Prudential Financial Inc – ‘10-K405’ for 12/31/01

On:  Tuesday, 3/26/02   ·   For:  12/31/01   ·   Accession #:  950130-2-1967   ·   File #:  1-16707

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Annual Report — [x] Reg. S-K Item 405   —   Form 10-K
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Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Form 10-K                                            234   1.43M 
 2: EX-23.1     Consent of Independent Accountants                     1      5K 
 3: EX-24.1     Powers of Attorney                                    23     63K 

10-K405   —   Form 10-K
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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: 

                                                                [Download Table]

           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 

                                                        [Enlarge/Download Table]

                                                                                              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.                 

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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.                               

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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.                                                           

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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                                

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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.                                                                          

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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.                                                        

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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                

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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                        

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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        

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   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.             

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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.                                                                     

                                                        [Enlarge/Download Table]

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

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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.                

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.  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.              

                                                        [Enlarge/Download Table]

                                                                          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.                               

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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.                                                                

                                                                [Download Table]

                            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.                                                          

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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           

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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.                                                                      

                                                        [Enlarge/Download Table]

                                                                       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.

                                                                [Download Table]

                             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

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--------                                                                        
(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.                   

                                                        [Enlarge/Download Table]

                                                                          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.                                                            

                                                                [Download Table]

                                    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                                                         

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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.                              

                                                                [Download Table]

                                       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.                    

                                                                [Download Table]

                                  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.                                      

                                                                [Download Table]

                                      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.                                                              

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  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.                                                                      

                                                        [Enlarge/Download Table]

                                                                                        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.                                     

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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,                              

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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                                                  

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

                                                        [Enlarge/Download Table]

                                                                      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         

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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.                                                      

                                                                [Download Table]

                            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.                                 

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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.                                                                    

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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.                                                         

                                                                [Download Table]

                                                       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                                            

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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.                                               

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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.                                                 

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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.                                            

                                                        [Enlarge/Download Table]

                                                                                         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    
                                                        [Enlarge/Download Table]


                                                                        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.                                                                        

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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.      

                                                        [Enlarge/Download Table]

                                       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. 

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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.                                                        

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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.                                           

                                                                [Download Table]

                                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

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

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--------                                                                        
(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                                                         

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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.                                                            

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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.                                                                         

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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                                               

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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.                             

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  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                                       

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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.                                      

                                                        [Enlarge/Download Table]

                                                                  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                                                               

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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.                                  

                                                        [Enlarge/Download Table]

                                                                   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.                             

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

                                                                [Download Table]

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

                                                                [Download Table]

                                         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.                            

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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 

                                                        [Enlarge/Download Table]

                                                   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 

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

                                                        [Enlarge/Download Table]

                                                 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 

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

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Private Fixed Maturities by Credit Quality  

                                                        [Enlarge/Download Table]

                                                   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 

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

                                                        [Enlarge/Download Table]

                                                 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                                    

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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  

                                                        [Enlarge/Download Table]

                                                 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.                                        

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                                                        [Enlarge/Download Table]

                                                           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.                

                                                        [Enlarge/Download Table]

                                                              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%

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

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

Commercial Loan Maturities  

                                                        [Enlarge/Download Table]

                                                     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 

                                                                [Download Table]

                                                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.                                         

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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.                                                         

                                                        [Enlarge/Download Table]

                                                                                      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.                                                     

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(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.                                                

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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.                        

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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.                                                                     

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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.                                                              

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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                                                      

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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                                                       

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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.                                                       

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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                   

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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.                       

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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:            

                                                        [Enlarge/Download Table]

         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.                                                                     

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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                                                               

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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.                      

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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.                 

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 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                                 

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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                                                                 

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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.                        

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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.                                                                       

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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.                                                    

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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                                                                          

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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                             

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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.                                             

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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.                                                      

                                                        [Enlarge/Download Table]

                                           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.       

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  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.                                 

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 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.                                              

                                                        [Enlarge/Download Table]

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

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--------                                                                        
(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:                                                                

                                                                [Download Table]

                                                     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:                                                                     

                                                        [Enlarge/Download Table]

                                                                    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.                                                             

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                                                        [Enlarge/Download Table]

                                                            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.    

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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.      

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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                                                           

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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.    

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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                       

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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                                                                     

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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.                                              

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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.                                           

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 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.                                

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  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         

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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                   

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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.                                                

                                                                [Download Table]

                                                 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."                                   

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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.                    

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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.                                                                     

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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.                 

                                                        [Enlarge/Download Table]

                                                                      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.                                                                

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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                                                             

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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.                               

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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.               

                                                                [Download Table]

                     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.                                                      

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Individual Life Insurance                                                       

Operating Results                                                         

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

                                                                [Download Table]

                                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.                                                                          

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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                  

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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.                                

                                                                [Download Table]

                                         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.                                                                        

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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.      

                                                        [Enlarge/Download Table]

                                                                          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.                                              

                                                                [Download Table]

                                                  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                        

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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.                                                              

                                                                [Download Table]

                                          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                       

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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.                  

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Retail Investments                                                              

Operating Results                                                         

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

                                                                [Download Table]

                            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.                     

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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.           

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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.                                                             

                                                        [Enlarge/Download Table]

                                                                         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                                                                     

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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.                                                        

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Property and Casualty Insurance                                                 

Operating Results                                                         

  The following table sets forth the Property and Casualty Insurance segment's
operating results for the periods indicated.                                    

                                                                [Download Table]

                                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.                                                      

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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. 

                                                                [Download Table]

                            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.                                                   

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 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).                       

                                                                [Download Table]

                                                             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                                            

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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.           

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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.                 

                                                        [Enlarge/Download Table]

                                                                             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:                                    

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                                                                [Download Table]

                                                        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.                                              

                                                                [Download Table]

                            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.                               

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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.              

                                                                [Download Table]

                                           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                                

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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.                                 

                                                                [Download Table]

                          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.                                           

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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.                                    

                                                                [Download Table]

                                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.             

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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.                                                                       

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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.                                                                     

                                                        [Enlarge/Download Table]

                                                                  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.    

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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.         

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                                                                [Download Table]

                                                      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.                                                        

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Operating Results                                                         

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

                                                                [Download Table]

                                                        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,                                                                      

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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                                                                        

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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                                                        

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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.                          

                                                                [Download Table]

                                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.                                                                           

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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   

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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.                                                          

                                                                [Download Table]

                                                      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.                                          

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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.                 

                                                                [Download Table]

                                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.                                  

                                                                [Download Table]

                              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.     

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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.                                    

                                                                [Download Table]

                            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.                                                   

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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.            

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 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.                                 

                                                                [Download Table]

                                                             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.                                                             

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  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            

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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                       

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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.                                                      

                                                        [Enlarge/Download Table]

                                                                             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.                                                                         

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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                          

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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.  

                                                        [Enlarge/Download Table]

                                                                                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.                                                              

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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.      

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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                                                            

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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.                                                                   

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The following table sets forth our outstanding financing as of the dates  
indicated:                                                                      

                                                                [Download Table]

                                                      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:                                          

                                                                [Download Table]

                                            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   

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

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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.                                              

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 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.                          

