As filed with the Securities and Exchange Commission on April 25, 2001

Registration No. 333-58524
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

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

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

AMENDMENT NO. 1

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

--------------
PRUDENTIAL FINANCIAL, INC.
(Exact name of registrant as specified in its charter)

New Jersey 6719 22-3703799
(Primary Standard (I.R.S. Employer
(State or Other Industrial Identification Number)
Jurisdiction of Classification Code
Incorporation or Number)
Organization)

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

751 Broad Street
Newark, New Jersey 07102
(973) 802-6000
(Address, including Zip code, and telephone number, including area code, of
registrant's principal executive offices)

John M. Liftin, Esq.
General Counsel
Prudential Financial, Inc.
751 Broad Street
Newark, New Jersey 07102
(973) 802-6000
(Name, address, including Zip code, and telephone number, including area code,
of agent for service)

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

Copies to:

William J. Williams, Jr., Esq. Alan L. Beller, Esq.
Andrew S. Rowen, Esq. Yong G. Lee, Esq.
Sullivan & Cromwell Cleary, Gottlieb, Steen & Hamilton
125 Broad Street One Liberty Plaza
New York, New York 10004 New York, New York 10006
(212) 558-4000 (212) 225-2000

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

Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
--------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If the delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, check the following box. [_]

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

CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

Proposed Maximum
Title of Each Class Aggregate Amount of
of Securities to Be Registered Offering Price(1)(2) Registration Fee
- -------------------------------------------------------------------------------

Common Stock, par value $.01 per share
(3)..................................... $3,889,300,000 $972,325(4)
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
(1) A portion of the shares to be registered represents shares that are to be
offered outside of the United States but that may be resold from time to
time in the United States. Such shares are not being registered for the
purpose of sales outside the United States.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
(3) Each share of Common Stock includes one Shareholder Protection Right as
described under "Description of Capital Stock".

(4) Previously paid.

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

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.

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

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated , 2001.

[LOGO]

89,000,000 Shares

Prudential Financial, Inc.

Common Stock

----------

This is an initial public offering of shares of Common Stock of Prudential
Financial, Inc. We are offering these shares in connection with the
reorganization of The Prudential Insurance Company of America from a mutual
life insurance company owned by its policyholders to a stock life insurance
company that will be a wholly owned indirect subsidiary of Prudential
Financial, Inc. in a process known as a demutualization. All of the 89,000,000
shares are being sold by Prudential Financial, Inc.

In addition to these offered shares, we will issue an estimated 454,600,000
shares of Common Stock of Prudential Financial, Inc. to policyholders of The
Prudential Insurance Company of America and some of its subsidiaries as part of
the demutualization. We plan to issue an estimated 2,000,000 shares of Class B
Stock of Prudential Financial, Inc. to institutional investors in a private
placement completed concurrently with or within 30 days following this
offering, although the completion of the sale of the shares of Class B Stock is
not a condition to the completion of this offering.

Prior to this offering, there has been no public market for the Common Stock.
We currently estimate that the initial public offering price per share will be
between $ and $ . We intend to list the Common Stock on the New York Stock
Exchange under the symbol "PRU".

See "Risk Factors" beginning on page 20 to read about factors you should
consider before buying shares of the Common Stock.

----------

Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.

----------

Per Share Total
--------- -----

Initial public offering price.................................. $ $
Underwriting discount.......................................... $ $
Proceeds, before expenses, to Prudential Financial, Inc........ $ $

To the extent that the underwriters sell more than 89,000,000 shares of
Common Stock, the underwriters have the option to purchase up to an additional
13,350,000 shares from Prudential Financial, Inc. at the initial public
offering price less the underwriting discount.

----------

The underwriters expect to deliver the shares against payment in New York,
New York on , 2001.

Goldman, Sachs & Co. Prudential Securities Incorporated

Prospectus dated , 2001.

PROSPECTUS SUMMARY

We currently conduct our business through The Prudential Insurance Company of
America and its subsidiaries. In connection with the demutualization,
Prudential Financial, Inc. will become the ultimate holding company for all of
our companies. "Prudential", "we" and "our" refer to our consolidated
operations before and after demutualization. "The Prudential Insurance Company
of America" also refers to its stock successor upon completion of the
demutualization.

We have included a glossary of insurance and other terms commencing on page
G-1. These terms are printed in boldface type the first time they appear in
this prospectus summary and the first time they appear after the prospectus
summary.

Prudential

We have a leading or significant market presence in most of the markets we
serve. The Prudential name and "Rock" logo are among the most widely recognized
in the United States.

At December 31, 2000, we had $20.6 billion in total equity and $272.8 billion
in total assets. In 2000, our total revenues were $26.5 billion and our net
income was $398 million. As of December 31, 2000, we had

. total assets under management and administration of $592.9 billion,
consisting of:

. total assets under management (including assets in our general and
separate accounts) of approximately $371.1 billion, and

. additional assets in securities brokerage and bank custodial accounts
and other assets under administration of $221.8 billion,

. total gross life insurance in force in the United States of $1.2
trillion (including individual and group insurance), and

. total gross life insurance in force in Japan and other countries outside
the United States of $154 billion.

At December 31, 1999 (the latest date for which information is available), we
had the largest individual life insurance business in the United States in
terms of statutory in force premiums and were the second largest U.S. life
insurer in terms of total gross life insurance in force in the United States
according to A.M. Best.

We have one of the largest distribution forces in the financial services
industry, with approximately 16,250 sales people worldwide at December 31,
2000, including approximately

. 6,100 Prudential Agents, who are insurance agents in our insurance
operations in the United States,

. 3,500 Life Planners, who are insurance agents in our insurance
operations outside the United States, and

. 6,650 domestic and international Financial Advisors, who are financial
advisors and securities brokers in our Prudential Securities operations.

Business Divisions and Segments

We conduct our principal businesses through four divisions: U.S. Consumer,
Employee Benefits, International and Asset Management. We also conduct other
activities in Corporate and Other operations. We refer to the businesses that
comprise our four operating divisions and our Corporate and Other operations,
collectively, as our "Financial Services Businesses". We also have a
Traditional Participating Products segment primarily composed of our domestic
participating products. We will cease offering these participating products in
connection with the demutualization.

Financial Services Businesses

U.S. Consumer Division. Our U.S. Consumer division consists of four segments:
Individual Life Insurance, Private Client Group, Retail Investments and
Property and Casualty Insurance.

Our Individual Life Insurance segment manufactures and distributes variable
life, term life and other non-participating life insurance protection products
to the U.S. retail market and distributes investment and protection products
for our other segments.

. As of December 31, 2000, we were the largest U.S. variable life insurer
according to Tillinghast-Towers Perrin, with $15.9 billion of variable
life insurance assets, representing a market share of 20%.

. In 2000, we were the sixth largest seller of individual variable life
insurance and the fifth largest seller of individual term life insurance,
including participating term life policies, in the United States, in
terms of new annualized premiums according to LIMRA.

We distribute our individual life insurance products in the United States
primarily through our Prudential Agents. Increasingly, we also distribute
individual life insurance domestically through PruSelect, which targets the
affluent and mass affluent markets through third-party distribution channels.
In 2000, our PruSelect channel accounted for 33% of our total domestic
individual life insurance sales, including traditional participating policies,
as measured by statutory first year premiums and deposits, up from 12% in 1996.

Our Private Client Group segment provides full service securities brokerage
and financial advisory services to U.S. retail customers. At December 31, 2000,
Prudential Securities, with approximately 5,900 domestic Financial Advisors,
was the seventh largest securities brokerage firm in the United States based on
the number of retail registered representatives according to the Securities
Industry Association.

Our Retail Investments segment provides mutual funds, variable and fixed
annuities, wrap-fee and unit investment trust products to U.S. retail
customers. At December 31, 2000, we were the seventh largest mutual fund wrap
provider based on market share according to Cerulli Associates, Inc., and the
23rd largest mutual fund management company in the United States in terms of
assets under management according to the Investment Company Institute. Our
Retail Investments segment distributes primarily through our Financial Advisors
and Prudential Agents and, beginning in 1999, through third-party channels.

Our Property and Casualty Insurance segment manufactures and distributes
personal lines property and casualty insurance products, principally automobile
and homeowners insurance, to the U.S. retail market. We distribute these
products through our Prudential Agents and through alternative channels. In
2000, approximately 62% of our Property and Casualty Insurance segment's first
year direct written premiums came through alternative channels.

Employee Benefits Division. Our Employee Benefits division consists of two
segments: Group Insurance and Other Employee Benefits. Our Group Insurance
segment manufactures and distributes group life, disability and related
insurance products in connection with employee and member benefit plans. For
the nine months ended September 30, 2000, we were the second largest seller of
group life insurance in the United States based on new sales according to
LIMRA. The principal sales channel for our group life and disability insurance
is our institutional sales force, which distributes through the independent
broker and consultant market. Our Other Employee Benefits segment provides
products and services for defined contribution and other retirement plans as
well as guaranteed investment contracts and group annuities. We distribute
employee benefits products primarily through our own specialized institutional
sales forces, third-party distributors and Financial Advisors. At December 31,
2000, we were the second largest provider of relocation services to employers
according to Relocation Information Service Incorporated. We also market real
estate brokerage franchises to regional and local real estate brokers.

International Division. Our International division consists of two segments:
International Insurance and International Securities and Investments. Our
International Insurance segment manufactures and distributes individual life
insurance products through approximately 3,500 Life Planners to affluent
markets in Japan, Korea and six other Asian, Latin American and European
countries. In Japan, which, according to Moody's, has the largest insurance
market of any country in the world based on total premium income as a
percentage of the gross domestic product, we ranked third based on absolute
growth in Japanese yen of life insurance in force in 1999.

On April 20, 2001, we completed the acquisition of Kyoei Life Insurance Co.,
Ltd., a financially troubled Japanese life insurer now renamed "Gibraltar Life
Insurance Co., Ltd." The reorganization proceedings, which substantially
restructured the assets and liabilities of Kyoei, were officially concluded on
April 23, 2001. Our financial commitment in Gibraltar Life totals approximately
$1.2 billion. Within our International Securities and Investments segment we
provide full service securities brokerage, asset management and financial
advisory services to retail and institutional clients outside the United
States, primarily through approximately 620 international Financial Advisors.

Asset Management Division. Our Asset Management division consists of two
segments: Investment Management and Advisory Services and Other Asset
Management. The Investment Management and Advisory Services segment provides
asset management products and services to unaffiliated institutional clients as
well as management services for assets supporting products offered by our other
businesses. At December 31, 2000, this segment managed approximately $313
billion of our $371 billion of total assets under management, as follows:

. $108 billion of retail customer assets, including mutual funds and
variable insurance and variable annuity products,

. $95 billion of institutional customer assets, and

. $110 billion of general account assets.

The Other Asset Management segment engages in equity securities sales and
trading, investment research, investment activities and syndications.

Corporate and Other Operations. Corporate and Other Operations includes
corporate-level activities, including investment activities and international
ventures that we do not allocate to our business segments.

During the last five years, we have divested or stopped pursuing a number of
under-performing businesses, including healthcare, reinsurance, commercial
insurance and home mortgage businesses. Additionally, we restructured the
capital markets activities of Prudential Securities, exiting its lead-managed
underwriting and institutional fixed income businesses. Corporate and Other
operations also include these divested and wind-down businesses, except for our
divested healthcare business, which is treated as a discontinued operation.

Traditional Participating Products

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 have historically been included in our Traditional
Participating Products segment. In connection with the demutualization, we will
cease offering domestic participating products. The liabilities for our
individual in force participating products will then be segregated, together
with assets which will be used exclusively for the payment of guaranteed
benefits and policyholder dividends, expenses and taxes with respect to these
products, in a regulatory mechanism referred to as the "Closed Block". We have
selected the amount and type of assets and liabilities of the Closed Block,
which we refer to as the "Closed Block Assets" and "Closed Block Liabilities",
so that these assets, which initially will have a lower book value than the
liabilities, are expected to generate sufficient cash flow 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 products. We also will segregate, for accounting purposes, the
surplus and related assets that we will need to hold outside the Closed Block
to meet capital requirements related to the products included within the Closed
Block. We refer to these segregated assets outside the Closed Block as the
"Surplus and Related Assets". No new policies will be added to the Closed Block
following demutualization and its in force business is expected to ultimately
decline as policyholder benefits are paid 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
has consisted of other traditional insurance products that will not be included
in the Closed Block.

businesses. However, the relatively lower returns to us on traditional
participating products will continue to affect our consolidated results of
operations for many years.

As discussed below, concurrent with this offering, we plan to issue, in a
private placement, shares of Class B Stock that will be designed to reflect the
performance of our participating products to be included in the Closed Block
and other related assets and liabilities. Following any such issuance, we would
refer to this business as the "Closed Block Business". If we issue the Class B
Stock, the Common Stock issued in this offering is expected to reflect the
performance of our Financial Services Businesses, which will then 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 will also include other traditional insurance
products previously included in the Traditional Participating Products segment
but which will not be included in the Closed Block.

Strategy

Our goal is to be a worldwide financial services leader in both the growth
and protection of our clients' assets. We seek to achieve this goal by
providing our customers with the advice and information that they seek through
the distribution options of their choice, offering investment and insurance
products supported by excellent service. We seek to achieve this goal through
the following strategies:

. Build on our brand name and leading market positions. We have been in
business for over 125 years, and the Prudential name and "Rock" logo are
among the most widely recognized in the United States. Our "Rock" logo
has long been associated with trust and financial strength. We believe
that our brand will continue to be a significant competitive advantage in
an increasingly crowded financial services marketplace. In the United
States, we are among the most diversified organizations in the financial
services industry, with leading or significant positions in life
insurance, annuities, securities brokerage, mutual funds, 401(k) plan
products, asset management and residential real estate brokerage
franchise and relocation services. We have built a customer base of over
10 million households in the United States, or one in every 10 U.S.
households. We will continue to focus aggressively on customer service
and retention as we attempt to maximize the value of our customer base.
In addition, we have in excess of 24,000 institutional relationships and
over one million international retail customers.

