asset Management division's sales
force and $20.6 billion was gathered by the Employee Benefits division's sales
forces. We manage a broad array of publicly traded equity and debt asset
classes using various investment styles. In 2000, substantially all of our
public equity asset management capabilities were consolidated into our
wholly-owned subsidiary, Jennison Associates, LLC ("Jennison"). Jennison is a
widely recognized manager of institutional assets and is a leading subadvisor
for mutual fund assets.

   Institutional Real Estate and Private Equity Asset Management

   Our real estate unit provides asset management services for single-client
and commingled real estate portfolios and manufactures and manages a variety of
real estate investment vehicles for institutional clients. These operations
accounted for $10.0 billion of our assets under management as of December 31,
2001 and December 31, 2000. Our real estate investment vehicles range from
fully diversified funds to specialized funds that invest in specific types of
properties or specific geographic regions or follow other specific investment
strategies.

   Our private equity asset management unit includes venture capital, leveraged
buyouts, development capital, mezzanine debt and special situation subclasses.
Recently, we have decided to divest certain of these activities, and to
integrate the activities that remain into the rest of our investment management
business.

   Commercial Mortgage Origination and Servicing

   Our commercial mortgage banking business provides mortgage origination and
servicing for our general account and institutional clients. The unit also
originates and purchases commercial mortgages for sale in securitization
transactions. Origination and servicing activity is included in this segment.
Securitization activity

                                      31



is included in the Other Asset Management segment, as described below under
"--Other Asset Management--Commercial Mortgage Securitization."

   In May 2000, we acquired The WMF Group, Ltd., a leading originator and
servicer of multi-family and commercial mortgage loans, which was combined with
the rest of our commercial mortgage banking activities. The WMF businesses that
were acquired include Fannie Mae loan origination and servicing, FHA loan
origination and servicing and a high-yield real estate funds management company.

   At December 31, 2001, we serviced commercial mortgage loans of $14.5 billion
for third parties, and we serviced and managed $16.9 billion of commercial
mortgage loans owned by Prudential and $2.6 billion owned by institutional
investors. At December 31, 2000, we serviced commercial mortgage loans of $13.6
billion for third parties, and we serviced and managed $17.0 billion of
commercial mortgage loans owned by Prudential and $3.0 billion owned by
institutional investors.

   Proprietary Investments and Syndications

   We also make proprietary investments in public and private debt and equity
securities, including controlling interests, with the intention to sell or
syndicate to investors, including our general account. As of December 31, 2001,
we had invested approximately $161 million in this portfolio. After sale or
syndication, these assets are managed by our Investment Management and Advisory
Services segment.

Other Asset Management

Equity Securities Sales and Trading

   We engage in equity securities sales and trading, and pursue co-manager
positions and participations in underwritings where our research efforts are
attractive to issuers and lead underwriters. We execute client transactions in
equity securities on both an agency and a principal basis in listed and NASDAQ
equities and equity options and make a market in 468 NASDAQ securities.

Investment Research

   Our analysts, who numbered 54 as of December 31, 2001, produce reports and
studies on the economy; the equity markets; industries and specific companies;
investment and portfolio strategies; and regulatory, political, legislative and
tax issues. In the past we focused our research on many of the same industries
and market segments that were covered by our former lead-managed equity
underwriting for corporate issuers and institutional fixed income businesses.
We are now focusing our research on companies of interest to our retail and
institutional customers, as our research is intended to provide information and
advice to investor clients.

Commercial Mortgage Securitization

   We sell commercial mortgages originated by the Investment Management and
Advisory Services segment, together with other commercial mortgages we may
purchase for this purpose, in securitization transactions. We also make interim
loans when we expect the loan to lead to a securitization opportunity. As of
December 31, 2001, our warehouse balance of mortgages pending securitization
and interim loans totaled approximately $1.1 billion.

Hedge Portfolios

   In 1998, we started a hedge portfolio that holds principal positions in U.S.
government and agency securities and hedges them with short positions in
similar securities in order to utilize our general account investment
management strengths. We currently have authorized a maximum aggregate
principal position limit of $10 billion and associated asset-based financing
for this hedge portfolio. In December 1999, we began operating a second hedge
portfolio, that involves a wider range of security types, including domestic
and foreign investment grade corporate bonds, foreign sovereign debt and
currency forward contracts and has an authorized maximum aggregate principal
position limit of $2 billion and associated asset-based financing. As of
December 31, 2001, the hedge portfolios had a total carrying value of
approximately $3.9 billion, reflecting both principal positions and securities
financing positions.

                                      32



                        Corporate and Other Operations

   Our Corporate and Other operations include corporate-level activities and
international ventures that we do not allocate to our business segments.
Corporate-level activities consist primarily of corporate-level income and
expenses not allocated to any of our business segments, including costs for
company-wide initiatives such as enhancement of our Internet capabilities and
income from our own qualified pension plans, as well as investment returns on
our capital that is not deployed in any of our business segments. Our Corporate
and Other operations also include returns from investments that we do not
allocate to any of our business segments. These investments, including cash and
cash equivalents, totaled $18.3 billion and $9.1 billion as of December 31,
2001 and December 31, 2000, respectively. Historically, as part of our
corporate investment activities, we borrowed funds and used our asset/liability
management skills to earn additional spread income on the borrowed funds. These
activities were substantially curtailed in 2001. During the last five years, we
have divested or stopped pursuing a number of under-performing businesses, most
of which were incurring losses. Corporate and Other operations include these
divested and wind-down businesses, except for our divested healthcare business,
which is treated as a discontinued operation.

Wind-down Businesses

Group Credit Insurance

   We ceased issuing new group policies in our group credit insurance
operations in 1996. We ceded through assumption reinsurance a significant
portion of the business pursuant to which the reinsurer assumes the role of the
insurer, or terminated substantially all of our outstanding balance business in
1997 and 1998. We estimate that a substantial majority of our remaining group
credit insurance business will expire by 2006, although the latest policy
expiration date is in 2027. As of December 31, 2001, our reserves for future
policy benefits and claims for the remaining in force group credit insurance
business total approximately $17.5 million.

Individual Health

   In 1992, we ceased writing individual disability income policies and a year
later ceased writing hospital expense and major medical policies due to
declining sales and poor financial results. Most of our disability income
policies are noncancelable, which means that we can neither change the premium
nor cancel the coverage. The 1997 Health Insurance Portability and
Accountability Act guarantees renewal of all health policies. Under certain
circumstances, we are permitted to change the premiums charged for individual
health coverage if we can demonstrate that the premiums have not been
sufficient to pay claims and expenses. As of December 31, 2001, we had reserves
of $81 million for approximately 44,000 individual health policies and reserves
of $49 million for approximately 29,500 individual disability income policies
in effect at that date. As of July 1, 1999, we reinsured all the disability
income policies.

Canadian Operations

   We have retained and continue to service several blocks of insurance not
sold with our divested Canadian businesses described under "--Divested
Businesses--Divested Canadian Businesses" below. These blocks represent
approximately $118 million of policy liabilities at December 31, 2001. These
blocks of insurance include the policies that are included in the Canadian
closed block described above under "--Demutualization and Related
Transactions--The Closed Blocks." A significant portion of the retained
business constitutes paid-up individual life insurance.

Divested Businesses

   The following operations are businesses that we previously divested but that
do not qualify for "discontinued operations" accounting treatment under GAAP.
We include the results of these divested businesses in our income from
continuing operations before income taxes, but we exclude these results from
our adjusted operating income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Consolidated Results of
Operations--Adjusted Operating Income" for an explanation of adjusted operating
income.

                                      33



Lead-Managed Equity Underwriting for Corporate Issuers and Institutional Fixed
Income Activities of Prudential Securities

   In the fourth quarter of 2000, we announced a restructuring of Prudential
Securities' activities to implement a fundamental shift in our business
strategy. We have exited the lead-managed equity underwriting for corporate
issuers and institutional fixed income businesses. The total reduction in
staffing from the former lead-managed underwriting and institutional fixed
income businesses of Prudential Securities involved approximately 700 positions.

Gibraltar Casualty

   On September 19, 2000, we sold all of the stock of Gibraltar Casualty
Company, our commercial property and casualty insurer that we had placed in
wind-down status in 1985. Gibraltar Casualty's business consisted
primarily of surplus and excess lines insurance, including property, casualty,
professional liability and product liability, underwritten for medium to large
corporations. As of the date of sale, Gibraltar Casualty's largest continuing
exposures were potential liabilities for asbestos and environmental damages.
The ultimate liability for asbestos and environmental claims cannot be
estimated using traditional reserving techniques due to significant
uncertainties. In addition, Gibraltar Casualty faced potential liability
arising from claims for latent injury product exposures involving silicone
implants, HIV-contaminated blood products and pharmaceutical products. Upon
closing of the sale, we entered into a stop-loss agreement with the purchaser
under which we will reinsure the purchaser for up to 80% of the first $200
million of any adverse loss development in excess of Gibraltar Casualty's
carried reserves as of the closing date of the transaction. We believe that any
payments ultimately made pursuant to the stop-loss agreement will not have a
material adverse effect on our financial position.

Divested Canadian Businesses

   We previously sold individual and group life insurance, annuities and group
health insurance in Canada through a Canadian branch of Prudential Insurance
and through Prudential of America Life Insurance Company, as well as property
and casualty insurance through Prudential of America General Insurance Company
(Canada) and OTIP/RAEO Benefits Incorporated. In 1996, except as noted above,
we sold substantially all of the Canadian branch's operations and policies in
force and all of our Canadian property and casualty operations. Also, in 2000,
we sold our interest in Prudential of America Life Insurance Company.

   In the sale of the life insurance operations, the purchaser assumed through
assumption reinsurance, pursuant to which it assumed our role as insurer,
approximately $3 billion of our insurance and annuity liabilities, received an
equal amount of investment assets to support the assumed liabilities and
purchased substantially all of the Canadian branch's operating assets. We have
indemnified the purchaser for damages with respect to any claims related to
sales practices or market conduct issues arising from the Canadian branch's
operations prior to the sale. We retained no policy liabilities with respect to
the property and casualty insurance business following that company's sale.
While there can be no assurance, we believe we have reserved in all material
respects for any contingent liabilities arising from these divested Canadian
businesses prior to sale. In connection with the sales, we agreed to refrain
from conducting new individual and group life and health insurance, annuity,
property and casualty insurance and mutual funds business in Canada for five
years from the applicable sale date.

Residential First Mortgage Banking

   Prior to May 1996, we conducted substantial residential first mortgage
banking and related operations through The Prudential Home Mortgage Company,
Inc. and its affiliates. Prudential Home Mortgage originated and purchased
residential first mortgage loans and generally sold the loans it originated and
purchased, through both direct sales and securitizations, while retaining the
servicing rights and ongoing servicing fees. We decided to sell Prudential Home
Mortgage in 1995 and sold substantially all of the business operations and
mortgage loan inventory and approximately two-thirds of the loan servicing
rights in 1996. In 1997, we sold substantially all of the remaining loan
servicing rights and, since 1996, have sold most of its remaining first
mortgage loans, foreclosed properties and other assets.

   We remain liable with respect to claims concerning these operations prior to
sale, including claims made by borrowers under the loans Prudential Home
Mortgage originated or serviced, purchasers of the loans Prudential Home
Mortgage sold, investors in the mortgage-backed securities issued in the
securitizations and purchasers of

                                      34



the operations and servicing rights. Since the sale of the operations, we have
been involved in a number of class action lawsuits relating to Prudential Home
Mortgage's operations prior to sale that remain pending. These class action
lawsuits primarily allege that certain of Prudential Home Mortgage's loan
origination or servicing practices violated applicable federal or state
consumer protection laws. While we believe that as of December 31, 2001 we had
adequately reserved in all material respects for the remaining liabilities
associated with Prudential Home Mortgage, we may be required to take additional
charges that could be material to our results of operations.

                             Closed Block Business

   As a mutual insurance company, we issued most of our individual life
insurance products on a "participating" basis, whereby policyholders are
eligible to receive policyholder dividends reflecting experience. These life
insurance products were historically included in our Traditional Participating
Products segment. In connection with the demutualization, we ceased offering
domestic participating products. The liabilities for our individual in force
participating products were segregated, together with assets that will be used
exclusively for the payment of benefits and policyholder dividends, expenses
and taxes with respect to these products, in the Closed Block. We selected the
amount and type of Closed Block Assets and Closed Block Liabilities included in
the Closed Block so that the Closed Block Assets initially had a lower book
value than the Closed Block Liabilities. We expect that the Closed Block Assets
will generate sufficient cash flow, together with anticipated revenues from the
Closed Block Policies, over the life of the Closed Block to fund payments of
all policyholder benefits to be paid to, and the reasonable dividend
expectations of, policyholders of the Closed Block Policies. We also segregated
for accounting purposes the Surplus and Related Assets that we need to hold
outside the Closed Block to meet capital requirements related to the products
included within the Closed Block. No policies sold after demutualization will
be added to the Closed Block and its in force business is expected to
ultimately decline as we pay policyholder benefits in full. We expect the
proportion of our business represented by the Closed Block to decline as we
grow other businesses. A minor portion of our Traditional Participating
Products segment consisted of other traditional insurance products that are not
included in the Closed Block.

   Historically, the participating products included in the Closed Block have
yielded lower returns on capital invested than many of our other businesses.
The separation for reporting purposes of the Closed Block Business from our
Financial Services Businesses permits us to better identify the results of
these businesses. However, the relatively lower returns on traditional
participating products will continue to affect our consolidated results of
operations for many years.

   Our strategy for the Closed Block Business is to maintain the Closed Block
as required by our Plan of Reorganization over the time period of its gradual
diminishment as policyholder benefits are paid in full. As discussed in Note 9
to the Consolidated Financial Statements, if performance of the Closed Block is
more favorable than we originally assumed in funding, we will pay the excess to
Closed Block policyholders as additional policyholder dividends, and it will
not be available to shareholders. For discussion of the Closed Block Business,
see "--Demutualization and Related Transactions."

                      Discontinued Operations--Healthcare

Overview and Principal Sale Transaction

   We sold substantially all of the assets and liabilities of our group managed
and indemnity healthcare business to Aetna Inc. in a transaction that closed on
August 6, 1999.

   We agreed not to re-enter, directly or through acquisitions, the group
managed or indemnity healthcare business until August 6, 2004. We also entered
into a trademark license agreement that granted Aetna a non-exclusive license
to use certain Prudential trademarks in connection with the disposed healthcare
business until January 31, 2002, subject to extension in certain circumstances.
Aetna has requested an extension of this agreement.


                                      35



   The sale to Aetna did not include our 50% interest in Rush Prudential Health
Plans, a joint venture with Rush-Presbyterian--St. Luke's Medical Center of
Chicago that provided managed and indemnity health care coverages. On March 1,
2000, we and our joint venture partner completed the sale of this joint venture
to WellPoint Health Networks, Inc.

   We retained all liabilities associated with litigation that existed at the
closing date or commenced within two years of that date (i.e., August 6, 2001)
with respect to claims relating to events that occurred prior to the closing
date. While we believe that at December 31, 2001 we had adequately reserved in
all material respects for remaining costs and liabilities associated with the
healthcare business, taking into account amounts paid and received to date, we
may be required to take additional charges that could be material to our
results of operations.

                     Intangible and Intellectual Property

   We use numerous federal, state and foreign service and trademarks. We
believe that the goodwill associated with many of our marks, particularly the
word marks "Prudential," "Prudential Insurance," "Prudential Securities,"
"Prudential Investments" and "Prudential Real Estate" and our "Rock" logo, are
significant competitive assets in the United States. In a number of countries
outside North and South America, primarily the United Kingdom, western Europe,
Hong Kong and Singapore, we are unable to use the "Prudential" name. Where
these limitations apply, we combine our "Rock" logo with alternative word
marks. We believe that these limitations do not materially affect our ability
to operate or expand internationally.

                          General Account Investments

   We maintain a diversified investment portfolio in our insurance companies to
support our liabilities to customers in our Financial Services Businesses,
including the U.S. Consumer, Employee Benefits and International divisions and
certain of our Corporate and Other operations, and the Closed Block Business,
as well as our other general liabilities. Our general account does not include
assets of our securities brokerage, securities trading, banking operations,
assets of our asset management operations managed for third parties, and
separate account assets for which the customer assumes risks of ownership.

Management of Investments

   We design asset mix strategies for our general account to match the
characteristics of our products and other obligations and seek to closely
approximate the interest rate sensitivity of the assets with the estimated
interest rate sensitivity of the product liabilities. We achieve income
objectives through asset/liability management and strategic and tactical asset
allocations within a disciplined risk management framework. Our asset
allocation also reflects our desire for broad diversification across asset
classes, sectors and issuers.

   The Investment Committee of our Board of Directors oversees our proprietary
investments. It also reviews performance and risk positions quarterly. Our
Senior Vice President, Asset Liability and 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 develops investment
objectives, performance factors and measurement and asset allocation ranges.

   The Asset Liability and Risk Management Group works closely with each of our
business units to ensure that the specific characteristics of our products are
incorporated into its processes. The Asset Liability and Risk Management Group
has the authority to initiate tactical shifts within exposure ranges approved
annually by the Investment Committee. The Investment Management and Advisory
Services segment manages virtually all of

                                      36



our investments, other than those of our International Insurance operations,
under the Asset Liability and Risk Management Group's direction. Our
International Insurance operations manage the majority of their investments
locally.

Asset/Liability Management

   The Asset Liability and Risk Management Group uses a disciplined,
risk-controlled approach to asset/liability management. The methodology focuses
on aligning assets to the effective sensitivity of the cash flow and return
requirements of our liabilities. The Asset Liability and Risk Management Group
consults with the product experts in the business units on an ongoing basis to
arrive at asset/liability matching policies and decisions. We adjust this
dynamic process as products change, as we develop new products and as changes
in the market environment occur.

   We develop asset strategies for specific classes of product liabilities and
attributed or accumulated surplus, each with distinct risk characteristics. We
categorize products in the following four classes:

  .  interest-crediting products, for which the rates credited to customers are
     periodically adjusted to reflect market and competitive forces and actual
     investment experience, such as fixed annuities;

  .  participating individual and experience rated group products, in which
     customers participate in actual investment and business results through
     annual dividends, interest or return of premium;

  .  guaranteed products, for which there are price or rate guarantees for the
     life of the contract, such as GICs; and

  .  other products, such as automobile and homeowners insurance.

   We determine a target asset mix for each product class that we reflect in
our investment policies. Our asset/liability management process has permitted
us to manage interest-sensitive products successfully through several market
cycles.

Summary of Investments

   Since the date of demutalization, we have allocated our investments between
the Financial Services Businesses and Closed Block Business. Accordingly, the
following tables provide investment information allocated between the Financial
Services Businesses and Closed Block Business as of December 31, 2001.

   The following table sets forth the composition of the investments of our
general account as of the dates indicated.



                                                                  As of December 31,
                                                  --------------------------------------------------
                                                                 2001                      2000
                                                  ----------------------------------  --------------
                                                  Financial   Closed
                                                   Services   Block            % of            % of
                                                  Businesses Business  Total   Total   Total   Total
                                                  ---------- -------- -------- -----  -------- -----
                                                                    ($ in millions)
                                                                             
Fixed maturities:
   Public available for sale, at fair value......  $51,173   $26,634  $ 77,807  51.8% $ 62,454  47.6%
   Public held to maturity, at amortized cost....      318     --          318   0.2       757   0.6
   Private available for sale, at fair value.....   17,612    14,428    32,040  21.3    21,294  16.2
   Private held to maturity, at amortized cost...       53     --           53   0.0    11,686   8.9
Trading account assets, at fair value............      112     --          112   0.1         3   0.0
Equity securities, at fair value.................    1,675       584     2,259   1.5     2,315   1.8
Commercial loans, at book value..................   13,070     6,106    19,176  12.8    15,418  11.8
Other long-term investments(1)...................    4,013     1,082     5,095   3.4     4,259   3.2
Policy loans, at outstanding balance.............    2,812     5,758     8,570   5.7     8,046   6.1
Short-term investments, at amortized cost........    2,972     1,882     4,854   3.2     4,963   3.8

                                                   -------   -------  -------- -----  -------- -----
   Total investments.............................  $93,810   $56,474  $150,284 100.0% $131,195 100.0%

                                                   =======   =======  ======== =====  ======== =====

--------
(1)Other long-term investments consist of real estate and non-real estate
   related investments in joint ventures and partnerships, investment real
   estate held through direct ownership, our interest in separate account
   investments and other miscellaneous investments.

   The overall income yield on our general account invested assets after
investment expenses, but excluding realized investment gains (losses), was
5.58% for the year ended December 31, 2001, 6.85% for 2000 and 6.97% for 1999.
The decline in yield on the portfolio in 2001 from 2000 reflects the addition
of lower-yielding

                                      37



investments due to the acquisition of Gibraltar Life in April 2001. The
annualized yield on the investment portfolio of our Japanese insurance
operations, including Gibraltar Life, for the year ended December 31, 2001 was
1.52%. In addition, reinvestment at lower interest rates during 2001 reduced
the yield on our domestic asset base.

   The following table sets forth the income yield and investment income,
excluding realized investment gains/losses, for each major asset category of
our general account for the periods indicated.



                                                                   As of December 31,
                                      -----------------------------------------------------------------------------
                                                                    2001                                    2000
                                      ----------------------------------------------------------------  ------------
                                      Financial Services Businesses  Closed Block Business   Combined     Combined
                                      -----------------------------  --------------------- ------------ ------------
                                      Yield           Amount         Yield      Amount     Yield Total  Yield Total
                                      -----           ------         -----      ------     ----- ------ ----- ------
                                                                     ($ in millions)
                                                                                      
Fixed maturities..................... 5.60%           $3,820         7.62%      $3,013     6.37% $6,833 7.54% $6,958
Equity securities.................... 0.78                19         2.76           26     1.30      45 2.42      67
Commercial loans..................... 6.40               761         8.80          634     7.27   1,395 8.23   1,255
Policy loans......................... 5.81               164         6.44          358     6.22     522 6.34     478
Short-term investments and cash
 equivalents......................... 2.32               251         4.62          202     2.98     453 7.58     683
Other investments.................... 7.27               252         5.69           76     6.96     328 9.54     420
                                      ----            ------         ----       ------     ----  ------ ----  ------
   Total before investment expenses.. 5.28%           $5,267         7.32%      $4,309     6.06% $9,576 7.54% $9,861
   Total after investment expenses... 4.93%           $4,938         6.62%      $3,897     5.58% $8,835 6.85% $8,990


   Portfolio composition is a critical element of the investment management
process. The composition of our general account reflects, within the discipline
provided by our risk management approach, our need for competitive results and
the diverse selection of investment alternatives available through our
Investment Management and Advisory Services segment. The size of our portfolio
enables us to invest in asset classes that may be unavailable to the typical
investor.

Fixed Maturity Securities

   We held approximately 73% of general account assets in fixed maturity
securities at December 31, 2001, unchanged from 73% at December 31, 2000. These
securities include both publicly traded and privately placed debt securities.
In our international portfolios, our investments are predominantly foreign
government securities.

   Subject to our adjusted operating income objectives, 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 subsidiaries, to a profile
that reflects local market regulations and our investment competencies in these
markets. We seek to employ relative value analysis both in credit selection and
in purchasing and selling securities. To the extent that we actively purchase
and sell securities as part of portfolio selection and portfolio rebalancing,
the total return that we earn on the portfolio will be reflected both as
investment income and also as realized gains or losses on investments. We
expect that using this strategy in a declining interest rate environment will
result in lower investment income partially offset by realized investment gains
and that using this strategy when rates are rising will result in increased
investment income partially offset by realized investment losses.

   We use our private placement and asset-backed portfolios to enhance the
diversification and yield of our overall fixed maturity portfolio. Within our
domestic portfolios, we maintain a private fixed income portfolio that is
larger than the industry average as a percentage of total fixed income
holdings, according to A.M. Best. Our investment staff directly originates
approximately half of all of our private placements. Our origination capability
offers the opportunity to lead transactions and gives us the opportunity for
better terms, including covenants and call protection, and to take advantage of
innovative deal structures.

   Our credit and portfolio management processes help ensure prudent controls
over valuation and management of the private portfolio. We have separate
pricing and authorization processes to establish "checks and balances" for new
investments. We apply consistent standards of credit analysis and due diligence
for all transactions, whether they originate through our own in-house
origination staff or through agents. Our regional offices closely monitor the
portfolios in their regions. We set all valuation standards centrally, and we
assess the fair value of all investments quarterly.

                                      38



   The following table sets forth the composition of our fixed maturity
portfolio by industry category as of the dates indicated.



                                            As of December 31,
                          -------------------------------------------------------
                                                   2001
                          -------------------------------------------------------
                          Financial Services Businessess  Closed Block Business
                          ------------------------------ ------------------------
                                        % of                       % of
                          Amortized     Total    Fair    Amortized Total   Fair
                            Cost        Cost     Value     Cost    Cost    Value
                          ---------    -----    -------  --------- -----  -------
                                              ($ in millions)
                                                        
  U.S. Government........  $ 5,274       7.8%  $ 5,382    $ 4,563   11.4% $ 4,666
  Manufacturing..........   11,418      16.9    11,684      7,742   19.3    7,834
  Utilities..............    7,531      11.1     7,883      6,316   15.7    6,494
  Finance................    7,661      11.3     7,918      4,268   10.6    4,402
  Services...............    6,652       9.8     6,774      5,078   12.6    5,176
  Mortgage-backed........    1,788       2.7     1,868      3,381    8.4    3,446
  Foreign government.....   16,486      24.4    16,698        942    2.3    1,006
  Retail and wholesale...    2,265       3.4     2,321      2,399    6.0    2,449
  Asset-backed securities    5,175       7.7     5,281      2,356    5.9    2,399
  Transportation.........    1,795       2.7     1,779      1,275    3.2    1,268
  Energy.................      773       1.1       809        799    2.0      819
  Other..................      753       1.1       780      1,052    2.6    1,103
                           -------      -----   -------   -------  -----  -------
    Total................  $67,571     100.0%  $69,177    $40,171  100.0% $41,062
                           =======      =====   =======   =======  =====  =======




                                          As of December 31,
                         -----------------------------------------------------
                                    2001                       2000
                         -------------------------- --------------------------
                                   Total                      Total
                         -------------------------- --------------------------
                                   % of   Estimated           % of   Estimated
                         Amortized Total    Fair    Amortized Total    Fair
                           Cost    Cost     Value     Cost    Cost     Value
                         --------- -----  --------- --------- -----  ---------
                                            ($ in millions)
                                                   
 U.S. Government........ $  9,837    9.1% $ 10,048   $10,109   10.6%  $10,639
 Manufacturing..........   19,160   17.7    19,518    18,864   19.7    18,689
 Utilities..............   13,847   12.9    14,377    15,688   16.4    15,771
 Finance................   11,929   11.1    12,320    11,792   12.3    11,931
 Services...............   11,730   10.9    11,950    11,264   11.8    11,204
 Mortgage-backed........    5,169    4.8     5,314     6,495    6.8     6,669
 Foreign government.....   17,428   16.2    17,704     4,650    4.9     4,853
 Retail and wholesale...    4,664    4.3     4,770     4,022    4.2     4,005
 Asset-backed securities    7,531    7.0     7,680     6,063    6.4     6,068
 Transportation.........    3,070    2.8     3,047     3,233    3.4     3,199
 Energy.................    1,572    1.5     1,628       937    1.0       947
 Other..................    1,805    1.7     1,883     2,361    2.5     2,382

                         --------  -----  --------   -------  -----   -------
    Total............... $107,742  100.0% $110,239   $95,478  100.0%  $96,357

                         ========  =====  ========   =======  =====   =======


   At December 31, 2001, securities backed by residential mortgage loans made
up less than 5% of our fixed maturity investments. Nearly 95% of the
mortgage-backed securities in the general account were publicly traded agency
pass-through securities. Collateralized mortgage obligations represented only
5% of our total mortgage-backed securities, and less than 0.2% of fixed
maturities. The primary risk of these mortgage-backed securities is the rate at
which the loans are prepaid. The loans can generally be prepaid at any time
without penalty. As a general rule, when the interest rates on the loans
underlying the securities are significantly higher than prevailing interest
rates on similar loans, borrowers are more likely to prepay their loans, and we
would likely reinvest the prepayment proceeds in lower interest rate
obligations, with a resulting net reduction of our future investment income.

   The amortized cost of our below-investment grade fixed maturities as of
December 31, 2001 totaled $10.2 billion, or 9.5%, of total fixed maturities on
that date, compared to $10.2 billion, or 10.7%, as of December 31, 2000. The
decrease in the percentage of below-investment grade fixed maturities at
December 31, 2001 from a year earlier came primarily from the addition of
Gibraltar Life's investment portfolio in April 2001.

                                      39



   The NAIC evaluates the investments of insurers for regulatory reporting
purposes and assigns fixed maturity securities to one of six categories called
"NAIC Designations." NAIC designations of "1" or "2" include fixed maturities
considered investment grade, which include securities rated Baa3 or higher by
Moody's or BBB- or higher by S&P. NAIC Designations of "3" through "6" are
referred to as below investment grade, which include securities rated Ba1 or
lower by Moody's and BB+ or lower by S&P. The fixed maturity securities
designated as NAIC 6 include securities that are not rated. The following
tables set forth our public and private fixed maturity portfolios by NAIC
rating as of the dates indicated.

                   Public Fixed Maturities by Credit Quality



                                                   As of December 31,
                                --------------------------------------------------------
                                                          2001
                                --------------------------------------------------------
                                Financial Services Businesses   Closed Block Business
                                ----------------------------- --------------------------
                                             % of   Estimated           % of   Estimated
 NAIC                           Amortized    Total    Fair    Amortized Total    Fair
Rating Rating Agency Equivalent   Cost       Cost     Value     Cost    Cost     Value
------ ------------------------ ---------    -----  --------- --------- -----  ---------
                                                    ($ in millions)
                                                          
  1       Aaa, Aa, A...........  $36,706      72.6%  $37,502   $17,514   67.2%  $17,993
  2       Baa..................   11,286      22.3    11,484     6,257   24.0     6,348
  3       Ba...................    1,501       3.0     1,518     1,392    5.3     1,419
  4       B....................      683       1.4       646       753    2.9       739
  5       C and lower..........      112       0.2       116       122    0.5       122
  6       In or near default...      246       0.5       241        12    0.1        13

                                 -------     -----   -------   -------  -----   -------
          Total................  $50,534     100.0%  $51,507   $26,050  100.0%  $26,634

                                 =======     =====   =======   =======  =====   =======




                                                 As of December 31,
                                -----------------------------------------------------
                                           2001                       2000
                                -------------------------- --------------------------
                                          Total                      Total
                                -------------------------- --------------------------
                                          % of   Estimated           % of   Estimated
 NAIC                           Amortized Total    Fair    Amortized Total    Fair
Rating Rating Agency Equivalent   Cost    Cost     Value     Cost    Cost     Value
------ ------------------------ --------- -----  --------- --------- -----  ---------
                                                   ($ in millions)
                                                       
  1       Aaa, Aa, A...........  $54,220   70.8%  $55,495   $42,311   67.6%  $43,208
  2       Baa..................   17,543   22.9    17,832    15,346   24.5    15,273
  3       Ba...................    2,893    3.8     2,937     2,427    3.9     2,401
  4       B....................    1,436    1.9     1,385     2,125    3.4     2,004
  5       C and lower..........      234    0.3       238       369    0.6       331
  6       In or near default...      258    0.3       254        12    0.0        11

                                 -------  -----   -------   -------  -----   -------
          Total................  $76,584  100.0%  $78,141   $62,590  100.0%  $63,228

                                 =======  =====   =======   =======  =====   =======


                                      40



                  Private Fixed Maturities by Credit Quality



                                                   As of December 31,
                                --------------------------------------------------------
                                                          2001
                                --------------------------------------------------------
                                Financial Services Businesses   Closed Block Business
                                ----------------------------- --------------------------
                                             % of   Estimated           % of   Estimated
 NAIC                           Amortized    Total    Fair    Amortized Total    Fair
Rating Rating Agency Equivalent   Cost       Cost     Value     Cost    Cost     Value
------ ------------------------ ---------    -----  --------- --------- -----  ---------
                                                    ($ in millions)
                                                          
  1       Aaa, Aa, A...........  $ 5,982      35.1%  $ 6,337   $ 4,091   29.0%  $ 4,231
  2       Baa..................    8,148      47.8     8,399     7,543   53.4     7,751
  3       Ba...................    1,487       8.7     1,529     1,419   10.1     1,415
  4       B....................      917       5.4       883       674    4.8       642
  5       C and lower..........      390       2.3       401       344    2.4       338
  6       In or near default...      112       0.7       121        50    0.3        51

                                 -------     -----   -------   -------  -----   -------
          Total................  $17,036     100.0%  $17,670   $14,121  100.0%  $14,428

                                 =======     =====   =======   =======  =====   =======




                                                 As of December 31,
                                -----------------------------------------------------
                                           2001                       2000
                                -------------------------- --------------------------
                                          Total                      Total
                                -------------------------- --------------------------
                                          % of   Estimated           % of   Estimated
 NAIC                           Amortized Total    Fair    Amortized Total    Fair
Rating Rating Agency Equivalent   Cost    Cost     Value     Cost    Cost     Value
------ ------------------------ --------- -----  --------- --------- -----  ---------
                                                   ($ in millions)
                                                       
  1       Aaa, Aa, A...........  $10,073   32.3%  $10,568   $11,379   34.6%  $11,631
  2       Baa..................   15,691   50.4    16,150    16,122   49.0    16,253
  3       Ba...................    2,906    9.3     2,944     2,897    8.8     2,843
  4       B....................    1,591    5.1     1,525     1,893    5.8     1,792
  5       C and lower..........      734    2.4       739       405    1.2       382
  6       In or near default...      162    0.5       172       192    0.6       228

                                 -------  -----   -------   -------  -----   -------
          Total................  $31,157  100.0%  $32,098   $32,888  100.0%  $33,129

                                 =======  =====   =======   =======  =====   =======


   We maintain separate monitoring processes for domestic public and private
fixed maturities and create watch lists to highlight securities which require
special scrutiny and management. Our domestic public fixed maturity asset
managers formally review all public fixed maturity holdings on a monthly basis
and more frequently when necessary to identify potential credit deterioration
whether due to ratings downgrades, unexpected price variances, and/or industry
specific concerns. We classify public fixed maturity securities of issuers that
have defaulted as loans not in good standing and all other public watch list
assets as closely monitored.

   Included in the above tables are investments of our Japanese insurance
companies, which comprise substantially all of our international general
account investments. The investments of our Japanese insurance companies are
not subject to NAIC guidelines; however, they are regulated locally by the
Financial Services Agency, an agency of the Japanese government. The Financial
Services Agency has its own investment quality criteria and risk control
standards. Our Japanese insurance companies comply with all of the Financial
Services Agency's credit quality review and risk monitoring guidelines.
However, the credit quality ratings of the investments of our Japanese
insurance companies included in the tables above are based on ratings assigned
by Moody's.

   Our private fixed maturity asset managers conduct specific servicing tests
on each investment on an ongoing basis to determine whether the investment is
in compliance or should be placed on the watch list or assigned an early
warning classification. We assign early warning classifications to those
issuers that have failed a servicing test or experienced a minor covenant
default, and we continue to monitor them for

                                      41



improvement or deterioration. In certain situations, the general account
benefits from negotiated rate increases or fees resulting from a covenant
breach. We assign closely monitored status to those investments that have been
recently restructured or for which restructuring is a possibility due to
substantial credit deterioration or material covenant defaults. We classify as
not in good standing securities of issuers that are in more severe conditions,
for example, bankruptcy or payment default.

   When a decline in value of a security is deemed to be other than temporary,
we record an impairment loss in our Consolidated Statements of Operations
within "Realized investment gains (losses), net."

   Factors we consider in evaluating whether a decline in value is other than
temporary are: (1) whether this decline is substantial; (2) our ability and
intent to retain our investment for a period of time sufficient to allow for an
anticipated recovery in value; (3) the duration and extent to which the market
value has been less than cost; and (4) the financial condition and near-term
prospects of the issuer.

   The following table sets forth the book value of our domestic public and
private fixed maturity portfolio watch list as of the dates indicated.

                         Fixed Maturities--Watch List



                                                 As of December 31,
                              --------------------------------------------------------
                                                  2001                         2000
                              -------------------------------------------  -----------
                              Financial Services Closed Block
                                  Businesses       Business      Total        Total
                              -----------------  -----------  -----------  -----------
                                           % of  Book   % of  Book   % of  Book   % of
                              Book Value   Total Value  Total Value  Total Value  Total
                              ----------   ----- -----  ----- ------ ----- ------ -----
                                                   ($ in millions)
                                                          
Closely monitored............    $644       1.0% $484    1.2% $1,128  1.1% $1,147  1.2%
Not in good standing.........     335       0.5    40    0.1     375  0.3     209  0.2

                                 ----       ---  ----    ---  ------  ---  ------  ---
   Total.....................    $979       1.5% $524    1.3% $1,503  1.4% $1,356  1.4%

                                 ====       ===  ====    ===  ======  ===  ======  ===


Commercial Loans

   As of December 31, 2001, we held approximately 13% of our general account
portfolio in commercial loans, essentially unchanged from December 31, 2000.
The portfolio as of December 31, 2001, consisted of $13.1 billion of commercial
mortgage loans, $3.5 billion of residential and agricultural loans and $3.1
billion of consumer loans. These values are gross of a $535 million allowance
for losses.

   We originate commercial mortgages through two sources, both managed out of
three regional offices in Atlanta, Chicago and San Francisco. The direct
channel, staffed by Prudential investment personnel, originates loans with
principal amounts of $20 million and higher. The Pru Express channel uses a
network of independent companies to originate loans in the $2 million to $20
million range. All loans are underwritten consistently to Prudential standards
using our proprietary rating system that was developed using our experience in
real estate and mortgage lending.

   Consumer loans are loans extended by Gibraltar Life to individuals for
financing purchases of consumer goods and services and are guaranteed by third
party guarantor companies.

   Our loan portfolio strategy emphasizes diversification by property type and
geographic location. The following tables set forth the breakdown of the
carrying values of our commercial loan portfolio by geographic region and
property type as of the dates indicated.

                                      42





                                                           As of December 31,
                                   -----------------------------------------------------------------
                                                          2001                               2000
                                   -------------------------------------------------    --------------
                                   Financial Services  Closed Block
                                       Businesses        Business           Total            Total
                                   -----------------  --------------   --------------   --------------
                                   Carrying   % of    Carrying % of    Carrying % of    Carrying % of
                                    Value     Total    Value   Total    Value   Total    Value   Total
                                   --------   -----   -------- -----   -------- -----   -------- -----
    Commercial loans by region                              ($ in millions)
                                                                         
U.S. Regions
 Pacific.......................... $ 2,670     19.7%  $2,364    38.2%  $ 5,034   25.5%  $ 4,969   31.8%
 South Atlantic...................   1,768     13.1    1,139    18.4     2,907   14.8     2,922   18.7
 Middle Atlantic..................   1,509     11.2      938    15.2     2,447   12.4     2,583   16.5
 East North Central...............     954      7.1      437     7.1     1,391    7.1     1,591   10.2
 Mountain.........................     420      3.1      432     7.0       852    4.3       921    5.9
 West South Central...............     594      4.4      349     5.6       943    4.8       944    6.0
 West North Central...............     389      2.9      239     3.9       628    3.2       733    4.7
 New England......................     385      2.8      146     2.4       531    2.7       519    3.3
 East South Central...............     208      1.5      137     2.2       345    1.7       393    2.5
 Other............................      33      0.2       --      --        33    0.2        55    0.3

                                   -------    -----    ------  -----   -------  -----   -------  -----
   Subtotal--United States........ $ 8,930     66.0%   $6,181  100.0%  $15,111   76.7%  $15,630   99.9%
                                   -------    -----    ------  -----   -------  -----   -------  -----
Asia..............................   4,596     34.0        --     --     4,596   23.3         9    0.1
                                   -------    -----    ------  -----   -------  -----   -------  -----
   Total commercial loans......... $13,526    100.0%   $6,181  100.0%  $19,707  100.0%  $15,639  100.0%

                                   =======    =====    ======  =====   =======  =====   =======  =====


   Commercial loans in Japan and California accounted for $4.5 billion and $4.1
billion, respectively, of the foregoing as of December 31, 2001.



                                                              As of December 31,
                                      -----------------------------------------------------------------
                                                             2001                             2000
                                      ------------------------------------------------- --------------
                                      Financial Services  Closed Block
                                          Businesses        Business          Total           Total
                                      ----------------- --------------  --------------  --------------
                                      Carrying   % of   Carrying % of   Carrring % of   Carrying % of
                                       Value     Total   Value   Total   Value   Total   Value   Total
                                      --------   -----  -------- -----  -------- -----  -------- -----
                                                               ($ in millions)
                                                                         
Collateralized loans by property type
Apartment complexes.................. $ 2,839     21.0%  $1,370   22.2% $ 4,209   21.4%   4,455   28.5%
Office buildings.....................   2,120     15.7    1,432   23.1    3,552   18.0    3,719   23.8
Retail stores........................   1,162      8.6      894   14.5    2,056   10.4    2,465   15.8
Industrial buildings.................   1,351     10.0    1,335   21.6    2,686   13.6    2,331   14.9
Residential properties...............   1,615     11.9       14    0.2    1,629    8.3      215    1.4
Agricultural properties..............   1,037      7.7      871   14.1    1,908    9.7    1,857   11.8
Other................................     304      2.2      265    4.3      569    2.9      597    3.8
                                      -------    -----   ------  -----  -------  -----  -------  -----
   Subtotal of collateralized loans.. $10,428     77.1%  $6,181  100.0% $16,609   84.3% $15,639  100.0%
    Uncollateralized loans
Gibraltar Life uncollateralized loans   3,098     22.9       --     --    3,098   15.7       --     --
                                      -------    -----   ------  -----  -------  -----  -------  -----

   Total commercial loans............ $13,526    100.0%  $6,181  100.0% $19,707  100.0% $15,639  100.0%

                                      =======    =====   ======  =====  =======  =====  =======  =====


                                      43



   The following table sets forth the distribution of principal maturities of
our commercial loan portfolio.

                          Commercial Loan Maturities



                                                     As of December 31,
                            --------------------------------------------------------------------
                                                    2001                               2000
                            --------------------------------------------------- ---------------
                            Financial Services   Closed Block
                                Businesses         Business          Total            Total
                            ----------------- ---------------  ---------------  ---------------


                            Principal         Principal        Principal        Principal
                             Balance   % of    Balance   %of    Balance  % of    Balance  % of
                            Maturing   Total  Maturing  Total  Maturing  Total  Maturing  Total
                            ---------  -----  --------- -----  --------- -----  --------- -----
                                                       ($ in millions)
                                                                  
Due in one year or less....  $ 2,888    21.3%  $   112    1.8%  $ 3,000   15.2%  $   557    3.6%
Due in two to three years..      918     6.8       346    5.6     1,264    6.5       945    6.0
Due in three to four years.    1,474    10.9       604    9.8     2,078   10.6       830    5.3
Due in four to five years..    1,121     8.3       421    6.8     1,542    7.8     1,545    9.9
Due in five to six years...      838     6.2       366    5.9     1,204    6.1     1,396    8.9
Due in six to seven years..      945     7.0       626   10.1     1,571    8.0     1,014    6.5
Due in seven to eight years    1,080     8.0       703   11.4     1,783    9.0     1,376    8.8
Due in eight to nine years.    1,231     9.1       545    8.8     1,776    9.0     1,561   10.0
Due in nine to ten years...      607     4.5       321    5.2       928    4.7     1,673   10.7
Due in more than ten years.    2,424    17.9     2,137   34.6     4,561   23.1     4,742   30.3
                             -------   -----   -------  -----   -------  -----   -------  -----
   Total...................  $13,526   100.0%  $6,181   100.0%  $19,707  100.0%  $15,639  100.0%
                             =======   =====   =======  =====   =======  =====   =======  =====


   We evaluate our commercial loans on a quarterly basis for watch list status
based on compliance with various financial ratios and other covenants set forth
in the loan agreements, borrower credit quality, property condition and other
factors. We may place loans on early warning status in cases where we detect
that the physical condition of the property, the financial situation of the
borrower or tenant, or other factors could lead to a loss of principal or
interest. We classify as closely monitored those loans that have experienced
material covenant defaults or substantial credit or collateral deterioration.
Not in good standing loans are those for which there is a high probability of
loss of principal, such as when the borrower is in bankruptcy or the loan is in
foreclosure. In our domestic operations, an experienced staff of workout
professionals actively manages the loans in the closely monitored and not in
good standing categories. In our international portfolios, we monitor
delinquency in consumer loans on a pool basis and evaluate any servicing
relationship and guarantees, the same way we do for commercial loans.

   The following table shows the percentages of our mortgage loan portfolio
that are delinquent but not in foreclosure, delinquent and in foreclosure,
restructured and foreclosed as well as the industry averages.

                           Mortgage Loan Comparisons



                                                As of December 31,
                               ----------------------------------------------------
                                               2001                       2000
                               -----------------------------------  ---------------
                               Financial   Closed
                                Services   Block            ACLI             ACLI
                               Businesses Business Total Average(1) Total Average(1)
                               ---------- -------- ----- ---------- ----- ----------
                                                        
Delinquent, not in foreclosure    0.47%      -- %  0.28%    0.05%   0.13%    0.28%
Delinquent, in foreclosure....    0.10        --   0.06     0.07      --     0.15
Restructured..................    2.05      0.47   1.41     0.98    1.45     1.50

                                  ----      ----   ----     ----    ----     ----
   Subtotal...................    2.62      0.47   1.75     1.10    1.58     1.93
Loans foreclosed during period    0.06      0.53   0.25     0.24    0.38     0.22

                                  ----      ----   ----     ----    ----     ----
   Total mortgage loans.......    2.68%     1.00%  2.00%    1.34%   1.96%    2.15%

                                  ====      ====   ====     ====    ====     ====

--------
(1) Represents the average for the U.S. life insurance industry according to
    The American Council of Life Insurers.

   The low level of delinquencies and loans in process of foreclosure is
primarily attributable to the strong commercial real estate market in the
United States during the above periods.

                                      44



Equity Securities

   We held approximately 2% of general account assets in equity securities as
of December 31, 2001, essentially unchanged from December 31, 2000. These
securities consist of investments in common stock, including shares of real
estate investment trusts. Approximately 88% of our equity securities are
publicly traded on national securities exchanges. For the years ended December
31, 2001, 2000 and 1999, net realized investment gains (losses) from sales and
impairments of equity securities were $(245) million, $450 million and $223
million, respectively.

Other Long-Term Investments

   The general account's "Other long-term investments" include investments in
joint ventures and limited partnerships of $2.1 billion and $2.4 billion as of
December 31, 2001 and 2000, respectively. These investments include $1.0
billion and $1.4 billion in real estate related interests and $1.1 billion and
$1.0 billion in non-real estate related interests as of December 31, 2001 and
2000, respectively.

   "Other long-term investments" also includes the general account's interests
in separate accounts of $1.0 billion and $1.1 billion, investment real estate
held through direct ownership of $1.1 billion and $0.2 billion and other
miscellaneous investments of $0.8 billion and $0.6 billion as of December 31,
2001 and 2000, respectively.

                                    Ratings

   Claims-paying and credit ratings are important factors affecting public
confidence in an insurer and its competitive position in marketing products.
Rating organizations continually review the financial performance and condition
of insurers, including Prudential Insurance and our other insurance company
subsidiaries. Our credit ratings are also important to our ability to raise
capital through the issuance of debt and to the cost of such financing.

   The following table summarizes the current ratings from S&P, Moody's, A.M.
Best and Fitch for our rated U.S. insurance companies, Prudential Insurance's
outstanding rated debt securities, the indebtedness issued through Prudential
Financial and Prudential Funding, LLC and the long-term counterparty rating of
Prudential Securities Group Inc. ("PSGI"). Claims-paying ratings represent the
opinions of rating agencies regarding the financial ability of an insurance
company to meet its obligations under an insurance policy. Credit ratings
represent the opinions of rating agencies regarding an entity's ability to
repay its indebtedness.



                                                                                      A.M.
                                                                   S&P(1) Moody's(2) Best(3) Fitch(4)
                                                                   ------ ---------- ------- --------
                                                                                 
Insurance Claims-Paying Ratings:
The Prudential Insurance Company of America.......................  A+        A1        A       AA-
PRUCO Life Insurance Company......................................  A+        A1        A       NR*
PRUCO Life Insurance Company of New Jersey........................  A+        A1        A       NR
Prudential Property & Casualty Insurance Company..................   A        A1       A-       NR
The Prudential Property & Casualty Insurance Company of New Jersey  NR        A1       A-       NR
The Prudential Life Insurance Co. Ltd. (Prudential of Japan)......  AA-       NR       A+       NR
Gibraltar Life Insurance Company, Ltd.............................   A        A2       NR       NR
Credit Ratings:
Prudential Financial, Inc.:
   Short-term borrowings..........................................  A2        P2      AMB-1     F1
   Long-term senior debt..........................................  A-        A3       a-        A
   Redeemable Capital Securities..................................  A-        A3       a-        A
The Prudential Insurance Company of America:
   Capital and surplus notes, due 2001-2005.......................  A-        A3       a-       NR
Prudential Funding, LLC:
   Commercial paper...............................................  A1        P1      AMB-1     NR
   Long-term senior debt..........................................  A+        A2        a       NR
Prudential Securities Group Inc...................................  BBB       NR       NR       NR

--------
* "NR" indicates not rated.

                                      45



(1) Standard & Poor's Ratings Group's ("S&P") claims-paying ratings currently
    range from "AAA (superior)" to "CCC (extremely vulnerable)." These ratings
    reflect S&P's opinion of an operating insurance company's financial
    capacity to meet the obligations of its insurance policies in accordance
    with their terms. According to S&P's publications, "A+" rated insurance
    companies have strong financial security characteristics, but are somewhat
    more likely to be affected by adverse business conditions than insurers
    with higher ratings. The symbol (+) following "A" shows a company's
    relative standing within the "A" rating category. An insurer rated "AA" has
    very strong financial security characteristics, differing only slightly
    from those rated higher. A "+" or "-" indicates relative strength within a
    category.

   An S&P credit rating is a current opinion of the creditworthiness of an
   obligor with respect to a specific financial obligation, a specific class of
   financial obligations or a specific financial program. S&P's long-term issue
   credit ratings range from "AAA (highest rating)" to "D (payment default)."
   S&P publications indicate that an "A+" rated issue is somewhat more
   susceptible to the adverse effects of changes in circumstances and economic
   condition than obligations in higher rated categories; however, the
   obligor's capacity to meet its financial commitment to the obligation is
   still strong. S&P short-term ratings range from "A-1 (highest category)" to
   "D (payment default)." Within the A-1 category some obligations are
   designated with a plus sign (+) indicating that the obligor's capacity to
   meet its financial commitment on the obligation is extremely strong.

(2) Moody's Investors Service, Inc.'s ("Moody's") insurance claims-paying
    ratings (sometimes referred to as "financial strength" ratings) currently
    range from "Aaa (exceptional)" to "C (lowest rated)." Moody's insurance
    ratings reflect the ability of insurance companies to repay punctually
    senior policy-holder claims and obligations. Moody's indicates that "A1"
    rated insurance companies offer good financial security, but elements may
    be present which suggest a susceptibility to impairment sometimes in the
    future. Numeric modifiers are used to refer to the ranking within the
    group--with 1 being the highest and 3 being the lowest. However, the
    financial strength of companies within a generic rating symbol ("A" for
    example) is broadly the same.

   Moody's credit ratings currently range from "Aaa (best quality)" to "C
   (lowest rated)." Moody's credit ratings grade debt according to its
   investment quality. Moody's considers "A2" and "A3" rated debt to be upper
   medium grade obligations, and that while factors giving security to
   principal and interest are considered adequate, elements may be present that
   suggest a susceptibility to impairment sometime in the future.

   Moody's short-term ratings are opinions of the ability of issuers to honor
   senior financial obligations and contracts. Prime ratings range from
   "Prime-1" (P-1), which represents a superior ability for repayment of senior
   short-term debt obligations, to "Prime-1" (P-3), which represents an
   acceptable ability for repayment of such obligations. Issuers rated "Not
   Prime" do not fall within any of the Prime rating categories.

(3) A.M. Best Company's ("A.M. Best") claims-paying ratings for insurance
    companies currently range from "A++ (superior)" to "F (in liquidation)."
    A.M. Best's ratings reflect its opinion of an insurance company's financial
    strength, operating performance and ability to meet its obligations to
    policyholders. A.M. Best considers "A" and "A-" rated companies to have a
    strong ability to meet their ongoing obligations to policyholders.

   An A.M. Best long-term credit rating is an opinion of the capacity and
   willingness of an obligor to pay interest and principal in accordance with
   the terms of the obligation. A.M. Best long-term credit ratings range from
   "aaa (exceptional)" to "d (in default)," with ratings from "aaa" to "bbb"
   considered as investment grade. A rating of "a" is assigned to issuers that
   possess a low level of credit risk and a strong capacity to meet the terms
   of the obligation.

   An A.M. Best short-term credit rating reflects an opinion of the issuer's
   fundamental credit quality. Ratings range from "AMB-1+," which represents an
   exceptional ability to repay short-term debt obligations, to "AMB-4," which
   correlates with a speculative ("bb") long-term rating.


(4) Fitch Ratings' ("Fitch") claims-paying ratings (sometimes referred to as
    "financial strength" ratings) currently range from "AAA (negligible risk
    factors)" to "DD (company is under an order of liquidation)." Fitch's
    ratings reflect its assessment of the likelihood of timely payment of
    policyholder and contractholder obligations. According to Fitch, "AA-"
    companies have very high claims-paying ability, strong protection factors
    and modest risk which may vary slightly over time due to economic and/or
    underwriting conditions.

   Fitch long-term ratings currently range from "AAA (highest credit quality),"
   which denotes exceptionally strong capacity for timely payment of financial
   commitments, to "D (default)." Investment grade ratings range between "AAA"
   and "BBB." Short-term ratings range from "F1 (highest credit quality)" to "C
   (high default risk)." Within long-term and short-term ratings, a "+" or a
   "-" may be appended to a rating to denote relative status with major rating
   categories.

   The ratings set forth above with respect to Prudential Financial, Prudential
Insurance and our other insurance and financing subsidiaries reflect current
opinions of each rating organization with respect to claims-paying ability,
financial strength, operating performance and ability to meet obligations to
policyholders or debt holders, as the case may be. These ratings are of concern
to policyholders, agents and intermediaries. They are not directed toward
stockholders and do not in any way reflect evaluations of the safety and
security of the Common Stock. A downgrade in our claims-paying or credit
ratings could limit our ability to market products, increase the number or
value of policies being surrendered and/or hurt our relationships with
creditors or trading counterparties. Our claims-paying ratings are an important
factor affecting public confidence in most of our products and, as a result,
our competitiveness. The interest rates we pay on our borrowings are largely
dependent on our credit ratings.

                                      46



   On February 7, 2002, S&P affirmed the ratings of PSGI and its subsidiary,
Prudential Securities Incorporated, but revised its outlook to negative, which
reflects the continued weak results at PSGI in 2001. Ratings could be lowered
if meaningful improvement in PSGI's core profitability is not forthcoming.

                                  Competition

   In each of our businesses we face intense competition from domestic and
foreign insurance companies, asset managers, investment banks and diversified
financial institutions. Many of our competitors are large and well-capitalized
and some have higher claims-paying or credit ratings than we do. We compete in
our businesses generally on the basis of price, quality of service, scope of
distribution, quality of products and brand recognition. The relative
importance of these factors depends on the particular product in question.

   In recent years, there has been substantial consolidation and convergence
among companies in the financial services industry, particularly as the U.S.
laws separating banking and insurance have been relaxed, resulting in increased
competition from large, well-capitalized financial services firms. In
particular, a number of large commercial banks, insurance companies and other
broad-based financial services firms have established or acquired other
financial services businesses such as a broker-dealer or an insurance company.
Many of these firms also have been able to increase their distribution systems
through mergers or contractual arrangements. We expect consolidation to
continue and perhaps accelerate. We expect that the Gramm-Leach-Bliley Act,
which was adopted on November 11, 1999, will contribute to consolidation by
liberalizing restrictions on affiliation of banks with insurance companies and
other financial institutions and on activities of bank affiliates with respect
to mutual funds, private equity investments and other activities. While we are
among the largest competitors in terms of market share in many of our business
lines, in some cases there are one or more dominant market players in a
particular line of business. The trend toward consolidation in the financial
services industry may result in competitors with increased market shares, or
the introduction of larger or financially stronger competitors through
acquisitions or otherwise, in those or other lines of business in which we
compete.

   Our investment-linked insurance products and our Investment Management and
Advisory Services and Retail Investments segments also compete on the basis of
investment performance. A material decline in the investment performance of our
variable life, mutual fund, variable annuity or defined contribution products
could have an adverse effect on our sales. Rankings and ratings of investment
performance have a significant effect on our ability to increase our assets
under management.

   In recent years our rankings against competitors in sales of certain
investment and insurance products have declined. We continue our efforts to
strengthen and broaden both our distribution channels and our product offerings
but we cannot assure they will be successful. In particular, the marketplace
may make a more significant or rapid shift to non-affiliated and direct
distribution alternatives than we anticipate or are able to achieve ourselves.
If this happens, our market share and results of operations could be adversely
affected.

   Competition for personnel in all of our businesses is intense, including for
Prudential Agents, Financial Advisors and other captive sales personnel, and
our investment managers. In the ordinary course of business, we lose from time
to time personnel in whom we have invested significant training, and in the
recent past we have in particular lost some of our most experienced Financial
Advisors. We are focusing substantial efforts on refocusing our Prudential
Agents, on increasing productivity requirements for Prudential Agents and on
reducing turnover among Financial Advisors. The loss of key investment managers
could have a material adverse effect on our Investment Management and Advisory
Services segment. Our decision to exit the lead-managed equity underwriting for
corporate issuers and institutional fixed income businesses of Prudential
Securities, and to pursue our strategy of providing research of interest to our
investor clients is new, and its effect on our ability to attract and retain
Financial Advisors and research analysts is uncertain.

   Many of our businesses are in industries where access to multiple sales
channels may be a competitive advantage. We believe that insurance and
investment products will continue to be sold primarily through face-to-face
sales channels, although customers' desire for objective and not
product-related advice will, over time, increase the amount of insurance and
investment products sold through non-affiliated distributors such as
independent agents, insurance brokers and investment advisors. In addition, we
expect that insurance and investment products will increasingly be sold through
direct marketing, including through electronic commerce.

                                      47



The proliferation and growth of multiple sales channels puts pressure on our
face-to-face sales channels to either increase their productivity or reduce
their costs. We continue our efforts to strengthen and broaden our sales
channels, but we cannot assure they will be successful. We run the risk that
the marketplace will make a more significant or rapid shift to non-affiliated
and direct distribution alternatives than we anticipate or are able to achieve
ourselves. If this happens, our market share and results of operations could be
adversely affected.

   Our current claims-paying ratings have substantially reduced our ability to
sell traditional guaranteed products. A downgrade in our claims-paying ratings
could adversely affect our ability to sell our insurance products and reduce
our profitability.

   Our international life insurance business, other than Gibraltar Life,
competes by focusing on a limited market using our Life Planner model to offer
high quality service and needs-based protection products. Certain competitors,
including Sony Life in Japan, employ or seek to employ versions of the Life
Planner model.

                                  Regulation

Overview

   Our businesses are subject to comprehensive regulation and supervision
primarily as follows:

Insurance Operations

   State insurance laws regulate all aspects of our insurance businesses and
state insurance departments in the fifty states, the District of Columbia and
various U.S. territories and possessions supervise our insurance operations.
Prudential Insurance is organized in New Jersey and its principal insurance
regulatory authority is the New Jersey Department of Banking and Insurance. Our
other insurance companies are principally regulated by the insurance
departments of the states in which they are organized. Our international
insurance operations are principally regulated by non-U.S. insurance regulatory
authorities in the jurisdiction in which they operate, including the Japanese
Ministry of Finance and Financial Services Agency. Our insurance products are
substantially affected by federal, state and non-U.S. tax laws. Products that
also constitute "securities", such as variable life insurance and variable
annuities, are also subject to federal and state securities laws and
regulations. The SEC, the NASD, state securities commissions and non-U.S.
authorities regulate and supervise these products.

Asset Management Operations

   Our investment products and services, including mutual funds and private
banking activities, are subject to federal, state and non-U.S. securities,
fiduciary, including ERISA, and other laws and regulations. The SEC, the NASD,
state securities commissions, the Department of Labor and similar non-U.S.
authorities, including the United Kingdom's Financial Services Authority
("FSA"), are the principal regulators that regulate our asset management
operations. Federal, state and non-U.S. tax laws also substantially affect our
investment products and services.

Securities Operations

   Our securities operations, principally conducted by Prudential Securities
Incorporated and a number of other SEC-registered broker-dealers and non-U.S.
broker-dealers, are subject to federal, state and non-U.S. securities,
commodities and related laws. The SEC, the CFTC, state securities authorities,
the NYSE, the NASD and similar U.S. and non-U.S. authorities, including the
FSA, are the principal regulators of our securities operations.

   The purpose of these regulations is primarily to protect our customers and
not our shareholders. Many of the laws and regulations to which we are subject
are regularly re-examined, and existing or future laws and regulations may
become more restrictive or otherwise adversely affect our operations. U.S. law
and regulation of our international business, particularly as it relates to
monitoring customer activities, is likely to increase as a result of the recent
terrorist activity in the U.S. and abroad and may affect our ability to attract
and retain customers. The summary below is of U.S. regulation. Our
international operations are subject to similar types of regulation in the
jurisdictions in which they operate.

   Our international operations face political, legal, operational and other
risks that we do not face in our U.S. operations, including the risk of
discriminatory regulation, nationalization or expropriation of assets, price
controls and exchange controls or other restrictions that prevent us from
transferring funds from these operations out of the countries in which they
operate or converting local currencies we hold into U.S. dollars or other
currencies.

                                      48



Regulation Affecting Prudential Financial

   Prudential Financial is the holding company for all of our operations.
Prudential Financial itself is not licensed as an insurer, investment advisor,
broker-dealer, bank or other regulated entity. However, because it owns
regulated entities, Prudential Financial is subject to regulation as an
insurance holding company and a savings and loan holding company.

Insurance Holding Company Regulation

   Prudential Financial is subject to the insurance holding company laws in the
states where our insurance subsidiaries are, or are treated as, organized,
which currently include New Jersey, Arizona, Delaware, Indiana, Michigan,
Minnesota, New York, Oklahoma, Tennessee, Texas and others. These laws
generally require the insurance holding company and each insurance company
directly or indirectly owned by the holding company to register with the
insurance department in the insurance company's state of domicile and to
furnish annually financial and other information about the operations of
companies within the holding company system. Generally, all transactions
affecting the insurers in the holding company system must be fair and, if
material, require prior notice and approval or non-disapproval by the state's
insurance department.

   Acquisition of Control

   Under the New Jersey statute governing the demutualization and the Plan of
Reorganization, for the three years after the date of demutualization, no
person, other than Prudential Financial, its subsidiaries or any employee
benefit plans or trusts sponsored by us, may offer to acquire 5% or more of
Prudential Financial's Common Stock or total voting power without the prior
approval of the New Jersey insurance regulator. Under this statute, the New
Jersey insurance regulator may not approve the acquisition unless he or she
determines, among other things, that:

  .  the acquisition would not frustrate the Plan of Reorganization;

  .  either Prudential Financial's Board of Directors has approved the
     acquisition or extraordinary circumstances that the Plan of Reorganization
     did not contemplate have arisen that justify their approval of the
     acquisition; and

  .  the acquisition would be in the interests of our policyholders.

   The New Jersey statute governing the demutualization provides that any
security that is subject to an agreement regarding acquisition or that is
acquired or to be acquired in violation of the statute or in violation of an
order of the New Jersey insurance regulator may not be voted at any
shareholders' meeting, and any action of shareholders requiring the affirmative
vote of a percentage of shares may be taken as though these securities were not
issued and outstanding. If these securities are voted, however, any action
taken at a shareholders' meeting will be valid unless it materially affects
control of Prudential Financial or unless a New Jersey court has otherwise
ordered.

   Most states, including the states in which our insurance companies are
domiciled, have insurance laws that require regulatory approval of a change of
control of an insurer or an insurer's holding company. Laws such as these that
apply to us prevent any person from acquiring control of Prudential Financial
or of our insurance subsidiaries unless that person has filed a statement with
specified information with the insurance regulators and has obtained their
prior approval. Under most states' statutes, acquiring 10% or more of the
voting stock of an insurance company or its parent company is presumptively
considered a change of control, although such presumption may be rebutted.
Accordingly, any person who acquires 10% or more of the voting securities of
Prudential Financial without the prior approval of the insurance regulators of
the states in which our insurance companies are domiciled will be in violation
of these states' laws and may be subject to injunctive action requiring the
disposition or seizure of those securities by the relevant insurance regulator
or prohibiting the voting of those securities and to other actions determined
by the relevant insurance regulator.

   In addition, many state insurance laws require prior notification of state
insurance departments of a change in control of a non-domiciliary insurance
company doing business in that state. While these prenotification statutes do
not authorize the state insurance departments to disapprove the change in
control, they authorize regulatory action in the affected state if particular
conditions exist such as undue market concentration. Any future transactions
that would constitute a change in control of Prudential Financial may require
prior notification in those states that have adopted preacquisition
notification laws.

                                      49



   These laws may discourage potential acquisition proposals and may delay,
deter or prevent a change of control of Prudential Financial, including through
transactions, and in particular unsolicited transactions, that some or all of
the stockholders of Prudential Financial might consider to be desirable.

Bank and Savings and Loan Holding Company Regulation

   Although The Prudential Bank and Trust Company is a "bank" as defined in the
Bank Holding Company Act of 1956, Prudential Financial is exempted from
regulation as a bank holding company under federal law as long as we continue
to comply with certain restrictions. As a result of its ownership of The
Prudential Savings Bank, F.S.B., Prudential Financial is a savings and loan
holding company. Federal and state banking laws generally provide that no
person may acquire control of Prudential Financial, and gain indirect control
of The Prudential Bank and Trust Company, The Prudential Savings Bank, F.S.B.
or Prudential Trust Company, without prior regulatory approval. Generally,
beneficial ownership of 10% or more of the voting securities of Prudential
Financial would be presumed to constitute control.

Insurance Operations

State Insurance Regulation

   State insurance authorities have broad administrative powers with respect to
all aspects of the insurance business including:

  .  licensing to transact business,

  .  licensing agents,

  .  admittance of assets to statutory surplus,

  .  regulating premium rates,

  .  approving policy forms,

  .  regulating unfair trade and claims practices,

  .  establishing reserve requirements and solvency standards,

  .  fixing maximum interest rates on life insurance policy loans and minimum
     accumulation or surrender values, and

  .  regulating the type, amounts and valuations of investments permitted and
     other matters.

   State insurance laws and regulations require our insurance companies to file
financial statements with insurance departments everywhere they do business,
and the operations of our insurance companies and accounts are subject to
examination by those departments at any time. Our insurance companies prepare
statutory financial statements in accordance with accounting practices and
procedures prescribed or permitted by these departments.

   State insurance departments conduct periodic examinations of the books and
records, financial reporting, policy filings and market conduct of insurance
companies domiciled in their states, generally once every three to five years.
Examinations are generally carried out in cooperation with the insurance
departments of other states under guidelines promulgated by the NAIC. The New
Jersey insurance regulator completed a financial examination of Prudential
Insurance and its indirect insurance subsidiary, PRUCO Life Insurance Company
of New Jersey, for each of the previous five years for the period ended
December 31, 1996, and found no material deficiencies.

   Financial Regulation

   Dividend Payment Limitations.  The New Jersey insurance law and the
insurance laws of the other states in which our insurance companies are
domiciled regulate the amount of dividends that may be paid by Prudential
Insurance and our other insurance companies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Prudential Financial" for more detail.

   Risk-Based Capital.  In order to enhance the regulation of insurers'
solvency, the NAIC adopted a model law to implement risk-based capital
requirements for life, health and property and casualty insurance companies.
All states have adopted the NAIC's model law or a substantially similar law.
The RBC calculation, which regulators use to assess the sufficiency of an
insurer's capital, measures the risk characteristics of a company's assets,
liabilities and certain off-balance sheet items. RBC is calculated by applying
factors to various asset, premium and liability items. Within a given risk
category, these factors are higher for those items with greater underlying risk
and lower for items with lower underlying risk. Insurers that have less
statutory capital than the

                                      50



RBC calculation requires are considered to have inadequate capital and are
subject to varying degrees of regulatory action depending upon the level of
capital inadequacy. The RBC ratios for each of our insurance companies
currently are well above the ranges that would require any regulatory or
corrective action.

   The NAIC approved a series of statutory accounting principles which have
been adopted, in some cases with modifications, by all state insurance
regulators, other than New York, effective as of January 1, 2001. The
measurement of statutory capital under these principles has resulted in an
increase in our RBC ratios.

   IRIS Tests.  The NAIC has developed a set of financial relationships or
tests known as the Insurance Regulatory Information System to assist state
regulators in monitoring the financial condition of insurance companies and
identifying companies that require special attention or action by insurance
regulatory authorities. Insurance companies generally submit data annually to
the NAIC, which in turn analyzes the data using prescribed financial data
ratios, each with defined "usual ranges." Generally, regulators will begin to
investigate or monitor an insurance company if its ratios fall outside the
usual ranges for four or more of the ratios. If an insurance company has
insufficient capital, regulators may act to reduce the amount of insurance it
can issue. None of our insurance companies is currently subject to regulatory
scrutiny based on these ratios.

   Insurance Reserves.  State insurance laws require us to analyze the adequacy
of our reserves annually. Our actuary must submit an opinion that our reserves,
when considered in light of the assets we hold with respect to those reserves,
make adequate provision for our contractual obligations and related expenses.

   The NAIC has adopted a model regulation called "Valuation of Life Insurance
Policies Model Regulation" that establishes new minimum statutory reserve
requirements for individual life insurance policies written after the effective
date of the regulation. These reserve standards have been enacted by most of
the states, generally with a January 1, 2000 effective date. As a result,
insurers selling some individual life insurance products such as term life
insurance with guaranteed premium periods have adjusted reserves and/or
shortened guarantee periods. While the model regulation has been enacted by the
states in which we have domestic companies, the enactment of the regulation has
not had a material impact on us. The NAIC is currently considering revisions to
this regulation, but we do not expect the revisions to have a material impact
on us.

   Market Conduct Regulation

   State insurance laws and regulations include numerous provisions governing
the marketplace activities of insurers, including provisions governing the form
and content of disclosure to consumers, illustrations, advertising, sales
practices and complaint handling. State regulatory authorities generally
enforce these provisions through periodic market conduct examinations.

   Property and Casualty Regulation

   Our property and casualty operations are subject to rate and other laws and
regulations covering a range of trade and claim settlement practices. State
insurance regulatory authorities have broad discretion in approving an
insurer's proposed rates. When a state restricts underwriting, pricing and
profits, as is the case for automobile insurance in New Jersey, an insurer's
ability to operate profitably on a consistent basis may be affected. In New
Jersey, if the profit earned on automobile insurance over a three-year period
exceeds the amount determined under insurance regulations, the insurer must
provide a refund or credit to policyholders.

   State insurance laws and regulations require us to participate in mandatory
property-liability "shared market," "pooling" or similar arrangements that
provide insurance coverage to individuals or others who otherwise are unable to
purchase coverage voluntarily provided by private insurers. Shared market
mechanisms include assigned risk plans; fair access to insurance requirement or
"FAIR" plans; and reinsurance facilities, such as the New Jersey Unsatisfied
Claim and Judgment Fund, the Florida Hurricane Catastrophe Fund, and the
California Earthquake Authority. In addition, some states require insurers to
participate in reinsurance pools for claims that exceed specified amounts. Our
participation in these mandatory shared market or pooling mechanisms generally
is related to the amounts of our direct writings for the type of coverage
written by the specific arrangement in the applicable state. We cannot predict
the financial impact of our participation in these arrangements.

   Insurance Guaranty Association Assessments

   Each state has insurance guaranty association laws under which life and
property and casualty insurers doing business in the state may be assessed by
state insurance guaranty associations for certain obligations of insolvent
insurance companies to policyholders and claimants. Typically, states assess
each member insurer in an

                                      51



amount related to the member insurer's proportionate share of the business
written by all member insurers in the state. For the years ended December 31,
2001 and 2000, we paid approximately $2.1 million and $8.5 million,
respectively, in assessments pursuant to state insurance guaranty association
laws. For the year ended December 31, 1999, we received approximately $0.5
million in refunds pursuant to these laws. While we cannot predict the amount
and timing of any future assessments on our insurance companies under these
laws, we have established reserves that we believe are adequate for assessments
relating to insurance companies that are currently subject to insolvency
proceedings.

Federal Regulation

   Our variable life insurance products, as well as our variable annuity and
mutual fund products, generally are securities within the meaning of federal
and state securities laws, are registered under the Securities Act of 1933 and
are subject to regulation by the SEC, the NASD and state securities
commissions. Federal and state securities regulation similar to that discussed
below under "--Asset Management Operations" and "--Securities Operations"
affect investment advice, sales and related activities with respect to these
products. In addition, although the federal government does not comprehensively
regulate the business of insurance, federal legislation and administrative
policies in several areas, including taxation, financial services regulation
and pension and welfare benefits regulation, can significantly affect the
insurance industry. Congress also periodically considers and is considering
laws affecting privacy of information and genetic testing that could
significantly and adversely affect the insurance industry.

   Tax Legislation

   Current federal income tax laws generally permit certain holders to defer
taxation on the build-up of value of annuities and life insurance products
until payments are actually made to the policyholder or other beneficiary and
to exclude the build-up of value which is paid as a death benefit under a life
insurance contract. Congress from time to time considers legislation that could
make our products less attractive to consumers, including legislation that
would reduce or eliminate the benefit of this deferral on some annuities and
insurance products, as well as other types of changes that could reduce or
eliminate the attractiveness of annuities and life insurance products to
consumers.