                                                        [Enlarge/Download Table]

                                                                                                          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%

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

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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):                                       

                                                                [Download Table]

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.                                                                   

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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.                           

                                                                [Download Table]

                                     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.      

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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.                                      

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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.                       

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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.                         

                                                        [Enlarge/Download Table]

                                                                  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)  

                                                                                            =======   

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                                                        [Enlarge/Download Table]

                                                                  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.                                        

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 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.         

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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:                                                      

                                                                [Download Table]

                      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.                                                      

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                            

CONSOLIDATED FINANCIAL STATEMENTS 
INDEX 

                                                                [Download Table]

                                                                              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  

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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                                                               

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PRUDENTIAL FINANCIAL, INC.  

Consolidated Statements of Financial Position 
December 31, 2001 and 2000 (in Millions)  

                                                        [Enlarge/Download Table]

                                                                                                              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  

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PRUDENTIAL FINANCIAL, INC.  

Consolidated Statements of Operations 
Years Ended December 31, 2001, 2000 and 1999 (in Millions, Except Per Share 
Amounts)  

                                                        [Enlarge/Download Table]

                                                                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 
                                                               =======  =======  ======= 
                                                                [Download Table]

                                                                 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  

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PRUDENTIAL FINANCIAL, INC.  

Consolidated Statements of Stockholders' Equity 
Years Ended December 31, 2001, 2000 and 1999 (in Millions)  

                                                        [Enlarge/Download Table]

                                                                         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   
                                    =====   ====    =======   ========     =====     =======      ====       =======   
                                                                [Download Table]


                                        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  

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PRUDENTIAL FINANCIAL, INC.  

Consolidated Statements of Cash Flows 
Years Ended December 31, 2001, 2000 and 1999 (in Millions)  

                                                        [Enlarge/Download Table]

                                                                                            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  

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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).                                                            

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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.                                                         

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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                                                

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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               

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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                                                              

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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.                         

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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.            

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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                                                

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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.                                                        

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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                                                  

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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,                                                                             

                                                        [Enlarge/Download Table]

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

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PRUDENTIAL FINANCIAL, INC.  

Notes to Consolidated Financial Statements  

6.  INVESTMENTS (continued)                                                     

                                                        [Enlarge/Download Table]


                                                                              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 
                                                             =======    ======     ======    ======= 
                                                        [Enlarge/Download Table]


                                                                              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:                    

                                                                [Download Table]

                                       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                       

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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,            

                                                                [Download Table]

                                              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:                                    

                                                                [Download Table]

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

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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:                                                                     

                                                                [Download Table]

                                                        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:                                                  

                                                                [Download Table]

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

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PRUDENTIAL FINANCIAL, INC.  

Notes to Consolidated Financial Statements  

6.  INVESTMENTS (continued)                                                     

                                                        [Enlarge/Download Table]

                                                                           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:                                                              

                                                                [Download Table]

                                                 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.                                          

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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:                                                

                                                                [Download Table]

                                               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.                                  

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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:                                        

                                                        [Enlarge/Download Table]

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

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PRUDENTIAL FINANCIAL, INC.  

Notes to Consolidated Financial Statements  

6.  INVESTMENTS (continued)                                                     

The table below presents unrealized gains (losses) on investments by asset
class:                                                                          

                                                                [Download Table]

                                            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:           

                                                                [Download Table]

                                     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.                   

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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:                                

                                                                [Download Table]

                                                         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:                    

                                                                [Download Table]

                              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.                         

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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):                              

                                                        [Enlarge/Download Table]

         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:           

                                                                [Download Table]

                                                                  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.             

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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):

                                                        [Enlarge/Download Table]

              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:                                                

                                                        [Enlarge/Download Table]

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

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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                                      

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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:               

                                                        [Enlarge/Download Table]

                                                                                               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     
                                                                                                    =======     

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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:                   

                                                        [Enlarge/Download Table]

                                                                                     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:                               

                                                                [Download Table]

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

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PRUDENTIAL FINANCIAL, INC.  

Notes to Consolidated Financial Statements  

10.  REINSURANCE (continued)                                                    

  Reinsurance recoverables, included in "Other assets" at December 31, were as
follows:                                                                        

                                                                [Download Table]

                               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:                            

                                                                [Download Table]

                                   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.                                                      

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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:                             

                                                        [Enlarge/Download Table]

                                                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    

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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.                      

                                                        [Enlarge/Download Table]

                                                                                (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)  

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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.                                                                     

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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.                   

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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      

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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.                                                                   

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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.                                                          

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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:                                           

                                                        [Enlarge/Download Table]

                                                                          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.                                 

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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                                                    

                                                                [Download Table]

                                                 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:                                            

                                                                [Download Table]

                                                   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:              

                                                                [Download Table]

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

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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:                      

                                                                [Download Table]

                                                     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:                                               

                                                        [Enlarge/Download Table]

                                                    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:                                            

                                                                [Download Table]

                                                          2001   
                                                       ----------
                                                                 
Dividend yield........................................         1%
Expected volatility...................................        37%
Risk-free interest rate...............................      4.07%
Expected life of stock option......................... 3.95 years

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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:               

                                                                [Download Table]

                                                                        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:                                       

                                                                [Download Table]

                                    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.                                                          

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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:                                   

                                                        [Enlarge/Download Table]

                                                                                   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.                                   

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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:                           

                                                        [Enlarge/Download Table]

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

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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:                                                 

                                                        [Enlarge/Download Table]

                                                              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:                                                                        

                                                                [Download Table]

                                                         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:                        

                                                                [Download Table]

                                                  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  
                                                  ===      ===   ===  

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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:                                                            

                                                                [Download Table]

                                                   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:                                  

                                                                [Download Table]

                                        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:                                                  

                                                                [Download 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)
                                                    =======  ====== 

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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.                                                             

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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,                          

                                                        [Enlarge/Download Table]

                                                       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  

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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   

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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.                                              

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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 .                  

                                                        [Enlarge/Download Table]

                                                                                                                 (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                      

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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,                                                          

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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.       

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PRUDENTIAL FINANCIAL, INC.  

Notes to Consolidated Financial Statements  

19.  DERIVATIVE INSTRUMENTS (continued)                                         

Derivative Financial Instruments  
December 31, 2001 

                                                        [Enlarge/Download Table]

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

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PRUDENTIAL FINANCIAL, INC.  

Notes to Consolidated Financial Statements  

19.  DERIVATIVE INSTRUMENTS (continued)                                         

Derivative Financial Instruments  
December 31, 2000 

                                                        [Enlarge/Download Table]

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

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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.                                         

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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.                      

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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:                                                        

                                                        [Enlarge/Download Table]

                                                                         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         

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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.      

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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:                                      

                                                        [Enlarge/Download Table]

                                                                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)   
                                   ======       =====         =====       ====       =====         =====          =====    

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PRUDENTIAL FINANCIAL, INC.  

Notes to Consolidated Financial Statements  

20.  SEGMENT INFORMATION (continued)                                            

                                                        [Enlarge/Download Table]

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

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PRUDENTIAL FINANCIAL, INC.  