. Grow our U.S. retail mass affluent customer base. Our customer base today
includes over 2.5 million U.S. retail households with incomes or
investable assets in excess of $100,000, which we refer to as the "mass
affluent". We seek to expand our presence in this market as well as in
the emerging affluent and pre-retirement markets. We have taken several
steps to improve the quality of services provided to the mass affluent
market by our Prudential Agent and Financial Advisor distribution system.
First, we are targeting new hires for our Prudential Agent force with
college educations and prior experience and are enhancing the training
and product choices available to them. Second, we have increased the
productivity standards for our Prudential Agents several times in the
past few years. The actions we have taken to improve the quality and
productivity of our Prudential Agent force have resulted in a reduction
in the size of the agency force. In 2001, we have again increased the
productivity standards. Third, we have begun to transition our Prudential
Agents from a transaction focus using proprietary products to meet our
customers' financial needs to an approach of offering advice on an array
of products manufactured by Prudential as well as other companies. We
call this strategy "Advised Choice" and believe it enables our customers
to make more informed decisions about investment and insurance choices.
We also have begun to transition our Financial Advisors from a
transaction focus to an approach emphasizing fee-based financial advisory
services to better meet the needs of the mass affluent market.

The productivity of our Prudential Agents, as measured by average
commissions on new sales of all products by agents employed the entire
year, has increased 86% from $18,700 in 1996 to $34,700 in 2000. The
productivity of our domestic Financial Advisors, as measured by gross
revenues, has increased 26% from $319,000 in 1996 to $401,000 in 2000.

. Improve the profitability of our existing U.S. consumer franchise. In
addition to our 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. In addition, we
will seek to sell certain commodity products to the mass market through
telemarketing, the Internet and our workplace marketing and employee
benefits platform.

. 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 independent financial advisors, affinity programs,
workplace marketing, direct mail, Internet and telemarketing. PruSelect,
our third-party distribution channel, focuses on serving the
intermediaries who provide insurance solutions in support of estate and
wealth transfer planning for affluent individuals. We have begun to
explore additional third-party channels for life insurance products,
including broker-dealers and independent producers. We sell our retail
investment products such as mutual funds, annuities and wrap-fee products
through independent financial advisors. Net sales of mutual funds, other
than money market funds, through this channel totaled $1.2 billion in
2000. We also seek to expand sales of our mutual funds and separate
account products by participating in competitors' variable annuities and
wrap-fee programs. We have invested in workplace/payroll deduction models
with the acquisition of a property and casualty subsidiary that
specializes in workplace marketing and our minority investment in an
Internet-based employee benefits broker.

Prudential Securities was one of the first full-service brokerage firms
to develop and offer electronic choices in connection with full-service
brokerage accounts. We believe that Internet technology and electronic
commerce will continue to provide us with new and more efficient ways to
communicate with and distribute products to our customers.

. Continue profitable growth of our international operations. We believe
that many of our best opportunities for growth lie outside of the United
States. We have a well-established international presence with a client
base in excess of one million individuals.

The compound annual growth rate in our international annualized new
business premiums for individual life insurance was 25% per year from
1998 to 2000 on a constant exchange rate basis. In Japan, we pioneered a
highly effective Life Planner distribution model that targets affluent
market segments. We believe that this distribution model contributed to a
second year persistency level of 90% in 2000 in comparison to the
Japanese industry average of 74%. We have expanded our presence in other
international markets, including Korea and Taiwan, where we have
successfully implemented the Life Planner model. We have also entered
five other markets in Asia, Latin America and Europe.

We seek to expand our position internationally in securities brokerage,
financial advisory and asset management services for the affluent market.
We have made several acquisitions and investments in international asset
management firms, and we intend to continue to grow our international
businesses significantly in the future.

. Strengthen institutional relationships to grow our employee benefits
businesses and enhance access to retail customers. We are a leading
provider of life and disability insurance, retirement services,
relocation services and other benefits to employees through group
contracts and our relationships with institutional clients. We have
relationships with over 24,000 institutions of all sizes, representing
over 30 million employees and members with over 12 million participants.
Our Group Insurance segment has grown significantly since 1997, with a
compound annual growth rate in revenues of 13% from 1998 to 2000. We also
believe that the workplace channel is an effective way to acquire
additional individual customers. By using our employee and group benefits
marketing skills, we seek to strengthen our relationships with
institutions of all sizes and increase the distribution of voluntary
benefits products to their employees. We seek to use technology to
accelerate revenue growth and improve cost efficiencies. Through our
voluntary benefits website, we offer employees of our institutional
customers Prudential voluntary benefits products as well as selected
products from other leading companies in a convenient, easy to use on-
line format with call center support. Our business arrangements with an
Internet-based employee benefits service provider are intended to broaden
our distribution of Prudential products and services.

. Grow fee-based assets under management. We are a leading asset manager
with $371 billion of assets under management at December 31, 2000,
including $313 billion managed by our Asset Management division. We seek
to increase fee-based assets under management by expanding our sales of
investment and insurance products such as variable annuities, mutual
funds, variable life insurance and wrap-fee

products that provide customers with a variety of investment options, as
well as providing investment management services to institutions. During
2000, we consolidated resources in our public equity asset management
businesses into Jennison Associates, our widely recognized manager of
institutional assets. By doing so, we seek to enhance our competitive
position, increase sales of proprietary products through our distribution
channels and expand distribution through outside channels.

. Improve our financial performance. We are seeking to improve our
operating performance, especially in our mature businesses, in two
primary ways: by focusing on capital management and by targeting expense
reductions. We have improved capital efficiency by exiting under-
performing businesses, such as lead-managed underwriting and
institutional fixed income, healthcare, reinsurance and residential first
mortgage lending, as well as by focusing on asset accumulation, variable
insurance products and other businesses that offer attractive returns for
the capital that they require. We are also implementing strategies to
improve our performance by reducing expenses, including overhead in our
corporate and field offices. In particular, beginning in 1999 we
commenced an initiative to restructure our field operations in our
Individual Life Insurance segment by reducing the number of sales
territories, from 16 to 6, and by consolidating our field offices, which
we reduced from 266 to 79. This resulted in the elimination of 600
management positions and approximately 1,100 non-agent positions.

We seek growth internally and through acquisition, joint venture or
other forms of business combination or investment. Our principal
acquisition focus is in our current business lines, both domestically and
internationally.

. Reposition Prudential Securities' domestic businesses to focus on
investors rather than issuers. In late 2000 we announced a restructuring
of Prudential Securities' capital markets activities to implement a
fundamental shift in our business strategy. We exited our lead-managed
underwriting and institutional fixed income businesses. Prudential
Securities' investment bank historically aspired to lead-manage capital
raising transactions in the new issues market. We have exited that
business, and we will redirect some of its resources to engage in
underwritings and syndications led by investment banks to generate new
issues market products for our investor clients. In addition, our equity
research staff, which previously focused on coverage of potential issuer
customers, will emphasize coverage of companies and other topics of
interest to our investor clients. We believe that our new strategy,
through which we seek to provide advice and quality execution to our
retail and institutional customers, will differentiate us from our
competitors and will reduce earnings volatility.

. Strengthen performance-based culture. We are committed to aligning the
incentives and rewards of our senior management team with shareholders'
interests. A portion of our managers' compensation is directly linked to
market-based measures for their businesses. We will implement stock and
option ownership programs for employees that will allow them to become
shareholders as soon as possible following the initial public offering.
We believe this will strengthen our performance-based culture throughout
the organization.

Demutualization and Related Transactions

We are conducting this offering in connection with the demutualization of The
Prudential Insurance Company of America. In this process, The Prudential
Insurance Company of America will convert, pursuant to our plan of
reorganization, from a mutual life insurance company owned by policyholders to
a stock life insurance company that is a wholly owned indirect subsidiary of
Prudential Financial, Inc. The demutualization will extinguish policyholders'
membership interests in The Prudential Insurance Company of America, and
eligible policyholders will receive compensation in the form of shares of
Prudential Financial, Inc.'s Common Stock, cash or policy credits, which are
increases in policy values or increases in other policy benefits. We believe
the demutualization will allow us to compete more effectively in the global
financial services industry by providing full access to the capital markets to
fund growth in our businesses. Access to equity will make it easier for us to
build new products, services or sales channels that are consistent with our
strategy. We will also be able to use our stock to pay for possible
acquisitions. In addition, we will be able to use stock-based compensation

programs to recruit and retain management and sales personnel whose long-term
interests can be aligned with shareholders' interests. Once the conditions to
the demutualization have been met, the demutualization will become effective
when we complete this offering.

In connection with the demutualization, we plan to implement three
significant changes to our organization and capital structure designed to
increase the value of demutualization compensation received by eligible
policyholders and enhance our financial flexibility, although we are not
required to implement any of them as a condition to completing our
demutualization. These intended changes are:

. Destacking: We plan to "destack" or reorganize the ownership of various
subsidiaries of The Prudential Insurance Company of America so that they
become direct or indirect subsidiaries of Prudential Financial, Inc.
rather than The Prudential Insurance Company of America. The destacking
will be accomplished as an extraordinary dividend concurrently with, or
within 30 days following, the demutualization. Destacking requires
regulatory review separate from the approval required for
demutualization, and, if it is disapproved prior to demutualization, we
will proceed with the demutualization without the destacking or, subject
to the appropriate regulatory approvals, with a partial destacking. The
principal subsidiaries that we are seeking to destack, together with
certain related assets and liabilities, are:

. 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,
residential real estate brokerage franchise and relocation services
operations.

The destacking itself will not affect Prudential Financial, Inc.'s
consolidated results or financial reporting. One of the principal
purposes of the destacking is to diversify the sources of cash flow that
may be paid to Prudential Financial, Inc. by permitting the destacked
subsidiaries to pay dividends to Prudential Financial, Inc. directly
rather than through The Prudential Insurance Company of America. In
addition, we believe that destacking will permit a more efficient use of
our capital and will create a better platform for possible acquisitions.

. Class B Stock and IHC Debt Issuances: We plan to issue shares of Class B
Stock of Prudential Financial, Inc. to institutional investors in a
private placement concurrently with or within 30 days following this
offering of our Common Stock. We also plan to issue debt securities
through a newly-formed intermediate holding company of The Prudential
Insurance Company of America, which debt we refer to as the "IHC debt",
prior to, concurrently with or within 30 days following the
demutualization, and we currently intend that the IHC debt will be
insured by a bond insurer. If issued, the Class B Stock will be designed
to reflect the performance of the Closed Block Business, including the
Closed Block Assets and Closed Block Liabilities and the Surplus and
Related Assets, as well as other related assets and liabilities noted
below, including the IHC debt. If issued, the IHC debt is expected to be
serviced by, and the dividends to the holders of the Class B Stock are
expected to reflect, the net cash flows of the Closed Block Business over
time.

We believe the sale of the Class B Stock and IHC debt will improve the
value and investment attributes of the Common Stock distributed to
eligible policyholders in our demutualization and in this offering, and
this is the purpose of their issuances. If we issue the Class B Stock, we
expect the Common Stock will then reflect the performance of our post-
demutualization Financial Services Businesses without reflecting the
relatively lower returns of the participating products included in the
Closed Block. Further, we will allocate the entire net proceeds from the
issuances of the Class B Stock and the IHC debt to our Financial Services
Businesses. We will use most of these proceeds in our Financial Services
Businesses, which should further increase the value of the Financial
Services Businesses, although a minority portion of the proceeds of the
IHC debt will secure servicing thereof as discussed below.

For this purpose, on April 25, 2001, we entered into a subscription
agreement with institutional investors to purchase 2.0 million shares of
Class B Stock at the time of our demutualization, which will generate
aggregate gross proceeds of $175 million. We also are negotiating a
commitment with a

bond insurer to insure approximately $1.75 billion of IHC debt, which debt
we plan to market prior to this offering. The subscription agreement
contains conditions to the investors' commitments. Successful conclusion
of negotiations with the bond insurer is not assured and any commitment of
the bond insurer obtained will also contain conditions to its obligations.
We also retain discretion not to issue the Class B Stock or IHC debt.
Accordingly, there is no assurance that the Class B Stock or the IHC debt
will ultimately be issued.

If the Class B Stock is issued, dividends declared and paid on the
Common Stock will then 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.

If issued, 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 for regulatory purposes. 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, Inc. 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 The Prudential Insurance Company of
America under specified (but not all) provisions of New Jersey insurance
law. We currently anticipate that CB Distributable Cash Flow will
substantially exceed the Target Dividend Amount. Subject to the discretion
of the Board of Directors of Prudential Financial, Inc., we currently
anticipate paying dividends on the Class B Stock at the Target Dividend
Amount for the foreseeable future.

If we issue the IHC debt, the issuer would be Prudential Holdings, LLC.
Prudential Holdings, LLC will distribute most of the net proceeds to
Prudential Financial, Inc. for general corporate purposes. Prudential
Holdings, LLC will deposit a minority portion of the net proceeds of the
IHC debt in a debt service coverage account which, together with
reinvested earnings thereon, will constitute a source of payment and
security for the IHC debt. Since such net proceeds and earnings will be
allocated to the Financial Services Businesses, to the extent they are
used to service payments with respect to the IHC debt or to pay dividends
to Prudential Financial, Inc. 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 of issuances of the Class B Stock and IHC
debt will reflect capital in excess of that necessary to support the
Closed Block Business and that the Closed Block Business will have
sufficient assets and cash flows to service the IHC debt. The investors
in the Class B Stock have

agreed to this allocation and usage of issuance proceeds. The Closed Block
Business will be financially leveraged through the issuance of the IHC
debt, and dividends on the Class B Stock will be subject to prior
servicing of the IHC debt.