   In June 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001
(the "2001 Act") was enacted. The 2001 Act contains provisions that will, over
time, significantly lower individual tax rates. This will have the effect of
reducing the benefits of tax deferral on the build-up of value of annuities and
life insurance products. The 2001 Act also includes provisions that will
eliminate, over time, the estate, gift and generation-skipping taxes and
partially eliminates the step-up in basis rule applicable to property held in a
decedent's estate. Some of these changes might hinder our sales and result in
the increased surrender of insurance products.

   ERISA

   ERISA is a comprehensive federal statute that applies to employee benefit
plans sponsored by private employers and labor unions. Plans subject to ERISA
include pension and profit sharing plans and welfare plans (including health,
life and disability plans). ERISA provisions include reporting and disclosure
rules, standards of conduct that apply to plan fiduciaries, prohibitions on
conflict-of-interest transactions and certain transactions between a benefit
plan and a party in interest ("prohibited transactions"), and a scheme of civil
and criminal penalties and enforcement. Our insurance, asset management, plan
administrative services, brokerage and other businesses provide services to
employee benefit plans subject to ERISA, including services where we may act as
an ERISA fiduciary. In addition to ERISA regulation of those businesses in the
sales of products to and provisions of services to ERISA plans, we become
parties in interest to those plans and subject to ERISA's prohibited
transaction rules for transactions with those plans, which may affect our
ability to enter transactions, or the terms on which transactions may be
entered, with those plans, even in businesses unrelated to those giving rise to
party in interest status.

                                      52



Asset Management Operations

   Some of our separate accounts, mutual funds and other pooled investments, in
addition to being registered under the Securities Act of 1933, are registered
as investment companies under the Investment Company Act of 1940, and the
shares of certain of these entities are qualified for sale in some states and
the District of Columbia. We also have several subsidiaries that are registered
as broker-dealers under the Securities Exchange Act of 1934 ("Exchange Act")
and are subject to federal and state regulation, including but not limited to
the SEC's net capital rules. In addition, we have several subsidiaries that are
investment advisors registered under the Investment Advisers Act of 1940. Our
Prudential Agents and other employees, insofar as they sell products that are
securities, as well as our Financial Advisors, are subject to the Exchange Act
and to examination requirements and regulation by the SEC, the NASD and state
securities commissioners. Regulation also extends to various Prudential
entities that employ or control those individuals.

   For a discussion of potential federal tax legislation and other federal
regulation affecting our variable annuity products, see "--Insurance
Operations--Federal Regulation" above.

Securities Operations

   Prudential Securities Incorporated and a number of our other subsidiaries
are registered as broker-dealers with the SEC and with some or all of the 50
states and the District of Columbia. Prudential Securities and a number of our
other subsidiaries are also registered as investment advisors with the SEC.
Prudential Securities and its broker-dealer affiliates are members of, and are
subject to regulation by "self-regulatory organizations," including the NASD
and the NYSE. Many of these self-regulatory organizations conduct examinations
of and have adopted rules governing their member broker-dealers. In addition,
state securities and certain other regulators have regulatory and oversight
authority over our registered broker-dealers. We are also subject to the rules
of the Municipal Securities Rulemaking Board in our municipal activities. Our
Financial Advisors are also subject to regulation under the Exchange Act as
described above under "--Asset Management Operations."

   Broker-dealers and their sales forces are subject to regulations that cover
many aspects of the securities business, including sales methods and trading
practices. The regulations cover the suitability of investments for individual
customers, use and safekeeping of customers' funds and securities, capital
adequacy, record-keeping, financial reporting and the conduct of directors,
officers and employees.

   The commodity futures and commodity options industry in the United States is
subject to regulation under the Commodity Exchange Act. The CFTC is the federal
agency charged with the administration of the Commodity Exchange Act and the
regulations adopted under the act. Prudential Securities Incorporated and a
number of our other subsidiaries are registered with the CFTC as futures
commission merchants, commodity pool operators or commodity trading advisors.
Our futures business is also regulated in the United States by the National
Futures Association.

   The SEC and other governmental agencies and self-regulatory organizations,
as well as state securities commissions in the United States, have the power to
conduct administrative proceedings that can result in censure, fine, the
issuance of cease-and-desist orders or suspension, termination or limitation of
the activities of a broker-dealer or an investment advisor or its employees.

   As registered broker-dealers and members of various self-regulatory
organizations, Prudential Securities Incorporated and our U.S. other registered
broker-dealer subsidiaries are subject to the SEC's Uniform Net Capital Rule.
The Uniform Net Capital Rule sets the minimum level of net capital a
broker-dealer must maintain and also requires that at least a minimum part of a
broker-dealer's assets be kept in relatively liquid form. These net capital
requirements are designed to measure the financial soundness and liquidity of
broker-dealers. Prudential Securities Incorporated is also subject to the net
capital requirements of the CFTC and the various securities and commodities
exchanges of which it is a member. Compliance with the net capital requirements
could limit those operations that require the intensive use of capital, such as
underwriting and trading activities, and may limit the ability of these
subsidiaries to pay dividends to Prudential Financial. As of December 31, 2001,
Prudential Securities Incorporated's regulatory net capital was well in excess
of the required amount.

   Margin lending by certain of our broker-dealer subsidiaries is subject to
the margin rules of the Federal Reserve Board, which limit the amount they may
lend when customers are buying securities. These subsidiaries

                                      53



are also required by NYSE rules to impose maintenance requirements on the
values of securities contained in margin accounts.

Other Businesses

   Our domestic banking operations are subject to extensive federal and state
regulation, including examination and review by state authorities of consumer
finance offices. Prudential provides trust services through Prudential Trust
Company, a state-chartered trust company incorporated under the laws of the
Commonwealth of Pennsylvania, The Prudential Bank and Trust Company, and The
Prudential Savings Bank, F.S.B. Our non-U.S. banking operations are subject to
banking and securities regulation in the jurisdictions in which they are doing
business. The sale of real estate franchises by our real estate brokerage
franchise operation is regulated by various state laws and the FTC. The federal
Real Estate Settlement Procedures Act and state real estate brokerage and
unfair trade practice laws regulate payments among participants in the sale or
financing of residences or the provision of settlement services such as
mortgages, homeowners insurance and title insurance.

Privacy of Customer Information

   Federal law and regulation requires financial institutions to protect the
security and confidentiality of customer information and to notify customers
about their policies and practices relating to their collection and disclosure
of customer information and their policies relating to protecting the security
and confidentiality of that information. Federal and state laws also regulate
disclosures of customer information. Congress and state legislatures are
expected to consider additional regulation relating to privacy and other
aspects of customer information.

Environmental Considerations

   Federal, state and local environmental laws and regulations apply to our
ownership and operation of real property. Inherent in owning and operating real
property is the risk of hidden environmental liabilities and the costs of any
required clean-up. As to our commercial mortgage lending, under the laws of
certain states, contamination of a property may give rise to a lien on the
property to secure recovery of the costs of clean-up. In several states, this
lien has priority over the lien of an existing mortgage against such property.
In addition, in some states and under the federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 ("CERCLA"), we may be liable,
as an "owner" or "operator," for costs of cleaning-up releases or threatened
releases of hazardous substances at a property mortgaged to us. We also risk
environmental liability when we foreclose on a property mortgaged to us. Recent
legislation provides for a safe harbor from CERCLA liability for secured
lenders that foreclose and sell the mortgaged real estate, provided that
certain requirements are met. However, there are circumstances in which actions
taken could still expose us to CERCLA liability. Application of various other
federal and state environmental laws could also result in the imposition of
liability on us for costs associated with environmental hazards.

   We routinely conduct environmental assessments for real estate we acquire
for investment and before taking title through foreclosure to real property
collateralizing mortgages that we hold. Although unexpected environmental
liabilities can always arise, based on these environmental assessments and
compliance with our internal procedures, we believe that any costs associated
with compliance with environmental laws and regulations or any clean-up of
properties would not have a material adverse effect on our results of
operations.

                                   Employees

   As of December 31, 2001, we employed approximately 60,792 employees. We
believe our relations with our employees are satisfactory. On January 30, 2002,
the Office and Professional Employees International Union, Local 153, AFL-CIO,
filed petitions with the National Labor Relations Board ("NLRB") seeking
representation of approximately 2,000 Prudential Agents who had formerly been
covered by the terms of now expired collective bargaining agreements. An
election to determine whether this union will represent these Agents,
administered by the NLRB, will commence on April 5, 2002.

                                      54



ITEM 1A.  EXECUTIVE OFFICERS

   The names of the executive officers of Prudential Financial and their
respective ages and positions, as of March 8, 2002, were as follows:



         Name           Age              Title              Other Directorships
         ----           ---              -----              -------------------
                                                   
Arthur F. Ryan......... 59  Chairman, Chief Executive             None
                              Officer and President

Vivian L. Banta........ 51  Executive Vice President              None

Michele S. Darling..... 48  Executive Vice President              None

Robert Charles Golden.. 55  Executive Vice President              None

Mark B. Grier.......... 49  Executive Vice President              . RGS Energy Group
                                                                    Incorporated
                                                                  . Annuity and Life
                                                                    Re (Holding), Ltd.

Jean D. Hamilton....... 55  Executive Vice President              None

Rodger A. Lawson....... 55  Executive Vice President              None

John R. Strangfeld, Jr. 48  Executive Vice President              None

Richard J. Carbone..... 54  Senior Vice President and Chief       None
                              Financial Officer

John M. Liftin......... 58  Senior Vice President and             None
                              General Counsel


   Biographical information about Prudential Financial executive officers is as
follows:

   Arthur F. Ryan was elected Chairman, Chief Executive Officer and President
of Prudential Financial in December 2000, and served as President and Chief
Executive Officer of Prudential Financial from January 2000 to December 2000.
He joined Prudential Insurance as the Chairman of the Board, Chief Executive
Officer and President in December 1994. Mr. Ryan was with Chase Manhattan Bank
from 1972 to 1994, serving in various executive positions including President
and Chief Operating Officer from 1990 to 1994 and Vice Chairman from 1985 to
1990. Mr. Ryan was elected a Director of Prudential Financial in December 1999
and has been a director of Prudential Insurance since December 1994.

   Vivian L. Banta was elected Executive Vice President of Prudential Financial
in February 2001. Since January 2000, she variously served as Senior Vice
President, Individual Financial Services, Executive Vice President, Individual
Financial Services and Executive Vice President, U.S. Consumer Group, of
Prudential Insurance, a position she also holds at this time. Prior to joining
Prudential she was an independent consultant from 1997 to 1999 and served as
Executive Vice President, Global Investor Services, Group Executive for Chase
Manhattan Bank from 1991 to 1997.

   Michele S. Darling was elected Executive Vice President of Prudential
Financial in February 2001. Since February 1997, she has variously served as
Executive Vice President, Human Resources, Executive Vice President, Human
Resources and Corporate Governance and Executive Vice President, Corporate
Governance, Human Resources and Community Resources of Prudential Insurance, a
position she also holds at this time. Prior to joining Prudential she was the
Executive Vice President, Human Resources, Canadian Imperial Bank of Commerce
from 1990 to 1997.

   Robert Charles Golden was elected Executive Vice President of Prudential
Financial in February 2001 and was elected Executive Vice President, Operations
and Systems of Prudential Insurance in June 1997. Previously, he served as
Executive Vice President and Chief Administrative Officer for Prudential
Securities.

                                      55



   Mark B. Grier was elected Executive Vice President of Prudential Financial
in December 2000. He served as a director of Prudential Financial from December
1999 to January 2001 and as Vice President of Prudential Financial from January
2000 to December 2000. He was elected Executive Vice President of Prudential
Insurance in May 1995. Since May 1995 he has variously served as Chief
Financial Officer, Executive Vice President, Corporate Governance and Executive
Vice President, Financial Management, the position he holds at this time. Prior
to joining Prudential, Mr. Grier was an executive with Chase Manhattan
Corporation.

   Jean D. Hamilton was elected Executive Vice President of Prudential
Financial in February 2001 and was elected Executive Vice President, Prudential
Institutional of Prudential Insurance in October 1998. She was the President of
the Prudential Diversified Group from February 1995 to October 1998 and has
held several other senior management positions since joining Prudential in
1988. Previously, Ms. Hamilton was an executive with First National Bank of
Chicago.

   Rodger A. Lawson was elected Executive Vice President of Prudential
Financial in February 2001 and was elected Executive Vice President,
International Investments and Global Marketing Communications of Prudential
Insurance in October 1998. He was Executive Vice President, Marketing and
Planning of Prudential Insurance from June 1996 to October 1998. Prior to
joining Prudential, Mr. Lawson was the President and Chief Executive Officer of
VanEck Global (investment management) from April 1994 to June 1996; Managing
Director and Partner, President and Chief Executive Officer of Global Private
Banking and Mutual Funds, Bankers Trust Company from January 1992 to April
1994; Managing Director and Chief Executive Officer of Fidelity
Investments--Retail from May 1985 to May 1991 and President and Chief Executive
Officer of Dreyfus Service Corporation from March 1982 to May 1985.

   John R. Strangfeld, Jr. was elected Executive Vice President of Prudential
Financial in February 2001. He was elected Executive Vice President, Prudential
Investment Management of Prudential Insurance in February, 2001 and Chairman
and CEO of Prudential Securities in October 2000. He has been with Prudential
since July 1977, serving in various management positions, including the
executive in charge of Prudential's Asset Management Group since 1996; Senior
Managing Director, The Private Asset Management Group from 1995 to 1996; and
Chairman, PRICOA Europe from 1989 to 1995.

   Richard J. Carbone was elected Chief Financial Officer and Senior Vice
President of Prudential Financial in December 2000 and November 2001,
respectively, and was elected Senior Vice President and Chief Financial Officer
of Prudential Insurance in July 1997. Prior to that, Mr. Carbone was the Global
Controller and a Managing Director of Salomon, Inc. from July 1995 to June
1997, and Controller of Bankers Trust New York Corporation and a Managing
Director and Controller of Bankers Trust Company from April 1988 to March 1993.
From March 1993 to July 1995, Mr. Carbone was a Managing Director and Chief
Administrative Officer of the Private Client Group at Bankers Trust Company.

   John M. Liftin was elected Senior Vice President and General Counsel of
Prudential Financial in December 2000. He served as a director of Prudential
Financial from December 1999 to January 2001 and as Vice President of
Prudential Financial from January 2000 to December 2000. He was elected Senior
Vice President and General Counsel of Prudential Insurance in April 1998. Prior
to that, Mr. Liftin was an independent consultant from 1997 to 1998 and the
Senior Vice President and General Counsel of Kidder, Peabody Group Inc. from
1987 to 1996.

ITEM 2.  PROPERTIES

   We own our headquarters building located at 751 Broad Street, Newark, New
Jersey. Our headquarters is approximately one half million square feet. In
addition, we own other properties that we use for home office functions.
Excluding properties used for the International division and Prudential
Securities' operations, we own 14 and lease 21 properties. Our insurance
operations use approximately 500 other locations throughout the United States,
most of which are leased.

   For our International Insurance operations, we lease nine home offices
located in Argentina, Brazil, China, Italy, Japan, The Philippines, Poland and
Taiwan and own a home office in Korea. In addition, we have purchased an 80%
beneficial interest in a 38-story office, residential and retail development
that is currently

                                      56



under construction in central Tokyo and that will become the home office of our
Japan operations when completed, which is expected late in 2002. In connection
with the development of this property, we have paid approximately (Yen)42.3
billion (approximately $323 million at an exchange rate on December 31, 2001 of
$1=(Yen)131.06) through December 31, 2001. On completion of the building and
full occupancy, we expect that the major portion of our total acquisition and
development costs, estimated at (Yen)55.4 billion (approximately $423 million),
will be financed through non-recourse borrowings and that our equity investment
in this property will be approximately (Yen)17.4 billion (approximately $133
million). We also own 327 field offices and lease approximately 279 other field
offices throughout Argentina, Brazil, Italy, Japan, Korea, The Philippines,
Poland and Taiwan. For our International Securities and Investments operations,
we own one branch office and lease approximately 17 other branch offices
throughout Japan, Mexico and Taiwan.

   For our securities operations we lease two home offices in New York City,
which total approximately 1.8 million square feet. These leases are linked to
benefit agreements with the New York City Industrial Development Agency. In
addition, we lease approximately 310 other locations throughout the United
States and approximately 30 locations outside of the United States for our
securities operations.

   We believe our properties are adequate and suitable for our business as
currently conducted and are adequately maintained. The above properties do not
include properties we own for investment only.

ITEM 3.  LEGAL PROCEEDINGS

   We are subject to legal and regulatory actions in the ordinary course of our
businesses, including class action lawsuits. Our pending legal and regulatory
actions include proceedings specific to us and proceedings generally applicable
to business practices in the industries in which we operate. In our insurance
operations, we are subject to class action lawsuits and individual lawsuits
involving a variety of issues, including sales practices, underwriting
practices, claims payment and procedures, additional premium charges for
premiums paid on a periodic basis, denial or delay of benefits, return of
premiums or excessive premium charges and breaching fiduciary duties to
customers. In addition to the types of claims generally affecting our insurance
operations, with respect to our automobile and homeowners insurance products,
we are also subject to individual and class action lawsuits involving a variety
of issues including allegations of "redlining" or impermissible discrimination
among customers, diminution of automobile value following a casualty loss,
improper adjustment of earthquake claims, and challenges to the method of
calculating replacement cost value for homes, the deduction of depreciation for
certain types of property losses, the amount of and changes to policy
deductibles, and other coverage and claims payment disputes. In our
investment-related operations, we are subject to litigation involving
commercial disputes with counterparties or partners and class action lawsuits
and other litigation alleging, among other things, that we made improper or
inadequate disclosures in connection with the sale of assets and annuity and
investment products or charged excessive or impermissible fees on these
products, recommended unsuitable products to customers, mishandled customer
accounts or breached fiduciary duties to customers. In our securities
operations, we are subject to class action lawsuits, arbitrations and other
actions arising out of our retail securities brokerage, account management,
underwriting, former investment banking and other activities, including claims
of improper or inadequate disclosure regarding investments or charges,
recommending unsuitable investments or products that were unsuitable for tax
advantaged accounts, assessing impermissible fees or charges, engaging in
excessive or unauthorized trading, making improper underwriting allocations,
breaching alleged duties to non-customer third parties and breaching fiduciary
duties to customers. We may be a defendant in, or be contractually responsible
to third parties for, class action lawsuits and individual litigation arising
from our other operations, including claims for breach of contract and payment
of real estate taxes on transfer of equitable interests in residential
properties in our relocation businesses, or the businesses we are winding down
or have divested, including claims under the Real Estate Settlement Procedures
Act, in connection with our divested residential first mortgage operations and
claims related to our discontinued healthcare operations. We are also subject
to litigation arising out of our general business activities, such as our
investments, contracts, leases and labor and employment relationships,
including claims of discrimination and harassment.

   In some of our pending legal and regulatory actions, parties are seeking
large and/or indeterminate amounts, including punitive or exemplary damages.
The following is a summary of certain pending proceedings.

                                      57



Insurance

Life Insurance Sales Practices Issues


   We have been subject to substantial regulatory actions and civil litigation
involving individual life insurance sales practices. These proceedings alleged
principally that we made misrepresentations concerning the use of existing life
insurance policies to fund additional policies, the number of annual
out-of-pocket cash premium payments required to fund life insurance policies
and the characterization of policies as investments rather than life insurance
policies.

   In 1996, we entered into settlement agreements with the insurance regulatory
authorities of all 50 states and the District of Columbia and with the
plaintiffs in the principal life insurance sales practices class action lawsuit
brought by owners of individual permanent life insurance policies issued in the
United States from 1982 to 1995. Pursuant to the settlement agreements, we
agreed to various changes to our sales and business practices controls, to pay
a series of fines, penalties and related payments totaling approximately $65
million, and to provide specific forms of relief to eligible class members
pursuant to a remediation program. Ultimately, approximately 565,000 claims
submitted pursuant to the remediation program were determined to warrant claim
relief, out of a total class of owners of approximately 10.7 million policies.
As of December 31, 2001, virtually all claims by class members filed in
connection with the settlements have been resolved and virtually all aspects of
the remediation program have been satisfied.

   In 1999, our individual life insurance broker-dealer, Pruco Securities
Corporation ("Pruco Securities"), entered into a settlement agreement with the
NASD through which we were censured, fined a total of $20 million, and required
to retain an independent consultant to review Pruco Securities' policies and
procedures related to supervision and sales practices controls. The settlement
did not change our remediation program.

   While the approval of the class action settlement is now final, Prudential
Insurance remains subject to oversight and review by insurance regulators and
other regulatory authorities with respect to its sales practices and the
conduct of the remediation program. The United States District Court for the
District of New Jersey, which approved the class action settlement, has also
retained jurisdiction as to all matters relating to its administration,
consummation, enforcement and interpretation.

   The class action settlement does not cover:

  .  policies other than individual permanent life insurance policies issued in
     the United States;

  .  any type of policy issued prior to 1982 or after 1995;

  .  the policyholders who opted out of participation in the settlement, some
     of whom are proceeding with their own individual actions; and

  .  other individual actions that are not barred by the class action
     settlement.

   As of February 28, 2002, we remained a party to approximately 44 individual
sales practices actions filed by policyholders who "opted out" of the class
action settlement related to permanent life insurance policies we issued in the
United States between 1982 and 1995. In addition, there were 20 sales practices
actions pending that were filed by policyholders who were members of the class
and who failed to "opt out" of the class action settlement. We believe that
those actions are governed by the class settlement release and expect them to
be enjoined and/or dismissed. Some of these cases seek substantial damages
while others seek unspecified compensatory, punitive or treble damages. It is
possible that substantial punitive damages might be awarded in one or more of
these cases. Six of these cases pending in the United States District Court for
the Southern District of Florida were consolidated for trial under the caption
Cruz, et al. v. Prudential Insurance. Trial of these consolidated actions began
on December 3, 2001, and ended on February 1, 2002, with a jury verdict
awarding approximately $66,000 to certain of the plaintiffs, but finding no
fraudulent conduct by us with respect to any of the plaintiffs, and awarding no
punitive damages against us. Plaintiffs subsequently filed post-trial motions,
including a motion for a new trial, and these motions are currently pending.
Plaintiffs also filed a notice of appeal to the United States Court of Appeals
for the Seventh Circuit. Ten other cases are pending in Palm Beach County,
Florida, Circuit Court and have been consolidated for trial in Ribarich v.
Prudential Insurance. No trial dates have been set in these cases. While the
number of new lawsuits filed has been diminishing over time, we anticipate that
additional suits may be filed by other policyholders who "opted out" of the
class action settlement or who failed to "opt out" but nevertheless seek to
proceed against us. We intend to defend these cases vigorously.

                                      58



   While we believe we have adequately reserved in all material respects based
on information currently available, as with any litigation, the litigation by
policyholders who "opted out" of the class action settlement is subject to many
uncertainties, and, given the complexity and scope of these suits, we cannot
predict their outcome. For a discussion of charges and reserves relating to
these matters, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Consolidated Results of Operations--Sales Practices
Remedies and Costs."

   Sales practices litigation has been filed in Canada against a number of
insurance companies, including Prudential Insurance and London Life Insurance
Company, to whom we sold most of our Canadian life insurance policies in 1996.
As we discuss above under "Business--Corporate and Other Operations--Divested
Businesses--Divested Canadian Businesses," we agreed to indemnify London Life
against damages relating to our pre-sale market conduct activities. To date, we
have not been made a party to any London Life class action lawsuits, although
we indemnify London Life on an ongoing basis with respect to individual
actions. We also are party to one purported Canadian sales practice class
action lawsuit involving policies sold by National Life Insurance Company of
Canada which were jointly issued under a reinsurance agreement with Prudential
Insurance. There has been no significant activity in this case since the filing
of the complaint in 1997. While there can be no assurance, we currently believe
our potential Canadian exposure, if any, is covered by the foregoing sales
practice reserves.

Other

   On August 13, 2000, plaintiffs filed a purported national class action
against us in the District Court of Valencia County, New Mexico, Azar, et al.
v. Prudential Insurance, based upon the alleged failure to adequately disclose
the increased costs associated with payment of life insurance premiums on a
"modal" basis, i.e., more frequently than once a year. Similar actions have
been filed in New Mexico against over a dozen other insurance companies. The
complaint includes allegations that we should have disclosed to each
policyholder who paid for coverage on a modal basis the dollar cost difference
between the modal premium and the annual premium required for the policy, as
well as the effective annual percentage rate of interest of such difference.
Based on these allegations, plaintiffs assert statutory claims including
violation of the New Mexico Unfair Practices Act, and common law claims for
breach of the implied covenant of good faith and fair dealing, breach of
fiduciary duty, unjust enrichment and fraudulent concealment. The complaint
seeks injunctive relief, compensatory and punitive damages, both in unspecified
amounts, restitution, treble damages, pre-judgment interest, costs and
attorneys' fees. We filed an answer denying the claims. Thereafter, both we and
the plaintiffs filed separate motions for summary judgment. On March 9, 2001,
the court entered an order granting partial summary judgment to plaintiffs as
to liability, permitting us to appeal the order and staying the case pending
completion of the appeal proceeding. Oral argument on the appeal was heard on
February 21, 2002.

Securities

   In November 1998, plaintiffs filed a purported class action lawsuit in the
United States District Court for the Southern District of New York, Gillet v.
Goldman, Sachs & Co., et al., against over two dozen underwriters of initial
public offering securities, including Prudential Securities. A number of
similar actions brought on behalf of purported classes of both IPO purchasers
and IPO issuers were consolidated under the name In re Public Offering Fee
Antitrust Litigation. The amended complaint alleges that the defendants
conspired to fix at 7% the spread that underwriting syndicates receive from
issuers of securities in certain offerings in violation of the federal
antitrust laws, and seeks treble damages and injunctive relief. On February 9,
2001, the court dismissed the purchaser cases for lack of antitrust standing,
without leave to replead. Plaintiffs appealed that dismissal to the United
States Court of Appeals for the Second Circuit, and the court established a
briefing schedule. In July 2001, a consolidated class action complaint was
filed in the issuer cases, and, in September 2001, defendants filed a motion to
dismiss that complaint.

   Since June 1999, news organizations have widely reported that Martin R.
Frankel, a Connecticut businessman, is under indictment for allegedly
misappropriating several hundred million dollars of assets of several insurance
companies. Mr. Frankel controlled or was otherwise affiliated with accounts
held at numerous broker-dealers, including Prudential Securities. Prudential
Securities has received requests for information and documents regarding
accounts and transactions related to Mr. Frankel from various governmental
authorities and private parties. Prudential Securities has complied with these
requests and is cooperating with the government

                                      59



investigations. In June 2001, an action was commenced in Circuit Court, Cole
County, Missouri, Lakin et al. v. Prudential Securities Inc. et al., against
Prudential Securities, Prudential Investments and Prudential Savings Bank by
the insurance commissioners for Missouri, Mississippi, Tennessee and Oklahoma
in their capacities as liquidators of six insurance companies previously
controlled by Mr. Frankel. The complaint alleges that, in connection with
accounts maintained by the insurance companies at Prudential, the Prudential
defendants allowed Mr. Frankel and his associates to transfer funds without
proper authority and failed to detect and stop their looting activities. The
complaint asserts causes of action for negligence, breach of contract and
breach of fiduciary duty, and seeks compensatory damages in an amount to be
proved at trial. In August 2001, we removed the case to the United States
District Court for the Western District of Missouri, Central Division.
Prudential Securities answered the complaint, and Prudential Savings Bank filed
a motion to dismiss based on lack of personal jurisdiction. In December 2001,
plaintiff moved for leave to file an amended complaint that contains
substantially the same allegations as its original complaint. In March 2002,
the court granted Prudential Savings Bank's motion to dismiss it from the
action.

   In September 2001, an amended complaint was filed by a plan participant in a
purported class action lawsuit, Kolar v. Rite Aid, et al., pending against Rite
Aid Corporation ("Rite Aid") and individual trustees of a Rite Aid-sponsored
401(k) plan (the "Plan") in the United States District Court for the Eastern
District of Pennsylvania naming Prudential Insurance, Prudential Securities,
Prudential Retirement Services, Inc., Prudential Investment Management
Services, LLC and the Rohrbaugh Group as defendants. The amended complaint
alleges that the Prudential defendants, which provide record keeping and other
services to the Plan, acted as ERISA fiduciaries and breached fiduciary duties
to the Plan by (1) failing to disclose to Plan participants Rite Aid's failure
to register its common stock offered under the Plan, (2) allowing Plan
participants to purchase unregistered Rite Aid stock, and (3) failing to seek
remedies on their behalf. The amended complaint also alleges that, under ERISA,
the Prudential defendants are liable as co-fiduciaries with Rite Aid or by
knowingly participating in Rite Aid's breaches of its fiduciary duties to the
Plan. The amended complaint seeks damages of $100 million against all
defendants plus interest, attorneys' fees and costs and, as to the Prudential
defendants, the equitable remedy of rescission with respect to purchases of
Rite Aid stock by the Plan participants. The time to answer the complaint has
not yet expired.

Corporate and Other Operations

   In July 2001, a purported national class action was filed against Prudential
Insurance and its Board of Directors in the Superior Court of Essex County, New
Jersey, Hutcheson v. Prudential Insurance, et al., challenging Prudential
Insurance's Plan of Reorganization. The complaint alleges that, pursuant to the
Plan of Reorganization, non-participating policyholders would be paid
demutualization compensation at the expense of participating policyholders and
purports to assert causes of action for violation of New Jersey's
demutualization law, breach and anticipatory breach of contract, and breach of
fiduciary duty. The complaint also seeks to enjoin implementation of the Plan
of Reorganization, to set aside the results of any vote to approve the Plan of
Reorganization, and compensatory damages.

   After Hutcheson was filed, two other similar lawsuits, containing
allegations relating to the payment of demutualization compensation to
non-participating policyholders, were filed in the Superior Court of New
Jersey, Essex County, i.e., Denenberg v. Prudential Insurance and Scala v.
Prudential Insurance. The Scala complaint also contains allegations concerning
the creation of the "Closed Block" and raises issues pertaining to voting on
the Plan of Reorganization, including disclosures to policyholders. We have
filed motions to dismiss all three actions. By agreement of the parties, the
motions to dismiss Hutcheson and Scala were stayed pending the resolution of
the appeals described below. The Denenberg plaintiffs amended the complaint
twice, first, to focus on the payment of demutualization compensation to
policyholders of subsidiaries and, second, to add claims that New Jersey's
demutualization law is unconstitutional under the New Jersey Constitution and
the demutualization is fundamentally unfair. We have filed a motion to dismiss
the second amended complaint.

   The New Jersey law governing the demutualization provides that a
Commissioner's order approving or disapproving a plan of reorganization shall
be a final agency decision subject to appeal in accordance with, and within the
time period specified by, the rules governing the courts of the state of New
Jersey. In October and November, 2001, policyholders, including certain of the
plaintiffs in the lawsuits described in the preceding paragraph, filed notices
of appeal with the Superior Court of New Jersey, Appellate Division that
challenge the Commissioner's approval of the Plan of Reorganization, including
its provision for distribution of consideration to non-participating
policyholders. In November 2001, an appeal challenging the Commissioner's
approval to the

                                      60



extent it allows the distribution of demutualization compensation to persons
who are not policyholders of the mutual company was also filed by the
policyholders who are plaintiffs in the Denenberg action. The appeals have been
consolidated.

   A successful challenge to the Plan of Reorganization or the Commissioner's
Decision and Order (and the demutualization) could result in monetary damages,
a modification of the Plan of Reorganization, or the Commissioner's approval
being set aside. A successful challenge would likely result in substantial
uncertainty relating to the terms and effectiveness of the Plan of
Reorganization, and a substantial period of time might be required to reach a
final determination. Such an outcome would likely negatively affect holders of
Common Stock and could have a material adverse effect on our business, results
of operations and financial condition.

   In November 1996, plaintiffs filed a purported class action lawsuit against
Prudential Insurance, The Prudential Home Mortgage Company, Inc. and several
other subsidiaries in the Superior Court of New Jersey, Essex County, Capitol
Life Insurance Company v. Prudential Insurance, et al., in connection with the
sale of certain subordinated mortgage securities sold by a subsidiary of
Prudential Home Mortgage. In February 1999, the court entered an order
dismissing all counts without prejudice with leave to refile after limited
discovery. In May 2000, plaintiffs filed a second amended complaint that
alleges violations of the New Jersey securities and RICO statutes, fraud,
conspiracy and negligent misrepresentation, and seeks compensatory as well as
treble and punitive damages. Defendants filed a motion to dismiss that was
denied in October 2001. Defendants answered the second amended complaint in
November 2001. See "Business--Corporate and Other Operations--Divested
Businesses--Residential First Mortgage Banking" for a discussion of other
litigation relating to our divested residential mortgage banking operations.

   In August 1999, a Prudential Insurance employee and several Prudential
Insurance retirees filed an action in the United States District Court for the
Southern District of Florida, Dupree, et al., v. Prudential Insurance, et al.,
against Prudential Insurance and its Board of Directors in connection with a
group annuity contract entered into in 1989 between the Prudential Retirement
Plan and Prudential Insurance. The suit alleges that the annuitization of
certain retirement benefits violates ERISA and that, in the event of
demutualization, Prudential Insurance will retain shares distributed under the
annuity contract in violation of ERISA's fiduciary duty requirements. In July
2001, plaintiffs filed an amended complaint dropping three counts, and we filed
an answer denying the essential allegations of the complaint. In March 2002,
the court dismissed certain of the claims against the individual defendants.

   In September 2001, plaintiffs filed a second amended complaint in a
purported national class action lawsuit against Prudential entities and over
two dozen other mutual fund companies in the United States District Court for
the Southern District of Illinois, Nelson, et al. v. Aim Advisors, et al.,
alleging that distribution and advisory fees paid by numerous mutual funds were
unlawful. The complaint alleges that the statutorily independent directors for
each fund complex were, in fact, controlled by the advisor and, therefore, the
fees were not properly approved. The complaint further alleges that the fees
were, in any event, excessive in relation to the services rendered. The
complaint alleges that defendants' actions violated the Investment Company Act
of 1940, as well as the fiduciary duties owed under common law, and seeks
actual and punitive damages and declaratory relief. In October 2001, we filed a
motion to sever, which would require plaintiffs to re-plead their claims
against us in a separate action, and a motion to transfer the case to the
United States District Court for the District of New Jersey. In March 2002, the
trial court severed the actions and transferred our action to the District of
New Jersey. An earlier case filed in the United States District Court for the
District of New Jersey, Krantz v. Prudential Investments Fund Management LLC
and Prudential Investment Management Services LLC, contains similar challenges
to the validity of the investment advisory and distribution agreements with one
of our mutual funds. In 1999, the court dismissed the case and an appeal to the
United States Court of Appeals for the Third Circuit is pending.

Discontinued Operations

   As discussed under "Business--Discontinued Operations--Healthcare," we have
agreed to indemnify Aetna for certain litigation involving the disposed
healthcare operations, and we have been sued directly for certain alleged
actions occurring before the disposition of those operations. This litigation
includes class action lawsuits and individual suits involving various issues,
including payment of claims, denial of benefits, vicarious liability for
malpractice claims, contract disputes with provider groups and former
policyholders, purported class action lawsuits challenging practices of our
former managed care operations, including the class action lawsuits described
below, and coordination of benefits with other carriers.

                                      61



   Nationwide class action lawsuits were filed against us in 1999-2000 in
several United States District Courts on behalf of participants in our managed
health care plans. On October 23, 2000, by Order of the Judicial Panel on
Multi-District Litigation, these actions were consolidated for pre-trial
purposes, along with lawsuits pending against other managed health care
companies, in the United States District Court for the Southern District of
Florida, in a consolidated proceeding captioned In re Managed Care Litigation.
The consolidated participant complaint, Williamson v. Prudential Insurance,
alleges violations of RICO and ERISA through alleged misrepresentations of the
level of health care services provided, failure to disclose financial incentive
agreements with physicians, interference with the physician-patient
relationship, breach of fiduciary duty, and deprivation of plaintiffs' rights
to the receipt of honest medical services. It also alleges that we and other
major health care organizations engaged in an industry-wide conspiracy to
defraud subscribers as to the level of services and quality of care. The
complaint seeks compensatory damages, restitution and treble damages, all in
unspecified amounts, the imposition of an equitable trust for any wrongful
revenues and attorneys' fees. Our motion to dismiss the complaint for failure
to state a claim was granted and the case dismissed with leave to amend. An
amended complaint filed in June 2001 asserts substantially the same claims. On
February 20, 2002, the court granted our motion to dismiss the RICO, conspiracy
and unjust enrichment claims but not the ERISA breach of fiduciary duty claim.
The court granted leave to plaintiffs to amend the ERISA claim. Plaintiffs'
motion for class certification is pending. We joined the other defendants in
filing a motion for reconsideration of the February 20, 2002 dismissal order to
the extent that it did not dismiss the ERISA fiduciary duty claims. We also
joined the other defendants in filing a petition requesting that the order be
certified for appellate review. Plaintiffs have filed a motion for
reconsideration of the dismissal of the RICO claims.

   In Batas and Vogel v. Prudential Insurance, a case filed in a New York state
court in 1997 based on allegations similar to those in Williamson, an
intermediate appeals court held that claims alleging breach of contract, fraud,
tortious interference with contractual relations and violations of the New York
deceptive acts and practices statute may be brought against managed care
organizations. The court affirmed the dismissal of claims for breach of
fiduciary duty, breach of the covenant of good faith and for injunctive and
declaratory relief. Plaintiffs' motion to certify a nationwide class of
non-ERISA plan participants is pending.

   We have also been sued in Shane v. Humana, et al., a purported nationwide
class action lawsuit brought on behalf of provider physicians and physician
groups against Prudential and other health care companies in the consolidated
proceeding in the United States District Court for the Southern District of
Florida. That case alleges that the defendants engaged in an industry-wide
conspiracy to defraud physicians by failing to pay under provider agreements
and by unlawfully coercing providers to enter into agreements with unfair and
unreasonable terms. The original complaint asserted various claims for relief
based on these allegations, several of which the court, in response to our
motion, held were subject to mandatory arbitration. The court subsequently
granted our motion to dismiss the remaining claims, including RICO conspiracy
and aiding and abetting claims, but allowed plaintiffs the opportunity to amend
the complaint. We appealed the district court's decision to the United States
Court of Appeals for the Eleventh Circuit to the extent it failed to require
the plaintiff to arbitrate all claims against us. On March 14, 2002, the Court
of Appeals affirmed the District Court's arbitration order in all respects. An
amended complaint, naming additional plaintiffs, including three state medical
associations, and an additional defendant, was filed in March 2001. Like the
original complaint, it alleges claims of breach of contract, quantum meruit,
unjust enrichment, violations of RICO, conspiracy to violate RICO, aiding and
abetting RICO violations, and violations of state prompt pay statutes and the
California unfair business practices statute. The amended complaint seeks
compensatory and punitive damages in unspecified amounts, treble damages
pursuant to RICO, and attorneys' fees. Our motion to dismiss the amended
complaint and plaintiffs' motion for class certification are pending. The case
remains stayed pending final disposition of the appeal.

Summary

   Our litigation is subject to many uncertainties, and given their complexity
and scope, the outcomes cannot be predicted. It is possible that our results of
operations or cash flow in a particular quarterly or annual period could be
materially affected by an ultimate unfavorable resolution of pending litigation
and regulatory matters depending, in part, upon the results of operations or
cash flow for such period. Management believes, however, that the ultimate
outcome of all pending litigation and regulatory matters, after consideration
of applicable reserves, should not have a material adverse effect on our
financial position.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   No matter was submitted to a vote of security holders of Prudential
Financial during the period from the date of demutualization through December
31, 2001.

                                      62



                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

                                    General

   Prudential Financial has outstanding two separate classes of common stock.
The Common Stock, which reflects the performance of our Financial Services
Businesses, was issued to eligible policyholders in Prudential Insurance's
demutualization (457.1 million shares) and sold to investors in Prudential
Financial's initial public offering (126.5 million shares). The Common Stock
began trading on the New York Stock Exchange under the symbol "PRU" on December
13, 2001. The Class B Stock, which reflects the performance of the Closed Block
Business, was issued (2.0 million shares) to institutional investors (two
subsidiaries 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.

   The high and low closing prices for the Common Stock on the New York Stock
Exchange during the period from December 13, 2001 through December 31, 2001
were $33.19 and $29.30. On March 21, 2002, there were 4,675,234 registered
holders of record for the Common Stock and 584.3 million shares outstanding,
and the closing price of the Common Stock on the New York Stock Exchange was
$31.25. On March 21, 2002, there were 3 holders of record for the Class B Stock
and 2.0 million shares outstanding.

   In addition, on the date of demutualization, Prudential Financial issued
13.8 million 6.75% equity security units (the "Units"). Each Unit has a stated
amount of $50 and initially consists of a contract requiring the holder to
purchase, for $50, shares of Prudential Financial's Common Stock on November
15, 2004, and a redeemable capital security of Prudential Financial Capital
Trust I, a statutory business trust that is consolidated in our financial
statements, with a stated liquidation amount of $50.

   The distribution of Common Stock to eligible policyholders in the
demutualization was exempt from registration under the Securities Act of 1933
pursuant to Section 3(a)(10) based on the Commissioner of the New Jersey
Department of Banking and Insurance's approval of the Plan of Reorganization.
On December 12, 2001, the Securities and Exchange Commission declared effective
(i) the Registration Statement on Form S-1 (Registration No. 333-58524) of
Prudential Financial with respect to the 126.5 million shares of Common Stock
offered in Prudential Financial's initial public offering and (ii) the
Registration Statement on Form S-1 (Registration Nos. 333-70888 and
333-70888-01) of Prudential Financial and Prudential Financial Capital Trust I
with respect to the 13.8 million Units.

   The lead managing underwriter for the U.S. offerings of the Common Stock and
the Units was Goldman Sachs & Co. The lead managing underwriter for the
international offering of the Common Stock was Goldman Sachs International.
Each of these offerings commenced on December 12, 2001. The offerings of the
Common Stock terminated upon the sale of all the 126.5 million shares of Common
Stock (including 16.5 million sold pursuant to the underwriters' over-allotment
option). The offering of the Units terminated upon the sale of all of the 13.8
million Units (including 1.8 million Units sold pursuant to the underwriters'
over-allotment option).

                                 Net Proceeds

   The aggregate offering price of the Common Stock sold was $3,479 million
(including $454 million of gross proceeds attributable to the shares of Common
Stock sold pursuant to the exercise of the underwriters' over-allotment
option). Prudential Financial incurred expenses of $142 million in connection
with the offering of Common Stock including underwriting discounts and
commissions of $133 million and other expenses of $9 million. Other expenses
include legal and accounting fees and expenses, printing and engraving
expenses, filing and listing fees, registrar and transfer agent fees and
miscellaneous items. The net proceeds to Prudential Financial from the offering
of the Common Stock, after deducting the foregoing expenses, were $3,337
million.

   The aggregate offering price of the Units sold was $690 million (including
$90 million of gross proceeds attributable to the Units sold pursuant to the
exercise of the underwriters' over-allotment option). Prudential Financial
incurred expenses of $27 million in connection with the offering of the Units
including underwriting discounts and commissions of $24 million and other
expenses of $3 million. Other expenses include legal and accounting fees and
expenses, printing and engraving expenses, filing and listing fees, registrar
and transfer agent fees and miscellaneous items. The net proceeds to Prudential
Financial from the offering of the Units, after deducting the foregoing
expenses, were $663 million.

                                      63



   For a description of the use of proceeds from these offerings, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" included in this Annual Report on
Form 10-K.

                                Convertibility

   The Common Stock is not convertible.

   Prudential Financial may, at its option, at any time, exchange all
outstanding shares of Class B Stock into such number of shares of Common Stock
as have an aggregate average market value (discussed below) equal to 120% of
the appraised "Fair Market Value" (discussed below) of the outstanding shares
of Class B Stock.

   In addition, if (1) Prudential Financial sells or otherwise disposes of all
or substantially all of the Closed Block Business or (2) a "change of control"
of Prudential Financial occurs, Prudential Financial must exchange all
outstanding shares of Class B Stock into such number of shares of Common Stock
as have an aggregate average market value of 120% of the appraised Fair Market
Value of such shares of Class B Stock. For this purpose, "change of control"
means the occurrence of any of the following events (whether or not approved by
the Board of Directors of Prudential Financial): (a)(i) any person(s) (as
defined) (excluding Prudential Financial and specified related entities) is or
becomes the beneficial owner (as defined), directly or indirectly, of more than
50% of the total voting power of the then outstanding equity securities of
Prudential Financial; or (ii) Prudential Financial merges with, or consolidates
with, another person or disposes of all or substantially all of its assets to
any person, other than, in the case of either clause (i) or (ii), any
transaction where immediately after such transaction the persons that
beneficially owned immediately prior to the transaction the then outstanding
voting equity securities of Prudential Financial beneficially own more than 50%
of the total voting power of the then outstanding voting securities of the
surviving person; or (b) during any year or any period of two consecutive
years, individuals who at the beginning of such period constituted the Board of
Directors of Prudential Financial (together with any new directors whose
election by such Board of Directors or whose nomination for election by the
shareholders of Prudential Financial was approved by a vote of a majority of
the directors of Prudential Financial then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason, other than pursuant
to (x) a proposal or request that the Board of Directors be changed as to which
the holder of the Class B Stock seeking the conversion has participated or
assisted or is participating or assisting or (y) retirements in the ordinary
course (as defined), to constitute a majority of the Board of Directors then in
office.

   Holders of Class B Stock will be permitted to convert their shares of Class
B Stock into such number of shares of Common Stock as have an aggregate average
market value equal to 100% of the appraised Fair Market Value of the
outstanding shares of Class B Stock (1) in the holder's sole discretion, in the
year 2016 or at any time thereafter, and (2) 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, the Class B Stock or the IHC debt in a manner
that materially adversely affects the CB Distributable Cash Flow (as defined
below); provided, however, that in no event may a holder of Class B Stock
convert shares of Class B Stock to the extent such holder immediately upon such
conversion, together with its affiliates, would be the "beneficial owner" (as
defined under the Securities Exchange Act of 1934) of in excess of 9.9% of the
total outstanding voting power of Prudential Financial's voting securities. In
the event a holder of shares of Class B Stock requests to convert shares
pursuant to clause (2)(a) in the preceding sentence, Prudential Financial may
elect, instead of effecting such conversion, to increase the Target Dividend
Amount to $12.6875 per share per annum retroactively from the time of issuance
of the Class B Stock.

   "CB Distributable Cash Flow" means, for any quarterly or annual period, the
sum of (i) the excess of (a) the Surplus and Related Assets over (b) the
"Required Surplus" applicable to the Closed Block Business within Prudential
Insurance, to the extent that Prudential Insurance is able to distribute such
excess as a dividend to PHLLC under New Jersey law without giving effect,
directly or indirectly, to the "earned surplus" requirement of Section
17:27A-4c.(3) of the New Jersey Insurance Holding Company Systems Law, plus
(ii) any amount held by PHLLC allocated to the Closed Block Business in excess
of remaining debt service payments on the IHC debt. For purposes of the
foregoing, "Required Surplus" means the amount of surplus applicable to the
Closed

                                      64



Block Business within Prudential Insurance that would be required to maintain a
quotient (expressed as a percentage) of (i) the "Total Adjusted Capital"
applicable to the Closed Block Business within Prudential Insurance (including
any applicable dividend reserves) divided by (ii) the "Company Action Level
RBC" applicable to the Closed Block Business within Prudential Insurance, equal
to 100%, where "Total Adjusted Capital" and "Company Action Level RBC" are as
defined in the regulations promulgated under the New Jersey Dynamic Capital and
Surplus Act of 1993. These amounts are determined according to statutory
accounting principles.

   In the event of any reclassification, recapitalization or exchange of, or
any tender offer or exchange offer for, the outstanding shares of Common Stock,
including by merger, consolidation or other business combination, as a result
of which shares of Common Stock are exchanged for or converted into another
security which is both registered under the Securities Exchange Act of 1934 and
publicly traded, then the Class B Stock will remain outstanding (unless
exchanged by virtue of a "change of control" occurring or otherwise, or
otherwise converted) and, in the event 50% or more of the outstanding shares of
Common Stock are so exchanged or converted, holders of outstanding Class B
Stock will be entitled to receive, in the event of any subsequent exchange or
conversion, the securities into which the Common Stock has been exchanged or
converted by virtue of such reclassification, recapitalization, merger,
consolidation, tender offer, exchange offer or other business combination. If,
in the event of any reclassification, recapitalization or exchange, or any
tender or exchange offer for, the outstanding shares of Common Stock, including
by merger, consolidation or other business combination, as a result of which a
majority of the outstanding shares of Common Stock are converted into or
exchanged or purchased for either cash or securities which are not public
securities, or a combination thereof, the Class B Stock will be entitled to
receive cash and/or securities of the type and in the proportion that such
holders of Class B Stock would have received if an exchange or conversion of
the Class B Stock had occurred immediately prior to the conversion, exchange or
purchase of a majority of the outstanding shares of Common Stock and the
holders of Class B Stock had participated as holders of Common Stock in such
conversion, exchange or purchase. The amount of cash and/or securities payable
upon such exchange or conversion will be calculated based upon the Fair Market
Value of the Class B Stock as of the date on which the Common Stock was
exchanged, converted or purchased and will be multiplied by 120%.

   For purposes of all exchanges and conversions, the "average market value" of
the Common Stock will be determined during a specified 20 trading day period
preceding the time of the exchange or conversion. "Fair Market Value" of the
Class B Stock means the fair market value of all of the outstanding shares of
Class B Stock as determined by appraisal by a nationally recognized actuarial
or other competent firm independent of and selected by the Board of Directors
of Prudential Financial and approved by the holders of a majority of the
outstanding shares of Class B Stock. Fair Market Value will be the present
value of expected future cash flows to holders of the Class B Stock, reduced by
any payables to the Financial Services Businesses. Future cash flows will be
projected consistent with the policy, as described in the plan of
reorganization, for the Board of Directors of Prudential Insurance to declare
policyholder dividends based on actual experience in the Closed Block.
Following the repayment in full of the IHC debt, these cash flows shall be the
excess of statutory surplus applicable to the Closed Block Business over
Required Surplus (as defined in the definition of "CB Distributable Cash Flow")
for each period that would be distributable as a dividend under New Jersey law
if the Closed Block Business were a separate insurer. These cash flows will be
discounted at an equity rate of return, to be estimated as a risk-free rate
plus an equity risk premium. The risk-free rate will be an appropriate ten-year
U.S. Treasury rate reported by the Federal Reserve Bank of New York. The equity
risk premium will be eight and one quarter percent initially, declining evenly
to four percent over the following 21 years and remaining constant thereafter.
Fair Market Value will be determined by appraisal as of a specified date
preceding the time of the exchange or conversion.

   Any exchange or conversion of Class B Stock into Common Stock could occur at
a time when either or both of the Common Stock and Class B Stock may be
considered to be overvalued or undervalued. In the future, if the Class B Stock
is exchanged for or converted into Common Stock, the number of shares of Common
Stock then obtainable by the Class B Stockholders might constitute a higher
proportion of the total shares of Common Stock then outstanding than the
proportion represented by (x) the number of shares of Class B Stock initially
issued divided by (y) the total number of shares of Common Stock outstanding
upon completion of the demutualization. The degree of any such proportionate
increase would depend principally on: the performance of the Closed Block
Business over time and the valuation of the Closed Block Business at the time
of exchange or conversion; whether the exchange or conversion implemented
involves a premium; the number of any new shares of

                                      65



Common Stock we issue after the demutualization for financing, acquisition or
other purposes or any repurchases of Common Stock that we may make; and the
market value of our Common Stock at the time of exchange or conversion.

                                   Dividends

   There were no dividends declared or paid on either of the classes of common
stock during the period from the date of demutualization through December 31,
2001. Future dividend decisions will be based on, and affected by, a number of
factors including the impact of regulatory restrictions and the financial
performance of the Financial Services Businesses and Closed Block Business for
the Common Stock and Class B Stock, respectively. For a discussion of dividends
and related regulatory restrictions, see "Business," "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and Note 13 to the Consolidated Financial Statements
included in this Annual Report on Form 10-K and the section entitled
"Description of Capital Stock" in Prudential Financial's Prospectus dated
December 12, 2001, filed pursuant to Rule 424(b) under the Securities Act of
1933.

   Prudential Financial's Board of Directors currently intends to declare
dividends on the Common Stock, payable once annually, and expects that the
first annual dividend will be $0.30 per share, which will be declared in the
fourth quarter of 2002. The declaration of dividends is subject to the
discretion of Prudential Financial's Board of Directors and will depend on our
financial condition, results of operations, cash requirements, future
prospects, regulatory restrictions on the payment of dividends by Prudential
Financial subsidiaries and such other factors as the Board of Directors may
deem relevant. Dividends payable by Prudential Financial are limited to the
amount that would be legally available for payment under New Jersey corporate
law.

ITEM 6.  SELECTED FINANCIAL DATA

   We derived the selected consolidated income statement data and division and
segment operating results for the years ended December 31, 2001, 2000 and 1999
and the selected consolidated balance sheet data as of December 31, 2001 and
2000 from our Consolidated Financial Statements included elsewhere herein. We
derived the selected consolidated income statement data for the years ended
December 31, 1998 and 1997 and the selected consolidated balance sheet data as
of December 31, 1999, 1998 and 1997 from consolidated financial statements not
included herein.

   In April 2001, we completed the acquisition of Gibraltar Life, which has
adopted a November 30 fiscal year end. Consolidated balance sheet data as of
December 31, 2001 includes Gibraltar Life assets and liabilities as of November
30, 2001, and consolidated income statement data includes Gibraltar Life
results for the period April 2, 2001 through November 30, 2001. Statistics
reported for Gibraltar Life are based on these dates as well.

   We have made several dispositions that materially affect the comparability
of the data presented below. In the fourth quarter of 2000, we restructured the
capital markets activities of Prudential Securities, exiting its lead-managed
equity underwriting for corporate issuers and institutional fixed income
businesses. These businesses incurred a pre-tax loss of $159 million in 2001, a
pre-tax loss of $620 million in 2000, pre-tax income of $23 million in 1999, a
pre-tax loss of $73 million in 1998 and pre-tax income of $55 million in 1997.
The loss from these operations in 2000 included charges of $476 million
associated with our termination and wind-down of these businesses. In 2000, we
sold Gibraltar Casualty Company, a commercial property and casualty insurer
that we placed in wind-down status in 1985. Gibraltar Casualty had no impact on
results in 2001 and incurred pre-tax losses of $7 million in 2000, $72 million
in 1999, $76 million in 1998 and $24 million in 1997. Residual activity from
the residential first mortgage banking business that we sold in a prior period
resulted in a pre-tax loss of $41 million in 1998 and a pre-tax profit of $9
million in 1997, primarily related to our remaining obligations with respect to
this business.

   On December 18, 2001, Prudential Insurance converted from a mutual life
insurance company owned by its policyholders to a stock life insurance company
and became an indirect, wholly owned subsidiary of Prudential Financial. For a
discussion of these transactions, see "Business--Demutualization and Related
Transactions" included elsewhere in this Annual Report on Form 10-K.
"Demutualization costs and expenses" amounted to $588 million in 2001, $143
million in 2000, $75 million in 1999 and $24 million in 1998. "Demutualization
costs and expenses" in 2001 include $340 million of demutualization
consideration payable to former Canadian branch policyholders as more fully
described in Note 2 to the Consolidated Financial Statements included elsewhere
in this Annual Report on Form 10-K.

                                      66



   You should read this selected consolidated financial and other information
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our Consolidated Financial Statements
included elsewhere herein.


                                           As of or for the Year Ended December 31,
                                       ------------------------------------------------
                                         2001      2000      1999      1998      1997
                                       --------  --------  --------  --------  --------
                                                         (in millions)
                                                                
Income Statement Data:
Revenues:
   Premiums........................... $ 12,477  $ 10,181  $  9,528  $  9,048  $  9,043
   Policy charges and fee income......    1,803     1,639     1,516     1,465     1,423
   Net investment income..............    9,151     9,497     9,367     9,454     9,458
   Realized investment gains
   (losses), net......................     (705)     (288)      924     2,641     2,168
   Commissions and other income.......    4,451     5,475     5,233     4,416     4,381

                                       --------  --------  --------  --------  --------
    Total revenues....................   27,177    26,504    26,568    27,024    26,473

                                       --------  --------  --------  --------  --------
Benefits and expenses:
   Policyholders' benefits............   12,752    10,640    10,226     9,786     9,956
   Interest credited to
   policyholders' account balances....    1,804     1,751     1,811     1,953     2,170
   Dividends to policyholders.........    2,722     2,724     2,571     2,477     2,422
   General and administrative
   expenses...........................    9,538    10,043     9,530     9,037     8,525
   Capital markets restructuring......    --          476     --        --        --
   Sales practices remedies and
   costs..............................    --        --          100     1,150     2,030
   Demutualization costs and
   expenses...........................      588       143        75        24     --

                                       --------  --------  --------  --------  --------
    Total benefits and expenses.......   27,404    25,777    24,313    24,427    25,103

                                       --------  --------  --------  --------  --------
Income (loss) from continuing
operations before income taxes........     (227)      727     2,255     2,597     1,370

                                       --------  --------  --------  --------  --------
Income tax expense (benefit)..........      (57)      406     1,042       970       407

                                       --------  --------  --------  --------  --------
Income (loss) from continuing
operations............................     (170)      321     1,213     1,627       963

                                       --------  --------  --------  --------  --------
Discontinued operations:
   Loss from healthcare
   operations, net of taxes...........    --        --        --         (298)     (353)
   Gain (loss) on disposal of
   healthcare operations, net of
   taxes..............................       16        77      (400)     (223)    --

                                       --------  --------  --------  --------  --------
    Net gain (loss) from
    discontinued operations, net
    of taxes..........................       16        77      (400)     (521)     (353)

                                       --------  --------  --------  --------  --------
Net income (loss)..................... $   (154) $    398  $    813  $  1,106  $    610

                                       ========  ========  ========  ========  ========
   Basic and diluted earnings per
    share--Common Stock(1)............ $   0.07
   Basic and diluted earnings per
    share--Class B Stock(1)........... $   1.50

Division and Segment Data:
Income (loss) from continuing
operations before income taxes(2):
   Individual Life Insurance.......... $    228  $    108  $     94  $    196
   Private Client Group...............     (239)      237       224       114
   Retail Investments.................      130       233       180       343
   Property and Casualty Insurance....       91       166       161       327

                                       --------  --------  --------  --------
    Total U.S. Consumer...............      210       744       659       980

                                       --------  --------  --------  --------
   Group Insurance....................       (2)      156       143       221
   Other Employee Benefits............       27       113       342       715

                                       --------  --------  --------  --------
    Total Employee Benefits...........       25       269       485       936

                                       --------  --------  --------  --------
   International Insurance............      554       281       227       153
   International Securities and
   Investments........................      (88)       26        15        13

                                       --------  --------  --------  --------
    Total International...............      466       307       242       166

                                       --------  --------  --------  --------
   Investment Management and
   Advisory Services..................       97       155       156       145
   Other Asset Management.............      114       122        97        22

                                       --------  --------  --------  --------
    Total Asset Management............      211       277       253       167

                                       --------  --------  --------  --------
   Corporate and Other................     (520)   (1,063)      272    (1,319)

                                       --------  --------  --------  --------
    Total--Financial Services
    Businesses........................      392       534     1,911       930

                                       --------  --------  --------  --------
   Closed Block Business..............     (619)      193       344     1,667

                                       --------  --------  --------  --------
    Total............................. $   (227) $    727  $  2,255  $  2,597

                                       ========  ========  ========  ========
Balance Sheet Data:
Total investments excluding policy
loans................................. $157,264  $140,469  $151,338  $148,837  $146,594
Separate account assets...............   77,158    82,217    82,131    80,931    73,451
Total assets..........................  293,030   272,753   285,094   279,422   259,571
Future policy benefits,
 policyholders' account balances
 and unpaid claims and claim
 adjustment expenses..................  133,732   104,130   102,887   104,301   105,615
Separate account liabilities..........   77,158    82,217    82,131    80,931    73,451
Short-term debt.......................    5,405    11,131    10,858    10,082     6,774
Long-term debt........................    5,304     2,502     5,513     4,734     4,273
Total liabilities.....................  271,887   252,145   265,803   259,027   239,853
Guaranteed minority interest in
Trust holding solely debentures of
Parent................................      690     --        --        --        --
Equity................................   20,453    20,608    19,291    20,395    19,718
Equity excluding net unrealized
 investment gains and losses on
 available-for-sale securities........   19,225    20,249    19,951    19,123    17,966

--------
(1) Earnings per share data reflects earnings for the period from December 18,
    2001, the date of demutualization, through December 31, 2001 only. Net
    income during this period was $38 million and $3 million for the Financial
    Services Businesses and Closed Block Business, respectively.
(2) Prepared in accordance with GAAP. Operating results by division and segment
    for 1997 are neither readily available nor practicable to obtain.

                                      67



   In managing our business, we analyze our operating performance by separately
considering our Financial Services Businesses and our Closed Block Business. In
addition, within the Financial Services Businesses we analyze our operating
performance using a non-GAAP measure we call "adjusted operating income." Prior
to the date of demutualization, we also analyzed results of our Traditional
Participating Products segment based on this non-GAAP measure. We calculate
adjusted operating income by adjusting our income from continuing operations
before income taxes shown above to exclude certain items. The items we exclude
are:

  .  realized investment gains, net of losses and related charges;

  .  sales practices remedies and costs;

  .  the gains, losses and contribution to income/loss of divested businesses
     that we have sold but that do not qualify for "discontinued operations"
     accounting treatment under GAAP; and

  .  demutualization costs and expenses.

Wind-down businesses that we have not divested remain in adjusted operating
income. We exclude our discontinued healthcare operations from income from
continuing operations before income taxes, as shown above.

   The excluded items are important to an understanding of our overall results
of operations. You should not view adjusted operating income as a substitute
for net income determined in accordance with GAAP and you should note that our
definition of adjusted operating income may differ from that used by other
companies. However, we believe that the presentation of adjusted operating
income as we measure it for management purposes enhances the understanding of
our results of operations by highlighting the results from ongoing operations
and the underlying profitability factors of our business. We exclude realized
investment gains, net of losses and related charges, from adjusted operating
income because the timing of transactions resulting in recognition of gains or
losses is largely at our discretion and the amount of these gains or losses is
heavily influenced by and fluctuates in part according to the availability of
market opportunities. Including the fluctuating effects of these transactions
could distort trends in the underlying profitability of our businesses. We
exclude sales practices remedies and costs because they relate to a substantial
and identifiable non-recurring event. We exclude the gains and losses and
contribution to income/loss of divested businesses because, as a result of our
decision to dispose of these businesses, these results are not relevant to the
profitability of our ongoing operations and could distort the trends associated
with our ongoing businesses. We also exclude demutualization costs and expenses
because they are directly related to our demutualization and could distort the
trends associated with our business operations.

                                      68



   We show our revenues and adjusted operating income by division and segment,
as well as a reconciliation of both measures on a consolidated basis to their
corresponding GAAP amounts, below.


                                                                                      Year Ended December 31,
                                                                                     -------------------------
                                                                                      2001     2000     1999
                                                                                     -------  -------  -------
                                                                                           (in millions)
                                                                                              
Division and Segment Operating Results:
Financial Services Businesses:
Revenues(1):
   Individual Life Insurance........................................................ $ 1,919  $ 1,828  $ 1,703
   Private Client Group.............................................................   2,216    2,767    2,562
   Retail Investments...............................................................   1,458    1,631    1,551
   Property and Casualty Insurance..................................................   2,051    1,800    1,747
                                                                                     -------  -------  -------
       Total U.S. Consumer..........................................................   7,644    8,026    7,563
                                                                                     -------  -------  -------
   Group Insurance..................................................................   3,248    2,801    2,428
   Other Employee Benefits..........................................................   2,664    2,885    3,014
                                                                                     -------  -------  -------
       Total Employee Benefits......................................................   5,912    5,686    5,442
                                                                                     -------  -------  -------
   International Insurance..........................................................   4,146    1,920    1,522
   International Securities and Investments.........................................     548      704      580
                                                                                     -------  -------  -------
       Total International..........................................................   4,694    2,624    2,102
                                                                                     -------  -------  -------
   Investment Management and Advisory Services......................................     835      874      768
   Other Asset Management...........................................................     437      470      373
                                                                                     -------  -------  -------
       Total Asset Management.......................................................   1,272    1,344    1,141
                                                                                     -------  -------  -------
   Corporate and Other..............................................................     103      205      509
                                                                                     -------  -------  -------
       Total........................................................................  19,625   17,885   16,757
                                                                                     -------  -------  -------
Other amounts included in consolidated revenues:
   Realized investment gains (losses), net..........................................    (162)    (379)     586
   Revenues from divested businesses................................................     (14)     269      511
                                                                                     -------  -------  -------
       Total revenues--Financial Services Businesses................................  19,449   17,775   17,854
                                                                                     -------  -------  -------
Closed Block Business:
Revenues(1).........................................................................   8,271    8,638    8,376
Other amounts included in consolidated revenues:
   Realized investment gains (losses), net..........................................    (543)      91      338
                                                                                     -------  -------  -------
       Total revenues--Closed Block Business........................................   7,728    8,729    8,714
                                                                                     -------  -------  -------
       Total consolidated revenues.................................................. $27,177  $26,504  $26,568
                                                                                     =======  =======  =======
Financial Services Businesses:
Adjusted operating income (loss) (2):
   Individual Life Insurance........................................................ $   273  $   114  $   117
   Private Client Group.............................................................    (239)     237      224
   Retail Investments...............................................................     181      239      174
   Property and Casualty Insurance..................................................      95      150      152
                                                                                     -------  -------  -------
       Total U.S. Consumer..........................................................     310      740      667
                                                                                     -------  -------  -------
   Group Insurance..................................................................      70      158      128
   Other Employee Benefits..........................................................     113      229      272
                                                                                     -------  -------  -------
       Total Employee Benefits......................................................     183      387      400
                                                                                     -------  -------  -------
   International Insurance..........................................................     611      296      218
   International Securities and Investments.........................................     (88)      26       15
                                                                                     -------  -------  -------
       Total International..........................................................     523      322      233
                                                                                     -------  -------  -------
   Investment Management and Advisory Services......................................     105      154      155
   Other Asset Management...........................................................     114      122       97
                                                                                     -------  -------  -------
       Total Asset Management.......................................................     219      276      252
                                                                                     -------  -------  -------
   Corporate and Other..............................................................      28       (4)     137
                                                                                     -------  -------  -------
       Total........................................................................   1,263    1,721    1,689
                                                                                     -------  -------  -------
Items excluded from adjusted operating income:
Realized investment gains, net of losses and related charges:
   Realized investment gains (losses), net..........................................    (162)    (379)     586
   Related charges(3)...............................................................      26      (29)    (142)
                                                                                     -------  -------  -------
       Total realized investment gains, net of losses and related charges...........    (136)    (408)     444
                                                                                     -------  -------  -------
   Sales practices remedies and costs...............................................      --       --     (100)
   Divested businesses..............................................................    (147)    (636)     (47)
   Demutualization costs and expenses...............................................    (588)    (143)     (75)
                                                                                     -------  -------  -------
Income from continuing operations before income taxes--Financial Services Businesses     392      534    1,911
                                                                                     -------  -------  -------
Closed Block Business:
Adjusted operating income(2)........................................................     436      547      316
Items excluded from adjusted operating income:
Realized investment gains, net of losses and related charges:
   Realized investment gains (losses), net..........................................    (543)      91      338
   Dividends to policyholders(4)....................................................    (512)    (445)    (310)
                                                                                     -------  -------  -------
       Total realized investment gains, net of losses and related charges...........  (1,055)    (354)      28
                                                                                     -------  -------  -------
Income (loss) from continuing operations before income taxes--Closed Block Business.    (619)     193      344
                                                                                     -------  -------  -------
Consolidated income (loss) from continuing operations before income taxes........... $  (227) $   727  $ 2,255
                                                                                     =======  =======  =======


                                      69



--------
(1)Revenues by segment exclude (i) realized investment gains, net and (ii)
   revenues from divested businesses. Revenues for the Closed Block Business
   exclude realized investment gains, net.
(2)Adjusted operating income equals revenues as defined above in footnote (1)
   less benefits and expenses excluding (i) the impact of net realized
   investment gains on deferred acquisition cost amortization, reserves and
   dividends to policyholders; (ii) sales practices remedies and costs; (iii)
   the benefits and expenses of divested businesses; and (iv) demutualization
   costs and expenses.
(3)Net realized investment gains impact our reserves for future policy
   benefits, our deferred policy acquisition costs, and our policyholder
   dividends. We refer to these impacts collectively as the "related charges."
   Related charges for the Financial Services Businesses consist of the
   following:



                                                     Year Ended
                                                    December 31,
                                                  ----------------
                                                  2001 2000  1999
                                                  ---- ----  -----
                                                    (in millions)
                                                    
Reserves for future policy benefits.............. $ 6  $(36) $(147)
Amortization of deferred policy acquisition costs  20     7      5

                                                  ---  ----  -----
   Total......................................... $26  $(29) $(142)

                                                  ===  ====  =====


   We adjust the reserves for some of our policies when cash flows related to
   these policies are affected by net realized investment gains and the related
   charge for reserves for future policy benefits represents that adjustment.
   We amortize deferred policy acquisition costs for certain investment-type
   products based on estimated gross profits, which include net realized
   investment gains on the underlying invested assets, and the related charge
   for amortization of deferred policy acquisition costs represents the
   amortization related to net realized investment gains. As part of our
   acquisition of Gibraltar Life, we are obligated to pay pre-acquisition
   Gibraltar Life policyholders a dividend generally equal to 70% of any net
   realized investment gains from the collection or disposition of loans and
   investment real estate in excess of the value of such assets included in the
   Reorganization Plan. The related charge for dividends to policyholders
   represents the portion of our expense charge for policyholder dividends
   attributable to net realized investment gains on these assets during the
   period.
(4)Net realized investment gains is one of the elements that we consider in
   establishing the dividend scale, and the related charge for dividends to
   policyholders represents the estimated portion of our expense charge for
   policyholder dividends that is attributable to net realized investment gains
   that we consider in determining our dividend scale. These gains are
   reflected in the dividend scale over a number of years.

Other Data:


                                                                    As of December 31,
                                                                   --------------------
                                                                    2001   2000   1999
                                                                   ------ ------ ------
                                                                      (in billions)
                                                                        
Assets Under Management and Administration (at fair market value):
Managed by Asset Management division:.............................
 Retail customers(1).............................................. $ 96.5 $107.4 $108.5
 Institutional customers(2).......................................   89.1   95.1   96.8
 General account..................................................  113.8  110.0  107.9

                                                                   ------ ------ ------
   Total proprietary..............................................  299.4  312.5  313.2
Managed by Retail Investments or Private Client Group segments:
 Non-proprietary wrap-fee and other assets under management(3)....   49.3   50.5   44.8
International(4)..................................................   39.3    8.1    5.3

                                                                   ------ ------ ------
   Total assets under management..................................  388.0  371.1  363.3
Client assets under administration................................  201.6  221.8  232.9

                                                                   ------ ------ ------
   Total assets under management and administration............... $589.6 $592.9 $596.2

                                                                   ====== ====== ======

--------
(1) Consists of individual mutual funds, including investments in our mutual
    funds through wrap-fee products, and both variable annuities and variable
    life insurance assets in our separate accounts. Fixed annuities and the
    fixed rate options of both variable annuities and variable life insurance
    are included in general account.
(2) Consists of third-party institutional assets and group insurance contracts.
(3) Consists of wrap-fee assets gathered by the Private Client Group and Retail
    Investments segments and funds invested in the non-proprietary options of
    our investment products other than wrap-fee products.
(4) Consists primarily of general account assets supporting our International
    Insurance segment, assets gathered by the International Securities and
    Investments segment, and wind-down Canadian operations. December 31, 2001
    includes assets of $29.2 billion for Gibraltar Life, which was acquired in
    April 2001.

                                      70





                                                            As of December 31,
                                                  --------------------------------------
                                                        2001  2000   1999   1998   1997
                                                        ---  ------ ------ ------ ------
                                                                   
Employees and Representatives:
Prudential Agents................................      4,387  6,086  7,818  8,868 10,115
Life Planners....................................      4,104  3,495  2,884  2,332  1,908
Gibraltar Life Advisors (as of November 30, 2001)      6,121     --     --     --     --
Financial Advisors...............................      6,159  6,676  6,898  6,820  6,613
Total employees(1)...............................     60,792 56,925 59,530 61,793 60,777

--------
(1) All periods exclude employees of our discontinued healthcare operations.

                                      71



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

   You should read the following analysis of our consolidated financial
condition and results of operations in connection with the "Selected Financial
Data" and the Consolidated Financial Statements included in this Annual Report
on Form 10-K. Effective on the date of demutualization, the consolidated
financial statements of Prudential Insurance for financial statement periods as
of and ended prior to the demutualization became the historical Consolidated
Financial Statements of Prudential Financial.

                   Demutualization and Related Transactions

   On the date of demutualization, Prudential Insurance converted from a mutual
life insurance company owned by its policyholders to a stock life insurance
company and became an indirect, wholly owned subsidiary of Prudential
Financial. On that date, eligible policyholders, as defined in the Plan of
Reorganization, received shares of Prudential Financial's Common Stock or the
right to receive cash or policy credits, which are increases in policy values
or increases in other policy benefits, upon the extinguishment of all
membership interests in Prudential Insurance. In the aggregate, eligible
policyholders received 457.1 million shares of Common Stock, the right to
receive cash totaling $3,487 million, including $340 million to former Canadian
branch policyholders, and policy credits totaling $1,042 million in the
demutualization. In addition, two closed blocks, as discussed below, were
established for the benefit of certain participating individual life insurance
policies and annuities issued by Prudential Insurance and its Canadian branch.

   On the date of demutualization, Prudential Financial completed an initial
public offering of 110.0 million shares of its Common Stock at an initial
public offering price of $27.50 per share, and on December 21, 2001, Prudential
Financial issued an additional 16.5 million shares of Common Stock as a result
of the exercise of the over-allotment option granted to underwriters in the
initial public offering. Also on the date of demutualization, Prudential
Financial completed the sale, through a private placement, of 2.0 million
shares of Class B Stock, a separate class of common stock, at a price of $87.50
per share. The Common Stock reflects the performance of the Financial Services
Businesses, and the Class B Stock reflects the performance of the Closed Block
Business. Collectively, the Financial Services Businesses and the Closed Block
Business are referred to as the "Businesses." In addition, on the date of
demutualization, Prudential Financial issued 13.8 million 6.75% equity security
units for gross proceeds of $690 million, including as a component thereof
redeemable capital securities of Prudential Financial Capital Trust I, a
statutory business trust that is consolidated in our financial statements.
Furthermore, Prudential Holdings, LLC ("PHLCC"), a wholly owned subsidiary of
Prudential Financial that owns the capital stock of Prudential Insurance,
issued $1.75 billion in senior secured notes (the "IHC debt"), a portion of
which were insured by a bond insurer, as discussed below.