Notes to Consolidated Financial Statements  

20.  SEGMENT INFORMATION (continued)                                            

                                                        [Enlarge/Download Table]

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

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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:                                                            

                                                        [Enlarge/Download Table]

                                                                              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 
                                                  =======    ======      =======         ======        ======      ====== 
                                                                [Download Table]


                                                  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   
                                                     ======   

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PRUDENTIAL FINANCIAL, INC.  

Notes to Consolidated Financial Statements  

20.  SEGMENT INFORMATION (continued)                                            

                                                        [Enlarge/Download Table]

                                                                              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  
                                                  =======    ======      =======         ======        ======       ====  
                                                                [Download Table]


                                                  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   
                                                     ======   

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PRUDENTIAL FINANCIAL, INC.  

Notes to Consolidated Financial Statements  

20.  SEGMENT INFORMATION (continued)                                            

                                                        [Enlarge/Download Table]

                                                                              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  
                                                  =======    ======      =======         ======        ======       ====  
                                                                [Download Table]


                                                  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   
                                                     ======   

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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,                                                        

                                                                [Download Table]

                                                            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:                                                

                                                                [Download Table]

                              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.                                                                       

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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.                                                             

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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.                                           

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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:                           

                                                                [Download Table]

                                                 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   

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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.                  

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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:                            

                                                        [Enlarge/Download Table]

                                                                              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.                                       

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PRUDENTIAL FINANCIAL, INC.  

Supplemental Combining Statement of Financial Position  
December 31, 2001 (in Millions) 

                                                        [Enlarge/Download Table]

                                                                          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 

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PRUDENTIAL FINANCIAL, INC.  

Supplemental Combining Statement of Operations  
Year Ended December 31, 2001 (in Millions, Except Per Share Amounts)  

                                                        [Enlarge/Download Table]

                                                                              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)  
                                                                               =======   =======    =======   

                                                        [Enlarge/Download Table]

                                                                        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 

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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       

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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 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.                                                                    

 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.                                                                          

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PRUDENTIAL FINANCIAL, INC.  

Notes to Supplemental Combining Financial Information 

5.   CONTINGENCIES                                                              

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.                

6.  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.                 

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ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND        
FINANCIAL DISCLOSURES                                         

None.                                                                     

PART III  

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                    

  Certain information called for by this item is hereby incorporated herein by
reference to the sections entitled "Item 1--Election of Class I Directors,"     
"Nominees for Class I Directors for Terms to Expire in 2005," "Continuing Class 
II Directors Whose Terms Expire in 2003" and "Continuing Class III Directors    
Whose Terms Expire in 2004" in 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 within 120 days after the year ended December 31, 2001.          
Additional information called for by this item is contained in Item 1A of this  
Annual Report on Form 10-K under the caption "Executive Officers."              

ITEM 11.  EXECUTIVE COMPENSATION                                                

The information called for by this item is hereby incorporated herein by  
reference to the sections entitled "Compensation of Executive Officers,"        
"Summary Compensation Table," "Retirement Plans," "Prudential Severance and     
Senior Executive Severance Plan; Change of Control Program" and "Long-Term      
Compensation Table" in 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 within 120 days after the year ended December 31, 2001.                     

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT        

The information called for by this item is hereby incorporated herein by  
reference to the section entitled "Voting Securities and Principal Holders      
Thereof" in 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 within 120    
days after the year ended December 31, 2001.                                    

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                        

The information called for by this item is hereby incorporated herein by  
reference to the section entitled "Certain Relationships and Related            
Transactions" in 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 within 120 days after the year ended December 31, 2001.                     

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PART IV 

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K      

                                                        [Enlarge/Download Table]

                                                                                        Page 
                                                                                       Number
(a) The following documents are filed as part of this report:                          ------
                                                                                             

    1.  Financial Statements - Item 8. Financial Statements and Supplementary Data....  141  

    2.  Financial Statement Schedules:                                                       

        Schedule I    Summary of Investments Other Than Investments in Related Parties  220  
        Schedule II    Condensed Financial Information of Registrant..................  221  
        Schedule III   Supplementary Insurance Information............................  224  
        Schedule IV  Reinsurance......................................................  227  
        Schedule V   Valuation and Qualifying Accounts................................  228  
        Any remaining schedules are omitted because they are inapplicable.                   

                                                                [Download Table]
             

3.  Exhibits:

                                                        [Enlarge/Download Table]
                                                                                                       
 2.1 Plan of Reorganization. Incorporated by reference to Exhibit 2.1 to Prudential Financial, Inc.'s  
     Registration Statement on Form S-1 (No. 333-58524) (the "Registration Statement").                
 3.1 Form of Amended and Restated Certificate of Incorporation of Prudential Financial, Inc.           
     Incorporated by reference to Exhibit 3.1 to the Registration Statement.                           
 3.2 Form of By-laws of Prudential Financial, Inc. Incorporated by reference to Exhibit 3.2 to the     
     Registration Statement.                                                                           
 4.1 Form of certificate for the Common Stock of Prudential Financial, Inc., par value $.01 per share. 
     Incorporated by reference to Exhibit 4.1 to the Registration Statement.                           
 4.2 Form of Shareholders' Rights Plan. Incorporated by reference to Exhibit 4.2 to the Registration   
     Statement.                                                                                        
 4.3 Upon the request of the Securities and Exchange Commission, the Registrant will furnish copies    
     of all instruments defining the rights of holders of long-term debt of the Registrant.            
 4.4 Inter-Business Transfer and Allocation Policies relating to the Financial Services Businesses and 
     the Closed Block Business. Incorporated by reference to Exhibit 4.6 to the Registration Statement.
10.1 Support Agreement between The Prudential Insurance Company of America and Prudential              
     Funding Corporation dated as of March 18, 1982. Incorporated by reference to Exhibit 10.1 to the  
     Registration Statement.                                                                           
10.2 Stipulation of Settlement--United States District Court for the District of New Jersey, in re: The
     Prudential Insurance Company of America Sales Practices Litigation, MDL No. 1061, Master          
     Docket No. 95-4704 (AMW) (Document dated October 28, 1996). Incorporated by reference to          
     Exhibit 10.2 to the Registration Statement.                                                       
10.3 Amendment to Stipulation of Settlement--United States District Court for the District of New      
     Jersey, in re: The Prudential Insurance Company of America Sales Practices Litigation MDL No.     
     1061, Master Docket No. 95-4704 (AMW) (Original filed February 24, 1997) (Document dated          
     February 22, 1997). Incorporated by reference to Exhibit 10.3 to the Registration Statement.      
10.4 The Prudential Insurance Company of America Deferred Compensation Plan. Incorporated by           
     reference to Exhibit 10.4 to the Registration Statement.                                          
10.5 The Prudential Deferred Compensation Plan for Non-Employee Directors. Incorporated by             
     reference to Exhibit 10.5 to the Registration Statement.                                          

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                                                        [Enlarge/Download Table]
                                                                                                     