The issuances of the Class B Stock and the IHC debt are not assured and
are not conditions to completion of this offering. If we proceed with
this offering but do not issue any Class B Stock, the Common Stock will
reflect the performance of all our businesses, including the Traditional
Participating Products segment, and we will not achieve the intended
benefits noted above. If we issue the Class B Stock, we will refer to the
Financial Services Businesses and the Closed Block Business as the
"Businesses".

. Extraordinary Dividend: At the time, or within 30 days, of
demutualization, The Prudential Insurance Company of America expects to
pay an extraordinary dividend, in addition to the destacking, not to
exceed $2.5 billion to Prudential Financial, Inc. for use in the
Financial Services Businesses. The amount actually paid will be based on
the capital and risk positions of The Prudential Insurance Company of
America at the time of or shortly prior to this offering and is intended
to be the maximum amount that, together with the demutualization and the
destacking, would maintain capital adequacy of The Prudential Insurance
Company of America at levels consistent with our financial strength
ratings objectives. We estimate that this extraordinary dividend would
have been in the amount of $360 million if it had occurred on December
31, 2000; however, that amount could be substantially larger by the time
of this offering.

giving effect to the demutualization and the issuances of Class B Stock and the
IHC debt, the Closed Block Business would consist principally of:

. Within The Prudential Insurance Company of America, Closed Block Assets,
Surplus and Related Assets and deferred policy acquisition costs and
other assets and, with respect to liabilities, Closed Block Liabilities.

. Within Prudential Holdings, LLC, the principal amount of the IHC debt and
related unamortized debt issuance costs.

. Within Prudential Financial, Inc., dividends received from Prudential
Holdings, LLC, and reinvestment thereof, and other liabilities of
Prudential Financial, Inc., in each case as attributable to the Closed
Block Business.

The Financial Services Businesses will bear any expenses and liabilities from
litigation affecting the Closed Block policies and the consequences of certain
adverse tax determinations. These expenses 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, or
expect to agree, to indemnify the investors 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 will 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 will 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 Closed Block Assets will not be available to service interest and principal
of the IHC debt or dividends on the Class B Stock. It is expected that any
inter-business loan, reflecting the obligation of the Closed Block Business to
repay the Financial Services Businesses any amounts used from the debt service
coverage account to service the IHC debt or pay dividends to Prudential
Financial, Inc. for purposes of the Closed Block Business, will be repaid in
full out of Surplus and Related Assets, but not Closed Block Assets. Such loan
will be subordinate to the IHC debt.

All assets and liabilities of Prudential Financial, Inc. and its subsidiaries
not included in the Closed Block Business will constitute the Financial
Services Businesses. If the Class B Stock is issued, the Financial Services
Businesses will include the capital previously included in the Traditional
Participating Products segment in excess of the amount necessary to support the
Closed Block Business. Additionally, the minor portion of traditional insurance
products historically included in the Traditional Participating Products
segment but which

will not be included in the Closed Block would be reflected in our Individual
Life Insurance segment. For further information regarding the allocation of the
assets and liabilities of the Businesses, see "Unaudited Pro Forma Condensed
Consolidated Financial Information".

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

[DIAGRAM]

If we issue Class B Stock, you should understand that there will be no legal
separation of the two Businesses and that holders of Common Stock and holders
of Class B Stock will both be common stockholders of Prudential Financial, Inc.
They will vote together on all matters, except as otherwise required by law and
except that the holders of the Class B Stock will have class voting or consent
rights with respect to specified matters directly affecting the Class B Stock
as described in this prospectus. Holders of Common Stock and Class B Stock will
also have dividend and liquidation rights with respect to Prudential Financial,
Inc. as described in this prospectus. Holders of Common Stock will have no
interest in a legal entity representing the Financial Services Businesses,
holders of Class B Stock will have no interest in a legal entity representing
the Closed Block Business and holders of each class of common stock will be
subject to all of the risks associated with an investment in Prudential
Financial, Inc. and all of our businesses, assets and liabilities.

As described herein, the Class B Stock will be 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, Inc. 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 separation of the Businesses would cease and the
intended benefits of such separation noted above would also cease.

If the Class B Stock is issued, Prudential Financial, Inc.'s GAAP financial
statements reported to you will be prepared so that the following financial
disclosures will be made following demutualization:

. audited annual consolidated financial statements and unaudited interim
consolidated financial statements of Prudential Financial, Inc. 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 will separately report the financial positions and results
of operations of the Financial Services Businesses and the Closed Block
Business.

Having two classes of common stock could result in potential conflicts of
interest between the two classes. Prudential Financial, Inc.'s Board of
Directors would have a fiduciary duty to all holders of Common Stock and Class
B Stock and intends to resolve such conflicts in a manner it deems fair to such
holders.

The Common Stock Offering

Common Stock Offering............ The Common Stock will be offered in separate,
concurrent U.S. and international offerings as follows:

U.S. Offering.................... million shares
International Offering........... million shares
Total............................ 89.0 million shares

We refer to these offerings collectively as the
"offering". The shares do not include 13.35 million
shares of Common Stock issuable upon exercise of the
underwriters' options to purchase additional shares as
described under "Underwriting".

Shares of Common Stock to be
Outstanding after the Offering... Approximately 543.6 million shares. This number does
not include the 13.35 million shares of Common Stock
issuable upon exercise of the underwriters' options to
purchase additional shares as described under
"Underwriting". This number also does not include up to
approximately 0.86 million shares of Common Stock to be
issuable under employee stock options expected to be
granted at the time of the offering.

Use of Proceeds.................. We estimate that Prudential Financial, Inc. will
receive net proceeds from the offering of $2,562
million, or $2,948 million if the underwriters' options
to purchase additional shares as described under
"Underwriting" are exercised in full, assuming an
initial public offering price of $30.00 per share.
Prudential Financial, Inc. will:

. use the net proceeds of this offering, other than
proceeds obtained from any exercise of the
underwriters' options to purchase additional shares,
to make certain cash payments to eligible
policyholders receiving cash in the demutualization,
and

. retain any remaining proceeds for general corporate
purposes.

Common Stock Dividend
Policy........................... Prudential Financial, Inc.'s Board of Directors
currently intends to declare dividends, payable once
annually, and expects that the first annual dividend
will be $ per share, which will be declared in .
See "Dividend Policy" for a discussion of the factors
that will affect the determination by our Board of
Directors to declare dividends as well as other matters
concerning our dividend policy.

Risk Factors..................... For a discussion of factors you should consider before
buying shares of Common Stock, see "Risk Factors".

New York Stock Exchange Symbol... PRU

We based the information above on assumptions we have made as to the number
of shares of Common Stock and the amount of cash and policy credits that we
will distribute to eligible policyholders in our demutualization. We discuss
these assumptions in "--Summary Unaudited Pro Forma Condensed Consolidated
Financial Information" below. See "--Other Concurrent Offerings--Effects of
Issuance of Class B Stock" below for the effects of such issuance on your
rights as a holder of our Common Stock.

Acquisitions of 5% or more shares of our common stock or the total voting
power of the Common Stock and any Class B Stock will be subject to certain
legal restrictions as described under "Business--Regulation-- Regulation
Affecting Prudential Financial, Inc.--Insurance Holding Company Regulation--
Acquisition of Control".

Other Concurrent Offerings

Class B Stock and IHC
debt to be Concurrently
Offered in Private
Placements................ 2.0 million shares of Class B Stock are expected to
be sold in a private placement concurrently with or
within 30 days following this offering of Common
Stock. Assuming issuance of all such shares, upon
completion of the demutualization, this offering
and the private placement of Class B Stock, Pruden-
tial Financial, Inc. will have approximately 545.6
million total shares of Common Stock and Class B
Stock outstanding, with the shares of Class B Stock
representing less than 1% of the outstanding
shares, based on the assumptions noted above re-
garding the number of shares issued in the
demutualization.

Approximately $1.75 billion of IHC debt is expected
to be offered in a private placement prior to, con-
currently with or within 30 days following this of-
fering.

Other Concurrent
Financings................ In addition to this offering and the private place-
ments of Class B Stock and the IHC debt, the plan
of reorganization permits us, subject to any re-
quired regulatory approval, to raise funds for use
in connection with the plan of reorganization prior
to, on or within 30 days after the effective date
of the demutualization through one or more of the
following transactions: (i) the offering of public
or private debt; (ii) the offering of preferred
stock or other equity securities or options, war-
rants or other securities convertible, exchangeable
or exercisable for any of the foregoing; and (iii)
bank borrowings. We retain flexibility to raise
funds for general corporate purposes at any time.

Effects of Issuance of
Class B Stock.............
If we issue the Class B Stock, the voting, dividend
and liquidation rights of the Common Stock will be
affected. The Common Stock and the Class B Stock
will be separate classes of common stock under New
Jersey corporate law. The shares of Common Stock
would 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 hold-
ers of the Class B Stock will have class voting or
consent rights with respect to specified matters
directly affecting the Class B Stock. Holders of
Common Stock would be entitled to receive divi-
dends, if and when declared by the Board of Direc-
tors, out of assets of the Financial Services Busi-
nesses legally available for the payment of divi-
dends as if the Financial Services Businesses were
a separate corporation. The declaration and payment
of dividends on the Common Stock would depend upon
the financial condition, results of operations,
cash requirements, future prospects and other fac-
tors relating to the Financial Services Businesses,
as well as regulatory restrictions on the payment
of dividends by Prudential Financial, Inc.'s sub-
sidiaries. Dividends declared and paid on the Com-
mon Stock will not depend upon or be affected by
the financial performance of the Closed Block Busi-
ness, unless the Closed Block Business is in finan-
cial distress, and provided that we cannot pay cash
dividends on the Common Stock for any period if we
choose 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 Divi-
dend Amount for that period. In the event of a liq-
uidation, dissolution or winding-up of Prudential
Financial, Inc., holders of Common Stock and hold-
ers of Class B Stock would be entitled to receive a
proportionate share of the net assets of Prudential
Financial, Inc. that remains after paying all lia-
bilities and the liquidation preferences of any
preferred stock, such proportion being based on the
average market value per share of the Common Stock
determined over a specified trading period ending
60 days after this offering and the issuance price
per share of the Class B Stock.

The issuance of the Class B Stock is not a condi-
tion to completion of this offering. If we proceed
with this offering but do not issue any Class B
Stock, the Common Stock will reflect the perfor-
mance of all our businesses, including the Tradi-
tional Participating Products segment.

Summary Consolidated Financial and Other Information

All financial data and ratios presented in this prospectus have been prepared
using generally accepted accounting principles unless otherwise indicated. The
consolidated financial statements of The Prudential Insurance Company of
America prior to the demutualization will become Prudential Financial, Inc.'s
consolidated financial statements upon demutualization. References to our
financial results or condition refer to our consolidated results or condition
unless otherwise indicated.

We derived the summary consolidated income statement data, balance sheet data
and division operating results as of and for the annual periods shown below
from our audited consolidated financial statements which, for years 2000 and
1999, are included in this prospectus.

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
underwriting and institutional fixed income businesses. These businesses
recorded 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 recorded pre-tax
losses of $7 million in 2000, $72 million in 1999, $76 million in 1998, $24
million in 1997 and $29 million in 1996. In 1996, we sold substantially all of
our Canadian life insurance operations and policies in force and our Canadian
property and casualty insurer. These divested Canadian businesses generated
pre-tax income of $85 million in 1996, which reflects a $116 million gain on
disposal. In 1996, we sold substantially all of the remaining mortgage
servicing rights from our residential first mortgage banking business that we
had previously sold, which resulted in a pre-tax gain of $229 million. We also
recognized 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.

You should read this summary consolidated financial and other data in
conjunction with "Selected Consolidated Financial and Other Information",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Unaudited Pro Forma Condensed Consolidated Financial Information"
and our consolidated financial statements included in this prospectus.

As of or for the Year Ended December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Income Statement Data: (in millions)

Revenues:
Premiums.................... $ 10,221 $ 9,528 $ 9,048 $ 9,043 $ 9,999
Policy charges and fee
income..................... 1,639 1,516 1,465 1,423 1,490
Net investment income....... 9,497 9,367 9,454 9,458 9,461
Realized investment gains
(losses), net.............. (288) 924 2,641 2,168 1,128
Commissions and other
income..................... 5,475 5,233 4,416 4,381 4,512
-------- -------- -------- -------- --------
Total revenues.............. 26,544 26,568 27,024 26,473 26,590
-------- -------- -------- -------- --------
Benefits and expenses:
Benefits and expenses other
than sales practices
remedies and costs......... 25,817 24,213 23,277 23,073 23,925
Sales practices remedies and
costs...................... -- 100 1,150 2,030 1,125
-------- -------- -------- -------- --------
Total benefits and
expenses................... 25,817 24,313 24,427 25,103 25,050
-------- -------- -------- -------- --------
Income from continuing
operations before income
taxes....................... 727 2,255 2,597 1,370 1,540
-------- -------- -------- -------- --------
Income taxes................. 406 1,042 970 407 180
-------- -------- -------- -------- --------
Income from continuing
operations.................. 321 1,213 1,627 963 1,360
-------- -------- -------- -------- --------
Net gain (loss) from
discontinued operations, net
of taxes.................... 77 (400) (521) (353) (282)
-------- -------- -------- -------- --------
Net income................... $ 398 $ 813 $ 1,106 $ 610 $ 1,078
======== ======== ======== ======== ========
Division Data:
Income from continuing
operations before income
taxes(1):
U.S. Consumer Division...... $ 744 $ 659 $ 980
Employee Benefits Division.. 269 485 936
International Division...... 307 242 166
Asset Management Division... 277 253 167
Corporate and Other......... (1,063) 272 (1,319)
-------- -------- --------
Total--Financial Services
Businesses................ 534 1,911 930
-------- -------- --------
Traditional Participating
Products segment........... 193 344 1,667
-------- -------- --------
Total...................... $ 727 $ 2,255 $ 2,597
======== ======== ========
Balance Sheet Data:
Total assets................. $272,753 $285,094 $279,422 $259,571 $228,867
Long-term debt............... 2,502 5,513 4,734 4,273 3,760
Total liabilities............ 252,145 265,803 259,027 239,853 210,344
Equity....................... 20,608 19,291 20,395 19,718 18,523
Equity excluding net
unrealized investment gains
and losses on available-for-
sale securities............. 20,249 19,951 19,123 17,966 17,387

- --------
(1) Prepared in accordance with GAAP. Operating results by division for periods
prior to 1998 are neither readily available nor practicable to obtain.