   Concurrent with the demutualization, Prudential Insurance completed a
corporate reorganization whereby various subsidiaries (and certain related
assets and liabilities) of Prudential Insurance were dividended (or
"destacked") so that they became wholly owned subsidiaries of Prudential
Financial rather than of Prudential Insurance. The subsidiaries distributed by
Prudential Insurance to Prudential Financial included its property and casualty
insurance companies, its principal securities brokerage companies, 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.

   The Plan of Reorganization required us to establish and operate a mechanism
known as the Closed Block. The Closed Block is designed generally to provide
for the reasonable expectations for future policy dividends after
demutualization of holders of policies included in the Closed Block by
allocating assets that will be used for payment of benefits, including
policyholder dividends, on these policies. See Note 9 to the Consolidated
Financial Statements for more information on the Closed Block.

   On January 22, 2002, Prudential Financial's Board of Directors authorized
the repurchase of up to $1 billion of its Common Stock. The timing and amount
of any purchases of Common Stock under this authorization will be determined by
management based on market conditions and other considerations, and such
purchases may be effected by market or negotiated transactions, including
programs adopted under Rule 10b5-1 of the Securities Exchange Act of 1934.

                                      72



                                   Overview

Financial Services Businesses and Closed Block Business

Financial Services Businesses

   We refer to the businesses in our four operating divisions and our Corporate
and Other operations, collectively, as our Financial Services Businesses. The
U.S. Consumer division consists of our Individual Life Insurance, Private
Client Group, Retail Investments and Property and Casualty Insurance segments.
The Employee Benefits division consists of our Group Insurance and Other
Employee Benefits segments. The International division consists of our
International Insurance and International Securities and Investments segments.
The Asset Management division consists of our Investment Management and
Advisory Services and Other Asset Management segments. We also have Corporate
and Other operations, which contain corporate items and initiatives that are
not allocated to the business segments. Corporate and Other operations also
include businesses that we have divested or placed in wind-down status (other
than our divested healthcare business, which is treated as a discontinued
operation). The principal corporate items are the expense of corporate
management and earnings on equity not allocated to our businesses.

   We attribute financing costs to each segment based on its use of financing
and reflect financing costs in each segment's results. The net investment
income of each segment includes earnings on the amount of equity which
management believes is necessary to support the risks of that segment.

Closed Block Business

   Effective with the date of demutualization, we established the Closed Block
Business. For periods prior to the date of demutualization, the results of the
Closed Block Business are those of our former Traditional Participating
Products segment. Upon the establishment of the Closed Block Business, we
transferred $5.6 billion of net assets previously associated with the
Traditional Participating Products segment, including the majority of the net
proceeds of the Class B Stock and the IHC debt issuances, to the Financial
Services Businesses. This capital was initially allocated to our Corporate and
Other operations as of the date of demutualization. As a result, adjusted
operating income of the Closed Block Business does not include returns on these
net assets, which were historically included in adjusted operating income of
the Traditional Participating Products segment.

   In connection with the demutualization, we ceased offering domestic
participating products. The liabilities for our individual in force
participating products were segregated, together with assets which will be used
exclusively for the payment of benefits and policyholder dividends, expenses
and taxes with respect to these products, in a regulatory mechanism referred to
as the "Closed Block." We selected the amount and type of Closed Block assets
and Closed Block liabilities included in the Closed Block so that the Closed
Block assets initially had a lower book value than the Closed Block
liabilities. We expect that the Closed Block assets will generate sufficient
cash flow, together with anticipated revenues from the Closed Block policies,
over the life of the Closed Block to fund payments of all expenses, taxes and
policyholder benefits to be paid to, and the reasonable dividend expectations
of, policyholders of the Closed Block policies. We also segregated for
accounting purposes the assets that we need to hold outside the Closed Block to
meet capital requirements related to the policies included within the Closed
Block. No policies sold after demutualization will be added to the Closed Block
and its in force business is expected to ultimately decline as we pay
policyholder benefits in full. We expect the proportion of our business
represented by the Closed Block to decline as we grow other businesses. A minor
portion of our former Traditional Participating Products segment, which
included the policies now included in the Closed Block Business prior to our
demutualization, consisted of other traditional insurance products that were
not included in the Closed Block.

   The Closed Block Business consists principally of the Closed Block as well
as the Surplus and Related Assets, deferred policy acquisition costs, other
assets and the IHC debt. We allocated the net proceeds from the issuance of the
Class B Stock and IHC debt, except for $72 million used to purchase a
guaranteed investment

                                      73



contract to fund a portion of the bond insurance cost associated with that
debt, 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 report results of the Closed Block Business, including interest
expenses associated with the IHC debt.

Revenues and Expenses

   We earn our revenues principally from insurance premiums; mortality,
expense, and asset management fees from insurance and investment products;
commissions and other revenues from securities brokerage transactions; and
investment of general account and other funds. We earn premiums primarily from
the sale of individual life insurance, group life and disability insurance and
automobile and homeowners insurance. We earn mortality, expense, and asset
management fees from the sale and servicing of separate account products
including variable life insurance and variable annuities. We also earn asset
management and administrative fees from the sale and servicing of mutual funds,
retirement products and other asset management products and services. Our
operating expenses principally consist of insurance benefits provided, general
business expenses, dividends to policyholders, commissions and other costs of
selling and servicing the various products we sell and interest credited on
general account liabilities.

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.


                                      74



   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.

Valuation of Investments

   The major portion of our investments are recorded at fair value in the
statements of financial position. Fair values are based on quoted market prices
or estimates from independent pricing services, when available. However, when
such information is not available, for example, with respect to private
placement fixed maturity securities, fair value is estimated, typically by
using a discounted cash flow model, which considers current market credit
spreads for publicly traded issues with similar terms by companies of
comparable credit quality. Consequently, changes in estimated future cash flows
or in our assessment of the issuer's credit quality will result in changes in
carrying value. For fixed maturities and equity securities classified as
available for sale, the impact of such changes is recorded in "Accumulated
other comprehensive income (loss)," a separate component of equity. However,
the carrying value of these securities is written down to estimated fair value
when a decline in value is considered to be other than temporary, and we record
the corresponding impairment loss in "Realized investment gains (losses), net"
in the statements of operations. The factors we consider to determine if an
impairment loss is warranted are discussed more fully in Note 2 to the
Consolidated Financial Statements. The level of impairment losses can be
expected to increase when economic conditions worsen and decrease when economic
conditions improve.

   "Commercial loans" are carried at unpaid principal balances, net of
unamortized discounts and an allowance for losses. This allowance includes a
loan specific portion as well as a portfolio reserve for incurred but not
specifically identified losses. The loan specific portion is based on
management's judgment as to ultimate collectibility of loan principal. The
portfolio reserve is based on a number of factors, such as historical
experience and portfolio diversification. Similar to impairment losses
discussed above, the allowance for losses can be expected to increase when
economic conditions worsen and decrease when economic conditions improve.

Policyholder Liabilities and Deferred Policy Acquisition Costs

   The liability for "Future policy benefits" is the largest liability included
in our statements of financial position. This liability is primarily comprised
of the present value of estimated future payments to holders of life insurance
and annuity products where the timing and amount of payment depends on
policyholder mortality, surrender or retirement experience. For traditional
participating life insurance products of our Closed Block

                                      75



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 experience or standard industry
tables. Interest rate assumptions are based on factors such as market
conditions and expected investment returns. Although mortality and interest
rate assumptions are "locked-in" upon the issuance of new insurance or annuity
business with fixed and guaranteed terms, significant changes in experience or
assumptions may require us to provide for expected future losses on a product
by establishing premium deficiency reserves. For example, in 2000 we
restructured the portfolio that supports the structured settlement products
within our Other Employee Benefits segment to reduce the emphasis on equity
investments, which in turn lowered our expected future investment returns. As a
result, we recorded a charge to establish a premium deficiency reserve for
these products.

   Our liability for "Unpaid claims and claim adjustment expenses" includes
estimates of claims that we believe have been incurred, but have not yet been
reported ("IBNR") as of the balance sheet date, primarily attributable to our
Property and Casualty Insurance segment and the group disability products
within our Group Insurance segment. These estimates, and estimates of the
amounts of loss we will ultimately incur on reported claims, which are based in
part on our historical experience, are regularly adjusted to reflect actual
claims experience. When actual experience differs from our previous estimate,
the resulting difference will be included in our reported results for the
period of the change in estimate. On an ongoing basis, trends in actual
experience are a significant factor in the determination of claim reserve
levels. In recent years, actual claims experience with respect to our
automobile insurance business within our Property and Casualty Insurance
segment has been more favorable than the assumptions we used in originally
establishing the reserves for these claims, which resulted in a benefit to
adjusted operating income for these years due to reserve releases, although we
do not anticipate a comparable benefit in 2002. Actual claims experience can
also be less favorable than that assumed in establishing reserves, which can
require a charge to earnings to increase reserves. For example, we recorded a
charge in 1999 with respect to our discontinued healthcare business, increasing
the loss we had initially recorded in 1998 in connection with the sale of the
business, as a result of adverse claims experience subsequent to our initial
estimate of the required reserves.

   For most life insurance and annuity products that we sell, we defer costs
that vary with and are related primarily to the production of new business to
the extent these costs are deemed recoverable from future profits, and we
record these costs as an asset known as "Deferred policy acquisition costs" or
"DAC" in the statements of financial position. We amortize this DAC asset over
the expected lives of the contracts, based on the level and timing of either
estimated profits or premiums, depending on the type of contract. For products
with amortization based on future premiums, the amortization rate is locked-in
when the product is sold. However, for products with amortization based on
estimated profits, the amortization rate is periodically updated to reflect
current period experience or changes in assumptions that affect future
profitability, such as lapse rates, investment returns, mortality experience,
expense margins and surrender charges. These changes result in adjustments to
DAC balances in the period that we change our assumptions as well as changes in
prospective DAC amortization. For example, adverse market conditions in 2001
resulted in declines in the market values of assets supporting our variable
life insurance and annuity products, which in turn resulted in lower
expectations regarding our estimated future gross profits from fee-based
income. As a result, we recorded a higher level of DAC amortization in 2001 for
these products. DAC is also subject to periodic recoverability testing.

Reserves For Contingencies

   A contingency is an existing condition that involves a degree of uncertainty
that will ultimately be resolved upon the occurrence of future events. Under
GAAP, reserves for contingencies are required to be established when the future
event is probable and its impact can be reasonably estimated. An example is the
establishment of a reserve for losses in connection with an unresolved legal
matter. The initial reserve reflects management's best estimate of the probable
cost of ultimate resolution of the matter and is revised accordingly as facts
and circumstances change and, ultimately, when the matter is brought to
closure. Another example is the actual execution of a definitive management
commitment to exit or restructure a business. When management formally commits
to such an action, reserves are established based on the estimated cost of
executing the action. These would typically include severance and employee
benefit costs, facilities closure costs, and certain other direct incremental
costs. For example, we established such reserves in connection with our
disposition of our former healthcare business (see Note 3 to the Consolidated
Financial Statements) and the restructuring of the capital markets business of
Prudential Securities (see Note 4 to the Consolidated Financial Statements).
The initial

                                      76



establishment of these reserves reflected management's best estimate of the
ultimate costs. Our results for subsequent periods reflected changes in these
estimates to the extent that the actual costs of carrying out the plans were
different from our original estimates.

Other Significant Estimates

   In addition to the items discussed above, the application of GAAP requires
management to make other estimates and assumptions. For example, accounting for
pension and other postretirement and postemployment benefits requires estimates
of future returns on plan assets, expected increases in compensation levels and
trends in health care costs. These are discussed in Note 16 to the Consolidated
Financial Statements. Another example is the recognition of deferred tax
assets, which depends on management's assumption that future earnings will be
sufficient to realize the deferred benefit. This is discussed in Note 17 to the
Consolidated Financial Statements.

                      Consolidated Results of Operations

   In managing our business, we analyze our operating performance by separately
considering our Financial Services Businesses and our Closed Block Business. In
addition, within the Financial Services Businesses, we analyze our operating
performance using a non-GAAP measure we call "adjusted operating income". Prior
to the date of demutualization, we also analyzed results of our Traditional
Participating Products segment based on this non-GAAP measure. We calculate
adjusted operating income by adjusting our income from continuing operations
before income taxes to exclude certain items. The items excluded are:

  .  realized investment gains, net of losses and related charges;

  .  sales practices remedies and costs;

  .  the gains, losses and contribution to income/loss of divested businesses
     that we have sold but that do not qualify for "discontinued operations"
     accounting treatment under GAAP; and

  .  demutualization costs and expenses.

   Wind-down businesses that we have not divested remain in adjusted operating
income. We exclude our discontinued healthcare operations from income from
continuing operations before income taxes.

   The excluded items are important to an understanding of our overall results
of operations. You should not view adjusted operating income as a substitute
for net income determined in accordance with GAAP, and you should note that our
definition of adjusted operating income may differ from that used by other
companies. However, we believe that the presentation of adjusted operating
income as we measure it for management purposes enhances the understanding of
our results of operations by highlighting the results from ongoing operations
and the underlying profitability of our businesses. We exclude realized
investment gains, net of losses
and related charges, from adjusted operating income, because the timing of
transactions resulting in recognition of gains or losses is largely at our
discretion and the amount of these gains or losses is heavily influenced by and
fluctuates in part according to the availability of market opportunities.
Including the fluctuating effects of these transactions could distort trends in
the underlying profitability of our businesses. We exclude sales practices
remedies and costs because they relate to a substantial and identifiable
non-recurring event. We exclude the gains and losses and contribution to
income/loss of divested businesses because, as a result of our decision to
dispose of these businesses, these results are not relevant to the
profitability of our ongoing operations and could distort the trends associated
with our ongoing operations. We also exclude demutualization costs and expenses
because they are directly related to our demutualization and could distort the
trends associated with our business operations.

   In the discussion below of our consolidated results of operations, we
separately discuss income from continuing operations before income taxes and
adjusted operating income for the Financial Services Businesses, as well as the
divisions thereof and Corporate and Other operations, and the Closed Block
Business. We also discuss the items excluded from adjusted operating income,
i.e., realized investment gains, sales practices remedies and costs,
demutualization costs and expenses and divested businesses, as well as items
not included in income from continuing operations before taxes, i.e., taxes and
discontinued operations. Realized investment gains and losses are allocated
between the Financial Services Businesses and the Closed Block Business. Sales
practices remedies and costs and divested businesses are allocated entirely to
the Financial Services Businesses. For purposes of analyzing our results, taxes
and discontinued operations are not allocated to our segments or divisions.
Following this consolidated discussion, you will find a detailed discussion of
our results of operations by division and by the segments of each division, as
well as the Closed Block Business.

                                      77



Net Income

   2001 to 2000 Annual Comparison.  On a consolidated basis net income
decreased $552 million from income of $398 million in 2000 to a loss of $154
million in 2001. The decrease reflects a $954 million decrease in income from
continuing operations before income taxes, partially offset by a $463 million
decrease in the related provision for income taxes as discussed below under
"--Taxes." Our $154 million net loss in 2001 included a net loss of $506
million for the fourth quarter of 2001. The $506 million net loss reflects a
loss from continuing operations before income taxes of $609 million, including
net realized investment losses of $435 million, demutualization costs and
expenses of $389 million, and adjusted operating income of $320 million.

   The $954 million decrease in income from continuing operations before income
taxes resulted from a $142 million decrease from the Financial Services
Businesses and a $812 million decrease from the Closed Block Business. The $142
million decrease from the Financial Services Businesses came primarily from a
$534 million decline from our U.S. Consumer division, a $244 million decline
from our Employee Benefits division, and an $66 million decline from our Asset
Management division, partially offset by an increase of $159 million from our
International division and a $543 million reduction in losses from Corporate
and Other operations.

   The $534 million decline from our U.S. Consumer division, the $244 million
decline from our Employee Benefits division and the $66 million decline from
our Asset Management division came primarily from decreases in adjusted
operating income. The $159 million increase from our International division
came from an increase in adjusted operating income. Results for our
International division include the results of Gibraltar Life Insurance Company,
Ltd. ("Gibraltar Life"), which we acquired in April 2001, from April 2, 2001
through November 30, 2001. The $543 million reduction in losses from Corporate
and Other operations came primarily from a $467 million increase in realized
investment gains, net of losses, and a $489 million decrease in losses from
divested businesses which were partially offset by a $445 million increase in
demutualization costs and expenses and a $32 million improvement in adjusted
operating income.

   Net income on an equivalent share basis assumes that shares issued in the
demutualization and the initial public offering were outstanding for all
periods and does not reflect adjustments to earnings for demutualization or
related transactions. Net income per equivalent share of Common Stock, which
reflects the performance of the Financial Services Businesses, decreased to 52
cents per equivalent Common Share for the year ended December 31, 2001, from 53
cents per equivalent Common Share for the year ended December 31, 2000. Also on
an equivalent share basis, net income per equivalent share of the Class B
Stock, which reflects the performance of the Closed Block Business, decreased
to a loss of $228.00 per equivalent share of Class B Stock for the year ended
December 31, 2001, from income of $43.50 per equivalent share of Class B Stock
for the year ended December 31, 2000. The decrease in net income per equivalent
share of the Common Stock and Class B Stock from 2000 to 2001 reflects the
decline in net income of the Financial Services Businesses and Closed Block
Business as discussed above.

   See "--Adjusted Operating Income" below for a discussion of the adjusted
operating income results of our divisions, Corporate and Other operations and
our Closed Block Business.

   See "--Realized Investment Gains" below for a discussion of realized
investment gains, net of losses, and charges related to net realized investment
gains.

   Terrorist Attacks on the United States

   Our losses from insurance claims arising in connection with the September
11, 2001 terrorist attacks, after release of existing reserves and reinsurance
recoveries, had a negative effect on adjusted operating income and income from
continuing operations before income taxes of approximately $37 million, and on
net income of approximately $23 million, for 2001. These insurance losses are
based on gross losses of approximately $172 million from group life, individual
life, and property and casualty insurance claims. Approximately $27 million of
the negative impact on adjusted operating income and income from continuing
operations before income taxes related to the Financial Services Businesses,
primarily in the Individual Life Insurance segment. The remainder of the losses
related to the Closed Block Business.

   We suffered no material injury to our personnel or properties used in our
business operations from the attacks.

                                      78



   2000 to 1999 Annual Comparison.  Net income decreased $415 million, or 51%,
from $813 million in 1999 to $398 million in 2000. This decrease reflects a
$1.528 billion decrease in income from continuing operations before income
taxes, partially offset by a $636 million decrease in the related provision for
income taxes as discussed below under "--Taxes." Additionally, net income for
2000 included $77 million of income resulting from a reduction in our loss on
disposal of our discontinued healthcare operations, while 1999 net income
included a $400 million increase in our loss on disposal of these operations,
as discussed below under "--Discontinued Operations."

   The $1.528 billion decrease in income from continuing operations before
income taxes resulted from a $1.377 billion decrease from the Financial
Services Businesses and a $151 million decrease from the Closed Block Business.
The $1.377 billion decrease from the Financial Services Businesses came
primarily from a $1.335 billion decline from Corporate and Other operations and
a $216 million decline from our Employee Benefits division, partially offset by
an $85 million increase from our U.S. Consumer division and a $65 million
increase from our International division. The $1.335 billion decline from
Corporate and Other operations came primarily from a $637 million decline in
realized investment gains, net of losses, and from a $643 million decline from
the former lead-managed underwriting and institutional fixed income businesses
of Prudential Securities, which we include in "divested businesses." The $216
million decline from our Employee Benefits division came primarily from a $203
million decline in realized investment gains, net of losses and related
charges. The $85 million increase from our U.S. Consumer division came
primarily from a $73 million increase in adjusted operating income. The $65
million increase from our International division reflected an $89 million
increase in adjusted operating income.

Adjusted Operating Income

   2001 to 2000 Annual Comparison.  On a consolidated basis, adjusted operating
income decreased $569 million, or 25%, from $2.268 billion for 2000 to $1.699
billion for 2001. Our adjusted operating income for the fourth quarter of 2001
was $320 million, reflecting adjusted operating income of $173 million for the
Financial Services Businesses and $147 million for the Closed Block Business.
Adjusted operating income in the Financial Services Businesses for the fourth
quarter of 2001 reflected declines in results in the U.S. Consumer and Employee
Benefits divisions compared to prior periods of 2001. The decrease for the year
ended December 31, 2001 came from a $458 million decrease from the Financial
Services Businesses, and a $111 million decrease from the Closed Block
Business. Adjusted operating income of our Financial Services Businesses for
2001 includes $262 million, which represents Gibraltar Life's results from
April 2, 2001 through November 30, 2001.

   Adjusted operating income of our Financial Services Businesses decreased
$458 million, or 27%, from 2000 to 2001. The decrease came primarily from
decreases of $430 million from our U.S. Consumer division and $204 million from
our Employee Benefits division, partially offset by a $201 million increase in
adjusted operating income from our International division, including the $262
million contribution of Gibraltar Life in 2001.

   The $430 million decrease in adjusted operating income from our U.S.
Consumer division came primarily from a $476 million decrease from the Private
Client Group segment. The $204 million decrease in adjusted operating income
from our Employee Benefits division came from declines in both segments in the
division.

   Adjusted operating income of the Closed Block Business decreased $111
million, or 20%, from 2000 to 2001, primarily from a $144 million reserve for
unreported death claims and related expenses and a decline in net investment
income resulting from the transfer of assets previously associated with our
Traditional Participating Products segment to the Financial Services Businesses
in connection with the establishment of the Closed Block Business on the date
of demutualization. These declines were partially offset by a reduction in the
charge for policyholder dividends, which excludes the portion of the dividend
related to net realized investment gains, a reduction in amortization of
deferred policy acquisition costs and a decline in operating expenses.

   2000 to 1999 Annual Comparison.  On a consolidated basis, adjusted operating
income increased $263 million, or 13%, from 1999 to 2000. The increase came
from a $231 million increase from the Closed Block Business and a $32 million
increase from the Financial Services Businesses.

                                      79



   Adjusted operating income of our Financial Services Businesses increased $32
million, or 2%, from 1999 to 2000. The increase came primarily from increases
of $89 million from our International division and $73 million from our U.S.
Consumer division, partially offset by a $141 million decrease from Corporate
and Other operations.

   The $89 million increase in adjusted operating income from our International
division came primarily from a $78 million increase from the International
Insurance segment. The $73 million increase in adjusted operating income from
our U.S. Consumer division came primarily from an increase of $65 million from
the Retail Investments segment. The $141 million decrease from Corporate and
Other operations came primarily from corporate-level activities, which included
a one-time benefit of $114 million recognized in 1999 as a result of a
reduction of recorded liabilities for our own employee benefits.

   Adjusted operating income of the Closed Block Business increased $231
million, or 73%, from 1999 to 2000, primarily as a result of an increase in
investment income net of interest expense and a decline in operating expenses.

Realized Investment Gains

   We have frequently used an active management strategy for a significant
portion of our public fixed maturity investment portfolio to maximize the
overall return on our investments, subject to our adjusted operating income
objectives. The implementation of this strategy resulted in significant
realized investment losses in 2000 and 1999. When applied during a period of
generally declining interest rates, we expect that using this strategy will
result in lower investment income partially offset by realized investment
gains. Conversely, when applied during a period of generally rising interest
rates, we expect that using this strategy will result in increased investment
income offset by realized investment losses. The amount of our gains or losses
also depends on relative value opportunities and other variables. In
consideration of our adjusted operating income objectives, and other factors,
we may choose, at times, to constrain our active management and, therefore, the
magnitude of realized investment gains or losses.

   In addition, we require most issuers of private fixed maturity securities to
pay us make-whole yield maintenance payments when they prepay the securities.
Prepayment levels are also driven by the interest rate environment and other
factors not within our control. The prepayment of private fixed maturities we
held contributed realized investment gains of $155 million in the year ended
December 31, 2001, $74 million in 2000 and $155 million in 1999.

   Realized investment gains, net of losses, also includes impairments on fixed
income and equity assets, which we recognize on an ongoing basis. The level of
impairments generally reflects economic conditions, and is expected to increase
when economic conditions worsen and to decrease when economic conditions
improve.

   We use derivative contracts to hedge the risk that changes in interest rates
or foreign currency exchange rates will affect the market value of certain
investments. The vast majority of these derivative contracts do not qualify for
hedge accounting and, consequently, we recognize the changes in fair value of
such contracts from period to period in current earnings, although we do not
necessarily treat the underlying assets the same way. Accordingly, our hedging
activities contribute significantly to fluctuations in realized investment
gains and losses.

   The comparisons below discuss realized investment gains net of losses and
related charges. These charges relate to policyholder dividends, DAC, and
reserves for future policy benefits. Net realized investment gains is one of
the elements that we consider in establishing the domestic dividend scale and
in providing for dividends to Gibraltar Life policyholders, and the related
charge for dividends to policyholders represents the estimated portion of our
expense charge for policyholder dividends that is attributable to net realized
investment gains that we consider in determining our dividend scale and the
Gibraltar Life dividends. See "--Results of Operations for Financial Services
Businesses by Division and Closed Block Business" below. We amortize deferred
policy acquisition costs for interest sensitive products based on estimated
gross profits, which include net realized investment gains on the underlying
invested assets, and the related charge for amortization of deferred policy
acquisition costs represents the amortization related to net realized
investment gains. We adjust the reserves for some of our policies when cash
flows related to these policies are affected by net realized investment gains,
and the related charge for reserves for future policy benefits represents that
adjustment. The changes in these related charges from one period to another may
be disproportionate to the changes in realized investment gains, net of

                                      80



losses, because the indicated reserve adjustments relate to realized investment
gains, but not losses, evaluated over several periods, and because realized
investment gains and losses are reflected in the dividend scale over a number
of years.

   2001 to 2000 Annual Comparison.  For the Financial Services Businesses,
realized investment gains, net of losses and related charges, increased $272
million, from a net loss of $408 million in 2000 to a net loss of $136 million
in 2001. The net realized investment loss of the Financial Services Businesses
for 2001 reflected impairments recognized of $557 million, and $196 million of
losses on disposal of substantially all of the Enron holdings of the Financial
Services Businesses. For the Closed Block Business, realized investment gains,
net of losses and related charges, declined $701 million, from a net loss of
$354 million in 2000 to a net loss of $1.055 billion in 2001. The net realized
investment loss of the Closed Block Business for 2001 reflected impairments
recognized of $475 million, and $160 million of losses on disposal of
substantially all of the Enron holdings of the Closed Block Business.

   On a consolidated basis, realized investment gains, net of losses and
related charges, declined $429 million, from a net loss of $762 million in 2000
to a net loss of $1.191 billion in 2001. Realized investment losses, net of
gains but excluding related charges, declined $417 million, from a net loss of
$288 million in 2000 to a net loss of $705 million in 2001. Charges related to
net realized investment gains and losses amounted to $474 million in 2000 and
$486 million in 2001. These charges did not change proportionately with the
change in realized investment gains, net of losses, from 2000 to 2001 for the
reasons described above.

   On a consolidated basis, we realized net losses of $639 million on fixed
maturity investments in 2001, compared to net losses of $ 1.066 billion in
2000. During 2001, we recognized impairments on fixed maturities totaling $777
million and realized additional losses of $356 million on the sale of
substantially all of our Enron holdings. These impairments and losses were
partially offset by realized gains of $494 million primarily from sales and
prepayments of fixed maturities in an environment of lower interest rates than
when the securities were purchased. The net losses in 2000 came primarily from
fixed maturity investment sales in an environment of higher interest rates than
those when the securities were purchased as well as impairments we recorded on
fixed maturity investments totaling $540 million. The effect of economic and
market conditions is uncertain and could result in additional impairments. We
realized net losses on equity securities of $245 million in 2001, compared to
net gains of $450 million in 2000, as we benefited in 2000 from more favorable
equity market conditions, particularly during the early part of the year, and
we disposed of appreciated equity securities as part of a portfolio rebalancing
program. We recorded net investment gains on derivatives of $126 million in
2001 and $165 million in 2000.

   2000 to 1999 Annual Comparison.  For the Financial Services Businesses,
realized investment gains, net of losses and related charges, declined $852
million from a net gain of $444 million in 1999 to a net loss of $408 million
in 2000. For the Closed Block Business, realized investment gains, net of
losses and related charges, declined $382 million, from a net gain of $28
million in 1999 to a net loss of $354 million in 2000.

   On a consolidated basis, realized investment gains, net of losses and
related charges, declined $1.234 billion, from a net gain of $472 million in
1999 to a net loss of $762 million in 2000. Realized investment gains, net of
losses but excluding related charges, declined $1.212 billion, from a net gain
of $924 million in 1999 to a net loss of $288 million in 2000. Charges related
to net realized investment gains and losses were essentially unchanged,
amounting to $452 million in 1999 and $474 million in 2000. These charges did
not change proportionately with the change in realized investment gains, net of
losses, in 2000 from 1999 for the reasons described above.

   We realized losses of $1.066 billion on fixed maturity investments in 2000
and $557 million in 1999. These net realized losses reflected the impact of
fixed maturity investment sales in environments of higher interest rates than
those when the securities were purchased. The $509 million increase in fixed
maturity realized losses in 2000 from 1999 came primarily from a portfolio
strategy we implemented to sell securities with lower investment income yields
underlying some of our long-duration products in the Other Employee Benefits
segment and in our debt-financed corporate investment portfolio, reinvesting
the proceeds in higher yielding securities, and from increased impairments in
2000. We recognized impairments on fixed maturity investments

                                      81



of $540 million in 2000, primarily on publicly traded high yield and other
corporate bonds, compared to $266 million in 1999. We realized net gains on
sales of equity securities of $450 million in 2000, compared to $223 million in
1999. We realized net gains from disposals of direct real estate and real
estate related joint ventures of $149 million in 2000 compared to $703 million
in 1999, reflecting several major transactions that closed in 1999. We recorded
net investment gains of $165 million on derivatives during 2000, compared to
net gains of $305 million in 1999.

Sales Practices Remedies and Costs

   As of December 31, 2001, we have provided $4.405 billion before tax,
equivalent to $2.850 billion after tax, for both the cost of remedies to be
provided to life insurance policyholders under the remediation process required
under the principal sales practices class action settlement to which we are a
party and additional sales practices costs and expenses. We believe we are
fully reserved and we have not recorded any incremental charges since 1999.
These costs include estimated administrative costs related to the remediation
program and its accompanying alternative dispute resolution process, regulatory
fines, penalties and related payments, litigation costs and settlements,
including settlements associated with the resolution of claims of deceptive
sales practices asserted by policyholders who elected to "opt-out" of the class
action settlement and litigate their claims against us separately, as well as
other associated fees and expenses, which we refer to in the aggregate as
additional sales practices costs.

   Charges associated with the cost of remedying policyholder claims and
additional sales practices costs have been adjusted from year to year,
beginning in 1996. No additional net charges have been recorded since 1999. The
charges from year to year primarily reflected the increased availability over
time of more specific information about the number of policyholder claims
received and remedied, the accrued interest associated with claim relief, other
factors affecting both the cost of remedies and the cost to us of administering
the remediation program, and the cost of resolving "opt out" litigation as
described above. See Note 21 to the Consolidated Financial Statements for a
further description of these charges.

   The charges related to our estimated costs of sales practices remedies and
additional sales practices costs and the related liability balances at the
dates indicated are shown below.



                                                 Year Ended December 31,
                                         ---------------------------------------
                                         2001 2000   1999    1998   1997   1996
                                         ---- ----  ------  ------ ------ ------
                                                        (in millions)
                                                        
Liability balance at beginning of period $253 $891  $3,058  $2,553 $  963 $   --
Charges to expense, pre-tax:
   Remedy costs.........................   --  (54)    (99)    510  1,640    410
   Additional sales practices costs.....   --   54     199     640    390    715

                                         ---- ----  ------  ------ ------ ------
   Total charges to expense.............   --   --     100   1,150  2,030  1,125
Amounts paid or credited:
   Remedy costs.........................   71  448   1,708     147     --     --
   Additional sales practices costs.....  130  190     559     498    440    162

                                         ---- ----  ------  ------ ------ ------
   Total amount paid or credited........  201  638   2,267     645    440    162

                                         ---- ----  ------  ------ ------ ------
Liability balance at end of period...... $ 52 $253  $  891  $3,058 $2,553 $  963

                                         ==== ====  ======  ====== ====== ======


   See Note 21 to the Consolidated Financial Statements for a description of
the life insurance sales practices litigation.

   While a portion of the sales practices remedies have been in the form of
policy credits or enhancements, the major portion of the total cost for sales
practices remedies and additional sales practices costs have resulted in cash
disbursements. The cash outflows from these disbursements have reduced our
invested assets and consequently have reduced our investment income. We
included the investment income from the assets used to satisfy the sales
practices remedies and additional sales practices costs prior to their
disbursement in our adjusted operating income for Corporate and Other
operations. The $4.4 billion of cash disbursements do not include the cash flow
from surrenders associated with the implementation of the sales practices
remediation program, which are discussed under "--Results of Operations for
Financial Services Businesses by Division and Closed Block Business--Closed
Block Business--Policy Surrender Experience."

                                      82



Divested Businesses

   Our income from continuing operations includes results from several
businesses that we have divested but that under generally accepted accounting
principles do not qualify for "discontinued operations" treatment in our income
statement. Our results from divested businesses primarily relate to the former
lead-managed equity underwriting for corporate issuers and institutional fixed
income businesses of Prudential Securities and the operations of Gibraltar
Casualty Company, a commercial property and casualty insurer that we sold in
September 2000, as well as obligations we retained or agreed to in the
transactions to sell our other divested businesses. The lead-managed equity
underwriting for corporate issuers and institutional fixed income businesses of
Prudential Securities recorded pre-tax losses of $159 million in the year ended
December 31, 2001, and $620 million in 2000, and pre-tax income of $23 million
in 1999. The losses in 2001 came primarily from deterioration in the value of
collateralized receivables that we are in the process of liquidating, which are
related to these businesses, and wind-down costs. The losses from these
operations in 2000 came primarily from charges of $476 million associated with
our termination and wind-down of these activities. Gibraltar Casualty recorded
pre-tax losses of $7 million in 2000 and $72 million in 1999. The 1999 losses
are attributable to increased reserves for environmental and asbestos-related
claims resulting primarily from an increase in the number of lawsuits being
filed against manufacturers of asbestos-related products. The remainder of our
results from divested businesses are attributable to our remaining obligations
with respect to our divested residential mortgage banking business, a benefits
plan administration business we sold in 1998, and a Canadian life insurance
subsidiary that we sold in May 2000.

Demutualization Costs and Expenses

   We incurred costs and expenses related to demutualization totaling $588
million in the year ended December 31, 2001, including $340 million of
demutualization consideration paid to our former Canadian branch policyholders,
$143 million in 2000, and $75 million in 1999. These costs and expenses are
reported separately in our consolidated income statements within income from
continuing operations before income taxes. Demutualization expenses consist
primarily of the costs of engaging independent accounting, actuarial,
investment banking, legal and other consultants to advise us and insurance
regulators in the demutualization process and related matters as well as
printing and postage for communication with policyholders.

Taxes

   A provision of federal tax law applicable to mutual life insurance companies
has resulted in significant fluctuations in our effective tax rate. This tax
law requires adjustment to the deductible portion of policyholder dividends
based on a complex multi-year formula that compares the financial accounting
earnings rates of mutual life insurance companies with those of stock life
insurers. The actual rate to be applied to a particular tax year is determined
by the IRS up to two years after the end of the tax year. Accordingly, for
periods prior to our demutualization, we were required to estimate the current
year's rate in determining our tax provision for the current year for
accounting purposes. When the actual rate was announced by the IRS, we
recognized any difference between our estimated rate and the IRS's actual rate
in that year. We are no longer subject to this tax after the demutualization.
The impact of this tax law as reflected in reported results, including the
current year estimate and adjustment of prior year estimates, constitutes the
primary reason for the difference between our reported effective tax rates and
the statutory rate of 35%. See Note 17 to the Consolidated Financial Statements.

   We recorded a net income tax benefit of $57 million in 2001 and an income
tax provision of $406 million in 2000. The income tax benefit in 2001
represented 25% of our loss from continuing operations before income taxes,
while the income tax provision in 2000 represented 56% of that year's income
from continuing operations before income taxes. The net income tax benefit in
2001 was primarily due to a $200 million reduction of the estimated liability
for the mutual life insurance company tax, while the income tax provision in
2000 reflected a $100 million provision for this tax. The disparity between our
effective tax rates in 2001 and 2000 and the application of the corporate
income tax rate of 35% to our income or loss from continuing operations before
income taxes is primarily a result of the mutual life insurance company tax and
the inclusion of demutualization costs and expenses within income or loss from
continuing operations before income taxes.

   Our income tax provisions amounted to $406 million for 2000 and $1.042
billion for 1999. The income tax provisions represented 56% of income from
continuing operations before income taxes in 2000 and 46% of income from
continuing operations before income taxes in 1999. This increase in the
effective rate was due primarily to the mutual life insurance company tax
discussed above and an increase in demutualization expenses.

                                      83



Discontinued Operations

   In December 1998, we entered into a definitive agreement to sell our
healthcare operations as described in Note 3 to the Consolidated Financial
Statements. The sale was completed in August 1999. Net losses from these
operations, after related income tax benefits, were $521 million in 1998,
including a $223 million loss on disposal. We recognized an additional loss on
disposal of these operations during 1999 amounting to $400 million after
related tax benefits. Higher than anticipated operating losses prior to the
closing date, resulting principally from adverse claims experience, and the
impact of this experience on our evaluation of our obligations under our
agreement to make payments to the purchaser of our healthcare operations if the
medical loss ratio exceeds specified levels, caused the additional loss. In
2000, upon completion of the period covered by that agreement and comparing
other costs we incurred related to the healthcare disposal to those estimated
in 1998 and 1999, we reduced the loss on disposal by $77 million, after related
income taxes. In 2001, we further reduced the loss on disposal by $16 million,
after related income taxes, upon completing the negotiation of the final
medical loss ratio settlement in December 2001. While we believe that, as of
December 31, 2001, we have adequately reserved in all material respects for
remaining costs and liabilities associated with our healthcare business, we
might incur additional charges that might be material to our results of
operations.

                                      84



    Results of Operations for Financial Services Businesses by Division and
                             Closed Block Business

   In managing our business, we analyze our operating performance using
"adjusted operating income," which is a non-GAAP measure that excludes certain
items as described above under "--Consolidated Results of Operations." The
following table, prepared on that basis, sets forth the revenues, adjusted
operating income and income from continuing operations before income taxes for
each of our four divisions and for Corporate and Other operations, including
consolidating adjustments, which together comprise our Financial Services
Businesses, and for our Closed Block Business, for the years ended December 31,
2001, 2000 and 1999, as well as their assets as of those dates.


                                                                      As of or for
                                                                Year Ended December 31,
-                                                             ----------------------------
                                                                2001      2000      1999
                                                              --------  --------  --------
                                                                     (in millions)
                                                                         
Revenues(1):
Financial Services Businesses:
   U.S. Consumer............................................. $  7,644  $  8,026  $  7,563
   Employee Benefits.........................................    5,912     5,686     5,442
   International.............................................    4,694     2,624     2,102
   Asset Management..........................................    1,272     1,344     1,141
   Corporate and Other.......................................      103       205       509

                                                              --------  --------  --------
     Total Financial Services Businesses.....................   19,625    17,885    16,757
Closed Block Business (2)....................................    8,271     8,638     8,376

                                                              --------  --------  --------
     Total................................................... $ 27,896  $ 26,523  $ 25,133

                                                              ========  ========  ========
Adjusted operating income(3):
Financial Services Businesses:
   U.S. Consumer............................................. $    310  $    740  $    667
   Employee Benefits.........................................      183       387       400
   International.............................................      523       322       233
   Asset Management..........................................      219       276       252
   Corporate and Other.......................................       28        (4)      137

                                                              --------  --------  --------
     Total Financial Services Businesses.....................    1,263     1,721     1,689
Closed Block Business (2)....................................      436       547       316

                                                              --------  --------  --------
     Total................................................... $  1,699  $  2,268  $  2,005

                                                              ========  ========  ========
Income (loss) from continuing operations before income taxes:
Financial Services Businesses:
   U.S. Consumer............................................. $    210  $    744  $    659
   Employee Benefits.........................................       25       269       485
   International.............................................      466       307       242
   Asset Management..........................................      211       277       253
   Corporate and Other.......................................     (520)   (1,063)      272

                                                              --------  --------  --------
     Total Financial Services Businesses.....................      392       534     1,911
Closed Block Business (2)....................................     (619)      193       344

                                                              --------  --------  --------
     Total................................................... $   (227) $    727  $  2,255

                                                              ========  ========  ========
Assets:
Financial Services Businesses:
   U.S. Consumer............................................. $ 71,231  $ 73,223  $ 78,235
   Employee Benefits.........................................   72,767    75,817    73,955
   International(4)..........................................   41,401    10,370     9,275
   Asset Management..........................................   28,357    30,602    25,558
   Corporate and Other.......................................   17,549    12,814    29,498

                                                              --------  --------  --------
     Total Financial Services Businesses.....................  231,305   202,826   216,521
Closed Block Business (2)....................................   61,725    69,927    68,573

                                                              --------  --------  --------
     Total................................................... $293,030  $272,753  $285,094
                                                              ========  ========  ========

--------
(1) Revenues exclude realized investment gains, net of losses, and revenues
    from divested businesses.
(2) Amounts shown for the Closed Block Business represent results of the
    Traditional Participating Products segment for periods prior to the date of
    demutualization.
(3) Adjusted operating income equals revenues as defined above in footnote (1)
    less benefits and expenses excluding (i) the impact of net realized
    investment gains on deferred acquisition cost amortization, reserves and
    dividends to policyholders; (ii) sales practices remedies and costs; (iii)
    the benefits and expenses from divested businesses; and (iv)
    demutualization costs and expenses.
(4) Assets of our International division at December 31, 2001 include assets of
    Gibraltar Life, which we acquired in April 2001, amounting to $30.238
    billion.

                                      85



U.S. Consumer Division

   The U.S. Consumer division generates income from premiums, as well as
fee-based revenues and spread income, through the Individual Life Insurance,
Retail Investments and Property and Casualty Insurance segments. Premiums and
investment income are received by the Individual Life Insurance and Property
and Casualty Insurance segments on insurance products and by the Retail
Investments segment on some of its annuity products. Products and services that
generate fee-based revenue include mutual funds, variable annuities, variable
life insurance and wrap-fee products. The latter fee-based revenues consist
primarily of asset management fees, account servicing fees and risk charges.
The Retail Investments segment receives fees and investment income from retail
investment products. Additionally, the securities brokerage operations that
account for the major portion of revenues of the Private Client Group segment
generate revenues from client commissions, asset management and portfolio
service fees, and net interest revenues derived primarily from margin lending
to customers, as well as sales credits related to transactions with retail
customers associated with equity and fixed income sales and trading operations.
We also earn trading revenues from our fixed income trading operations which
are incidental to our retail operations. We include fee-based revenues in the
line captioned "Commissions and other income" or "Policy charges and fee
income" in our consolidated statements of operations. The Private Client Group
segment also includes our consumer banking operations.

   We seek to earn spread income in our general account on various products.
Spread income is the difference between our return on the investments
supporting the products net of expenses and the amounts we credit to our
contractholders. Products that generate spread income primarily include the
general account insurance products of the Individual Life Insurance segment,
and fixed annuities and the fixed-rate option of variable annuities of the
Retail Investments segment. We include revenues from these products, other than
premiums received from policyholders, primarily in the line captioned "Net
investment income" in our consolidated statements of operations.

   The Individual Life Insurance and Private Client Group segments pay the
expenses of their own proprietary sales forces for distribution of products.
Additionally, the Retail Investments segment pays the Individual Life Insurance
and Private Client Group segments for distribution of its products by
Prudential Agents and Financial Advisors. The Individual Life Insurance, Retail
Investments and Property and Casualty Insurance segments also pay our
Investment Management and Advisory Services segment for management of
proprietary assets which include the general account investments that support
our Individual Life Insurance, Retail Investments and Property and Casualty
Insurance segments, as well as most of the assets supporting our separate
account life insurance and annuity products such as variable life insurance and
annuities. These fees result in expenses to the segments of the U.S. Consumer
division and revenues to the Asset Management division. We reflect all of the
intra-company asset management services at rates that we determine with
reference to market rates.

   In recent years, sales in our individual life insurance business, as
measured by both number of policies and premiums, have generally declined or
not grown significantly. This trend is due in part to a continuing decline in
the number of Prudential Agents. We believe that the decline in Prudential
Agents results, in part, from our implementation of higher productivity
standards associated with measures we have taken to reduce the cost structure
of our proprietary distribution channel. This trend in sales has had an adverse
impact on premiums, primarily from new business, and adjusted operating income.
We are seeking to improve performance by taking steps to refocus the Prudential
Agent sales force on the mass affluent market and to continue to improve
productivity of the proprietary distribution channel, and to expand third-party
distribution of our products. However, we cannot predict whether these steps
will succeed or have the desired effects.

   Prior to 2001, we experienced net redemptions in our proprietary retail
investment products due in substantial part to turnover among experienced
Financial Advisors and our focus on the value style of investment management in
our equity mutual funds. The impact of these outflows was partially offset by
higher revenues resulting from market appreciation of remaining assets, which
produced increases in assets under management in 1999 and 2000. Over the last
several years, we began to diversify the focus of our investment products and
we have been building investment manager choice into most of our Retail
Investments products. This advised choice approach allows us to offer customers
investment alternatives advised by third parties in our products and asset
management styles that we might not otherwise offer. Our Retail Investments
wrap-fee assets increased to $19.6 billion at December 31, 2000, from $16.7
billion a year earlier and $11.5 billion at December 31, 1998. We believe these
increases reflect increased marketplace emphasis on products that provide
customers a broader

                                      86



choice of investments. At December 31, 2001, wrap-fee assets decreased to $18.0
billion, reflecting market value declines during 2001. We believe the
continuing turnover among domestic Financial Advisors is due in part to the
lack of a stock-based compensation program. In 1999 this turnover increased due
in part to greater industry competition for productive Financial Advisors. We
have taken actions to stabilize the Financial Advisor force, including our
implementation, effective January 1, 2000, of an equity-market-linked,
voluntary long-term deferred compensation plan, and our introduction of an
aggressive recruiting effort targeting experienced Financial Advisors,
including recruiting and retention incentives. We expect that these programs
will contribute to improvement of our turnover rates over time, although there
can be no assurance of this.

   We have taken actions to reduce the operating cost structures and overhead
levels of the businesses of the U.S. Consumer division. In the Individual Life
Insurance segment, a program to restructure our field management and agency
structure resulted in a reduction in the number of sales territories,
establishing a smaller number of larger field offices, and eliminated
approximately 1,700 management and non-agent positions. In the Private Client
Group segment, we have taken actions in 2001 to reduce staffing levels,
occupancy costs, and other overhead costs. We have also taken actions in the
Property and Casualty Insurance segment to reduce staffing levels and overhead
costs. While there can be no assurance that our anticipated cost reductions
will be fully achieved, we believe that these initiatives will reduce operating
expenses, excluding certain non-interest expenses in the Private Client Group
segment, below 2000 levels by more than $320 million on an annual basis in
2002, and that reduced expenses resulting from these initiatives will benefit
results thereafter. Adjusted operating income of the U.S. Consumer division
benefited in 2001 from a reduction in operating expenses, associated with these
initiatives, of approximately $170 million as compared to 2000, primarily in
the Individual Life Insurance segment. We believe that the remainder of the
anticipated reduction in operating expenses will benefit adjusted operating
income of the U.S. Consumer division in 2002 as compared to 2001. Expenses
incurred to achieve these reductions were about $175 million in 2001.

   Most of our variable life insurance, variable annuity and wrap-fee products
include investment alternatives that are managed by third parties. The
Individual Life Insurance and Retail Investments segments pay investment
management fees to the third-party managers for the funds invested through
these non-proprietary options. We also sponsor mutual funds that have
third-party advisors. Because of these arrangements, our assets under
management and administration that are invested through non-proprietary options
and our proprietary funds that are managed by third parties may offer lower
profitability than the assets we manage directly.

                                      87



Division Results

   The following table and discussion present the U.S. Consumer division's
results based on our definition of adjusted operating income, which is a
non-GAAP measure, as well as income from continuing operations before income
taxes, which is prepared in accordance with GAAP. As shown below, adjusted
operating income excludes realized investment gains, net of losses and related
charges. The excluded items are important to an understanding of our overall
results of operations. You should not view adjusted operating income as a
substitute for income from continuing operations determined in accordance with
GAAP, and you should note that our definition of adjusted operating income may
differ from that used by other companies. However, we believe that the
presentation of adjusted operating income as we measure it for management
purposes enhances the understanding of our results of operations by
highlighting the results from ongoing operations and the underlying
profitability factors of our businesses. We exclude realized investment gains,
net of losses and related charges, from adjusted operating income because the
timing of transactions resulting in recognition of gains or losses is largely
at our discretion and the amount of these gains or losses is heavily influenced
by and fluctuates in part according to the availability of market
opportunities. Including the fluctuating effects of these transactions could
distort trends in the underlying profitability of our businesses.



                     Year Ended December 31,
                     ----------------------
                      2001    2000    1999
                     ------  ------  ------
                          (in millions)
                            
Division
operating
results:
   Revenues(1)...... $7,644  $8,026  $7,563
   Benefits
   and
   expenses(2)......  7,334   7,286   6,896

                     ------  ------  ------
   Adjusted
   operating
   income........... $  310  $  740  $  667

                     ======  ======  ======
Adjusted
operating
income by
segment:
   Individual
   Life
   Insurance........ $  273  $  114  $  117
   Private
   Client Group.....   (239)    237     224
   Retail
   Investments......    181     239     174
   Property
   and
   Casualty
   Insurance........     95     150     152

                     ------  ------  ------
     Total..........    310     740     667
Items excluded
from adjusted
operating
income:
Realized
investment
gains, net of
losses and
related
charges:
   Realized
   investment
   gains
   (losses),
   net..............   (112)      2      (9)
   Related
   charges(3).......     12       2       1

                     ------  ------  ------
     Total
     realized
     investment
     gains,
     net of
     losses
     and
     related
     charges........   (100)      4      (8)

                     ------  ------  ------
Income from
continuing
operations
before income
taxes............... $  210  $  744  $  659

                     ======  ======  ======
--------
(1) Revenues
    exclude
    realized
    investment
    gains, net
    of losses.
(2) Benefits
    and
    expenses
    exclude
    the impact
    of net
    realized
    investment
    gains on
    deferred
    acquisition
    cost
    amortization
    and
    reserves.
(3) Related
    charges
    consist of
    the
    following:

                     Year Ended December 31,
                     ----------------------
                      2001    2000    1999
                     ------  ------  ------
                          (in millions)
Reserves for
future policy
benefits............ $   (1) $   (4) $   --
Amortization
of deferred
policy
acquisition
costs...............     13       6       1

                     ------  ------  ------
   Total............ $   12  $    2  $    1

                     ======  ======  ======


   2001 to 2000 Annual Comparison.  Adjusted operating income of our U.S.
Consumer division decreased $430 million, or 58%, in 2001 from 2000. The
decline resulted primarily from a decrease in adjusted operating income in our
Private Client Group segment. Income from continuing operations before income
taxes decreased $534 million, or 72%, primarily as a result of the decrease in
adjusted operating income.

   2000 to 1999 Annual Comparison.  Adjusted operating income of our U.S.
Consumer division increased $73 million, or 11%, in 2000 from 1999. The
increase came primarily from an increase in adjusted operating income from our
Retail Investments segment. Income from continuing operations before income
taxes increased $85 million, or 13%, primarily as a result of the increase in
adjusted operating income.

                                      88



Individual Life Insurance

   Operating Results

   The following table sets forth the Individual Life Insurance segment's
operating results for the periods indicated.



                                Year Ended December 31,
                                -----------------------
                                 2001    2000    1999
                                ------  ------  ------
                                     (in millions)
                                       
Operating results:
   Revenues(1)................. $1,919  $1,828  $1,703
   Benefits and expenses.......  1,646   1,714   1,586

                                ------  ------  ------
   Adjusted operating income... $  273  $  114  $  117

                                ======  ======  ======

--------
(1) Revenues exclude realized investment gains, net of losses.

   Adjusted Operating Income

   2001 to 2000 Annual Comparison.  Adjusted operating income increased $159
million in 2001 from 2000. The increase came primarily from a $183 million
decrease in operating expenses. The decrease in operating expenses came
primarily from savings that we have begun to realize from our field management
and agency restructuring program as described above and lower program
implementation costs, which amounted to $90 million in 2001 and $107 million in
2000. Implementation costs for this program were substantially completed in
2001. Additionally, in 2000 we recorded a $23 million one-time increase in
reserves related to a portion of our variable life insurance business in force.
However, amortization of deferred policy acquisition costs increased $60
million in 2001 from 2000, and we recorded net losses of $25 million from
insurance claims arising from the September 11, 2001 terrorist attacks on the
United States.

   2000 to 1999 Annual Comparison.  Adjusted operating income was essentially
unchanged in 2000 from 1999. Growth in our base of term products in force
resulted in an increase in premium revenues, and investment income increased
due to the larger base of general account assets and an increased investment
yield. However, these increases were essentially offset by a one-time increase
in reserves related to a portion of our variable life insurance business in
force.

   Revenues

   2001 to 2000 Annual Comparison.  Revenues, as shown in the table above under
"--Operating Results," increased $91 million, or 5%, in 2001 from 2000.

   Premiums increased $117 million, or 43%, from $270 million in 2000 to $387
million in 2001, due to increased premiums on term insurance we issued, under
policy provisions, to customers who previously had lapsing variable life
insurance with us.

   Policy charges and fees amounted to $1.017 billion in 2001, essentially
unchanged from $1.023 billion in 2000.

   Net investment income increased $17 million, or 5%, from $374 million in
2000 to $391 million in 2001, primarily from an increase in the base of general
account invested assets.

   Other income decreased $37 million, or 23%, from $161 million in 2000 to
$124 million in 2001, primarily as a result of a decline in sales of
non-Prudential products by our agents.

   2000 to 1999 Annual Comparison.  Revenues increased $125 million, or 7%, in
2000 from 1999. The increase came primarily from a $58 million increase in net
investment income and a $28 million increase in premiums.

   Premiums increased $28 million, or 12%, from $242 million in 1999 to $270
million in 2000. The increase came primarily from an increase in renewal
premiums for our term products, reflecting the increased base of business in
force.

                                      89



   Policy charges and fees amounted to $1.023 billion for 2000, relatively
unchanged from $1.030 billion in 1999.

   Net investment income increased $58 million, or 18%, from $316 million in
1999 to $374 million in 2000. The increase resulted from an increase in the
base of general account invested assets and a slight increase in investment
yield.

   Benefits and Expenses

   2001 to 2000 Annual Comparison.  Benefits and expenses, as shown in the
table above under "--Operating Results," decreased $68 million, or 4%, in 2001
from 2000. A decrease of $183 million in operating expenses, including
distribution costs that we charge to expense, was partially offset by a $60
million increase in amortization of deferred policy acquisition costs and a $60
million increase in policyholder benefits and related changes in reserves.

   Operating expenses decreased $183 million, from $761 million in 2000 to $578
million in 2001, primarily as a result of savings we began to realize from our
program to restructure our field management and agency structure as described
above and lower program implementation costs which amounted to $90 million in
2001 and $107 million in 2000. The implementation costs for this program were
substantially completed in 2001. While there can be no assurance, based on our
evaluation of results through 2001 we believe that these initiatives will
reduce operating expenses below 2000 levels by approximately $120 million on an
annual basis in 2002, including a reduction of about $30 million below the
level of 2001, and that reduced expenses resulting from these initiatives will
benefit results thereafter. In addition, we expect these initiatives to
eliminate approximately $50 million of costs that would have been capitalized.

   Amortization of deferred policy acquisition costs increased $60 million,
from $172 million in 2000 to $232 million in 2001, primarily due to declines in
market values of the underlying assets on which our fees are based.

   Policyholder benefits and related changes in reserves increased $60 million,
from $628 million in 2000 to $688 million in 2001, primarily as a result of
term insurance we issued under policy provisions to customers who previously
had lapsing variable life insurance with us and insurance claims arising from
the September 11, 2001 terrorist attacks on the United States. In 2000,
policyholder benefits and the related changes in reserves included a reserve
increase related to a portion of our variable life insurance business as noted
above amounting to $23 million.

   2000 to 1999 Annual Comparison.  Benefits and expenses increased $128
million, or 8%, in 2000 from 1999. The increase came primarily from an increase
in policyholder benefits and related changes in reserves of $121 million, from
$507 million in 1999 to $628 million in 2000, as a result of growth in the base
of term insurance in force and aging of policies in force as well as the
reserve increase related to a portion of our variable
life insurance business as noted above amounting to $23 million. Operating
expenses, including distribution costs that we charge to expense, were
essentially unchanged in 2000 from 1999.

   Operating expenses included severance, termination benefits, facilities
closure and other costs that we incurred largely in connection with the
implementation of the program to restructure our field management and agency
structure described above. The expenses related to this program amounted to
$107 million in 2000 and $116 million in 1999.

   Sales Results

   The following table sets forth the Individual Life Insurance segment's
sales, as measured by statutory first year premiums and deposits for the
periods indicated. These amounts do not correspond to revenues under GAAP. In
managing our individual life insurance business, we analyze statutory first
year premiums and deposits as well as revenues because statutory first year
premiums and deposits measure the current sales performance of

                                      90



the business unit, while revenues reflect, predominantly in our case, the
renewal persistency and aging of in force policies written in prior years and
net investment income, as well as current sales.



                                                 Year Ended December 31,
        -                                        -----------------------
                                                  2001    2000    1999
                                                 ----    ----    ----
                                                      (in millions)
                                                        
        Sales(1):
           Variable life(2)..................... $427    $328    $301
           Term life............................   43      59      74

                                                  ----    ----    ----
             Total.............................. $470    $387    $375

                                                  ====    ====    ====
        Sales by distribution channel(1):
           Prudential Agents.................... $218    $259    $287
           Third-party and other distributors...  252     128      88

                                                  ----    ----    ----
             Total.............................. $470    $387    $375

                                                  ====    ====    ====

--------
(1)Statutory first year premiums and deposits.
(2)Includes universal life insurance products.

   2001 to 2000 Annual Comparison.  Sales of new life insurance, as measured by
statutory first year premiums, increased $83 million, or 21%, in 2001 from
2000. The increase came from a $157 million increase in the segment's sales of
corporate-owned life insurance products, substantially all of which is sold by
the PruSelect third-party distribution channel. Inclusive of these
corporate-owned life insurance sales, which totaled $199 million for 2001
including a single $100 million sale, PruSelect accounted for 54% of the
Individual Life Insurance segment's sales in 2001, compared to 33% in 2000.
Sales by the PruSelect channel, other than corporate-owned life insurance,
decreased $33 million, or 38%, in 2001 from 2000. We have begun to expand the
focus of PruSelect, which has historically served intermediaries who provide
insurance solutions in support of estate and wealth transfer planning for
affluent individuals and corporate-owned life insurance for businesses, toward
the mass affluent market. We believe the 2001 sales results for the PruSelect
channel for products other than corporate-owned life insurance reflected both a
reduced level of market demand for individual variable life insurance products
during 2001 and our transition to the new focus, which included changes in our
underwriting classifications and a reduction in our maximum insurance coverage
on a single life. Additionally, we repriced certain term insurance products and
introduced two new universal life insurance products in late 2001 to be offered
by both the PruSelect distribution channel and Prudential Agents. While there
can be no assurance, we believe these actions will result in more favorable
risk adjusted return on business written and an opportunity to enhance sales in
our selected markets.

   The increase in sales through PruSelect was partially offset by a decline in
sales from Prudential Agents. The number of Prudential Agents declined to
approximately 4,400 at December 31, 2001, from 6,100 at December 31, 2000, as
we continued to take actions to increase the productivity standards required to
continue agency contracts. Prudential Agent productivity increased slightly to
$35,000 in 2001 from $34,700 in 2000. We have not implemented further increases
in these productivity standards for periods subsequent to 2001. While there can
be no assurance, we believe that maintenance of these standards at their
current level will contribute to stabilization in the number of Prudential
Agents. We measure Prudential Agent productivity as commissions on new sales of
all products, not only life insurance, by Prudential Agents with us for the
entire period, divided by the number of those Prudential Agents.

   2000 to 1999 Annual Comparison.  Sales of new life insurance, as measured by
statutory first year premiums, increased $12 million, or 3%, in 2000 from 1999.
The increase came from greater unscheduled premiums on variable life insurance
products in 2000 and reflected a higher level of third-party sales through our
PruSelect third-party distribution channel, which grew by $40 million, or 45%,
in 2000 from 1999. PruSelect accounted for 33% of the Individual Life Insurance
segment's sales in 2000, compared to 23% of its sales in 1999. The increase in
sales through PruSelect was partially offset by a decline in sales from
Prudential Agents. We continued to take actions to improve Prudential Agent
productivity. The number of Prudential Agents declined to approximately 6,100
at December 31, 2000 compared to approximately 7,800 one year earlier. However,
Prudential Agent productivity increased 11%, from $31,300 for 1999 to $34,700
in 2000.

                                      91



   Policy Surrender Experience

   The following table sets forth the Individual Life Insurance segment's
policy surrender experience for variable life insurance, measured by cash value
of surrenders, for the periods indicated. These amounts do not correspond to
expenses under GAAP. 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 with us, a driver of future profitability.
Our term life insurance products do not provide for cash surrender values.



                                                                          Year Ended December 31,
                                                                          ----------------------
                                                                           2001      2000   1999
                                                                          ----      ----   ----
                                                                              ($ in millions)
                                                                                  
Cash value of surrenders................................................. $637      $641   $597

                                                                           ====      ====   ====
Cash value of surrenders as a percentage of mean future policy benefit
 reserves, policyholders' account balances, and separate account balances  3.8%      3.7%   3.7%

                                                                           ====      ====   ====


   2001 to 2000 Annual Comparison.  The total cash value of surrenders and the
level of surrenders as a percentage of mean future policy benefit reserves,
policyholders' account balances and separate account balances were relatively
constant from 2000 to 2001.

   2000 to 1999 Annual Comparison.  The total cash value of surrenders
increased $44 million, or 7%, in 2000 from 1999. The level of surrenders as a
percentage of mean future policy benefits, policyholders' account balances and
separate account balances remained constant from 1999 to 2000.

Private Client Group

   Operating Results

   The following table sets forth the Private Client Group segment's operating
results for the periods indicated.



                                                      Year Ended December 31,
                                                      -----------------------
                                                       2001     2000    1999
                                                      ------   ------  ------
                                                           (in millions)
                                                              
    Operating results:
       Non-interest revenues......................... $1,973   $2,468  $2,293
       Net interest revenues.........................    243      299     269
                                                      ------   ------  ------
         Total revenues, net of interest expense.....  2,216    2,767   2,562
       Total non-interest expenses...................  2,455    2,530   2,338
                                                      ------   ------  ------
       Adjusted operating income..................... $ (239)  $  237  $  224

                                                      ======   ======  ======


   Adjusted Operating Income

   2001 to 2000 Annual Comparison.  The Private Client Group segment reported a
pre-tax loss of $239 million, on an adjusted operating income basis, for 2001
compared to adjusted operating income of $237 million for 2000. The $476
million decline came primarily from a $433 million decrease from our domestic
securities brokerage operations, which reported a loss of $243 million for 2001
compared to adjusted operating income of $190 million in 2000. These operations
were adversely affected in 2001 by a decline in individual investor transaction
volume and margin loan balances, which resulted in decreased commission and net
interest revenues. These revenue declines were coupled with increased costs of
recruiting and retaining Financial Advisors, including increased expenses
relating to recruiting and retention incentives extended to some recently
recruited experienced Financial Advisors. Additionally, we incurred costs of
$65 million in 2001 from employee terminations associated with staff
reductions, as well as branch closings and facilities consolidations. The
remaining $43 million decrease in the segment's adjusted operating income came
from our consumer banking operations, which benefited in 2000 from the sale of
a major portion of the consumer bank's credit card receivables. The Private
Client Group segment had a loss of $79 million, on an adjusted operating income
basis, for the fourth quarter of 2001.

   2000 to 1999 Annual Comparison.  Adjusted operating income increased $13
million, or 6%, from 1999 to 2000. Adjusted operating income from our consumer
banking operations increased $27 million, primarily as a

                                      92



result of the sale of a major portion of the consumer bank's credit card
receivables in 2000. Adjusted operating income from our domestic securities
brokerage operations decreased $14 million, from $204 million in 1999 to $190
million in 2000.

   Revenues

   The following table sets forth the Private Client Group segment's revenues,
as shown in the table above under "--Operating Results," by source for the
periods indicated.



                                          Year Ended December 31,
-                                         -----------------------
                                           2001    2000    1999
                                          ------  ------  ------
                                               (in millions)
                                                 
Commissions.............................. $1,155  $1,561  $1,554
Fees.....................................    684     748     571
Other....................................    134     159     168

                                          ------  ------  ------
 Total non-interest revenues.............  1,973   2,468   2,293
Net interest revenues....................    243     299     269

                                          ------  ------  ------
 Total revenues, net of interest expense. $2,216  $2,767  $2,562

                                          ======  ======  ======


   2001 to 2000 Annual Comparison.  Total revenues, net of interest expense, as
shown in the table above under "--Operating Results," decreased $551 million,
or 20%, from 2000 to 2001. The decrease came primarily from a $498 million
decline in revenues from our domestic securities brokerage operations, from
$2.675 billion in 2000 to $2.177 billion in 2001.

   Commission revenues decreased $406 million, or 26%, from 2000 to 2001. The
decrease came primarily from a $375 million decline in commissions from
over-the-counter and listed equity securities transactions. Commission revenues
were negatively affected in 2001 by less active securities markets and reduced
retail transaction volume, and benefited in 2000 from exceptionally active
over-the-counter equity markets and related retail transaction volume in the
first four months of the year. Commission revenues accounted for 59% of total
segment non-interest revenues for 2001. Accordingly, we expect that a
continuation of the level of securities market activity experienced in 2001, or
a further downtrend in this activity, would continue to have a negative impact
on our revenues and on the segment's adjusted operating income, partially
offset by planned expense reductions.

   Fee revenues, which include asset management and account service fees,
declined $64 million, or 9%, from 2000 to 2001. The decline came from a
decrease in revenues from wrap-fee products, reflecting competitive pricing
pressures as well as the negative impact of market value declines. The negative
impact of market value declines on wrap-fee and managed account assets under
management essentially offset the impact of new assets gathered in these
accounts. Additionally, the negative impact of market value declines on
clients' mutual funds, on which a portion of our fees are based, contributed to
the decline in fee revenues. Fee revenues accounted for 35% of total
non-interest revenues of the domestic securities operations in 2001, compared
to 31% in 2000, reflecting actions we have taken to increase the contribution
of recurring revenues. These actions included enhanced marketing of fee-based
products and compensation incentives to Financial Advisors for sales of these
products, as well as emphasis on financial planning in recruiting and training
of Financial Advisors.

   Other revenues decreased $25 million, or 16%, from 2000 to 2001, primarily
due to the sale of a major portion of the consumer bank's credit card
receivables in 2000.

   Net interest revenues decreased $56 million, or 19%, from 2000 to 2001,
primarily as a result of a decrease in average customer margin lending balances
of our domestic securities brokerage operations, related to the reduced level
of individual investor activity. Average customer margin lending balances were
$4.30 billion in 2001 compared to $6.54 billion in 2000 and amounted to $3.40
billion at December 31, 2001. Increased investment income on greater attributed
capital partially offset the impact of lower average customer margin lending
balances.

   The number of domestic retail Financial Advisors was 5,383 at December 31,
2001, a decrease of 9% from 5,906 at December 31, 2000. Approximately 90% of
the decline came from Financial Advisors with less than 4

                                      93



years' industry experience with us, and reflected a decrease in our recruiting
of inexperienced Financial Advisors to be trained by us. In response to
recruiting efforts by our competitors, we introduced an aggressive recruiting
effort targeting experienced Financial Advisors, including recruiting and
retention incentives, and, as discussed above, an equity-market-linked
voluntary long-term deferred compensation plan to seek to enhance our Financial
Advisor recruitment and retention efforts.

   Assets under management and client assets decreased $21 billion to $251
billion at December 31, 2001 from $272 billion at December 31, 2000, primarily
as a result of overall market value declines.

   2000 to 1999 Annual Comparison.  Total revenues, net of interest expense,
increased $205 million, or 8%, from 1999 to 2000. The increase came primarily
from our domestic securities brokerage operations, which recorded an increase
of $202 million, or 8%, from $2.473 billion in 1999 to $2.675 billion in 2000.

   Commission revenues increased slightly in 2000 from 1999, as increases of
$17 million from mutual funds and $13 million from equity securities
transactions were partially offset by a decline in commissions from fixed
income products and commodity transactions. While commission revenues from our
securities brokerage operations benefited from active over-the-counter equity
markets and increased transaction volume during the first four months of the
year, commission revenues declined slightly during the May through December
period of 2000 versus the same period of 1999, reflecting less active
securities markets and reduced transaction volume.

   Fee revenues, comprised of asset management and account service fees,
increased $177 million, or 31%, from 1999 to 2000. This increase resulted
primarily from a $5.2 billion increase in wrap-fee and managed account assets
under management to $31.9 billion at December 31, 2000 from $26.7 billion a
year earlier.

   Net interest revenues increased $30 million, or 11%, from 1999 to 2000.
Substantially all of the increase came from our domestic securities brokerage
operations, primarily from higher average customer margin lending balances,
which increased from $5.06 billion in 1999 to $6.54 billion in 2000. Partially
offsetting the increase in average customer margin lending balances was a
decrease in the spread earned on these balances, reflecting competitive
pressures on the rates charged to clients who buy securities on margin.

   The number of domestic Financial Advisors was 5,906 at December 31, 2000, a
decrease of 3% from 6,072 a year earlier.

   Assets under management and client assets decreased $16 billion to $272
billion at December 31, 2000 from $288 billion a year earlier, primarily as a
result of overall market value declines.

   Non-Interest Expenses

   2001 to 2000 Annual Comparison.  Total non-interest expenses, as shown in
the table above under "--Operating Results," decreased $75 million from 2000 to
2001. Employee compensation and benefits at our domestic securities brokerage
operation decreased due to the lower level of revenues and earnings in 2001,
but the decrease was not proportional to the revenue decline largely due to the
recruiting and retention incentives as described above as well as $41 million
in employee termination costs associated with staff reductions in 2001. These
recruiting and retention incentives will continue to be applicable and to
adversely affect expense levels in future periods. The decrease in employee
compensation and benefits was further offset by $24 million of costs we
incurred to consolidate and close several retail branch and other locations
during 2001.

   2000 to 1999 Annual Comparison.  Total non-interest expenses increased $192
million, or 8%, from 1999 to 2000. The increase came primarily from employee
compensation and benefits at our retail securities brokerage operations, which
increased by $108 million, or 8%, due to higher commissions paid to Financial
Advisors on higher fee and commission revenues, and higher incentive and other
compensation, as well as higher costs to recruit and retain Financial Advisors.
Additionally, other non-interest expenses at the domestic securities brokerage
operations increased $108 million, or 12%, primarily as a result of higher
operations and administrative support costs, higher equity research costs, and
increased investment in our branch office technology platform.

                                      94



Retail Investments

   Operating Results

   The following table sets forth the Retail Investments segment's operating
results for the periods indicated.



                                          Year Ended December 31,
                                          -----------------------
                                           2001    2000    1999
                                          ------  ------  ------
                                               (in millions)
                                                 
              Operating results:
               Revenues(1)............... $1,458  $1,631  $1,551
               Benefits and expenses(2)..  1,277   1,392   1,377

                                          ------  ------  ------
               Adjusted operating income. $  181  $  239  $  174

                                          ======  ======  ======

--------
(1) Revenues exclude realized investment gains, net of losses.
(2) Benefits and expenses exclude the impact of net realized investment gains
    on deferred acquisition cost amortization and reserves.

   Adjusted Operating Income

   2001 to 2000 Annual Comparison.  Adjusted operating income decreased $58
million, or 24%, from 2000 to 2001. Adjusted operating income for 2000
benefited $21 million from refinements in our calculations of deferred policy
acquisition costs. Excluding this change, adjusted operating income decreased
$37 million, or 17%. Approximately $23 million of the $37 million decrease came
from our mutual funds and wrap-fee products business, primarily due to lower
asset-based distribution revenues as well as a lower level of fee-producing
redemptions. The remainder of the decrease came from our annuity business,
primarily due to lower fee revenues.

   2000 to 1999 Annual Comparison.  Adjusted operating income increased by $65
million, or 37%, from 1999 to 2000. Adjusted operating income for 2000
benefited $21 million from refinements in our calculations of deferred policy
acquisition costs. Excluding this change, adjusted operating income increased
$44 million, or 25%. Approximately $26 million of the $44 million increase came
from our annuity business. This increase was primarily due to greater fee
revenues from variable annuities, and resulted from an increase in average
account values. A decrease in administrative expenses, primarily the result of
expense management efforts, also contributed to the increase in adjusted
operating income.

   The remainder of the increase in adjusted operating income came from our
mutual funds and wrap-fee products business. Asset-based and transaction-based
fees increased as a result of continued growth in our proprietary mutual fund
assets under management and expansion of our wrap-fee products.

   Revenues

   2001 to 2000 Annual Comparison.  Revenues, as shown in the table above under
"--Operating Results," decreased $173 million, or 11%, from 2000 to 2001.
Fee-based revenue decreased $112 million, from $1.081 million in 2000 to $969
million in 2001. The decrease came primarily from our mutual funds and wrap-fee
products, reflecting lower asset-based distribution revenues as well as a lower
level of fee-producing redemptions, and from our variable annuity products,
reflecting a decline in the average market value of customer accounts on which
our fees are based. The remainder of the decrease came primarily from lower
investment income in 2001 and a reduction in premiums we recognized on
conversion of deferred annuities by customers to income-paying status.