10.6  The Pension Plan for Non-Employee Directors of The Prudential Insurance Company of             
      America. Incorporated by reference to Exhibit 10.6 to the Registration Statement.              
10.7  2001 Prudential Long-Term Performance Unit Plan. Incorporated by reference to Exhibit 10.7 to  
      the Registration Statement.                                                                    
10.8  2000 Prudential Long-Term Performance Unit Plan. Incorporated by reference to Exhibit 10.8 to  
      the Registration Statement.                                                                    
10.9  1999 Prudential Long-Term Performance Unit Plan. Incorporated by reference to Exhibit 10.9 to  
      the Registration Statement.                                                                    
10.10 1998 Amended Prudential Long-Term Performance Unit Plan. Incorporated by reference to          
      Exhibit 10.10 to the Registration Statement.                                                   
10.11 1998 Prudential Annual Incentive Plan. Incorporated by reference to Exhibit 10.11 to the       
      Registration Statement.                                                                        
10.12 Prudential Financial, Inc. Stock Option Plan. Incorporated by reference to Exhibit 10.12 to the
      Registration Statement.                                                                        
10.13 Prudential Supplemental Retirement Plan. Incorporated by reference to Exhibit 10.13 to the     
      Registration Statement.                                                                        
10.14 Prudential Supplemental Employee Savings Plan. Incorporated by reference to Exhibit 10.14 to   
      the Registration Statement.                                                                    
10.15 Prudential Severance Plan for Senior Executives. Incorporated by reference to Exhibit 10.15 to 
      the Registration Statement.                                                                    
21.1  Subsidiaries of Prudential Financial, Inc. Incorporated by reference to Exhibit 21.1 to the    
      Registration Statement.                                                                        
23.1  Consent of PricewaterhouseCoopers LLP.                                                         
24.1  Powers of Attorney.                                                                            

                                                                [Download Table]
                                                                              
(b) Reports on Form 8-K                                                       
    There were no reports on Form 8-K filed during the fourth quarter of 2001.

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PRUDENTIAL FINANCIAL, INC.  
Schedule I  
Summary of Investments Other Than Investments in Related Parties  
As of December 31, 2001 (in Millions) 

                                                        [Enlarge/Download Table]

                                                                                           Amount at  
                                                                                             which    
                                                                                         shown in the 
Type of Investment                                                     Cost(1)   Value   balance sheet
------------------                                                     -------- -------- -------------
                                                                                                      
Fixed maturities, available for sale:                                                                 
 Bonds:                                                                                               
   United States Government and government agencies and authorities... $  7,900 $  8,060   $  8,060   
   States, municipalities and political subdivisions..................    1,936    1,987      1,987   
   Foreign governments................................................   17,322   17,590     17,590   
   Mortgage-backed securities.........................................    5,234    5,380      5,380   
   Public utilities...................................................   13,806   14,331     14,331   
   Convertibles and bonds with warrants attached......................       19       20         20   
   All other corporate bonds..........................................   60,946   62,246     62,246   
 Certificates of deposit..............................................    --       --         --      
 Redeemable preferred stock...........................................      301      328        328   

                                                                       -------- --------   --------   
     Total fixed maturities, available for sale....................... $107,464 $109,942   $109,942   

                                                                       -------- --------   --------   
Fixed maturities, held to maturity:                                                                   
Bonds:                                                                                                
   United States Government and government agencies and authorities... $      2 $      2   $      2   
   States, municipalities and political subdivisions..................        1        1          1   
   Foreign governments................................................      106      114        106   
   Mortgage-backed securities.........................................    --       --         --      
   Public utilities...................................................    --       --         --      
   Convertibles and bonds with warrants attached......................    --       --         --      
   All other corporate bonds..........................................      265      278        265   
 Certificates of deposit..............................................    --       --         --      
 Redeemable preferred stock...........................................    --       --         --      

                                                                       -------- --------   --------   
     Total fixed maturities, held to maturity......................... $    374 $    395   $    374   

                                                                       -------- --------   --------   
Equity securities:                                                                                    
  Common Stocks:                                                                                      
   Public utilities................................................... $     48 $     68   $     68   
   Banks, trust and insurance companies...............................       95      100        100   
   Industrial, miscellaneous and other................................    2,001    1,957      1,957   
   Nonredeemable preferred stocks.....................................      108      147        147   

                                                                       -------- --------   --------   
     Total equity securities.......................................... $  2,252 $  2,272   $  2,272   

                                                                       -------- --------   --------   
Commercial loans (2).................................................. $ 19,729            $ 19,729   
Policy loans..........................................................    8,570               8,570   
Cash collateral for borrowed securities...............................    5,210               5,210   
Securities purchased under agreements to resell.......................    4,421               4,421   
Trading account assets (3)............................................    5,043               5,043   
Short-term investments................................................    4,855               4,855   
Other long-term investments...........................................    5,418               5,418   

                                                                       --------            --------   
     Total investments................................................ $163,336            $165,834   

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

--------                                                                        
(1) Original cost of equities and, as to fixed maturities, original cost        
reduced by repayments and adjusted for amortization of premiums and     
accretion of discounts.                                                 
(2) Includes mortgage loans of $16,946 million and Gibraltar Life               
uncollateralized loans of $2,783 million.                               
(3) At fair value.                                                              

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PRUDENTIAL FINANCIAL, INC.  
Schedule II 
Condensed Financial Information of Registrant 
Condensed Statement of Financial Position as of December 31, 2001 
(in Millions) 

                                                        [Enlarge/Download Table]

ASSETS                                                                                                       
                                                                                                             
Total investments.................................................................................... $   197
Cash and cash equivalents............................................................................   4,234
Due from subsidiaries................................................................................     198
Loans receivable from subsidiaries...................................................................   1,091
Investment in subsidiaries...........................................................................  19,565
Other assets.........................................................................................      31
                                                                                                      -------
       TOTAL ASSETS.................................................................................. $25,316
                                                                                                      =======
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                         
LIABILITIES                                                                                                  
Due to subsidiaries.................................................................................. $     4
Loans payable to subsidiaries........................................................................   1,761
Other liabilities....................................................................................   3,098
                                                                                                      -------
       Total liabilities.............................................................................   4,863
                                                                                                      -------
STOCKHOLDERS' EQUITY                                                                                         
Preferred Stock ($0.01 par value; 10,000,000 shares authorized)......................................      --
Common Stock ($.01 par value; 1,500,000,000 shares authorized; 583,582,767 shares issued and                 
  outstanding at December 31, 2001)..................................................................       6
Class B Stock ($0.01 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
Retained earnings....................................................................................      41
                                                                                                      -------
       Total stockholders' equity....................................................................  20,453
                                                                                                      -------
       TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................................... $25,316
                                                                                                      =======

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PRUDENTIAL FINANCIAL, INC.  
Schedule II 
Condensed Financial Information of Registrant 
Condensed Statement of Operations For the Period From December 18, 2001 Through 
December 31, 2001 
(in Millions) 

                                                                [Download Table]
                                                                    
REVENUES                                                            
Net investment income.......................................... $ 4 
Realized investment gains, net.................................   6 
Affiliated interest revenue....................................   1 
                                                                --- 
     Total revenues............................................  11 
                                                                --- 
EXPENSES                                                            
General and administrative expenses............................  10 
Affiliated interest expense....................................   2 
                                                                --- 
     Total expenses............................................  12 
                                                                --- 
LOSS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF SUBSIDIARIES  (1)
                                                                --- 
Income taxes                                                        
 Current.......................................................  (1)
 Deferred......................................................   3 
                                                                --- 
       Total income tax expense................................   2 
                                                                --- 
LOSS BEFORE EQUITY IN EARNINGS OF SUBSIDIARIES.................  (3)
                                                                --- 
EQUITY IN EARNINGS OF SUBSIDIARIES                                  
Income from earnings of subsidiaries...........................  44 
                                                                --- 
NET INCOME..................................................... $41 
                                                                === 