In managing our business, we analyze our operating performance separately for
our Financial Services Businesses and our Traditional Participating Products
segment using a non-GAAP measure we call "adjusted operating income". 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 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 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 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.

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

Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
(in millions)

Operating Results:
Financial Services Businesses:
Revenues(1):
U.S. Consumer Division............................. $ 8,015 $ 7,530 $ 7,335
Employee Benefits Division......................... 5,686 5,442 5,463
International Division............................. 2,624 2,102 1,622
Asset Management Division.......................... 1,344 1,137 993
Corporate and Other................................ 283 566 313
------- ------- -------
Total............................................. 17,952 16,777 15,726
------- ------- -------
Other amounts included in consolidated revenues:
Realized investment gains (losses), net............ (379) 586 944
Revenues from divested businesses.................. 269 511 325
------- ------- -------
Total revenues--Financial Services Businesses..... 17,842 17,874 16,995
------- ------- -------
Traditional Participating Products segment:
Revenues(1)........................................ 8,611 8,356 8,332
Other amounts included in consolidated revenues:
Realized investment gains, net..................... 91 338 1,697
------- ------- -------
Total revenues--Traditional Participating
Products segment................................. 8,702 8,694 10,029
------- ------- -------
Total consolidated revenues......................... $26,544 $26,568 $27,024
======= ======= =======
Financial Services Businesses:
Adjusted operating income(2):
U.S. Consumer Division............................. $ 740 $ 667 $ 852
Employee Benefits Division......................... 387 400 440
International Division............................. 322 233 157
Asset Management Division.......................... 276 252 166
Corporate and Other................................ (4) 137 (34)
------- ------- -------
Total adjusted operating income................... 1,721 1,689 1,581
------- ------- -------
Items excluded from adjusted operating income:
Realized investment gains, net of losses and
related charges:
Realized investment gains (losses), net........... (379) 586 944
Related charges(3)................................ (29) (142) (225)
------- ------- -------
Total realized investment gains, net of losses
and related charges............................. (408) 444 719
------- ------- -------
Sales practices remedies and costs................. -- (100) (1,150)
Divested businesses................................ (636) (47) (196)
Demutualization costs and expenses................. (143) (75) (24)
------- ------- -------
Income from continuing operations before income
taxes--Financial Services Businesses............. 534 1,911 930
------- ------- -------
Traditional Participating Products segment:
Adjusted operating income(2)....................... 547 316 206
Items excluded from adjusted operating income:
Realized investment gains, net of losses and
related charges:
Realized investment gains, net.................... 91 338 1,697
Dividends to policyholders(4)..................... (445) (310) (236)
------- ------- -------
Total realized investment gains, net of losses
and related charges............................. (354) 28 1,461
------- ------- -------
Income from continuing operations before income
taxes--Traditional Participating Products
segment.......................................... 193 344 1,667
------- ------- -------
Consolidated income from continuing operations
before income taxes................................ $ 727 $ 2,255 $ 2,597
======= ======= =======

- --------
(1) Revenues by division exclude (i) realized investment gains, net and (ii)
revenues from divested businesses. Revenues for the Traditional
Participating Products segment 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 impacts our reserves for future policy
benefits, our deferred policy acquisition costs, and our policyholder
dividends. We refer to these impacts collectively as the "related charges".
Related charges for the Financial Services Businesses consist of the
following:

Year Ended
December 31,
------------------
2000 1999 1998
---- ----- -----
(in millions)

Reserves for future policy benefits..................... $(36) $(147) $(218)
Amortization of deferred policy acquisition costs....... 7 5 (7)
---- ----- -----
Total.................................................. $(29) $(142) $(225)
==== ===== =====

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.
(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.

Due to the planned issuance of the Class B Stock, we have included below
supplemental condensed financial information for the Financial Services
Businesses and the Traditional Participating Products segment. If we issue the
Class B Stock, the Common Stock is expected to reflect the performance of the
Financial Services Businesses only. After the demutualization and if the Class
B Stock is issued, the Financial Services Businesses will then include the
capital presently included in the Traditional Participating Products segment in
excess of the amount necessary to support the Closed Block Business.
Additionally, the minor portion of traditional insurance products historically
included within the Traditional Participating Products segment but which will
not be included in the Closed Block will then be reflected in the Financial
Services Businesses. Accordingly, the results of the Financial Services
Businesses and the Traditional Participating Products segment following the
demutualization and issuance of the Class B Stock will not be comparable to,
and may vary materially from, the results reflected below.

Year Ended
December 31, 2000
----------------------------
Traditional
Financial Participating
Services Products
Businesses Segment
---------- -------------
(in millions)

Revenues(1)........................................ $17,952 $8,611
Expenses(2)........................................ 16,231 8,064
------- ------
Adjusted operating income.......................... $ 1,721 $ 547
======= ======

- --------
(1) Excludes realized investment gains, net of losses, and revenues from
divested businesses.
(2) Excludes impact of net realized investment gains on deferred acquisition
cost amortization; reserves and dividends to policyholders;
demutualization costs and expenses; and benefits and expenses of divested
businesses.

Other Data:

As of December 31,
--------------------
2000 1999 1998
------ ------ ------
Assets Under Management and Administration (at fair market
value): (in billions)

Managed by Asset Management division:
Retail customers(1)...................................... $107.4 $108.5 $ 96.5
Institutional customers(2)............................... 95.1 96.8 92.0
General account.......................................... 110.0 107.9 119.8
------ ------ ------
Total proprietary assets under management................ 312.5 313.2 308.3
Non-proprietary investment product assets(3).............. 11.0 8.9 7.8
Non-proprietary wrap-fee assets(4)........................ 39.4 35.5 25.2
Other(5).................................................. 8.2 5.7 7.5
------ ------ ------
Total assets under management............................ 371.1 363.3 348.8
Client assets under administration........................ 221.8 232.9 197.7
------ ------ ------
Total assets under management and administration......... $592.9 $596.2 $546.5
====== ====== ======

- --------
(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 our general account.
(2) Consists of third-party institutional assets and group insurance
contracts.
(3) Consists of funds invested in the non-proprietary options of our
investment products other than wrap-fee products.
(4) Consists of wrap-fee assets gathered by the Private Client Group and
Retail Investments segments.
(5) Consists primarily of general account assets supporting our International
Insurance segment and wind-down Canadian insurance operations.

As of December 31,
----------------------------------
2000 1999 1998 1997 1996
Employees and Representatives: ------ ------ ------ ------ ------

Prudential Agents............................ 6,086 7,818 8,868 10,115 12,126
Life Planners................................ 3,495 2,884 2,332 1,908 1,603
Financial Advisors........................... 6,653 6,649 6,584 6,473 6,209
Total employees(1)........................... 56,925 59,530 61,793 60,777 59,824

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

We discuss our net income and adjusted operating income under "Management's
Discussion and Analysis of Financial Condition and Results of Operations".

Summary Unaudited Pro Forma Condensed Consolidated Financial Information

The following summary unaudited pro forma condensed consolidated financial
information summarizes the unaudited pro forma condensed consolidated financial
information and the accompanying notes included in this prospectus. This
information gives effect to the demutualization, this offering and the
issuances of the Class B Stock and IHC debt, as if they each had occurred as of
December 31, 2000 for purposes of the unaudited pro forma statement of
financial position information and as of January 1, 2000 for purposes of the
unaudited pro forma statement of operations information. We have provided this
information for informational purposes only and it is not necessarily
indicative of our consolidated financial position or results of operations had
the demutualization, this offering and the issuances of the Class B Stock and
IHC debt been consummated on the dates assumed. It also does not project or
forecast our consolidated financial position or results of operations for any
future date or period.

Under the plan of reorganization, we will allocate approximately 616.5
million notional shares of Common Stock to eligible policyholders. The
information set forth below assumes that 161.9 million shares of these
allocated notional shares of Common Stock are not issued to eligible
policyholders who, under the plan of reorganization, are required to receive
payments in the form of cash or policy credits, and further reflects the
assumptions that 20% of policyholders eligible to elect to receive shares
actually elect to receive shares and that this election is available to
policyholders who are allocated 30 or fewer shares.

Number Percentage Ownership
of Shares of Shares Outstanding
------------- ---------------------
(in millions)

Common Stock Share Data:
Shares notionally allocated to eligible
policyholders............................ 616.5
Less shares allocated to eligible
policyholders who receive cash or policy
credits.................................. 161.9
-----
Shares issued to eligible policyholders... 454.6 84%
Shares issued in the offering............. 89.0 16%
----- ----
Total shares of Common Stock outstanding.. 543.6 100%
===== ====

The data set forth below under Pro Forma for Demutualization and the Offering
give effect to gross proceeds of $2,670 million from the issuance of Common
Stock in this offering less the underwriting discount and estimated offering
expenses aggregating $108 million, or net proceeds from the offering of $2,562
million, in each case based on an assumed initial public offering price of
$30.00 per share without giving any effect to exercise of the underwriters'
options to purchase additional shares. In preparing the data set forth below
under Pro Forma for Demutualization, the Offering and Issuances of Class B
Stock and IHC debt, we have assumed $175 million of gross proceeds, or $171
million of net proceeds, are raised from the issuance of the Class B Stock, all
of which will be allocated to the Financial Services Businesses, and $1,750
million of gross proceeds, or $1,730 million of net proceeds, are raised from
the issuance of the IHC debt, all of which will be allocated to the Financial
Services Businesses, and 25% of which will be deposited in a debt service
coverage account as security for payment of principal and interest on the IHC
debt. Per share information under Pro Forma for Demutualization and the
Offering relates to the Common Stock assuming that the Class B Stock is not
issued. The per share information under Pro Forma for Demutualization, the
Offering and Issuances of Class B Stock and IHC debt under Financial Services
Businesses relates to the Common Stock, while the information under Closed
Block Business relates to the Class B Stock. The data do not give effect to any
other financing transaction that may be consummated at the time of
demutualization.

As of or for the Year Ended December 31, 2000
------------------------------------------------------------------------------------------------------------
Financial Services Businesses Closed Block Business
---------------------------------- ------------------------------
Pro Forma for Pro Forma for
Demutualization, Historical Demutualization,
the Offering and Traditional the Offering and
Pro Forma for Issuances of Participating Issuances of
Demutualization Class B Stock and Products Class B Stock Consolidated
Historical and the Offering Historical IHC Debt Segment and IHC Debt Pro Forma
---------- ---------------- -------------- ----------------- ------------- ---------------- ------------
(in millions, except per share data)

Income (loss) from
continuing
operations........ $ 321 $ 397 $ 234 $ 475 $ 87 $ (158) $ 317
Income (loss) from
continuing
operations per
share of:
Common Stock...... -- $ 0.73 -- $ 0.87 -- -- $ 0.87
Class B Stock..... -- -- -- -- -- $(79.00) $(79.00)
Attributed equity.. $20,608 $18,116 $ 13,741 $ 17,332 $6,867 $ 955 $18,287
Book value per
share of:
Common Stock...... -- $ 33.33 -- $ 31.88 -- -- $ 31.88
Class B Stock..... -- -- -- -- -- $477.50 $477.50

RISK FACTORS

You should carefully consider the following risks before investing. These
risks could materially affect our business, results of operations or financial
condition and cause the trading price of our Common Stock to decline. You
could lose part or all of your investment.

We could incur income statement charges if our insurance and annuity reserves
are inadequate.

Our reserves for future policy benefits and claims may prove to be
inadequate. We establish and carry, as a liability, reserves based on
estimates by actuaries of how much we will need to pay for future benefits and
claims. For our life insurance and annuity products, we calculate these
reserves based on many assumptions and estimates, including estimated premiums
we will receive over the assumed life of the policy, the timing of the event
covered by the insurance policy, the amount of benefits or claims to be paid
and the investment returns on the assets we purchase with the premiums we
receive. We establish property and casualty reserves based on assumptions and
estimates of damages and liabilities incurred. We establish disability and
long-term care reserves based on assumptions and estimates of morbidity rates,
policy and claim termination rates, benefit amounts, investment returns and
other factors. Our reserving assumptions and estimates are inherently
uncertain. Accordingly, we cannot determine with precision the ultimate
amounts that we will pay for, or the timing of payment of, actual benefits and
claims or whether the assets supporting the policy liabilities will grow to
the level we assume prior to payment of benefits or claims. If our actual
experience is different from our assumptions or estimates, our reserves could
be inadequate. This could result in income statement charges from benefit or
claim payments greater than the level used to establish or increase our
reserves.