   2000 to 1999 Annual Comparison.  Revenues increased $80 million, or 5%, from
1999 to 2000. Fee-based revenues increased $74 million, from $1.007 billion in
1999 to $1.081 billion in 2000. The increase came primarily from our mutual
funds and wrap-fee products, as well as our variable annuity products,
reflecting growth in our average assets under management for these products. In
addition, premiums increased by $19 million as a result of increased
conversions of deferred annuities by our customers to income-paying status. Net
investment income declined $13 million, from $491 million in 1999 to $478
million in 2000, as a result of reductions in our base of fixed annuity
business due to withdrawals and scheduled benefit payments.

                                      95



   Benefits and Expenses

   2001 to 2000 Annual Comparison.  Benefits and expenses, as shown in the
table above under "--Operating Results," decreased $115 million, or 8%, from
2000 to 2001. Benefits and expenses for 2000 includes a $21 million reduction
in amortization of deferred policy acquisition costs from the refinements noted
above. Excluding the impact of this change, benefits and expenses decreased
$136 million, or 10%. Commissions and other general expenses decreased $71
million, or 9%, from $762 million in 2000 to $691 million 2001, primarily due
to a decrease in general and administrative expenses reflecting our expense
management efforts and lower sales-based and asset-based commission expense on
our mutual fund products. Policyholder benefits and related changes in reserves
decreased $43 million, from $152 million in 2000 to $109 million in 2001,
primarily as a result of the reduction in premiums noted above and a $12
million charge we recorded in 2000 to increase annuity reserves due to
investment portfolio restructuring to reduce the emphasis on equity
investments. Amortization of deferred policy acquisition costs, excluding the
refinements noted above, decreased $23 million, from $233 million in 2000 to
$210 million in 2001, primarily as a result of decreased amortization
associated with lower fee income. Amortization of deferred policy acquisition
costs included $17 million in 2001 and $20 million in 2000 to reflect decreases
in expected future gross profits on our annuity products primarily due to
declines in market values of the underlying assets on which our fees are based.

   2000 to 1999 Annual Comparison.  Benefits and expenses remained relatively
unchanged from 1999 to 2000. Benefits and expenses for 2000 includes a $21
million reduction in amortization of deferred policy acquisition costs from the
refinements noted above. Excluding the impact of this change, benefits and
expenses increased $36 million, or 3%. Changes in reserves, net of benefit
payments, increased $34 million, from $118 million in 1999 to $152 million in
2000, as a result of customers converting deferred annuities to income-paying
status and a $12 million charge to increase annuity reserves due to investment
portfolio restructuring as noted above. During 2000, we recorded $20 million of
additional amortization of deferred policy acquisition costs, to reflect a
decrease in expected future gross profits on our annuity products primarily due
to declines in market values of the underlying assets on which our fees are
based. However, this increased charge was essentially offset by reduced
amortization resulting from our termination, in the second quarter of 2000, of
the annuity exchange program we commenced in 1997. Other general expenses were
flat in 2000 from 1999, as a decrease in administrative expenses reflecting our
expense management efforts was largely offset by a $30 million increase in
sub-advisory expense resulting from growth in assets under management of our
mutual funds and wrap-fee products and our variable annuity products.

                                      96



   Sales Results and Assets Under Management

   The following table sets forth the changes in the total mutual fund assets,
excluding wrap-fee products, and the balance of wrap-fee product assets and
annuities, at fair market value for mutual funds and account value for
annuities, and net sales of our Retail Investments mutual fund and annuity
products for the periods indicated. Net sales (redemptions) are gross sales
minus redemptions or surrenders and withdrawals, as applicable. Neither sales
nor net sales are revenues under GAAP; they are, however, relevant measures of
sales and business activity. Revenues are derived from fees and spread income
as discussed above.



                                                                         Year Ended December 31,
                                                                        -------------------------
                                                                         2001     2000     1999
                                                                        -------  -------  -------
                                                                              (in millions)
                                                                                 
Mutual Funds(1) and Wrap-fee Products(2):
Mutual fund assets, excluding wrap-fee products:
   Beginning total mutual fund assets.................................. $57,764  $55,245  $53,412
   Sales (other than money market).....................................   5,273    5,378    3,773
   Redemptions (other than money market)...............................  (4,697)  (5,561)  (4,872)
   Reinvestment of distributions and change in market value............  (1,894)     726    3,744
   Net money market sales..............................................   1,363    1,976     (812)
                                                                        -------  -------  -------
     Ending total mutual fund assets...................................  57,809   57,764   55,245
Wrap-fee product assets at end of period...............................  17,955   19,621   16,723
                                                                        -------  -------  -------
Total mutual fund and wrap-fee product assets at end of period......... $75,764  $77,385  $71,968
                                                                        =======  =======  =======
Net mutual fund sales (redemptions) other than money market(3)......... $   576  $  (183) $(1,099)
                                                                        =======  =======  =======
Variable Annuities(1):
   Beginning total account value....................................... $21,059  $22,614  $19,919
   Sales, excluding exchanges..........................................   1,271    1,809    2,025
   Exchanges sales.....................................................      --      481    1,402
   Surrenders, withdrawals and exchange redemptions....................  (2,356)  (2,989)  (3,432)
   Change in market value, interest credited and other activity(4)(5)..  (1,285)    (856)   2,700
                                                                        -------  -------  -------
     Ending total account value........................................ $18,689  $21,059  $22,614
                                                                        =======  =======  =======
Net sales (redemptions)................................................ $(1,085) $  (699) $    (5)
                                                                        =======  =======  =======
Fixed Annuities:
   Beginning total account value....................................... $ 2,926  $ 3,020  $ 3,249
   Sales...............................................................     120      221      160
   Surrenders, withdrawals and exchange redemptions....................    (216)    (361)    (425)
   Interest credited and other activity(4)(5)..........................     145       46       36
                                                                        -------  -------  -------
     Ending total account value........................................ $ 2,975  $ 2,926  $ 3,020
                                                                        =======  =======  =======
Net sales (redemptions)................................................ $   (96) $  (140) $  (265)
                                                                        =======  =======  =======

--------
(1) Mutual funds and variable annuities include only those sold as retail
    investment products. Investments through defined contribution plan products
    are included with such products.
(2) Wrap-fee product assets include proprietary assets of $3.1 billion at
    December 31, 2001, $3.4 billion at December 31, 2000, and $3.5 billion at
    December 31, 1999.
(3) Excludes wrap-fee products.
(4) Includes maintenance and insurance charges assessed, net bonus payments
    credited to contract holder accounts, annuity benefits and other
    adjustments.
(5) Includes increases to policyholder account values as a result of
    policyholder credits issued in 2001 in connection with Prudential's
    demutalization, amounting to $429 million for variable annuities and $157
    million for fixed annuities.

   2001 to 2000 Annual Comparison.  Mutual fund and wrap-fee product assets
under management amounted to $75.8 billion at December 31, 2001, a decrease of
$1.6 billion, or 2%, from December 31, 2000. Mutual fund assets under
management at December 31, 2001 amounted to $57.8 billion, essentially
unchanged from December 31, 2000. Wrap-fee assets declined $1.7 billion, to
$18.0 billion at December 31, 2001.

   Mutual fund assets under management were essentially unchanged at December
31, 2001 from a year earlier, as declines in market values of existing customer
accounts were essentially offset by our $1.4 billion net money market sales and
net mutual fund sales, other than money market funds, of $576 million. We
believe our

                                      97



net money market sales, both in 2001 and 2000, reflect customer response to the
unfavorable performance of the equity securities markets subsequent to the
early part of 2000. The $759 million increase in net mutual fund sales other
than money market funds reflected increased gross sales that came primarily
from third-party distribution of our mutual funds resulting from our
participation in competitors' products and distribution and a lower level of
redemptions than that of 2000. Net sales of mutual funds from sub-advised
relationships, which commenced in 2000, amounted to $1.2 billion in 2001 and
$472 million in 2000.

   The decrease in wrap-fee assets during 2001 came primarily from declines in
the market values of customers' accounts. Net sales of wrap-fee products, which
are distributed primarily by our Financial Advisors, decreased to $1.4 billion
in 2001 from $4.8 billion in 2000 as a result of lower gross sales and
increased redemptions. We believe that this experience reflects customer
response to recent securities market conditions, as well as the continued
attrition of Financial Advisors.

   Total account values for fixed and variable annuities amounted to $21.7
billion as of December 31, 2001, a decrease of $2.3 billion from December 31,
2000. This decrease resulted primarily from declines in the market value of
customers' variable annuities as well as net redemptions, which increased from
$839 million in 2000 to $1.2 billion in 2001. The increase in net redemptions
in 2001 came primarily from lower sales, which we believe reflects customer
response to recent securities market conditions as well as the decreased number
of Prudential Agents. Furthermore, fixed annuity sales in 2000 benefited from a
promotional campaign we offered. The net redemptions of fixed and variable
annuities in 2001 were partially offset by policy credits we issued in
connection with our demutualization, which increased policyholders' account
values by $586 million.

   2000 to 1999 Annual Comparison.  Mutual funds and wrap-fee product assets
under management amounted to $77.4 billion at December 31, 2000, an increase of
$5.4 billion, or 8%, from December 31, 1999. Mutual fund assets under
management at December 31, 2000 amounted to $57.8 billion, an increase of $2.5
billion, or 5%, from December 31, 1999. Excluding money market funds, net
mutual fund redemptions for 2000 were $183 million, which included $359 million
of gross sales from our purchases of stock index shares for a long-term
deferred compensation program for our own Financial Advisors. Gross sales
increased $1.2 billion, or 33%, from 1999 to 2000 excluding the latter
purchases of stock index shares, which was partially offset by an increase of
$689 million, or 14%, in redemptions. Redemptions, other than money market
funds, increased $689 million, from $4.9 billion in 1999 to $5.6 billion in
2000. The increase in gross sales was a result of strong sales of
growth-oriented mutual funds, primarily products managed by our Jennison unit.
Net money market sales increased by $2.8 billion for 2000 compared to 1999,
reflecting customer response to volatile securities market conditions during
2000.

   Wrap-fee assets increased $2.9 billion, or 17%, from $16.7 billion at
December 31, 1999 to $19.6 billion at December 31, 2000. The increase came from
net sales during 2000 of $4.8 billion of wrap-fee products, in which we offer
customers a choice of proprietary and non-proprietary mutual funds as well as
managed accounts, which was partially offset by declines in market values. We
believe these net sales reflect increased marketplace emphasis on products that
provide customers with a broader choice of investment options.

   Total account values for fixed and variable annuities amounted to $24.0
billion at December 31, 2000, a decrease of $1.6 billion, or 6%, from December
31, 1999. The decrease resulted from market value declines and greater net
redemptions. Net redemptions of variable annuities were $699 million for 2000,
an increase of $694 million compared to 1999. This increase resulted from an
increase in surrenders, other than those related to exchange activity,
consistent with maturation of the business, as a larger percentage of the
business is no longer subject to surrender charges.

   Our withdrawals of variable and fixed annuities include exchanges of $481
million in 2000 and $1.4 billion in 1999. The discontinuance, during the second
quarter of 2000, of the annuity exchange program referred to below did not
appear to have a material impact on net variable annuity redemptions during
that period or thereafter.

   Fixed annuity net redemptions of $140 million in 2000 were $125 million, or
47%, lower than the comparable net outflows for 1999. The decrease in net
redemptions was attributable to an increase in new sales of our Discovery
Classic annuity product.

                                      98



Property and Casualty Insurance

   Operating Results

   The following table sets forth the Property and Casualty Insurance segment's
operating results for the periods indicated.



                                Year Ended December 31,
                                -----------------------
                                 2001    2000    1999
                                ------  ------  ------
                                     (in millions)
                                       
Operating results:
   Revenues(1)................. $2,051  $1,800  $1,747
   Benefits and expenses.......  1,956   1,650   1,595

                                ------  ------  ------
   Adjusted operating income... $   95  $  150  $  152

                                ======  ======  ======

--------
(1) Revenues exclude realized investment gains, net of losses.

   Adjusted Operating Income

   2001 to 2000 Annual Comparison.  Adjusted operating income decreased $55
million, or 37%, from 2000 to 2001. Results for 2001 reflected a $59 million
lower benefit from prior accident-year development. Adjusted operating income
in 2000 reflected the negative impact of $40 million that we provided for
premium refunds or credits to certain New Jersey automobile policyholders under
that state's excess profits regulations. Partially offsetting this was a $35
million decrease in net investment income in 2001 from 2000.

   We released reserves of $106 million in 2001 and $165 million in 2000
because our automobile casualty claims experience for prior years was more
favorable than we previously estimated in establishing reserves for these
accident years. Additionally, we benefited $80 million in each of the years
2001 and 2000 under stop-loss reinsurance contracts, which are based on current
accident-year results. However, we do not expect our 2002 adjusted operating
income to include a comparable benefit from prior accident-year development,
and any stop-loss recoveries for that year are contractually limited to less
than half of the benefit we realized in 2001. Consequently, if the
accident-year experience of 2001 continues, we would anticipate a continuing
decline in results in 2002. As discussed under "--Benefits and Expenses," we
have commenced re-underwriting and non-renewal of business that has produced
adverse loss experience. While there can be no assurance, we believe that these
actions, together with our cost reduction measures, will contribute to
improvement of accident-year experience.

   In May 2000, we completed the acquisition of the specialty automobile
business of the St. Paul Companies, which writes in the non-standard automobile
insurance business. While, as discussed under "--Revenues" below, this
acquisition had an effect on the comparison of revenues for 2001 to 2000, it
did not have a material impact on adjusted operating income.

   2000 to 1999 Annual Comparison.  Adjusted operating income was essentially
unchanged from 1999 to 2000. Results in 2000 reflect an $80 million recovery
from a stop-loss reinsurance contract based on current accident-year results
during that year and a $15 million greater benefit from prior accident year
development. We released reserves of $165 million in 2000 and $150 million in
1999 because our automobile casualty claims experience for prior accident years
was more favorable than we previously estimated in establishing reserves for
these accident years. However, these favorable developments were largely offset
by a $53 million increase in operating expenses, other than expenses of the
specialty automobile business we acquired in 2000 as discussed below. The
increase in operating expenses was primarily due to increases in expenses to
expand our distribution capabilities in direct, affinity group, property and
casualty agent and independent agent channels, and a provision for refunds or
credits to certain New Jersey automobile policyholders under insurance
regulations based on profits generated from that business, as noted above.

   While, as discussed under "--Revenues" below, our acquisition in May 2000 of
a business which writes non-standard automobile insurance had an effect on the
comparison of revenues for 2000 to 1999, it did not have a material impact on
adjusted operating income.

                                      99



   Revenues

   The following table sets forth the Property and Casualty Insurance segment's
earned premiums, which are net of reinsurance ceded, for the periods indicated.



                                          Year Ended December 31,
                                          -----------------------
                                           2001    2000    1999
                                          ------  ------  ------
                                               (in millions)
                                                 
              Automobile................. $1,403  $1,153  $1,069
              Homeowners.................    448     413     447
              Other......................     33      33      32

                                          ------  ------  ------
                 Total earned premiums... $1,884  $1,599  $1,548

                                          ======  ======  ======


   2001 to 2000 Annual Comparison.  Revenues, as shown in the table above under
"--Operating Results," increased $251 million, or 14%, from 2000 to 2001. The
$251 million increase included an increase of $96 million in revenues from the
subsidiary we acquired in May 2000 that specializes in non-standard automobile
business, which is included in 2000 results only from the date of acquisition.
The remaining revenue increase of $155 million, from our existing business,
came primarily from a $196 million increase in earned premiums from automobile
and homeowners' insurance, partially offset by a $41 million decline in
investment income.

   Total earned premiums, as shown in the immediately preceding table,
increased by $285 million, or 18%, from 2000 to 2001. Excluding the impact of
the acquisition mentioned above, earned premiums increased by $196 million,
including the effect of a $40 million reduction in 2000 premiums from the
provision for premium refunds or credits to certain New Jersey automobile
policyholders, as noted above.

   Automobile earned premiums increased by $250 million, or 22%, from 2000 to
2001, including $89 million from the non-standard automobile business and the
effect of the $40 million reduction in 2000 premiums mentioned above. The
remaining $121 million increase came primarily from new distribution channels
we implemented during 1999 and 2000, including career agents focused on selling
property and casualty insurance, workplace and affinity marketing, direct
distribution, and independent agents, many of whom were producers for the
acquired subsidiary. As discussed below under "--Benefits and Expenses,"
commencing in the second half of 2001 we have suspended our mailing
solicitations for the direct distribution channel and limited the growth of new
business from some of these other distribution channels, based on our
evaluation of the quality of the business. In October 2001, we announced that
we would no longer write business through our property and casualty insurance
career agency channel except in a few selected markets. We have also commenced
re-underwriting and non-renewal of business that has produced adverse loss
experience, to the extent permitted contractually and by state insurance
regulations. Improved persistency in 2001 also contributed to the growth in
earned premiums.

   Homeowners earned premiums increased $35 million, or 8%, from 2000 to 2001
due to lower reinsurance premiums ceded, as the number of policies in force was
relatively unchanged. This stabilization of our policies in force represents an
improvement compared with declines in prior years, which reflects intense rate
competition that attracted customers to other companies.

   Net investment income decreased by $35 million, or 18%, from $193 million in
2000 to $158 million in 2001, and decreased by $41 million excluding the impact
of the acquisition mentioned above. This decrease was primarily a result of a
lower average base of invested assets, reflecting lower attributed capital, and
a decline in investment yield.

   2000 to 1999 Annual Comparison.  Revenues increased $53 million, or 3%, from
1999 to 2000. Total revenues of $1.800 billion for 2000 include revenues of
$178 million from the subsidiary we acquired in May 2000 that specializes in
the non-standard automobile business. Excluding the impact on revenues from
this newly-acquired subsidiary, revenues declined by $125 million, or 7%, from
$1.747 billion in 1999 to $1.622 billion in 2000, due principally to a $117
million decrease in earned premiums on our existing automobile and homeowners
business. The $117 million decline in earned premiums resulted in part from the
$40 million reduction in 2000 premiums mentioned above, and a $30 million
increase in reinsurance premiums ceded due to our purchase of additional
reinsurance coverage in 2000.

                                      100



   Automobile earned premiums increased $84 million, or 8%, from 1999 to 2000.
Excluding the impact of the acquisition and provision for premium refunds or
credits mentioned above, automobile earned premiums declined by $44 million, or
4%, from $1.069 billion in 1999 to $1.025 billion in 2000 primarily as a result
of a decline in average premium, due in part to the continued phase-in of a 15%
rate reduction for New Jersey policyholders mandated by New Jersey law that
came into effect in March 1999. As of December 31, 2000, this premium reduction
was entirely reflected in our earned premiums. Our policies in force from our
existing automobile business, excluding the newly acquired subsidiary,
increased 2% at December 31, 2000 from a year earlier. The increase reflected
improved persistency in 2000 as compared to 1999 as well as an increase in new
policies sold, representing an improvement from prior year declines.

   Homeowners earned premiums decreased $34 million, or 8%, from 1999 to 2000.
Excluding the impact of reinsurance premiums ceded, which increased in 2000
from 1999, homeowners earned premiums were flat as the number of policies in
force was relatively unchanged.

   Net investment income was $193 million for 2000, relatively unchanged from
$197 million in 1999.

   Benefits and Expenses

   The following table shows our calendar year loss, expense and combined
ratios, the impact on these calendar year ratios of catastrophic losses and our
accident year combined ratios based on loss experience for the periods
indicated (all based on statutory accounting principles).



                                                             Year Ended December 31,
                                                             ----------------------
                                                              2001      2000   1999
                                                             -----     -----  -----
                                                                     
Loss ratio(1):
   Automobile...............................................  70.6%     64.0%  71.1%
   Homeowners...............................................  76.5      72.4   70.7
     Overall................................................  70.8      65.8   71.1
Expense ratio(2):
   Automobile...............................................  30.8      35.3   30.5
   Homeowners...............................................  36.6      45.3   39.1
     Overall................................................  32.1      37.8   33.1
Combined ratio(3):
   Automobile............................................... 101.4      99.3  101.6
   Homeowners............................................... 113.1     117.7  109.8
     Overall................................................ 102.9     103.6  104.2
Effect of catastrophic losses included in combined ratio(4):   2.2       2.7    3.3
Accident year combined ratio(5):............................ 107.0     114.6  107.5

--------
(1)Represents ratio of incurred losses and loss adjustment expenses to earned
   premium. Ratios reflect the favorable development in the calendar period
   from prior accident year reserves of $106 million in the year ended December
   31, 2001, $165 million in 2000, and $150 million in 1999. Ratios also
   reflect recoveries from current accident year stop-loss reinsurance
   contracts of $80 million in each of the years ended December 31, 2001 and
   2000.
(2)Represents ratio of operating expenses to net written premium.
(3)Represents the sum of (1) and (2).
(4)Represents losses and loss adjustment expenses attributable to catastrophes
   that are included in the combined ratio. Our calendar year catastrophe
   losses include both current and prior accident year losses. We classify as
   catastrophes those events that are declared catastrophes by Property Claims
   Services, which is an industry organization that declares and tracks all
   property-related catastrophes causing insured property damage in the United
   States. Property Claims Services declares an event a catastrophe if it
   causes in excess of a specified dollar amount of insured property damage,
   which was $25 million throughout the periods presented, and affects a
   significant number of policyholders and insurance companies.
(5)Accident year combined ratios for annual periods reflect the combined ratios
   for accidents that occur in the indicated calendar year, restated to reflect
   subsequent changes in loss estimates for those claims based on cumulative
   loss data through December 31, 2001. These ratios reflect the recoveries
   from stop-loss reinsurance contracts as noted above. We analyze
   accident-year combined ratios because they reflect the actual loss
   experience of accidents that occur in a given period excluding the effect of
   accidents that occur in other periods.

   2001 to 2000 Annual Comparison.  Our automobile loss ratio, as shown in the
table immediately above, increased from 2000 to 2001 primarily due to the lower
net benefit from prior accident-year reserve development in 2001. The impact of
experience on new automobile business also contributed to the increase in this
ratio, since the experience on our seasoned automobile business was relatively
consistent. We added significant new

                                      101



automobile business during 2001, primarily in the first half of the year, which
we expected would produce less favorable experience in its initial year than
similarly priced seasoned business. However, based on our evaluation of the
quality of the new business produced, particularly the major portion of the
business which was sold through the new distribution channels we implemented in
1999 and 2000 as noted above, we have suspended our mailing solicitations for
the direct distribution channel and limited the growth of business from some of
our distribution channels, other than Prudential Agents, commencing in the
third quarter of 2001. In October 2001, we announced that we would no longer
write business through our property and casualty insurance career agency
channel except in a few selected markets. We have also commenced
re-underwriting and non-renewal of business that has produced adverse loss
experience, to the extent permitted contractually and by state insurance
regulations. The increase in the homeowners' loss ratio came from a 16%
increase in claim severity and a 3% increase in claim frequency. Our stop-loss
reinsurance recoveries resulted in decreases in the homeowners' combined ratio
of 5.4 percentage points in 2001 and had no impact in 2000.

   Our calendar year catastrophe losses, net of reinsurance, amounted to $42
million for 2001 compared to $45 million for 2000.

   Losses that we ceded through reinsurance, including stop-loss reinsurance,
resulted in decreases in the total combined ratio of 7.3 percentage points for
2001 and 8.3 percentage points for 2000.

   Our overall expense ratio for 2001 decreased from 2000, as we incurred costs
in 2000 to develop our distribution channels and benefited in 2001 from staff
reductions and the favorable impact of the increased premium base.

   The decrease in the accident year combined ratio resulted from the decline
in the expense ratio. Recoveries from stop-loss reinsurance resulted in
decreases in the accident year combined ratio of 4.3 percentage points in 2001
and 4.8 percentage points in 2000.

   2000 to 1999 Annual Comparison.  Our automobile and total combined ratios,
as shown in the table immediately above, improved in 2000 from 1999 primarily
as a result of the $80 million recovery from a stop-loss reinsurance contract
during 2000 and the $15 million greater benefit from prior accident year
reserve development. The decrease in the automobile loss ratio came primarily
from our recovery from a stop-loss reinsurance contract as noted above, and the
greater benefit from release of prior accident year reserves in 2000 as well as
our efforts to limit loss severity, partially offset by a slight increase in
claim frequency. The increase in the homeowners' loss ratio primarily came from
a 13% increase in claim severity, partially offset by a 9% decrease in claim
frequency.

   Our catastrophe losses, net of reinsurance, amounted to $45 million for 2000
compared to $51 million for 1999.

   Losses that we ceded through reinsurance resulted in a decrease in the total
combined ratio of 8.3 percentage points for 2000 and, as a result of changes in
recoverable amounts previously recorded, an increase of 2.6 percentage points
for 1999.

   Our overall expense ratio for 2000 increased in comparison to 1999 mainly
because of the impact of increased operating expenses as discussed above.

Employee Benefits Division

   The Employee Benefits division generates income from premiums, as well as
fee-based revenues and spread income, through the Group Insurance and Other
Employee Benefits segments. Premiums and investment income from group life and
disability insurance, as well as fee-based revenues from products like group
variable universal life insurance, are the primary sources of revenues for the
Group Insurance segment. The Other Employee Benefits segment also receives
premiums and investment income, as well as fee-based revenues. Products and
services for defined contribution and defined benefit retirement plans, as well
as real estate and relocation services, generate the major portion of the Other
Employee Benefits segment's fee-based revenues. We include these fee-based
revenues in the line captioned "Commissions and other income" or "Policy
charges and fee income" in our consolidated statements of operations.

                                      102



   We seek to earn spread income in our general account on various products,
which is the difference between our return on the investments supporting the
products net of expenses and the amounts we credit to our contractholders.
These products primarily include the general account insurance group life and
disability products of the Group Insurance segment as well as guaranteed
investment contracts and certain group annuity products of the Other Employee
Benefits segment. We include revenues from these products, other than premiums
received from policyholders, primarily in the line captioned "Net investment
income" in our consolidated statements of operations.

   The Group Insurance and Other Employee Benefits segments pay the expenses of
their own proprietary sales forces for distribution of products, and pay the
Individual Life Insurance and Private Client Group segments within the U.S.
Consumer division for distribution of their products through Prudential Agents
and Financial Advisors. These segments also pay our Investment Management and
Advisory Services segment for management of proprietary assets. These fees
result in expenses to the segments of the Employee Benefits division and
revenues to the Asset Management division. We reflect all of the intra-company
services at rates that we determined with reference to market rates. The Other
Employee Benefits segment also pays third-party managers for management of
non-proprietary assets that support some of its defined contribution retirement
products.

Division Results

   The following table and discussion present the Employee Benefits division's
results based on our definition of adjusted operating income, which is a
non-GAAP measure, as well as income from continuing operations before income
taxes, which is prepared in accordance with GAAP. As shown below, adjusted
operating income excludes realized investment gains, net of losses and related
charges. The excluded items are important to an understanding of our overall
results of operations. You should not view adjusted operating income as a
substitute for income from continuing operations determined in accordance with
GAAP, and you should note that our definition of adjusted operating income may
differ from that used by other companies. However, we believe that the
presentation of adjusted operating income as we measure it for management
purposes enhances the understanding of our results of operations by
highlighting the results from ongoing operations and the underlying
profitability factors of our businesses. We exclude realized investment gains,
net of losses and related charges, from adjusted operating income because the
timing of transactions resulting in recognition of gains or losses is largely
at our discretion and the amount of these gains or losses is heavily influenced
by and fluctuates in part according to the availability of market
opportunities. Including the fluctuating effects of these transactions could
distort trends in the underlying profitability of our business.



                                                                             Year Ended December 31,
                                                                             ----------------------
                                                                              2001    2000    1999
                                                                             ------  ------  ------
                                                                                  (in millions)
                                                                                    
Division operating results:
   Revenues(1).............................................................. $5,912  $5,686  $5,442
   Benefits and expenses(2).................................................  5,729   5,299   5,042

                                                                             ------  ------  ------
   Adjusted operating income................................................ $  183  $  387  $  400

                                                                             ======  ======  ======
Adjusted operating income by segment:
   Group Insurance.......................................................... $   70  $  158  $  128
   Other Employee Benefits..................................................    113     229     272

                                                                             ------  ------  ------
     Total..................................................................    183     387     400
Items excluded from adjusted operating income:
   Realized investment gains, net of losses and related charges:
     Realized investment gains (losses), net................................   (172)    (87)    228
     Related charges(3).....................................................     14     (31)   (143)

                                                                             ------  ------  ------
     Total realized investment gains, net of losses and related charges.....   (158)   (118)     85

                                                                             ------  ------  ------
Income from continuing operations before income taxes....................... $   25  $  269  $  485

                                                                             ======  ======  ======

--------
(1) Revenues exclude realized investment gains, net of losses.
(2)Benefits and expenses exclude the impact of net realized investment gains on
   reserves and deferred acquisition cost amortization.
(3)Related charges consist of the following:

                                      103





                                                          Year Ended December 31,
                                                          ----------------------
                                                          2001      2000   1999
                                                          ----     ----    -----
                                                               (in millions)
                                                                 
     Reserves for future policy benefits................. $ 7      $(32)  $(147)
     Amortization of deferred policy acquisition costs...   7          1      4

                                                          ---       ----   -----
       Total............................................. $14      $(31)  $(143)

                                                          ===       ====   =====


   2001 to 2000 Annual Comparison.  Adjusted operating income of our Employee
Benefits division decreased $204 million, or 53%, from 2000 to 2001 as a result
of a $116 million decrease in adjusted operating income from our Other Employee
Benefits segment and an $88 million decrease from our Group Insurance segment.
Income from continuing operations before income taxes decreased $244 million,
or 91%, from 2000 to 2001, reflecting the decrease in adjusted operating income
as well as a $40 million increase in realized investment losses, net of related
charges. For a discussion of realized investment gains and losses and charges
related to realized investment gains and losses, see "--Consolidated Results of
Operations--Realized Investment Gains."

   2000 to 1999 Annual Comparison.  Adjusted operating income of our Employee
Benefits division decreased $13 million, or 3%, from 1999 to 2000 as a result
of a $43 million decrease in adjusted operating income from our Other Employee
Benefits segment which was partially offset by a $30 million increase from our
Group Insurance segment. Income from continuing operations before income taxes
decreased $216 million, from $485 million in 1999 to $269 million in 2000. This
decline resulted primarily from realized investment losses, net of related
charges, of $118 million in 2000 compared to realized investment gains, net of
related charges, of $85 million in 1999.

Group Insurance

   Operating Results

   The following table sets forth the Group Insurance segment's operating
results for the periods indicated.



                            Year Ended December 31,
                            -----------------------
                             2001    2000    1999
                            ------  ------  ------
                                 (in millions)
                                   
Operating results:
 Revenues(1)............... $3,248  $2,801  $2,428
 Benefits and expenses.....  3,178   2,643   2,300

                            ------  ------  ------
 Adjusted operating income. $   70  $  158  $  128

                            ======  ======  ======

--------
(1) Revenues exclude realized investment gains, net of losses.

   Adjusted Operating Income

   2001 to 2000 Annual Comparison.  Adjusted operating income decreased $88
million, or 56%, from 2000 to 2001. The decrease came primarily from less
favorable mortality experience on group life insurance in 2001, which included
an increase in our estimate of incurred but not reported claims. This increase
in estimate had a negative impact of approximately $36 million on our adjusted
operating income for 2001. The mortality experience on group life insurance was
partially offset by earned premium growth and improved morbidity on group
disability products. In addition, adjusted operating income benefited $32
million in 2000 from refinements in our calculations of reserves and return
premiums for waiver of premium features. However, about half of this benefit
was offset during 2000, primarily by a charge to increase the allowance for
receivables. An increase in operating expenses, including $12 million of
consulting costs in 2001, also contributed to the decrease in adjusted
operating income.

   2000 to 1999 Annual Comparison.  Adjusted operating income increased $30
million, or 23%, from 1999 to 2000. Approximately half of the increase came
from growth in earned premiums on both group life and disability products,
reflecting increased sales and strong persistency, as well as improved
mortality and morbidity on group life and disability products in 2000. Adjusted
operating income benefited $32 million in 2000 from refinements in our
calculations of reserves and return premiums for waiver of premium features.
However, about half of this benefit was offset during 2000, primarily by a
charge to increase the allowance for receivables.

                                      104



   Revenues

   2001 to 2000 Annual Comparison.  Revenues, as shown in the table above under
"--Operating Results," increased by $447 million, or 16%, from 2000 to 2001.
Group life insurance premiums increased by $350 million, or 21%, to $2.005
billion primarily due to growth in business in force resulting from new sales,
as described below, and continued strong persistency, which increased from 95%
in 2000 to 97% in 2001. Group disability premiums, which include long-term care
products, increased by $43 million, also reflecting the growth in business in
force. Persistency decreased from 91% in 2000 to 89% in 2001, primarily due to
the cancellation of a large case. Net investment income increased $62 million,
or 13%, primarily due to a larger base of invested assets.

   2000 to 1999 Annual Comparison.  Revenues increased by $373 million, or 15%,
from 1999 to 2000. Group life insurance premiums increased by $189 million, or
13%, to $1.655 billion primarily due to growth in business in force resulting
from new sales, which increased in 2000. Persistency increased from 94% in 1999
to 95% in 2000. Group disability premiums, which include long-term care
products, increased by $71 million, or 18%, also reflecting the growth in
business in force resulting from new sales, which increased in 2000.
Persistency increased from 88% in 1999 to 91% in 2000. The remainder of the
increase in revenues came primarily from higher fees on products sold to
employers for funding of employee benefit programs and retirement arrangements,
reflecting growth of this business in 2000. Net investment income was $485
million in 2000, relatively unchanged from $470 million in 1999.

   Benefits and Expenses

   The following table sets forth the Group Insurance segment's benefits and
administrative operating expense ratios for the periods indicated.



                                                   Year Ended December 31,
                                                   ----------------------
                                                    2001      2000   1999
                                                   ----      -----  -----
                                                           
        Benefits ratio(1):
           Group life............................. 92.6%      85.8%  88.3%
           Group disability....................... 95.2      101.9  102.7
        Administrative operating expense ratio(2):
           Group life............................. 10.0       11.6   11.4
           Group disability....................... 23.6       21.0   23.5

--------
(1) Ratio of policyholder benefits to earned premiums, policy charges and fee
    income. Group disability ratios include long-term care products.
(2) Ratio of administrative operating expenses (excluding commissions) to gross
    premiums, policy charges and fee income.

   2001 to 2000 Annual Comparison.  Benefits and expenses, as shown in the
table above under "--Operating Results," increased by $535 million, or 20%,
from 2000 to 2001. The increase resulted in large part from an increase of $448
million, or 22%, in policyholders' benefits, including the change in policy
reserves. This increase reflected less favorable group life insurance claims
experience in 2001, which included an increase in our estimate of incurred but
not reported claims, as well as the growth of business in force. Based on our
evaluation of mortality experience during 2001, we have reviewed our pricing
policies to determine whether our pricing structure provides for adequate
margins and returns on all of our group insurance products. As a result of this
review, we have commenced pricing adjustments, when contractually permitted,
which consider the recent deterioration of the benefits ratio on our group life
insurance products. During 2002, we expect to implement pricing adjustments on
group life insurance business representing about half of our 2001 premiums in
force, including business representing approximately 26% of our 2001 premium in
force for which pricing adjustments were implemented upon renewal in January
2002. While there can be no assurance, we expect these actions to result, over
time, in a return to benefits ratios consistent with those experienced on this
business prior to 2001. However, we expect that the implementation of these
actions, given the competitive marketplace for our products, may result in a
decline in persistency on our group life insurance business in force and some
slowing of our sales. As a result of our reinsurance coverages, insurance
losses resulting from the September 11, 2001 terrorist attacks on the United
States did not have a material impact on our results. An increase of $64
million, or 16%, in operating expenses also contributed to the increase in
benefits and expenses. The increase in operating

                                      105



expenses, from $402 million in 2000 to $466 million in 2001, resulted primarily
from sales-based compensation costs driven by the increase in group life
insurance sales. Additionally, expenses in 2001 included $12 million of
consulting costs to enhance our underwriting and other business processes.

   The group life benefits ratio for 2001 increased 6.8 percentage points from
2000 primarily as a result of the less favorable claims experience on our group
life insurance business in 2001. About 4 percentage points of the increase in
the group life benefits ratio came from the increase in estimate of incurred
but not reported claims and the net impact of the refinements in reserve
calculations and charge to increase the allowance for receivables in 2000. The
group disability benefits ratio improved by 6.7 percentage points from 2000 to
2001 reflecting better morbidity experience, which we attribute to accelerated
case resolution and our ongoing efforts to improve the quality of our
underwriting and claims management processes as well as the impact of our
increase in the allowance for receivables, which contributed about 2 percentage
points to the 2000 ratio. The group life administrative operating expense ratio
improved 1.6 percentage points, reflecting the impact of our efforts to improve
operational efficiencies. The group disability insurance administrative
operating expense ratio increased 2.6 percentage points, reflecting the
favorable impact, in 2000, of changes in our estimate of the administrative
costs associated with settlement of pending claims.

   2000 to 1999 Annual Comparison.  Benefits and expenses increased by $343
million, or 15%, from 1999 to 2000. This increase includes the changes in
reserves from the refinements in reserve calculations noted above, which
reduced our expenses by $54 million in 2000. Excluding this change, total
benefits and expenses increased $397 million, or 17%. The increase resulted in
large part from an increase of $337 million, or 19%, in policyholders'
benefits, including the change in policy reserves. This increase reflected the
growth in business in force, partially offset by the impact of improved
mortality and morbidity experience on group life and disability products in
2000. An increase of $47 million, or 13%, in operating expenses also
contributed to the increase in benefits and expenses. The increase in operating
expenses, from $354 million in 1999 to $401 million in 2000, resulted primarily
from the sales-based compensation costs related to the increase in sales of our
group life and group disability products, and volume related costs to
administer the increased business in force.

   The group life benefits ratio for 2000 improved by 2.5 percentage points
from 1999 primarily as a result of improved mortality experience. The group
disability benefits ratio improved by 0.8 percentage points from 1999 to 2000
reflecting better morbidity experience, which we attribute to our ongoing
efforts to improve the quality of our underwriting and claims management
processes. The group life administrative operating expense ratio was relatively
unchanged, while the group disability insurance administrative operating
expense ratio improved 2.5 percentage points, reflecting the impact of our
efforts to improve operational efficiencies, including a reduction in our
estimate of the administrative costs associated with settlement of pending
claims.

   Sales Results

   The following table sets forth the Group Insurance segment's new annualized
premiums for the periods indicated. In managing our group insurance business,
we analyze new annualized premiums, which do not correspond to revenues under
GAAP, as well as revenues, because new annualized premiums measure the current
sales performance of the business unit, while revenues reflect the renewal
persistency and aging of in force policies written in prior years and net
investment income in addition to current sales.



                          Year Ended December 31,
                          -----------------------
                           2001    2000    1999
                          ----    ----    ----
                               (in millions)
                                 
New annualized premiums:
   Group life(1)......... $483    $321    $262
   Group disability(2)...  147     162     105
                           ----    ----    ----
     Total............... $630    $483    $367
                           ====    ====    ====

--------
(1) Amounts do not include excess premiums, which are premiums that build cash
    value but do not purchase face amounts of group universal life insurance.
(2) Includes long-term care products.

                                      106



   2001 to 2000 Annual Comparison.  Total new annualized premiums increased
$147 million, or 30%, from 2000 to 2001, with an increase of $162 million in
group life sales partially offset by a $15 million decline in group disability
sales. The group life sales increase included $46 million in premiums in 2001
from additional coverage under an insurance program for the United States armed
forces under which our retained risk, and consequently the risk charge we
include in the premiums charged, are limited. The remainder of the group life
sales increase came from a small number of large sales to new and existing
customers, including annualized premiums of $99 million from one sale. The
group disability sales decrease reflected the benefit to 2000 results from
sales opportunities resulting from the well-publicized financial difficulties
of a competitor.

   2000 to 1999 Annual Comparison.  Total new annualized premiums increased
$116 million, or 32%, from 1999 to 2000, with increases of $59 million in group
life sales and $57 million in group disability sales. Sales for 1999 benefited
from annualized premiums of $40 million from one sale. We believe the sales
increase reflected improved competitiveness of our products as well as sales
opportunities resulting from the well-publicized financial difficulties of a
competitor.

Other Employee Benefits

   Operating Results

   The following table sets forth the Other Employee Benefits segment's
operating results for the periods indicated.


                                Year Ended December 31,
                                -----------------------
                                 2001    2000    1999
                                ------  ------  ------
                                     (in millions)
                                       
Operating results:
   Revenues(1)................. $2,664  $2,885  $3,014
   Benefits and expenses(2)....  2,551   2,656   2,742

                                ------  ------  ------
   Adjusted operating income... $  113  $  229  $  272

                                ======  ======  ======

--------
(1) Revenues exclude realized investment gains, net of losses.
(2) Benefits and expenses exclude the impact of net realized investment gains
    on reserves and deferred acquisition cost amortization.

   Adjusted Operating Income

   2001 to 2000 Annual Comparison.  Adjusted operating income decreased $116
million, or 51%, in 2001 from 2000. Adjusted operating income benefited $64
million in 2000 primarily from refinements in our annuity reserves. Excluding
this change, adjusted operating income decreased $52 million, or 32%. The $52
million decrease came from decreases in adjusted operating income of $42
million from our real estate and relocation business and $23 million from our
guaranteed products business, partially offset by a $13 million reduction in
losses from our full service defined contribution business.

   Our real estate and relocation business reported a loss, on an adjusted
operating income basis, of $11 million in 2001 versus adjusted operating income
of $31 million in 2000. The loss in 2001 resulted from expenses of $35 million
from consolidation of operating facilities as well as a decline in corporate
relocation volume.

   Our guaranteed products business reported adjusted operating income of $153
million in 2001, a decrease of $23 million from 2000 adjusted operating income,
excluding the impact of the annuity reserve refinement noted above. Results
from this business in 2000 were negatively affected by a $56 million charge we
recorded to increase reserves for our structured settlement products as a
result of our restructuring of the investment portfolio supporting these
products to reduce the emphasis on equity investments, and we also recorded
charges amounting to $26 million during that year to establish reserves for
guaranteed benefits on several separate account contracts. However, the impact
of the foregoing items was largely offset by less favorable mortality
experience in 2001, and, during the first nine months of 2001, we recorded
approximately $29 million of increased estimates of policy liabilities relating
to prior periods. Additionally, this business continues to be adversely
affected by the gradual runoff of our general account products, including
general account guaranteed investment contract ("GIC"), business, that we have
experienced over the past several years. We expect to continue to have low
sales of general account GICs unless and until our ratings improve.


                                      107



   Our full service defined contribution business, which benefited from lower
expense levels in 2001, reported a loss of $29 million on an adjusted operating
income basis compared to a loss of $42 million in 2000.

   2000 to 1999 Annual Comparison.  Adjusted operating income decreased $43
million, or 16%, in 2000 from 1999. Adjusted operating income benefited $64
million in 2000 and $54 million in 1999 primarily from refinements in our
annuity reserves. Excluding these changes, adjusted operating income decreased
$53 million, or 24%, from $218 million in 1999 to $165 million in 2000. The $53
million decrease came primarily from a $45 million decline in adjusted
operating income from our guaranteed products business. Results from this
business were negatively affected by a $56 million charge we recorded in 2000
to increase our reserves for structured settlement products as discussed above.
We recorded charges of $26 million in 2000 and $37 million in 1999 to establish
reserves for guaranteed benefits on several separate account contracts. Results
from this business continue to be affected by the scheduled runoff of our
general account GIC business that we have experienced over the past several
years. Losses from our full service defined contribution business were $42
million in 2000, relatively unchanged from $39 million in 1999.

   Revenues

   2001 to 2000 Annual Comparison.  Revenues, as shown in the table above under
"--Operating Results," decreased $221 million, or 8%, from 2000 to 2001. Net
investment income decreased $151 million, or 6%, from $2.332 billion in 2000 to
$2.181 billion in 2001 reflecting lower yields as well as the gradual runoff of
our general account products, including general account GIC business. Premiums,
policy charges and fees decreased $49 million, from $149 million in 2000 to
$100 million in 2001, reflecting lower sales of general account group annuity
products.

   2000 to 1999 Annual Comparison.  Revenues decreased $129 million, or 4%,
from 1999 to 2000. Net investment income decreased $128 million, or 5%, from
$2.460 billion in 1999 to $2.332 billion in 2000. The majority of this decline
relates to the continued runoff of our general account GIC business. Fee-based
revenue in 2000 was approximately equal to 1999, as the impact on 1999 revenues
from $16 million in fees we earned in connection with our participation in the
rehabilitation of another life insurance company was essentially offset by
higher fee-based revenues resulting from growth in our full service defined
contribution and real estate and relocation businesses in 2000.

   Benefits and Expenses

   2001 to 2000 Annual Comparison.  Benefits and expenses, as shown in the
table above under "--Operating Results," decreased $105 million, or 4%, from
2000 to 2001. This decrease includes the effect of refinements in our annuity
reserves in 2000 as noted above. Excluding this change, benefits and expenses
decreased $169 million, or 6%. Policyholders' benefits together with the change
in policy reserves and interest credited to policyholders, decreased $128
million in 2001 from 2000, excluding the effect of the 2000 refinement in
annuity reserves. The decrease reflected our maturing block of group annuity
business and the decline in premiums mentioned above. In addition, interest
expense decreased $31 million from 2000 to 2001 as a result of a lower level of
investment-related borrowing and lower borrowing rates.

   2000 to 1999 Annual Comparison.  Benefits and expenses decreased $86
million, or 3%, from 1999 to 2000. Interest credited to policyholders declined
from $1.086 billion in 1999 to $1.024 billion in 2000, primarily as a result of
the runoff of our general account GIC business as noted above. This decrease
was essentially offset by the $56 million charge we recorded in 2000 to
increase our reserves for structured settlement products. The remainder of the
decrease came primarily from a decrease in policyholders' benefits, including
the change in policy reserves, reflecting our maturing block of group annuity
business.

                                      108



   Sales Results and Assets Under Management

   The following table shows the changes in the account values and net sales of
Other Employee Benefits segment products for the periods indicated. Net sales
are total sales minus withdrawals or withdrawals and benefits, as applicable.
As noted above under "--U.S. Consumer Division--Retail Investments--Sales
Results and Assets Under Management," neither sales nor net sales are revenues
under GAAP.



                                                                  Year Ended December 31,
                                                                 -------------------------
                                                                  2001     2000     1999
                                                                 -------  -------  -------
                                                                       (in millions)
                                                                          
Defined Contribution:
Beginning total account value................................... $26,046  $25,788  $21,527
Sales...........................................................   3,689    5,439    4,736
Withdrawals.....................................................  (3,422)  (3,937)  (3,287)
Change in market value, interest credited, and other activity(1)  (1,673)  (1,244)   2,812

                                                                 -------  -------  -------
   Ending total account value................................... $24,640  $26,046  $25,788

                                                                 =======  =======  =======
Net sales....................................................... $   267  $ 1,502  $ 1,449

                                                                 =======  =======  =======
Guaranteed Products(2):
Beginning total account value................................... $41,577  $41,757  $45,560
Sales...........................................................   2,299    2,024    1,951
Withdrawals and benefits........................................  (4,372)  (5,279)  (7,244)
Change in market value and interest income......................   2,198    2,997    2,070
Other(3)........................................................  (1,877)      78     (580)

                                                                 -------  -------  -------
   Ending total account value................................... $39,825  $41,577  $41,757

                                                                 =======  =======  =======
Net sales....................................................... $(2,073) $(3,255) $(5,293)

                                                                 =======  =======  =======

--------
(1) Includes an increase to policyholder account values as a result of
    policyholder credits issued in 2001 in connection with Prudential's
    demutualization, amounting to $433 million.
(2) Prudential's retirement plan accounted for 29% of sales in the year ended
    December 31, 2001, 27% of sales for 2000, and 28% for 1999. Ending total
    account value includes assets of Prudential's retirement plan of $9.1
    billion at December 31, 2001, $8.2 billion at December 31, 2000, and $8.2
    billion at December 31, 1999.
(3) Represents changes in asset balances for externally managed accounts.
    Additionally, in 2001, includes an increase to policyholder account values
    of $181 million representing cumulative conversions of client balances to
    products currently included in this business and a further increase of $2
    million as a result of policyholder credits issued in connection with
    Prudential's demutualization.

   2001 to 2000 Annual Comparison.  Assets under management in our full service
defined contribution business amounted to $24.6 billion at December 31, 2001, a
decrease of $1.4 billion, or 5%, from December 31, 2000. This decrease is
primarily due to a decline in market value of mutual funds reflecting the
general downturn in the equity markets. In addition, net sales decreased $1.2
billion in 2001 from 2000, reflecting a decrease in new institutional clients.

   Assets under management for guaranteed products amounted to $39.8 billion at
December 31, 2001, a decrease of $1.8 billion, or 4%, from December 31, 2000.
The decrease from December 31, 2000 is primarily due to a decrease in separate
account annuity assets that reflected approximately $1.4 billion of annuity
benefits.

   As of December 31, 2001, our guaranteed products assets under management
included $10.2 billion relating to non-participating group annuities and
structured settlements that were sold predominantly in a high interest rate
environment. Historically, we have actively managed the investment portfolios
underlying these long-duration products to maximize economic value. This
strategy has produced significant realized investment gains over the years;
however, the reinvestment of sales proceeds in lower yielding assets has
resulted in marginally profitable adjusted operating income on these products
for the three years ended December 31, 2001.

   2000 to 1999 Annual Comparison.  Assets under management in our full service
defined contribution business were relatively unchanged at December 31, 2000
from a year earlier. Net sales benefited from increased participant
contributions, reflecting an increased participant base. However, the $1.5
billion net sales in 2000 were largely offset by negative changes in market
value of $1.2 billion resulting from poor performance in the equity markets.

                                      109



   Assets under management for guaranteed products at December 31, 2000 were
also relatively unchanged from a year earlier. Although assets related to our
general account GIC business continued to decline, reflecting the scheduled
runoff of that business, this decrease was largely offset by an increase in our
separate account annuity assets resulting primarily from market appreciation
and interest income on fixed income investments. Withdrawals and benefits from
guaranteed products for 2000 totaled $5.3 billion, $2.0 billion less than those
of 1999, reflecting the declining volume of general account GIC contracts.
Sales of guaranteed products increased $73 million over 1999, as an increase in
separate account GICs and funding agreements more than offset a decline in
traditional GICs.

International Division

   The International division generates revenues from premiums and investment
income through our International Insurance segment and from commissions, asset
management fees and investment income from the international securities and
futures brokerage and trading operations that comprise our International
Securities and Investments segment. We include the asset management fees and
commissions from these operations in the line captioned "Commissions and other
income" in our consolidated statements of operations.

   The International Insurance and International Securities and Investments
segments pay the expenses of their own proprietary sales forces, consisting of
Life Planners, Life Advisors and Financial Advisors, for distribution of
products.

   Our international operations conduct their business primarily in local
currencies and, accordingly, fluctuations in foreign currency exchange rates,
net of the impact of our hedging strategies, affect the profitability of these
operations in our Consolidated Financial Statements. For a discussion of our
currency hedging strategies, see "Quantitative and Qualitative Disclosures
About Market Risk--Risk Management, Market Risk and Derivative
Instruments--Other Than Trading Activities--Market Risk Related to Foreign
Currency Exchange Rates."

   In addition, we must manage our risk in connection with principal
transactions associated with the international and futures operations of the
International Securities and Investments segment. The liquidity of markets and
transactional volume, the level and volatility of interest rates, security and
currency valuations, competitive conditions and other factors also affect our
revenues and profitability. See "--Overview--Profitability."

Division Results

   The following table and discussion present the International division's
results based on our definition of adjusted operating income, which is a
non-GAAP measure, as well as income from continuing operations before income
taxes, which is prepared in accordance with GAAP. As shown below, adjusted
operating income excludes realized investment gains, net of losses and related
charges. The excluded items are important to an
understanding of our overall results of operations. You should not view
adjusted operating income as a substitute for income from continuing operations
determined in accordance with GAAP, and you should note that our definition of
adjusted operating income may differ from that used by other companies.
However, we believe that the presentation of adjusted operating income as we
measure it for management purposes enhances the understanding of our results of
operations by highlighting the results from ongoing operations and the
underlying profitability factors of our businesses. We exclude realized
investment gains, net of losses and related charges, from adjusted operating
income because the timing of transactions resulting in recognition of gains or
losses is largely at our discretion and the amount of these gains or losses is
heavily influenced by and fluctuates in part according to the availability of
market opportunities. Including the fluctuating effects of these transactions
could distort trends in the underlying profitability of our businesses.

                                      110





                                                        Year Ended December 31,
                                                        -----------------------
                                                         2001     2000    1999
                                                        ------   ------  ------
                                                             (in millions)
                                                                
  Division operating results:
     Revenues(1)....................................... $4,694   $2,624  $2,102
     Benefits and expenses.............................  4,171    2,302   1,869

                                                        ------   ------  ------
     Adjusted operating income......................... $  523   $  322  $  233

                                                        ======   ======  ======
  Adjusted operating income by segment:
     International Insurance........................... $  611   $  296  $  218
     International Securities and Investments..........    (88)      26      15

                                                        ------   ------  ------
       Total...........................................    523      322     233
  Item excluded from adjusted operating income:
     Realized investment gains, net of losses..........    (57)     (15)      9

                                                        ------   ------  ------
  Income from continuing operations before income taxes $  466   $  307  $  242
                                                        ======   ======  ======

--------
(1) Revenues exclude realized investment gains, net of losses.

   2001 to 2000 Annual Comparison.  Adjusted operating income of our
International division increased $201 million, or 62%, in 2001 from 2000. The
increase came from an increase of $315 million in adjusted operating income
from our International Insurance segment, including $262 million from Gibraltar
Life which we acquired in 2001, as discussed below. This increase was partially
offset by a $114 million decline in adjusted operating income from our
International Securities and Investments segment. Income from continuing
operations before income taxes increased by $159 million, or 52%, in 2001 from
2000 as a result of the increase in adjusted operating income, which was
partially offset by a $42 million increase in realized investment losses. For a
discussion of realized investment gains and losses, and charges related to
realized investment gains and losses, see "--Consolidated Results of
Operations--Realized Investment Gains."

   2000 to 1999 Annual Comparison.  Adjusted operating income of our
International division increased $89 million, or 38%, in 2000 from 1999 due to
increases in both segments in the division. Income from continuing operations
before income taxes increased $65 million, or 27%, in 2000 from 1999. The
increase came from the $89 million increase in adjusted operating income, which
was partially offset by a $24 million decrease in realized investment gains,
net of losses.

International Insurance

   Our international insurance operations are subject to currency fluctuations
that can materially impact the U.S. dollar results of our international
insurance operations from period to period even if results on a local currency
basis are relatively constant. Exchange rates fluctuated significantly in the
three years ended December 31, 2001. The financial results of our International
Insurance segment reflect the impact of our currency hedging strategies
including internal hedges, whereby some currency fluctuation exposure is
assumed in our Corporate and Other operations. Unless otherwise stated, we have
translated all information in this section on the basis of exchange rates in
accordance with GAAP. To achieve a better understanding of local operating
performance, where indicated below, we analyze results both on the basis of
GAAP translated results and on the basis of local results translated at a
constant exchange rate. When we discuss constant exchange rate information
below, we translated on the basis of the average exchange rates for the year
ended December 31, 2001.

                                      111



   Operating Results

   The following table sets forth the International Insurance segment's
operating results for the periods indicated.



                                                        Year Ended December 31,
                                                        -----------------------
                                                         2001    2000    1999
                                                        ------  ------  ------
                                                             (in millions)
                                                               
Operating results:
  Revenues(1):
   International Insurance, excluding Gibraltar Life... $2,120  $1,920  $1,522
   Gibraltar Life......................................  2,026      --      --

                                                        ------  ------  ------
                                                         4,146   1,920   1,522

                                                        ------  ------  ------
Benefits and expenses:
   International Insurance, excluding Gibraltar Life...  1,771   1,624   1,304
   Gibraltar Life......................................  1,764      --      --

                                                        ------  ------  ------
                                                         3,535   1,624   1,304

                                                        ------  ------  ------
Adjusted operating income.............................. $  611  $  296  $  218

                                                        ======  ======  ======

--------
(1) Revenues exclude realized investment gains, net of losses.

   Adjusted Operating Income

   2001 to 2000 Annual Comparison.  Adjusted operating income increased $315
million from 2000 to 2001. Results of Gibraltar Life, which we include in our
results from April 2, 2001, the date of the reorganization, through November
30, 2001, contributed $262 million to the increase in adjusted operating
income. The International Insurance segment reported adjusted operating income
of $172 million for the fourth quarter of 2001, including $77 million from
Gibraltar Life.

   The $262 million adjusted operating income reported by Gibraltar Life
reflected revenues of $2.026 billion and benefits and expenses of $1.764
billion. Gibraltar Life's revenues were comprised primarily of $1.710 billion
of premiums, policy charges and fees, and $304 million net investment income,
and its benefits and expenses were comprised primarily of $1.358 billion of
policy benefits including changes in reserves and $406 million of operating
expenses. As a result of Gibraltar Life's recent emergence from reorganization
proceedings 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 for Gibraltar Life's years of operations, commencing
at the date of reorganization, are 6% in the first year and 4% thereafter for
paid-up policies and 2% to 38% in the first year, 3% to 14% in the second year,
and 6% to 10% thereafter for premium paying policies, although the actual
surrender rates we experience may differ materially from our assumptions.
Gibraltar Life's adjusted operating income for the initial eight-month period
included in our results benefited from gains on policy surrenders of about $56
million, including about $6 million in the three months ended November 30,
2001. Substantially all of this contribution to adjusted operating income
resulted from a high level of surrenders due to customer response to the
initial impact of policy changes introduced as part of Gibraltar Life's
reorganization. These surrenders, which were significantly greater in the
initial eight-month period than the level we expect on an ongoing basis, are
not anticipated to have a material adverse impact on future results from
Gibraltar Life. Future surrender experience in the near term may be
significantly different from the levels we assumed, and our future adjusted
operating income will be sensitive to differences in actual surrender
experience from our assumptions, particularly during an initial period of about
two years from the date of reorganization. We estimate that every 1% of in
force policies that surrender in excess of our assumed level would contribute
$40 to $50 million to our adjusted operating income for the period of the
surrenders, and conversely that for every 1% of in force policies that
surrender below our assumed level, our reported adjusted operating income would
be negatively affected by $40 to $50 million.

   Adjusted operating income, excluding the impact of the Gibraltar Life
acquisition discussed above, increased $53 million, or 18%, from 2000 to 2001.
Adjusted operating income for 2001 benefited $8 million from a refinement in
the methodology used to calculate reserves in our Korean operations. Excluding
this item,

                                      112



adjusted operating income increased $45 million, or 15%. The increase came from
improved results both from our operations in countries other than Japan and our
Japanese insurance operations. Our operations in countries other than Japan
contributed adjusted operating income of $6 million for 2001, excluding the
reserve refinement, compared to an operating loss of $19 million for 2000, as
increased profits from our operations in Korea and Taiwan more than offset
continued costs associated with our expansion into additional countries. Our
Japanese insurance operations reported continuing improved results, with
adjusted operating income of $335 million in 2001 compared to $315 million in
2000, due to strong persistency and new sales, partially offset by a negative
impact of about $24 million from currency fluctuations and less favorable
mortality experience.

   The segment's increase in adjusted operating income includes the unfavorable
effect of year over year fluctuations in currency exchange rates as well as the
impact of our hedging at expected exchange rates. On a constant exchange rate
basis and excluding the impact of currency hedging, adjusted operating income,
including results of Gibraltar Life, increased $333 million.

   2000 to 1999 Annual Comparison.  Adjusted operating income increased $78
million, or 36%, from 1999 to 2000. The increase resulted from continuing
improved results from our Japanese insurance operations, from $240 million in
1999 to $315 million in 2000, which experienced continued growth in insurance
in force due to strong persistency and new sales. Our operations in countries
other than Japan resulted in operating losses of $19 million in 2000 and $22
million in 1999, as improved operating income from our Korean insurance
operations was partially offset by increased costs associated with our
expansion into additional countries. The segment's increase in adjusted
operating income includes the favorable effect of year over year fluctuations
in currency exchange rates as well as the impact of our hedging at expected
exchange rates. On a constant exchange rate basis and excluding the impact of
currency hedging, adjusted operating income increased $37 million, or 18%.

   Revenues

   2001 to 2000 Annual Comparison.  Revenues, as shown in the table above under
"--Operating Results," increased $2.226 billion from 2000 to 2001, including
$2.026 billion from Gibraltar Life. Excluding the impact of the Gibraltar Life
acquisition, revenues increased $200 million, or 10%, from 2000 to 2001. The
$200 million increase in revenues came primarily from an increase in premium
income of $152 million, or 9%, from $1.680 billion in 2000 to $1.832 billion in
2001. Premiums from our Korean operations increased $97 million, from $188
million in 2000 to $285 million in 2001, as a result of increased sales and
strong persistency. Premiums in all other countries increased $55 million, from
$1.492 billion in 2000 to $1.547 billion in 2001, primarily as a result of
continued strong persistency and new sales in Japan and Taiwan. On a constant
exchange rate basis and excluding the impact of currency hedging, total segment
revenues increased $2.424 billion, from 2000 to 2001.

   2000 to 1999 Annual Comparison.  Revenues increased $398 million, or 26%,
from 1999 to 2000. The growth in revenues came primarily from an increase in
premium income of $335 million, from $1.345 billion in 1999 to $1.680 billion
in 2000. Premiums from our Japanese operations increased $227 million, from
$1.167 billion in 1999 to $1.394 billion in 2000, as a result of continued
strong persistency and new sales, as well as the favorable impact of currency
exchange fluctuations. Premiums in all other countries increased $108 million,
from $178 million in 1999 to $286 million in 2000, primarily as a result of
increased sales and strong persistency in Korea and Taiwan. Net investment
income increased $30 million, from $99 million in 1999 to $129 million in 2000,
as a result of the growth in invested assets related to the increase in our
business in force. On a constant exchange rate basis and excluding the impact
of currency hedging, revenues increased $272 million, or 19%, from 1999 to 2000.

   Benefits and Expenses

   2001 to 2000 Annual Comparison.  Benefits and expenses, as shown in the
table above under "--Operating Results," increased $1.911 billion from 2000 to
2001, including $1.764 billion from Gibraltar Life. Excluding the impact of the
Gibraltar Life acquisition, benefits and expenses increased $147 million, or
9%, from 2000 to 2001. The $147 million increase in benefits and expenses came
primarily from an increase of $120 million in policyholders' benefits, which
includes the change in reserves for future policy benefits. Policyholders'
benefits

                                      113



increased from $1.268 billion in 2000 to $1.388 billion in 2001, primarily as a
result of the greater volume of business in force, which was driven by new
sales, continued strong persistency and the aging of business in force in
markets where our operations are more mature. On a constant exchange rate
basis, total segment benefits and expenses increased $2.091 billion.

   2000 to 1999 Annual Comparison.  Benefits and expenses increased $320
million, or 25%, from 1999 to 2000. The increase in benefits and expenses came
primarily from an increase of $234 million in policyholders' benefits, which
includes the change in reserves for future policy benefits. Policyholders'
benefits increased from $1.034 billion in 1999 to $1.268 billion in 2000,
primarily as a result of the greater volume of business in force, which was
driven by new sales and continued strong persistency, as well as the aging of
business in force in markets where our operations are more seasoned. The
remaining increase in benefits and expenses of $85 million reflected the
increase in administrative expenses associated with the greater volume of
business in force and increased expenses related to opening additional agencies
in existing markets and expansion into new markets. On a constant exchange rate
basis, benefits and expenses increased $235 million, or 19%.

   Sales Results

   In managing our international insurance business, we analyze new annualized
premiums, which do not correspond to revenues under GAAP, as well as revenues,
because new annualized premiums measure the current sales performance of the
business unit, while revenues reflect the renewal persistency and aging of in
force policies written in prior years and net investment income in addition to
current sales.

   2001 to 2000 Annual Comparison.  New annualized premiums increased $183
million, or 36%, from $509 million in 2000 to $692 million in 2001, including
$110 million from Gibraltar Life and reflecting the unfavorable impact of
currency exchange rate fluctuations. On a constant exchange rate basis, new
annualized premiums increased $240 million, or 53%, from 2000 to 2001,
including $110 million from Gibraltar Life. On that basis, new annualized
premiums from our operations other than Gibraltar Life increased $130 million,
or 29%. The $130 million increase included $51 million from our existing
operation in Japan, reflecting an increase in the number of Life Planners from
1,811 at December 31, 2000 to 1,992 at December 31, 2001 as well as $25 million
of new annualized premiums sold by the Gibraltar Life sales force for our
existing operation prior to the acquisition date. After that date, the
Gibraltar Life sales force has distributed only Gibraltar products. For all
countries other than Japan, also on a constant exchange rate basis, new
annualized premiums increased $79 million, or 59%, with $76 million of the
increase coming from our operations in Korea and Taiwan. The increase in
countries other than Japan reflects an increase in the number of Life Planners,
from 1,684 at December 31, 2000 to 2,112 at December 31, 2001, as well as an
increase in Life Planner productivity.

   2000 to 1999 Annual Comparison.  New annualized premiums increased $111
million, or 28%, from $398 million in 1999 to $509 million in 2000, including
the favorable impact of currency exchange fluctuations. On a constant exchange
rate basis, new annualized premiums increased $82 million, or 22%. For all
countries other than Japan, on a constant exchange rate basis, new annualized
premiums increased $45 million, or 51%, with $44 million of the increase coming
from our operations in Korea and Taiwan. The increase in countries other than
Japan reflects an increase in the number of Life Planners, from 1,203 at
December 31, 1999 to 1,684 at December 31, 2000, which we attribute to our
recruitment program and retention of existing Life Planners. New annualized
premiums in Japan, on a constant exchange rate basis, increased $37 million, or
13%, reflecting an increase in the number of Life Planners from 1,681 at
December 31, 1999 to 1,811 at December 31, 2000. As discussed below under
"--Investment Margins and Other Profitability Factors," in April 1999 Japanese
regulators approved a reduction in the required interest rates for most of the
products we sell due to the low interest rate environment in that country. We
believe that customer purchases of life insurance in 1999 in anticipation of
this change before it was implemented benefited 1999 sales, partially
offsetting the impact of additional Life Planners in 2000.

   Investment Margins and Other Profitability Factors

   Many of our insurance products sold in international markets provide for the
buildup of cash values for the policyholder at mandated guaranteed interest
rates. The spread between the actual investment returns and these guaranteed
rates of return to the policyholder is an element of the profit or loss that we
will experience on these

                                      114



products. Interest rates guaranteed in our Japanese insurance contracts are
regulated by Japanese authorities. Between July 1, 1996 and April 1, 1999, we
guaranteed premium rates using an interest rate of 3.1% on most of the products
we sold even though the yield on Japanese government and high-quality corporate
bonds was less than that much of this time. This resulted in some negative
investment spreads over this period. As a consequence, our profitability with
respect to these products in Japan during that period resulted primarily from
margins on mortality charges and expenses. In response to the low interest rate
environment, Japanese regulators approved a reduction in the required rates for
most of the products we sell to 2.35% in April of 1999, which has allowed us to
charge higher premiums on new business for the same amount of insurance. While
this has also resulted in an improvement in investment spreads, these spreads
had a negative impact on adjusted operating income from our Japanese insurance
operations other than Gibraltar Life in each of the three years ended December
31, 2001 and the profitability of these products in Japan continues to result
primarily from margins on mortality charges and expenses. In 2001, Japanese
regulators approved further reductions in the required interest rates
applicable to most of the products we sell. As a result, we increased premium
rates on most of our products sold in Japan when the new rates were
implemented, in April 2001 for some products and in October 2001 for other
products. Additionally, interest rates on our guaranteed products sold in Korea
are regulated by Korean authorities, who implemented, in April 2001, a
reduction in the required rates for most of the products we sell, allowing us
to charge higher premiums on new business for the same amount of insurance.
While these actions enhance our ability to set rates commensurate with
available investment returns, the major sources of profitability on our
products in Korea, as in Japan, are margins from mortality and expense charges
rather than investment spreads.

   We base premiums and cash values in the countries in which we operate on
mandated mortality tables. Our mortality experience in the International
Insurance segment on an overall basis for each of the three years ended
December 31, 2001 was well within our pricing assumptions and below the
guaranteed levels reflected in the premiums we charge.

International Securities and Investments

   Operating Results

   The following table sets forth the International Securities and Investments
segment's operating results for the periods indicated.



                                             Year Ended December 31,
                                             -----------------------
                                              2001     2000    1999
                                             ----     ----    ----
                                                  (in millions)
                                                     
             Operating results:
                Revenues.................... $548     $704    $580
                Expenses....................  636      678     565

                                              ----     ----    ----
                Adjusted operating income... $(88)    $ 26    $ 15

                                              ====     ====    ====


   Adjusted Operating Income

   2001 to 2000 Annual Comparison.  The International Securities and
Investments segment reported a pre-tax loss of $88 million, on an adjusted
operating income basis, for 2001 compared to adjusted operating income of $26
million for 2000. The $114 million decrease came from our international
securities operations, including our futures operations, reflecting the
slowdown in equity markets which began after the early part of 2000 as well as
$21 million greater expenses in 2001 relating to staff reductions and
facilities consolidations. In addition, adjusted operating income for 2000
benefited from a $21 million gain from our interest in the conversion of London
Stock Exchange and Hong Kong Stock and Futures Exchange seats into listed
shares and trading rights. Losses from our international investments operations
amounted to $44 million in 2001 and $51 million in 2000, as increased expenses
from the expansion of this developing business essentially offset its revenue
growth. The International Securities and Investments segment reported a loss of
$47 million on an adjusted operating income basis, for the fourth quarter of
2001.

                                      115



   2000 to 1999 Annual Comparison.  Adjusted operating income increased $11
million from 1999 to 2000. Adjusted operating income from our international
securities operations, including our futures operations, increased $30 million
in 2000 from 1999, including a $21 million gain in 2000 from our interest in
the conversion of stock exchange seats as discussed above. Our international
securities operations benefited from continued active U.S. equity markets,
particularly during the early part of 2000. An $11 million decline in adjusted
operating income from our futures operations due to reduced volatility in the
global commodity and foreign exchange markets in 2000 was a partial offset.
Losses from our international investments operations increased $19 million,
from $32 million in 1999 to $51 million in 2000, reflecting increased expenses
from the expansion of this developing business.

   Revenues

   2001 to 2000 Annual Comparison.  Revenues, as shown in the table above under
"--Operating Results," decreased $156 million, or 22%, from 2000 to 2001. The
decrease came from a $177 million decrease in revenues from our international
securities operations, which include our futures operations. The $177 million
decrease came primarily from lower commission revenues associated with reduced
transaction volume, reflecting the less active equity markets in comparison to
2000 which benefited from exceptionally active equity markets in the early part
of the year. In addition, revenues for 2000 included the $21 million gain from
our interest in the conversion of stock exchange seats as noted above. Revenues
from our international investments operations increased $21 million, primarily
from asset management fees and commissions earned by recently acquired units.

   2000 to 1999 Annual Comparison.  Revenues increased $124 million, or 21%,
from 1999 to 2000. The increase came primarily from a $106 million increase in
revenues from our international securities operations. The increase reflected
higher commission revenues associated with increased transaction volume,
primarily due to active U.S. equity markets particularly during the early part
of 2000, higher fee revenues from a London-based broker and asset manager that
we acquired in 1999, and the $21 million gain from our interest in the
conversion of stock exchange seats as noted above. The increase in revenues
also reflects an increase in the number of international Financial Advisors to
620 at December 31, 2000 from 577 a year earlier. The remainder of the increase
in revenues came from our international investments operations, reflecting
their expansion as noted above.

   Expenses

   2001 to 2000 Annual Comparison.  Expenses, as shown in the table above under
"--Operating Results," decreased $42 million, or 6%, from 2000 to 2001.
Expenses of our international securities operations decreased $56 million, due
primarily to decreases in revenue-based compensation costs. During 2001, our
international securities operations incurred $30 million of expenses relating
to staff reductions and facilities consolidations, while expenses in 2000
reflected about $9 million of such costs. Expenses of our international
investments operations increased $14 million, reflecting expenses from recently
acquired units.

   2000 to 1999 Annual Comparison.  Expenses increased $113 million, or 20%,
from 1999 to 2000. Expenses of our international securities operations
increased $76 million, primarily as a result of increased compensation paid to
Financial Advisors on higher commission revenues, increased formula-based and
incentive compensation on higher revenues and earnings, increased expenses from
a London-based broker and asset manager that we acquired in 1999 and costs to
expand our securities operations in Asia and Latin America. Expenses of our
international investment operations increased $37 million, reflecting expenses
from the development of this business.

Asset Management Division

   The Asset Management division, through our Investment Management and
Advisory Services segment, receives asset-based management fees from the
businesses of the U.S. Consumer and Employee Benefits divisions, from third
parties, and also from the Closed Block Business. The Other Asset Management
segment includes our commercial mortgage securitization operations and
investment research activities supporting our Private Client Group operations.
This segment also participates in securities underwritings where our research

                                      116



efforts are attractive to issuers and lead underwriters, engages in equity
securities sales and trading, manages our hedge portfolios. We include the
division's asset-based management fees in the line captioned "Commissions and
other income" in our consolidated statements of operations.

   The Asset Management division pays the expenses of its own portfolio
managers for asset management and the expenses of its own proprietary sales
force for distribution of products to third parties.

   Profitability of the Asset Management division depends primarily on our
ability to develop and retain a base of assets under management, both through
the U.S. Consumer and Employee Benefits divisions and directly from third
parties, on which we can earn asset-based fees, and to manage the level of
expenses incurred in the management of those assets. We generally base asset
management fees on the market value of the underlying assets and, accordingly,
profitability varies as these market values change due to external factors,
such as securities market conditions and interest rates and other factors that
may affect the values of particular investments. We also earn transaction-based
and performance-based fees which depend on such external factors. In addition,
revenue streams, including mark-to-market adjustments, from our commercial
mortgage securitizations and hedge portfolios are subject to market
fluctuations.

Division Results

   The following table sets forth the Asset Management division's results for
the periods indicated.