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PRUDENTIAL FINANCIAL, INC.  
Schedule II 
Condensed Financial Information of Registrant 
Condensed Statement of Cash Flows For the Period From 
December 18, 2001 Through December 31, 2001 
(in Millions) 

                                                                [Download Table]
                                                                             

CASH FLOWS FROM OPERATING ACTIVITIES                                         
Net Income.......................................................... $    41 
Equity in earnings of subsidiaries..................................     (44)
Realized investment gains, net......................................      (6)

Adjustments to reconcile net income to cash provided by                      
 operating activities:                                                       
   Due from subsidiaries, net of due to subsidiaries................    (194)
   Other, net.......................................................      (7)
                                                                     ------- 
     Cash used in operating activities..............................    (210)
                                                                     ------- 

CASH FLOWS FROM INVESTING ACTIVITIES                                         
Capital contributions to subsidiaries...............................  (1,760)
Dividends from subsidiaries.........................................   2,254 
Loans to subsidiaries...............................................  (1,091)
Payments for the purchase of:                                                
   Short-term investments...........................................    (185)
   Long-term investments............................................     (12)
                                                                     ------- 
     Cash used in investing activities..............................    (794)
                                                                     ------- 

CASH FLOWS FROM FINANCING ACTIVITIES                                         
Loans from subsidiaries.............................................   1,734 
Proceeds from the issuance of Common Stock..........................   3,337 
Proceeds from the issuance of Class B Stock.........................     167 
                                                                     ------- 
     Cash provided by financing activities..........................   5,238 
                                                                     ------- 
INCREASE IN CASH AND CASH EQUIVALENTS...............................   4,234 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................      -- 
                                                                     ------- 
CASH AND CASH EQUIVALENTS, END OF PERIOD............................ $ 4,234 
                                                                     ======= 

NON-CASH TRANSACTIONS DURING THE PERIOD                                      
Cash demutualization consideration payable to eligible policyholders $ 3,060 

Notes to Condensed Financial Information of Registrant                          

  Prudential Financial, Inc. was incorporated on December 28, 1999 as a wholly
owned subsidiary of The Prudential Insurance Company of America. On December    
18, 2001, The Prudential Insurance Company of America converted from a mutual   
life insurance company to a stock life insurance company and became an          
indirect, wholly owned subsidiary of Prudential Financial, Inc.                 

Prudential Financial, Inc. received dividends from certain of its         
subsidiaries during the period from December 18, 2001 through December 31,      
2001. Total dividends received by Prudential Financial, Inc. during this period 
amounted to $2,254 million, including $1,218 million received from Prudential   
Holdings, LLC as discussed in Note 11 to the Consolidated Financial Statements. 

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PRUDENTIAL FINANCIAL, INC.  
Schedule III  
Supplementary Insurance Information 
As of and for the year ended December 31, 2001 (in Millions)  

                                                        [Enlarge/Download Table]

                                                         Future              Other                                        
                                                         Policy              Policy  Premium,                             
                                             Deferred   Benefits,            Claims   Policy             Benefits, Claims,
                                              Policy     Losses,              and    Charges     Net        Losses and    
                                            Acquisition  Claims,  Unearned  Benefits and Fee  Investment    Settlement    
                  Segment                      Costs    Expenses  Premium   Payable   Income    Income       Expenses     
                  -------                   ----------- --------- --------- -------- -------- ---------- -----------------
                                                                                                                          
Individual Life Insurance..................   $3,133     $ 1,807    $  --   $ 3,831  $ 1,404    $  391        $   836     
Private Client Group.......................     --         ---       --       --       --          243          --        
Retail Investments.........................      628         729     --       5,047      288       443            370     
Property and Casualty Insurance............      132       1,748        622   --       1,884       158          1,334     

                                              ------     -------  --------- -------  -------    ------        -------     
   U.S. Consumer Division..................    3,893       4,284        622   8,878    3,576     1,235          2,540     

                                              ------     -------  --------- -------  -------    ------        -------     
Group Insurance............................       27       3,160        124   4,029    2,676       547          2,714     
Other Employee Benefits....................       66      12,317     --      15,372      100     2,181          1,883     

                                              ------     -------  --------- -------  -------    ------        -------     
   Employee Benefits Division..............       93      15,477        124  19,401    2,776     2,728          4,597     

                                              ------     -------  --------- -------  -------    ------        -------     
International Insurance....................    1,615      22,005         44  10,541    3,644       450          2,746     
International Securities and Investments...     --         --        --        --       --          61          --        

                                              ------     -------  --------- -------  -------    ------        -------     
   International Division..................    1,615      22,005         44  10,541    3,644       511          2,746     

                                              ------     -------  --------- -------  -------    ------        -------     
Investment Management and Advisory Services     --         --        --       --       --           42          --        
Other Asset Management.....................     --         --        --       --       --           48                    

                                              ------     -------  --------- -------  -------    ------        -------     
   Asset Management Division...............     --         --        --       --       --           90          --        

                                              ------     -------  --------- -------  -------    ------        -------     
Corporate and Other........................      (63)        592         12      49       34       690             40     

                                              ------     -------  --------- -------  -------    ------        -------     
   Total Financial Services Businesses.....    5,538      42,358        802  38,869   10,030     5,254          9,923     

                                              ------     -------  --------- -------  -------    ------        -------     
Closed Block Business......................    1,330      47,239     --       6,560    4,250     3,897          7,355     

                                              ------     -------  --------- -------  -------    ------        -------     
   Total...................................   $6,868     $89,597  $     802 $45,429  $14,280    $9,151        $17,278     

                                              ======     =======  ========= =======  =======    ======        =======     
                                                                [Download Table]


                                                           Other             
                                            Amortization Operating  Premiums 
                  Segment                      of DAC    Expenses   Written  
                  -------                   ------------ --------- ----------
                                                                             
Individual Life Insurance..................    $  232     $  578      $ --   
Private Client Group.......................      --        2,455       --    
Retail Investments.........................       197        698       --    
Property and Casualty Insurance............       395        227        1,925

                                               ------     ------   ----------
   U.S. Consumer Division..................       824      3,958        1,925

                                               ------     ------   ----------
Group Insurance............................         4        460       --    
Other Employee Benefits....................         3        651       --    

                                               ------     ------   ----------
   Employee Benefits Division..............         7      1,111       --    

                                               ------     ------   ----------
International Insurance....................       163        626       --    
International Securities and Investments...         1        635       --    

                                               ------     ------   ----------
   International Division..................       164      1,261       --    

                                               ------     ------   ----------
Investment Management and Advisory Services      --          730       --    
Other Asset Management.....................                  323       --    

                                               ------     ------   ----------
   Asset Management Division...............      --        1,053       --    

                                               ------     ------   ----------
Corporate and Other........................       (82)       838             

                                               ------     ------   ----------
   Total Financial Services Businesses.....       913      8,221        1,925