We have retained contingent liabilities from discontinued, divested and wind-
down businesses that may require us to incur income statement charges.

We have retained insurance or reinsurance obligations and other contingent
liabilities in connection with our divestiture or winding down of various
businesses, and our reserves for these obligations and liabilities may prove
to be inadequate. In particular, in connection with the sale of our healthcare
operations, we agreed that if the medical loss ratio, which is the sum of the
amount of claims paid plus an actuarial estimate of the claims incurred
divided by the premiums earned, for substantially all of the healthcare
business exceeds specified levels between August 6, 1999 and December 31,
2000, we will pay 75% of the additional losses that the purchaser suffers.
This loss guarantee will ultimately be settled in the fourth quarter of 2001.
We also retained all liabilities associated with litigation arising from or
related to the healthcare business that existed at August 6, 1999 or that
commences within two years after that date with respect to claims relating to
events that occurred prior to that date, as discussed in relation to legal and
regulatory matters below. In connection with the sale of Gibraltar Casualty
Company, we entered into a stop-loss agreement whereby we reinsured the buyer
for up to 80% of the first $200 million of adverse loss development in excess
of Gibraltar's reserves on the closing date of the sale. Gibraltar's remaining
insurance and reinsurance liabilities primarily include significant exposure
to asbestos, environmental and product liability claims which involve
substantial uncertainty as to, among other things, the number and value of
possible claims, the timing of resolution of possible claims, responsibility
for damages and other matters. While we believe that as of December 31, 2000
we had adequately reserved in all material respects for remaining costs and
liabilities associated with our divested and wind-down businesses, including
the costs associated with the healthcare loss guarantee and litigation and the
Gibraltar exposure, retained and contingent liabilities in connection
therewith could cause us to take additional charges that could be material to
our results of operations. See "Business--Discontinued Operations--Healthcare"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Consolidated Results of Operations--Discontinued Operations"
for a further discussion of our discontinued healthcare business and
"Business--Corporate and Other Operations--Divested Businesses" and "--Wind-
down Businesses" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Consolidated Results of Operations--
Divested Businesses" and "--Corporate and Other Operations" for a further
discussion of Gibraltar and other divested and wind-down businesses.

Catastrophe losses could materially reduce our profitability or cash flow.

Our personal lines property and casualty insurance operations expose us to
claims arising out of catastrophes, principally arising under our homeowners
insurance policies. Hurricanes, earthquakes, tornadoes, wind, hail, fires,
explosions and other events may cause catastrophes, and the occurrence and
severity of catastrophes are inherently unpredictable. In accordance with
generally accepted accounting principles, we do

not establish reserves for catastrophes in advance of their occurrence, and
the loss or losses from a single or multiple catastrophes could be material to
our results of operations or cash flow in particular quarterly or annual
periods. Our catastrophe exposure risk management program relies heavily on
reinsurance to reduce our catastrophe exposure, and the loss of availability
of all or portions of our reinsurance program could subject us to increased
exposure, which could be material. The cost of reinsurance affects the
profitability of our property and casualty insurance business. There have
been, and in the future may be, periods when reinsurance has not been
available or at least not at acceptable rates and levels. We also face credit
risk with respect to our reinsurers and other risk bearers, such as the
Florida Hurricane Catastrophe Fund, in all lines of our insurance business,
including property and casualty insurance, 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.

Interest rate fluctuations could negatively affect our profitability.

Changes in interest rates may reduce both our profitability from spread
businesses and our return on invested capital. Some of our products,
principally traditional whole life insurance, fixed annuities and guaranteed
investment contracts, expose us to the risk that changes in interest rates
will reduce our "spread", or the difference between the amounts that we are
required to pay under the contracts and the rate of return we are able to earn
on our general account investments intended to support our obligations under
the contracts. Declines in our spread from these products or other spread
businesses we conduct could have a material adverse effect on our businesses
or results of operations.

In periods of increasing interest rates, we may not be able to replace the
assets in our general account with higher yielding assets needed to fund the
higher crediting rates necessary to keep our interest sensitive products
competitive. We therefore may have to accept a lower spread and thus lower
profitability or face a decline in sales and greater loss of existing
contracts and related assets. In periods of declining interest rates, we have
to reinvest the cash we receive as interest or return of principal on our
investments in lower yielding instruments then available. Moreover, borrowers
may prepay fixed-income securities, commercial mortgages and mortgage-backed
securities in our general account in order to borrow at lower market rates,
which exacerbates this risk. Because we are entitled to reset the interest
rates on our fixed rate annuities and guaranteed investment contracts only at
limited, pre-established intervals, and since many of our policies have
guaranteed minimum interest or crediting rates, our spreads could decrease and
potentially become negative.

A decline in market interest rates available on investments could also
reduce our return from investments of capital that do not support particular
policy obligations, which also could have a material adverse effect on our
results of operations.

Increases in interest rates may cause increased surrenders and withdrawals
of insurance products. In periods of increasing interest rates, policy loans
and surrenders and withdrawals of life insurance policies and annuity
contracts may increase as policyholders seek to buy products with perceived
higher returns. This process may lead to a flow of cash out of our businesses.
These outflows may require investment assets to be sold at a time when the
prices of those assets are lower because of the increase in market interest
rates, which may result in realized investment losses. A sudden demand among
consumers to change product types or withdraw funds could lead us to sell
assets at a loss to meet the demand for funds. In addition, unanticipated
withdrawals and terminations also may require us to accelerate the
amortization of deferred policy acquisition costs. This would increase our
current expenses.

Changes in interest rates may reduce profitability or result in potential
losses in non-insurance businesses where we take principal risk on fixed-
income investments. We operate two fixed-income securities hedge portfolios in
our Other Asset Management segment in which we take principal positions that
we hedge with short positions and support through securities repurchase,
reverse repurchase and lending transactions. As of December 31, 2000, the
hedge portfolios had a total carrying value of approximately $7.9 billion,
reflecting both principal positions and securities financing positions. We
also run a commercial mortgage banking business in our Asset Management
division in which we make or purchase loans secured by commercial mortgages
and hold them until they can be aggregated in a combined investment fund, the
securities of which we sell to investors in a securitization transaction.
Similarly, we hold or "warehouse" other loan receivables pending sale in
securitization transactions. As of December 31, 2000, we held approximately
$1.2 billion of commercial mortgages and other loan receivables pending
securitization, substantially all of which is supported by approximately $1.3
billion of financing. We hold a matched book and other inventory in our
Private Client Group

segment principally in connection with our business with customers. We engage
in corporate investment activities, in which we borrow funds and use our
asset/liability management techniques to earn additional spread income on the
borrowed funds. As of December 31, 2000, the total indebtedness supporting
these activities was approximately $3.8 billion.

Losses due to defaults by others could reduce our profitability or negatively
affect the value of our investments.

Third parties that owe us money, securities or other assets may not pay or
perform their obligations. These parties include the issuers whose securities
we hold, borrowers under the mortgage loans we make, customers, trading
counterparties, counterparties under swaps and other derivative contracts,
reinsurers, clearing agents, exchanges, clearing houses and other financial
intermediaries. These parties may default on their obligations to us due to
bankruptcy, lack of liquidity, downturns in the economy or real estate values,
operational failure or other reasons. The current uncertain trend in the U.S.
and other economies has resulted in rising investment impairments, and a
further downturn could result in increased impairments. We recognized
impairments of fixed maturities of $540 million in 2000 as compared to $266
million in 1999.

The default of a major market participant could disrupt the securities
markets or clearance and settlement systems in the United States or abroad. A
failure of a major market participant could cause some clearance and
settlement systems to assess members of that system, including our broker-
dealer subsidiaries, or could lead to a chain of defaults that could adversely
affect us. A default of a major market participant could disrupt various
markets which could in turn cause market declines or volatility.

Other market fluctuations and general economic, market and political
conditions may also negatively affect our business and profitability.

Our investment returns, and thus our profitability, may also be adversely
affected from time to time by conditions affecting our specific investments
and, more generally, by stock, real estate and other market fluctuations and
general economic, market and political conditions.

Our ability to make a profit on insurance products, fixed annuities and
guaranteed products depends in part on the returns on investments supporting
our obligations under these products and the value of specific investments may
fluctuate substantially depending on the foregoing conditions.

We also make investments in securities to support our customer operations in
our securities operations, including our market-making and other principal
trading activities to facilitate customer transactions, and our commercial
mortgage securitization operations. We also engage in proprietary trading of
equities, commodities and futures and take proprietary positions in our hedge
portfolios and our proprietary investment and syndication activities. The
foregoing activities expose us to significant market risk as we buy securities
or other assets, including assets to be repackaged, all of which are subject
to market fluctuation. Even though we generally buy the securities or other
assets for resale and the risk in most, but not all, cases is short-term, our
exposure is often for large amounts. We use a variety of strategies to hedge
our exposure to interest rate and other market risk. However, hedging
strategies are not always available, and our hedging could be ineffective. As
a result of exiting the lead-managed underwriting and institutional fixed
income businesses, we are winding down related portfolios of loans and loan
commitments to clients of these businesses which, at December 31, 2000,
aggregated approximately $3.5 billion. We could incur material losses from
these activities.

The current uncertain trend in the U.S. and Japanese economic and investment
climates may adversely affect our businesses and profitability, particularly
in the event of a U.S. recession. Our profitability has benefitted from strong
equity markets in 1998 through 2000, and the decline in global stock markets
has adversely affected, and can be expected to adversely affect, profitability
of many of our businesses.

A decline or increase in volatility in the securities markets may negatively
affect our businesses.

Our investment-based and asset management products and services and our
investment advisory and securities brokerage services expose us to the risk
that sales will decline and lapses of variable life and annuity products and
withdrawals of assets from other investment products will increase if, as a
result of a failure of the market to maintain its rate of growth, a market
downturn, increased market volatility or other market conditions, customers
become dissatisfied with their investments. A market downturn also would
result in lower account balances as a result of decreases in market value and
lower margin account balances. In many cases our fees in

these businesses are based on a percentage of the assets we manage and, if
account values decline, our fee revenue would decline. Declines in margin
account balances would result in a decline in our net interest revenues. A
market downturn also could result in a decline in the volume of transactions
that we execute for our customers, and therefore a decline in our commission
and fee revenue.

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, which are intended to measure our ability to meet
policyholder obligations, 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.
Starting in 1992 and as recently as 1998, the various ratings agencies
downgraded our claims-paying and credit ratings. You can read about the
downgrades of our claims-paying ratings under "Business--Ratings".

We believe our current claims-paying and credit ratings are stable. However,
further downgrading of our claims-paying ratings would limit our ability to
sell our insurance and annuity products and guaranteed contracts and would
reduce our profitability. Further downgrading of our credit ratings would
further increase the cost of borrowing and reduce our profitability.

Intense competition could negatively affect our ability to maintain or
increase our profitability.

Our businesses are intensely competitive. We compete based on a number of
factors including name recognition, service, the quality of investment advice,
investment performance, product features, price, perceived financial strength,
and claims-paying and credit ratings. Our competitors include insurers,
broker-dealers, financial advisors, asset managers and other financial
institutions. A number of our business units face competitors that have
greater market share, offer a broader range of products or have higher claims-
paying or credit ratings than we do.

In recent years, there has been substantial consolidation and convergence
among companies in the financial services industry, particularly as the laws
separating banking, insurance and securities 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 in light of the adoption of the Gramm-Leach-
Bliley Act, which we discuss below.

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 rankings against competitors' market shares
and results of operations could be adversely affected.

We may be unable to attract and retain sales representatives and other
employees, particularly Financial Advisors.

We compete to attract and retain Prudential Agents, Financial Advisors, Life
Planners, asset managers, research analysts, investment bankers and other
employees, as well as independent distributors of our products. Intense
competition exists for persons and independent distributors with demonstrated
ability. We compete with other financial institutions primarily on the basis
of our products, compensation, support services and financial position. In
particular, we have experienced continuing turnover among Financial Advisors,
including experienced Financial Advisors, due in part to greater industry
competition for productive Financial Advisors and the lack of a stock-based
compensation program. While we have undertaken several initiatives with
respect to our Financial Advisors, these initiatives may not succeed in
attracting or retaining new Financial Advisors. In addition, our decision to
exit the lead-managed underwriting 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.
Sales and

persistency in our businesses and our results of operations and financial
condition could be materially adversely affected if we are unsuccessful in
attracting and retaining sales representatives.

Fluctuations in foreign currency exchange rates and foreign securities markets
could negatively affect our profitability.

Our foreign insurance operations generally write policies denominated in
local currencies and invest in local currencies. Although investing in local
currencies limits the effect of currency exchange rate fluctuation on local
operating results, fluctuations in such rates affect the translation of these
results into our consolidated financial statements. Our foreign securities
operations transact business in both local currencies and U.S. dollars.
Accordingly, fluctuations in foreign currency exchange rates may directly
affect these operations.

Our domestic and international insurance and securities businesses own
foreign securities and are subject to fluctuations in foreign securities
markets, which can be volatile. In the last several years, various emerging
market countries have experienced severe economic and financial disruptions,
including significant devaluations of their currencies and low or negative
growth rates in their economies. Interest rates in Japan have been at
historically low levels in recent years, and continued low or declining rates
could affect the profitability of our international insurance operations. The
possible effects of these conditions include losses in our securities
inventory positions and in our general account.

Our international operations face political, legal, operational and other
risks that could negatively affect those operations or our profitability.

Our international operations face political, legal, operational and other
risks that we do not face in our domestic operations. We face 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. Some of our foreign insurance operations are, and are likely to
continue to be, in emerging markets where these risks are heightened. In
addition, we rely on local sales forces in these countries and we may
encounter labor problems resulting from workers' associations and trade unions
in some countries. If our business model is not successful in a particular
country, we may lose all or most of our investment in building and training
the sales force in that country.