                                                        Year Ended December 31,
                                                        -----------------------
                                                         2001     2000    1999
                                                        ------   ------  ------
                                                             (in millions)
                                                                
  Division operating results:
     Revenues(1)....................................... $1,272   $1,344  $1,141
     Benefits and expenses.............................  1,053    1,068     889

                                                        ------   ------  ------
     Adjusted operating income......................... $  219   $  276  $  252

                                                        ======   ======  ======
  Adjusted operating income by segment:
     Investment Management and Advisory Services....... $  105   $  154  $  155
     Other Asset Management............................    114      122      97

                                                        ------   ------  ------
       Total...........................................    219      276     252
  Items excluded from adjusted operating income:
     Realized investment gains, net of losses..........     (8)       1       1

                                                        ------   ------  ------
  Income from continuing operations before income taxes $  211   $  277  $  253

                                                        ======   ======  ======

--------
(1) Revenues exclude realized investment gains, net of losses.

   2001 to 2000 Annual Comparison.  Adjusted operating income of our Asset
Management division decreased $57 million, or 21%, in 2001 from 2000, due to
declines from both segments in the division. Income from continuing operations
before income taxes decreased $66 million, or 24%, primarily as a result of the
decrease in adjusted operating income.

   2000 to 1999 Annual Comparison.  Adjusted operating income of our Asset
Management division increased $24 million, or 10%, in 2000 from 1999, due to an
increase from the Other Asset Management segment. Income from continuing
operations before income taxes increased $24 million, or 9%, as a result of the
increase in adjusted operating income.

                                      117



Investment Management and Advisory Services

   Operating Results

   The following table sets forth the Investment Management and Advisory
Services segment's operating results for the periods indicated.



                                            Year Ended December 31,
                                            -----------------------
                                             2001    2000    1999
                                            ----    ----    ----
                                                 (in millions)
                                                   
            Operating results:
               Revenues(1)................. $835    $874    $768
               Expenses....................  730     720     613

                                             ----    ----    ----
               Adjusted operating income... $105    $154    $155

                                             ====    ====    ====

--------
(1) Revenues exclude realized investment gains, net of losses.

   Adjusted Operating Income

   2001 to 2000 Annual Comparison.  Adjusted operating income decreased $49
million, or 32%, from 2000 to 2001, due primarily to lower earnings from asset
management resulting from declines in market value of the underlying assets on
which our fees are based. Although 2000 adjusted operating income reflected
expenses related to the consolidation of substantially all of our public equity
management capabilities into our Jennison unit, these expenses were largely
offset by revenues from performance incentive fees which exceeded those earned
in 2001. Adjusted operating income in 2001 includes $6 million from the
operations of a specialized asset management unit within this segment that we
sold in the first quarter of 2002.

   2000 to 1999 Annual Comparison.  Adjusted operating income was flat from
1999 to 2000. Although revenues increased, the increase was essentially offset
primarily by expenses related to the consolidation of substantially all of our
public equity management capabilities into our Jennison unit.

   Revenues

   The following table sets forth the Investment Management and Advisory
Services segment's revenues, as shown in the table above under "--Operating
Results," by source for the periods indicated.



                                           Year Ended December 31,
                                           -----------------------
                                            2001    2000    1999
                                           ----    ----    ----
                                                (in millions)
                                                  
             Revenues:
                Retail customers(1)....... $210    $244    $225
                Institutional customers...  383     409     322
                General account...........  242     221     221

                                            ----    ----    ----
                  Total revenue........... $835    $874    $768

                                            ====    ====    ====

--------
(1) Consists of individual mutual funds and both variable annuities and
    variable life insurance in our separate accounts. Fixed annuities and the
    fixed rate options of both variable annuities and variable life insurance
    are included in general account. Also includes funds invested in
    proprietary mutual funds through our defined contribution plan products.

   2001 to 2000 Annual Comparison.  Revenues, as shown in the table above under
"--Operating Results," decreased $39 million, or 4%, from 2000 to 2001. The
decrease came primarily from declines of $34 million, or 14%, in revenues from
management of retail customer assets and $26 million, or 6%, in revenues from
management of institutional customer assets. The decrease in revenues from
management of retail customer assets came primarily from market value declines
on publicly traded equity securities which resulted in a lower level of average
assets under management. The decrease in revenues from management of
institutional customer assets reflected a $25 million performance incentive fee
earned in 2000. Revenues from management of general account assets increased
$21 million, reflecting increased market values on fixed income securities.

                                      118



   2000 to 1999 Annual Comparison.  Revenues increased $106 million, or 14%,
from 1999 to 2000. The increase was principally a result of an $87 million
increase in revenues from management of institutional customer assets, which
included $32 million of mortgage origination and servicing revenues from a
subsidiary we acquired in 2000. The remainder of the increase came primarily
from a $25 million performance incentive fee as well as increased revenue from
our real estate and private equity advisory businesses.

   Expenses

   2001 to 2000 Annual Comparison.  Expenses, as shown in the table above under
"--Operating Results," were essentially unchanged from 2000 to 2001, as our
2001 results included expenses for the entire year relating to the mortgage
origination and servicing activities of a subsidiary that we acquired in June
2000, while our 2000 results included approximately $40 million of expenses
related to the consolidation of substantially all of our public equity
management capabilities into our Jennison unit.

   2000 to 1999 Annual Comparison.  Expenses increased $107 million, or 17%,
from 1999 to 2000. The increase reflected approximately $40 million of expenses
related to the consolidation of substantially all of our public equity
management capabilities into our Jennison unit and $24 million of expenses
related to the mortgage origination and servicing activities of the subsidiary
we acquired in 2000. The remainder of the increase came primarily from
compensation charges that are linked to revenues and costs to expand our
domestic and European proprietary investment activities.

Other Asset Management

   Operating Results

   The following table sets forth the Other Asset Management segment's
operating results for the periods indicated.



                                          Year Ended December 31,
                                          -----------------------
                                           2001    2000    1999
                                          ----    ----    ----
                                               (in millions)
                                                 
              Operating results:
               Revenues.................. $437    $470    $373
               Expenses..................  323     348     276

                                           ----    ----    ----
               Adjusted operating income. $114    $122    $ 97

                                           ====    ====    ====


   Adjusted Operating Income

   2001 to 2000 Annual Comparison.  Adjusted operating income decreased $8
million, or 7%, in 2001 from 2000. The decrease came from a $25 million decline
in adjusted operating income from our equity sales and trading operations,
partially offset by a $17 million increase from our commercial mortgage
securitization operations and hedge portfolios. Adjusted operating income from
our equity sales and trading operations in 2001 included $20 million that
Prudential Securities earned as co-manager in the initial public offering of
our Common Stock during the fourth quarter of 2001, which is offset by a
corresponding charge in our Corporate and Other results. Absent this item,
adjusted operating income from our equity sales and trading operations in 2001
was $35 million, a decrease of $45 million or 56% from 2000. This decrease
reflected a decline in our revenues from principal trading activities
supporting retail and institutional customers as well as increased costs from
employee terminations associated with staff reductions and facilities
consolidations.

   Adjusted operating income from our commercial mortgage securitization
operations and hedge portfolios increased $17 million to $59 million in 2001
from $42 million in 2000. The increase came primarily from our mortgage
securitization operations, which benefited from changes in market value of
financial instruments held pending securitizations. As of December 31, 2001,
the hedge portfolios held assets, including both principal positions and
securities financing positions, of approximately $3.9 billion, compared to $7.9
billion at December 31, 2000.

                                      119



   2000 to 1999 Annual Comparison.  Adjusted operating income increased $25
million, or 26%, from 1999 to 2000. The increase came primarily from a $26
million increase in adjusted operating income from our equity sales and trading
operations, from $54 million in 1999 to $80 million in 2000, primarily due to
increased trading volume in the equity markets during the first four months of
2000. Results from our commercial mortgage securitization operations and hedge
portfolios were essentially unchanged in 2000 from 1999. As of December 31,
2000, the hedge portfolios held assets, including both principal positions and
securities financing positions, of approximately $7.9 billion, compared to $5.9
billion a year earlier.

   Revenues

   2001 to 2000 Annual Comparison.  Revenues, as shown in the table above under
"--Operating Results," decreased $33 million, or 7%, from 2000 to 2001. The
decrease came from a decline in revenues from our equity sales and trading
operations, from $404 million in 2000 to $347 million in 2001, which included
revenues of $22 million that Prudential Securities received as co-manager in
the initial public offering of our Common Stock. Excluding this item, revenues
from our equity sales and trading operations declined $79 million, or 20%, in
2001 from 2000. Revenues in 2001 were negatively affected by reduced revenues
from principal trading supporting retail and institutional customers, while
2000 revenues benefited from exceptionally active equity securities markets
during the first four months of the year. The reduced principal trading
revenues we experienced in 2001 reflected lower transaction volume in the
equity securities markets resulting from decreased individual investor trading
activity, as well as reduced securities trading spreads.

   2000 to 1999 Annual Comparison.  Revenues increased $97 million, or 26%,
from 1999 to 2000. The increase came from a $102 million increase in revenues
from our equity sales and trading operations, from $302 million in 1999 to $404
million in 2000. The equity sales and trading operations benefited from
increased volume from retail activity associated with the strength of the
technology sector early in 2000, as well as increased transaction volume from
institutional clients.

   Expenses

   2001 to 2000 Annual Comparison.  Expenses, as shown in the table above under
"--Operating Results," decreased $25 million, or 7%, from 2000 to 2001. The
decline came from a decrease of $32 million in our equity sales and trading
operations, from $324 million in 2000 to $292 million in 2001, reflecting
decreased compensation expenses driven by the declines in revenue and earnings.

   2000 to 1999 Annual Comparison.  Expenses increased $72 million, or 26%,
from 1999 to 2000. The increase came from an increase of $76 million in our
equity sales and trading operations, from $248 million in 1999 to $324 million
in 2000, reflecting increased employee compensation expenses driven by
increased revenue and earnings as well as increased expenses to expand our
equity research capabilities.

Corporate and Other Operations

   Corporate and Other operations includes corporate-level activities that we
do not allocate to our business segments. It also consists of international
ventures, divested businesses and businesses that we have placed in wind-down
status, but that we have not divested. The latter businesses include individual
health insurance, group credit insurance and Canadian life insurance. The
divested businesses include the lead-managed equity underwriting for corporate
issuers and institutional fixed income businesses of Prudential Securities,
Gibraltar Casualty Company, a Canadian life insurance subsidiary, and our
divested residential first mortgage banking business. As previously discussed,
we exclude the gains, losses and contributions to income/loss of the divested
businesses from adjusted operating income.

   The following table and discussion present results of these activities based
on our definition of adjusted operating income, which is a non-GAAP measure, as
well as income from continuing operations before income taxes, which is
prepared in accordance with GAAP. As shown below, in addition to the gains,
losses and contributions to income/loss of divested businesses, adjusted
operating income excludes realized investment gains, net of losses, sales
practices remedies and costs and demutualization costs and expenses.

                                      120



   The excluded items are important to an understanding of our overall results
of operations. You should not view adjusted operating income as a substitute
for income from continuing operations determined in accordance with GAAP, and
you should note that our definition of adjusted operating income may differ
from that used by other companies. However, we believe that the presentation of
adjusted operating income as we measure it for management purposes enhances the
understanding of our results of operations by highlighting the results from
ongoing operations and the underlying profitability factors of our businesses.
We exclude realized investment gains, net of losses because the timing of
transactions resulting in recognition of gains or losses is largely at our
discretion and the amount of these gains or losses is heavily influenced by and
fluctuates in part according to the availability of market opportunities.
Including the fluctuating effects of these transactions could distort trends in
the underlying profitability of our businesses. We exclude sales practices
remedies and costs because they relate to a substantial and identifiable
non-recurring event. We exclude the gains and losses and contribution to
income/loss of divested businesses because, as a result of our decision to
dispose of these businesses, these results are not relevant to the
profitability of our ongoing operations and could distort the trends associated
with our ongoing businesses. We exclude demutualization costs and expenses
because they are directly related to our demutualization and could distort the
trends associated with our business operations.



                                                             Year Ended December 31,
                                                             ----------------------
                                                              2001    2000    1999
                                                             -----   -------  -----
                                                                  (in millions)
                                                                     
Adjusted operating income:
   Corporate-level activities(1)............................ $  70   $   (22) $ 126
   Other businesses:
     International ventures.................................   (50)      (32)   (11)
     Other..................................................     8        50     22

                                                             -----   -------  -----
        Total...............................................    28        (4)   137
Items excluded from adjusted operating income:
   Sales practices remedies and costs.......................    --        --   (100)
   Realized investment gains, net of losses.................   187      (280)   357
   Divested businesses......................................  (147)     (636)   (47)
   Demutualization costs and expenses.......................  (588)     (143)   (75)

                                                             -----   -------  -----
Income (loss) from continuing operations before income taxes $(520)  $(1,063) $ 272

                                                             =====   =======  =====

--------
(1) Includes consolidating adjustments.

   Corporate-level activities consist primarily of corporate-level income and
expenses not allocated to any of our business segments, including costs for
company-wide initiatives such as enhancement of our Internet capabilities and
income from our qualified pension plans, as well as investment returns on our
unallocated equity, which is capital that is not deployed in any of our
segments. Our Corporate and Other operations also include returns from
investments that we do not allocate to any of our business segments, including
a debt-financed investment portfolio, and transactions with other segments. Our
policy is to include expenses incurred by corporate-level functions such as
operations and systems, human resources, financial management, auditing, law
and compliance in the operating results of our business segments to the extent
that the expenses are either directly or indirectly attributable to the
operations of the segment. We include expenses incurred by corporate-level
functions that are not allocated to any of our business segments, such as
research and development pertaining to company-wide information technology
applications or marketing expenses not specific to a particular business unit,
in corporate-level activities.

   2001 to 2000 Annual Comparison.  Corporate and Other operations resulted in
adjusted operating income of $28 million in 2001 and a $4 million loss, on an
adjusted operating income basis, in 2000, an increase of $32 million.

   Corporate-level activities resulted in adjusted operating income of $70
million in 2001 and a $22 million loss, on an adjusted operating income basis,
in 2000. The $92 million increase came primarily from $125 million greater
income from our own qualified pension plan and a $22 million reduction in
hedging losses retained at the corporate level, partially offset by reduced
investment income and a $20 million charge offsetting the income earned by
Prudential Securities as co-manager in the initial public offering of our
Common Stock, which is included in adjusted operating income of our Other Asset
Management segment.

                                      121



   Income from our own qualified pension plan amounted to $540 million in 2001,
compared to $415 million in 2000. The $125 million increase came primarily from
increased income on pension assets and amortization of deferred gains. This
income is partially offset in our consolidated results by charges for our other
retirement plans allocated both to Corporate and Other operations and our
business segments. On a consolidated basis, our net pension credit related to
continuing operations amounted to $457 million in 2001 and $362 million in
2000. The contribution to adjusted operating income from income from our own
qualified pension plan has increased during recent periods. We expect that
income from our own qualified pension plan will continue to contribute to
adjusted operating income in 2002 at a level about 10% below that of 2001.
Hedging losses retained at the corporate level decreased $22 million, from $26
million in 2000 to $4 million in 2001. The increase in income from our own
qualified pension plan and decrease in hedging losses were partially offset by
reductions in investment income from our debt-financed investment portfolio and
from invested assets that we held pending disbursement for sales practices
remedies and costs. Investment income from the debt-financed investment
portfolio, net of interest expense, contributed $38 million to adjusted
operating income for 2001 compared to $98 million for 2000, as a result of a
decline in the assets in the portfolio to approximately $223 million at
December 31, 2001 from $3.7 billion a year earlier. We have taken actions to
reduce this portfolio and repay the related borrowings, and expect that we will
continue to do so. Accordingly, we expect that the contribution to adjusted
operating income from this debt-financed portfolio will decline in future
periods. Income from invested assets related to sales practices remedies and
costs declined $25 million as disbursements were made to satisfy these
liabilities. Investment income for 2001 included about $15 million relating to
assets initially invested within our Corporate and Other operations as a result
of transactions relating to our demutualization, effective as of December 18,
2001. About half of this investment income represents earnings on assets
corresponding to cash payments in January 2002 for demutualization
consideration in lieu of Common Stock.

   General and administrative expenses at the corporate level, on a gross basis
before qualified pension income, amounted to $682 million in 2001 compared to
$687 million in 2000. Commencing in 2002, we expect to incur additional
expenses associated with servicing our stockholder base, including mailing and
printing fees, of up to $60 million annually. However, we have taken actions to
reduce expenses at the corporate level and, while there can be no assurance, we
expect that these actions will result in expense reductions commencing in 2002
that will more than offset the impact of these shareholder servicing costs.

   Other businesses included in Corporate and Other operations resulted in a
loss, on an adjusted operating income basis, of $42 million in 2001 compared to
adjusted operating income of $18 million in 2000. The $60 million decline came
primarily from the benefit to 2000 results from reductions of reserves for
future claims in our remaining Canadian insurance operations and our wind-down
group credit insurance operations, and from an $18 million increase in losses
from start-up international ventures.

   Income from continuing operations before income taxes amounted to a loss of
$520 million in 2001, compared to a loss of $1.063 billion in 2000. The $543
million decrease in the loss came primarily from a $489 million decrease in
losses from divested businesses which included, in 2000, charges of $476
million associated with the termination and wind-down of Prudential Securities'
former lead-managed equity underwriting for corporate issuers and institutional
fixed income businesses, and from $187 million of realized investment gains in
2001 compared to $280 million of realized investment losses in 2000. However,
we incurred demutualization costs and expenses of $588 million in 2001,
including a charge of $340 million for demutualization consideration to former
Canadian branch policyholders, compared to $143 million of demutualization
expenses in 2000.

   For a discussion of sales practices remedies and costs, realized investment
gains, net of losses, divested businesses and demutualization costs and
expenses, see "--Consolidated Results of Operations--Sales Practices Remedies
and Costs," "--Realized Investment Gains," "--Divested Businesses" and
"--Demutualization Costs and Expenses."

   2000 to 1999 Annual Comparison.  Corporate and Other operations resulted in
a pre-tax loss of $4 million in 2000, compared to pre-tax income of $137
million in 1999, on an adjusted operating income basis. The $141 million
decline came primarily from corporate-level activities.

   Corporate-level activities resulted in a pre-tax loss of $22 million in
2000, compared to pre-tax income of $126 million in 1999. The $148 million
decline resulted primarily from a one-time $114 million reduction of

                                      122



liabilities for our own employee benefits that we recorded in 1999 due to a
clarification of law that led us to take into account previously unrecognized
assets in that amount. Corporate-level activities benefited from income related
to our own qualified pension plan amounting to $415 million in 2000 compared to
$197 million in 1999, an increase of $218 million. This income is partially
offset in our consolidated results by charges for our other retirement plans
allocated both to Corporate and Other operations and our business segments. On
a consolidated basis, our net pension credit related to continuing operations
amounted to $362 million in 2000 and $201 million in 1999. The increase in
pension plan income came primarily from a reduction in the number of plan
participants due to the sale of our healthcare operations in 1999, increased
income on pension assets and amortization of deferred gains. Amendments to our
pension and postretirement plans in 2000 did not have a material effect on our
results of operations. The $218 million increase in qualified pension plan
income was offset by an increase in general and administrative expenses, and a
reduction of investment income net of interest expense at the corporate level.
General and administrative expenses at the corporate level, on a gross basis
before qualified pension income, were $687 million in 2000 compared to $576
million in 1999. The $111 million increase came primarily from costs incurred
during 2000 for company-wide technology development including enhancement of
our Internet capabilities. The decrease in investment income net of interest
expense, from $386 million in 1999 to $303 million in 2000, resulted primarily
from a reduction in invested assets related to sales practices remedies and
costs as disbursements were made to satisfy these liabilities.

   Income from continuing operations before income taxes declined $1.335
billion, from $272 million in 1999 to a loss of $1.063 billion in 2000. The
increase in losses came primarily from a $637 million decline in realized
investment gains, net of losses, and from the former lead-managed underwriting
and institutional fixed income businesses of Prudential Securities, as well as
the $141 million decline in adjusted operating income and a $68 million
increase in demutualization expenses.

Closed Block Business

   As discussed under "Overview--Financial Services Businesses and Closed Block
Business," we established the Closed Block Business effective at the date of
demutualization. The Closed Block Business, which represents results of our
Traditional Participating Products segment prior to the demutualization,
includes our in force traditional participating life insurance and annuity
products, and assets that will be 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 have ceased offering
these participating policies.

   Also concurrently with our demutualization, PHLLC issued the IHC debt. We
allocated the majority of the net proceeds from the issuance of the IHC debt 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
report results of the Closed Block Business, including interest expense
associated with the IHC debt.

   Upon the establishment of the Closed Block Business, we transferred $5.6
billion of net assets previously associated with the Traditional Participating
Products segment to the Financial Services Businesses. This capital was
initially allocated to our Corporate and Other operations as of the date of our
demutualization. As a result, adjusted operating income of the Closed Block
Business does not include returns on these net assets, which were historically
included in adjusted operating income of the Traditional Participating Products
segment.

   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 gains over a number of years, mortality experience and
other factors. As required by generally accepted accounting principles, 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 what we originally expected. The
policyholder dividends we charge to expense within the Closed Block Business
will include any such policyholder dividend obligations that we recognize in
addition to the actual policyholder dividends declared by

                                      123



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. For the portion of the year ended December 31, 2001
subsequent to the date of demutualization, there was no required charge to
recognize a policyholder dividend obligation.

   Operating Results

   The following table sets forth the Closed Block Business's operating results
for the periods indicated.



                                                                             Year Ended December 31,
                                                                             -----------------------
                                                                              2001     2000    1999
                                                                             -------  ------  ------
                                                                                  (in millions)
                                                                                     
Operating results:
   Revenues(1).............................................................. $ 8,271  $8,638  $8,376
   Benefits and expenses(2).................................................   7,835   8,091   8,060

                                                                             -------  ------  ------
   Adjusted operating income................................................     436     547     316
Items excluded from adjusted operating income:
Realized investment gains, net of losses and related charges:
   Realized investment gains, net of losses.................................    (543)     91     338
   Related charges(3).......................................................    (512)   (445)   (310)

                                                                             -------  ------  ------
     Total realized investment gains, net of losses and related charges.....  (1,055)   (354)     28

                                                                             -------  ------  ------
Income (loss) from continuing operations before income taxes................ $  (619) $  193  $  344

                                                                             =======  ======  ======

--------
(1) Revenues exclude realized investment gains, net of losses.
(2) Benefits and expenses exclude the impact of net realized investment gains
    on dividends to policyholders.
(3) Related charges consist of the portion of dividends to policyholders
    attributable to realized investment gains, net of losses.

   Adjusted Operating Income and Income from Continuing Operations Before
   Income Taxes

   2001 to 2000 Annual Comparison.  Adjusted operating income decreased $111
million, or 20%, in 2001 from 2000. The decrease in adjusted operating income
reflected $144 million of reserves established in 2001 for death and other
benefits due with respect to policies for which we have not received a death
claim but where death has occurred. We have made substantial efforts to
identify policyholders for whom we lack current information and the $144
million reserve recorded represents a revision to our past estimate of incurred
but not reported death claims and related expenses. Upon demutalization $134
million of this reserve became a liability of the Financial Services
Businesses, and any subsequent reestimation of the liability (upward or
downward) will be included in adjusted operating income of the Financial
Services Businesses. Additionally, the effect of aging of policies in force on
policyholder benefits and related reserves exceeded the returns on the
underlying assets. These developments were partially offset by a $141 million
reduction in the charge for policyholder dividends, a $56 million reduction in
amortization of deferred policy acquisition costs, and a $26 million decline in
operating expenses. The $141 million reduction in the charge for policyholder
dividends, which excludes the portion of the dividend related to net realized
investment gains, reflects dividend scale changes for 2002. Income from
continuing operations before income taxes amounted to a loss of $619 million in
2001, compared to income of $193 million in 2000, with the decline primarily
due to a $701 million decrease in realized investment gains, net of losses and
related charges. For a discussion of realized investment gains and losses, and
charges related to realized investment gains and losses, see "--Consolidated
Results of Operations --Realized Investment Gains."

   2000 to 1999 Annual Comparison.  Adjusted operating income increased $231
million, or 73%, in 2000 from 1999. The increase came primarily from a $180
million increase in investment income, net of interest expense, and a $93
million decline in operating expenses. Income from continuing operations before
income taxes decreased $151 million, or 44%, in 2000 from 1999, primarily as a
result of a $382 million decline in realized investment gains, net of losses
and related charges, partially offset by the increase in adjusted operating
income.

                                      124



   Revenues

   2001 to 2000 Annual Comparison.  Revenues, as shown in the table above under
"--Operating Results," decreased $367 million, or 4%, in 2001 from 2000.
Premiums decreased $105 million, or 2%, from $4.355 billion in 2000 to $4.250
billion in 2001, as an increase in paid-up additions which represent additional
insurance purchased with policyholder dividends was more than offset by lower
renewal premiums. We expect the decline in premiums for this business to
continue as the policies in force mature or terminate over time, as we have
discontinued sales of traditional participating products in connection with our
demutualization. Net investment income decreased $275 million, or 7%, from
$4.172 billion in 2000 to $3.897 billion in 2001. The decrease, which was
partially offset by a $118 million decrease in interest expense, as discussed
below, reflects a decline in the general account invested assets supporting
this business due to a lower level of borrowing activity, and a lower
investment yield.

   2000 to 1999 Annual Comparison.  Revenues increased $262 million, or 3%, in
2000 from 1999. Premiums were relatively unchanged, amounting to $4.355 billion
in 2000 and $4.303 billion in 1999, as an increase in paid-up additions which
represent additional insurance purchased with policyholder dividends was
essentially offset by lower first year and renewal premiums. Paid-up additions,
along with policyholder dividends, have continued to grow as the average length
of time our traditional whole life insurance policies have been in force
increases. The decline in first year and renewal premiums reflects a shift in
our sales during recent years away from traditional whole life into variable
life insurance products. We believe the trend from traditional whole life to
variable life reflects shifts in industry-wide consumer demand, and we expect
this trend to continue in the future. Net investment income increased $261
million, or 7%, from $3.911 billion in 1999 to $4.172 billion in 2000. The
increase, which was partially offset by an $81 million increase in interest
expense, as discussed below, resulted from an increase in investment yield and
an increase in the base of general account invested assets.

   Benefits and Expenses

   2001 to 2000 Annual Comparison.  Benefits and expenses, as shown in the
table above under "--Operating Results," decreased $256 million, or 3%, in 2001
from 2000. Interest expense declined $118 million, from $152 million in 2000 to
$34 million in 2001, primarily due to a lower level of borrowing activity
associated with the decrease in investment income. Amortization of deferred
policy acquisition costs decreased $56 million, from $269 million in 2000 to
$213 million in 2001, as these costs became fully amortized on a portion of
this business. Operating expenses, including distribution costs that we charge
to expense, decreased $26 million, or 3%, from $771 million in 2000 to $745
million in 2001, as a result of our continued efforts to reduce operating cost
levels.

   While there can be no assurance that our anticipated cost reductions will be
fully achieved, we believe that our cost reduction initiatives will reduce
operating expenses of the business included in the Closed Block Business below
2000 levels by approximately $100 million on an annual basis in 2002, including
a reduction of about $40 million below the level of 2001, and that reduced
expenses resulting from these initiatives will benefit results of this business
thereafter. However, under the terms of the Closed Block, expenses of the
Closed Block will be based on a formula representing historical expenses
attributable to the Closed Block. To the extent actual expenses of the Closed
Block Business vary in the future from those established pursuant to the
formula, the variance (positive or negative) will inure to the financial
results of our Financial Services Businesses. These variances will be treated
as adjustments in determining the earnings applicable to our Common Stock and
Class B Stock. Adjusted operating income of the Closed Block Business included
costs of implementing our expense reduction program amounting to $48 million in
2001 and $52 million in 2000.

   Policyholder benefits and related changes in reserves, including interest
credited to policyholders, increased $84 million, from $4.638 billion in 2000
to $4.722 billion for 2001. The increase in benefits and reserves resulted from
death benefits, including $138 million of reserves recorded in 2001 for death
and other benefits due with respect to policies for which we have not received
a death claim but where death has occurred, and the aging of policies in force,
as well as insurance claims relating to the September 11, 2001 terrorist
attacks on the United States, which resulted in net losses of approximately $10
million. Partially offsetting these items is a reduction in the amount of
reserves established for new and renewal business, consistent with our
discontinuation of sales of traditional products discussed above.

   Dividends to policyholders, which excludes the portion of dividends relating
to net realized investment gains as discussed under "--Consolidated Results of
Operations--Realized Investment Gains" above, amounted

                                      125



to $2.121 billion in 2001, a decrease of $140 million, or 6%, from $2.261
billion in 2000. There was no adjustment to the dividend scale in 2001 from the
scale of 2000. The decrease relates to the portion of our dividend provision
related to dividends for the subsequent year and reflects dividend scale
changes for 2002 based on evaluation of the experience underlying the dividend
scale.

   2000 to 1999 Annual Comparison.  Benefits and expenses were essentially
unchanged in 2000 from 1999. An $81 million increase in interest expense, from
$71 million in 1999 to $152 million in 2000, relates primarily to a higher
level of borrowing activity associated with the increase in investment income.
Policyholder benefits and related changes in reserves and interest credited to
policyholders increased $76 million, from $4.562 billion in 1999 to $4.638
billion in 2000, reflecting the continued increase in the length of time that
the policies have been in force. Operating expenses, including distribution
costs that we charge to expense, decreased $96 million, or 11%, from $867
million in 1999 to $771 million in 2000, as a result of our continued efforts
to reduce operating cost levels which resulted in reduced employee costs.

   Dividends to policyholders, which excludes the portion of dividends relating
to net realized investment gains as discussed under "--Consolidated Results of
Operations--Realized Investment Gains" above, amounted to $2.261 billion in
2000, relatively unchanged from $2.246 billion in 1999. There was no adjustment
to the dividend scale for 2000 from the scale for 1999. Mortality experience
for both 2000 and 1999 was consistent, on an overall basis, with our pricing
assumptions.

   Sales Results

   New statutory premiums from sales of traditional participating individual
life insurance products amounted to $36 million for the year ended December 31,
2001, $49 million for 2000, and $61 million for 1999. The limited sales of
these products reflect a continuing shift in our sales during recent years away
from traditional whole life into variable life insurance products. We ceased
sales of traditional participating products in connection with our
demutualization.

   Policy Surrender Experience

   The following table sets forth policy surrender experience for the Closed
Block Business, measured by cash value of surrenders, for the periods
indicated. These amounts do not correspond to the income statement impact of
surrenders under GAAP. 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 with us, a driver of future profitability.



                                                                                Year Ended December 31,
                                                                                ----------------------
                                                                                 2001    2000    1999
                                                                                ------  ------  ------
                                                                                    ($ in millions)
                                                                                       
Cash value of surrenders....................................................... $1,246  $1,217  $1,226

                                                                                ======  ======  ======
Cash value of surrenders as a percentage of mean future policy benefit reserves    2.7%    2.7%    2.9%

                                                                                ======  ======  ======


   2001 to 2000 Annual Comparison.  The total cash value of surrenders
increased $29 million, or 2%, from 2000 to 2001, primarily as a result of our
efforts to locate policyholders in connection with our demutualization. The
level of surrenders as a percentage of mean future policy benefit reserves was
unchanged from 2000 to 2001.

   2000 to 1999 Annual Comparison.  The total cash value of surrenders was
essentially unchanged from 1999 to 2000. Traditional life policy surrenders
reflected $109 million of surrenders in 2000 associated with the implementation
of the sales practices remediation program. The levels of surrenders as a
percentage of mean future policy benefit reserves remained relatively constant
from 1999 to 2000.


                                      126



                        Liquidity and Capital Resources

Prudential Financial

   Prudential Financial's principal source of revenues to meet its obligations,
including the payment of shareholder dividends, debt service, capital
contributions to subsidiaries as may be required, and operating expenses, are
dividends and interest income from its direct and indirect subsidiaries. At
December 31, 2001, Prudential Financial had substantial excess cash liquidity,
including cash and short-term investments of approximately $4.4 billion as a
result of $6.0 billion of funds received in the fourth quarter of 2001, less
net application of $1.6 billion of funds to our operating businesses. The $6.0
billion of funds received were from the following sources:

  .  net proceeds from the initial public offering, including the underwriters'
     exercise of their option to purchase 16.5 million additional shares, of
     $3.337 billion;

  .  the net proceeds from the offering of the equity security units, including
     the underwriters' exercise of their option to purchase 1.8 million
     additional units, of $663 million;

  .  net proceeds from the issuance of the Class B Stock of $167 million, and
     net proceeds from the IHC debt of $1.218 billion; and

  .  dividends in late December 2001 from our property and casualty insurance
     subsidiary of $525 million and from our asset management subsidiary of $40
     million.

   The net uses of $1.6 billion of funds at our operating businesses were
comprised primarily of capital contributions and loans to several operating
units.

   Approximately $2.3 billion of the $4.4 billion cash and short-term
investments at Prudential Financial as of December 31, 2001, were applied in
early 2002 to pay cash demutualization consideration to eligible policyholders
in our demutualization. Prudential Financial remains obligated to disburse
further payments of approximately $800 million, representing demutualization
consideration for eligible policyholders we were unable to locate. To the
extent we are unable to locate these policyholders within a prescribed period
of time specified by state escheat laws, typically three to seven years, the
funds must be remitted to governmental authorities.

   We anticipate that Prudential Financial will establish several financing
programs to satisfy needs for cash and capital at the parent company level and
for the destacked subsidiaries and will eventually serve as the primary
financing company for the destacked subsidiaries. Prudential Funding, LLC
("Prudential Funding"), a wholly owned subsidiary of Prudential Insurance, has
historically served as the primary financing company for Prudential Insurance
and its subsidiaries as discussed under "--Financing Activities" below and will
continue to provide a limited amount of financing for the destacked
subsidiaries. Rating organizations have assigned lower credit ratings to
Prudential Financial than Prudential Funding. As a result, we expect that some
of our financing costs will increase as we transition existing financing from
Prudential Funding to Prudential Financial.

   On the date of demutualization, Prudential Financial made a capital
contribution of approximately $1.05 billion to Prudential Insurance to
replenish the reduction of its capital in that amount which resulted from
distribution of demutualization compensation to some policyholders in the form
of policy credits rather than Common Stock or cash. The capital contribution
was financed with the proceeds from the purchase by Prudential Insurance of a
series of notes issued by Prudential Financial with market rates of interest
and maturities ranging from nineteen months to three years.

   On January 22, 2002, Prudential Financial's Board of Directors authorized
the purchase of up to $1 billion of its Common Stock. The timing and amount of
any purchases of Common Stock under the authorization will be determined by
management based on market condition and other considerations, and such
purchases may be effected by market or negotiated transactions, including
programs adopted under Rule 10b5-1 of the Securities Exchange Act of 1934.

                                      127



   Our insurance, broker-dealer and various other companies are subject to
regulatory limitations on the payment of dividends and on other transfers of
funds to affiliates. For the reason noted in the following paragraph, the
ability of Prudential Insurance to pay stockholder dividends will be
constrained in the initial years following demutualization. The principal
sources of funds to meet Prudential Financial's obligations, including the
payment of dividends to its stockholders, will be the net proceeds, after the
foregoing cash payments to eligible policyholders, from the initial public
offering of its Common Stock, the offering of the equity security units and the
net proceeds from issuances of the Class B Stock and IHC debt, as well as
dividends from the destacked subsidiaries, and interest and fee payments from
subsidiaries.

   New Jersey insurance law provides that, except in the case of extraordinary
dividends or distributions, all dividends or distributions paid by Prudential
Insurance may be declared or paid only from unassigned surplus, as determined
pursuant to statutory accounting principles, less unrealized investment gains
and revaluation of assets. Upon demutualization, unassigned surplus was reduced
to zero, thereby limiting Prudential Insurance's ability to pay a dividend
immediately following demutualization. As of December 31, 2001, Prudential
Insurance's unassigned surplus was $228 million, and there were no applicable
adjustments for unrealized investment gains or revaluation of assets for
purposes of the foregoing law regarding dividends and distributions.
Dividendable funds are expected to grow thereafter in the ordinary course of
business over time. Prudential Insurance also must notify the New Jersey
insurance regulator of its intent to pay a dividend, if the dividend, together
with other dividends or distributions made within the preceding twelve months,
would exceed a specified statutory limit and obtain a non-disapproval from the
New Jersey insurance regulator. The current statutory limitation applicable to
New Jersey life insurers generally is the greater of:

   (1) 10% of such insurer's surplus as regards policyholders as of the
       December 31 next preceding the date of the proposed dividend or
       distribution or

   (2) the net gain from operations of such insurer, not including realized
       investment gains, for the 12-month period ending the December 31 next
       preceding the date of the proposed dividend or distribution,

in each case determined under statutory accounting principles. Statutory
accounting principles differ from GAAP primarily in relation to deferred policy
acquisition costs, deferred taxes, reserve calculation assumptions and required
investment reserves, including the asset valuation reserve and the interest
maintenance reserve. The New Jersey insurance regulator is also authorized to
disallow the payment of any dividend or distribution that would otherwise be
permitted under the statutory limit if it determines that a company does not
have a reasonable surplus as to policyholders relative to its outstanding
liabilities and adequate to its financial needs or if it finds such company to
be in a hazardous financial condition. The terms of the IHC debt also contain
restrictions potentially limiting dividends by Prudential Insurance applicable
to the Financial Services Businesses in the event the Closed Block Business is
in financial distress and other circumstances.

   Other states and foreign jurisdictions have similar regulations to those of
New Jersey which affect the ability of our other insurance companies to pay
dividends. The laws regulating dividends of the other states and foreign
jurisdictions where our other insurance companies are domiciled are similar,
but not identical, to New Jersey's. In addition, the net capital rules to which
our broker-dealer subsidiaries are subject may limit their ability to pay
dividends to Prudential Financial.

Consolidated Liquidity and Financial Leverage Management

   We manage our liquidity and capital resources on a company-wide basis, as
well as by legal entity and business, recognizing regulatory restrictions on
transfers of funds among entities engaged in the insurance, securities and
other businesses.

   We seek to manage our consolidated liquidity position so that we have, on a
cost-effective basis, adequate resources to satisfy operating cash requirements
and investment objectives, as well as to fund business growth. We also seek to
manage our liquidity so that we have adequate sources of funding to support our
needs under stress scenarios so that we can meet our obligations without
materially disrupting our operating and investing activities.

   We borrow money on an ongoing basis to support our business operations and
strategies and seek to do so in a manner consistent with maintaining and
seeking to improve our current credit ratings. We manage our borrowing
according to company-wide, legal entity and business borrowing limits, which
are monitored by our

                                      128



Treasurer's department and reviewed regularly by the Finance Committee of the
Board of Directors. To this end, we monitor a number of financial leverage
measures on a legal entity and on a consolidated basis, including our ratios of
corporate debt to capital, liabilities to equity capital, liquid assets to
short-term liabilities, and various other capitalization and liquidity ratios.
We seek to reduce our liquidity and refinancing risks by employing a variety of
liability management techniques, including staggering of maturities, actively
utilizing alternative sources of financing, investor base diversification, and
maintaining lines of credit in excess of the amount we believe will actually be
required in a stress scenario.

Financing Activities

   Our financing principally consists of unsecured short- and long-term debt
borrowings and asset-based or secured forms of financing. These secured
financing arrangements include transactions such as securities lending and
repurchase agreements, which we generally use to finance portfolios of liquid
securities.

   Prudential Funding historically has served as a financing company for
Prudential Insurance and its subsidiaries and has facilitated the centralized
management of most unsecured borrowing arrangements with unrelated parties on a
company-wide basis. Prudential Funding borrows funds primarily through the
direct issuance of commercial paper, private placement medium-term notes,
Eurobonds, Eurocommercial paper, and Euro medium-term notes and lends the
proceeds of its borrowings to Prudential Insurance and its subsidiaries,
generally at cost. Borrowings of the destacked subsidiaries from Prudential
Funding have been repriced to market terms as of the date of demutualization.
Prudential Securities also engages in external unsecured financing. We
anticipate that Prudential Funding's outstanding borrowings will decline over
time as it transitions into a financing company primarily for Prudential
Insurance and its remaining subsidiaries. We anticipate that our other
companies will borrow on market terms from third parties.

   Under a support agreement, Prudential Insurance has agreed to maintain
Prudential Funding's positive tangible net worth at all times. We manage
Prudential Funding's borrowings so that cash inflows from the operating
companies to Prudential Funding are sufficient to meet Prudential Funding's
debt service requirements. Prudential Funding also generally maintains cash and
short-term investments that can be used in the event of cash flow timing
differences.

   Prudential Insurance and Prudential Funding have unsecured committed lines
of credit totaling $4.1 billion, of which $1.5 billion expires in October 2002,
$0.1 billion expires during 2003, $1.0 billion expires in May 2004, and the
remaining $1.5 billion expires in October 2006. Borrowings under the facility
expiring in October 2002 must mature no later than October 2003, and borrowings
under the other facilities must mature no later than the respective expiration
dates of the facilities. The facility expiring in May 2004 includes 33
financial institutions, many of which are also among the 27 financial
institutions participating in the other facilities. Up to $2.5 billion of the
amount available under these facilities can be utilized by Prudential
Financial. The $2.5 billion consists of $500 million, $1.0 billion and $1.0
billion made available under the facilities expiring in October 2002, May 2004
and October 2006, respectively. We use these facilities primarily as back-up
liquidity lines for our commercial paper programs. Our ability to borrow under
these facilities is conditioned on our continued satisfaction of customary
conditions, including maintenance at all times by Prudential Insurance of total
adjusted capital of at least $5.5 billion based on statutory accounting
principles prescribed under New Jersey law. Prudential Insurance's total
adjusted capital as of December 31, 2001 was $10.0 billion. The ability of
Prudential Financial to borrow under these facilities is conditioned on its
maintenance of consolidated net worth of at least $12.5 billion, based on GAAP.
Prudential Financial's consolidated net worth totaled $20.5 billion as of
December 31, 2001. In addition, we have an uncommitted credit facility
utilizing a third-party-sponsored, asset-backed commercial paper conduit, under
which we can borrow up to $1.0 billion. Our actual ability to borrow under this
facility depends on market conditions. This facility expires in June 2002. We
also use uncommitted lines of credit from banks and other financial
institutions.

                                      129



   The following table sets forth our outstanding financing as of the dates
indicated:



                                                      As of December 31,
                                                      ------------------
                                                        2001      2000
                                                       -------  -------
                                                        (in millions)
                                                          
Borrowings:
General obligation short-term debt................... $ 5,334   $11,131
General obligation long-term debt:
   Senior debt.......................................   2,042     1,454
   Surplus notes.....................................     989       988

                                                       -------  -------
   Total general obligation long-term debt...........   3,031     2,442

                                                       -------  -------
      Total general obligations......................   8,365    13,573
                                                       -------  -------
   Total limited and non-recourse borrowing(1).......   2,344        60
                                                       -------  -------
     Total borrowings................................  10,709    13,633

                                                       -------  -------
   Total asset-based financing.......................  24,683    32,590

                                                       -------  -------
     Total borrowings and asset-based financings..... $35,392   $46,223

                                                       =======  =======

--------
(1) As of December 31, 2001, $1.75 billion of limited and non-recourse debt is
    within the Closed Block Business.

   Our total borrowings consist of amounts used for general corporate purposes,
investment related debt, securities business related debt, and debt related to
specified other businesses. Borrowings used for general corporate purposes
include those used for cash flow timing mismatches, and investments in equity
and debt securities of subsidiaries including amounts needed for regulatory
capital purposes. Investment related borrowings consist of debt issued to
finance specific investment assets or portfolios of investment assets,
including real estate, real estate related investments held in consolidated
joint ventures, and institutional spread lending investment portfolios.
Securities business related debt consists of debt issued to finance primarily
the liquidity of our broker-dealers, and our capital markets and other
securities business related operations. Debt related to specified other
businesses consists of borrowings associated with consumer banking activities,
real estate franchises, and relocation services. Borrowings under which either
the holder is entitled to collect only against the assets pledged to the debt
as collateral, or has only very limited rights to collect against other assets,
have been classified as limited and non-recourse debt.

   Our borrowings as of December 31, 2001 and December 31, 2000, categorized by
use of proceeds, are summarized below:



                                                 December 31, December 31,
                                                     2001         2000
                                                 ------------ ------------
                                                       (in millions)
                                                        
     General obligations:
        General corporate purposes..............   $ 2,667      $ 3,158
        Investment related......................     1,420        5,254
        Securities business related.............     3,123        4,426
        Specified other businesses..............     1,155          735

                                                   -------      -------
             Total general obligations..........     8,365       13,573
     Limited and non-recourse debt..............     2,344           60

                                                   -------      -------
             Total borrowings...................   $10,709      $13,633

                                                   =======      =======
     Long-term debt.............................   $ 5,304      $ 2,502
     Short-term debt............................     5,405       11,131

                                                   -------      -------
             Total borrowings...................   $10,709      $13,633

                                                   =======      =======
     Borrowings of Financial Services Businesses   $ 8,959      $12,369
     Borrowings of Closed Block Business........     1,750        1,264

                                                   -------      -------
             Total borrowings...................   $10,709      $13,633

                                                   =======      =======


                                      130



   Total borrowings and asset-based financing at December 31, 2001 decreased
approximately $10.8 billion, or 23%, from December 31, 2000, reflecting a $5.7
billion decrease in short-term debt, a $2.8 billion increase in long-term debt,
and a $7.9 billion decrease in asset-based financing. The decline in short-term
debt resulted from decreases in our debt-financed investment portfolios,
reductions in subsidiary debt in our insurance operations with cash raised at
the time of demutualization, and reductions in bank borrowings associated with
our broker-dealer operations. Long-term debt increased due to the issuance by
PHLLC of $1.75 billion of IHC debt related to the establishment of the Closed
Block Business. We have classified this debt as limited and non-recourse. In
addition, long-term debt has also increased $599 million due to the acquisition
of Gibraltar Life. The decline in asset-based financing relates primarily to
reductions in asset-based financed positions in our spread and hedge portfolios.

   Our short-term debt includes bank borrowings and commercial paper
outstanding under Prudential Funding's domestic and European commercial paper
programs. The weighted average interest rates on the commercial paper
borrowings under these programs were 4.22% for the year ended December 31,
2001; 6.31% for 2000 and 5.11% for 1999. The total principal amount of debt
outstanding under Prudential Funding's medium-term note programs was $2.0
billion at December 31, 2001; $1.6 billion at December 31, 2000 and $1.8
billion at December 31, 1999. The weighted average interest rates on Prudential
Funding's long-term debt, in the aggregate, were 5.94% for the year ended
December 31, 2001; 6.67% for 2000 and 5.61% for 1999. See Note 11 to the
Consolidated Financial Statements for additional information on our short-term
and long-term debt.

   We had outstanding surplus notes totaling $989 million at December 31, 2001
and $988 million at December 31, 2000. These debt securities, which are
included as surplus of Prudential Insurance on a statutory accounting basis,
are subordinate to other borrowings and to policyholder obligations and are
subject to regulatory approvals for principal and interest payments.

   The ratings assigned by independent rating agencies are an important
determinant of the market acceptance and cost of our financing through
commercial paper, medium-term notes, surplus notes and other indebtedness.

   We use interest rate swaps to convert some of our fixed rate long-term debt
to floating rates of interest and to convert some of our floating rate
long-term debt to fixed rates of interest, to match the interest rate
sensitivity of the positions financed. We hedge currency risks related to
non-United States dollar borrowings by using foreign currency swaps and/or
foreign exchange forward contracts. See "Quantitative and Qualitative
Disclosures About Market Risk--Risk Management, Market Risk and Derivative
Instruments--Other Than Trading Activities--Market Risk Related to Foreign
Currency Exchange Rates" below.

IHC Debt

   Prudential Financial issued shares of Class B Stock to institutional
investors in a private placement concurrently with the initial public offering
of Common Stock. In connection with and at the time of the issuance of the
Class B Stock, PHLLC also issued the IHC debt, a portion of which is insured by
a bond insurer. We expect that the IHC debt will be serviced by, and holders of
the Class B Stock will receive as dividends, net cash flows of the Closed Block
Business over time if and when such funds are dividended out of Prudential
Insurance.

Insurance, Annuities and Guaranteed Products Liquidity

   Our principal cash flow sources from insurance, annuities and guaranteed
products are premiums and annuity considerations, investment and fee income,
and investment maturities and sales. We supplement these cash inflows with
financing activities. We actively use our balance sheet capacity for financing
activities on a secured basis through securities lending, repurchase and dollar
roll transactions and on an unsecured basis for temporary cash flow mismatch
coverage. Historically, we have also used our balance sheet capacity to earn
additional spread income, primarily through our debt-financed investment
portfolio included in Corporate and Other operations, although this portfolio
was substantially reduced in 2001.

                                      131



   Cash outflow requirements principally relate to benefits, claims, dividends
paid to policyholders, and payments to contract holders as well as amounts paid
to policyholders and contract holders in connection with surrenders,
withdrawals and net policy loan activity. Uses of cash also include
commissions, general and administrative expenses, purchases of investments, and
debt service and repayments in connection with financing activities. Some of
our products, such as guaranteed products offered to institutional customers of
the Employee Benefits division, provide for payment of accumulated funds to the
contract holder at a specified maturity date unless the contract holder elects
to roll over the funds into another contract with us. We regularly monitor our
liquidity requirements associated with policyholder and contractholder
obligations so that we can manage cash inflows to match anticipated cash
outflow requirements.

   Gross account withdrawals, including those of Gibraltar Life, which we
acquired in April 2001, amounted to $9.014 billion in the year ended December
31, 2001 and $8.165 billion in the year ended December 31, 2000. These
withdrawals include contractually scheduled maturities of traditional
guaranteed investment contracts totaling $1.671 billion in the year ended
December 31, 2001 and $1.785 billion in the year ended December 31, 2000. We
experienced these large withdrawals on guaranteed products as a result of
contractual expirations of products sold in the late 1980s and early 1990s.
Since these contractual withdrawals, as well as the level of surrenders
experienced, were consistent with our assumptions in asset liability
management, the associated cash outflows did not have an adverse impact on our
overall liquidity.

   Interest rate fluctuations can affect the timing of cash flows associated
with our insurance and annuity liabilities as well as the value of the assets
supporting these obligations. Changes in interest rates and other market
conditions can also expose us to the risk of accelerated surrenders as
policyholders and contract holders are attracted to alternative products. We
seek to maintain an appropriate match between our assets and liabilities so
that we can satisfy the changing cash flow requirements associated with
interest rate fluctuations. In response to interest rate changes, we can alter
our strategies for investment of new cash flows, adjust credited interest rates
if and to the extent permitted by contracts, and adjust the pricing of new
products. We can also adjust dividend scales on our participating products.

   We closely monitor surrenders and withdrawals for our life insurance and
annuity contracts. Upon policy surrender, life insurance policyholders are
surrendering the life insurance protection in addition to their investment in
the contract, which would typically require new underwriting and acquisition
costs to replace. Therefore, our exposure to increased surrenders is
considerably less for life insurance policies than for annuities. In addition,
many of our contracts contain provisions that discourage early surrender.
Market value adjustment features in some contracts provide for adjustments of
the amount available in the event of surrender to reflect changes in the value
of the underlying investments. We deduct policy loans, which we report as
assets, from amounts available on surrender. Some contracts impose surrender
charges that we deduct in the event of surrender before specified dates.

   We use these surrender charges and other contract provisions to mitigate the
extent, timing and profitability impact of withdrawals of funds by customers
from annuity contracts. The following table sets forth withdrawal
characteristics of our annuity reserves and deposit liabilities (based on
statutory liability values) as of the dates indicated.



                                                                                                          As of December 31,
                                                                                                      --------------------------
                                                                                                          2001          2000
                                                                                                      ------------  ------------
                                                                                                              % of          % of
                                                                                                      Amount  Total Amount  Total
                                                                                                      ------- ----- ------- -----
                                                                                                            ($ in millions)
                                                                                                                
Not subject to discretionary withdrawal provisions................................................... $36,935   38% $38,184   41%
Subject to discretionary withdrawal, with adjustment:
   With market value adjustment......................................................................  19,727   21%  22,602   24%
   At market value...................................................................................  24,906   26%  25,508   27%
   At contract value, less surrender charge of 5% or more............................................   7,166    7%   1,330    1%

                                                                                                      -------  ---  -------  ---
     Subtotal........................................................................................  88,734   92%  87,624   93%
Subject to discretionary withdrawal at contract value with no surrender charge or surrender charge of
less than 5%.........................................................................................   7,224    8%   6,746    7%

                                                                                                      -------  ---  -------  ---
Total annuity reserves and deposit liabilities....................................................... $95,958  100% $94,370  100%

                                                                                                      =======  ===  =======  ===


                                      132



   We sell variable life insurance products that contain both general and
separate account components, with the bulk of account balances in separate
accounts. The principal product of this type, Variable Appreciable Life, also
imposes surrender charges for the first ten years after issuance. In addition
to the right to surrender, policyholders may transfer account balances between
the general account and the separate account components, subject to limitations
on the amount transferred and only within a 30-day period following each
anniversary of the policy. As of December 31, 2001 and 2000, general account
balances for variable life insurance products other than single-payment life
were $1.9 billion and $1.8 billion, respectively, while separate account
balances were $13.0 billion and $13.9 billion, respectively. The table above
includes as of December 31, 2001, $5.881 billion of annuity reserves and
deposit liabilities of Gibraltar Life, which we acquired in April 2001.
Gibraltar Life's assets and liabilities were substantially restructured under a
reorganization concurrent with our acquisition, which included the imposition
of special surrender penalties on existing policies according to the following
schedule (for each year ending March 31):



2002 2003 2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- ---- ---- ----
              
15%  14%  12%  10%   8%   6%   4%   2%


   We believe that cash flows from operating and investing activities of our
insurance, annuity and guaranteed products operations are adequate to satisfy
liquidity requirements of these operations based on our current liability
structure and considering a variety of reasonably foreseeable stress scenarios.
The continued adequacy of this liquidity will depend upon factors including
future securities market conditions, changes in interest rate levels and
policyholder perceptions of our financial strength, which could lead to reduced
cash inflows or increased cash outflows. As of December 31, 2001 and 2000, we
had short-term investments of approximately $4.9 billion and $5.0 billion,
respectively, and fixed maturity investments classified as "available for sale"
with fair values of $109.9 billion and $83.8 billion at those dates,
respectively. At December 31, 2001, the fair value of fixed maturities
available for sale included $17.6 billion related to Gibraltar Life.
Additionally, the increase in fixed maturities classified as "available for
sale" in the 2001 reflects our reclassification, as of January 1, 2001, of
$12.1 billion fair value of fixed maturity investments that were previously
classified as "held to maturity" concurrently with our adoption of new
accounting standards for derivative instruments and hedging activities as
required by guidance issued by the Financial Accounting Standards Board. The
latter portfolios are comprised primarily of investment grade corporate bonds
and United States government obligations, substantially all of which we
consider to be highly liquid and can be sold and/or pledged in financing
transactions.

Securities Operations Liquidity

   Prudential Securities Group Inc. maintains a highly liquid balance sheet
with substantially all of its assets consisting of securities purchased under
agreements to resell, short-term collateralized receivables from clients and
broker-dealers arising from securities transactions, marketable securities,
securities borrowed and cash equivalents. Prudential Securities Group's assets
totaled $22.8 billion at December 31, 2001 and $25.8 billion at December 31,
2000. Prudential Securities Group's total capitalization, including equity,
subordinated debt and long-term debt, was $3.3 billion at December 31, 2001 and
$3.4 billion at December 31, 2000. In October 2000, we announced that we would
terminate our institutional fixed income activities which constituted the major
portion of the debt capital markets operations of Prudential Securities Group.
As indicated above, our termination of institutional fixed income activities
resulted in a reduced level of asset-based financing at Prudential Securities
Group and on a consolidated basis. At December 31, 2001, Prudential Securities
Group had remaining assets amounting to approximately $1.7 billion related to
its institutional fixed income activities, as compared to $2.0 billion at
December 31, 2000 and $17 billion at December 31, 1999. Substantially all of
these assets were financed by means of asset-based borrowings.

   Prudential Securities Group finances its balance sheet through asset-backed
financing, including repurchase transactions, securities lending arrangements
and free credit balances in customers' accounts, as well as internal short-term
and long-term borrowings from Prudential Funding, uncommitted lines of credit
from banks and other financial institutions and the asset-backed commercial
paper market.

                                      133



Hedge Portfolios, Commercial Mortgage Securitization and Proprietary
Investments and Syndications Operations Liquidity

   Our Asset Management division includes our hedge portfolios, the commercial
mortgage securitization operation and proprietary investments and syndications.
The hedge portfolios are financed through securities repurchase agreements and
other securities financing activity and to a lesser extent unsecured borrowing.
The underlying securities are government securities or corporate bonds and are
generally liquid. The commercial mortgage securitization operation is financed
by loans from Prudential Funding and by pledging assets to a third-party
asset-backed commercial paper conduit. We generally finance the mortgages until
a portfolio accumulates that is large enough to securitize and sell, which
currently takes approximately 180 to 270 days, a period that we expect will
shorten when we have a more fully developed process for accumulating mortgages.
The commercial mortgage securitization operation's portfolio is less liquid
than publicly traded securities. To mitigate those risks in this portfolio we
use an alternative asset-backed commercial paper conduit and maintain a higher
proportion of long-term financing to support these activities. In addition, we
acquire public and private debt and equity investments, including controlling
interests, of domestic and international companies, with the intention of
selling them to institutional investors, including Prudential's general
account. We acquire the investments with equity or short- or long-term debt
depending on the liquidity and anticipated time for selling the investment.

Non-Insurance Contractual Obligations

   The following table presents our contractual cash flow commitments on
short-term and long-term debt, equity security units and operating leases. See
Notes 11, 12 and 21 to the Consolidated Financial Statements for additional
information on our short-term and long-term debt, equity security units and
operating leases. This table does not reflect our obligations under our
insurance, annuity and guaranteed products contracts.



                                            Payment Due by Period
                                     ------------------------------------
                                              Less
                                              than   1-3    4-5   After 5
                                      Total  1 Year Years  Years   Years
                                     ------- ------ ------ ------ -------
                                                (in millions)
                                                   
       Short-term and long-term debt $10,709 $5,405 $1,123 $  133 $4,048
       Equity security units........     690     --     --    690     --
       Operating leases.............   1,915    311    480    363    761
                                     ------- ------ ------ ------ ------
       Total........................ $13,314 $5,716 $1,603 $1,186 $4,809
                                     ======= ====== ====== ====== ======


   During the normal course of our business, we utilize financial instruments
with off-balance sheet credit risk such as commitments, financial guarantees
and letters of credit. Commitments include commitments to purchase and sell
mortgage loans, the underfunded portion of commitments to fund investments in
private placement securities and unused credit card and home equity lines.

   In connection with our consumer banking business, loan commitments for
credit cards, home equity lines of credit and other lines of credit include
agreements to lend up to specified limits to customers. It is anticipated that
commitment amounts will only be partially drawn down based on overall customer
usage patterns and, therefore, do not necessarily represent future cash
requirements. We evaluate each credit decision on such commitments at least
annually and have the ability to cancel or suspend such lines at our option.
The total available lines of credit card, home equity and other commitments
were $1.415 billion, of which $569 million remains available at December 31,
2001.

   Other commitments primarily include commitments to purchase and sell
mortgage loans and the unfunded portion of commitments to fund investments in
private placement securities. These mortgage loans and private placement
commitments were $2.029 billion, of which $1.083 billion remain available at
December 31, 2001.

   We also provide financial guarantees incidental to other transactions and
letters of credit that guarantee the performance of customers to third parties.
These credit-related financial instruments have off-balance sheet credit risk
because only their origination fees, if any, and accruals for probable losses,
if any, are recognized until the obligation under the instrument is fulfilled
or expires. These instruments can extend for several years and expirations are
not concentrated in any period. We seek to control credit risk associated with
these instruments by limiting credit, maintaining collateral where customary
and appropriate and performing other monitoring procedures. At December 31,
2001, financial guarantees and letters of credit issued were $341 million.

                                      134



Off-Balance Sheet Arrangements

   We utilize special purpose entities ("SPE's") for several business purposes.
Our principal use of SPE's has been in connection with our existing commercial
mortgage securitization business. The institutional fixed income business of
Prudential Securities, which we exited in 2000, also conducted securitization
activities. In those securitizations, mortgage loans or other receivables are
sold to an SPE that issues debt and residual interests backed by the cash flows
of the SPE's assets. In many of these transactions, we have no further
continuing involvement in the assets or activities of the SPE except for
retained servicing. In others, we may retain subordinated debt or a
non-controlling portion of the equity of the SPE or may provide asset
management services to the SPE. Our position as asset manager is controlled by
third party investors in the SPE, who have the ability to terminate our
services. We have also used SPE's in connection with the sale of investments,
primarily real estate. In these transactions, at the time of sale, the
investment is transferred to the SPE and is no longer included on our balance
sheet. In other instances in which we utilize SPE's, such as structured
financings and acquisitions, the SPE's are fully consolidated in our financial
statements. We do not have any transactions, arrangements or other
relationships with unconsolidated entities or other persons that are reasonably
likely to have a material effect on our liquidity or our access to or
requirements for capital resources. In addition, we do not have relationships
with any unconsolidated entities that are contractually limited to narrow
activities that facilitate our transfer of or access to assets.

   We enter into over-the-counter market transactions primarily for the purpose
of hedging interest rate and foreign exchange risk. In addition, we may take
positions in foreign currencies, precious and base metals. These activities are
executed in highly liquid markets, and the fair values generated internally are
compared to third-party valuations, usually on a daily basis, during the lives
of the contracts.

Deferred Policy Acquisition Costs

   We capitalize costs that vary with and are related primarily to the
production of new insurance and annuity business. These costs include
commissions, costs to issue and underwrite the policies and certain variable
field office expenses. The capitalized amounts are known as deferred policy
acquisition costs, or DAC. Our total DAC, including the impact of unrealized
investment gains and losses, amounted to $6.868 billion at December 31, 2001,
and $7.063 billion at December 31, 2000. Approximately 46% of our total DAC at
December 31, 2001 relates to our Individual Life Insurance segment, and
approximately 19% relates to our Closed Block Business.

   If we were to experience a significant increase in lapse or surrender rates
on policies for which we amortize DAC based on estimated gross margins or gross
profits, such as participating and variable life insurance, we would expect
acceleration of the write-off of DAC for the affected blocks of policies.
Additionally, for all policies on which we have outstanding DAC, we would be
required to evaluate whether this experience called into question our ability
to recover all or a portion of the DAC, and we would be required to write off
some or all of the DAC if we concluded that we could not recover it. While an
accelerated write-off of DAC would not affect our cash flow or liquidity, it
would negatively affect our reported earnings and level of capital under
generally accepted accounting principles.

                       Recent Accounting Pronouncements

   See Note 2 to the Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.

                                      135



ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

            Risk Management, Market Risk and Derivative Instruments

   Risk management includes the identification and measurement of various forms
of risk, the establishment of risk thresholds and the creation of processes
intended to maintain risks within these thresholds while optimizing returns on
the underlying assets or liabilities. We consider risk management an integral
part of our core business.

   Market risk is the risk of change in the value of financial instruments as a
result of absolute or relative changes in interest rates, foreign currency
exchange rates or equity or commodity prices. To varying degrees, the
investment and trading activities supporting all of our products and services
generate market risks. The market risks incurred and our strategies for
managing these risks vary by product.

   With respect to non-variable life insurance products, fixed rate annuities,
the fixed rate options in our variable life insurance and annuity products,
consumer banking products, and other finance businesses, we incur market risk
primarily in the form of interest rate risk. We manage this risk through
asset/liability management strategies that seek to match the interest rate
sensitivity of the assets to that of the underlying liabilities. Our overall
objective in these strategies is to limit the net change in value of assets and
liabilities arising from interest rate movements. While it is more difficult to
measure the interest sensitivity of our insurance liabilities than that of the
related assets, to the extent that we can measure such sensitivities we believe
that interest rate movements will generate asset value changes that
substantially offset 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 fees decrease
as a result of declines in assets under management due to changes in prices of
securities. We also run the risk that asset management fees calculated by
reference to performance could be lower. For variable annuity and variable life
insurance products with minimum guaranteed death benefits, we also face the
risk that declines in the value of underlying investments as a result of
changes in prices of securities may increase our net exposure to death benefits
under these contracts. We do not believe that these risks add significantly to
our overall market risk.

   We manage our exposure to equity price risk relating to our general account
primarily by seeking to match the risk profile of equity investments against
risk-adjusted equity market benchmarks. We measure benchmark risk levels in
terms of price volatility in relation to the market in general.

   The sources of our exposure to market risk can be divided into two
categories, "other than trading" activities conducted primarily in our
insurance, annuity and guaranteed products operations, and "trading" activities
conducted primarily in our securities operations. As part of our management of
both "other than trading" and "trading" market risks, we use a variety of risk
management tools and techniques. These include sensitivity and Value-at-Risk
("VaR") measures, position and other limits based on type of risk, and various
hedging methods.

Other Than Trading Activities

   We hold the majority of our assets for "other than trading" activities in
our segments that offer insurance, annuities and guaranteed products. We
incorporate asset/liability management techniques and other risk management
policies and limits into the process of investing our assets. We use
derivatives for hedging purposes in the asset/liability management process.

   Insurance, Annuities and Guaranteed Products Asset/Liability Management

   We seek to maintain interest rate and equity exposures within established
ranges, which we periodically adjust based on market conditions and the design
of related products sold to customers. Our risk managers establish investment
risk limits for exposures to any issuer, geographic region, type of security or
industry sector and oversee efforts to manage risk within policy constraints
set by management and approved by the Board of Directors.


                                      136



   We use duration and convexity analyses to measure price sensitivity to
interest rate changes. Duration measures the relative sensitivity of the fair
value of a financial instrument to changes in interest rates. Convexity
measures the rate of change of duration with respect to changes in interest
rates. We seek to manage our interest rate exposure by legal entity by matching
the relative sensitivity of asset and liability values to interest rate
changes, or controlling "duration mismatch" of assets and liabilities. We have
target duration mismatch constraints for each entity. As of December 31, 2001,
the difference between the pre-tax duration of assets and the target duration
of liabilities in our duration managed portfolios was within our constraint
limits. We consider risk-based capital implications in our asset/liability
management strategies.

   We also perform portfolio stress testing as part of our regulatory cash flow
testing. In this testing, we evaluate the impact of altering our
interest-sensitive assumptions under various moderately adverse interest rate
environments. These interest-sensitive assumptions relate to the timing and
amount of redemptions and prepayments of fixed-income securities and lapses and
surrenders of insurance products. We evaluate any shortfalls that this cash
flow testing reveals to determine if we need to increase statutory reserves or
adjust portfolio management strategies.

   Market Risk Related to Interest Rates

   Our "other than trading" assets that subject us to interest rate risk
include fixed maturity securities, mortgage loans and policy loans. In the
aggregate, the carrying value of these assets represented 64% of our
consolidated assets, other than assets that we held in separate accounts, as of
December 31, 2001 and 63% as of December 31, 2000.

   With respect 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.

   We assess interest rate sensitivity for "other than trading" financial
assets, financial liabilities and derivatives using hypothetical test scenarios
that assume either upward or downward 100 basis point parallel shifts in the
yield curve from prevailing interest rates. The following tables set forth the
potential loss in fair value from a hypothetical 100 basis point upward shift
at December 31, 2001 and 2000, because this scenario results in the greatest
net exposure to interest rate risk of the hypothetical scenarios tested at
those dates. While the test scenario is for illustrative purposes only and does
not reflect our expectations regarding future interest rates or the performance
of fixed-income markets, it is a near-term, reasonably possible hypothetical
change that illustrates the potential impact of such events. These test
scenarios do not measure the changes in value that could result from
non-parallel shifts in the yield curve, which we would expect to produce
different changes in discount rates for different maturities. As a result, the
actual loss in fair value from a 100 basis point change in interest rates could
be different from that indicated by these calculations.



                                                                  December 31, 2001
                                               ------------------------------------------------------
                                                                      Hypothetical Fair
                                                Notional   Estimated  Value After + 100   Hypothetical
                                                Value of     Fair    Basis Point Parallel  Change in
                                               Derivatives   Value    Yield Curve Shift    Fair Value
                                               ----------- --------- -------------------- ------------
                                                                    (in millions)
                                                                              
Financial assets with interest rate risk:
 Fixed maturities:
   Available for sale.........................             $109,942        $103,620         $(6,322)
   Held to maturity...........................                  395             374             (21)
 Commercial loans.............................               20,106          18,990          (1,116)
 Mortgage securitization inventory............                1,188           1,180              (8)
 Policy loans.................................                9,562           8,982            (580)
 Derivatives:
   Swaps......................................   $10,724         55             191             136
   Futures....................................     2,877          6              62              56
   Options....................................       338          3              (1)             (4)
   Forwards...................................     9,735         84              84              --
Financial liabilities with interest rate risk:
   Short-term and long-term debt..............              (10,881)        (10,448)            433
   Investment contracts.......................              (35,911)        (35,345)            566

                                                                                            -------
Total estimated potential loss................                                              $(6,860)

                                                                                            =======


                                      137





                                                                  December 31, 2000
                                               ------------------------------------------------------
                                                                      Hypothetical Fair
                                                Notional   Estimated  Value After + 100   Hypothetical
                                                Value of     Fair    Basis Point Parallel  Change in
                                               Derivatives   Value    Yield Curve Shift    Fair Value
                                               ----------- --------- -------------------- ------------
                                                                    (in millions)
                                                                              
Financial assets with interest rate risk:
 Fixed maturities:
   Available for sale.........................             $ 83,827        $ 79,312         $(4,515)
   Held to maturity...........................               12,615          12,085            (530)
 Commercial loans.............................               15,308          14,634            (674)
 Mortgage securitization inventory............                1,448           1,373             (75)
 Policy loans.................................                8,659           8,147            (512)
 Derivatives:
   Swaps......................................   $4,765           4             125             121
   Futures....................................    3,878          34              15             (19)
   Forwards...................................    3,247         (50)            (50)             --
Financial liabilities with interest rate risk:
   Short-term and long-term debt..............              (13,800)        (13,683)            117
   Investment contracts.......................              (25,359)        (25,122)            237
   Securities sold but not yet purchased......                 (157)           (141)             16

                                                                                            -------
Total estimated potential loss................                                              $(5,834)

                                                                                            =======



   The tables above do not include approximately $95 billion of insurance
reserve and deposit liabilities at December 31, 2001 and $77 billion at
December 31, 2000. We believe that the interest rate sensitivities of these
insurance liabilities offset, in large measure, the interest rate risk of the
financial assets set forth in these tables.

   Substantially all of the $1.026 billion increase in the total estimated
potential loss at December 31, 2001 from December 31, 2000 resulted from our
acquisition of Gibraltar Life in April 2001.

   The estimated changes in fair values of our financial assets shown above
relate to assets invested to support our insurance liabilities, but do not
include assets associated with products for which investment risk is borne
primarily by the contract holders rather than by us.

   Market Risk Related to Equity Prices

   We actively manage equity price risk against benchmarks in respective
markets. We benchmark our return on equity holdings against a blend of market
indices, mainly the S&P 500 and Russell 2000, and we target price sensitivities
that approximate those of the benchmark indices. We estimate our equity price
risk from a hypothetical 10% decline in equity benchmark market levels and
measure this risk in terms of the decline in fair market value of equity
securities we hold. Using this methodology, our estimated equity price risk at
December 31, 2001 was $227 million, representing a hypothetical decline in fair
market value of equity securities we held at that date from $2.272 billion to
$2.045 billion. Of our $227 million estimated equity price risk at December 31,
2001, approximately $90 million relates to Gibraltar Life. Our estimated equity
price risk using this methodology at December 31, 2000 was $232 million,
representing a hypothetical decline in fair market value of equity securities
we held at that date from $2.317 billion to $2.085 billion. In calculating
these amounts, we exclude equity securities related to products for which the
investment risk is borne primarily by the contractholder rather than by us.
While these scenarios are for illustrative purposes only and do not reflect our
expectations regarding future performance of equity markets or of our equity
portfolio, they represent near term reasonably possible hypothetical changes
that illustrate the potential impact of such events.

   Market Risk Related to Foreign Currency Exchange Rates

   We are exposed to foreign currency exchange rate risk in our general account
and through our operations in foreign countries. In our international life
insurance business, we generally invest in assets denominated in the same
currencies as our insurance liabilities, which mitigates our foreign currency
exchange rate risk for these operations.

                                      138



   Our exposure to foreign currency risk within the general account investment
portfolios supporting our U.S. insurance operations arises primarily from
purchased investments that are denominated or payable in foreign currencies. We
generally hedge substantially all foreign currency-denominated fixed-income
investments supporting our U.S. operations into U.S. dollars, using foreign
exchange forward contracts and currency swaps, in order to mitigate the risk
that the fair value of these investments fluctuates as a result of changes in
foreign exchange rates. We generally do not hedge all of the foreign currency
risk of our equity investments in unaffiliated foreign entities.

   Our operations in foreign countries create two additional sources of foreign
currency risk. First, we reflect the operating results of our foreign branches
and subsidiaries in our financial statements based on the average exchange
rates prevailing during the period. We hedge some of these foreign currency
flows based on our overall risk management strategy and loss limits. We
generally hedge our anticipated exposure to adjusted operating income
fluctuations resulting from changes in foreign currency exchange rates relating
to our International operations in Japan, of which our Japanese insurance
operations are the most significant, using foreign exchange forward contracts
and currency swaps. Second, we translate our equity investment in foreign
branches and subsidiaries into U.S. dollars using the foreign currency exchange
rate at the financial statement period-end date. We have chosen to partially
hedge this exposure.

   We actively manage foreign currency exchange rate risk within specified
limits at the consolidated level using Value-at-Risk analysis. This statistical
technique estimates, at a specified confidence level, the potential pretax 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.