                                               ------     ------   ----------
Closed Block Business......................       213        779             

                                               ------     ------   ----------
   Total...................................    $1,126     $9,000   $    1,925

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

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PRUDENTIAL FINANCIAL, INC.  
Schedule III  
Supplementary Insurance Information 
As of and for the year ended December 31, 2000 (in Millions)  

                                                        [Enlarge/Download Table]

                                                         Future             Other                        Benefits,              
                                                         Policy             Policy  Premiums,             Claims,               
                                             Deferred   Benefits,           Claims   Policy                Losses               
                                              Policy     Losses,             and     Charges     Net        and                 
                                            Acquisition  Claims,  Unearned Benefits  and Fee  Investment Settlement Amortization
                  Segment                      Costs    Expenses  Premium  Payable   Income     Income    Expenses     of DAC   
                  -------                   ----------- --------- -------- -------- --------- ---------- ---------- ------------
                                                                                                                                
Individual Life Insurance..................   $3,090     $ 1,541      --   $ 3,532   $ 1,293    $  374    $   771      $  172   
Private Client Group.......................       --          --      --        --        --       299         --          --   
Retail Investments.........................      682         795      --     4,907       356       478        421         206   
Property and Casualty Insurance............      137       1,837    $577        --     1,599       193      1,045         365   
                                              ------     -------    ----   -------   -------    ------    -------      ------   
   U.S. Consumer Division..................    3,909       4,173     577     8,439     3,248     1,344      2,237         743   
                                              ------     -------    ----   -------   -------    ------    -------      ------   
Group Insurance............................       12       2,822     113     3,546     2,291       485      2,242           1   
Other Employee Benefits....................       76      12,581      --    15,338       149     2,332      1,986          21   
                                              ------     -------    ----   -------   -------    ------    -------      ------   
   Employee Benefits Division..............       88      15,403     113    18,884     2,440     2,817      4,228          22   
                                              ------     -------    ----   -------   -------    ------    -------      ------   
International Insurance....................    1,425       4,536      --       131     1,772       129      1,268         145   
International Securities and Investments...       --          --      --        --        --        66         --           1   
                                              ------     -------    ----   -------   -------    ------    -------      ------   
   International Division..................    1,425       4,536      --       131     1,772       195      1,268         146   
                                              ------     -------    ----   -------   -------    ------    -------      ------   
Investment Management and Advisory Services       --          --      --        --        --        21         --          --   
Other Asset Management.....................       --          --      --        --        --        31         --          --   
                                              ------     -------    ----   -------   -------    ------    -------      ------   
Asset Management Division..................       --          --      --        --        --        52         --          --   
                                              ------     -------    ----   -------   -------    ------    -------      ------   
Corporate and Other........................      (33)        574      18        88         5       917         38         (84)  
                                              ------     -------    ----   -------   -------    ------    -------      ------   
   Total Financial Services Businesses.....    5,389      24,686     708    27,542     7,465     5,325      7,771         827   
                                              ------     -------    ----   -------   -------    ------    -------      ------   
Closed Block Business......................    1,674      46,014      --     6,643     4,355     4,172      7,344         269   
                                              ------     -------    ----   -------   -------    ------    -------      ------   
   Total...................................   $7,063     $70,700    $708   $34,185   $11,820    $9,497    $15,115      $1,096   
                                              ======     =======    ====   =======   =======    ======    =======      ======   
                                                                [Download Table]


                                              Other           
                                            Operating Premiums
                  Segment                   Expenses  Written 
                  -------                   --------- --------
                                                              
Individual Life Insurance..................  $  771        -- 
Private Client Group.......................   2,530        -- 
Retail Investments.........................     763        -- 
Property and Casualty Insurance............     240    $1,597 
                                             ------    ------ 
   U.S. Consumer Division..................   4,304     1,597 
                                             ------    ------ 
Group Insurance............................     400        -- 
Other Employee Benefits....................     680        -- 
                                             ------    ------ 
   Employee Benefits Division..............   1,080        -- 
                                             ------    ------ 
International Insurance....................     211        -- 
International Securities and Investments...     677        -- 
                                             ------    ------ 
   International Division..................     888        -- 
                                             ------    ------ 
Investment Management and Advisory Services     720        -- 
Other Asset Management.....................     348        -- 
                                             ------    ------ 
Asset Management Division..................   1,068        -- 
                                             ------    ------ 
Corporate and Other........................   1,303        -- 
                                             ------    ------ 
   Total Financial Services Businesses.....   8,643     1,597 
                                             ------    ------ 
Closed Block Business......................     923        -- 
                                             ------    ------ 
   Total...................................  $9,566    $1,597 
                                             ======    ====== 

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PRUDENTIAL FINANCIAL, INC.  
Schedule III  
Supplementary Insurance Information 
As of and for the year ended December 31, 1999 (in Millions)  

                                                        [Enlarge/Download Table]

                                                      Future             Other                                         
                                                      Policy             Policy  Premiums,                             
                                          Deferred   Benefits,           Claims   Policy              Benefits, Claims,
                                           Policy     Losses,             and     Charges     Net        Losses and    
                                         Acquisition  Claims,  Unearned Benefits  and Fee  Investment    Settlement    
                Segment                     Costs    Expenses  Premium  Payable   Income     Income       Expenses     
                -------                  ----------- --------- -------- -------- --------- ---------- -----------------
                                                                                                                       
Individual Life                                                                                                        
 Insurance..............................   $3,014     $ 1,360    $ --   $ 3,303   $ 1,272    $  316        $   641     
Private Client Group....................     --         --         --     --        --          269          --        
Retail Investments......................      693         782      --     5,065       316       491            389     
Property and Casualty Insurance.........      110       1,758     494     --        1,548       197          1,100     

                                           ------     -------    ----   -------   -------    ------        -------     
   U.S. Consumer Division...............    3,817       3,900     494     8,368     3,136     1,273          2,130     

                                           ------     -------    ----   -------   -------    ------        -------     
Group Insurance.........................        2       2,581     117     3,150     1,927       470          1,956     
Other Employee Benefits.................      103      12,717      --    16,090       163     2,460          2,220     

                                           ------     -------    ----   -------   -------    ------        -------     
  Employee Benefits Division............      105      15,298     117    19,240     2,090     2,930          4,176     

                                           ------     -------    ----   -------   -------    ------        -------     
International Insurance.................    1,325       3,971       1        55     1,422        99          1,034     
International Securities and Investments     --         --         --     --        --           54          --        

                                           ------     -------    ----   -------   -------    ------        -------     
  International Division................    1,325       3,971       1        55     1,422       153          1,034     

                                           ------     -------    ----   -------   -------    ------        -------     
Investment Management and Advisory                                                                                     
 Services...............................     --         --         --     --        --            3          --        
Other Asset Management..................     --         --         --     --        --           29          --        

                                           ------     -------    ----   -------   -------    ------        -------     
  Asset Management Division.............     --         --         --     --        --           32          --        

                                           ------     -------    ----   -------   -------    ------        -------     
Corporate and Other.....................       (9)      1,671      40       116        93     1,068            150     

                                           ------     -------    ----   -------   -------    ------        -------     
Total Financial Services Businesses.....    5,238      24,840     652    27,779     6,741     5,456          7,490     