Our businesses are heavily regulated and changes in regulation may reduce our
profitability.

Our insurance operations are subject to state insurance laws regulating all
aspects of our business and are regulated and supervised principally by state
insurance departments in the fifty states and U.S. territories and
possessions. Our principal insurance regulatory authorities are the New Jersey
Department of Banking and Insurance and the state insurance authorities in
other states where our insurance subsidiaries are organized. The purpose of
the state regulation of insurance is to protect policyholders and not our
shareholders. Foreign insurance regulatory authorities regulate our
international insurance operations. Products that are also "securities", such
as variable life insurance and variable annuities, are also subject to federal
and state securities laws and are regulated and supervised by the SEC, the
NASD and state securities commissions.

On November 11, 1999, the Gramm-Leach-Bliley Act was adopted. This federal
law permits the creation of financial services firms that can include
commercial banking, merchant banking, securities, insurance and investment
management activities under one holding company that would be subject to
federal regulation. We expect the legislation will result in increased
consolidation within the financial services industry. We cannot predict the
effect of this legislation or further consolidation on our competitive
position.

State insurance regulators and the National Association of Insurance
Commissioners regularly re-examine existing laws and regulations applicable to
insurance companies. Existing or future insurance-related laws and regulations
may become more restrictive and may adversely affect our profitability.

State insurance guaranty associations have the right to assess insurance
companies doing business in their state for funds to help pay the obligations
of insolvent insurance companies to policyholders and claimants. Because the
amount and timing of an assessment is beyond our control, the reserves that we
have currently established for these potential liabilities may not be
adequate.

Our asset management, securities, banking and other operations are subject
to extensive regulation at the federal and/or state level by regulators
including the SEC, the NASD, the NYSE, the CFTC, the Department of Labor, the
FDIC, the OTS, the FTC, the Georgia Department of Banking and Finance, the
Pennsylvania

Department of Banking, and state securities authorities, and are subject to
regulation in those jurisdictions outside the United States in which the
businesses operate. The requirements imposed by regulators are generally
designed to ensure the integrity of the financial markets and to protect
customers and other third parties who deal with us, and are not designed to
protect our shareholders. As a result, regulatory requirements often limit our
activities, and we face the risk of significant intervention by regulatory
authorities.

Many of the foregoing regulatory or governmental bodies have the authority
to review our products and business practices and those of our agents and
employees and to bring regulatory or other legal actions against us if, in
their view, our practices, or those of our agents or employees, are improper.
These actions can result in substantial fines, penalties or prohibitions or
restrictions on our business activities and could have a material adverse
effect on our business, results of operations or financial condition.

Legal and regulatory actions are inherent in our businesses and could result
in financial losses or harm our businesses.

We are, and in the future may be, subject to legal and regulatory actions in
the ordinary course of our insurance, asset management, securities, investing
and other operations, both domestically and internationally. Pending legal and
regulatory actions include proceedings relating to aspects of our businesses
and operations that are specific to us and proceedings that are typical of the
businesses in which we operate, including in both cases businesses that we
have 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. Substantial legal liability
in these or future legal or regulatory actions could have a material financial
effect or cause significant reputational harm which in turn could seriously
harm our business prospects.

Regulatory authorities and customers brought significant regulatory actions
and civil litigation against us in the past involving sales of individual
permanent life insurance policies that we issued in the United States from
1982 to 1995. 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. These
proceedings, substantial related negative publicity and our actions to improve
sales practice controls caused significant turnover and reduced headcount in
our Prudential Agent sales force, principally in 1996 and 1997. Primarily as a
result of this turnover, reduced headcount and negative publicity, we lost
policies, customer accounts and assets in our individual life insurance and
property and casualty insurance businesses. In 1996 we settled the insurance
regulatory proceedings and the principal life insurance sales practices class
action lawsuit. Pursuant to these settlements, we have distributed final
remedies to virtually all eligible class members through the alternative
dispute resolution process that we established. In addition, as of December
31, 2000, we remained a party to approximately 61 individual sales practices
actions filed by class members who "opted out" of the class settlement
relating to permanent life insurance policies we issued in the United States
between 1982 and 1995, as well as 48 sales practices actions filed by class
members who failed to "opt out" of the class settlement. Many of these suits
seek substantial punitive damages in addition to compensatory damages. You can
read about the life insurance related litigation in greater detail under
"Business--Litigation and Regulatory Proceedings--Insurance--Life Insurance
Sales Practices Issues".

We remain liable for certain litigation involving our divested healthcare
operations. This litigation includes purported class actions 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, and class actions challenging
practices of our former managed care operations. The class actions involve
purported nationwide classes of participants and multiple defendants and
allege, among other things, misrepresentation of the level and quality of
services, 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 class actions are only in
the preliminary stage and the remedies sought include unspecified damages,
restitution, disgorgement of profits, treble damages, punitive damages and
injunctive relief. You can read about the healthcare related litigation in
greater detail under "Business--Litigation and Regulatory Proceedings--
Discontinued Operations".

Although we believe we have adequately reserved in all material respects for
the costs of our litigation and regulatory matters, we can provide no
assurance of this. It is possible that our results of operations or cash flow
in particular quarterly or annual periods could materially decline due to an
ultimate unfavorable outcome of these matters.

Employee misconduct is difficult to detect and deter and could harm our
business, results of operations or financial condition.

Employee misconduct could result in violations of law by us, regulatory
sanctions and/or serious reputational or financial harm. Employee misconduct
can occur in each of our businesses and could include:

. binding us to transactions that exceed authorized limits,

. hiding unauthorized or unsuccessful activities resulting in unknown and
unmanaged risks or losses,

. improperly using or disclosing confidential information,

. recommending transactions that are not suitable,

. engaging in fraudulent or otherwise improper activity,

. engaging in unauthorized or excessive trading to the detriment of
customers, particularly in our Private Client Group segment, or

. otherwise not complying with laws or our control procedures.

We cannot always deter employee misconduct, and the precautions we take to
prevent and detect this activity may not be effective in all cases. We cannot
assure you that employee misconduct will not lead to a material adverse effect
on our business, results of operations or financial condition.

Changes in federal income tax law could make some of our products less
attractive to consumers and increase our tax costs.

Congress has, from time to time, considered tax legislation that could make
our products less attractive to consumers. Some of the more important are:

. Congress has, in the past, considered legislation that would reduce or
eliminate the benefit of the current federal income tax rule under which
tax on the build-up of value of annuities and life insurance products
can generally be deferred until payments are actually made to the
policyholder or other beneficiary and excluded when paid as a death
benefit under a life insurance contract.

. In March 2001, the House of Representatives passed legislation that
would lower individual tax rates. This legislation could, if enacted,
also reduce the benefit of deferral.

. In April 2001, the House of Representatives passed legislation that
would eliminate, over time, the estate, gift and generation-skipping
taxes and would partially eliminate the step-up in basis rule applicable
to property held in a decedent's estate. Similar legislation was passed
by Congress in 2000 and subsequently vetoed by President Clinton.
Changes in the law that reduce estate taxes could hinder sales and
result in increased surrenders of our insurance products. On the other
hand, termination of the step-up in basis rule may increase the
attractiveness of insurance products.

Congress, as well as foreign, state and local governments, also consider
from time to time legislation that could increase our tax costs. If such
legislation is adopted, our consolidated net income could decline.

We cannot predict whether any such legislation will be enacted, what the
specific terms of any such legislation will be or how, if at all, it might
affect sales of our products.

Our risk management policies and procedures may leave us exposed to
unidentified or unanticipated risk, which could negatively affect our
businesses or result in losses.

We have devoted significant resources to develop our risk management
policies and procedures and expect to continue to do so in the future.
Nonetheless, our policies and procedures to identify, monitor and manage risks
may not be fully effective. Many of our methods of managing risk and exposures
are based upon our use of observed historical market behavior or statistics
based on historical models. As a result, these methods may not predict future
exposures, which could be significantly greater than the historical measures
indicate. Other risk management methods depend upon the evaluation of
information regarding markets, clients, catastrophe occurrence or other
matters that is publicly available or otherwise accessible to us, which may
not always be

accurate, complete, up-to-date or properly evaluated. Management of
operational, legal and regulatory risks requires, among other things, policies
and procedures to record properly and verify a large number of transactions
and events, and these policies and procedures may not be fully effective.

Allocation of inadequate assets to the Closed Block could reduce net income
available to our shareholders.

The plan of reorganization requires us to establish and operate a Closed
Block for the benefit of holders of certain participating individual insurance
and annuity policies issued by The Prudential Insurance Company of America.
The Closed Block is a mechanism designed to provide for the reasonable
expectations for future policy dividends after demutualization of the holders
of the policies included in the Closed Block by allocating assets that will be
used for the payment of guaranteed benefits and policyholder dividends,
expenses and taxes on those policies. The policies that we will include in the
Closed Block are certain individual life insurance policies and individual
annuity contracts that are in force on the effective date of the
demutualization on which we are currently paying or expect to pay experience-
based policy dividends.

We initially will allocate assets to the Closed Block equal to approximately
26% of The Prudential Insurance Company of America's general account invested
assets. This amount, together with the investment cash flows they produce and
the anticipated revenue from the Closed Block policies, are expected to be
reasonably sufficient to provide for all guaranteed Closed Block policy
benefits and expenses and taxes charged to the Closed Block, as well as future
policy dividends after demutualization in accordance with the dividend scales
in effect for 2000 if the experience underlying these scales continues. These
assets include public and private fixed maturities, commercial and
agricultural mortgages, public and private equities and real estate. See
"Unaudited Pro Forma Condensed Consolidated Financial Information--Unaudited
Pro Forma Closed Block Information" for a description of the establishment and
funding of the Closed Block.

We will operate the Closed Block for the benefit of the holders of the
policies included in the Closed Block, and cash flows provided by the Closed
Block Assets will solely benefit the holders of those policies and will not be
available for dividends to our shareholders. However, in the unlikely event
that poor results from business operations outside of the Closed Block
completely deplete The Prudential Insurance Company of America's surplus, The
Prudential Insurance Company of America may be required to use Closed Block
Assets to pay guaranteed benefits on policies not included in the Closed
Block. Closed Block policies will continue to be the obligation of The
Prudential Insurance Company of America, and we will remain obligated to pay
guaranteed policy benefits on these policies in accordance with their terms
should the assets of the Closed Block be insufficient to satisfy the claims.
If, over the period the Closed Block remains in existence, performance of the
Closed Block Assets is more favorable than we originally expected, we will pay
the excess to Closed Block policyholders as additional policyholder dividends,
and it will not be available to our shareholders. If performance is less
favorable, The Prudential Insurance Company of America will not be required to
support the payment of dividends on Closed Block policies from its general
funds, although it could choose to provide such support. If we were to make
substantial payments to the benefit of Closed Block policies from our general
funds, either in support of the payment of policyholder dividends or to
satisfy claims, a lower amount of assets and net income would be available to
our shareholders and the market price of our Common Stock could decline. The
Closed Block will continue in effect as long as any policy in the Closed Block
remains in force, which we currently expect will be at least 100 years.

We will also establish a separate closed block for the benefit of the owners
of the participating insurance policies issued by our remaining Canadian
branch. We will operate this closed block, which, because of the substantially
smaller number of outstanding Canadian policies, will be insignificant in
size, in a similar manner as the U.S. Closed Block and reflect it in our
Corporate and Other operations of our Financial Services Businesses.

Our ability to pay shareholder dividends may be affected by limitations
imposed on The Prudential Insurance Company of America and our other
subsidiaries.

Prudential Financial, Inc. will act as a holding company for all our
operations, and we do not intend that Prudential Financial, Inc. will have
significant operating businesses. Prudential Financial, Inc.'s principal
sources of revenues to meet its obligations, including the payment of
shareholder dividends and operating expenses, will be dividends and interest
from its subsidiaries. Prudential Financial, Inc.'s regulated insurance,
broker-dealer and various other subsidiaries are subject to regulatory
limitations on their payment of dividends and other transfers of funds to
affiliates.

New Jersey insurance law provides that, except in the case of extraordinary
dividends or distributions, all dividends or distributions paid by The
Prudential Insurance Company of America may be declared or paid only from
unassigned surplus, as determined pursuant to statutory accounting principles.
The Prudential Insurance Company of America also must notify the New Jersey
insurance regulator prior to paying a dividend and if the dividend, together
with other dividends or distributions made within the preceding twelve months,
would exceed a specified statutory limit based on financial results under
statutory accounting principles, obtain a non-disapproval from the New Jersey
insurance regulator. You should note that results under statutory accounting
principles may not be as favorable as results under generally accepted
accounting principles. For a description of the statutory dividend limit, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources". Upon demutualization, unassigned
surplus will be reduced to zero, thereby constraining The Prudential Insurance
Company of America's ability to pay dividends in the initial years following
demutualization. Unassigned surplus is expected to grow thereafter in the
ordinary course of business over time, including gains from operations and any
realized capital gains.

The laws regulating dividends of the other states in which our other
insurance companies are organized 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, Inc. 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, Inc.

We cannot assure that Prudential Financial, Inc.'s subsidiaries will have
enough earnings to support dividend payments to Prudential Financial, Inc. in
an amount sufficient to fund Prudential Financial, Inc.'s cash requirements
and shareholder dividends. From time to time the National Association of
Insurance Commissioners and various state insurance regulators have
considered, and may in the future consider, proposals to further limit
dividend payments that an insurance company may make without regulatory
approval. These proposals, if enacted, could further restrict the ability of
our insurance companies to pay dividends to Prudential Financial, Inc.