   We calculate Value-at-Risk estimates of exposure to loss from volatility in
foreign currency exchange rates for one-month time periods. Our estimated VaR
at December 31, 2001 for foreign currency assets not hedged to U.S. dollars,
measured at the 95% confidence level and using a one-month time horizon, was $9
million, representing a hypothetical decline in fair market value of these
foreign currency assets from $495 million to $486 million. Our estimated VaR at
December 31, 2000 for foreign currency assets not hedged to U.S. dollars,
measured at the 95% confidence level and using a one-month time horizon, was
$18 million, representing a hypothetical decline in fair market value of these
foreign currency assets from $906 million to $888 million. These calculations
use historical price volatilities and correlation data at a 95% confidence
level. We discuss limitations of VaR models below. Our estimated VaR for
foreign exchange forward contracts and currency swaps used to hedge our
anticipated exposure to adjusted operating income fluctuations resulting from
changes in foreign currency exchange rates relating to our international
operations, measured at the 95% confidence level and using a one-month time
horizon, was $45 million at December 31, 2001 and $11 million at December 31,
2000.

   Our average monthly Value-at-Risk for foreign currency assets not hedged to
U.S. dollars from foreign currency exchange rate movements, measured at the 95%
confidence level over a one month time horizon, was $13 million during 2001 and
$16 million during 2000.

   Derivatives

   Derivatives are financial instruments 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 Note 19 to the Consolidated Financial Statements for
a summary of our derivative positions as of December 31, 2001 and 2000. Under
insurance statutes, our insurance companies may use derivative financial
instruments to hedge actual or anticipated changes in their assets or
liabilities, to replicate cash market instruments or for certain
income-generating activities. These statutes generally prohibit the use of
derivatives for speculative purposes. We use derivative financial instruments
to seek to reduce market risk from changes in interest rates or foreign
currency exchange rates, and to alter interest rate or foreign currency
exposures arising from mismatches between assets and liabilities. In addition,
derivatives are used in our securities operations for trading purposes.

                                      139



Trading Activities

   We engage in trading activities primarily in connection with our securities
businesses. We maintain trading inventories in various equity and fixed-income
securities, foreign exchange instruments and commodities, primarily to
facilitate transactions for our clients. Market risk affects the values of our
trading inventories through fluctuations in absolute or relative interest
rates, credit spreads, foreign currency exchange rates, securities and
commodity prices. We seek to use short security positions and forwards,
futures, options and other derivatives to limit exposure to interest rate and
other market risks. We also trade derivative financial instruments that allow
our clients to manage exposure to interest rate, currency and other market
risks. Most of our derivative transactions involve exchange-listed contracts
and are short-term in duration. We act both as a broker, by selling
exchange-listed contracts, and as a dealer, by entering into futures and
security transactions as a principal. As a broker, we assume counterparty and
credit risks that we seek to mitigate by using margin or other credit
enhancements and by establishing trading limits and credit lines. As a dealer,
we are subject to market risk as well as counterparty and credit risk. We
manage the market risk associated with trading activities through hedging
activities and formal policies, risk and position limits, counterparty and
credit limits, daily position monitoring, and other forms of risk management.

   Value-at-Risk

   VaR is one of the tools we use to monitor and manage our exposure to the
market risk of our trading activities. We calculate a VaR that encompasses our
trading activities using a 95% confidence level. The VaR method incorporates
the risk factors to which the market value of our trading activities is
exposed, which consist of interest rates, including credit spreads, foreign
exchange rates, equity prices and commodity prices, estimates of volatilities
from historical data, the sensitivity of our trading activities to changes in
those market factors and the correlations of those factors. We regularly test
our VaR model by comparing actual adverse results to those estimated by the VaR
model with a 95% confidence level over a one-day time horizon. The VaR for our
trading activities expressed in terms of adverse changes to fair value at the
95% confidence level over a one-day time horizon was $5 million at December 31,
2001 and $6 million at December 31, 2000. The average daily VaR for our trading
activities, expressed in terms of adverse changes to fair value with a 95%
confidence level over a one-day time horizon, was $6 million during 2001 and $9
million during 2000. The following table sets forth a breakdown of this VaR by
risk component as follows:



                                As of     Average    As of     Average
                             December 31,   for   December 31,   for
                                 2001      2001       2000      2000
                             ------------ ------- ------------ -------
                                           (in millions)
                                                   
          Interest rate risk     $ 5        $5         $4        $6
          Equity risk.......      --         1          2         3

                                 ---        --         --        --
             Total(1).......     $ 5        $6         $6        $9

                                 ===        ==         ==        ==

--------
(1)At December 31, 2001 and 2000, and during the years then ended, VaR from
   each of foreign currency exchange rate risk and commodity risk in our
   trading activities was immaterial.

Limitations of VaR Models

   Although VaR models represent a recognized tool for risk management, they
have inherent limitations, including reliance on historical data that may not
be indicative of future market conditions or trading patterns. Accordingly, you
should not view VaR models as a predictor of future results. We may incur
losses that could be materially in excess of the amounts indicated by the
models on a particular trading day or over a period of time, and there have
been instances when results have fallen outside the values generated by our VaR
models. A VaR model does not estimate the greatest possible loss. We use these
models together with other risk management tools, including stress testing. The
results of these models and analysis thereof are subject to the judgment of our
risk management personnel.


                                      140



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                       CONSOLIDATED FINANCIAL STATEMENTS
                                     INDEX



                                                                              Page
                                                                             Number
                                                                             ------
                                                                          
Report of Independent Accountants...........................................  142
Consolidated Statements of Financial Position as of December 31, 2001 and
  2000......................................................................  143
Consolidated Statements of Operations for the years ended December 31,
  2001, 2000 and 1999.......................................................  144
Consolidated Statements of Stockholders' Equity for the years ended
  December 31, 2001, 2000 and 1999..........................................  145
Consolidated Statements of Cash Flows for the years ended December 31,
  2001, 2000 and 1999.......................................................  146
Notes to Consolidated Financial Statements..................................  147
Supplemental Combining Financial Information:
  Supplemental Combining Statement of Financial Position as of December 31,
   2001.....................................................................  212
  Supplemental Combining Statement of Operations for the year ended
   December 31, 2001........................................................  213
  Notes to Supplemental Combining Financial Information.....................  214


                                      141



                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Prudential Financial, Inc.:

   In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Prudential Financial, Inc. and its subsidiaries at December 31,
2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedules listed in the
index appearing under Item 14 (a)(2) present fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

   Our audits were conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The accompanying
supplemental combining financial information is presented for purposes of
additional analysis of the consolidated financial statements rather than to
present the financial position and results of operations of the individual
components. Such supplemental information has been subjected to the auditing
procedures applied in the audits of the consolidated financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
consolidated financial statements taken as a whole.

/s/  PRICEWATERHOUSECOOPERS LLP

New York, New York
February 12, 2002

                                      142



                          PRUDENTIAL FINANCIAL, INC.

                 Consolidated Statements of Financial Position
                   December 31, 2001 and 2000 (in Millions)





                                                                                                              2001     2000
                                                                                                            -------- --------
                                                                                                               
ASSETS
Fixed maturities:
   Available for sale, at fair value (amortized cost: 2001--$107,464; 2000--$83,115)....................... $109,942 $ 83,827
   Held to maturity, at amortized cost (fair value: 2001--$395; 2000--$12,615).............................      374   12,448
Trading account assets, at fair value......................................................................    5,043    7,217
Equity securities, available for sale, at fair value (cost: 2001--$2,252; 2000--$2,266)....................    2,272    2,317
Commercial loans...........................................................................................   19,729   15,919
Policy loans...............................................................................................    8,570    8,046
Securities purchased under agreements to resell............................................................    4,421    5,395
Cash collateral for borrowed securities....................................................................    5,210    3,858
Other long-term investments................................................................................    5,418    4,459
Short-term investments.....................................................................................    4,855    5,029
                                                                                                            -------- --------
      Total investments....................................................................................  165,834  148,515

Cash and cash equivalents..................................................................................   18,536    7,676
Accrued investment income..................................................................................    1,828    1,916
Broker-dealer related receivables..........................................................................    7,802   11,860
Deferred policy acquisition costs..........................................................................    6,868    7,063
Other assets...............................................................................................   15,004   13,506
Separate account assets....................................................................................   77,158   82,217
                                                                                                            -------- --------
      TOTAL ASSETS......................................................................................... $293,030 $272,753
                                                                                                            ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Future policy benefits..................................................................................... $ 86,991 $ 67,859
Policyholders' account balances............................................................................   43,333   32,722
Unpaid claims and claim adjustment expenses................................................................    3,408    3,549
Policyholders' dividends...................................................................................    2,096    1,463
Securities sold under agreements to repurchase.............................................................   12,385   15,010
Cash collateral for loaned securities......................................................................    9,427   11,053
Income taxes payable.......................................................................................    1,332    1,610
Broker-dealer related payables.............................................................................    6,445    5,965
Securities sold but not yet purchased......................................................................    2,791    4,959
Short-term debt............................................................................................    5,405   11,131
Long-term debt.............................................................................................    5,304    2,502
Other liabilities..........................................................................................   15,812   12,105
Separate account liabilities...............................................................................   77,158   82,217
                                                                                                            -------- --------
      Total liabilities....................................................................................  271,887  252,145
                                                                                                            -------- --------
Guaranteed minority interest in Trust holding solely debentures of Parent..................................      690       --
                                                                                                            -------- --------
COMMITMENTS AND CONTINGENCIES (See Note 21)

STOCKHOLDERS' EQUITY
Preferred Stock ($.01 par value; 10,000,000 shares authorized).............................................       --       --
Common Stock ($.01 par value; 1,500,000,000 shares authorized; 583,582,767 shares issued and outstanding at
 December 31, 2001)........................................................................................        6       --
Class B Stock ($.01 par value; 10,000,000 shares authorized; 2,000,000 shares issued and outstanding at
 December 31, 2001)........................................................................................       --       --
Additional paid-in capital.................................................................................   19,462       --
Accumulated other comprehensive income.....................................................................      944      234
Retained earnings..........................................................................................       41   20,374
                                                                                                            -------- --------
      Total stockholders' equity...........................................................................   20,453   20,608
                                                                                                            -------- --------
      TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................................... $293,030 $272,753
                                                                                                            ======== ========


                See Notes to Consolidated Financial Statements

                                      143



                          PRUDENTIAL FINANCIAL, INC.

                     Consolidated Statements of Operations
  Years Ended December 31, 2001, 2000 and 1999 (in Millions, Except Per Share
                                   Amounts)



                                                                2001     2000     1999
                                                               -------  -------  -------
                                                                        
REVENUES
Premiums...................................................... $12,477  $10,181  $ 9,528
Policy charges and fee income.................................   1,803    1,639    1,516
Net investment income.........................................   9,151    9,497    9,367
Realized investment gains (losses), net.......................    (705)    (288)     924
Commissions and other income..................................   4,451    5,475    5,233
                                                               -------  -------  -------
   Total revenues.............................................  27,177   26,504   26,568
                                                               -------  -------  -------
BENEFITS AND EXPENSES
Policyholders' benefits.......................................  12,752   10,640   10,226
Interest credited to policyholders' account balances..........   1,804    1,751    1,811
Dividends to policyholders....................................   2,722    2,724    2,571
General and administrative expenses...........................   9,538   10,043    9,530
Capital markets restructuring.................................      --      476       --
Sales practices remedies and costs............................      --       --      100
Demutualization costs and expenses:
   Administrative expenses....................................     248      143       75
   Consideration to former Canadian branch policyholders......     340       --       --
                                                               -------  -------  -------
   Total benefits and expenses................................  27,404   25,777   24,313
                                                               -------  -------  -------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES..    (227)     727    2,255
                                                               -------  -------  -------
Income taxes:
   Current....................................................    (927)     434      690
   Deferred...................................................     870      (28)     352
                                                               -------  -------  -------
      Total income tax expense (benefit)......................     (57)     406    1,042
                                                               -------  -------  -------
INCOME (LOSS) FROM CONTINUING OPERATIONS......................    (170)     321    1,213
                                                               -------  -------  -------
DISCONTINUED OPERATIONS
Gain (loss) on disposal of healthcare operations, net of taxes      16       77     (400)
                                                               -------  -------  -------
NET INCOME (LOSS)............................................. $  (154) $   398  $   813
                                                               =======  =======  =======



                                                                 For the period
                                                               December 18 through
                                                                December 31, 2001
                                                               -------------------
                                                            
INCOME FROM CONTINUING OPERATIONS AND NET INCOME AFTER DATE OF
 DEMUTUALIZATION
Financial Services Businesses (attributable to Common Stock)..        $  38
Closed Block Business (attributable to Class B Stock).........            3
                                                                      -----
Consolidated..................................................        $  41
                                                                      =====
EARNINGS PER SHARE AFTER DATE OF DEMUTUALIZATION
Financial Services Businesses
   Net income per share of Common Stock--basic and diluted....        $0.07
                                                                      =====
Closed Block Business
   Net income per share of Class B Stock--basic and diluted...        $1.50
                                                                      =====


                See Notes to Consolidated Financial Statements

                                      144



                          PRUDENTIAL FINANCIAL, INC.

                Consolidated Statements of Stockholders' Equity
          Years Ended December 31, 2001, 2000 and 1999 (in Millions)



                                                                         Accumulated Other Comprehensive Income (Loss)
                                                                        ----------------------------------------------
                                                                                       Net                    Total
                                                                          Foreign   Unrealized             Accumulated
                                                   Additional            Currency   Investment  Pension       Other
                                    Common Class B  Paid-in   Retained  Translation   Gains    Liability  Comprehensive
                                    Stock   Stock   Capital   Earnings  Adjustments  (Losses)  Adjustment Income (Loss)
                                    ------ ------- ---------- --------  ----------- ---------- ---------- -------------
                                                                                  
Balance, December 31, 1998......... $ --    $ --      $ --    $ 19,163     $ (31)    $ 1,272      $ (9)      $ 1,232
Comprehensive income:
  Net income.......................   --      --        --         813       --         --         --           --
  Other comprehensive loss, net of
   tax:
   Change in foreign currency
    translation adjustments........   --      --        --       --           13        --         --             13
   Change in net unrealized
    investment gains...............   --      --        --       --          --       (1,932)      --         (1,932)
   Additional pension liability
    adjustment.....................   --      --        --       --          --         --           2             2

  Other comprehensive loss.........

Total comprehensive loss...........
                                    -----   ----    -------   --------     -----     -------      ----       -------
Balance, December 31, 1999.........   --      --        --      19,976       (18)       (660)       (7)         (685)
Comprehensive income:
  Net income.......................   --      --        --         398       --         --         --           --
  Other comprehensive income,
   net of tax:
   Change in foreign currency
    translation adjustments........   --      --        --       --          (89)       --         --            (89)
   Change in net unrealized
    investment gains...............   --      --        --       --          --        1,019       --          1,019
   Additional pension liability
    adjustment.....................   --      --        --       --          --         --         (11)          (11)

  Other comprehensive income.......

Total comprehensive income.........
                                    -----   ----    -------   --------     -----     -------      ----       -------
Balance, December 31, 2000.........   --      --        --      20,374      (107)        359       (18)          234
Common Stock issued in
 demutualization...................     5     --     15,985    (15,990)      --         --         --           --
Policy credits issued and cash
 payments to be made to eligible
 policyholders.....................   --      --        --      (4,189)      --         --         --           --
Initial public offering of Common
 Stock.............................     1     --      3,336      --          --         --         --           --
Private placement of Class B
 Stock.............................   --      --        167      --          --         --         --           --
Equity security units..............   --      --        (26)     --          --         --         --           --
Comprehensive income:
  Net loss before the date of
   demutualization.................   --      --        --        (195)      --         --         --           --
  Net income after the date of
   demutualization.................   --      --        --          41       --         --         --           --
  Other comprehensive income, net
   of tax:
   Change in foreign currency
    translation adjustments........   --      --        --       --         (130)       --         --           (130)
   Change in net unrealized
    investment gains...............   --      --        --       --          --          869       --            869
   Additional pension liability
    adjustment.....................   --      --        --       --          --         --         (29)          (29)

  Other comprehensive income.......

Total comprehensive income.........
                                    -----   ----    -------   --------     -----     -------      ----       -------
Balance, December 31, 2001......... $   6   $ --    $19,462   $     41     $(237)    $ 1,228      $(47)      $   944
                                    =====   ====    =======   ========     =====     =======      ====       =======







                                        Total
                                    Stockholders'
                                       Equity
                                    -------------
                                 
Balance, December 31, 1998.........    $20,395
Comprehensive income:
  Net income.......................        813
  Other comprehensive loss, net of
   tax:
   Change in foreign currency
    translation adjustments........         13
   Change in net unrealized
    investment gains...............     (1,932)
   Additional pension liability
    adjustment.....................          2
                                       -------
  Other comprehensive loss.........     (1,917)
                                       -------
Total comprehensive loss...........     (1,104)
                                       -------
Balance, December 31, 1999.........     19,291
Comprehensive income:
  Net income.......................        398
  Other comprehensive income,
   net of tax:
   Change in foreign currency
    translation adjustments........        (89)
   Change in net unrealized
    investment gains...............      1,019
   Additional pension liability
    adjustment.....................        (11)
                                       -------
  Other comprehensive income.......        919
                                       -------
Total comprehensive income.........      1,317
                                       -------
Balance, December 31, 2000.........     20,608
Common Stock issued in
 demutualization...................       --
Policy credits issued and cash
 payments to be made to eligible
 policyholders.....................     (4,189)
Initial public offering of Common
 Stock.............................      3,337
Private placement of Class B
 Stock.............................        167
Equity security units..............        (26)
Comprehensive income:
  Net loss before the date of
   demutualization.................       (195)
  Net income after the date of
   demutualization.................         41
  Other comprehensive income, net
   of tax:
   Change in foreign currency
    translation adjustments........       (130)
   Change in net unrealized
    investment gains...............        869
   Additional pension liability
    adjustment.....................        (29)
                                       -------
  Other comprehensive income.......        710
                                       -------
Total comprehensive income.........        556
                                       -------
Balance, December 31, 2001.........    $20,453
                                       =======


                See Notes to Consolidated Financial Statements

                                      145



                          PRUDENTIAL FINANCIAL, INC.

                     Consolidated Statements of Cash Flows
          Years Ended December 31, 2001, 2000 and 1999 (in Millions)



                                                                                            2001      2000       1999
                                                                                          --------  ---------  ---------
                                                                                                      
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................................... $   (154) $     398  $     813
Adjustments to reconcile net income to net cash provided by operating activities:
   Realized investment (gains) losses, net...............................................      705        288       (915)
   Policy charges and fee income.........................................................     (482)      (342)      (300)
   Interest credited to policyholders' account balances..................................    1,804      1,751      1,811
   Depreciation and amortization, including premiums and discounts.......................      446        740        689
   Loss (gain) on disposal of healthcare operations, net of taxes........................      (16)       (77)       400
   Change in:
      Deferred policy acquisition costs..................................................     (259)      (228)      (178)
      Future policy benefits and other insurance liabilities.............................      933      1,473        788
      Trading account assets.............................................................    2,268      2,524       (853)
      Income taxes payable...............................................................   (1,282)       214        933
      Broker-dealer related receivables/payables.........................................    4,538       (388)    (1,898)
      Securities purchased under agreements to resell....................................      974      8,549     (3,692)
      Cash collateral for borrowed securities............................................   (1,352)     3,266     (1,502)
      Cash collateral for loaned securities..............................................   (1,626)       278      3,643
      Securities sold but not yet purchased..............................................   (2,168)    (2,009)     1,197
      Securities sold under agreements to repurchase.....................................   (2,625)    (9,588)     3,112
      Other, net.........................................................................   (1,628)     1,016     (3,486)
                                                                                          --------  ---------  ---------
         Cash flows from operating activities............................................       76      7,865        562
                                                                                          --------  ---------  ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale/maturity of:
   Fixed maturities, available for sale..................................................   98,150     99,971    122,790
   Fixed maturities, held to maturity....................................................      139      3,266      4,957
   Equity securities, available for sale.................................................    5,503      3,025      3,190
   Commercial loans......................................................................    5,443      1,632      2,640
   Other long-term investments...........................................................      764      2,044      2,169
Payments for the purchase of:
   Fixed maturities, available for sale..................................................  (97,492)  (103,086)  (124,759)
   Fixed maturities, held to maturity....................................................      (56)    (1,544)    (2,414)
   Equity securities, available for sale.................................................   (2,557)    (2,316)    (2,779)
   Commercial loans......................................................................   (1,521)    (1,334)    (2,595)
   Other long-term investments...........................................................   (1,379)    (1,374)    (2,280)
Cash acquired from Gibraltar Life........................................................    5,912      --         --
Short-term investments...................................................................     (442)    (2,257)    (1,138)
                                                                                          --------  ---------  ---------
      Cash flows from (used in) investing activities.....................................   12,464     (1,973)      (219)
                                                                                          --------  ---------  ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholders' account deposits..........................................................    6,771      6,813      7,667
Policyholders' account withdrawals.......................................................   (9,014)    (8,186)   (10,531)
Proceeds from the issuance of Common Stock...............................................    3,337      --         --
Proceeds from the issuance of Class B Stock..............................................      167      --         --
Proceeds from the issuance of equity security units......................................      663      --         --
Net increase (decrease) in short-term debt...............................................   (6,098)    (2,678)       444
Proceeds from the issuance of long-term debt.............................................    3,214        638      1,844
Repayments of long-term debt.............................................................     (720)    (1,230)      (919)
                                                                                          --------  ---------  ---------
      Cash flows used in financing activities............................................   (1,680)    (4,643)    (1,495)
                                                                                          --------  ---------  ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.....................................   10,860      1,249     (1,152)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.............................................    7,676      6,427      7,579
                                                                                          --------  ---------  ---------
CASH AND CASH EQUIVALENTS, END OF YEAR................................................... $ 18,536  $   7,676  $   6,427
                                                                                          ========  =========  =========
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid (received)............................................................. $    466  $     248  $    (344)
                                                                                          --------  ---------  ---------
Interest paid............................................................................ $    638  $   1,040  $     824
                                                                                          --------  ---------  ---------
NON-CASH TRANSACTIONS DURING THE YEAR
Policy credits issued and demutualization consideration payable to eligible policyholders $  4,529    $   --   $   --
                                                                                          --------  ---------  ---------


                See Notes to Consolidated Financial Statements

                                      146



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

1.  BUSINESS

   Prudential Financial, Inc. ("Prudential Financial") and its subsidiaries
(collectively, "Prudential" or the "Company") provide a wide range of
insurance, investment management, securities and other financial products and
services to both retail and institutional customers throughout the United
States and in many other countries. Principal products and services provided
include life insurance, property and casualty insurance, annuities, mutual
funds, pension and retirement related investments and administration, asset
management, and securities brokerage. The Company has organized its principal
operations into the Financial Services Businesses and the Closed Block
Business. The Financial Services Businesses operate through four operating
divisions: U.S. Consumer, Employee Benefits, International and Asset
Management. Businesses that are not sufficiently material to warrant separate
disclosure are included in Corporate and Other operations within the Financial
Services Businesses. The Closed Block Business, which is managed separately
from the Financial Services Businesses, was established on the date of
demutualization and includes the Company's in force participating insurance and
annuity products and assets that are used for the payment of benefits and
policyholder dividends on these products, as well as other assets and equity
that support these products and related liabilities. In connection with the
demutualization, the Company has ceased offering these participating products.

Demutualization and Initial Public Offering

   On December 18, 2001 (the "date of demutualization"), The Prudential
Insurance Company of America ("Prudential Insurance") converted from a mutual
life insurance company to a stock life insurance company and became an
indirect, wholly owned subsidiary of Prudential Financial. The demutualization
was completed in accordance with the Company's Plan of Reorganization, which
was approved by the Commissioner of Banking and Insurance of the State of New
Jersey in October 2001.

   On the date of demutualization, policyholder membership interests in
Prudential Insurance were extinguished and eligible policyholders collectively
received 457.1 million shares of Common Stock, the rights to receive cash
totaling $3,487 million (included in "Other liabilities" at December 31, 2001),
including $340 million to certain former Canadian branch policyholders, and
increases to their policy values in the form of policy credits totaling $1,042
million. The demutualization was accounted for as a reorganization.
Accordingly, the Company's retained earnings on the date of demutualization,
net of the aforementioned cash payments other than those to former Canadian
policyholders and policy credits which were charged directly to retained
earnings, were reclassified to "Common Stock" and "Additional paid-in capital."

   Concurrent with the demutualization, Prudential Insurance completed a
corporate reorganization whereby various subsidiaries (and certain related
assets and liabilities) of Prudential Insurance were dividended so that they
became wholly owned subsidiaries of Prudential Financial rather than of
Prudential Insurance. The subsidiaries distributed by Prudential Insurance to
Prudential Financial included its property and casualty insurance companies,
its principal securities brokerage companies, 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.

   On the date of demutualization, Prudential Financial completed an initial
public offering of 110.0 million shares of Common Stock at a price of $27.50
per share and, on December 21, 2001, Prudential Financial issued an additional
16.5 million shares of Common Stock as a result of the exercise of the
over-allotment option granted to underwriters in the initial public offering.
Also on the date of demutualization, Prudential Financial completed the sale,
through a private placement, of 2.0 million shares of Class B Stock, a separate
class of common stock, at a price of $87.50 per share. The Common Stock
reflects the performance of the Financial Services Businesses and the Class B
Stock reflects the performance of the Closed Block Business. In addition to the
issuances of Common Stock and Class B Stock, on the date of demutualization,
Prudential Financial issued 13.8 million 6.75% equity security units at a price
of $50 per unit (see Note 12) and Prudential Holdings, LLC, a wholly owned
subsidiary of Prudential Financial, issued $1.75 billion in senior secured
notes (see Note 11).

                                      147



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Basis of Presentation

   The consolidated financial statements include the accounts of Prudential
Financial, its majority-owned subsidiaries, and those partnerships and joint
ventures in which the Company has a controlling financial interest, except in
those instances where the Company cannot exercise control because the minority
owners have substantive participating rights in the operating and capital
decisions of the entity. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). Intercompany balances and transactions have
been eliminated. Effective on the date of demutualization and corporate
reorganization, the historical consolidated financial statements of Prudential
Insurance became the historical consolidated financial statements of Prudential
Financial.

Use of Estimates

   The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, in particular deferred policy acquisition costs,
investment allowances, 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. Actual results could differ from those
estimates.

Earnings Per Share

   As discussed in Note 1 under "Demutualization and Initial Public Offering,"
the Company has outstanding two separate classes of common stock. Basic
earnings per share are computed by dividing available income attributable to
each of the two groups of common shareholders for the period subsequent to the
demutualization by the respective weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised.

Investments

   Fixed maturities classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the positive intent and
ability to hold to maturity are stated at amortized cost and classified as
"held to maturity." See Note 19 for a discussion of the Company's
reclassificiation of "held to maturity" securities to "available for sale" in
connection with the implementation of new accounting standards for derivatives.
The amortized cost of fixed maturities is written down to estimated fair value
when a decline in value is considered to be other than temporary. See the
discussion below on realized investment gains and losses for a description of
the accounting for impairment adjustments. Unrealized gains and losses on fixed
maturities "available for sale," net of income tax and the effect on deferred
policy acquisition costs and future policy benefits that would result from the
realization of unrealized gains and losses, are included in a separate
component of equity, "Accumulated other comprehensive income (loss)."

   Trading account assets and securities sold but not yet purchased are carried
at estimated fair value. Realized and unrealized gains and losses on trading
account assets and securities sold but not yet purchased are included in
"Commissions and other income."

   Equity securities, available for sale, are comprised of common and
non-redeemable preferred stock and are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax and the effect on
deferred policy acquisition costs and future policy benefits that would result
from the realization of unrealized gains and losses, are included in
"Accumulated other comprehensive income (loss)." See the discussion below on
realized investment gains and losses for a description of the accounting for
impairment adjustments.

                                      148



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


   Commercial loans are stated primarily at unpaid principal balances, net of
unamortized discounts and an allowance for losses. In connection with the
acquisition of Gibraltar Life (see Note 5), commercial loans were acquired at a
discount to par and are carried at amortized cost. Accretion of the discount
over the remaining lives of the loans is included in "Net investment income."
The allowance for losses includes a loan specific reserve for impaired loans
and a portfolio reserve for incurred but not specifically identified losses.
Impaired loans include those loans for which it is probable that amounts due
according to the contractual terms of the loan agreement will not all be
collected. Impaired loans are measured at the present value of expected future
cash flows discounted at the loan's effective interest rate, or at the fair
value of the collateral if the loan is collateral dependent. Interest received
on impaired loans, including loans that were previously modified in a troubled
debt restructuring, is either applied against the principal or reported as
revenue, according to management's judgment as to the collectibility of
principal. Management discontinues accruing interest on impaired loans after
the loans are 90 days delinquent as to principal or interest, or earlier when
management has serious doubts about collectibility. When a loan is recognized
as impaired, any accrued but uncollectible interest is reversed against
interest income of the current period. Generally, a loan is restored to accrual
status only after all delinquent interest and principal are brought current
and, in the case of loans where the payment of interest has been interrupted
for a substantial period, a regular payment performance has been established.
The portfolio reserve for incurred but not specifically identified losses
considers the Company's past loan loss experience, the current credit
composition of the portfolio, historical credit migration, property type
diversification, default and loss severity statistics and other relevant
factors.

   Policy loans are carried at unpaid principal balances.

   Securities purchased under agreements to resell and securities sold under
agreements to repurchase are treated as collateralized financing arrangements
and are carried at the amounts at which the securities will be subsequently
resold or reacquired, including accrued interest, as specified in the
respective agreements. The Company's policy is to take possession or control of
securities purchased under agreements to resell and to value the securities
daily. Assets to be repurchased are the same, or substantially the same, as the
assets transferred. The market value of securities to be repurchased or resold
is monitored, and additional collateral is obtained, where appropriate, to
protect against credit exposure.

   Securities borrowed and securities loaned are treated as financing
arrangements and are recorded at the amount of cash advanced or received. With
respect to securities loaned, the Company obtains collateral in an amount equal
to 102% and 105% of the fair value of the domestic and foreign securities,
respectively. The Company monitors the market value of securities borrowed and
loaned on a daily basis with additional collateral obtained as necessary.
Substantially all of the Company's securities borrowed transactions are with
brokers and dealers, commercial banks and institutional clients. Substantially
all of the Company's securities loaned transactions are with large brokerage
firms.

   Securities repurchase and resale agreements and securities borrowed and
loaned transactions are used to generate net investment income and facilitate
trading activity. These instruments are short-term in nature (usually 30 days
or less) and are collateralized principally by U.S. Government and
mortgage-backed securities. The carrying amounts of these instruments
approximate fair value because of the relatively short period of time between
the origination of the instruments and their expected realization.

   Other long-term investments primarily represent the Company's investments in
joint ventures and limited partnerships in which the Company does not exercise
control. Other long-term investments also include investments in the Company's
own separate accounts, which are carried at estimated fair value, investment
real estate and derivatives held for purposes other than trading. See Note 19
for a discussion of accounting policies for derivative instruments. Joint
venture and partnership interests are generally accounted for using the equity
method of accounting, reduced for other than temporary declines in value,
except in instances in which the

                                      149



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Company's interest is so minor that it exercises virtually no influence over
operating and financial policies. In such instances, the Company applies the
cost method of accounting. The Company's net income from investments in joint
ventures and partnerships is generally included in "Net investment income."
However, for certain real estate joint ventures, Prudential's interest is
liquidated by means of one or more transactions that result in the sale of the
underlying invested assets to third parties and the ultimate distribution of
the proceeds to Prudential and other joint venture partners in exchange for and
settlement of the respective joint venture interests. These transactions are
accounted for as disposals of Prudential's joint venture interests and the
resulting gains and losses are included in "Realized investment gains (losses),
net."

   Real estate held for disposal is carried at the lower of depreciated cost or
fair value less estimated selling costs and is not further depreciated once
classified as such. Real estate which the Company has the intent to hold for
the production of income is carried at depreciated cost less any write-downs to
fair value for impairment losses and is reviewed for impairment whenever events
or circumstances indicate that the carrying value may not be recoverable. An
impairment loss is recognized when the review indicates that the carrying value
of the investment real estate exceeds the estimated undiscounted future cash
flows (excluding interest charges) from the investment. At that time, the
carrying value of the investment real estate is written down to fair value.
Depreciation on real estate held for the production of income is computed using
the straight-line method over the estimated lives of the properties, and is
included in "Net investment income."

   Short-term investments consist of highly liquid debt instruments with a
maturity of greater than three months and less than twelve months when
purchased. These investments are carried at amortized cost, which approximates
fair value.

   Realized investment gains (losses), net are computed using the specific
identification method. Costs of fixed maturities and equity securities are
adjusted for impairments considered to be other than temporary. Impairment
adjustments are included in "Realized investment gains (losses), net." Factors
considered in evaluating whether a decline in value is other than temporary
are: 1) whether the decline is substantial; 2) the Company's ability and intent
to retain the investment for a period of time sufficient to allow for an
anticipated recovery in value; 3) the duration and extent to which the market
value has been less than cost; and 4) the financial condition and near-term
prospects of the issuer. Provisions for losses on commercial loans are included
in "Realized investment gains (losses), net." Decreases in the carrying value
of investment real estate held for disposal or for the production of income are
recorded in "Realized investment gains (losses), net."

Cash and Cash Equivalents

   Cash and cash equivalents include cash on hand, amounts due from banks,
money market instruments and other debt issues with a maturity of three months
or less when purchased.

Deferred Policy Acquisition Costs

   The costs that vary with and that are related primarily to the production of
new insurance and annuity business are deferred to the extent such costs are
deemed recoverable from future profits. Such costs include commissions, costs
of policy issuance and underwriting, and variable field office expenses.
Deferred policy acquisition costs ("DAC") are subject to recoverability testing
at the end of each accounting period. Deferred policy acquisition costs, for
certain products, are adjusted for the impact of unrealized gains or losses on
investments as if these gains or losses had been realized, with corresponding
credits or charges included in "Accumulated other comprehensive income (loss)."

   For participating life insurance, DAC is amortized over the expected life of
the contracts (up to 45 years) in proportion to estimated gross margins based
on historical and anticipated future experience, which is updated

                                      150



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

periodically. The average rate of assumed future investment yield used in
estimating expected gross margins was 7.28% at December 31, 2001 and gradually
increases to 8.06% for periods after December 31, 2031. The effect of changes
in estimated gross margins on unamortized deferred acquisition costs is
reflected in "General and administrative expenses" in the period such estimated
gross margins are revised. Policy acquisition costs related to
interest-sensitive and variable life products and certain investment-type
products are deferred and amortized over the expected life of the contracts
(periods ranging from 7 to 30 years) in proportion to estimated gross profits
arising principally from investment results, mortality and expense margins, and
surrender charges based on historical and anticipated future experience, which
is updated periodically. The effect of changes to estimated gross profits on
unamortized deferred acquisition costs is reflected in "General and
administrative expenses" in the period such estimated gross profits are
revised. DAC related to non-participating term insurance is amortized over the
expected life of the contracts in proportion to premiums.

   The Company has offered 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 policies in exchange for life insurance policies
that do not have fixed and guaranteed terms, the Company immediately charges to
expense the remaining unamortized DAC on the surrendered policies. For other
internal replacement transactions, the unamortized DAC on the surrendered
policies is immediately charged to expense if the terms of the new policies are
not substantially similar to those of the former policies. If the new policies
have terms that are substantially similar to those of the earlier policies, the
DAC is retained with respect to the new policies and amortized over the life of
the new policies.

   For property and casualty insurance contracts, DAC is amortized over the
period in which related premiums are earned. Future investment income is
considered in determining the recoverability of DAC.

   For group life and disability insurance, group annuities and guaranteed
investment contracts, acquisition costs are expensed as incurred.

Separate Account Assets and Liabilities

   Separate account assets and liabilities are reported at estimated fair value
and represent segregated funds which are invested for certain policyholders,
pension funds and other customers. The assets consist of common stocks, fixed
maturities, real estate related securities, 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 value changes are borne by the
customers, except to the extent of minimum guarantees made by the Company with
respect to certain accounts. The investment income and gains or losses for
separate accounts generally accrue to the policyholders and are not included in
the Consolidated Statements of Operations. Mortality, policy administration and
surrender charges on the accounts are included in "Policy charges and fee
income." Asset management fees charged to the accounts are included in
"Commissions and other income."

Other Assets and Other Liabilities

   Other assets consist primarily of prepaid benefit costs, reinsurance
recoverables, certain restricted assets, trade receivables, mortgage
securitization inventory and mortgage servicing rights, property and equipment
and receivables resulting from sales of securities that had not yet settled at
the balance sheet date. During 2001, the Company sold $1,409 million of
commercial mortgage loans and other securities in securitization transactions
versus $1,874 million in 2000. In some of the commercial loan securitizations,
the Company retained servicing responsibilities. The Company did not retain any
material ownership interest in the financial assets that were transferred. The
Company recognized pretax gains of $42 million in 2001 versus losses of $6
million in 2000 in

                                      151



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

connection with securitization and related hedging activity which are recorded
in "Commissions and other income." At December 31, 2001 and 2000, mortgage
servicing assets, including both purchased and originated servicing assets,
were $126 million and $111 million, respectively. Property and equipment are
stated at cost less accumulated depreciation. Depreciation is determined using
the straight-line method over the estimated useful lives of the related assets
which generally range from 3 to 40 years. Other liabilities consist primarily
of trade payables, employee benefit liabilities, demutualization consideration
not yet paid to policyholders, and payables resulting from purchases of
securities that had not yet settled at the balance sheet date.

Contingencies

   Amounts related to contingencies are accrued if it is probable that a
liability has been incurred and an amount is reasonably estimable. Management
evaluates whether there are incremental legal or other costs directly
associated with the ultimate resolution of the matter that are reasonably
estimable and, if so, they are included in the accrual.

Policyholders' Dividends

   The amount of the dividends to be paid to policyholders of Prudential
Insurance is determined annually by its Board of Directors. The aggregate
amount of policyholders' dividends is based on the statutory results and past
experience of Prudential Insurance, including investment income, net realized
investment gains or losses over a number of years, mortality experience and
other factors. See Note 9 for further discussion of the impact of
policyholders' dividends on earnings.

Insurance Revenue and Expense Recognition

   Premiums from life insurance policies, excluding interest-sensitive life
contracts, are recognized when due. Benefits are recorded as an expense when
they are incurred. A liability for future policy benefits is recorded when
premiums are recognized using the net level premium method.

   Premiums from non-participating group annuities with life contingencies are
recognized when earned. For single premium immediate annuities and structured
settlements with life contingencies, premiums are recognized when earned in a
constant relationship to the amount of expected future benefit payments.

   Amounts received as payment for interest-sensitive life contracts, deferred
annuities, structured settlements, 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" and consist primarily of fees assessed during the
period against the policyholders' account balances for mortality charges,
policy administration charges and surrender charges. Benefits and expenses for
these products include claims in excess of related account balances, expenses
of contract administration, interest credited and amortization of DAC.

   For group life and disability insurance, and property and casualty
insurance, premiums are recognized over the period to which the premiums relate
in proportion to the amount of insurance protection provided. Claim and claim
adjustment expenses are recognized when incurred.

   Premiums, benefits and expenses are stated net of reinsurance ceded to other
companies. Estimated reinsurance recoverables and the cost of reinsurance are
recognized over the life of the reinsured policies using assumptions consistent
with those used to account for the underlying policies.

                                      152



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


Foreign Currency Translation Adjustments

   Assets and liabilities of foreign operations and subsidiaries reported in
other than U.S. dollars are translated at the exchange rate in effect at the
end of the period. Revenues, benefits and other expenses are translated at the
average rate prevailing during the period. The effects of translating the
statements of financial position of non-U.S. entities with functional
currencies other than the U.S. dollar are included, net of related hedge gains
and losses and income taxes, in "Accumulated other comprehensive income (loss)."

Commissions and Other Income

   Commissions and other income principally includes securities and commodities
commission revenues and asset management fees which are recognized in the
period in which the services are performed. Realized and unrealized gains from
trading activities of the Company's securities business are also included in
"Commissions and other income."

Derivative Financial Instruments

   Derivatives are financial instruments whose values are derived from interest
rates, foreign exchange rates, financial indices, or the value 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-the-counter market. See Note 19 for a discussion of the
Company's use of derivative financial instruments and the related accounting
and reporting treatment of such instruments.

Income Taxes

   The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") limits the amount of
non-life insurance losses that may offset life insurance company taxable
income. The Code also imposes an "equity tax" on mutual life insurance
companies which, in effect, imputes an additional tax to the Company based on a
formula that calculates the difference between stock and mutual life insurance
companies' earnings. Effective for the year ended December 31, 2001, the
Company, as a stock company, is no longer subject to the equity tax. The
provision for income taxes includes an estimate for changes in the total equity
tax to be paid for prior years. Subsidiaries operating outside the United
States are taxed under applicable foreign statutes.

   Deferred income taxes are recognized, based on enacted rates, when assets
and liabilities have different values for financial statement and tax reporting
purposes. A valuation allowance is recorded to reduce a deferred tax asset to
that amount that is expected to be realized.

Demutualization Costs and Expenses

   Demutualization costs and expenses include the cost of engaging external
accounting, actuarial, investment banking, legal and other consultants to
advise the Company, the New Jersey Department of Banking and Insurance and the
New York State Insurance Department in the demutualization process and related
matters as well as the cost of printing and postage for communications with
policyholders and other administrative costs. Demutualization costs and
expenses also include $340 million of demutualization consideration payable to
former Canadian branch policyholders pertaining to certain policies that
Prudential Insurance transferred to London Life Insurance Company in 1996 in
connection with the sale of most of its Canadian branch operations. Under the
Plan of Reorganization, these policyholders are required to receive
demutualization compensation in the form of cash. All demutualization costs and
expenses have been recorded in the periods prior to demutualization.

                                      153



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


New Accounting Pronouncements

   In September 2000, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities--a replacement of FASB Statement No. 125." The Company has
adopted the provisions of SFAS No. 140 relating to transfers and
extinguishments of liabilities which are effective for periods occurring after
March 31, 2001. The adoption did not have a material effect on the results of
operations of the Company.

   In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
Company account for all business combinations in the scope of the statement
using the purchase method. SFAS No. 142 requires that an intangible asset
acquired either individually or with a group of other assets shall initially be
recognized and measured based on fair value. An intangible asset with a finite
life is amortized over its useful life to the reporting entity; an intangible
asset with an indefinite useful life, including goodwill, is not amortized. All
indefinite lived intangible assets shall be tested for impairment in accordance
with the statement. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001; however, goodwill and intangible assets acquired after June
30, 2001 are subject immediately to the nonamortization and amortization
provisions of this statement. The Company has ceased the amortization of
goodwill as of January 1, 2002 and believes that the effect of implementing the
impairment provisions of this statement will not be material to its results of
operations and financial position. Goodwill amounted to $335 million at
December 31, 2001 and amortization amounted to $21 million for the year then
ended. Goodwill is included in "Other assets."

   In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 eliminated the requirement that
discontinued operations be measured at net realizable value or that entities
include losses that have not yet occurred. SFAS No. 144 eliminated the
exception to consolidation for a subsidiary for which control is likely to be
temporary. SFAS No. 144 requires that long-lived assets that are to be disposed
of by sale be measured at the lower of book value or fair value less cost to
sell. An impairment for assets that are not to be disposed of is recognized
only if the carrying amounts of long-lived assets are not recoverable and
exceed their fair values. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
and cash flows that (1) can be distinguished from the rest of the entity and
(2) will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and, generally, its provisions
are to be applied prospectively. At the date of adoption of this standard, the
impact on results of operations of the Company is not material.

Reclassifications

   Certain amounts in prior years have been reclassified to conform to the
current year presentation.

3.  DISCONTINUED OPERATIONS

   In December 1998, the Company entered into a definitive agreement to sell
its healthcare business to Aetna, Inc. ("Aetna"). The sale was completed on
August 6, 1999. The healthcare business is reported as discontinued operations
in the accompanying consolidated financial statements. As of December 31, 1998,
the measurement date, the Company recorded a loss on disposal of $223 million,
net of taxes, which included estimated operating losses of the healthcare
business subsequent to December 31, 1998 through the date of the sale, the
estimated cost of retained liabilities associated with litigation, as well as
estimates of other costs in connection with the disposition of the business.
These included facilities closure and systems termination costs, severance and
termination benefits, the impact of modifications to pension and benefit plans,
payments to Aetna related to the

                                      154



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

3.  DISCONTINUED OPERATIONS (continued)

Administrative Services Only business and payments in connection with a medical
loss ratio agreement (the "MLR Agreement"). The MLR Agreement provided for
payments to Aetna in the event that the medical loss ratios (i.e., incurred
medical expense divided by earned premiums) of the sold businesses were less
favorable than levels specified in the MLR Agreement for the years 1999 and
2000.

   The Company retained all liabilities associated with litigation that existed
at August 6, 1999 or commenced within two years of that date with respect to
claims that were incurred prior to August 6, 1999. The loss on disposal
includes management's best estimate of the cost of the ultimate resolution of
such litigation as well as the cost of resolving certain matters pertaining to
contractual and regulatory requirements. It is possible that additional
adjustments to this estimate may be necessary which might be material to future
results of operations of a particular quarterly or annual period.

   The loss on disposal was increased in 1999 by $400 million, net of taxes,
primarily as a result of higher than anticipated healthcare operating losses
prior to the August 6, 1999 closing date and an increase in the Company's
estimated obligation under the MLR Agreement. Actual pretax losses of $370
million during that period exceeded the original estimate of $160 million. In
2000, upon the completion of the period covered by the MLR Agreement and taking
into consideration other costs incurred compared with those estimated in 1998
and 1999, the Company reduced the loss on disposal by $77 million, net of
taxes. In 2001, upon the final settlement of the MLR Agreement, the Company
reduced the loss on disposal by an additional $16 million, net of taxes.

   Pursuant to a coinsurance agreement with Aetna, the Company was required to
issue additional policies for new customers in response to proposals made to
brokers or customers within six months after the closing date and to renew
insurance policies until two years after the closing date. All such additional
new and renewal policies were 100% coinsured by Aetna. The purpose of the
agreement was to provide for the uninterrupted operation and growth, including
renewals of existing policies and issuance of new policies, of the healthcare
business that Aetna acquired from Prudential. The operation of the business and
the attendant risks, except for the existence of the MLR Agreement, were
assumed entirely by Aetna. Consequently, the following amounts pertaining to
the agreement had no effect on the Company's results of operations. The Company
ceded premiums and benefits of $966 million and $827 million, respectively for
the year ended December 31, 2001. Premium and benefits ceded for the year ended
December 31, 2000 were $1,872 million and $1,418 million, respectively, and for
the period from August 6, 1999 through December 31, 1999 were $896 million and
$757 million, respectively. Reinsurance recoverable under this agreement,
included in "Other assets," was $202 million at December 31, 2001 and $355
million at December 31, 2000.

4.  CAPITAL MARKETS RESTRUCTURING

   In the fourth quarter of 2000, Prudential Securities Group Inc. exited the
lead-managed equity underwriting for corporate issuers and institutional fixed
income businesses. Exiting these businesses resulted in staff reductions of
approximately 700 positions, 350 of which were eliminated in 2000 and the
remainder in 2001. The positions eliminated included investment bankers,
traders, analysts and other professional and support staff. Results for 2000
include a pretax charge of $476 million in connection with the restructuring,
which is presented as "Capital markets restructuring." The charge includes $213
million for employee related costs, consisting largely of severance and
termination benefits. The charge also includes the write-off of $140 million of
goodwill previously recorded in connection with investment banking
acquisitions. Remaining charges of $123 million consist of lease termination
payments and other facility exit costs, including office equipment and
leasehold improvements write-downs, and other related costs. As of December 31,
2001, remaining reserves for capital markets restructuring costs were $28
million. See Note 20 for information pertaining to the operating results of
these exited businesses.

                                      155



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements


5.  ACQUISITION OF KYOEI LIFE INSURANCE COMPANY, LTD.

   In April 2001, the Company completed the acquisition of Kyoei Life Insurance
Co., Ltd. ("Kyoei"), a stock life insurance company located in Japan, which has
been accounted for as a purchase. Kyoei was renamed Gibraltar Life Insurance
Company, Ltd. ("Gibraltar Life") by the Company concurrent with the
acquisition. Gibraltar Life provides financial services throughout Japan.
Gibraltar Life primarily offers four types of insurance products: individual
insurance, including life and indemnity health coverage; individual annuities;
group life insurance; and group annuities. It distributes these products
through an agency force and large employer groups. Gibraltar Life also has
domestic and foreign subsidiaries, including non-insurance businesses, which
are not material to its financial position or results of operations.

   On October 20, 2000, Gibraltar Life filed for reorganization under the
Reorganization Law of Japan. The Reorganization Law, similar to Chapter 11 of
the U.S. Bankruptcy Code, is intended to provide a mechanism for restructuring
financially troubled companies by permitting the adjustment of the interests of
creditors, shareholders and other interested parties. On October 20, 2000, the
Tokyo District Court issued an order generally freezing Gibraltar Life's assets
and appointed an interim Trustee who, on October 23, 2000, was appointed as
sole Trustee.

   On April 2, 2001, the Tokyo District Court issued its official recognition
order approving the Reorganization Plan, which was submitted by the Trustee and
approved by Gibraltar Life's creditors. The Reorganization Plan became
effective immediately upon the issuance of the recognition order, and is
binding upon Gibraltar Life, its creditors, including policyholders, its
shareholders and other interested parties, whether or not they submitted claims
or voted for or against the plan. The Reorganization Plan included the
extinguishment of all existing stock for no consideration and the issuance of
1.0 million new shares of common stock. Pursuant to the Reorganization Plan, on
April 19, 2001 the Company contributed (Yen)50 billion ($395 million) in cash
to Gibraltar Life's capital and on April 20, 2001 received 100% of Gibraltar
Life's newly issued common stock. The Company also provided (Yen)98 billion
($775 million) to Gibraltar Life in the form of a subordinated loan. On April
23, 2001, the Tokyo District Court declared the reorganization proceedings
concluded and dismissed the Trustee. Under the Reorganization Plan, Gibraltar
Life was restructured as follows:

  .  Gibraltar Life was discharged from all financial indebtedness, retaining
     only liabilities under insurance policies and contracts, certain pension
     liabilities, liabilities incurred in the ordinary course of business and
     certain other claims approved by the Trustee. All existing shares of stock
     were extinguished without consideration.

  .  Gibraltar Life's in force insurance policies, except for group life,
     collective term and reinsurance policies, were restructured as follows:

     -- The guaranteed interest rate on in force policies was reduced to 1.75%.

     -- Except for individual annuities, cash surrender values before surrender
       charges were reduced by an average of approximately 11%, and maturity
       values were reduced by 8%. Annuities will be subject to reductions only
       if they are surrendered.

     -- Special surrender charges will be imposed on existing policies.

     -- Although participating policies retain their current participating
       status, it is not anticipated that policy dividends will be paid in the
       near future.

  .  In years four and eight following the recognition of the Reorganization
     Plan by the Tokyo District Court, a special dividend to certain Gibraltar
     Life policyholders will be payable based on 70% of net realized investment
     gains, if any, over the Trustee's valuation of real estate and loans, net
     of transaction costs and taxes. As of December 31, 2001, a liability of
     $678 million is included in "Policyholders' dividends" for amounts
     expected to be distributed. The liability is based on the difference
     between the current estimated fair values of loans and real estate at the
     date of the Consolidated Statements of Financial Position and the value of
     such assets included in the Reorganization Plan. The liability will be
     adjusted as purchase

                                      156



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

5.  ACQUISITION OF KYOEI LIFE INSURANCE COMPANY, LTD. (continued)

     discounts and premiums on loans are accreted and amortized and as changes
     occur in estimates of fair value of loans and real estate that are
     expected to have an effect on the ultimate amount to be paid.


  .  No funds were requested from the Life Insurance Policyholders Protection
     Corporation of Japan, which is the insurance industry guaranty fund in
     Japan.

   For purposes of inclusion in the Company's consolidated financial
statements, Gibraltar Life has adopted a November 30 fiscal year end;
therefore, the December 31, 2001 consolidated financial statements include
Gibraltar Life's assets and liabilities as of November 30, 2001, and Gibraltar
Life's results of operations for the period April 2, 2001 through November 30,
2001. The Company's December 31, 2001 consolidated financial statements include
assets and liabilities for Gibraltar Life of $30,238 million and $29,012
million, respectively, and income from continuing operations before income
taxes for Gibraltar Life of $238 million. Pro forma information to reflect the
acquisition of Gibraltar Life as if it had occurred as of an earlier date has
been omitted, as the lack of continuity of operations of Gibraltar Life
resulting from the implementation of the Reorganization Plan would render such
pro forma information not meaningful.

6.  INVESTMENTS

Fixed Maturities and Equity Securities

   The following tables provide additional information relating to fixed
maturities and equity securities (excluding trading account assets) at December
31,



                                                                              2001
                                                            -----------------------------------------
                                                                        Gross      Gross    Estimated
                                                            Amortized Unrealized Unrealized   Fair
                                                              Cost      Gains      Losses     Value
                                                            --------- ---------- ---------- ---------
                                                                          (In Millions)
                                                                                
Fixed maturities available for sale
U.S. Treasury securities and obligations of U.S. government
 corporations and agencies................................. $  7,900    $  195     $   35   $  8,060
Obligations of U.S. states and their political subdivisions    1,936        65         14      1,987
Foreign government bonds...................................   17,322       330         62     17,590
Corporate securities.......................................   75,072     2,810        957     76,925
Mortgage-backed securities.................................    5,234       166         20      5,380
                                                            --------    ------     ------   --------
Total fixed maturities available for sale.................. $107,464    $3,566     $1,088   $109,942
                                                            ========    ======     ======   ========
Equity securities available for sale....................... $  2,252    $  230     $  210   $  2,272
                                                            ========    ======     ======   ========

                                                                              2001
                                                            -----------------------------------------
                                                                        Gross      Gross    Estimated
                                                            Amortized Unrealized Unrealized   Fair
                                                              Cost      Gains      Losses     Value
                                                            --------- ---------- ---------- ---------
                                                                          (In Millions)
Fixed maturities held to maturity
U.S. Treasury securities and obligations of U.S. government
 corporations and agencies................................. $      2    $   --     $   --   $      2
Obligations of U.S. states and their political subdivisions        1        --         --          1
Foreign government bonds...................................      106         8         --        114
Corporate securities.......................................      265        15          2        278
                                                            --------    ------     ------   --------
Total fixed maturities held to maturity.................... $    374    $   23     $    2   $    395
                                                            ========    ======     ======   ========


                                      157



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

6.  INVESTMENTS (continued)




                                                                              2000
                                                            -----------------------------------------
                                                                        Gross      Gross    Estimated
                                                            Amortized Unrealized Unrealized   Fair
                                                              Cost      Gains      Losses     Value
                                                            --------- ---------- ---------- ---------
                                                                          (In Millions)
                                                                                
Fixed maturities available for sale
U.S. Treasury securities and obligations of U.S. government
 corporations and agencies.................................  $ 7,068    $  358     $    2    $ 7,424
Obligations of U.S. states and their political subdivisions    3,012       164          3      3,173
Foreign government bonds...................................    4,457       228         38      4,647
Corporate securities.......................................   62,066     1,205      1,374     61,897
Mortgage-backed securities.................................    6,512       188         14      6,686
                                                             -------    ------     ------    -------
Total fixed maturities available for sale..................  $83,115    $2,143     $1,431    $83,827
                                                             =======    ======     ======    =======
Equity securities available for sale.......................  $ 2,266    $  239     $  188    $ 2,317
                                                             =======    ======     ======    =======




                                                                              2000
                                                            -----------------------------------------
                                                                        Gross      Gross    Estimated
                                                            Amortized Unrealized Unrealized   Fair
                                                              Cost      Gains      Losses     Value
                                                            --------- ---------- ---------- ---------
                                                                          (In Millions)
                                                                                
Fixed maturities held to maturity
U.S. Treasury securities and obligations of U.S. government
 corporations and agencies.................................  $     7    $  --      $  --     $     7
Obligations of U.S. states and their political subdivisions       40        1          1          40
Foreign government bonds...................................      193       13         --         206
Corporate securities.......................................   12,208      343        189      12,362
                                                             -------    -----      -----     -------
Total fixed maturities held to maturity....................  $12,448    $ 357      $ 190     $12,615
                                                             =======    =====      =====     =======


   The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 2001, is shown below:



                                        Available for Sale   Held to Maturity
                                        ------------------- -------------------
                                                  Estimated           Estimated
                                        Amortized   Fair    Amortized   Fair
                                          Cost      Value     Cost      Value
                                                          
                                        --------  --------    ----      ----
                                           (In Millions)       (In Millions)
 Due in one year or less............... $ 14,015  $ 14,181    $  8      $  8
 Due after one year through five years.   24,791    25,386     130       140
 Due after five years through ten years   28,489    29,053      89        93
 Due after ten years...................   34,935    35,942     147       154
 Mortgage-backed securities............    5,234     5,380      --        --
                                        --------  --------    ----      ----
    Total.............................. $107,464  $109,942    $374      $395
                                        ========  ========    ====      ====


   Actual maturities may differ from contractual maturities because issuers
have the right to call or prepay obligations.

   Proceeds from the repayment of held to maturity fixed maturities during
2001, 2000 and 1999 were $139 million, $3,266 million, and $4,957 million,
respectively. Gross gains of $0 million, $8 million, and $73 million were
realized on prepayment of held to maturity fixed maturities during 2001, 2000
and 1999, respectively.

   Proceeds from the sale of available for sale fixed maturities during 2001,
2000 and 1999 were $84,629 million, $93,653 million and $117,685 million,
respectively. Proceeds from the maturity of available for

                                      158



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

6.  INVESTMENTS (continued)

sale fixed maturities during 2001, 2000 and 1999 were $13,521 million, $6,318
million and $5,105 million, respectively. Gross gains of $1,270 million, $909
million and $884 million, and gross losses of $1,136 million, $1,408 million
and $1,231 million were realized on sales and prepayments of available for sale
fixed maturities during 2001, 2000 and 1999, respectively. Realized losses
included $356 million in 2001 resulting from the sale of substantially all of
the Company's Enron Corp. holdings.

   Write-downs for impairments which were deemed to be other than temporary for
fixed maturities were $777 million, $540 million and $266 million, and for
equity securities were $238 million, $34 million and $205 million for the years
ended 2001, 2000 and 1999, respectively.

   Due to the adoption of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," on January 1, 2001, the aggregate amortized cost of
the 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's commercial loans were as follows at December 31,



                                              2001                 2000
                                      -------------------  -------------------
                                         Amount     % of      Amount     % of
                                      (In Millions) Total  (In Millions) Total
                                      ------------- -----  ------------- -----
                                                             
Collateralized loans by property type
Office buildings.....................    $ 3,553     20.7%    $ 3,727     23.1%
Retail stores........................      2,058     12.0%      2,465     15.3%
Residential properties...............      2,184     12.7%        713      4.4%
Apartment complexes..................      4,209     24.5%      4,455     27.6%
Industrial buildings.................      2,685     15.7%      2,331     14.4%
Agricultural properties..............      1,908     11.1%      1,856     11.5%
Other................................        569      3.3%        597      3.7%
                                         -------    -----     -------    -----
   Subtotal of collateralized loans..     17,166    100.0%     16,144    100.0%
                                                    =====                =====
Valuation allowance..................       (220)                (225)
                                         -------              -------
Total collateralized loans...........     16,946              $15,919
                                         -------              =======
Uncollateralized loans
Gibraltar Life uncollateralized loans      3,098
Valuation allowance..................       (315)
                                         -------
Total uncollateralized loans.........      2,783
                                         -------
Net carrying value...................    $19,729
                                         =======


   The commercial loans are geographically dispersed throughout the United
States, Canada and Asia with the largest concentrations in Japan (22.7%) and
California (20.6%) at December 31, 2001.

   Activity in the allowance for losses for all commercial loans, for the years
ended December 31, is summarized as follows:



                                                      2001   2000  1999
                                                      -----  ----  -----
                                                         (In Millions)
                                                          
      Allowance for losses, beginning of year........ $ 225  $221  $ 427
      Allowance on loans acquired from Gibraltar Life   739   --     --
      Addition (release) of allowance for losses.....   (24)   17   (201)
      Charge-offs, net of recoveries.................  (412)  (13)    (5)
      Change in foreign exchange.....................     7   --     --
                                                      -----  ----  -----
      Allowance for losses, end of year.............. $ 535  $225  $ 221
                                                      =====  ====  =====


                                      159



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

6.  INVESTMENTS (continued)


   Impaired commercial loans identified in management's specific review of
probable loan losses and the related allowance for losses at December 31, are
as follows:



                                                              2001   2000
                                                             -----   ----
                                                             (In Millions)
                                                               
      Impaired commercial loans with allowance for losses... $ 463   $192
      Impaired commercial loans with no allowance for losses   243    247
      Allowance for losses, end of year.....................  (333)   (35)
                                                             -----   ----
      Net carrying value of impaired commercial loans....... $ 373   $404
                                                             =====   ====


   Impaired commercial loans with no allowance for losses are loans in which
the fair value of the collateral or the net present value of the loans'
expected future cash flows equals or exceeds the recorded investment. The
average recorded investment in impaired loans before allowance for losses was
$1,309 million, $565 million and $884 million for 2001, 2000 and 1999,
respectively. Net investment income recognized on these loans totaled $35
million, $37 million and $55 million for the years ended December 31, 2001,
2000 and 1999, respectively.

Other Long-term Investments

   The Company's "Other long-term investments" include investments in joint
ventures and limited partnerships of $2,108 million and $2,391 million at
December 31, 2001 and 2000, respectively. These investments include $959
million and $1,363 million in real estate related interests and $1,149 million
and $1,028 million in non-real estate related interests at December 31, 2001
and 2000, respectively. The Company's share of net income from such entities
was $84 million, $187 million and $217 million for the years ended 2001, 2000
and 1999, respectively, and is reported in "Net investment income."

   Summarized combined financial information for joint ventures and limited
partnership interests accounted for under the equity method, in which the
Company has an investment of $10 million or greater and an equity interest of
10% or greater, is as follows:



                                                              At December 31,
                                                              ---------------
                                                               2001    2000
   -                                                          ------  ------
                                                               (In Millions)
                                                                
   STATEMENTS OF FINANCIAL POSITION
   Investments in real estate................................ $3,603  $3,617
   Investments in securities.................................  1,694   1,899
   Cash and cash equivalents.................................     87     111
   Other assets..............................................    208     173
                                                              ------  ------
   Total assets.............................................. $5,592  $5,800
                                                              ======  ======
   Borrowed funds-third party................................ $  598  $  598
   Borrowed funds-Prudential Financial.......................      3    --
   Other liabilities.........................................  1,399   1,450
                                                              ------  ------
   Total liabilities.........................................  2,000   2,048
   Partners' capital.........................................  3,592   3,752
                                                              ------  ------
   Total liabilities and partners' capital................... $5,592  $5,800
                                                              ======  ======
   Equity in partners' capital included above................ $  971  $1,030
   Equity in limited partnership interests not included above  1,137   1,361
                                                              ------  ------
   Carrying value............................................ $2,108  $2,391
                                                              ======  ======



                                      160



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

6.  INVESTMENTS (continued)



                                                                           For the years ended
                                                                               December 31,
                                                                           -------------------
                                                                           2001   2000   1999
-                                                                          -----  -----  -----
                                                                              (In Millions)
                                                                                
STATEMENTS OF OPERATIONS
Income of real estate joint ventures...................................... $ 246  $ 257  $ 102
Income of other limited partnership interests.............................   142    256    530
Interest expense-third party..............................................   (31)   (31)    (7)
Other expenses............................................................  (251)  (226)  (121)
                                                                           -----  -----  -----
Net earnings.............................................................. $ 106  $ 256  $ 504
                                                                           =====  =====  =====
Equity in net earnings included above..................................... $  37  $  79  $ 122
Equity in net earnings of limited partnership interests not included above    47    108     95
                                                                           -----  -----  -----
Total equity in net earnings.............................................. $  84  $ 187  $ 217
                                                                           =====  =====  =====


   "Other long-term investments" also includes investments in the Company's
separate accounts of $975 million and $1,077 million, investment real estate of
$1,072 million and $239 million which is held through direct ownership and
other miscellaneous investments of $1,263 million and $752 million at December
31, 2001 and 2000, respectively. Of the Company's real estate, $146 million and
$181 million consist of commercial and agricultural assets held for disposal at
December 31, 2001 and 2000, respectively. Impairment losses were $7 million, $0
million and $3 million for the years ended December 31, 2001, 2000 and 1999,
respectively, and are included in "Realized investment gains (losses), net."

Net Investment Income

   Net investment income for the years ended December 31, was from the
following sources:



                                                    2001     2000     1999
                                                   -------  -------  -------
                                                         (In Millions)
                                                            
   Fixed maturities available for sale............ $ 6,826  $ 5,938  $ 5,602
   Fixed maturities held to maturity..............      12    1,028    1,217
   Trading account assets.........................     294      734      622
   Equity securities available for sale...........      45       67       63
   Commercial loans...............................   1,432    1,370    1,401
   Policy loans...................................     522      478      448
   Securities purchased under agreements to resell      11       28       25
   Broker-dealer related receivables..............     513    1,222      976
   Short-term investments and cash equivalents....     465      683      490
   Other investment income........................     419      479      455
                                                   -------  -------  -------
   Gross investment income........................  10,539   12,027   11,299
   Less investment expenses.......................  (1,388)  (2,530)  (1,881)
                                                   -------  -------  -------
      Subtotal....................................   9,151    9,497    9,418
   Less amount relating to discontinued operations    --       --        (51)
                                                   -------  -------  -------
   Net investment income.......................... $ 9,151  $ 9,497  $ 9,367
                                                   =======  =======  =======


   Based on the carrying value, assets categorized as "non-income producing" at
December 31, 2001 included in fixed maturities, equity securities, commercial
loans and other long-term investments totaled $47 million, $6 million, $19
million and $33 million, respectively.


                                      161



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

6.  INVESTMENTS (continued)

Realized Investment Gains (Losses), Net

   Realized investment gains (losses), net, for the years ended December 31,
were from the following sources:



                                                    2001    2000    1999
                                                    -----  -------  -----
                                                        (In Millions)
                                                           
     Fixed maturities.............................. $(639) $(1,066) $(557)
     Equity securities available for sale..........  (245)     450    223
     Commercial loans..............................     1       (5)   209
     Investment real estate........................    40       49    106
     Joint ventures and limited partnerships.......   --       124    656
     Derivatives...................................   126      165    305
     Other.........................................    12       (5)   (27)
                                                    -----  -------  -----
        Subtotal...................................  (705)    (288)   915
     Less amount related to discontinued operations   --      --        9
                                                    -----  -------  -----
     Realized investment gains (losses), net....... $(705) $  (288) $ 924
                                                    =====  =======  =====


   The "joint ventures and limited partnerships" category includes net realized
investment gains relating to real estate joint ventures' and partnerships'
sales of their underlying invested assets, as described more fully in Note 2,
"Investments," amounting to $0 million, $91 million and $114 million for the
years ended 2001, 2000 and 1999, respectively.

                                      162



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

6.  INVESTMENTS (continued)


Net Unrealized Investment Gains (Losses)

   Net unrealized investment gains and losses on securities available for sale
and certain other long-term investments are included in the Consolidated
Statements of Financial Position as a component of "Accumulated other
comprehensive income (loss)." Changes in these amounts include reclassification
adjustments to exclude from "Other comprehensive income (loss)" those items
that are included as part of "Net income" for a period that had been part of
"Other comprehensive income (loss)" in earlier periods. The amounts for the
years ended December 31, are as follows:



                                                          Impact of unrealized investment gains (losses) on:
                                                      ----------------------------------------------------------
                                                                                                    Accumulated
                                                                                                       other
                                                                                                   comprehensive
                                                                                        Deferred   income (loss)
                                                      Unrealized   Deferred              income    related to net
                                                         gains      policy     Future      tax       unrealized
                                                      (losses) on acquisition  policy  (liability)   investment
                                                      investments    costs    benefits   benefit   gains (losses)
                                                      ----------- ----------- -------- ----------- --------------
                                                                             (In Millions)
                                                                                    
Balance, December 31, 1998...........................   $ 3,337      $(260)   $(1,095)   $ (710)      $ 1,272
Net investment gains (losses) on investments arising
 during the period...................................    (5,089)       --        --       1,845        (3,244)
Reclassification adjustment for (gains) losses
 included in net income..............................       404        --        --        (146)          258
Impact of net unrealized investment (gains) losses on
 deferred policy acquisition costs...................      --          566       --        (213)          353
Impact of net unrealized investment (gains) losses on
 future policy benefits..............................      --          --       1,092      (391)          701
                                                        -------      -----    -------    ------       -------
Balance, December 31, 1999...........................    (1,348)       306         (3)      385          (660)
Net investment gains (losses) on investments arising
 during the period...................................     1,458        --        --        (540)          918
Reclassification adjustment for (gains) losses
 included in net income..............................       621        --        --        (230)          391
Impact of net unrealized investment (gains) losses on
 deferred policy acquisition costs...................      --         (356)      --         132          (224)
Impact of net unrealized investment (gains) losses on
 future policy benefits..............................      --          --        (101)       35           (66)
                                                        -------      -----    -------    ------       -------
Balance, December 31, 2000...........................       731        (50)      (104)     (218)          359
Net investment gains (losses) on investments arising
 during the period...................................       757        --        --        (284)          473
Reclassification adjustment for (gains) losses
 included in net income..............................       884        --        --        (332)          552
Impact of net unrealized investment (gains) losses on
 deferred policy acquisition costs...................      --         (270)      --          97          (173)
Impact of net unrealized investment (gains) losses on
 future policy benefits..............................      --          --          27       (10)           17
                                                        -------      -----    -------    ------       -------
Balance, December 31, 2001...........................   $ 2,372      $(320)   $   (77)   $ (747)      $ 1,228
                                                        =======      =====    =======    ======       =======


                                      163



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

6.  INVESTMENTS (continued)


   The table below presents unrealized gains (losses) on investments by asset
class:



                                                    At December 31,
                                                 ---------------------
                                                  2001   2000   1999
        -                                        ------  ----  -------
                                                     (In Millions)
                                                      
        Fixed maturities........................ $2,478  $712  $(2,118)
        Equity securities.......................     20    51      733
        Other long-term investments.............   (126)  (32)      37
                                                 ------  ----  -------
        Unrealized gains (losses) on investments $2,372  $731  $(1,348)
                                                 ======  ====  =======


Securities Pledged, Restricted Assets and Special Deposits

   The Company pledges investment securities it owns to unaffiliated parties
through certain transactions, including securities lending, securities sold
under agreement to repurchase and futures contracts. At December 31, the
carrying value of investments pledged to third parties as reported in the
Consolidated Statements of Financial Position included the following:



                                                   2001    2000
                                                  ------- -------
                                                   (In Millions)
                                                    
              Fixed maturities available for sale $18,682 $20,080
              Trading account assets.............   3,379   5,796
              Separate account assets............   2,659   2,558
                                                  ------- -------
              Total securities pledged........... $24,720 $28,434
                                                  ======= =======


   In the normal course of its business activities, the Company accepts
collateral that can be sold or repledged. The primary sources of this
collateral are securities in customer accounts, securities purchased under
agreements to resell and securities borrowed transactions. At December 31,
2001, the fair value of this collateral was approximately $18,163 million
versus $19,329 million in 2000 of which $13,933 million versus $13,099 million
in 2000 had either been sold or repledged.

   Assets of $2,315 million and $2,538 million at December 31, 2001 and 2000,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $960 million
and $1,227 million at December 31, 2001 and 2000, respectively, were held in
voluntary trusts. Of these amounts, $244 million and $470 million at December
31, 2001 and 2000, respectively, related to the multi-state policyholder
settlement described in Note 21. The remainder relates to trusts established to
fund guaranteed dividends to certain policyholders and to fund certain employee
benefits. Assets valued at $158 million and $48 million at December 31, 2001
and 2000, respectively, were pledged as collateral for bank loans and other
financing agreements. Letter stock or other securities restricted as to sale
amounted to $183 million and $779 million at December 31, 2001 and 2000,
respectively. Restricted cash and securities of $1,930 million and
$2,196 million at December 31, 2001 and 2000, respectively, were included in
"Other assets." The restricted cash represents funds deposited by clients and
funds accruing to clients as a result of trades or contracts.

                                      164



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements


7.  DEFERRED POLICY ACQUISITION COSTS

   The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, are as follows:



                                                         2001     2000     1999
                                                        -------  -------  -------
                                                              (In Millions)
                                                                 
Balance, beginning of year............................. $ 7,063  $ 7,324  $ 6,462
Capitalization of commissions, sales and issue expenses   1,385    1,324    1,333
Amortization...........................................  (1,126)  (1,096)  (1,155)
Change in unrealized investment gains and losses.......    (270)    (356)     566
Foreign currency translation...........................    (184)    (154)     118
Acquisition of subsidiary..............................    --         21     --
                                                        -------  -------  -------
Balance, end of year................................... $ 6,868  $ 7,063  $ 7,324
                                                        =======  =======  =======


8.  POLICYHOLDERS' LIABILITIES

Future Policy Benefits

   Future policy benefits at December 31, are as follows:



                                                2001    2000
                                               ------- -------
                                                (In Millions)
                                                 
                  Life insurance.............. $71,276 $53,453
                  Annuities...................  14,500  13,398
                  Other contract liabilities..   1,215   1,008
                                               ------- -------
                  Total future policy benefits $86,991 $67,859
                                               ======= =======


   The Company's participating insurance is included within the Closed Block
Business. Participating insurance represented 37% and 40% of domestic
individual life insurance in force at December 31, 2001 and 2000, respectively,
and 92%, 94% and 95% of domestic individual life insurance premiums for 2001,
2000 and 1999, respectively.

   Life insurance liabilities include reserves for death and endowment policy
benefits, terminal dividends and certain health benefits. Annuity liabilities
include reserves for life contingent immediate annuities and life contingent
group annuities. Other contract liabilities primarily consist of unearned
premium and benefit reserves for group health products.