                                           ------     -------    ----   -------   -------    ------        -------     
Closed Block Business...................    2,086      44,615      --     6,485     4,303     3,911          7,118     

                                           ------     -------    ----   -------   -------    ------        -------     
   Total................................   $7,324     $69,455    $652   $34,264   $11,044    $9,367        $14,608     

                                           ======     =======    ====   =======   =======    ======        =======     
                                                                [Download Table]


                                                        Other           
                                         Amortization Operating Premiums
                Segment                     of DAC    Expenses  Written 
                -------                  ------------ --------- --------
                                                                        
Individual Life                                                         
 Insurance..............................    $  185     $  760    $   -- 
Private Client Group....................      --        2,338        -- 
Retail Investments......................       229        758        -- 
Property and Casualty Insurance.........       350        145    $1,500 

                                            ------     ------    ------ 
   U.S. Consumer Division...............       764      4,001     1,500 

                                            ------     ------    ------ 
Group Insurance.........................      --          354        -- 
Other Employee Benefits.................         6        649        -- 

                                            ------     ------    ------ 
  Employee Benefits Division............         6      1,003        -- 

                                            ------     ------    ------ 
International Insurance.................       102        168        -- 
International Securities and Investments         1        564        -- 

                                            ------     ------    ------ 
  International Division................       103        732        -- 

                                            ------     ------    ------ 
Investment Management and Advisory                                      
 Services...............................      --          613        -- 
Other Asset Management..................      --          276        -- 

                                            ------     ------    ------ 
  Asset Management Division.............      --          889        -- 

                                            ------     ------    ------ 
Corporate and Other.....................       (32)       987        -- 

                                            ------     ------    ------ 
Total Financial Services Businesses.....       841      7,612     1,500 

                                            ------     ------    ------ 
Closed Block Business...................       314        938        -- 

                                            ------     ------    ------ 
   Total................................    $1,155     $8,550    $1,500 

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

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PRUDENTIAL FINANCIAL, INC.  
Schedule IV 
Reinsurance 
For the Years Ended December 31, 2001, 2000 and 1999 (in Millions)  

                                                        [Enlarge/Download Table]

                                                                                         Percentage of 
                                      Gross    Ceded to Other  Assumed from      Net     Amount Assumed
                                      Amount     Companies    Other Companies   Amount       to Net    
                                    ---------- -------------- --------------- ---------- --------------
                                                                                                       
2001                                                                                                   
Life Insurance Face Amount In Force $1,756,021    $86,792         $12,017     $1,681,246      0.7%     

                                    ==========    =======         =======     ==========      ===      
Premiums:                                                                                              
 Life Insurance.................... $   10,615    $   602         $    45     $   10,058      0.4%     
 Accident and Health Insurance.....        549         17               3            535      0.6%     
 Property & Liability Insurance....      1,902         65              47          1,884      2.5%     

                                    ----------    -------         -------     ----------      ---      
   Total Premiums.................. $   13,066    $   684         $    95     $   12,477      0.8%     

                                    ==========    =======         =======     ==========      ===      
2000                                                                                                   
Life Insurance Face Amount In Force $1,324,453    $72,044         $ 6,866     $1,259,275      0.5%     

                                    ==========    =======         =======     ==========      ===      
Premiums:                                                                                              
 Life Insurance.................... $    8,529    $   483         $    42     $    8,088      0.5%     
 Accident and Health Insurance.....        506         15               3            494      0.6%     
 Property & Liability Insurance....      1,651         93              41          1,599      2.6%     

                                    ----------    -------         -------     ----------      ---      
   Total Premiums.................. $   10,686    $   591         $    86     $   10,181      0.8%     

                                    ==========    =======         =======     ==========      ===      
1999                                                                                                   
Life Insurance Face Amount In Force $1,215,752    $75,151         $ 7,901     $1,148,502      0.7%     

                                    ==========    =======         =======     ==========      ===      
Premiums:                                                                                              
 Life Insurance.................... $    8,006    $   489         $    29     $    7,546      0.4%     
 Accident and Health Insurance.....        542        109              --            433       --      
 Property & Liability Insurance....      1,573         61              37          1,549      2.4%     

                                    ----------    -------         -------     ----------      ---      
   Total Premiums.................. $   10,121    $   659         $    66     $    9,528      0.7%     

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

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PRUDENTIAL FINANCIAL, INC.  
Schedule V  
Valuation and Qualifying Accounts 
For the years ended December 31, 2001, 2000 and 1999 (in Millions)  

                                                        [Enlarge/Download Table]

                                                                Additions                      
                                          -----------------------------------------------------
                                           Balance   Charged to  Charged               Balance 
                                           at Beg.     Costs     to Other              at End  
Description                               of Period and Expenses Accounts  Deductions of Period
-----------                               --------- ------------ --------  ---------- ---------
                                                                                               
2001                                                                                           
Allowance for losses on commercial loans.   $225        $ --       $746(a)    $436(b)   $535   
Valuation allowance on deferred tax asset     38          39         --         --        77   

                                            ----        ----       ----       ----      ----   
                                            $263        $ 39       $746       $436      $612   

                                            ====        ====       ====       ====      ====   
2000                                                                                           
Allowance for losses on commercial loans.   $221        $ 17       $ --       $ 13(c)   $225   
Valuation allowance on deferred tax asset     24          18         --          4(d)     38   

                                            ----        ----       ----       ----      ----   
                                            $245        $ 35       $ --       $ 17      $263   

                                            ====        ====       ====       ====      ====   
1999                                                                                           
Allowance for losses on commercial loans.   $427        $ --       $ --       $206(e)   $221   
Valuation allowance on deferred tax asset     13          17         --          6(d)     24   

                                            ----        ----       ----       ----      ----   
                                            $440        $ 17       $ --       $212      $245   

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

--------                                                                        
(a) Represents $739 million acquired from Gibraltar Life and $7 million due to  
change in foreign exchange rates.                                       
(b) Represents $24 million of release of allowance for losses and $412 million  
of charge-offs, net of recoveries.                                      
(c) Represents $13 million of charge-offs, net of recoveries.                   
(d) Represents utilization of foreign tax credits.                              
(e) Represents $201 million of release of allowance for losses and $5 million   
of charge-offs, net of recoveries.                                      

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SIGNATURES  

Pursuant to the requirements of Section 13 or 15(d) of the Securities     
Exchange Act of 1934, the registrant has duly caused this report to be signed   
on its behalf by the undersigned, thereunto duly authorized, in the city of     
Newark, and state of New Jersey, on the 26/th/ day of March, 2002.              

                              Prudential Financial, Inc.