A challenge to the Commissioner's approval of the plan of reorganization could
adversely affect the terms of the demutualization and the market price of our
Common Stock.

After a public hearing, the Commissioner of Banking and Insurance of the
State of New Jersey will determine whether to approve the plan of
reorganization. To approve the plan, the Commissioner must find that the plan
meets the standards of New Jersey law governing demutualizations, including,
among other things, whether the plan is fair and equitable to the
policyholders of The Prudential Insurance Company of America. We do not expect
that any Commissioner order approving the plan will address the fairness of
the plan to purchasers of Common Stock in the offering.

The New Jersey law governing the demutualization provides that a
Commissioner order approving or disapproving the 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. Accordingly, if the Commissioner approves the plan it is possible
that an appeal challenging the Commissioner's approval could be filed up to 45
days after the date of the Commissioner's order. We cannot predict whether any
lawsuit challenging the plan or the Commissioner's approval will be commenced
or what aspects of the plan, if any, such an action might challenge. The
existence of such a challenge could delay completion of the plan of
reorganization or, when completed, negatively affect the market price of the
Common Stock.

In the event that the plan or the Commissioner's order is challenged, a
successful challenge could impede consummation of the demutualization or
result in monetary damages, a modification of the plan or the Commissioner's
approval of the plan being set aside. In addition, 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 or financial condition.

Regulatory requirements, provisions of our certificate of incorporation and
by-laws and our shareholder rights plan could delay, deter or prevent a
takeover attempt that shareholders might consider in their best interests.

Under the New Jersey statute governing the demutualization and our plan of
reorganization, for the three years after the effective date of the
demutualization, no person other than Prudential Financial, Inc., certain of
its subsidiaries or any employee benefit plans or trusts sponsored by us may
acquire 5% or more of the total voting

power of Prudential Financial, Inc.'s Common Stock and, if issued, Class B
Stock without the prior approval of the New Jersey insurance regulator. In
addition, various states in which our insurance companies are organized,
including New Jersey, must approve any change of control of insurance
companies organized in those states. Under most states' statutes, an entity is
presumed to have control of an insurance company if it owns, directly or
indirectly, 10% or more of the voting stock of that insurance company or its
parent company. Federal, and in some cases state, banking authorities would
also have to approve the indirect change of control of our banking operations.
The federal securities laws could also require reapproval by customers of our
investment advisory contracts to manage mutual funds, including mutual funds
included in annuity products. In addition, the New Jersey Business Corporation
Act prohibits certain business combinations with interested shareholders.
These regulatory and other restrictions may delay a potential merger or sale
of Prudential Financial, Inc., even if the Board of Directors decides that it
is in the best interests of shareholders to merge or be sold. These
restrictions also may delay sales or acquisitions of our subsidiaries.

Prudential Financial, Inc.'s certificate of incorporation and by-laws also
contain provisions that may delay, deter or prevent a takeover attempt that
shareholders might consider in their best interests. These provisions may
adversely affect prevailing market prices for our Common Stock and include:

. classification of Prudential Financial, Inc.'s Board of Directors into
three classes that serve staggered three-year terms,

. a prohibition on the removal of directors without cause,

. a restriction on the filling of vacancies on the Board of Directors by
shareholders,

. restrictions on the calling of special meetings by shareholders,

. a requirement that shareholders may take action without a meeting only by
unanimous written consent,

. advance notice procedures for the nomination of candidates to the Board
of Directors and shareholder proposals to be considered at shareholder
meetings, and

. supermajority voting requirements for the amendment of certain provisions
of the certificate of incorporation and by-laws.

Prudential Financial, Inc.'s Board of Directors also has authorized a
shareholders rights plan that will be effective upon the effective date of the
demutualization. This rights plan may also create obstacles that may delay,
deter or prevent a takeover attempt that shareholders might consider in their
best interests.

The price of our Common Stock may decline due to the large number of shares
that will be eligible for public sale following the demutualization.

Substantially all of the shares of our Common Stock distributed in the
demutualization will be eligible for resale in the public market without
restriction. It is possible that many of our policyholders might want to sell
their shares. Policyholders will not be able to sell their shares of Common
Stock until they receive a confirmation of the issuance of their shares. We
expect that policyholders will receive such confirmation within 45 days of the
effective date of the demutualization but it may happen earlier. Once a
policyholder receives this confirmation, the policyholder will be able to sell
shares either through the sales facility described below or by transferring
the shares to a brokerage account for sale.

Pursuant to the requirements of the New Jersey demutualization statute, we
will provide a program for a period of time beginning some time prior to the
second anniversary of the effective date of the demutualization that permits
each policyholder who receives 99 or fewer shares of Common Stock in the
demutualization, and other shareholders holding 99 or fewer shares, to sell,
at market prices and without brokerage commissions or similar fees, all of his
or her shares, or purchase shares to obtain ownership of 100 shares. We
estimate that when we complete the demutualization we will have approximately
4 million policyholders who will in total receive in excess of 165.5 million
shares that we believe would be eligible to participate in this commission-
free program. In addition to the commission-free program, our transfer agent
is expected to offer a sales facility for policyholders holding 1,000 shares
of Common Stock or less to sell shares, at their own expense, through the
transfer agent. The sales facility will not be available until at least 30
days after the effective date of the demutualization, and a policyholder may
not use the sales facility until receiving the confirmation noted above. The
terms of the commission-free program and these sales procedures will be
designed in accordance with SEC requirements.

Sales of substantial amounts of Common Stock, or uncertainty as to whether
sales of substantial amounts may occur, may adversely affect the price of the
Common Stock. We cannot predict what the effect, if any, on our Common Stock
price will be of future sales, or the availability of shares for future sales,
under the commission-free program, the foregoing sales procedures or
otherwise.

Risks Related to our Acquisition of Kyoei Life Insurance Co., Ltd.

. Kyoei's results of operations and financial condition have deteriorated
over recent years and this deterioration accelerated in 2000 prior to
Kyoei's filing for reorganization proceedings on October 20, 2000. There
is no assurance that we will be able to operate Gibraltar Life profitably
or as to the level of such profitability.

. Gibraltar Life could experience post-reorganization policyholder
surrenders and withdrawals materially different than those we anticipate
and/or incur material losses, including deterioration of assets or lower
than expected investment returns.

See "Recent Developments--Acquisition of Kyoei Life Insurance Co., Ltd." for
a discussion of Kyoei and the acquisition.

Additional risks relevant to you as holder of our Common Stock if we issue
Class B Stock.

The issuances of the Class B Stock and the IHC debt are not assured and are
not conditions to completion of this offering. If we proceed with this
offering but do not issue any Class B Stock, there will be no separation of
the Businesses, the Common Stock will reflect the performance of all our
businesses, including the Traditional Participating Products segment, and we
will not achieve the intended benefits of such issuances described in the
"Prospectus Summary". If we issue the Class B Stock and IHC debt, you should
consider the following risks:

Holders of Common Stock will be common stockholders of Prudential Financial,
Inc. and will be subject to risks associated with an investment in Prudential
Financial, Inc. as a whole, including the Closed Block Business. We cannot
assure you that the market value of Common Stock will in fact reflect the
performance of the Financial Services Businesses as we intend. Even though we
will allocate all our consolidated assets, liabilities, revenue, expenses and
cash flow between the Financial Services Businesses and the Closed Block
Business in order to prepare the supplemental combining financial information
regarding the Businesses, that allocation will not change the legal title to
any assets or responsibility for any liabilities and will not affect the
rights of any of our creditors. Further, holders of the Common Stock will not
have any legal rights related to specific assets of the Financial Services
Businesses. In any liquidation, holders of the Common Stock and Class B Stock
would be entitled to receive a proportionate share of the net assets of
Prudential Financial, Inc. that remains after paying all liabilities and the
liquidation preferences of any preferred stock, such proportion being based on
the average market value per share of Common Stock determined over a specified
trading period ending 60 days after this offering and the issuance price per
share of the Class B Stock. Holders of Common Stock will be common
stockholders of Prudential Financial, Inc., and, as such will be subject to
all risks associated with an investment in Prudential Financial, Inc. and all
of our businesses, assets and liabilities, including the Closed Block
Business. For example, if the cash flow of the Closed Block Business is
insufficient to satisfy its liabilities, the Financial Services Businesses and
the holders of Common Stock would be adversely affected.

If the Closed Block Business runs into financial difficulty, the value of
Common Stock may suffer for reasons having nothing to do with the prospects
for the Financial Services Businesses. Financial results of the Closed Block
Business, including debt service on the IHC debt, will affect Prudential
Financial, Inc.'s consolidated results of operations, financial position and
borrowing costs. Prudential Holdings, LLC'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 Prudential Holdings, LLC
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, Inc. 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, Inc. legally available for
dividends on the Common Stock. Accordingly, you should read financial
information for the Financial Services Businesses together with financial
information for Prudential Financial, Inc. as a whole.

Having two classes of common stock could create potential conflicts of
interest and the Board of Directors could make decisions that adversely affect
holders of Common Stock. Having two classes of common stock could give rise to
occasions when the interests of holders of one class might diverge or appear
to diverge from the interests of holders of the other class. Examples include:

. our decisions as to whether and when to issue shares of Common Stock in
exchange for Class B Stock,

. our decisions as to whether and when to approve dispositions of assets of
either the Financial Services Businesses or the Closed Block Business,
and

. our decisions as to whether to pay dividends on Common Stock and Class B
Stock.

Principles of corporate law may protect decisions of the Board of Directors
that have a disparate impact upon holders of Common Stock and Class B
Stock. To our knowledge New Jersey courts have not considered the duties of a
board of directors to holders of separate classes of common stock. However,
general principles of corporate law involving different treatment of two
classes of common stock, which we believe would apply in New Jersey, provide
that a board of directors has a fiduciary duty to all common stockholders
regardless of class or series. Under these principles and the related
principle known as the "business judgment rule", you may not be able to
challenge decisions that have a disparate impact upon holders of Common Stock
and Class B Stock if the Board of Directors:

. is disinterested and adequately informed with respect to such decisions,
and

. acts in good faith and in the belief that it is acting in the best
interests of Prudential Financial, Inc.'s stockholders.

The Board of Directors has sole discretion to allocate proceeds upon
issuances of Common Stock, or the costs of repurchases of Class B Stock, to
the Financial Services Businesses or the Closed Block Business. Proceeds from
future issuances of Common Stock may not necessarily be allocated to the
equity of the Financial Services Businesses and the costs of repurchases of
Class B Stock may not necessarily be allocated to the equity of the Closed
Block Business. Although this is the present intention, the Board of Directors
retains discretion, subject to its fiduciary duties, whether to allocate the
proceeds of issuances of Common Stock, or the costs of repurchases of Class B
Stock, to the Financial Services Businesses or to the equity of the Closed
Block Business.

Exchanges or conversions of Class B Stock for or into Common Stock may be
disadvantageous to holders of Common Stock. The Class B Stock will be
exchangeable for shares of Common Stock at our discretion (including in
anticipation of a merger or adverse regulatory or accounting treatment of the
separation of the Businesses or the tax treatment of the Class B Stock or IHC
debt) at any time or, mandatorily, in the event of a sale of all or
substantially all of the Closed Block Business or a "change of control" of
Prudential Financial, Inc. Any such exchange will provide for delivery of
shares of Common Stock having an aggregate average market value equal to 120%
of the then appraised "Fair Market Value" of the Class B Stock. In addition,
holders of Class B Stock may in their discretion, commencing in 2016, and in
the event of specified regulatory events at any time, convert their shares of
Class B Stock into shares of Common Stock having an aggregate average market
value equal to 100% of the then appraised Fair Market Value of the Class B
Stock. Any exchange or conversion 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. Accordingly, any such exchange or conversion may be
disadvantageous to holders of the Common Stock. 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 (which is expected to be
less than 1%). 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 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. In particular, in the
event the Closed Block Business performs well but the Financial Services
Businesses and, accordingly, the market value of our Common Stock, do not
perform well, the number of new shares of Common Stock issued upon an exchange
or conversion would increase and, dependent on the foregoing factors, could
increase as a percentage of total outstanding shares of Common Stock. For
discussion of the specific exchange and conversion rights, including the
manner by which the appraised Fair Market Value of the Class B Stock and the
average market value of the Common Stock will be determined for purposes of
exchange or conversion and limitations on the proportionate interest in the
Common Stock which a holder of Class B Stock can obtain upon exchange or
conversion, see "Description of Capital Stock".

Stockholders will not vote on how to allocate consideration received in
connection with a merger among holders of Common Stock and holders of Class B
Stock. Our certificate of incorporation will contain provisions governing how
holders of Class B Stock will be treated in connection with certain mergers,
consolidations or other business combinations involving Prudential Financial,
Inc. See "Description of Capital Stock--Common Stock--Exchange and Conversion
Provisions". Unless otherwise required by law, neither holders of Common Stock
nor holders of Class B Stock will have a separate class vote in any merger,
consolidation or other business combination.

We may dispose of assets of either the Financial Services Businesses or the
Closed Block Business without your approval. New Jersey law requires
stockholder approval only for a sale or other disposition of all or
substantially all of the assets of Prudential Financial, Inc. As long as the
assets attributed to the Financial Services Businesses or the Closed Block
Business represent less than substantially all of Prudential Financial, Inc.'s
assets, we may approve sales and other dispositions of any amount of the
assets of either the Financial Services Businesses or the Closed Block
Business without any stockholder approval. In addition, if we sell all or
substantially all of the assets of the Closed Block Business, we will be
required to exchange all outstanding shares of Class B Stock into shares of
Common Stock at 120% of the appraised Fair Market Value of the Class B Stock.
Because such an exchange of Common Stock for Class B Stock would be at a
premium, and the exchange 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, any such exchange may be disadvantageous to holders of the Common
Stock.