                                      165



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

8.  POLICYHOLDERS' LIABILITIES (continued)


   The following table highlights the key assumptions generally utilized in
calculating these reserves (excluding consideration of premium deficiency
reserves and reserves relating to Gibraltar Life):



         Product                              Mortality                       Interest Rate          Estimation Method
-------------------------- ------------------------------------------------ ----------------- --------------------------------
                                                                                     
Life insurance............ For Closed Block Business, rates guaranteed in   2.3% to 11.3% (b) Net level premium (a)
                           calculating cash surrender values; for Financial
                           Services Businesses, based on company
                           experience or standard industry tables
                           established at policy issue (a)

Individual annuities...... 1971 IAM, 1983 IAM and A2000 individual          3.5% to 13.4% (b) Present value of expected future
                           annuity mortality tables with certain                              payments based on historical
                           modifications based on company experience                          experience (a)
                           established at policy issue (a)

Group annuities........... 1951 and 1983 Group Annuity Mortality Tables     4.0% to 17.3%     Present value of expected future
                           with certain modifications based on company                        payments based on historical
                           experience established at policy issue                             experience

Other contract liabilities                                                  2.5% to 11.5%     Present value of expected future
                                                                                              payments based on historical
                                                                                              experience

--------
(a) Mortality assumptions for life insurance policies and individual annuities
    relating to Gibraltar Life are established at policy issue based on current
    Japanese industry tables with certain modifications based on company
    experience. Reserves for life insurance policies and individual annuities
    relating to Gibraltar Life are estimated based on the net level premium
    method and the present value of expected future payments based on
    historical experience, respectively.
(b) Interest rates used in establishing such reserves relating to Gibraltar
    Life range from 1.3% to 1.9% for both life insurance and individual annuity
    liabilities.

   Premium deficiency reserves are established, if necessary, when the
liability for future policy benefits plus the present value of expected future
gross premiums are determined to be insufficient to provide for expected future
policy benefits and expenses and to recover any unamortized policy acquisition
costs. Premium deficiency reserves have been recorded for the group single
premium annuity business, which consists of limited-payment, long duration
traditional and non-participating annuities; structured settlements and single
premium immediate annuities with life contingencies; and for certain individual
health policies. Liabilities of $1,867 million and $2,002 million are included
in "Future policy benefits" with respect to these deficiencies at December 31,
2001 and 2000, respectively.

Policyholders' Account Balances

   Policyholders' account balances at December 31, are as follows:



                                                                  2001    2000
                                                                 ------- -------
                                                                  (In Millions)
                                                                   
Individual annuities............................................ $ 7,564 $ 5,097
Group annuities.................................................   4,035   2,022
Guaranteed investment contracts and guaranteed interest accounts  13,031  12,852
Interest-sensitive life contracts...............................   8,112   3,809
Dividend accumulations and other................................  10,591   8,942
                                                                 ------- -------
Policyholders' account balances................................. $43,333 $32,722
                                                                 ======= =======


   Policyholders' account balances for interest-sensitive life and
investment-type contracts represent an accumulation of account deposits plus
credited interest less withdrawals, expenses and mortality charges.

                                      166



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

8.  POLICYHOLDERS' LIABILITIES (continued)


   Certain contract provisions that determine the policyholders' account
balances are as follows (excluding account balances relating to Gibraltar Life):



              Product                 Interest Rate                      Withdrawal/Surrender Charges
----------------------------------- ----------------- ------------------------------------------------------------------
                                                
Individual annuities............... 2.5% to 16.0% (a) 0% to 7% for up to 9 years (b)

Group annuities.................... 2.0% to 13.9% (a) Contractually limited or subject to market value adjustment (b)

Guaranteed investment contracts and
 guaranteed interest accounts...... 3.0% to 15.4%     Generally, subject to market value withdrawal provisions for any
                                                      funds withdrawn other than for benefit responsive and contractual
                                                      payments

Interest-sensitive life contracts.. 1.5% to 12.4% (a) Various up to 10 years (c)

Dividend accumulations and other... 2.0% to 11.5% (a) Generally, not subject to withdrawal/surrender charges, except for
                                                      certain contracts where withdrawal/surrender is limited or subject
                                                      to a market value adjustment (b)

--------
(a) Account balances relating to Gibraltar Life contain interest crediting
    rates of 0.5% to 1.8% for individual annuities, 1.5% for group annuities,
    0.5% to 1.5% for interest-sensitive life contracts, and 0.5% for dividend
    accumulations and other contracts.
(b) Individual and group annuity account balances relating to Gibraltar Life
    are subject to withdrawal/surrender charges which decline from 15% to 0%
    over 8 years.
(c) Account balances of interest-sensitive life contracts relating to Gibraltar
    Life are subject to various withdrawal/surrender charges up to 10 years.

Unpaid Claims and Claim Adjustment Expenses

   The following table provides a reconciliation of the activity in the
liability for unpaid claims and claim adjustment expenses for property and
casualty insurance, which includes the Company's Property and Casualty
Insurance segment, as well as the Company's wind-down commercial lines
business, primarily environmental and asbestos-related claims, and accident and
health insurance at December 31:



                                         2001              2000              1999
                                   ----------------  ----------------  ----------------
                                   Accident Property Accident Property Accident Property
                                     and      and      and      and      and      and
                                    Health  Casualty  Health  Casualty  Health  Casualty
                                   -------- -------- -------- -------- -------- --------
                                                       (In Millions)
                                                              
Balance at January 1..............  $1,701   $1,848   $1,735   $2,409   $2,307   $2,716
Less reinsurance recoverables, net     246      608      378      451       50      533
                                    ------   ------   ------   ------   ------   ------
Net balance at January 1..........   1,455    1,240    1,357    1,958    2,257    2,183
                                    ------   ------   ------   ------   ------   ------
Incurred related to:
   Current year...................     632    1,440      537    1,271    4,218    1,249
   Prior years....................     (45)    (113)     (22)    (150)     (73)     (54)
                                    ------   ------   ------   ------   ------   ------
Total incurred....................     587    1,327      515    1,121    4,145    1,195
                                    ------   ------   ------   ------   ------   ------
Paid related to:
   Current year...................     219      932      152      842    3,206      700
   Prior years....................     312      553      265      634      874      720
                                    ------   ------   ------   ------   ------   ------
Total paid........................     531    1,485      417    1,476    4,080    1,420
                                    ------   ------   ------   ------   ------   ------
Acquisitions (dispositions) (a)...      15     --       --       (363)    (965)    --
                                    ------   ------   ------   ------   ------   ------
Net balance at December 31........   1,526    1,082    1,455    1,240    1,357    1,958
Plus reinsurance recoverables, net     129      671      246      608      378      451
                                    ------   ------   ------   ------   ------   ------
Balance at December 31............  $1,655   $1,753   $1,701   $1,848   $1,735   $2,409
                                    ======   ======   ======   ======   ======   ======


                                      167



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

8.  POLICYHOLDERS' LIABILITIES (continued)

--------
(a) The 2001 accident and health increase relates to the acquisition of
    Gibraltar Life. The reduction in the 2000 property and casualty balance is
    primarily attributable to the sale of Gibraltar Casualty Company; the 1999
    accident and health reduction relates to the sale of Prudential's
    healthcare business.

   The accident and health reinsurance recoverable balance at December 31,
2001, 2000 and 1999 includes $117 million, $239 million and $371 million,
respectively, attributable to the Company's discontinued healthcare business.
The accident and health balance at January 1, 1999 includes $1,026 million
attributable to the Company's discontinued healthcare business.

   The unpaid claims and claim adjustment expenses presented above include
estimates for liabilities associated with reported claims and for incurred but
not reported claims based, in part, on the Company's experience. Changes in the
estimated cost to settle unpaid claims are charged or credited to the
Consolidated Statements of Operations periodically as the estimates are
revised. Accident and health unpaid claims liabilities are discounted using
interest rates ranging from 3.5% to 7.5%.

   The amounts incurred for claims and claim adjustment expenses for property
and casualty related to prior years were primarily driven by lower than
anticipated losses for the auto line of business. The amounts incurred for
claims and claim adjustment expenses for accident and health related to prior
years were primarily due to improved long-term disability claim termination
experience.

9.  CLOSED BLOCK

   Effective with demutualization, the Company adopted the American Institute
of Certified Public Accountants Statement of Position ("SOP") 00-3, "Accounting
by Insurance Enterprises for Demutualizations and Formations of Mutual
Insurance Holding Companies and For Certain Long-Duration Participating
Contracts." SOP 00-3 addresses financial statement presentation and accounting
for certain participating policies after demutualization, accounting for
demutualization expenses, and accounting for retained earnings and other
comprehensive income at the date of demutualization.

   On the date of demutualization, Prudential Insurance established a Closed
Block for certain individual life insurance policies and annuities issued by
Prudential Insurance in the United States. The Closed Block forms the principal
component of the Closed Block Business. For a discussion of the Closed Block
Business see Note 20. The Company established a separate closed block for
participating individual life insurance policies issued by the Canadian branch
of Prudential Insurance. Because of the substantially smaller number of
outstanding Canadian policies, this separate closed block is insignificant in
size and is not included in the information presented below.

   The policies 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
have been allocated to the Closed Block in an amount that has been determined
to produce cash flows which, together with revenues from policies included in
the Closed Block, are expected to be sufficient to support obligations and
liabilities relating to these policies, including provision for payment of
benefits, certain expenses, and taxes and to provide for continuation of the
policyholder dividend scales in effect in 2000, assuming experience underlying
such scales continues. To the extent that, over time, cash flows from the
assets allocated to the Closed Block and claims and other experience related to
the Closed Block are, in the aggregate, more or less favorable than what was
assumed when the Closed Block was established, total dividends paid to Closed
Block policyholders in the future may be greater than or less than the total
dividends that would have been paid to these policyholders if the policyholder
dividend scales in effect in 2000 had been continued. Any cash flows in excess
of amounts assumed will be available for distribution over time to Closed Block
policyholders and will not be available to

                                      168



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

9.  CLOSED BLOCK (continued)

stockholders. If the Closed Block has insufficient funds to make guaranteed
policy benefit payments, such payments will be made from assets outside of the
Closed Block. The Closed Block will continue in effect as long as any policy in
the Closed Block remains in force unless, with the consent of the New Jersey
insurance regulator, it is terminated earlier.

   The recorded assets and liabilities were allocated to the Closed Block at
their historical carrying amounts. The excess of Closed Block Liabilities over
Closed Block Assets at the effective date of the demutualization (adjusted to
eliminate the impact of related amounts in "Accumulated other comprehensive
income (loss)") represents the estimated maximum future earnings from the
Closed Block expected to result from operations attributed to the Closed Block
after income taxes. As required by SOP 00-3, the Company developed an actuarial
calculation of the timing of such maximum future earnings. If actual cumulative
earnings in any given period are greater than the expected cumulative earnings,
only the expected earnings will be recognized in income. Any excess of actual
cumulative earnings over expected cumulative earnings will represent
undistributed accumulated earnings attributable to policyholders and will be
recorded as a policyholder dividend obligation to be paid to Closed Block
policyholders as an additional policyholder dividend unless otherwise offset by
future Closed Block performance that is less favorable than originally
expected. As of December 31, 2001, no such additional policyholder dividends
were recorded. If over such period, the actual cumulative earnings of the
Closed Block are less than the expected cumulative earnings of the Closed
Block, the Company will recognize only the actual earnings in income. However,
the Company may change policyholder dividend scales in the future, which would
be intended to increase future actual earnings until the actual cumulative
earnings equal the expected cumulative earnings.

   On November 13, 2001, Prudential Insurance's Board of Directors acted to
reduce dividends, effective January 1, 2002, on Closed Block policies to
reflect unfavorable investment experience that has emerged since July 1, 2000,
the date the Closed Block was originally funded. This action resulted in a $104
million reduction of the liability for policyholder dividends recognized in the
year ended December 31, 2001.

   Closed Block Liabilities and Assets designated to the Closed Block at
December 31, 2001, as well as maximum future earnings to be recognized from
Closed Block Liabilities and Closed Block Assets, are as follows:



                                                                                               December 31, 2001
Closed Block Liabilities and Closed Block Assets                                               -----------------
                                                                                                 (In Millions)
                                                                                            
Closed Block Liabilities
   Future policy benefits.....................................................................      $47,239
   Policyholders' dividends payable...........................................................        1,171
   Policyholders' account balances............................................................        5,389
   Other Closed Block liabilities.............................................................        4,603
                                                                                                    -------
      Total Closed Block Liabilities..........................................................      $58,402
                                                                                                    -------
Closed Block Assets
   Total investments..........................................................................      $52,492
   Cash.......................................................................................        1,810
   Accrued investment income..................................................................          716
   Other Closed Block assets..................................................................          635
                                                                                                    -------
      Total Closed Block Assets...............................................................      $55,653
                                                                                                    -------
Excess of reported Closed Block Liabilities over Closed Block Assets..........................      $ 2,749
Portion of above representing other comprehensive income......................................          792
                                                                                                    -------
Maximum future earnings to be recognized from Closed Block Assets and Closed Block Liabilities      $ 3,541
                                                                                                    =======



                                      169



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

9.  CLOSED BLOCK (continued)


   Closed Block revenues and benefits and expenses for the period from the date
of demutualization through December 31, 2001 were as follows:



                                                                                     December 18, 2001
                                                                                          through
                                                                                     December 31, 2001
Closed Block Revenues and Benefits and Expenses                                      -----------------
                                                                                       (In Millions)
                                                                                  
Revenues
   Premiums.........................................................................       $293
   Net investment income............................................................        129
   Realized investment gains, net...................................................         24
   Other income.....................................................................          3
                                                                                           ----
      Total Closed Block revenues...................................................        449
                                                                                           ----
Benefits and Expenses
   Policyholders' benefits..........................................................        288
   Interest credited to policyholders' account balances.............................          5
   Dividends to policyholders.......................................................        100
   General and administrative expense charge........................................         33
                                                                                           ----
      Total Closed Block benefits and expenses......................................        426
                                                                                           ----
Closed Block benefits and expenses, net of Closed Block revenues before income taxes         23
                                                                                           ----
Income taxes........................................................................          2
                                                                                           ----
Closed Block benefits and expenses, net of Closed Block revenues and income taxes...       $ 21
                                                                                           ====


10.  REINSURANCE

   The Company participates in reinsurance in order to provide additional
capacity for future growth and limit the maximum net loss potential arising
from large risks. Life reinsurance is accomplished through various plans of
reinsurance, primarily yearly renewable term and coinsurance. Property and
casualty reinsurance is placed on a pro-rata basis and excess of loss,
including stop loss, basis. Reinsurance ceded arrangements do not discharge the
Company as the primary insurer. Ceded balances would represent a liability of
the Company in the event 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 contracts using assumptions consistent with those used to
account for the underlying contracts. The cost of reinsurance related to
short-duration contracts is accounted for over the reinsurance contract period.
Amounts recoverable from reinsurers, for both short and long-duration
reinsurance arrangements, are estimated in a manner consistent with the claim
liabilities and policy benefits associated with the reinsured policies.

   The tables presented below exclude amounts pertaining to the Company's
discontinued healthcare operations. See Note 3 for a discussion of the
Company's coinsurance agreement with Aetna.

   Reinsurance amounts included in the Consolidated Statements of Operations
for the years ended December 31, were as follows:



                                           2001     2000     1999
                                          -------  -------  -------
                                                (In Millions)
                                                   
            Direct premiums.............. $13,066  $10,686  $10,121
               Reinsurance assumed.......      95       86       66
               Reinsurance ceded.........    (684)    (591)    (659)
                                          -------  -------  -------
            Premiums..................... $12,477  $10,181  $ 9,528
                                          =======  =======  =======
            Policyholders' benefits ceded $   845  $   642  $   483
                                          =======  =======  =======


                                      170



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

10.  REINSURANCE (continued)


   Reinsurance recoverables, included in "Other assets" at December 31, were as
follows:



                                                 2001   2000
                                                ------ ------
                                                (In Millions)
                                                 
                  Life insurance............... $  795 $  674
                  Property and casualty........    694    628
                  Other reinsurance............     82     76
                                                ------ ------
                  Total reinsurance recoverable $1,571 $1,378
                                                ====== ======


   Three major reinsurance companies account for approximately 48% of the
reinsurance recoverable at December 31, 2001. The Company periodically reviews
the financial condition of its reinsurers and amounts recoverable therefrom in
order to minimize its exposure to loss from reinsurer insolvencies, recording
an allowance when necessary for uncollectible reinsurance.

11.  SHORT-TERM AND LONG-TERM DEBT

Short-term Debt

   Short-term debt at December 31, is as follows:



                                                   2001   2000
                                                  ------ -------
                                                  (In Millions)
                                                   
                Commercial paper................. $3,182 $ 7,686
                Notes payable....................  1,469   2,728
                Current portion of long-term debt    754     717
                                                  ------ -------
                Total short-term debt............ $5,405 $11,131
                                                  ====== =======


   The weighted average interest rate on outstanding short-term debt, excluding
the current portion of long-term debt, was approximately 3.9% and 6.4% at
December 31, 2001 and 2000, respectively.

   At December 31, 2001, the Company had $4,215 million in committed lines of
credit from numerous financial institutions, all of which were unused. These
lines of credit generally have terms ranging from one to five years.

   The Company issues commercial paper primarily to manage operating cash flows
and existing commitments, meet working capital needs and take advantage of
current investment opportunities. At December 31, 2001 and 2000, a portion of
commercial paper borrowings were supported by $4,000 million and $3,500 million
of the Company's existing lines of credit, respectively. At December 31, 2001
and 2000, the weighted average maturity of commercial paper outstanding was 21
and 25 days, respectively.

                                      171



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

11.  SHORT-TERM AND LONG-TERM DEBT (continued)


Long-term Debt

   Long-term debt at December 31, is as follows:



                                                Maturity
Description                                      Dates          Rate       2001   2000
-----------                                     ---------    -----------  ------ ------
                                                                          (In Millions)
                                                                     
Prudential Holdings, LLC notes (the "IHC debt")
   Series A....................................     2017 (a)         (b)  $  333 $   --
   Series B....................................    2023  (a)       7.245%    777     --
   Series C....................................    2023  (a)       8.695%    640     --
Fixed rate notes...............................
   U.S. Dollar................................. 2002-2035    5.97%-15.00%  1,147    758
   Japanese Yen................................      2010            (c)     348     --
Floating rate notes ("FRNs")...................
   U.S. Dollar................................. 2002-2035            (d)     975    640
   Canadian Dollar.............................      2003            (e)      80     96
   Japanese Yen................................      2010            (f)      15     --
   Great Britain Pound.........................      2002            (g)      --     20
Surplus notes.................................. 2003-2025    6.875%-8.30%    989    988
                                                                          ------ ------
Total long-term debt...........................                           $5,304 $2,502
                                                                          ====== ======

--------
(a) Annual scheduled repayments of principal for the Series A and Series C
    notes begin in 2013. Annual scheduled repayments of principal for the
    Series B notes begin in 2018.
(b) The interest rate on the Series A notes is a floating rate equal to LIBOR
    plus 0.875% per year. The interest rate in 2001 was 2.74%.
(c) The interest rate on the Japanese Yen denominated fixed rate note is 2.2%
    through 2008 at which time it becomes a floating rate note.
(d) The interest rates on the U.S. dollar denominated FRNs are generally based
    on rates such as LIBOR, Constant Maturity Treasury and the Federal Funds
    Rate. Interest rates on the U.S. dollar denominated FRNs ranged from 2.07%
    to 9.42% in 2001 and 5.99% to 7.08% in 2000. The 2000 interest rate range
    excludes a $29 million S&P 500 index linked note which had an interest rate
    range of 0.10% to 0.46%.
(e) The interest rate on the Canadian Dollar denominated FRN is based on the
    Canadian Bankers Acceptances Rate (CADBA) less 0.30%. This note has a
    contractual floor of 6.00% with a contractual cap of 9.125%. This rate
    ranged from 6.00% to 6.84% and 6.12% to 6.84% in 2001 and 2000,
    respectively.
(f) The interest rate on the Japanese Yen denominated FRN is based on the Yen
    LIBOR plus 1.20%. The interest rate in 2001 was 1.32%.
(g) The interest rate on the Great Britain Pound denominated FRN was based on
    the three month Sterling LIBOR plus 0.10% per year. This rate ranged from
    6.22% to 6.89% in 2000.

   Several long-term debt agreements have restrictive covenants related to the
total amount of debt, net tangible assets and other matters. At December 31,
2001 and 2000, the Company was in compliance with all debt covenants.

   Payment of interest and principal on the surplus notes issued after 1993, of
which $690 million and $689 million were outstanding at December 31, 2001 and
2000, respectively, may be made only with the prior approval of the
Commissioner of Banking and Insurance of the State of New Jersey ("the
Commissioner"). The Commissioner could prohibit the payment of the interest and
principal on the surplus notes if certain statutory capital requirements are
not met. At December 31, 2001, the Company has met these statutory capital
requirements.

   In order to modify exposure to interest rate and currency exchange rate
movements, the Company utilizes derivative instruments, primarily interest rate
swaps, in conjunction with some of its debt issues. The effect of these
derivative instruments is included in the calculation of the interest expense
on the associated debt, and as a result, the effective interest rates on the
debt may differ from the rates reflected in the tables above. Floating rates

                                      172



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

11.  SHORT-TERM AND LONG-TERM DEBT (continued)

are determined by contractual formulas and may be subject to certain minimum or
maximum rates. See Note 19 for additional information on the Company's use of
derivative instruments.

   Interest expense for short-term and long-term debt was $647 million, $1,056
million, and $863 million, for the years ended December 31, 2001, 2000, and
1999, respectively. Securities business related interest expense of $287
million, $456 million and $312 million for the years ended December 31, 2001,
2000 and 1999, respectively, is included in "Net investment income."

Prudential Holdings, LLC Notes

   On the date of demutualization, Prudential Holdings, LLC ("PHLLC"), a wholly
owned subsidiary of Prudential Financial, issued $1.75 billion in senior
secured notes (the "IHC debt"). PHLLC owns the capital stock of Prudential
Insurance and does not have any operating businesses of its own. The IHC debt
represents senior secured obligations of PHLLC with limited recourse; neither
Prudential Financial, Prudential Insurance nor any other affiliate of PHLLC is
an obligor or guarantor on the IHC debt. The IHC debt is collateralized by 14%
of the outstanding common stock of Prudential Insurance and other items
specified in the indenture, primarily the "debt coverage service account"
discussed below.

   PHLLC's ability to meet its obligations under the IHC debt is dependent
principally upon sufficient available funds being generated 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 of principal and interest on the Series
C notes is not insured. The IHC debt is redeemable prior to its stated maturity
at the option of PHLLC and, in the event of certain circumstances, the IHC debt
bond insurer can require PHLLC to redeem the IHC debt.

   Net proceeds from the IHC debt amounted to $1,727 million. The majority of
the net proceeds, or $1,218 million, was distributed to Prudential Financial
through a dividend on the date of demutualization for use in the Financial
Services Businesses. Net proceeds of $437 million were deposited to a
restricted account within PHLLC. This restricted account, referred to as the
"debt service coverage account," constitutes additional collateral for the IHC
debt and is maintained in the Financial Services Businesses. The remainder of
the net proceeds, or $72 million, was used to purchase a guaranteed investment
contract to fund a portion of the financial guarantee insurance premium related
to the IHC debt.

   Summarized consolidated financial data for Prudential Holdings, LLC is
presented below. Amounts include results of operations and cash flows of
Prudential Insurance prior to the date of demutualization.



                                                                                (In Millions)
                                                                                -------------
Consolidated Statement of Financial Position data at December 31, 2001:
-----------------------------------------------------------------------
                                                                             
                    Total assets...............................................   $220,585
                    Total liabilities..........................................   $205,994
                    Total equity...............................................   $ 14,591
                    Total liabilities and equity...............................   $220,585

Consolidated Statement of Operations data for the year ended December 31, 2001:
-------------------------------------------------------------------------------
                    Total revenues.............................................   $ 27,168
                    Total benefits and expenses................................   $ 27,395
                    Loss from continuing operations............................   $   (227)
                    Net loss...................................................   $   (151)

Consolidated Statement of Cash Flows data for the year ended December 31, 2001:
-------------------------------------------------------------------------------
                    Cash flows used in operating activities....................   $  5,240
                    Cash flows from investing activities.......................   $  7,401
                    Cash flows used in financing activities....................   $(13,730)
                   Net decrease in cash and cash equivalents...................   $ (1,089)


                                      173



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

11.  SHORT-TERM AND LONG-TERM DEBT (continued)


   Prudential Financial is a holding company and is a legal entity separate and
distinct from its subsidiaries. The rights of Prudential Financial to
participate in any distribution of assets of any subsidiary, including upon its
liquidation or reorganization, are subject to the prior claims of creditors of
that subsidiary, except to the extent that Prudential Financial may itself be a
creditor of that subsidiary and its claims are recognized. PHLLC and its
subsidiaries have entered into covenants and arrangements in connection with
the issuance of the IHC debt which are intended to confirm their separate,
"bankruptcy-remote" status, by assuring that the assets of PHLLC and its
subsidiaries are not available to creditors of Prudential Financial or its
other subsidiaries, except and to the extent that Prudential Financial and its
other subsidiaries are, as shareholders or creditors of PHLLC and its
subsidiaries, entitled to those assets.

   At December 31, 2001, the Company was in compliance with all IHC debt
covenants.

12.   EQUITY SECURITY UNITS

   On the date of demutualization, Prudential Financial issued 13,800,000 6.75%
equity security units (the "Units") to the public at an offering price of $50
per Unit for gross proceeds of $690 million. The Units are traded on the New
York Stock Exchange under the symbol "PFA." Each Unit has a stated amount of
$50 and initially consists of (1) a contract requiring the holder to purchase
(the "purchase contract"), for $50, shares of Common Stock of Prudential
Financial on November 15, 2004 (the "settlement date"), and (2) a redeemable
capital security of Prudential Financial Capital Trust I (the "Trust"), a
statutory business trust created under Delaware law, with a stated liquidation
amount of $50. The redeemable capital securities are initially pledged to
secure the obligations of the Unit holders to purchase Common Stock under the
purchase contracts. The number of shares of Common Stock that will be received
upon settlement of the purchase contracts (the "settlement rate") will be based
upon the "applicable market value" of the Common Stock. The "applicable market
value" means the average of the closing price per share of Common Stock on each
of the twenty consecutive trading days ending on the third trading day
preceding the settlement date. If the "applicable market value" of the Common
Stock is equal to or greater than $34.10, then the settlement rate will be 1.47
shares of Common Stock per purchase contract. If the "applicable market value"
of the Common Stock is less than or equal to $27.50, then the settlement rate
will be 1.82 shares of Common Stock per purchase contract. If the "applicable
market value" of the Common Stock is greater than $27.50 but less than $34.10,
the settlement rate will be equal to $50 divided by the "applicable market
value" of Common Stock per purchase contract.

   At the time of issuance of the Units by Prudential Financial, the Trust also
issued 426,805 shares of common securities to Prudential Financial at a price
of $50 per common security for gross proceeds of $21 million. The combined
proceeds to the Trust from the issuances of the redeemable capital securities
and the common securities (collectively, the "Trust securities"), or $711
million, were invested by the Trust in $711 million aggregate principal amount
5.34% debentures of Prudential Financial maturing on November 15, 2006. The
interest rate payable on the debentures will be reset to, and at the time of,
any reset to the distribution rate on the redeemable capital securities as
noted below. Prudential Financial may defer interest payments on the
debentures; however, the payments cannot be deferred beyond the maturity date
of the debentures of November 15, 2006. Upon repayment of the debentures by
Prudential Financial to the Trust on their maturity date, the Trust will use
the cash proceeds, after satisfaction of any liabilities to creditors of the
Trust, to repay the redeemable capital securities at their aggregate stated
liquidation amount plus any accrued and unpaid distributions. The Trust may not
redeem the redeemable capital securities at any other time, for any reason or
under any other circumstances. The debentures represent the sole assets of the
Trust and the redeemable capital securities and common securities represent an
undivided beneficial ownership interest in the assets of the Trust. The
redeemable capital securities rank equally with the common securities except
that, in the event of default by Prudential Financial on the debentures, the
redeemable capital securities become senior to the common securities. The
debentures are unsecured obligations of Prudential Financial and rank equally
in right of payment to all other senior unsecured debt of Prudential Financial.
Prudential Financial is dependent on dividends and other distributions from its
subsidiaries in order to make the principal and interest payments on the
debentures.


                                      174



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

12.   EQUITY SECURITY UNITS (continued)

   Holders of the purchase contracts receive, from Prudential Financial,
quarterly contract fee payments at an annual rate of 1.41% of the stated rate
of $50 per purchase contract through and including the settlement 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 of 5.34% of
the stated liquidation amount of $50 per redeemable capital security through
and including August 15, 2004. The quarterly distribution rate on the
redeemable capital securities may be reset, in conjunction with a planned
remarketing of the redeemable capital securities on August 15, 2004, effective
for distributions and interest accrued from August 16, 2004 to November 15,
2006. If Prudential Financial defers interest payments on the debentures as
noted above, the Trust will also defer distributions on the Trust securities.
During any period in which payments are deferred on the purchase contracts or
on the debentures and Trust securities, Prudential Financial cannot declare or
pay any dividends or distributions on its capital stock, other than the Class B
stock, or make certain other payments relating to the capital stock, other than
the Class B Stock, and debt of the Company that is equal to or junior to the
debentures.

   Prudential Financial has irrevocably guaranteed, on a senior and unsecured
basis, distributions on and the stated liquidation amount of the redeemable
capital securities to the extent of available Trust funds. The guarantee is
unsecured and ranks equally in right of payment to all other senior unsecured
debt of Prudential Financial. Prudential Financial currently has no outstanding
secured or other debt that would rank senior to this guarantee; however,
Prudential Financial's guarantee is effectively junior to the debt and other
liabilities of its subsidiaries.

   The financial statements of the Trust have been consolidated within the
financial statements of the Company. Accordingly, the investment in the common
securities of the Trust by Prudential Financial and the investment in the
debentures of Prudential Financial by the Trust have been eliminated in
consolidation and the redeemable capital securities, to which the entire gross
proceeds of $690 million from the issuance of the Units have been allocated,
are reported as "Guaranteed minority interest in Trust holding solely
debentures of Parent." Distributions on the redeemable capital securities are
reported as a charge to minority interest, which is included within "General
and administrative expenses." The present value of the sum of the contract fee
payments on the purchase contracts of $26 million has been recorded as a charge
directly to equity with a corresponding credit to liabilities. The contract fee
payments are allocated to the liability established and interest expense as the
payments are made. Issuance costs incurred in connection with the offering of
the Units, which have been paid by Prudential Financial, amounted to $27
million and are included in "Other assets." The issuance costs are being
amortized over the life of the redeemable capital securities.

13.  STOCKHOLDERS' EQUITY

Preferred Stock

   Prudential Financial adopted a shareholder rights plan (the "rights plan")
under which each outstanding share of Common Stock is coupled with a
shareholder right. The rights plan is not applicable to any Class B Stock. Each
right initially entitles the holder to purchase one one-thousandth of a share
of a series of Prudential Financial preferred stock upon payment of the
exercise price. At the time of the demutualization, the Board of Directors of
Prudential Financial determined that the initial exercise price per right is
$110, subject to adjustment from time to time as provided in the rights plan.
There is no preferred stock outstanding at December 31, 2001.

                                      175



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

13.  STOCKHOLDERS' EQUITY (continued)


Common Stock and Class B Stock

   On the date of demutualization, Prudential Financial completed an initial
public offering of 110.0 million shares of its Common Stock at an initial
public offering price of $27.50 per share. The shares of Common Stock issued in
the offerings were in addition to 457.1 million shares of Common Stock the
Company distributed to policyholders as part of the demutualization. On
December 21, 2001, Prudential Financial issued an additional 16.5 million
shares of Common Stock at an offering price of $27.50 per share as a result of
the exercise of the over-allotment option granted to underwriters in the
initial public offering. The Common Stock is traded on the New York 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.

   Holders of Common Stock have no interest in a legal entity representing the
Financial Services Businesses and holders of the Class B Stock have no interest
in a legal entity representing the Closed Block Business and holders of each
class of common stock are subject to all of the risks associated with an
investment in the Company.

   In the event of a liquidation, dissolution or winding-up of the Company,
holders of Common Stock and holders of Class B Stock would be entitled to
receive a proportionate share of the net assets of the Company that remain
after paying all liabilities and the liquidation preferences of any preferred
stock.

   On January 22, 2002, Prudential Financial's Board of Directors authorized
the repurchase of up to $1 billion of the outstanding Common Stock over an
unspecified period of time.

Dividend Restrictions

   Prudential Financial's principal sources of funds to meet its obligations,
including the payment of shareholder dividends and operating expenses, will be
dividends and interest from its subsidiaries. The regulated insurance,
broker-dealer 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 law provides that dividends or distributions may be
declared or paid by Prudential Insurance without prior regulatory approval only
from unassigned surplus, as determined pursuant to statutory accounting
principles, less unrealized capital gains and certain other adjustments. In
connection with the demutualization, unassigned surplus was reduced to zero,
thereby limiting Prudential Insurance's ability to pay a dividend in 2002
primarily to the amount of its statutory net gain from operations, not
including realized investment gains, for the period from December 18, 2001
through December 31, 2001. In addition, Prudential Insurance must obtain prior
non-disapproval from the New Jersey insurance regulator before paying a
dividend if the dividend, together with other dividends or distributions made
within the preceding twelve months, would exceed the greater of 10% of
Prudential Insurance's surplus as of the preceding December 31 or its net gain
from operations for the twelve month period ending on the preceding December 31.

   The laws regulating dividends of Prudential Financial's other insurance
subsidiaries domiciled in other states are similar, but not identical, to New
Jersey's. In addition, the net capital rules to which the broker-dealer
subsidiaries are subject may limit their ability to pay dividends to Prudential
Financial. The laws of foreign countries may also limit the ability of our
insurance and other subsidiaries organized in those countries to pay dividends
to Prudential Financial.

   The declaration and payment of dividends on the Common Stock depends
primarily upon the financial condition, results of operations, cash
requirements, future prospects and other factors relating to the Financial

                                      176



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

13.  STOCKHOLDERS' EQUITY (continued)

Services Businesses. Dividends declared and paid on the Common Stock do not
depend upon and are not affected by the financial performance of the Closed
Block Business, unless the Closed Block Business is in financial distress.
Dividends declared and paid on the Common Stock are not affected by decisions
with respect to dividend payments on the Class B Stock except as indicated in
the following paragraph. Furthermore, dividends on the Common Stock are limited
to both the amount that is legally available for payment under New Jersey
corporate law if the Financial Services Businesses were treated as a separate
corporation thereunder and the amount that is legally available for payment
under New Jersey corporate law on a consolidated basis after taking into
account dividends on the Class B Stock.

   The declaration and payment of dividends on the Class B Stock depends upon
the financial performance of the Closed Block Business and, as the Closed Block
matures, the holders of the Class B Stock will receive the surplus of the
Closed Block Business no longer required to support the Closed Block for
regulatory purposes. Dividends on the Class B Stock are payable in an aggregate
amount per year at least equal to the lesser of (1) a Target Dividend Amount of
$19.25 million or (2) the CB Distributable Cash Flow for such year, which is a
measure of the net cash flows of the Closed Block Business. Notwithstanding
this formula, as with any common stock, Prudential Financial will retain the
flexibility to suspend dividends on the Class B Stock; however, if CB
Distributable Cash Flow exists and Prudential Financial chooses not to pay
dividends on the Class B Stock in an aggregate amount at least equal to the
lesser of the CB Distributable Cash Flow or the Target Dividend Amount for that
period, then cash dividends cannot be paid on the Common Stock with respect to
such period.

Stock Conversion Rights of the Class B Stock

   Prudential Financial may, at its option, at any time, exchange all
outstanding shares of Class B Stock into such number of shares of Common Stock
as have an aggregate average market value equal to 120% of the appraised fair
market value of the outstanding shares of Class B Stock.

   Holders of Class B Stock will be permitted to convert their shares of Class
B Stock into such number of shares of Common Stock as have an aggregate average
market value equal to 100% of the appraised fair market value of the
outstanding shares of Class B Stock (1) in the holder's sole discretion,
beginning in the year 2016, and (2) 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, the Class B Stock or the IHC debt in a manner that
materially adversely affects the CB Distributable Cash Flow; provided, however,
that in no event may a holder of Class B Stock convert shares of Class B Stock
to the extent such holder immediately upon such conversion, together with its
affiliates, would be the beneficial owner (as defined under the Securities
Exchange Act of 1934) of in excess of 9.9% of the total outstanding voting
power of Prudential Financial's voting securities. In the event a holder of
shares of Class B Stock requests to convert shares pursuant to clause (2)(a) in
the preceding sentence, Prudential Financial may elect, instead of effecting
such conversion, to increase the Target Dividend Amount to $12.6875 per share
per annum retroactively from the time of issuance of the Class B Stock.

Statutory Net Income and Surplus

   Prudential Financial's insurance subsidiaries are required to prepare
statutory financial statements in accordance with statutory accounting
practices prescribed or permitted by the insurance department of the state of
domicile. Statutory accounting practices primarily differ from GAAP by 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 amounted to $(896)
million, $149 million and $333 million for the years ended December 31, 2001,
2000 and 1999, respectively. Statutory surplus of Prudential Insurance amounted
to $6,420 million and $8,640 million at December 31, 2001 and 2000,
respectively.

                                      177



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements


14.  EARNINGS PER SHARE

   The Company has outstanding two separate classes of common stock. The Common
Stock reflects the performance of the Financial Services Businesses, while the
Class B Stock reflects the performance of the Closed Block Business.
Accordingly, earnings per share is calculated separately for each of these two
classes of common stock. Earnings per share amounts are based on the earnings
available to common stockholders for the period subsequent to the date of
demutualization.

   Net income for the Financial Services Businesses and the Closed Block
Business is determined in accordance with GAAP and includes general and
administrative expenses charged to each of the respective businesses based on
the Company's methodology for the allocation of such expenses. The net income
of each business is modified for cash flows between the Financial Services
Businesses and the Closed Block Business related to administrative expenses,
which are determined by a policy servicing fee arrangement that is based upon
insurance in force and statutory cash premiums. To the extent actual
administrative expenses vary from these cash flow amounts, the differences will
be recorded, on an after tax basis, as direct equity adjustments to the
respective equity balances of each business. The direct equity adjustments are
used to adjust net income to determine the earnings available to each of the
classes of common stockholders for earnings per share purposes.

   The Financial Services Businesses will bear any expenses and liabilities
from litigation affecting the Closed Block policies as well as the consequences
of certain adverse tax determinations. In addition, in the year ended December
31, 2001 during the period prior to demutualization, a reserve of $144 million
was recorded in the Traditional Participating Products segment for death and
other benefits and related expenses due with respect to policies for which the
Company has not received a death claim but where death has occurred. Upon
demutualization, $134 million of this reserve became a liability of the
Financial Services Businesses and any subsequent changes in this reserve will
be included in the results of the Financial Services Businesses.

Common Stock

   The purchase contracts (see Note 12) are reflected in the diluted earnings
per share calculation using the treasury stock method. Under this method, the
number of shares of Common Stock used in calculating earnings per share for any
period are deemed to be increased by the excess, if any, of the number of
shares that would be required to be issued upon settlement of the purchase
contracts over the number of shares that could be purchased in the market, at
the average market price during that period, using the proceeds that would be
required to be paid upon settlement. Consequently, the purchase contracts are
dilutive to earnings per share when the average market price of the Common
Stock is above $34.10.

                                      178



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

14.  EARNINGS PER SHARE (continued)


   A reconciliation of the numerators and denominators of the basic and diluted
per share computations is as follows:



                                                                          December 18, 2001 through December 31, 2001
                                                                          -------------------------------------------
                                                                             Income                         Per Share
                                                                          (In Millions)          Shares      Amount
                                                                          -------------       -----------   ---------
                                                                                                   
Basic earnings per share
Net income attributable to the Financial Services Businesses available to
 holders of Common Stock.................................................      $38           580,047,053      $0.07
                                                                               ===            ===========     =====
Effect of dilutive securities
Stock options............................................................                        780,337
                                                                                              -----------
Diluted earnings per share
Net income attributable to the Financial Services Businesses available to
 holders of Common Stock.................................................      $38           580,827,390      $0.07
                                                                               ===            ===========     =====


Class B Stock

   The income attributable to the Closed Block Business and available to
holders of Class B Stock for the period December 18, 2001 through December 31,
2001 amounted to $3 million. The weighted average number of shares of Class B
Stock used in the calculation of basic earnings per share amounted to 2,000,000
shares. Diluted earnings per share is not presented as there are no potentially
dilutive shares associated with the Class B Stock.

15.  STOCK OPTIONS

   The Company's Board of Directors adopted the Prudential Financial, Inc.
Stock Option Plan (the "Plan"). Nonqualified Stock Options and Incentive Stock
Options as well as Stock Appreciation Rights ("SARs") are eligible for grant
under the plan. Participants can be employees and non-employees (i.e.,
statutory agents who perform services for the Company and participating
subsidiaries). The Company made one type of grant, the Associates Grant, in
2001. The Associates Grant is a broad based award, which granted 240 options
per full-time participant and 120 options per part-time participant. Each
option has an exercise price no less than the fair market value of the
Company's stock on the date the option is granted. The options have a maximum
term of 10 years. Generally, one third of the option grant vests in each of the
first three years; accordingly, options granted in 2001 generally will become
eligible for exercise in years 2002 through 2004. A total of 12,322,009 shares
have been authorized for grant under the Associates Grant. A total of
30,805,024 shares are available for the general grant of Options and SARs under
the Plan. There were no options granted or outstanding relating to the general
grant of Options and SARs at December 31, 2001.

                                      179



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

15.  STOCK OPTIONS (continued)


   The Company has elected to apply Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock options. If the Company had elected to
account for its stock options under the fair value method of SFAS No. 123
"Accounting for Stock Based Compensation," the Company's net income and
earnings per common share would have been reduced to the pro-forma amounts
indicated below:

Employee Stock Option Grants



                                                           2001
                                                  -----------------------
                                                       (In Millions)
                                                  (Except Per Share Data)
                                                  -----------------------
                                                  Financial       Closed
                                                   Services       Block
                                                  Businesses     Business
                                                  ----------     --------
                                                           
          Net Income
             As reported.........................   $  38         $   3
             Pro forma...........................      37             3
          Basic EPS
             As reported.........................   $0.07         $1.50
             Pro forma...........................    0.06          1.50
          Diluted EPS
             As reported.........................   $0.07         $1.50
             Pro forma...........................    0.06          1.50


   The compensation expense recognized for stock based employee compensation
awards was zero for the period December 18, 2001 through December 31, 2001.

   The fair value of each option is estimated on the date of grant using a
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2001:



                                                              2001
                                                             -------
                                                          
           Dividend yield...................................      1%
           Expected volatility..............................     37%
           Risk-free interest rate..........................   4.05%
           Expected life of stock option.................... 4 years


   The dividend yield reflects the assumption that the current dividend payout
will continue with no anticipated increases.

   A summary of the status of the Company's employee stock option grants at
December 31, and changes during the year ended is presented below:



                                                          2001
                                                  --------------------
                                                              Weighted
                                                              Average
                                                              Exercise
                                                    Shares     Price
         (Shares in thousands)                    ----------  --------
                                                        
         Outstanding at the beginning of the year     --       $   --
         Granted................................. 11,364,120    27.53
         Exercised...............................     --         --
         Forfeited...............................   (116,400)   27.50
         Expired.................................     --         --
         Transfer to non-employee status.........    (41,760)   27.50
                                                  ----------   ------
         Outstanding at the end of the year...... 11,205,960   $27.53
                                                  ==========   ======
         Options exercisable at the end of the
          year...................................     15,000   $27.50
                                                  ==========   ======


                                      180



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

15.  STOCK OPTIONS (continued)


   Employee options granted and their related grant date weighted average fair
value is isolated in further detail in the schedule below:



                                                          2001
                                             ------------------------------
                                                         Weighted  Weighted
                                                         Average   Average
                                                        Grant Date Exercise
                                               Shares   Fair Value  Price
     (Shares in thousands)                   ---------- ---------- --------
                                                          
     Exercise equals market................. 11,364,120   $8.78     $27.53
     Exercise exceeds market................     --        --         --
     Exercise less than market..............     --        --         --
                                             ----------   -----     ------
     Total granted during the year.......... 11,364,120   $8.78     $27.53
                                             ==========   =====     ======


   There were no significant modifications to employee options outstanding for
the year presented.

   The following table summarizes information about the employee stock options
outstanding at December 31, 2001:



                                                    Options Outstanding        Options Exercisable
                                              -------------------------------- --------------------
                                                           Weighted
                                                            Average   Weighted             Weighted
                                                           Remaining  Average              Average
                                                Number    Contractual Exercise   Number    Exercise
                                              Outstanding    Life      Price   Exercisable  Price
(Shares in thousands)                         ----------- ----------- -------- ----------- --------
                                                                            
Range of exercise prices ($27.50 -- $29.81).. 11,205,960     9.94      $27.53    15,000     $27.50


Non-employee Stock Option Grants

   The Company applies SFAS No. 123 "Accounting for Stock Based Compensation"
in accordance with Emerging Issues Task Force Issue No. 96-18 "Accounting for
Equity Instruments That Are Issued to Other Than Employees" and related
interpretations in accounting for its non-employee stock options.

   The compensation expense recognized for stock based non-employee
compensation awards was $270 thousand for the period December 18, 2001 through
December 31, 2001.

   The fair value of each option is estimated on the balance sheet date for
non-vested options and on the vesting date for vested options using a
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2001:



                                                                 2001
                                                              ----------
                                                           
       Dividend yield........................................         1%
       Expected volatility...................................        37%
       Risk-free interest rate...............................      4.07%
       Expected life of stock option......................... 3.95 years



                                      181



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

15.  STOCK OPTIONS (continued)


   The dividend yield reflects the assumption that the current dividend payout
will continue with no anticipated increases.

   A summary of the status of the Company's non-employee stock option grants at
December 31 and changes during the year ended is presented below:



                                                                        2001
                                                                  -----------------
                                                                           Weighted
                                                                           Average
                                                                           Exercise
                                                                  Shares    Price
(Shares in thousands)                                             -------  --------
                                                                     
Outstanding at the beginning of the year.........................    --     $   --
Granted.......................................................... 773,760    27.50
Exercised........................................................    --       --
Forfeited........................................................  (1,920)   27.50
Expired..........................................................    --       --
Transferred from employee status.................................  41,760    27.50
                                                                  -------   ------
Outstanding at the end of the year............................... 813,600   $27.50
                                                                  =======   ======
Options exercisable at the end of the year.......................   1,200   $27.50
                                                                  =======   ======
Weighted average balance sheet date fair value...................           $12.77
                                                                            ======


   There were no significant modifications to non-employee options outstanding
for the year.

   The following table summarizes information about the non-employee stock
options outstanding at December 31, 2001:



                                    Options Outstanding        Options Exercisable
                              -------------------------------- --------------------
                                           Weighted
                                            Average   Weighted             Weighted
                                           Remaining  Average              Average
                                Number    Contractual Exercise   Number    Exercise
                              Outstanding    Life      Price   Exercisable  Price
(Shares in thousands)         ----------- ----------- -------- ----------- --------
                                                            
Exercise price---$27.50......   813,600      9.94      $27.50     1,200     $27.50


16.  EMPLOYEE BENEFIT PLANS

Pension and Other Postretirement Plans

   The Company has funded non-contributory defined benefit pension plans which
cover substantially all of its employees. The Company also has several
non-funded non-contributory defined benefit plans covering certain executives.
For some employees, benefits are based on final average earnings and length of
service, while other employees are based on an account balance that takes into
consideration age, service and salary during their career. The Company's
funding policy is to contribute annually an amount necessary to satisfy the
Internal Revenue Code contribution guidelines.

   The Company provides certain life insurance and health care benefits ("other
postretirement benefits") for its retired employees, their beneficiaries and
covered dependents. The health care plan is contributory; the life insurance
plan is non-contributory.

   Substantially all of the Company's employees may become eligible to receive
other postretirement benefits if they retire after age 55 with at least 10
years of service or under certain circumstances after age 50 with at least 20
years of continuous service. These benefits are funded as considered necessary
by Company management.

                                      182



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

16.  EMPLOYEE BENEFIT PLANS (continued)


   The Company has elected to amortize its transition obligation for other
postretirement benefits over 20 years.


   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 plans as of September 30, adjusted for
fourth-quarter activity, is summarized below:



                                                                                   Other
                                                                              Postretirement
                                                           Pension Benefits      Benefits
                                                           ----------------  ----------------
                                                            2001     2000     2001     2000
                                                           -------  -------  -------  -------
                                                                      (In Millions)
                                                           ----------------------------------
                                                                          
Change in benefit obligation
Benefit obligation at the beginning of period............. $(5,461) $(5,430) $(1,996) $(1,941)
Service cost..............................................    (167)    (140)     (18)     (29)
Interest cost.............................................    (431)    (427)    (150)    (151)
Plan participants' contributions..........................      --       --       (8)      (7)
Amendments................................................       6      112       --      221
Acquisitions..............................................    (765)      --       --       --
Variable annuity purchase.................................     232       --       --       --
Actuarial gains (losses)..................................    (510)      34      (77)    (262)
Contractual termination benefits..........................      (1)     (17)      --       --
Benefits paid.............................................     462      407      152      172
Foreign currency changes..................................      28       --        1        1
                                                           -------  -------  -------  -------
Benefit obligation at end of period....................... $(6,607) $(5,461) $(2,096) $(1,996)
                                                           =======  =======  =======  =======
Change in plan assets
Fair value of plan assets at beginning of period.......... $10,356  $ 9,468  $ 1,560  $ 1,548
Actual return on plan assets..............................  (1,114)   1,270      (82)     170
Variable annuity purchase.................................    (232)      --       --       --
Employer contributions....................................      81       25        9        7
Plan participants' contributions..........................      --       --        8        7
Benefits paid.............................................    (462)    (407)    (152)    (172)
                                                           -------  -------  -------  -------
Fair value of plan assets at end of period................ $ 8,629  $10,356  $ 1,343  $ 1,560
                                                           =======  =======  =======  =======
Funded status
Funded status at end of period............................ $ 2,022  $ 4,895  $  (753) $  (436)
Unrecognized transition (asset) liability.................    (236)    (342)     188      207
Unrecognized prior service costs..........................      46       65        2        1
Unrecognized actuarial net gain...........................    (370)  (2,956)    (188)    (498)
Effects of fourth quarter activity........................       7        9        1        2
                                                           -------  -------  -------  -------
Net amount recognized..................................... $ 1,469  $ 1,671  $  (750) $  (724)
                                                           =======  =======  =======  =======
Amounts recognized in the Statements of Financial Position
Prepaid benefit cost...................................... $ 2,570  $ 2,022  $    --  $    --
Accrued benefit liability.................................  (1,177)    (382)    (750)    (724)
Intangible asset..........................................       6        7       --       --
Accumulated other comprehensive income....................      70       24       --       --
                                                           -------  -------  -------  -------
Net amount recognized..................................... $ 1,469  $ 1,671  $  (750) $  (724)
                                                           =======  =======  =======  =======


   The projected benefit obligations, accumulated benefit obligations and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $1,217 million, $1,080 million and $1 million,
respectively, at September 30, 2001 and $464 million, $384 million and $1
million, respectively, at September 30, 2000.

                                      183



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

16.  EMPLOYEE BENEFIT PLANS (continued)


   Pension plan assets consist primarily of equity securities, bonds, real
estate and short-term investments, of which $6,867 million and $7,381 million
are included in Separate Account assets and liabilities at September 30, 2001
and 2000, respectively.

   In 2001, the pension plan purchased a variable annuity contract for $232
million from Prudential Insurance. The approximate future annual benefit
payment for the variable annuity contract was $14 million.

   The benefit obligation for pensions decreased by $6 million in the year 2001
for miscellaneous changes related to the cash balance formula. The benefit
obligation for pensions decreased by a net $112 million in the year 2000 for
the effect of a Cost of Living Adjustment ("COLA") and the introduction of the
cash balance formula of ($134) million and $246 million, respectively. The COLA
was effective as of July 1, 2000 and increased benefits, subject to a maximum,
to retirees based upon their year of retirement. The introduction of the cash
balance formula was a feature of the substantive plan as of the measurement
date and is effective January 1, 2001 for new employees and January 1, 2002 for
existing employees.

   Other postretirement benefit plan assets consist of group and individual
life insurance policies, common stocks, corporate debt securities, U.S.
government securities, short-term investments and tax-exempt municipal debt.
Plan assets include $395 million and $463 million of Company insurance policies
at September 30, 2001 and 2000, respectively.

   The benefit obligation for other postretirement benefits was not affected by
amendments in 2001. The benefit obligation for other postretirement benefits
decreased by $221 million in the year 2000 for changes in the substantive plan
made to medical, dental and life benefits for individuals retiring on or after
January 1, 2001. The significant cost reduction features relate to the medical
and life benefits. The Company adopted a cap that limits its long-term cost
commitment to retiree medical coverage. The cap is defined as two times the
estimated company contribution toward the cost of coverage per retiree in 2000.
The new life insurance plan provides a reduced benefit of $10,000 of life
insurance to retirees.

   The pension benefits were amended during the time period presented to
provide contractual termination benefits to certain plan participants whose
employment had been terminated. Costs related to these amendments are reflected
in contractual termination benefits in the table below.

   Net periodic (benefit) cost included in "General and administrative
expenses" in the Company's Consolidated Statements of Operations for the years
ended December 31, includes the following components:



                                                                           Other Postretirement
                                                        Pension Benefits         Benefits
                                                      -------------------  -------------------
                                                      2001   2000   1999   2001   2000   1999
                                                      -----  -----  -----  -----  -----  -----
                                                                    (In Millions)
                                                                       
Components of net periodic (benefit) cost
Service cost......................................... $ 167  $ 140  $ 193  $  18  $  29  $  39
Interest cost........................................   431    427    410    150    150    141
Expected return on plan assets.......................  (880)  (799)  (724)  (134)  (133)  (121)
Amortization of transition amount....................  (106)  (106)  (106)    17     36     47
Amortization of prior service cost...................    12     47     45     --     --     --
Amortization of actuarial net (gain) loss............   (85)   (77)     4    (16)   (24)   (10)
Special termination benefits--discontinued operations    --     --     51     --     --      2
Curtailment (gain) loss--discontinued operations.....    --     --   (122)    --     --    108
Contractual termination benefits.....................     4      6     48     --     --     --
                                                      -----  -----  -----  -----  -----  -----
   Subtotal..........................................  (457)  (362)  (201)    35     58    206
Less amounts included in discontinued operations.....    --     --     84     --     --   (130)
                                                      -----  -----  -----  -----  -----  -----
Net periodic (benefit) cost.......................... $(457) $(362) $(117) $  35  $  58  $  76
                                                      =====  =====  =====  =====  =====  =====


                                      184



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

16.  EMPLOYEE BENEFIT PLANS (continued)


   The assumptions at September 30, used by the Company to calculate the
benefit obligations as of that date and to determine the benefit cost in the
subsequent year are as follows:



                                                              Pension Benefits    Other Postretirement Benefits
                                                              ----------------- ---------------------------------
                                                              2001  2000  1999     2001       2000       1999
                                                              ----- ----- ----- ---------- ---------- -----------
                                                                                    
Weighted-average assumptions
Discount rate (beginning of period).......................... 7.75% 7.75% 6.50%      7.75%      7.75%       6.50%
Discount rate (end of period)................................ 7.25% 7.75% 7.75%      7.25%      7.75%       7.75%
Rate of increase in compensation levels (beginning of period) 4.50% 4.50% 4.50%      4.50%      4.50%       4.50%
Rate of increase in compensation levels (end of period)...... 4.50% 4.50% 4.50%      4.50%      4.50%       4.50%
Expected return on plan assets............................... 9.50% 9.50% 9.50%      9.00%      9.00%       9.00%
Health care cost trend rates.................................    --    --    -- 6.76-8.76% 7.10-9.50% 7.50-10.30%
Ultimate health care cost trend rate after
  gradual decrease until 2006................................    --    --    --      5.00%      5.00%       5.00%


   Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage point increase and
decrease in assumed health care cost trend rates would have the following
effects:



                                                             Other
                                                    Postretirement Benefits
                                                    -----------------------
                                                             2001
                                                    -----------------------
                                                         (In Millions)
                                                 
    One percentage point increase
    Increase in total service and interest costs...          $ 10
    Increase in postretirement benefit obligation..           128

    One percentage point decrease
    Decrease in total service and interest costs...          $  8
    Decrease in postretirement benefit obligation..           110


Postemployment Benefits

   The Company accrues postemployment benefits primarily for life and health
benefits provided to former or inactive employees who are not retirees. The net
accumulated liability for these benefits at December 31, 2001 and 2000 was $189
million and $152 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
contributions by the Company of up to 4%, 3% and 3% of annual salary for 2001,
2000 and 1999, respectively. The matching contributions by the Company included
in "General and administrative expenses" are as follows:



                                                        401(k) Company Match
                                                        -------------------
                                                        2001     2000  1999
                                                        ----     ----  ----
                                                           (In Millions)
                                                              
      Company match.................................... $72      $62   $60
      Less amount included in discontinued operations..  --       --    (8)
                                                        ---      ---   ---
      401(k) Company match included in general and
       administrative expenses......................... $72      $62   $52
                                                        ===      ===   ===


                                      185



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements



17.  INCOME TAXES

   The components of income tax expense (benefit) for the years ended December
31, were as follows:



                                                       2001    2000   1999
                                                      -------  ----  ------
                                                          (In Millions)
                                                            
    Current tax expense (benefit)
       U.S........................................... $(1,030) $362  $  614
       State and local...............................      60    31      84
       Foreign.......................................      43    41      (8)
                                                      -------  ----  ------
       Total.........................................    (927)  434     690
    Deferred tax expense (benefit)
       U.S...........................................     773   (86)    206
       State and local...............................     (74)  (37)     44
       Foreign.......................................     171    95     102
                                                      -------  ----  ------
       Total.........................................     870   (28)    352
                                                      -------  ----  ------
    Total income tax expense (benefit)............... $   (57) $406  $1,042
                                                      =======  ====  ======


   The Company's actual income tax expense (benefit) for the years ended
December 31, differs from the expected amount computed by applying the
statutory federal income tax rate of 35% to income from continuing operations
before income taxes for the following reasons:



                                                  2001   2000   1999
                                                  -----  ----  ------
                                                     (In Millions)
                                                      
          Expected federal income tax expense.... $ (79) $254  $  789
          Non-deductible expenses................   228    61      33
          Equity tax.............................  (200)  100     190
          Non-taxable investment income..........   (83)  (42)    (78)
          State and local income taxes...........    (9)   (4)     83
          Other..................................    86    37      25
                                                  -----  ----  ------
             Total income tax expense (benefit).. $ (57) $406  $1,042
                                                  =====  ====  ======


   Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:



                                                           2001     2000
                                                          -------  ------
                                                           (In Millions)
                                                             
      Deferred tax assets
         Insurance reserves.............................. $   894  $1,371
         Net operating loss carryforwards................     366     353
         Policyholder dividends..........................     210     297
         Litigation related reserves.....................      88      32
         Investments.....................................      34    (129)
         Other...........................................     120     137
                                                          -------  ------
         Deferred tax assets before valuation allowance..   1,712   2,061
         Valuation allowance.............................     (77)    (38)
                                                          -------  ------
         Deferred tax assets after valuation allowance...   1,635   2,023
                                                          -------  ------
      Deferred tax liabilities
         Deferred policy acquisition costs...............   1,779   1,858
         Net unrealized investment gains (losses)........     890     273
         Depreciation....................................     159      71
         Employee benefits...............................      90      16
                                                          -------  ------
         Deferred tax liabilities........................   2,918   2,218
                                                          -------  ------
      Net deferred tax liability......................... $(1,283) $ (195)
                                                          =======  ======


                                      186



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

17.  INCOME TAXES (continued)


   Management believes that based on its historical pattern of taxable income,
the Company will produce sufficient income in the future to realize its
deferred tax asset after valuation allowance. A valuation allowance has been
recorded primarily related to tax benefits associated with foreign operations
and state and local deferred tax assets. Adjustments to the valuation allowance
will be made if there is a change in management's assessment of the amount of
the deferred tax asset that is realizable. At December 31, 2001 and 2000,
respectively, the Company had federal net operating loss carryforwards of $109
million and $848 million, which expire between 2009 and 2018. At December 31,
2001 and 2000, respectively, the Company had state operating loss carryforwards
for tax purposes approximating $2,647 million and $509 million, which expire
between 2005 and 2021. At December 31, 2001 and 2000, respectively, the Company
had foreign operating loss carryforwards for tax purposes approximating $597
million and $86 million, which expire between 2003 and 2006.

   Deferred taxes are not provided on the undistributed earnings of foreign
subsidiaries (considered to be permanent investments), which at December 31,
2001 were $1,749 million. Determining the tax liability that would arise if
these earnings were remitted is not practicable.

   The Internal Revenue Service (the "Service") has completed all examinations
of the consolidated federal income tax returns through 1992. The Service has
examined the years 1993 through 1995. Discussions are being held with the
Service with respect to proposed adjustments. Management, however, believes
there are adequate defenses against, or sufficient reserves to provide for such
adjustments. The Service has completed its examination of 1996 and has begun
its examination of 1997 through 2000.

18.  FAIR VALUE OF FINANCIAL INSTRUMENTS

   The estimated fair values presented below have been determined by using
available market information and by applying valuation methodologies.
Considerable judgment is applied in interpreting data to develop the estimates
of fair value. Estimated fair values may not be realized in a current market
exchange. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair values. The
methods and assumptions discussed below were used in calculating the estimated
fair values of the instruments. See Note 19 for a discussion of derivative
instruments.

Fixed Maturities and Equity Securities

   Estimated fair values for fixed maturities and equity securities, other than
private placement securities, are based on quoted market prices or estimates
from independent pricing services. Generally, fair values for private placement
fixed maturities are estimated using a discounted cash flow model which
considers the current market spreads between the U.S. Treasury yield curve and
corporate bond yield curve, adjusted for the type of issue, its current credit
quality and its remaining average life. The fair value of certain
non-performing private placement fixed maturities is based on amounts estimated
by management.

Commercial Loans

   The estimated fair value of commercial loans is primarily based upon the
present value of the expected future cash flows discounted at the appropriate
U.S. Treasury 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 policy loans is calculated using a discounted
cash flow model based upon current U.S. Treasury rates and historical loan
repayment patterns.

                                      187



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

18.  FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)


Mortgage Securitization Inventory

   The estimated fair value of the mortgage securitization inventory is
primarily based upon the intended exit strategy for the mortgage loans,
including securitization and whole loan sales. For loans expected to be
securitized, the value is estimated using a pricing model that, among other
factors, considers current investor yield requirements for subordination and
yield.

Investment Contracts

   For guaranteed investment contracts, income annuities, and other similar
contracts without life contingencies, estimated fair values are derived using
discounted projected cash flows based on interest rates being offered for
similar contracts with maturities consistent with those of the contracts being
valued. For individual deferred annuities and other deposit liabilities, fair
value approximates carrying value.

Debt

   The estimated fair value of short-term and long-term debt is derived by
using discount rates based on the borrowing rates currently available to the
Company for debt with similar terms and remaining maturities.

   The following table discloses the carrying amounts and estimated fair values
of the Company's financial instruments at December 31,



                                                       2001                2000
                                                ------------------- -------------------
                                                Carrying Estimated  Carrying Estimated
                                                 Amount  Fair Value  Amount  Fair Value
                                                -------- ---------- -------- ----------
                                                             (In Millions)
                                                                 
FINANCIAL ASSETS
Other than trading
Fixed maturities
   Available for sale.......................... $109,942  $109,942  $83,827   $83,827
   Held to maturity............................      374       395   12,448    12,615
Equity securities..............................    2,272     2,272    2,317     2,317
Commercial loans...............................   19,729    20,106   15,919    15,308
Policy loans...................................    8,570     9,562    8,046     8,659
Short-term investments.........................    4,855     4,855    5,029     5,029
Mortgage securitization inventory..............    1,180     1,188    1,420     1,448
Cash and cash equivalents......................   18,536    18,536    7,676     7,676
Restricted cash and securities.................    1,930     1,930    2,196     2,196
Separate account assets........................   77,158    77,158   82,217    82,217

Trading
Trading account assets......................... $  5,043  $  5,043  $ 7,217   $ 7,217
Broker-dealer related receivables..............    7,802     7,802   11,860    11,860
Securities purchased under agreements to resell    4,421     4,421    5,395     5,395
Cash collateral for borrowed securities........    5,210     5,210    3,858     3,858

FINANCIAL LIABILITIES
Other than trading
Investment contracts........................... $ 35,379  $ 35,911  $25,033   $25,359
Securities sold under agreements to repurchase.    6,088     6,088    7,162     7,162
Cash collateral for loaned securities..........    4,813     4,813    4,762     4,762
Short-term and long-term debt..................   10,709    10,881   13,633    13,800
Securities sold but not yet purchased..........       19        19      157       157
Separate account liabilities...................   77,158    77,158   82,217    82,217

Trading
Broker-dealer related payables................. $  6,445  $  6,445  $ 5,965   $ 5,965
Securities sold under agreements to repurchase.    6,297     6,297    7,848     7,848
Cash collateral for loaned securities..........    4,614     4,614    6,291     6,291
Securities sold but not yet purchased..........    2,772     2,772    4,802     4,802


                                      188



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements


19.  DERIVATIVE INSTRUMENTS

Adoption of Statement of Financial Accounting Standards ("SFAS") No. 133

   The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended, on January 1, 2001. Except as noted below, the
adoption of this statement did not have a material impact on the results of
operations of the Company.

   Upon its adoption of SFAS No. 133, the Company reclassified "held to
maturity" securities with a fair market value of approximately $12,085 million
to "available-for-sale" as permitted by the new standard. This reclassification
resulted in unrealized investment gains of $94 million, net of tax, which were
recorded as a component of "Accumulated other comprehensive income (loss)."

Accounting for Derivatives and Hedging Activities

   Derivatives are financial instruments whose values are derived from interest
rates, foreign exchange rates, financial indices, or the value 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-the-counter market.

   Derivatives held for trading purposes are used in the Company's securities
operations to meet the needs of customers by structuring transactions that
allow customers to manage their exposure to interest rates, foreign exchange
rates, indices or prices of securities and commodities. Trading derivatives are
also utilized in a limited-purpose subsidiary primarily through the operation
of hedge portfolios and in the Company's commercial mortgage securitization
business. Trading derivative positions are carried at estimated fair value,
generally by obtaining quoted market prices or through the use of pricing
models. Values are affected by changes in interest rates, currency exchange
rates, credit spreads, market volatility and liquidity.

   Derivatives held for trading purposes are recorded at fair value in the
Consolidated Statements of Financial Position either as assets, within "Trading
account assets" or "Broker-dealer related receivables," or as liabilities
within "Broker-dealer related payables" or "Other liabilities." Realized and
unrealized changes in fair value are included in "Commissions and other income"
in the Consolidated Statements of Operations in the periods in which the
changes occur. Cash flows from trading derivatives are reported in the
operating activities section of the Consolidated Statements of Cash Flows.

   Derivatives held for purposes other than trading are used to seek to reduce
exposure to interest rate and foreign currency risks associated with assets
held or expected to be purchased or sold, and liabilities incurred or expected
to be incurred. Other than trading derivatives are also used to manage the
characteristics of the Company's asset/liability mix, manage the interest rate
characteristics of invested assets and to mitigate the risk of a diminution,
upon translation to U.S. dollars, of expected non-U.S. earnings resulting from
unfavorable changes in currency exchange rates.

   Derivatives held for purposes other than trading are recognized on the
Consolidated Statements of Financial Position at their fair value. On the date
the derivative contract is entered into, the Company designates the derivative
as either (1) a hedge of the fair value of a recognized asset or liability or
unrecognized firm commitment ("fair value" hedge), (2) a hedge of a forecasted
transaction or of the variability of cash flows to be received or paid related
to a recognized asset or liability ("cash flow" hedge), (3) a foreign-currency
fair value or cash flow hedge ("foreign currency" hedge), (4) a hedge of a net
investment in a foreign operation, or (5) a derivative entered into as an
economic hedge that does not qualify for hedge accounting.

   To qualify for hedge accounting treatment, a derivative must be highly
effective in mitigating the designated risk of the hedged item. Effectiveness
of the hedge is formally assessed at inception and throughout the life of the

                                      189



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

19.  DERIVATIVE INSTRUMENTS (continued)

hedging relationship. Even if a derivative qualifies for special hedge
accounting treatment, there may be an element of ineffectiveness of the hedge.
Under such circumstances, the ineffective portion of adjusting the derivative
to fair value is recorded in "Realized investment gains (losses), net." The
ineffective portion of derivatives accounted for using both cash flow and fair
value hedge accounting for the period ended December 31, 2001 was not material
to the results of operations of the Company.

   The Company discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer highly effective in offsetting
changes in the fair value or cash flows of a hedged item (including firm
commitments or forecasted transactions); (2) the derivative expires or is sold,
terminated, or exercised; (3) the derivative is no longer designated as a hedge
instrument, because (a) it is unlikely that a forecasted transaction will
occur; (b) because a hedged firm commitment no longer meets the definition of a
firm commitment; or (c) management determines that designation of the
derivative as a hedge instrument is no longer appropriate.

   When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as a highly effective fair value hedge, the
derivative will continue to be carried on the balance sheet at its fair value,
and the hedged asset or liability, which normally would not be carried at fair
value, will no longer be adjusted for changes in fair value. When hedge
accounting is discontinued because the hedged item no longer meets the
definition of a firm commitment, the derivative will continue to be carried on
the balance sheet at its fair value, and any asset or liability that was
recorded pursuant to recognition of the firm commitment will be removed from
the balance sheet and recognized as a gain or loss in current-period earnings.
When hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, the derivative will continue to be carried on the
balance sheet at its fair value, and gains and losses that were accumulated in
other comprehensive income will be recognized immediately in earnings. In all
other situations in which hedge accounting is discontinued, the derivative will
be carried at its fair value on the balance sheet, with changes in its fair
value recognized in current-period earnings. For the year ended December 31,
2001, there were no reclassifications to earnings due to firm commitments no
longer deemed probable or due to forecasted transactions that had not occurred
by the end of the originally specified time period.

   The Company formally documents all relationships between hedging instruments
and hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives designated as fair value, cash flow, or foreign currency hedges to
specific assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions.

   When a derivative is designated as a fair value hedge and is determined to
be highly effective, changes in its fair value, along with changes in the fair
value of the hedged asset or liability (including losses or gains on firm
commitments), are reported on a net basis in the income statement line item
associated with the hedged item. Under certain circumstances, the change in
fair value of an unhedged item is either not recorded or recorded instead in
"Accumulated other comprehensive income (loss)." When such items are hedged and
the hedge qualifies as a fair value hedge, the change in fair value of the
hedged item and the derivative are reported on a net basis in "Realized
investment gains (losses), net."

   When a derivative is designated as a cash flow hedge and is determined to be
highly effective, changes in its fair value are recorded in "Accumulated other
comprehensive income (loss)" until earnings are affected by the variability of
cash flows (e.g., when periodic settlements on a variable-rate asset or
liability are recorded in earnings). At that time, the related portion of
deferred gains or losses are reclassified to the income statement
classification of the hedged item.

                                      190



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

19.  DERIVATIVE INSTRUMENTS (continued)


   Presented below is a roll forward of current period cash flow hedges in
"Accumulated other comprehensive income (loss)" before taxes .



                                                                                                                 (In Millions)
                                                                                                              
Additions due to cumulative effect of change in accounting principle upon adoption of SFAS No. 133 at January 1,
 2001...........................................................................................................     $  8
Net deferred losses on cash flow hedges from January 1 to December 31, 2001.....................................       (6)
Amount reclassified into current period earnings................................................................      (18)
                                                                                                                     ----
   Balance, December 31, 2001...................................................................................     $(16)
                                                                                                                     ====


   It is anticipated that a pre-tax gain of approximately $26 million will be
reclassified from "Accumulated other comprehensive income (loss)" to earnings
during the year ended December 31, 2002 and offset by equal amounts pertaining
to the hedged items. The maximum length for which variable cash flows are
hedged is 16 years. Income amounts deferred in "Accumulated other comprehensive
income (loss)" as a result of cash flow hedges are included in "Net unrealized
investment gains (losses)" in the Consolidated Statements of Stockholders'
Equity.

   When a derivative is designated as a foreign currency hedge and is
determined to be effective, changes in its fair value are recorded in either
current period earnings or "Accumulated other comprehensive income (loss),"
depending on whether the hedge transaction is a fair value hedge (e.g., a hedge
of a firm commitment that is to be settled in a foreign currency) or a cash
flow hedge (e.g., a foreign currency denominated forecasted transaction). If,
however, a derivative is used as a hedge of a net investment in a foreign
operation, its changes in fair value, to the extent effective as a hedge, are
recorded in the cumulative translation adjustments account within "Accumulated
other comprehensive income (loss)." Those amounts, before applicable taxes,
were gains of $77 million in 2001, $88 million in 2000 and a loss of $47
million in 1999.

   If a derivative does not qualify for hedge accounting as described above, it
is recorded at fair value in "Other long-term investments" or "Other
liabilities" in the Consolidated Statements of Financial Position, and changes
in its fair value are included in current earnings without considering changes
in fair value of the hedged assets or liabilities. See "Types of Derivative
Instruments" for further discussion of the classification of derivative
activity in current earnings. Cash flows from other than trading derivatives
are reported in the investing activities section in the Consolidated Statements
of Cash Flows.

   The Company occasionally purchases a financial instrument that contains a
derivative instrument that is "embedded" in the financial instrument. Upon
purchasing the instrument, the Company assesses whether the economic
characteristics of the embedded derivative are clearly and closely related to
the economic characteristics of the remaining component of the financial
instrument (i.e., the host contract) and whether a separate instrument with the
same terms as the embedded instrument would meet the definition of a derivative
instrument. When it is determined that (1) the embedded derivative possesses
economic characteristics that are not clearly and closely related to the
economic characteristics of the host contract, and (2) a separate instrument
with the same terms would qualify as a derivative instrument, the embedded
derivative is separated from the host contract, carried at fair value, and
changes in its fair value are included in "Realized investment gains (losses),
net."

Types of Derivative Instruments

   Interest rate swaps are used by the Company to manage interest rate
exposures arising from mismatches between assets and liabilities (including
duration mismatches) and to hedge against changes in the value of assets it
anticipates acquiring and other anticipated transactions and commitments. Under
interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed-rate and

                                      191



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

19.  DERIVATIVE INSTRUMENTS (continued)

floating-rate interest amounts calculated by reference to an agreed notional
principal amount. Generally, no cash is exchanged at the outset of the contract
and no principal payments are made by either party. Cash is paid or received
based on the terms of the swap. These transactions are entered into pursuant to
master agreements that provide for a single net payment to be made by one
counterparty at each due date. The fair value of swap agreements is estimated
based on proprietary pricing models or market quotes.