                                 /s/  RICHARD J. CARBONE
                                       By: _______________________________
                                 Name:Richard J. Carbone
                                   Title:Senior Vice President

Pursuant to the requirements of the Securities Exchange Act of 1934, this 
report has been signed below by the following persons on behalf of the          
registrant and in the capacities indicated on March 26, 2002:                   

Name                        Title     
----                        -----     

/s/  ARTHUR F. RYAN      Chairman, Chief Executive  
----------------------- Officer, President and Director 
Arthur F. Ryan                                  

/s/  RICHARD J. CARBONE     Chief Financial Officer     
-----------------------  (Principal Financial Officer)  
Richard J. Carbone                                  

/s/  ANTHONY S. PISZEL            Controller            
----------------------- (Principal Accounting Officer)  
Anthony S. Piszel                                 

FRANKLIN E. AGNEW*               Director           
-----------------------                                 
Franklin E. Agnew                                 

FREDERIC K. BECKER*              Director           
-----------------------                                 
Frederic K. Becker                                  

GILBERT F. CASELLAS*              Director            
-----------------------                                 
Gilbert F. Casellas                                 

JAMES G. CULLEN*                Director          
-----------------------                                 
James G. Cullen                                 

CAROLYNE K. DAVIS*               Director           
-----------------------                                 
Carolyne K. Davis                                 

ALLAN D. GILMOUR*               Director          
-----------------------                                 
Allan D. Gilmour                                  

WILLIAM H. GRAY, III*             Director            
-----------------------                                 
William H. Gray, III                                  

JON F. HANSON*                 Director         
-----------------------                                 
Jon F. Hanson                                 

GLEN H. HINER*                 Director         
-----------------------                                 
Glen H. Hiner                                 

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Name                             Title            
----                             -----            

CONSTANCE J. HORNER*                            Director          
---------------------------------                                             
Constance J. Horner                                             

GAYNOR N. KELLEY*                             Director        
---------------------------------                                             
Gaynor N. Kelley                                              

BURTON G. MALKIEL*                             Director         
---------------------------------                                             
Burton G. Malkiel                                             

IDA F. S. SCHMERTZ*                            Director         
---------------------------------                                             
Ida F. S. Schmertz                                              

CHARLES R. SITTER*                             Director         
---------------------------------                                             
Charles R. Sitter                                             

DONALD L. STAHELI*                             Director         
---------------------------------                                             
Donald L. Staheli                                             

RICHARD M. THOMSON*                            Director         
---------------------------------                                             
Richard M. Thomson                                              

JAMES A. UNRUH*                              Director       
---------------------------------                                             
James A. Unruh                                              

P. ROY VAGELOS*                              Director       
---------------------------------                                             
P. Roy Vagelos                                              

STANLEY C. VAN NESS*                            Director          
---------------------------------                                             
Stanley C. Van Ness                                             

PAUL A. VOLCKER*                              Director        
---------------------------------                                             
Paul A. Volcker                                             

By: *     /S/  RICHARD J. CARBONE                                             
---------------------------------                                             
Attorney-in-fact                                              

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Index to Exhibits 

                                                        [Enlarge/Download Table]

Exhibit                                                                                              
  No.                                            Description                                         
------- ---------------------------------------------------------------------------------------------
                                                                                                     
  2.1   Plan of Reorganization. Incorporated by reference to Exhibit 2.1 to Prudential Financial,    
        Inc.'s Registration Statement on Form S-1 (No. 333-58524) (the "Registration                 
        Statement").                                                                                 
  3.1   Form of Amended and Restated Certificate of Incorporation of Prudential Financial, Inc.      
        Incorporated by reference to Exhibit 3.1 to the Registration Statement.                      
  3.2   Form of By-laws of Prudential Financial, Inc. Incorporated by reference to Exhibit 3.2 to    
        the Registration Statement.                                                                  
  4.1   Form of certificate for the Common Stock of Prudential Financial, Inc., par value $.01 per   
        share. Incorporated by reference to Exhibit 4.1 to the Registration Statement.               
  4.2   Form of Shareholders' Rights Plan. Incorporated by reference to Exhibit 4.2 to the           
        Registration Statement.                                                                      
  4.3   Upon the request of the Securities and Exchange Commission, the Registrant will furnish      
        copies of all instruments defining the rights of holders of long-term debt of the Registrant.
  4.4   Inter-Business Transfer and Allocation Policies relating to the Financial Services           
        Businesses and the Closed Block Business. Incorporated by reference to Exhibit 4.6 to the    
        Registration Statement.                                                                      
 10.1   Support Agreement between The Prudential Insurance Company of America and                    
        Prudential Funding Corporation dated as of March 18, 1982. Incorporated by reference to      
        Exhibit 10.1 to the Registration Statement.                                                  
 10.2   Stipulation of Settlement--United States District Court for the District of New Jersey, in   
        re: The Prudential Insurance Company of America Sales Practices Litigation, MDL              
        No. 1061, Master Docket No. 95-4704 (AMW) (Document dated October 28, 1996).                 
        Incorporated by reference to Exhibit 10.2 to the Registration Statement.                     

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Exhibit                                                                                            
  No.                                           Description                                        
------- -------------------------------------------------------------------------------------------
                                                                                                   
 10.3   Amendment to Stipulation of Settlement--United States District Court for the District of   
        New Jersey, in re: The Prudential Insurance Company of America Sales Practices             
        Litigation MDL No. 1061, Master Docket No. 95-4704 (AMW) (Original filed February          
        24, 1997) (Document dated February 22, 1997). Incorporated by reference to Exhibit 10.3    
        to the Registration Statement.                                                             
 10.4   The Prudential Insurance Company of America Deferred Compensation Plan.                    
        Incorporated by reference to Exhibit 10.4 to the Registration Statement.                   
 10.5   The Prudential Deferred Compensation Plan for Non-Employee Directors. Incorporated         
        by reference to Exhibit 10.5 to the Registration Statement.                                
 10.6   The Pension Plan for Non-Employee Directors of The Prudential Insurance Company of         
        America. Incorporated by reference to Exhibit 10.6 to the Registration Statement.          
 10.7   2001 Prudential Long-Term Performance Unit Plan. Incorporated by reference to              
        Exhibit 10.7 to the Registration Statement.                                                
 10.8   2000 Prudential Long-Term Performance Unit Plan. Incorporated by reference to              
        Exhibit 10.8 to the Registration Statement.                                                
 10.9   1999 Prudential Long-Term Performance Unit Plan. Incorporated by reference to              
        Exhibit 10.9 to the Registration Statement.                                                
 10.10  1998 Amended Prudential Long-Term Performance Unit Plan. Incorporated by reference         
        to Exhibit 10.10 to the Registration Statement.                                            
 10.11  1998 Prudential Annual Incentive Plan. Incorporated by reference to Exhibit 10.11 to the   
        Registration Statement.                                                                    
 10.12  Prudential Financial, Inc. Stock Option Plan. Incorporated by reference to Exhibit 10.12   
        to the Registration Statement.                                                             
 10.13  Prudential Supplemental Retirement Plan. Incorporated by reference to Exhibit 10.13 to     
        the Registration Statement.                                                                
 10.14  Prudential Supplemental Employee Savings Plan. Incorporated by reference to                
        Exhibit 10.14 to the Registration Statement.                                               
 10.15  Prudential Severance Plan for Senior Executives. Incorporated by reference to              
        Exhibit 10.15 to the Registration Statement.                                               
 21.1   Subsidiaries of Prudential Financial, Inc. Incorporated by reference to Exhibit 21.1 to the
        Registration Statement.                                                                    
 23.1   Consent of PricewaterhouseCoopers LLP.*                                                    
 24.1   Powers of Attorney.*                                                                       

--------                                                                        
* Filed with the Annual Report on Form 10-K.                                    

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