   As discussed above, if an interest rate swap does not qualify for hedge
accounting, changes in its fair value are included in "Realized investment
gains (losses), net" without considering changes in fair value of the hedged
assets or liabilities. During the period that interest rate swaps are
outstanding, net receipts or payments are included in "Net investment income."
Net interest receipts (payments) were $(29) million in 2001, $11 million in
2000 and $(4) million in 1999.

   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
assets, and to hedge against changes in the value of securities it owns or
anticipates acquiring or selling. In exchange-traded futures transactions, the
Company agrees to purchase or sell a specified number of contracts, the value
of which are determined by the value of designated classes of Treasury
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 are members of a trading exchange. The fair value of
those futures and options is based on market quotes.

   Treasury futures typically are used to hedge duration mismatches between
assets and liabilities by replicating Treasury performance. Treasury futures
move substantially in value as interest rates change and can be used to either
modify or hedge existing interest rate risk. This strategy protects against the
risk that cash flow requirements may necessitate liquidation of investments at
unfavorable prices resulting from increases in interest rates. This strategy
can be a more cost effective way of temporarily reducing the Company's exposure
to a market decline than selling fixed income securities and purchasing a
similar portfolio when such a decline is believed to be over.

   When the Company anticipates a significant decline in the stock market that
will correspondingly affect its diversified portfolio, it may purchase put
index options where the basket of securities in the index is appropriate to
provide a hedge against a decrease in the value of the Company's equity
portfolio or a portion thereof. This strategy effects an orderly sale of hedged
securities. When the Company has large cash flows which it has allocated for
investment in equity securities, it may purchase call index options as a
temporary hedge against an increase in the price of the securities it intends
to purchase. This hedge is intended to permit such investment transactions to
be executed with less adverse market impact.

   Currency derivatives, including exchange-traded currency futures and
options, currency forwards and currency swaps, are used by the Company to
reduce market risks from changes in currency exchange rates with respect to
investments denominated in foreign currencies that the Company either holds or
intends to acquire or sell.

   Under exchange-traded currency futures and options, the Company agrees to
purchase or sell a specified number of contracts 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 currency
futures and options with regulated futures commissions merchants who are
members of a trading exchange.

   Under currency forwards, the Company agrees with other parties upon delivery
of a specified amount of an identified currency at a specified future date.
Typically, the price is agreed upon at the time of the contract and payment for
such a contract is made at the specified future date. In addition to managing
the risks noted above,

                                      192



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

19.  DERIVATIVE INSTRUMENTS (continued)

the Company uses currency forwards to mitigate the risk that unfavorable
changes in currency exchange rates will reduce U.S. dollar equivalent earnings
generated by certain of its non-U.S. businesses, primarily its Japanese
insurance operations. The Company executes forward sales of the hedged currency
in exchange for U.S. dollars at a specified exchange rate. The maturities of
these forwards correspond with the future periods in which the non-U.S.
earnings are expected to be generated. When contracts are terminated, in the
same period as the expected earnings, the resulting positive or negative cash
flow is included in "Commissions and other income" (revenues of $34 million in
2001 and $22 million in 2000). Changes in the fair value of open contracts are
included in "Realized investment gains (losses), net." At December 31, 2001,
the fair value of open contracts used for this purpose was $78 million.

   Under currency swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between one currency and another at a
forward exchange rate and calculated by reference to an agreed principal
amount. Generally, the principal amount of each currency is exchanged at the
beginning and termination of the currency swap by each party. These
transactions are entered into pursuant to master agreements that provide for a
single net payment to be made by one counterparty for payments made in the same
currency at each due date.

   Forward contracts are used by the Company to manage market risks relating to
interest rates and commodities and trades in mortgage-backed securities forward
contracts. The latter activity was exited in connection with the restructuring
of Prudential Securities Group Inc.'s capital markets activities as discussed
in Note 4. Typically, the price is agreed upon at the time of the contract and
payment for such a contract is made at the specified future date.

   The tables below summarize the Company's outstanding positions by derivative
instrument types at December 31, 2001 and 2000. The amounts presented are
classified as either trading or other than trading, based on management's
intent at the time of contract inception and throughout the life of the
contract. The table includes the estimated fair values of outstanding
derivative positions only and does not include the changes in fair values of
associated financial and non-financial assets and liabilities, which generally
offset derivative gains and losses. The fair value amounts presented also do
not reflect the netting of amounts pursuant to right of setoff, qualifying
master netting agreements with counterparties or collateral arrangements.

                                      193



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

19.  DERIVATIVE INSTRUMENTS (continued)


                       Derivative Financial Instruments
                               December 31, 2001



                          Trading                Other than Trading                 Total
                     ------------------ ------------------------------------- ------------------
                                                               Non-Hedge
                                         Hedge Accounting      Accounting
                                        ------------------ ------------------
                              Estimated          Estimated          Estimated          Estimated
                                Fair               Fair               Fair               Fair
                     Notional   Value   Notional   Value   Notional   Value   Notional   Value
                     -------- --------- -------- --------- -------- --------- -------- ---------
                                                    (In Millions)
                                                               
Swap Instruments
Interest rate
  Asset............. $10,537   $  574    $  175     $15    $ 2,199    $ 75    $12,911   $  664
  Liability.........  12,777      647       333      10      5,220      67     18,330      724
Currency
  Asset.............      --       --       779      37        742      88      1,521      125
  Liability.........     127       41       997      72        234      17      1,358      130
Equity and commodity
  Asset.............      20        3        --      --         45       6         65        9
  Liability.........      55        3        --      --         --      --         55        3
Forward contracts
Interest rate
  Asset.............   1,817        9        --      --         --      --      1,817        9
  Liability.........   1,882        9        --      --         --      --      1,882        9
Currency
  Asset.............   8,507      131     1,467      10      6,396     162     16,370      303
  Liability.........   8,724      138       486       6      1,386      82     10,596      226
Equity and commodity
  Asset.............   1,172       94        --      --         --      --      1,172       94
  Liability.........   1,161       90        --      --         --      --      1,161       90
Futures contracts
Interest rate
  Asset.............  10,273       21        --      --      1,610      11     11,883       32
  Liability.........   2,641       32        --      --        603       8      3,244       40
Currency
  Asset.............     253        1        --      --         --      --        253        1
  Liability.........     221        6        --      --         --      --        221        6
Equity and commodity
  Asset.............      28       --        --      --        659       4        687        4
  Liability.........     173        1        --      --          5       1        178        2
Option contracts
Interest rate
  Asset.............  10,699       73        --      --        338       3     11,037       76
  Liability.........   8,404       49        --      --         --      --      8,404       49
Currency
  Asset.............     181        5        --      --         --      --        181        5
  Liability.........     389        7        --      --         --      --        389        7
Equity and commodity
  Asset.............     111        4        --      --         --      --        111        4
  Liability.........     130        1        --      --         --      --        130        1
                     -------   ------    ------     ---    -------    ----    -------   ------
Total Derivatives
  Assets............ $43,598   $  915    $2,421     $62    $11,989    $349    $58,008   $1,326
                     =======   ======    ======     ===    =======    ====    =======   ======
  Liabilities....... $36,684   $1,024    $1,816     $88    $ 7,448    $175    $45,948   $1,287
                     =======   ======    ======     ===    =======    ====    =======   ======


                                      194



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

19.  DERIVATIVE INSTRUMENTS (continued)


                       Derivative Financial Instruments
                               December 31, 2000



                          Trading                Other than Trading                 Total
                     ------------------ ------------------------------------- ------------------
                                                               Non-Hedge
                                         Hedge Accounting      Accounting
                                        ------------------ ------------------
                              Estimated          Estimated          Estimated          Estimated
                                Fair               Fair               Fair               Fair
                     Notional   Value   Notional   Value   Notional   Value   Notional   Value
                     -------- --------- -------- --------- -------- --------- -------- ---------
                                                    (In Millions)
                                                               
Swap Instruments
Interest rate
  Asset............. $ 9,693    $352      $ --     $ --     $1,908    $ 57    $11,601   $  409
  Liability.........  10,521     370        --       --      2,126      81     12,647      451
Currency
  Asset.............       7      --        --       --        383      31        390       31
  Liability.........      30      34        --       --        302      20        332       54
Equity and commodity
  Asset.............      55      14        --       --         46      17        101       31
  Liability.........      55      12        --       --       --        --         55       12
Forward contracts
Interest rate
  Asset.............   3,469      33        --       --       --        --      3,469       33
  Liability.........   3,319      33        --       --       --        --      3,319       33
Currency
  Asset.............   6,044     185       472        9      2,319      29      8,835      223
  Liability.........   5,897     195       429        9         27      79      6,353      283
Equity and commodity
  Asset.............   2,091      75        --       --       --        --      2,091       75
  Liability.........   1,923      75        --       --       --        --      1,923       75
Futures contracts
Interest rate
  Asset.............  11,582      14        --       --      2,410      55     13,992       69
  Liability.........   6,513      29        --       --      1,468      21      7,981       50
Equity and commodity
  Asset.............     782      27        --       --       --        --        782       27
  Liability.........   1,324      36        --       --       --        --      1,324       36
Option contracts
Interest rate
  Asset.............   4,141      48        --       --       --        --      4,141       48
  Liability.........   4,273      29        --       --       --        --      4,273       29
Currency
  Asset.............   1,108      27        --       --       --        --      1,108       27
  Liability.........   1,174      26        --       --       --        --      1,174       26
Equity and commodity
  Asset.............     175       3        --       --       --        --        175        3
  Liability.........     126       1        --       --       --        --        126        1
                     -------    ----      ----     ----     ------    ----    -------   ------
Total Derivatives
  Assets............ $39,147    $778      $472     $  9     $7,066    $189    $46,685   $  976
                     =======    ====      ====     ====     ======    ====    =======   ======
  Liabilities....... $35,155    $840      $429     $  9     $3,923    $201    $39,507   $1,050
                     =======    ====      ====     ====     ======    ====    =======   ======


                                      195



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

19.  DERIVATIVE INSTRUMENTS (continued)


Credit Risk

   The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to derivative financial instruments.
Generally, the current credit exposure of the Company's derivative contracts is
limited to the fair value at the reporting date. The credit exposure of the
Company's swaps transactions is represented by the fair value (market value) of
contracts with a positive fair value (market value) at the reporting date.
Because exchange-traded futures and options are effected through regulated
exchanges, and positions are marked to market on a daily basis, the Company has
little exposure to credit-related losses in the event of nonperformance by
counterparties to such financial instruments. The credit exposure of
exchange-traded instruments is represented by the negative change, if any, in
the fair value (market value) of contracts from the fair value (market value)
at the reporting date. The credit exposure of currency forwards is represented
by the difference, if any, between the exchange rate specified in the contract
and the exchange rate for the same currency at the reporting date.

   The Company manages credit risk by entering into transactions with
creditworthy counterparties and obtaining collateral where appropriate and
customary. In addition, the Company enters into over-the-counter swaps pursuant
to master agreements that provide for a single net payment to be made by one
counterparty to another at each due date and upon termination. Likewise, the
Company effects exchange-traded futures and options through regulated exchanges
and these positions are marked to market on a daily basis.

20.  SEGMENT INFORMATION

   The Company has organized its principal operations into the Financial
Services Businesses and the Closed Block Business. Within the Financial
Services Businesses, the Company operates through four divisions which,
together, encompass ten reportable segments. The four operating divisions
within the Financial Services Businesses are: U.S. Consumer, Employee Benefits,
International and Asset Management. Businesses that are not sufficiently
material to warrant separate disclosure are included in Corporate and Other
operations. Collectively, the businesses that comprise the four operating
divisions and Corporate and Other are referred to as the Financial Services
Businesses. The segments within the Financial Services Businesses as well as
the Closed Block Business correspond to businesses for which discrete financial
information is available and reviewed by management.

   The U.S. Consumer division consists of the Individual Life Insurance,
Private Client Group, Retail Investments and Property and Casualty Insurance
segments. The Individual Life Insurance segment manufactures and distributes
variable life, term life, universal life, and other non-participating life
insurance products to the United States retail market and distributes
investment and protection products for other segments. The Private Client Group
segment offers full service securities brokerage and financial advisory
services, as well as consumer banking services, to retail customers in the
United States. The Retail Investments segment manufactures, distributes and
services mutual funds, variable and fixed annuities and wrap-fee products to
retail customers in the United States. The Property and Casualty Insurance
segment manufactures and distributes personal lines property and casualty
insurance products, principally automobile and homeowners insurance, to the
United States retail market.

   The Employee Benefits division consists of the Group Insurance and Other
Employee Benefits segments. The Group Insurance segment manufactures and
distributes group life, disability and related insurance products in connection
with employee and member benefit plans. The Other Employee Benefits segment
manufactures, services and delivers products and services for defined
contribution and other retirement plans as well as guaranteed investment
contracts, group annuities and relocation services to employers. The Other
Employee Benefits segment also markets real estate brokerage franchises to
regional and local real estate brokers.

                                      196



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

20.  SEGMENT INFORMATION (continued)


   The International division consists of the International Insurance and
International Securities and Investments segments. The International Insurance
segment manufactures and distributes principally individual life insurance
products to the affluent retail market in Japan, as well as Korea and Taiwan,
and has commenced operations in selected Asian, Latin American and European
countries. The International Securities and Investments segment offers
brokerage services, primarily in U.S. securities, asset management and
financial advisory services to retail and institutional clients outside of the
United States.

   The Asset Management division consists of the Investment Management and
Advisory Services and Other Asset Management segments. The Investment
Management and Advisory Services segment provides institutional asset
management products and services to unaffiliated institutional clients as well
as management services for assets supporting products offered by other
segments. The Other Asset Management segment includes equity securities sales
and trading and commercial mortgage securitization activities, as well as hedge
portfolio results.

   Corporate and Other includes financial services businesses that are not
included in other reportable segments as well as corporate-level activities.
These businesses include international ventures, divested businesses and
businesses that have not been divested but have been placed in wind-down
status. The latter includes individual health insurance, group credit insurance
and Canadian life insurance. The divested businesses include the results of the
lead-managed equity underwriting for corporate issuers and institutional fixed
income businesses of Prudential Securities Group Inc. (see Note 4), Gibraltar
Casualty (see Note 21), residential first mortgage banking and certain Canadian
businesses. Corporate-level activities include corporate-level income and
expenses not allocated to any business segments, including the cost of
company-wide initiatives, investment returns on unallocated equity, returns
from a debt-financed investment portfolio, transactions with other segments and
consolidating adjustments.

   The Closed Block Business, which is managed separately from the Financial
Services Businesses, was established on the date of demutualization. It
includes the Closed Block (as discussed in Note 9); assets held outside the
Closed Block necessary to meet insurance regulatory capital requirements
related to products included within the Closed Block; deferred policy
acquisition costs related to the Closed Block policies; the principal amount of
the IHC debt (as discussed in Note 11) and related unamortized debt issuance
costs and an interest rate swap related to the IHC debt; and certain other
related assets and liabilities.

   For periods prior to the date of demutualization, the results of the Closed
Block Business are those of the Traditional Participating Products segment,
which historically sold primarily participating insurance and annuity products
that the Company ceased offering in connection with demutualization. Upon the
establishment of the Closed Block Business, $5.6 billion of net assets
previously associated with the Traditional Participating Products segment was
transferred to the Financial Services Businesses. Consequently, the results of
the Closed Block Business after demutualization do not include returns on these
assets. A minor portion of the Traditional Participating Products segment
consisted of other traditional insurance products that are now included in the
Financial Services Businesses and not in the Closed Block.

                                      197



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

20.  SEGMENT INFORMATION (continued)


   The following summary presents certain financial data of our operations
based on their location:



                                                                         2001     2000    1999
                                                                        -------  ------- -------
                                                                             (In Millions)
                                                                                
Revenues
Domestic............................................................... $22,554  $23,664 $24,382
Japan..................................................................   3,620    1,598   1,338
All other international................................................   1,003    1,242     848
                                                                        -------  ------- -------
   Total revenues...................................................... $27,177  $26,504 $26,568
                                                                        =======  ======= =======
Income (loss) from continuing operations before income taxes
Domestic............................................................... $  (422) $   368 $ 1,939
Japan..................................................................     448      259     245
All other international (a)............................................    (253)     100      71
                                                                        -------  ------- -------
   Total income (loss) from continuing operations before income taxes.. $  (227) $   727 $ 2,255
                                                                        =======  ======= =======

--------
(a) 2001 includes $340 million of demutualization consideration payable to
    former Canadian branch policyholders as described in Note 2.

   The accounting policies of the segments are the same as those described in
Note 2, "Summary of Significant Accounting Policies."

   In managing its business, the Company analyzes the operating performance of
each segment using "adjusted operating income," which is a non-GAAP measure.
"Adjusted operating income" is calculated by adjusting income from continuing
operations before income taxes to exclude certain items. The items excluded are
realized investment gains, net of losses and related charges; sales practices
remedies and costs; demutualization costs and expenses; and the gains, losses
and contribution to income/loss of divested businesses which have been sold but
do not qualify for "discontinued operations" treatment under GAAP. Businesses
that the Company has placed in wind-down status but are not divested remain in
"adjusted operating income." The Company's discontinued healthcare operations
are excluded from "Income (loss) from continuing operations before income
taxes."

   The excluded items are important to an understanding of overall results of
operations. "Adjusted operating income" is not a substitute for net income
determined in accordance with GAAP and the Company's definition of "adjusted
operating income" may differ from that used by other companies. However, the
Company believes that the presentation of "adjusted operating income" as
measured for management purposes enhances the understanding of results of
operations by highlighting the results from ongoing operations and the
underlying profitability factors of the Company's businesses.

   The Company excludes realized investment gains, net of losses and related
charges, from "adjusted operating income" because the timing of transactions
resulting in recognition of gains or losses is largely at the Company's
discretion and the amount of these gains or losses is heavily influenced by and
fluctuates in part according to the availability of market opportunities.
Including the fluctuating effects of these transactions could distort trends in
the underlying profitability of the businesses. The Company excludes sales
practices remedies and costs because they relate to a substantial and
identifiable non-recurring event. The Company excludes demutualization costs
and expenses as they are directly related to demutualization and could distort
the trends associated with our business operations. The Company excludes the
gains and losses and contribution to income/ loss of divested businesses and
related runoff operations because, as a result of the decision to dispose of
these businesses, these results are not relevant to the profitability of the
Company's ongoing operations and could distort the trends associated with
ongoing businesses.

   The related charges offset against net realized investment gains and losses
relates to policyholder dividends, amortization of deferred policy acquisition
costs, and reserves for future policy benefits. Net realized investment

                                      198



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

20.  SEGMENT INFORMATION (continued)

gains is one of the elements that the Company considers in establishing the
dividend scale, and the related policyholder dividend charge represents the
estimated portion of the Company's expense charge for policyholder dividends
that is attributed to net realized investment gains that the Company considers
in determining the dividend scale. Deferred policy acquisition costs for
certain investment-type products are amortized based on estimated gross
profits, which include net realized investment gains and losses on the
underlying invested assets, and the related charge for amortization of deferred
policy acquisition costs represents the portion of this amortization associated
with net realized investment gains and losses. The reserves for certain
policies are adjusted when cash flows related to these policies are affected by
net realized investment gains and losses, and the related charge for reserves
for future policy benefits represents that adjustment.

   "Adjusted operating income" for each segment includes earnings on attributed
equity established at a level which management considers necessary to support
the segment's risks.

   Operating expenses specifically identifiable to a particular segment are
allocated to that segment as incurred. Operating expenses not identifiable to a
specific segment but which are incurred in connection with the generation of
segment revenues are generally allocated based upon the segment's historical
percentage of general and administrative expenses.

   The Investment Management and Advisory Services segment revenues include
intersegment revenues of $418 million, $404 million and $381 million for the
years ended 2001, 2000 and 1999, respectively, which primarily consist of
asset-based management fees from the businesses of the U.S. Consumer and
Employee Benefits divisions and the Closed Block Business. Management has
determined the intersegment fees for the various asset classes with reference
to market rates. These fees are eliminated in consolidation.

   The financial results of the International Insurance segment reflect the
impact of intercompany currency hedging arrangements whereby currency
fluctuation exposure within annual reporting periods is assumed within
Corporate and Other. As discussed in Note 19, the Company executes forward
currency transactions with third parties to mitigate the risk of unfavorable
changes in currency exchange rates. The financial results of the Other Asset
Management segment reflect the impact of intercompany fair value hedging
arrangements with Corporate and Other operations associated with the Company's
mortgage securitization operations.

   Segment results reflect certain reclassifications of historical revenues and
expenses to conform to the Company's current presentation. These
reclassifications have no impact on "adjusted operating income" of any of the
Company's divisions or segments. The most significant reclassification is to
revise the treatment of certain transactions between segments, so that all such
transactions are eliminated within Corporate and Other results rather than at
the division level.

   As discussed in Note 4, Capital Markets Restructuring, the Company has
exited the lead-managed equity underwriting for corporate issuers and
institutional fixed income businesses. Results for these businesses are
included in Divested Businesses in the tables that follow. Income from
continuing operations before income taxes for these businesses was income of
$23 million in 1999, a loss of $620 million in 2000 and a loss of $159 million
in 2001. The loss in 2000 includes a restructuring charge of $476 million.

                                      199



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

20.  SEGMENT INFORMATION (continued)


   The summary below reconciles adjusted operating income to income from
continuing operations before income taxes:



                                                                Year ended December 31, 2001
                                  ----------------------------------------------------------------------------------------
                                                                    Reconciling Items
                                            ----------------------------------------------------------------
                                                             Charges               Divested                    Income from
                                              Realized     Related to     Sales    Business                    Continuing
                                  Adjusted   Investment     Realized    Practices and Related Demutualization  Operations
                                  Operating     Gains         Gains     Remedies    Runoff       Costs and    Before Income
                                   Income   (Losses), Net (Losses), Net and Costs Operations     Expenses         Taxes
                                  --------- ------------- ------------- --------- ----------- --------------- -------------
                                                                        (In Millions)
                                                                                         
Individual Life Insurance........  $  273       $ (45)        $  --       $ --       $  --         $  --          $ 228
Private Client Group.............    (239)         --            --         --          --            --           (239)
Retail Investments...............     181         (63)           12         --          --            --            130
Property and Casualty Insurance..      95          (4)           --         --          --            --             91
                                   ------       -----         -----       ----       -----         -----          -----
   Total U.S. Consumer
    Division.....................     310        (112)           12         --          --            --            210
                                   ------       -----         -----       ----       -----         -----          -----
Group Insurance..................      70         (72)           --         --          --            --             (2)
Other Employee Benefits..........     113        (100)           14         --          --            --             27
                                   ------       -----         -----       ----       -----         -----          -----
   Total Employee Benefits
    Division.....................     183        (172)           14         --          --            --             25
                                   ------       -----         -----       ----       -----         -----          -----
International Insurance..........     611         (57)           --         --          --            --            554
International Securities and
 Investments.....................     (88)         --            --         --          --            --            (88)
                                   ------       -----         -----       ----       -----         -----          -----
   Total International Division..     523         (57)           --         --          --            --            466
                                   ------       -----         -----       ----       -----         -----          -----
Investment Management and
 Advisory Services...............     105          (8)           --         --          --            --             97
Other Asset Management...........     114          --            --         --          --            --            114
                                   ------       -----         -----       ----       -----         -----          -----
   Total Asset Management
    Division.....................     219          (8)           --         --          --            --            211
                                   ------       -----         -----       ----       -----         -----          -----
Corporate and Other..............      28         187            --         --        (147)         (588)          (520)
                                   ------       -----         -----       ----       -----         -----          -----
   Total Financial Services
    Businesses...................   1,263        (162)           26         --        (147)         (588)           392
                                   ------       -----         -----       ----       -----         -----          -----
Closed Block Business............     436        (543)         (512)        --          --            --           (619)
                                   ------       -----         -----       ----       -----         -----          -----
   Total.........................  $1,699       $(705)        $(486)      $ --       $(147)        $(588)         $(227)
                                   ======       =====         =====       ====       =====         =====          =====


                                      200



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

20.  SEGMENT INFORMATION (continued)




                                                                Year ended December 31, 2000
                                  ----------------------------------------------------------------------------------------
                                                                    Reconciling Items
                                            ----------------------------------------------------------------
                                                             Charges               Divested                    Income from
                                              Realized     Related to     Sales    Business                    Continuing
                                  Adjusted   Investment     Realized    Practices and Related Demutualization  Operations
                                  Operating     Gains         Gains     Remedies    Runoff       Costs and    Before Income
                                   Income   (Losses), Net (Losses), Net and Costs Operations     Expenses         Taxes
                                  --------- ------------- ------------- --------- ----------- --------------- -------------
                                                                        (In Millions)
                                                                                         
Individual Life Insurance........  $  114       $  (6)        $  --       $ --       $  --         $  --         $   108
Private Client Group.............     237          --            --         --          --            --             237
Retail Investments...............     239          (8)            2         --          --            --             233
Property and Casualty Insurance..     150          16            --         --          --            --             166
                                   ------       -----         -----       ----       -----         -----         -------
   Total U.S. Consumer
    Division.....................     740           2             2         --          --            --             744
                                   ------       -----         -----       ----       -----         -----         -------
Group Insurance..................     158          (2)           --         --          --            --             156
Other Employee Benefits..........     229         (85)          (31)        --          --            --             113
                                   ------       -----         -----       ----       -----         -----         -------
   Total Employee Benefits
    Division.....................     387         (87)          (31)        --          --            --             269
                                   ------       -----         -----       ----       -----         -----         -------
International Insurance..........     296         (15)           --         --          --            --             281
International Securities and
 Investments.....................      26          --            --         --          --            --              26
                                   ------       -----         -----       ----       -----         -----         -------
   Total International Division..     322         (15)           --         --          --            --             307
                                   ------       -----         -----       ----       -----         -----         -------
Investment Management and
 Advisory Services...............     154           1            --         --          --            --             155
Other Asset Management...........     122          --            --         --          --            --             122
                                   ------       -----         -----       ----       -----         -----         -------
   Total Asset Management
    Division.....................     276           1            --         --          --            --             277
                                   ------       -----         -----       ----       -----         -----         -------
Corporate and Other..............      (4)       (280)           --         --        (636)         (143)         (1,063)
                                   ------       -----         -----       ----       -----         -----         -------
   Total Financial Services
    Businesses...................   1,721        (379)          (29)        --        (636)         (143)            534
                                   ------       -----         -----       ----       -----         -----         -------
Closed Block Business............     547          91          (445)        --          --            --             193
                                   ------       -----         -----       ----       -----         -----         -------
   Total.........................  $2,268       $(288)        $(474)      $ --       $(636)        $(143)        $   727
                                   ======       =====         =====       ====       =====         =====         =======


                                      201



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

20.  SEGMENT INFORMATION (continued)




                                                                Year ended December 31, 1999
                                  -----------------------------------------------------------------------------------------
                                                                    Reconciling Items
                                            ----------------------------------------------------------------
                                                             Charges               Divested                    Income from
                                              Realized     Related to     Sales    Business                    Continuing
                                  Adjusted   Investment     Realized    Practices and Related Demutualization  Operations
                                  Operating     Gains         Gains     Remedies    Runoff       Costs and    Before Income
                                   Income   (Losses), Net (Losses), Net and Costs Operations     Expenses         Taxes
                                  --------- ------------- ------------- --------- ----------- --------------- -------------
                                                                        (In Millions)
                                                                                         
Individual Life Insurance........  $  117       $(23)         $  --       $  --      $ --          $ --          $   94
Private Client Group.............     224         --             --          --        --           --              224
Retail Investments...............     174          5              1          --        --           --              180
Property and Casualty Insurance..     152          9             --          --        --           --              161
                                   ------       ----          -----       -----      ----          ----          ------
   Total U.S. Consumer
    Division.....................     667         (9)             1          --        --           --              659
                                   ------       ----          -----       -----      ----          ----          ------
Group Insurance..................     128         25            (10)         --        --           --              143
Other Employee Benefits..........     272        203           (133)         --        --           --              342
                                   ------       ----          -----       -----      ----          ----          ------
   Total Employee Benefits
    Division.....................     400        228           (143)         --        --           --              485
                                   ------       ----          -----       -----      ----          ----          ------
International Insurance..........     218          9             --          --        --           --              227
International Securities and
 Investments.....................      15         --             --          --        --           --               15
                                   ------       ----          -----       -----      ----          ----          ------
   Total International Division..     233          9             --          --        --           --              242
                                   ------       ----          -----       -----      ----          ----          ------
Investment Management and
 Advisory Services...............     155          1             --          --        --           --              156
Other Asset Management...........      97         --             --          --        --           --               97
                                   ------       ----          -----       -----      ----          ----          ------
   Total Asset Management
    Division.....................     252          1             --          --        --           --              253
                                   ------       ----          -----       -----      ----          ----          ------
Corporate and Other..............     137        357             --        (100)      (47)          (75)            272
                                   ------       ----          -----       -----      ----          ----          ------
   Total Financial Services
    Businesses...................   1,689        586           (142)       (100)      (47)          (75)          1,911
                                   ------       ----          -----       -----      ----          ----          ------
Closed Block Business............     316        338           (310)         --        --            --             344
                                   ------       ----          -----       -----      ----          ----          ------
   Total.........................  $2,005       $924          $(452)      $(100)     $(47)         $(75)         $2,255
                                   ======       ====          =====       =====      ====          ====          ======


                                      202



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

20.  SEGMENT INFORMATION (continued)


   The summary below presents certain financial information for the Company's
reportable segments:



                                                                              Year ended December 31, 2001
                                                  ------------------------------------------------------------------------
                                                                                        Interest
                                                                                      Credited to
                                                              Net                    Policyholders'
                                                           Investment Policyholders'    Account     Dividends to  Interest
                                                  Revenues   Income      Benefits       Balances    Policyholders Expense
                                                  -------- ---------- -------------- -------------- ------------- --------
                                                                                      (In Millions)
                                                                                                
Financial Services Businesses:
   Individual Life Insurance..................... $ 1,919    $  391      $   688         $  137        $   11      $   --
   Private Client Group..........................   2,216       243         --             --            --            --
   Retail Investments............................   1,458       443          109            259             1           7
   Property and Casualty Insurance...............   2,051       158        1,334           --            --            --
                                                  -------    ------      -------         ------        ------      ------
      Total U.S. Consumer Division...............   7,644     1,235        2,131            396            12           7
                                                  -------    ------      -------         ------        ------      ------
   Group Insurance...............................   3,248       547        2,490            224          --            (2)
   Other Employee Benefits.......................   2,664     2,181          913            977          --            13
                                                  -------    ------      -------         ------        ------      ------
      Total Employee Benefits Division...........   5,912     2,728        3,403          1,201          --            11
                                                  -------    ------      -------         ------        ------      ------
   International Insurance.......................   4,146       450        2,600             72            74           4
   International Securities and Investments......     548        61         --             --            --          --
                                                  -------    ------      -------         ------        ------      ------
      Total International Division...............   4,694       511        2,600             72            74           4
                                                  -------    ------      -------         ------        ------      ------
   Investment Management and Advisory
    Services.....................................     835        42         --             --            --            15
   Other Asset Management........................     437        48         --             --            --          --
                                                  -------    ------      -------         ------        ------      ------
      Total Asset Management Division............   1,272        90         --             --            --            15
                                                  -------    ------      -------         ------        ------      ------
   Corporate and Other...........................     103       675           36              1             3         289
                                                  -------    ------      -------         ------        ------      ------
      Total......................................  19,625     5,239        8,170          1,670            89         326
                                                  -------    ------      -------         ------        ------      ------
Items Excluded From Adjusted Operating
 Income:
Realized investment gains, net of losses and
 related charges:
   Realized investment gains (losses), net.......    (162)     --           --             --            --          --
   Related Charges:
      Reserves...................................    --        --             (6)          --            --          --
      Amortization of deferred policy
       acquisition costs.........................    --        --           --             --            --          --
                                                  -------    ------      -------         ------        ------      ------
         Total realized investment gains,
          net of losses and related
          charges................................    (162)     --             (6)          --            --          --
                                                  -------    ------      -------         ------        ------      ------
   Divested businesses and related runoff
    operations...................................     (14)       15         --             --            --          --
                                                  -------    ------      -------         ------        ------      ------
         Total Financial Services
          Businesses.............................  19,449     5,254        8,164          1,670            89         326
                                                  -------    ------      -------         ------        ------      ------
Closed Block Business............................   8,271     3,897        4,588            134         2,121          34
Items Excluded From Adjusted Operating
 Income:
Realized investment gains, net of losses and
 related charges:
   Realized investment gains (losses), net.......    (543)     --           --             --            --          --
   Related Charges:
      Dividends to policyholders.................    --        --           --             --             512        --
                                                  -------    ------      -------         ------        ------      ------
         Total realized investment gains,
          net of losses and related
          charges................................    (543)     --           --             --             512        --
                                                  -------    ------      -------         ------        ------      ------
         Total Closed Block Business.............   7,728     3,897        4,588            134         2,633          34
                                                  -------    ------      -------         ------        ------      ------
         Total per Consolidated
          Financial Statements................... $27,177    $9,151      $12,752         $1,804        $2,722      $  360
                                                  =======    ======      =======         ======        ======      ======





                                                  Amortization
                                                  of Deferred
                                                     Policy
                                                  Acquisition
                                                     Costs
                                                  ------------

                                               
Financial Services Businesses:
   Individual Life Insurance.....................    $  232
   Private Client Group..........................      --
   Retail Investments............................       210
   Property and Casualty Insurance...............       395
                                                     ------
      Total U.S. Consumer Division...............       837
                                                     ------
   Group Insurance...............................         4
   Other Employee Benefits.......................        10
                                                     ------
      Total Employee Benefits Division...........        14
                                                     ------
   International Insurance.......................       163
   International Securities and Investments......         1
                                                     ------
      Total International Division...............       164
                                                     ------
   Investment Management and Advisory
    Services.....................................      --
   Other Asset Management........................      --
                                                     ------
      Total Asset Management Division............      --
                                                     ------
   Corporate and Other...........................       (82)
                                                     ------
      Total......................................       933
                                                     ------
Items Excluded From Adjusted Operating
 Income:
Realized investment gains, net of losses and
 related charges:
   Realized investment gains (losses), net.......      --
   Related Charges:
      Reserves...................................      --
      Amortization of deferred policy
       acquisition costs.........................       (20)
                                                     ------
         Total realized investment gains,
          net of losses and related
          charges................................       (20)
                                                     ------
   Divested businesses and related runoff
    operations...................................      --
                                                     ------
         Total Financial Services
          Businesses.............................       913
                                                     ------
Closed Block Business............................       213
Items Excluded From Adjusted Operating
 Income:
Realized investment gains, net of losses and
 related charges:
   Realized investment gains (losses), net.......      --
   Related Charges:
      Dividends to policyholders.................      --
                                                     ------
         Total realized investment gains,
          net of losses and related
          charges................................      --
                                                     ------
         Total Closed Block Business.............       213
                                                     ------
         Total per Consolidated
          Financial Statements...................    $1,126
                                                     ======



                                      203



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

20.  SEGMENT INFORMATION (continued)




                                                                              Year ended December 31, 2000
                                                  ------------------------------------------------------------------------
                                                                                        Interest
                                                                                      Credited to
                                                              Net                    Policyholders'
                                                           Investment Policyholders'    Account     Dividends to  Interest
                                                  Revenues   Income      Benefits       Balances    Policyholders Expense
                                                  -------- ---------- -------------- -------------- ------------- --------
                                                                                      (In Millions)
                                                                                                
Financial Services Businesses:
   Individual Life Insurance..................... $ 1,828    $  374      $   628         $  131        $   12       $ 10
   Private Client Group..........................   2,767       299           --             --            --         --
   Retail Investments............................   1,631       478          152            264             1          1
   Property and Casualty Insurance...............   1,800       193        1,045             --            --         --
                                                  -------    ------      -------         ------        ------       ----
      Total U.S. Consumer Division...............   8,026     1,344        1,825            395            13         11
                                                  -------    ------      -------         ------        ------       ----
   Group Insurance...............................   2,801       485        2,042            200            --         (1)
   Other Employee Benefits.......................   2,885     2,332          930          1,024            --         44
                                                  -------    ------      -------         ------        ------       ----
      Total Employee Benefits Division...........   5,686     2,817        2,972          1,224            --         43
                                                  -------    ------      -------         ------        ------       ----
   International Insurance.......................   1,920       129        1,265              2             1          4
   International Securities and Investments......     704        66           --             --            --         --
                                                  -------    ------      -------         ------        ------       ----
      Total International Division...............   2,624       195        1,265              2             1          4
                                                  -------    ------      -------         ------        ------       ----
   Investment Management and Advisory
    Services.....................................     874        21           --             --            --          5
   Other Asset Management........................     470        31           --             --            --         --
                                                  -------    ------      -------         ------        ------       ----
      Total Asset Management Division............   1,344        52           --             --            --          5
                                                  -------    ------      -------         ------        ------       ----
   Corporate and Other...........................     205       816           23             (3)            4        385
                                                  -------    ------      -------         ------        ------       ----
      Total......................................  17,885     5,224        6,085          1,618            18        448
                                                  -------    ------      -------         ------        ------       ----
Items Excluded From Adjusted Operating
 Income:
Realized investment gains, net of losses and
 related charges:
   Realized investment gains (losses), net.......    (379)       --           --             --            --         --
   Related Charges:
      Reserves...................................      --        --           36             --            --         --
      Amortization of deferred policy
       acquisition costs.........................      --        --           --             --            --         --
                                                  -------    ------      -------         ------        ------       ----
         Total realized investment gains,
          net of losses and related
          charges................................    (379)       --           36             --            --         --
                                                  -------    ------      -------         ------        ------       ----
   Divested businesses and related runoff
    operations...................................     269       101           14             --            --         --
                                                  -------    ------      -------         ------        ------       ----
         Total Financial Services
          Businesses.............................  17,775     5,325        6,135          1,618            18        448
                                                  -------    ------      -------         ------        ------       ----
Closed Block Business............................   8,638     4,172        4,505            133         2,261        152
Items Excluded From Adjusted Operating
 Income:
Realized investment gains, net of losses and
 related charges:
   Realized investment gains (losses), net.......      91        --           --             --            --         --
   Related Charges:
    Dividends to policyholders...................      --        --           --             --           445         --
                                                  -------    ------      -------         ------        ------       ----
         Total realized investment gains,
          net of losses and related
          charges................................      91        --           --             --           445         --
                                                  -------    ------      -------         ------        ------       ----
         Total Closed Block Business.............   8,729     4,172        4,505            133         2,706        152
                                                  -------    ------      -------         ------        ------       ----
         Total per Consolidated
          Financial Statements................... $26,504    $9,497      $10,640         $1,751        $2,724       $600
                                                  =======    ======      =======         ======        ======       ====





                                                  Amortization
                                                  of Deferred
                                                     Policy
                                                  Acquisition
                                                     Costs
                                                  ------------

                                               
Financial Services Businesses:
   Individual Life Insurance.....................    $  172
   Private Client Group..........................        --
   Retail Investments............................       212
   Property and Casualty Insurance...............       365
                                                     ------
      Total U.S. Consumer Division...............       749
                                                     ------
   Group Insurance...............................         1
   Other Employee Benefits.......................        22
                                                     ------
      Total Employee Benefits Division...........        23
                                                     ------
   International Insurance.......................       145
   International Securities and Investments......         1
                                                     ------
      Total International Division...............       146
                                                     ------
   Investment Management and Advisory
    Services.....................................        --
   Other Asset Management........................        --
                                                     ------
      Total Asset Management Division............        --
                                                     ------
   Corporate and Other...........................       (84)
                                                     ------
      Total......................................       834
                                                     ------
Items Excluded From Adjusted Operating
 Income:
Realized investment gains, net of losses and
 related charges:
   Realized investment gains (losses), net.......        --
   Related Charges:
      Reserves...................................        --
      Amortization of deferred policy
       acquisition costs.........................        (7)
                                                     ------
         Total realized investment gains,
          net of losses and related
          charges................................        (7)
                                                     ------
   Divested businesses and related runoff
    operations...................................        --
                                                     ------
         Total Financial Services
          Businesses.............................       827
                                                     ------
Closed Block Business............................       269
Items Excluded From Adjusted Operating
 Income:
Realized investment gains, net of losses and
 related charges:
   Realized investment gains (losses), net.......        --
   Related Charges:
    Dividends to policyholders...................        --
                                                     ------
         Total realized investment gains,
          net of losses and related
          charges................................        --
                                                     ------
         Total Closed Block Business.............       269
                                                     ------
         Total per Consolidated
          Financial Statements...................    $1,096
                                                     ======


                                      204



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

20.  SEGMENT INFORMATION (continued)




                                                                              Year ended December 31, 1999
                                                  ------------------------------------------------------------------------
                                                                                        Interest
                                                                                      Credited to
                                                              Net                    Policyholders'
                                                           Investment Policyholders'    Account     Dividends to  Interest
                                                  Revenues   Income      Benefits       Balances    Policyholders Expense
                                                  -------- ---------- -------------- -------------- ------------- --------
                                                                                      (In Millions)
                                                                                                
Financial Services Businesses:
   Individual Life Insurance..................... $ 1,703    $  316      $   507         $  126        $    8       $  4
   Private Client Group..........................   2,562       269           --             --            --         --
   Retail Investments............................   1,551       491          118            271            --          5
   Property and Casualty Insurance...............   1,747       197        1,100             --            --         --
                                                  -------    ------      -------         ------        ------       ----
      Total U.S. Consumer Division...............   7,563     1,273        1,725            397             8          9
                                                  -------    ------      -------         ------        ------       ----
   Group Insurance...............................   2,428       470        1,749            197            --         --
   Other Employee Benefits.......................   3,014     2,460          997          1,086            --         51
                                                  -------    ------      -------         ------        ------       ----
      Total Employee Benefits Division...........   5,442     2,930        2,746          1,283            --         51
                                                  -------    ------      -------         ------        ------       ----
   International Insurance.......................   1,522        99        1,031              1             2         --
   International Securities and Investments......     580        54           --             --            --         --
                                                  -------    ------      -------         ------        ------       ----
      Total International Division...............   2,102       153        1,031              1             2         --
                                                  -------    ------      -------         ------        ------       ----
   Investment Management and Advisory
    Services.....................................     768         3           --             --            --         --
   Other Asset Management........................     373        29           --             --            --         --
                                                  -------    ------      -------         ------        ------       ----
      Total Asset Management Division............   1,141        32           --             --            --         --
                                                  -------    ------      -------         ------        ------       ----
   Corporate and Other...........................     509       926           80             --             5        420
                                                  -------    ------      -------         ------        ------       ----
      Total......................................  16,757     5,314        5,582          1,681            15        480
                                                  -------    ------      -------         ------        ------       ----
Items Excluded From Adjusted Operating
 Income:
Realized investment gains, net of losses and
 related charges:
   Realized investment gains (losses), net.......     586        --           --             --            --         --
   Related Charges:
      Reserves...................................      --        --          147             --            --         --
      Amortization of deferred policy
       acquisition costs.........................      --        --           --             --            --         --
                                                  -------    ------      -------         ------        ------       ----
         Total realized investment gains,
          net of losses and related
          charges................................     586        --          147             --            --         --
                                                  -------    ------      -------         ------        ------       ----
   Divested businesses and related runoff
    operations...................................     511       142           65             --            --         --
                                                  -------    ------      -------         ------        ------       ----
         Total Financial Services
          Businesses.............................  17,854     5,456        5,794          1,681            15        480
                                                  -------    ------      -------         ------        ------       ----
Closed Block Business............................   8,376     3,911        4,432            130         2,246         71
Items Excluded From Adjusted Operating
 Income:
Realized investment gains, net of losses and
 related charges:
   Realized investment gains (losses), net.......     338        --           --             --            --         --
   Related Charges:
      Dividends to policyholders.................      --        --           --             --           310         --
                                                  -------    ------      -------         ------        ------       ----
         Total realized investment gains,
          net of losses and related
          charges................................     338        --           --             --           310         --
                                                  -------    ------      -------         ------        ------       ----
         Total Closed Block Business.............   8,714     3,911        4,432            130         2,556         71
                                                  -------    ------      -------         ------        ------       ----
         Total per Consolidated Financial
          Statements............................. $26,568    $9,367      $10,226         $1,811        $2,571       $551
                                                  =======    ======      =======         ======        ======       ====





                                                  Amortization
                                                  of Deferred
                                                     Policy
                                                  Acquisition
                                                     Costs
                                                  ------------

                                               
Financial Services Businesses:
   Individual Life Insurance.....................    $  185
   Private Client Group..........................        --
   Retail Investments............................       230
   Property and Casualty Insurance...............       350
                                                     ------
      Total U.S. Consumer Division...............       765
                                                     ------
   Group Insurance...............................        --
   Other Employee Benefits.......................        10
                                                     ------
      Total Employee Benefits Division...........        10
                                                     ------
   International Insurance.......................       102
   International Securities and Investments......         1
                                                     ------
      Total International Division...............       103
                                                     ------
   Investment Management and Advisory
    Services.....................................        --
   Other Asset Management........................        --
                                                     ------
      Total Asset Management Division............        --
                                                     ------
   Corporate and Other...........................       (32)
                                                     ------
      Total......................................       846
                                                     ------
Items Excluded From Adjusted Operating
 Income:
Realized investment gains, net of losses and
 related charges:
   Realized investment gains (losses), net.......        --
   Related Charges:
      Reserves...................................        --
      Amortization of deferred policy
       acquisition costs.........................        (5)
                                                     ------
         Total realized investment gains,
          net of losses and related
          charges................................        (5)
                                                     ------
   Divested businesses and related runoff
    operations...................................        --
                                                     ------
         Total Financial Services
          Businesses.............................       841
                                                     ------
Closed Block Business............................       314
Items Excluded From Adjusted Operating
 Income:
Realized investment gains, net of losses and
 related charges:
   Realized investment gains (losses), net.......        --
   Related Charges:
      Dividends to policyholders.................        --
                                                     ------
         Total realized investment gains,
          net of losses and related
          charges................................        --
                                                     ------
         Total Closed Block Business.............       314
                                                     ------
         Total per Consolidated Financial
          Statements.............................    $1,155
                                                     ======


                                      205



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

20.  SEGMENT INFORMATION (continued)


   The summary below presents total assets for the Company's reportable
segments at December 31,



                                                              Assets
                                                    --------------------------
                                                      2001     2000     1999
                                                    -------- -------- --------
                                                          (In Millions)
                                                             
  Individual Life Insurance........................ $ 23,488 $ 22,992 $ 22,040
  Private Client Group.............................   19,195   18,426   23,157
  Retail Investments...............................   24,225   27,042   28,658
  Property and Casualty Insurance..................    4,323    4,763    4,380
                                                    -------- -------- --------
     Total U.S. Consumer Division..................   71,231   73,223   78,235
                                                    -------- -------- --------
  Group Insurance..................................   17,026   15,891   13,850
  Other Employee Benefits..........................   55,741   59,926   60,105
                                                    -------- -------- --------
     Total Employee Benefits Division..............   72,767   75,817   73,955
                                                    -------- -------- --------
  International Insurance..........................   38,239    6,726    5,804
  International Securities and Investments.........    3,162    3,644    3,471
                                                    -------- -------- --------
     Total International Division..................   41,401   10,370    9,275
                                                    -------- -------- --------
  Investment Management and Advisory Services......   21,097   20,251   18,174
  Other Asset Management...........................    7,260   10,351    7,384
                                                    -------- -------- --------
     Total Asset Management Division...............   28,357   30,602   25,558
                                                    -------- -------- --------
  Corporate and Other..............................   17,549   12,814   29,498
                                                    -------- -------- --------
     Total Financial Services Businesses...........  231,305  202,826  216,521
                                                    -------- -------- --------
  Closed Block Business............................   61,725   69,927   68,573
                                                    -------- -------- --------
     Total Assets.................................. $293,030 $272,753 $285,094
                                                    ======== ======== ========


21.  COMMITMENTS AND GUARANTEES, CONTINGENCIES AND LITIGATION

Commitments and Guarantees

   The following table presents, as of December 31, 2001, the Company's future
commitments on short-term and long-term debt and the Units, as more fully
described in Notes 11 and 12, and future minimum lease payments under
non-cancelable operating leases:



                                     Short-term
                                        and
                                     Long-term      Equity     Operating
                                        Debt    Security Units  Leases
                                     ---------- -------------- ---------
                                                (In Millions)
                                                      
       2002.........................  $ 5,405       $  --       $  311
       2003.........................      662          --          262
       2004.........................      461          --          218
       2005.........................       64          --          191
       2006.........................       69         690          172
       Beyond 2006..................    4,048          --          761
                                      -------       -----       ------
       Total........................  $10,709       $ 690       $1,915
                                      =======       =====       ======


   The Company occupies leased office space in many locations under various
long-term leases and has entered into numerous leases covering the long-term
use of computers and other equipment. Rental expense incurred for the years
ended December 31, 2001, 2000 and 1999 was $520 million, $498 million and $456
million, respectively, excluding expenses relating to the Company's healthcare
business.

                                      206



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

21.  COMMITMENTS AND GUARANTEES, CONTINGENCIES AND LITIGATION (continued)


   During the normal course of its business, the Company utilizes financial
instruments with off-balance sheet credit risk such as commitments, financial
guarantees and letters of credit. Commitments include commitments to purchase
and sell mortgage loans, the underfunded portion of commitments to fund
investments in private placement securities and unused credit card and home
equity lines.

   In connection with the Company's consumer banking business, loan commitments
for credit cards, home equity lines of credit and other lines of credit include
agreements to lend up to specified limits to customers. It is anticipated that
commitment amounts will only be partially drawn down based on overall customer
usage patterns and, therefore, do not necessarily represent future cash
requirements. The Company evaluates each credit decision on such commitments at
least annually and has the ability to cancel or suspend such lines at its
option. The total available lines of credit card, home equity and other
commitments were $1,415 million, of which $569 million remains available at
December 31, 2001.

   Other commitments primarily include commitments to purchase and sell
mortgage loans and the unfunded portion of commitments to fund investments in
private placement securities. These mortgage loans and private commitments were
$2,029 million, of which $1,083 million remain available at December 31, 2001.

   The Company also provides financial guarantees incidental to other
transactions and letters of credit that guarantee the performance of customers
to third parties. These credit-related financial instruments have off-balance
sheet credit risk because only their origination fees, if any, and accruals for
probable losses, if any, are recognized until the obligation under the
instrument is fulfilled or expires. These instruments can extend for several
years, and expirations are not concentrated in any period. The Company seeks to
control credit risk associated with these instruments by limiting credit,
maintaining collateral where customary and appropriate and performing other
monitoring procedures. At December 31, 2001, financial guarantees and letters
of credit issued by the Company were $341 million.

Contingencies

   On September 19, 2000, the Company sold Gibraltar Casualty Company
("Gibraltar Casualty"), a subsidiary engaged in the commercial property and
casualty insurance business, to Everest Re Group, Ltd. ("Everest"). Upon
closing of the sale, the Company entered into a stop-loss reinsurance agreement
with Everest whereby the Company will reinsure Everest for up to 80% of the
first $200 million of any adverse loss development in excess of Gibraltar
Casualty's carried reserves as of the closing of the sale. As of December 31,
2001, no liability has been recorded in connection with this agreement.

   The Company's property and casualty operations are subject to rate and other
laws and regulations covering a range of trade and claim settlement practices.
State insurance regulatory authorities have broad discretion in approving an
insurer's proposed rates. A significant portion of the Company's automobile
insurance is written in the state of New Jersey. Under certain circumstances,
New Jersey insurance laws require an insurer to provide a refund or credit to
policyholders based upon the profits earned on automobile insurance.

   It is possible that the results of operations or the cash flow of the
Company in a particular quarterly or annual period could be materially affected
as a result of payments in connection with the matters discussed above
depending, in part, upon the results of operations or cash flow for such
period. Management believes, however, that ultimate payments in connection with
these matters should not have a material adverse effect on the Company's
financial position.

                                      207



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

21.  COMMITMENTS AND GUARANTEES, CONTINGENCIES AND LITIGATION (continued)


Litigation

   The Company is subject to legal and regulatory actions in the ordinary
course of its businesses. Pending legal and regulatory actions include
proceedings relating to aspects of our businesses and operations that are
specific to the Company and proceedings that are typical of the businesses in
which the Company operates, including in both cases businesses that have either
been divested or placed in wind-down status. Some of these proceedings have
been brought on behalf of various alleged classes of complainants. In certain
of these matters, the plaintiffs are seeking large and/or indeterminate
amounts, including punitive or exemplary damages.

   In particular, the Company has been subject to substantial regulatory
actions and civil litigation involving individual life insurance sales
practices. In 1996, the Company entered into settlement agreements with
relevant insurance regulatory authorities and plaintiffs in the principal life
insurance sales practices class action lawsuit covering policyholders of
individual permanent life insurance policies issued in the United States from
1982 to 1995. Pursuant to the settlements, the Company agreed to various
changes to its sales and business practices controls, to a series of fines, and
to provide specific forms of relief to eligible class members. Virtually all
claims by class members filed in connection with the settlements have been
resolved and virtually all aspects of the remediation program have been
satisfied. While the approval of the class action settlement is now final, the
Company remains subject to oversight and review by insurance regulators and
other regulatory authorities with respect to its sales practices and the
conduct of the remediation program. The U.S. District Court has also retained
jurisdiction as to all matters relating to the administration, consummation,
enforcement and interpretation of the settlements.

   As of December 31, 2001, the Company remained a party to approximately 44
individual sales practices actions filed by policyholders who "opted out" of
the class action settlement relating to permanent life insurance policies the
Company issued in the United States between 1982 and 1995. In addition, there
were 19 sales practices actions pending that were filed by policyholders who
were members of the class and who failed to "opt out" of the class action
settlement. The Company believes that those actions are governed by the class
settlement release and expects them to be enjoined and/or dismissed. Additional
suits may be filed by class members who "opted out" of the class settlement or
who failed to "opt out" but nevertheless seek to proceed against the Company. A
number of the plaintiffs in these cases seek large and/or indeterminate
amounts, including punitive or exemplary damages. Some of these actions are
brought on behalf of multiple plaintiffs. It is possible that substantial
punitive damages might be awarded in any of these actions and particularly in
an action involving multiple plaintiffs.

   The Company believes that its reserves related to sales practices, as of
December 31, 2001, are adequate. No incremental provisions were recorded in
2001 or 2000. In 1999, 1998, 1997 and 1996, the Company recorded provisions in
its Consolidated Statements of Operations of $100 million, $1,150 million,
$2,030 million and $1,125 million, respectively, to provide for estimated
remediation costs, and additional sales practices costs including related
administrative costs, regulatory fines, penalties and related payments,
litigation costs and settlements, including settlements associated with the
resolution of claims of deceptive sales practices asserted by policyholders who
elected to "opt-out" of the class action settlement and litigate their claims
against the Company separately and other fees and expenses associated with the
resolution of sales practices issues.

                                      208



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

21.  COMMITMENTS AND GUARANTEES, CONTINGENCIES AND LITIGATION (continued)


   The following table summarizes the Company's charges for the estimated total
costs of sales practices remedies and additional sales practices costs and
related liability balances as of the dates indicated:



                                                 Year Ended December 31,
                                         ---------------------------------------
                                         2001 2000   1999    1998   1997   1996
                                         ---- ----  ------  ------ ------ ------
                                                      (In Millions)
                                                        
Liability balance at beginning of period $253 $891  $3,058  $2,553 $  963 $   --
Charges to expense
   Remedy costs.........................   --  (54)    (99)    510  1,640    410
   Additional sales practices costs.....   --   54     199     640    390    715
                                         ---- ----  ------  ------ ------ ------
    Total charges to expense............   --   --     100   1,150  2,030  1,125
Amounts paid or credited
   Remedy costs.........................   71  448   1,708     147     --     --
   Additional sales practices costs.....  130  190     559     498    440    162
                                         ---- ----  ------  ------ ------ ------
    Total amounts paid or credited......  201  638   2,267     645    440    162
                                         ---- ----  ------  ------ ------ ------
Liability balance at end of period...... $ 52 $253  $  891  $3,058 $2,553 $  963
                                         ==== ====  ======  ====== ====== ======


   In 1996, the Company recorded in its Consolidated Statement of Operations
the cost of $410 million before taxes as a guaranteed minimum remediation
expense pursuant to the settlement agreement. Management had no better
information available at that time upon which to make a reasonable estimate of
the losses associated with the settlement. Charges were also recorded in 1996
for estimated additional sales practices costs totaling $715 million before
taxes.

   In 1997, management increased the estimated liability for the cost of
remedying policyholder claims by $1,640 million before taxes. This increase was
based on additional information derived from claim sampling techniques, the
terms of the settlement and the number of claim forms received. The Company
also recorded additional charges of $390 million before taxes to recognize the
increase in estimated total additional sales practices costs.

   In 1998, the Company recorded an additional charge of $510 million before
taxes to recognize the increase of the estimated total cost of remedying
policyholder claims to a total of $2,560 million before taxes. This increase
was based on (1) estimates derived from an analysis of claims actually remedied
(including interest); (2) a sample of claims still to be remedied; (3) an
estimate of additional liabilities associated with a claimant's right to
"appeal" the Company's decision; and (4) an estimate of an additional liability
associated with the results of an investigation by a court-appointed
independent expert regarding the impact of the Company's failure to properly
implement procedures to preserve all documents relevant to the class action and
remediation program. The Company also recorded additional charges of $640
million before taxes to recognize the increase in estimated total additional
sales practices costs.

   In 1999, the Company recorded an increase of $199 million of the estimate of
total additional sales practices costs. This increase was partially offset by a
$99 million release of the previously recorded liability relative to remedy
costs reflecting a decrease in the estimate of the total costs of remedying
policyholder claims.

   In 2000, the Company recorded an increase of $54 million of the estimate of
total additional sales practices costs. This increase was offset by a $54
million release of the previously recorded liability relative to remedy costs
reflecting a decrease in the estimate of the total costs of remedying
policyholder claims.

   In addition, the Company retained all liabilities for the litigation
associated with its discontinued healthcare business that existed at the date
of closing with Aetna (August 6, 1999), or commenced within two years of that

                                      209



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

21.  COMMITMENTS AND GUARANTEES, CONTINGENCIES AND LITIGATION (continued)

date, with respect to claims relating to events that occurred prior to the
closing date. This litigation includes purported class actions and individual
suits involving various issues, including payment of claims, denial of
benefits, vicarious liability for malpractice claims, and contract disputes
with provider groups and former policyholders. Some of the purported class
actions challenge practices of the Company's former managed care operations and
assert nationwide classes. On October 23, 2000, by Order of the Judicial Panel
on Multi-district Litigation, a number of these class actions were consolidated
for pre-trial purposes, along with lawsuits pending against other managed
health care companies, in the United States District Court for the Southern
District of Florida in a consolidated proceeding captioned In Re Managed Care
Litigation. Some of these class actions allege, among other things,
misrepresentation of the level of services and quality of care, failure to
disclose financial incentive agreements with physicians, interference with the
physician-patient relationship, breach of contract and fiduciary duty,
violations of ERISA, violations of and conspiracy to violate RICO, deprivation
of plaintiffs' rights to the delivery of honest medical services and
industry-wide conspiracy to defraud physicians by failing to pay under provider
agreements and by unlawfully coercing providers to enter into agreements with
unfair and unreasonable terms. The remedies sought include unspecified damages,
restitution, disgorgement of profits, treble damages, punitive damages and
injunctive relief. Motions to dismiss certain of the amended complaints and
plaintiff's motions to certify nationwide classes in the consolidated
proceedings are pending. In one of the consolidated actions the court granted
our motion to dismiss, in part.

   A joint venture in which an affiliate of Prudential Securities Group Inc. is
a participant brought an arbitration claim against Kyocera Corporation
alleging, among other things, claims of breach of contract relating to the
manufacture and distribution of computer disk drives. The arbitration panel
decided in favor of the claimants. The Company's share of damages, with
interest, would exceed $250 million. A federal district court in the Northern
District of California has confirmed the award and entered judgment in favor of
the claimants. Kyocera Corporation has appealed the decision to the United
States Court of Appeals for the Ninth Circuit. As with any litigation, the
outcome remains uncertain until all appeals have been concluded or the time to
appeal has expired and, accordingly, the Company has not included the award in
its results of operations.

   The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted. It is possible that the
results of operations or the cash flow of the Company in a particular quarterly
or annual period could be materially affected by an ultimate unfavorable
resolution of pending litigation and regulatory matters depending, in part,
upon the results of operations or cash flow for such period. Management
believes, however, that the ultimate outcome of all pending litigation and
regulatory matters, after consideration of applicable reserves, should not have
a material adverse effect on the Company's financial position.

                                      210



                          PRUDENTIAL FINANCIAL, INC.

                  Notes to Consolidated Financial Statements

22.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

   The unaudited quarterly results of operations for the years ended December
31, 2001 and 2000 are summarized in the table below:




                                                                              For The Three Months Ended
                                                                      --------------------------------------
                                                                      March 31 June 30 September 30 December 31
                                                                      -------- ------- ------------ -----------
                                                                       (In Millions, Except Per Share Amounts)
2001
----
                                                                                        
Total revenues.......................................................  $6,747  $7,168     $6,356      $6,906
Total benefits and expenses..........................................   6,024   7,012      6,853       7,515
Income (loss) from continuing operations before income taxes.........     723     156       (497)       (609)(a)
Net income (loss)....................................................     437     195       (280)       (506)(a)
Basic and diluted earnings per share -- Common Stock.................                                 $ 0.07 (b)
Basic and diluted earnings per share -- Class B Stock................                                 $ 1.50 (b)

2000
----
Total revenues.......................................................  $6,838  $6,730     $6,311      $6,625
Total benefits and expenses..........................................   6,146   6,273      6,115       7,243
Income (loss) from continuing operations before income taxes.........     692     457        196        (618)
Net income (loss)....................................................     376     223         67        (268)

--------
(a) Income from continuing operations and net income after the date of
    demutualization is $41 million.
(b) Earnings per share data reflects earnings for the period commencing with
    the date of demutualization only.


                                      211



                          PRUDENTIAL FINANCIAL, INC.

            Supplemental Combining Statement of Financial Position
                        December 31, 2001 (in Millions)



                                                                          Financial   Closed
                                                                           Services   Block
                                                                          Businesses Business Consolidated
                                                                          ---------- -------- ------------
                                                                                     
ASSETS
Fixed maturities:
   Available for sale, at fair value.....................................  $ 68,880  $41,062    $109,942
   Held to maturity, at amortized cost...................................       374    --            374
Trading account assets, at fair value....................................     5,043    --          5,043
Equity securities, available for sale, at fair value.....................     1,688      584       2,272
Commercial loans.........................................................    13,624    6,105      19,729
Policy loans.............................................................     2,812    5,758       8,570
Securities purchased under agreements to resell..........................     4,421    --          4,421
Cash collateral for borrowed securities..................................     5,210    --          5,210
Other long-term investments..............................................     4,336    1,082       5,418
Short-term investments...................................................     2,972    1,883       4,855
                                                                           --------  -------    --------
   Total investments.....................................................   109,360   56,474     165,834

Cash and cash equivalents................................................    16,900    1,636      18,536
Accrued investment income................................................     1,059      769       1,828
Broker-dealer related receivables........................................     7,802    --          7,802
Deferred policy acquisition costs........................................     5,538    1,330       6,868
Other assets.............................................................    13,488    1,516      15,004
Separate account assets..................................................    77,158    --         77,158
                                                                           --------  -------    --------
   TOTAL ASSETS..........................................................  $231,305  $61,725    $293,030
                                                                           ========  =======    ========
LIABILITIES AND ATTRIBUTED EQUITY
LIABILITIES
Future policy benefits...................................................  $ 39,752  $47,239    $ 86,991
Policyholders' account balances..........................................    37,944    5,389      43,333
Unpaid claims and claim adjustment expenses..............................     3,408    --          3,408
Policyholders' dividends.................................................       925    1,171       2,096
Securities sold under agreements to repurchase...........................     9,280    3,105      12,385
Cash collateral for loaned securities....................................     7,650    1,777       9,427
Income taxes payable.....................................................     1,085      247       1,332
Broker-dealer related payables...........................................     6,445    --          6,445
Securities sold but not yet purchased....................................     2,791    --          2,791
Short-term debt..........................................................     5,405    --          5,405
Long-term debt...........................................................     3,554    1,750       5,304
Other liabilities........................................................    15,572      240      15,812
Separate account liabilities.............................................    77,158    --         77,158
                                                                           --------  -------    --------
   Total liabilities.....................................................   210,969   60,918     271,887
                                                                           --------  -------    --------
Guaranteed minority interest in Trust holding solely debentures of Parent       690    --            690
                                                                           --------  -------    --------

COMMITMENTS AND CONTINGENCIES

ATTRIBUTED EQUITY
Accumulated other comprehensive income...................................       563      381         944
Other attributed equity..................................................    19,083      426      19,509
                                                                           --------  -------    --------
   Total attributed equity...............................................    19,646      807      20,453
                                                                           --------  -------    --------
   TOTAL LIABILITIES AND ATTRIBUTED EQUITY...............................  $231,305  $61,725    $293,030
                                                                           ========  =======    ========


           See Notes to Supplemental Combining Financial Information

                                      212



                          PRUDENTIAL FINANCIAL, INC.

                Supplemental Combining Statement of Operations
     Year Ended December 31, 2001 (in Millions, Except Per Share Amounts)





                                                                              Financial   Closed
                                                                               Services   Block
                                                                              Businesses Business Consolidated
                                                                              ---------- -------- ------------
                                                                                         
REVENUES
Premiums.....................................................................  $ 8,227   $ 4,250    $12,477
Policy charges and fee income................................................    1,803        --      1,803
Net investment income........................................................    5,239     3,897      9,136
Commissions and other income.................................................    4,356       124      4,480
                                                                               -------   -------    -------
   Total revenues............................................................   19,625     8,271     27,896
                                                                               -------   -------    -------
BENEFITS AND EXPENSES
Policyholders' benefits......................................................    8,170     4,588     12,758
Interest credited to policyholders' account balances.........................    1,670       134      1,804
Dividends to policyholders...................................................       89     2,121      2,210
General and administrative expenses..........................................    8,433       992      9,425
                                                                               -------   -------    -------
   Total benefits and expenses...............................................   18,362     7,835     26,197
                                                                               -------   -------    -------
ADJUSTED OPERATING INCOME....................................................    1,263       436      1,699
                                                                               -------   -------    -------
Items excluded from adjusted operating income
   Realized investment gains (losses), net, and related charges:
      Realized investment gains (losses), net................................     (162)     (543)      (705)
      Related charges........................................................       26      (512)      (486)
                                                                               -------   -------    -------
      Total realized investment gains (losses), net, and related charges.....     (136)   (1,055)    (1,191)

   Divested businesses.......................................................     (147)       --       (147)
   Demutualization costs and expenses........................................     (588)       --       (588)
                                                                               -------   -------    -------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES.................      392      (619)      (227)
                                                                               -------   -------    -------
   Total income tax expense (benefit)........................................      106      (163)       (57)
                                                                               -------   -------    -------
INCOME (LOSS) FROM CONTINUING OPERATIONS.....................................      286      (456)      (170)
                                                                               -------   -------    -------
DISCONTINUED OPERATIONS
   Gain on disposal of healthcare operations, net of taxes...................       16        --         16
                                                                               -------   -------    -------
NET INCOME (LOSS)............................................................  $   302   $  (456)   $  (154)
                                                                               =======   =======    =======




                                                                        For the period
                                                                      December 18 through
                                                                       December 31, 2001
                                                                      -------------------
                                                                           
NET INCOME AFTER DATE OF DEMUTUALIZATION............................. $  38  $   3  $  41
                                                                      =====  =====  =====
EARNINGS PER SHARE AFTER DATE OF DEMUTUALIZATION
   Financial Services Businesses
      Net income per share of Common Stock -- basic and diluted...... $0.07         $0.07
                                                                      =====         =====
   Closed Block Business
      Net income per share of Class B Stock -- basic and diluted.....        $1.50  $1.50
                                                                             =====  =====


           See Notes to Supplemental Combining Financial Information

                                      213



                          PRUDENTIAL FINANCIAL, INC.

             Notes to Supplemental Combining Financial Information



1.  BASIS OF PRESENTATION

   The supplemental combining financial information presents the consolidated
financial position and results of operations for Prudential Financial, Inc. and
its subsidiaries (the "Company") separately reporting the Financial Services
Businesses and the Closed Block Business. The Financial Services Businesses and
the Closed Block Business are both fully integrated operations of the Company
and are not separate legal entities. The supplemental combining financial
information presents the results of the Financial Services Businesses and the
Closed Block Business as if they were separate reporting entities and is
provided as supplemental information to the consolidated financial statements
of the Company. This information should be read in conjunction with the
consolidated financial statements of the Company.

   The Closed Block Business was established on the date of demutualization and
includes the assets and liabilities of the Closed Block (see Note 9 to the
consolidated financial statements for a description of the Closed Block). It
also includes assets held outside the Closed Block necessary to meet insurance
regulatory capital requirements related to products included within the Closed
Block; deferred policy acquisition costs related to the Closed Block policies;
the principal amount of the IHC debt (as discussed in Note 11) and related
unamortized debt issuance costs and an interest rate swap related to the IHC
debt; and certain other related assets and liabilities. For the period prior to
the date of demutualization, the results of the Closed Block Business are those
of the Traditional Participating Products segment, which historically sold
primarily participating insurance and annuity products that the Company ceased
offering in connection with demutualization. A minor portion of the Traditional
Participating Products segment historically consisted of other traditional
insurance products that are now included in the Financial Services Businesses
and not in the Closed Block Business. The Financial Services Businesses consist
of the U.S. Consumer, Employee Benefits, International and Asset Management
divisions and Corporate and Other operations.

   In managing its business, the Company analyzes the operating performance of
the Financial Services Businesses and individual segments within the Financial
Services Businesses, as well as the Closed Block Business, using "adjusted
operating income," which is a non-GAAP measure. In periods subsequent to the
date of demutualization, the measure of earnings used by management to evaluate
the results of the Closed Block Business will not include any adjustments to
reflect results on an "adjusted operating income" basis. "Adjusted operating
income" is calculated by adjusting income from continuing operations before
income taxes to exclude certain items. The items excluded are realized
investment gains, net of losses and related charges; demutualization costs and
expenses; and the gains, losses and contribution to income/loss of divested
businesses and related runoff operations which have been sold but do not
qualify for "discontinued operations" treatment under GAAP. Businesses that the
Company has placed in wind-down status but are not divested remain in "adjusted
operating income." For a complete description of the items excluded from income
from continuing operations for determination of "adjusted operating income,"
see Note 20 to the consolidated financial statements.

2.   DEMUTUALIZATION AND RECAPITALIZATION

   On the date of demutualization, the Company issued two classes of common
stock. The Common Stock reflects the performance of the Financial Services
Businesses while the Class B Stock reflects the performance of the Closed Block
Business. Upon the establishment of the Closed Block Business, $5.6 billion of
net assets previously associated with the Traditional Participating Products
segment were transferred to the Financial Services Businesses. Concurrent with
the demutualization, Prudential Holdings, LLC, a wholly owned subsidiary of
Prudential Financial, Inc., issued $1.75 billion in senior secured notes (the
"IHC debt"), of which net proceeds of $1.66 billion were allocated to the
Financial Services Businesses. The IHC debt is serviced by the cash flows of
the Closed Block Business and the results of the Closed Block Business reflect
interest expenses associated with the IHC debt.

3.   ALLOCATION OF RESULTS

   This supplemental combining financial information reflects the assets,
liabilities, revenues and expenses directly attributable to the Financial
Services Businesses and the Closed Block Business, as well as allocations

                                      214



                          PRUDENTIAL FINANCIAL, INC.

             Notes to Supplemental Combining Financial Information

3.   ALLOCATION OF RESULTS (continued)

deemed reasonable by management in order to fairly present the financial
position and results of operations of each business on a stand alone basis.
While management considers the allocations utilized to be reasonable,
management has the discretion to make operational and financial decisions which
may affect the allocation methods and resulting assets, liabilities, revenues
and expenses of each business. In addition, management has discretion over
accounting policies and the appropriate allocation of earnings between the two
businesses. The Company has agreements which provide that, in most 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 directly attributable to a specific business
but which has been incurred in connection with the generation of the businesses
revenues is generally allocated based on each businesses' historical general
and administrative expenses as a percentage of the total for the Company.

   Income taxes are allocated between the Financial Services Businesses and the
Closed Block Business as if they were separate companies based on the taxable
income or losses and other tax characterizations of each business. If a
business generates benefits, such as net operating losses, it is entitled to
record such tax benefits to the extent they are expected to be utilized on a
consolidated basis.

4.  STOCKHOLDERS' EQUITY

   The declaration and payment of dividends on the Common Stock depends
primarily upon the financial condition, results of operations, cash
requirements, future prospects and other factors relating to the Financial
Services Businesses. Dividends declared and paid on the Common Stock do not
depend upon and are not affected by the financial performance of the Closed
Block Business, unless the Closed Block Business is in financial distress.
Dividends declared and paid on the Common Stock are not affected by decisions
with respect to dividend payments on the Class B Stock except as indicated in
the following paragraph. Furthermore, dividends on the Common Stock are limited
to both the amount that is legally available for payment under New Jersey
corporate law if the Financial Services Businesses were treated as a separate
corporation thereunder and the amount that is legally available for payment
under New Jersey corporate law on a consolidated basis after taking into
account dividends on the Class B Stock.

   The declaration and payment of dividends on the Class B Stock depends upon
the financial performance of the Closed Block Business and, as the Closed Block
matures, the holders of the Class B Stock will receive the surplus of the
Closed Block Business no longer required to support the Closed Block for
regulatory purposes. Dividends on the Class B Stock are payable in an aggregate
amount per year at least equal to the lesser of (1) a Target Dividend Amount of
$19.25 million or (2) the CB Distributable Cash Flow for such year, which is a
measure of the net cash flows of the Closed Block Business. Notwithstanding
this formula, as with any common stock, Prudential Financial will retain the
flexibility to suspend dividends on the Class B Stock; however, if CB
Distributable Cash Flow exists and Prudential Financial chooses not to pay
dividends on the Class B Stock in an aggregate amount at least equal to the
lesser of the CB Distributa