We will not pay dividends equally on Common Stock and Class B Stock. We have
the right to, and expect to, pay dividends on Common Stock or Class B Stock,
or both, in unequal amounts. Dividends declared on either class of stock may
not reflect:

. the performance of either the Financial Services Businesses or the Closed
Block Business,

. the amount of assets available for dividends on either class,

. the amount of prior dividends declared on either class, or

. any other factor.

Furthermore, we may not pay cash dividends on the Common Stock for any
period if we choose 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 on the Class B Stock for that period. For a description
of CB Distributable Cash Flow, see "Description of Capital Stock".

In addition, net losses of the Closed Block Business, and any dividends or
distributions on, or repurchases of, Class B Stock, will reduce the assets of
Prudential Financial, Inc. legally available for dividends on Common Stock.

The Board of Directors may make operational and financial decisions
affecting the Financial Services Businesses and the Closed Block Business
differently. The Board of Directors, in its sole discretion, will make
operational and financial decisions and implement policies that affect the
businesses of the Financial Services Businesses and the Closed Block Business
differently. Examples include:

. any transfers of funds between the Financial Services Businesses and the
Closed Block Business as discussed below,

. the manner of accounting for any transfers of funds between the Financial
Services Businesses and the Closed Block Business,

. allocation of funds for capital expenditures,

. other transactions between the Financial Services Businesses and the
Closed Block Business, and

. the allocation of business opportunities, resources and personnel.

Decisions of the Board of Directors may favor either the Financial Services
Businesses or the Closed Block Business at the expense of the other. For
example, a decision to provide funds for the Closed Block Business may
adversely affect the ability of the Financial Services Businesses to obtain
funds sufficient to implement its growth strategies.

The Board of Directors will have discretion to transfer assets between the
Businesses and to allocate earnings between the Businesses and to make such
transfers or allocations in a manner that is disadvantageous to holders of
Common Stock. While all our assets and liabilities will be allocated between
the Businesses, we will be 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 will retain discretion over accounting policies and the appropriate
allocation of earnings between the two Businesses.

The Board of Directors will adopt certain policies with respect to inter-
business transfers and accounting matters, including allocation of earnings.
For a discussion of these policies, see "Demutualization and Related
Transactions--Related Transactions--Class B Stock and IHC Debt Issuances--
Inter-Business Transfers and Allocation Policies". In the future, the Board of
Directors may modify, rescind or add to any of these policies, although it has
no present intent to do so. However, the decision of the Board of Directors to
modify, rescind or add to any of these policies would be subject to the Board
of Directors' general fiduciary duties. In addition, we have agreed, or expect
to agree, with the investors in the Class B Stock and IHC debt that, in most
instances, these policies may not be changed without their consent. As a
result of the Board of Directors' discretion in these areas, an investment in
the Common Stock is riskier than an investment in the Common Stock if the
Class B Stock were not issued.

With respect to inter-business cash management transfers, the Board of
Directors has discretion to determine, among other things, whether a transfer
of cash from one Business to the other Business will be treated as a revolving
credit advance or a long-term subordinated loan. The determination of the
Board of Directors as to how to account for a cash transfer will affect the
amount of interest expense and interest income reflected in the supplemental
combining financial information of the Financial Services Businesses and the
Closed Block Business. Any inter-business loan established to reflect usage of
Prudential Holdings, LLC's debt service coverage account to pay debt service
on the IHC debt or dividends to Prudential Financial, Inc. would accrete in
principal amount by a fixed percentage per annum. Any such loan would not pay
cash interest and 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
retain the flexibility to lend additional funds from the Financial Services
Businesses to the Closed Block Business for other purposes, including funding
debt service on the IHC debt if the funds in the debt service coverage account
are insufficient.

If the Closed Block Business is unable to repay advances or loans owed to
the Financial Services Businesses, the Financial Services Businesses would be
adversely affected. Also, if the Financial Services Businesses extends an
advance or loan to the Closed Block Business at an interest rate below the
Financial Services Businesses' cost of funds or opportunity cost, the
Financial Services Businesses' results would be adversely affected to the
extent of the difference.

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. Any 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.

Holders of Common Stock will vote together with holders of Class B Stock and
will have limited separate voting rights. The Common Stock and Class B Stock
are separate classes of common stock under the New Jersey Business Corporation
Act. Holders of Common Stock and Class B Stock will vote together as a single
class, except as otherwise required by law and except that the holders of the
Class B Stock will have class voting

or consent rights with respect to specified matters directly affecting the
Class B Stock. Such matters include the selection of the appraisal firm for
determining the Fair Market Value of the Class B Stock for purposes of an
exchange or conversion.

If we issue the Class B Stock and an exchange or conversion of all
outstanding shares of Class B Stock takes place, the separation of the two
Businesses will cease. Upon an exchange or conversion of all Class B Stock for
or into Common Stock as herein described, the separation of the Businesses
would cease and the intended benefits of such separation noted above would
also cease.

Holders of Common Stock and Class B Stock would participate in any
liquidation of Prudential Financial, Inc. based on the relative values of the
Common Stock and Class B Stock determined at the time of the offering, not at
the time of liquidation. In the event of a liquidation, dissolution or
winding-up of Prudential Financial, Inc., holders of Common Stock and holders
of Class B Stock would be entitled to receive a proportionate share of the net
assets of Prudential Financial, Inc. that remain after paying all liabilities
and the liquidation preferences of any preferred stock. This proportion will
be based on the average market value per share of the Common Stock determined
over a specified trading period ending 60 days after this offering and the
issuance price per share of the Class B Stock. Since this proportion is not
determined at the time of liquidation, the proportionate interests of the
holders of Common Stock and Class B Stock in the remaining assets of
Prudential Financial, Inc. will not reflect subsequent growth or decline in
the market value of either the Financial Services Businesses or the Closed
Block Business. Accordingly, holders of Common Stock could be disadvantaged in
any liquidation of Prudential Financial, Inc. if, following the offering, the
Financial Services Businesses achieve disproportionately greater growth in
market value than the Closed Block Business. See "Description of Capital
Stock--Common Stock--Liquidation Rights".

We cannot predict the market price for Common Stock. We cannot predict the
prices at which the Common Stock will trade after the offering. Certain terms
of the Common Stock and Class B Stock may adversely affect the trading price
of Common Stock. These terms include:

. the potential that shares of Class B Stock will be exchanged for or
converted into Common Stock, and

. the discretion of the Board of Directors in making determinations
relating to a variety of cash management and earnings allocation matters.

Having two classes of common stock may inhibit or prevent acquisition bids
for Prudential Financial, Inc. The existence of two classes of common stock
could present complexities and could in certain circumstances pose obstacles,
financial or otherwise, to an acquiring person. The existence of two classes
of common stock could, under certain circumstances, prevent holders of Common
Stock from profiting from an increase in the market value of their shares as a
result of a change in control of Prudential Financial, Inc. by delaying or
preventing such change in control.

Some of the statements contained in this prospectus, including those using
words such as "believes", "expects", "intends", "estimates", "assumes",
"anticipates" and "seeks", are forward-looking statements. These forward-
looking statements involve risks and uncertainties. Actual results may differ
materially from those suggested by the forward-looking statements for various
reasons, including those discussed in this section. In particular, statements
contained in this prospectus regarding our business strategies involve risks
and uncertainties, and we can provide no assurance that we will be able to
execute our strategies effectively or achieve our financial and other
objectives.

As with any common stock investment, the price of our Common Stock may
fluctuate widely depending on many factors, including:

. the perceived prospects of our business in particular and the insurance,
asset management, securities and financial services industries generally;

. differences between our actual financial and operating results and those
expected by investors and analysts;

. changes in analysts' recommendations or projections;

. changes in general economic market conditions; and

. broad market fluctuations.

USE OF PROCEEDS

Based upon an assumed initial public offering price of $30.00 per share, we
estimate that Prudential Financial, Inc. will receive net proceeds from the
offering of $2,562 million, or $2,948 million if the underwriters' options to
purchase additional shares described under "Underwriting" are exercised in
full, after deducting the underwriting discount and estimated offering
expenses payable by us. Prudential Financial, Inc. will use the net proceeds
of the offering, other than proceeds obtained from any exercise of the
underwriter's options to purchase additional shares, to make certain cash
payments to eligible policyholders in the demutualization, and will retain any
remaining net proceeds, which we estimate will be $386 million if the
underwriters' options to purchase additional shares are exercised in full, for
general corporate purposes.

We will satisfy our needs for cash payments in the demutualization from the
net proceeds of this offering as well as any proceeds from other financing
transactions and/or internally generated funds.

In addition to this offering and the private placements of Class B Stock and
the IHC debt, the plan of reorganization governing the demutualization permits
us, subject to any required regulatory approvals, to raise funds for use in
connection with the plan of reorganization prior to, on or within 30 days
after the effective date of the demutualization through one or more of the
following transactions: (i) the offering of public or private debt; (ii) the
offering of preferred stock or other equity securities or options, warrants or
other securities convertible, exchangeable or exercisable for any of the
foregoing; and (iii) bank borrowings. We retain flexibility to raise funds for
general corporate purposes at any time.

DIVIDEND POLICY

Prudential Financial, Inc.'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 $ per share, which will be declared in .
The declaration of dividends is subject to the discretion of Prudential
Financial, Inc.'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,
Inc.'s subsidiaries and such other factors as the Board of Directors may deem
relevant. Dividends payable by Prudential Financial, Inc. are limited to the
amount that would be legally available for payment under New Jersey corporate
law.

If the Class B Stock is issued, the declaration and payment of dividends on
the Common Stock will depend upon the financial condition, results of
operations, cash requirements, future prospects and other factors relating to
the Financial Services Businesses, as well as regulatory restrictions on the
payment of dividends by Prudential Financial, Inc.'s subsidiaries. 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.
Furthermore, dividends on the Common Stock will be limited to the amount that
would be legally available for payment under New Jersey corporate law if the
Financial Services Businesses were treated as a separate corporation
thereunder.

If issued, 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 amount of the CB Distributable Cash Flow for
such year. 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,
Inc. 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. Dividends on the Class B Stock will
depend on the financial condition, results of operations, cash requirements,
future prospects and other factors relating to the Closed Block Business, as
well as regulatory restrictions on the payment of dividends by Prudential
Financial, Inc.'s subsidiaries. Dividends on the Class B Stock will be limited
to the amount that would be legally available for payment under New Jersey
corporate law if the Closed Block Business were treated as a separate
corporation thereunder. 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 The Prudential Insurance Company
of America under specified (but not all) provisions of New Jersey insurance
law.

We currently anticipate that CB Distributable Cash Flow will substantially
exceed the Target Dividend Amount. Subject to the discretion of the Board of
Directors of Prudential Financial, Inc., we currently anticipate paying
dividends on the Class B Stock at the Target Dividend Amount for the
foreseeable future. See "Description of Capital Stock--Common Stock--Exchange
and Conversion Provisions" for a discussion of limited circumstances in which
the Target Dividend Amount may be adjusted.

Prudential Financial, Inc.'s principal sources of revenues to pay dividends
on the Common Stock and, if issued, Class B Stock and meet its obligations
will be dividends from its subsidiaries. There are regulatory limits on the
ability of Prudential Financial, Inc.'s regulated insurance, broker-dealer and
various other subsidiaries to pay dividends or otherwise transfer funds to
Prudential Financial, Inc. See "Risk Factors--Our ability to pay shareholder
dividends may be affected by limitations imposed on The Prudential Insurance
Company of America and our other subsidiaries" and "--Additional risks
relevant to you as holder of our Common Stock if we issue Class B Stock" for
an explanation of the risks that may affect our ability to pay dividends on
the Common Stock.

CAPITALIZATION

The following table sets forth our consolidated short-term debt and
capitalization as of December 31, 2000:

. on an historical basis;

. on a pro forma basis to give effect to the demutualization, as if the
demutualization had occurred on December 31, 2000, and to reflect the
sale of 89.0 million shares of Common Stock in the offering at an assumed
initial public offering price of $30.00 per share, after deduction of the
underwriting discounts and estimated expenses payable by us in the
offering; and

. on a pro forma basis to give effect to the demutualization, this
offering, the issuance of 2.0 million shares of Class B Stock in a
private placement and the issuance of $1,750 million of IHC debt as if
they had occurred on December 31, 2000.

We based the pro forma information for demutualization and the offering on
the assumptions we have made about the number of shares of Common Stock and
the amount of cash and policy credits that will be distributed to eligible
policyholders in the demutualization and the number of shares of Common Stock
that will be issued to investors in this offering. We based the pro forma
information for demutualization, this offering and the issuances of Class B
Stock and IHC debt on assumptions we have made about the demutualization and
this offering as well as assumptions on the issuances of Class B Stock and IHC
debt. We describe these assumptions in "Unaudited Pro Forma Condensed
Consolidated Financial Information". The pro forma information does not give
effect to any other financing transaction that may be consummated at the time
of the demutualization. You should read the following table together with the
audited consolidated financial statements and the information under the
caption "Unaudited Pro Forma Condensed Consolidated Financial Information"
elsewhere in this prospectus.

As of December 31, 2000
-----------------------------------------------------------------------------------
Class B
Initial Public Pro Forma for Stock and
Demutualization Offering Demutualization IHC Debt Consolidated
Historical Adjustments Adjustments and the Offering Adjustments Pro Forma
---------- --------------- -------------- ---------------- ----------- ------------
(in millions, except per share data)

Short-term debt:
Commercial paper....... $ 7,686 $ -- $ -- $ 7,686 $ -- $ 7,686
Notes payable.......... 2,728 -- -- 2,728 -- 2,728
Current portion of
long-term debt........ 717 -- -- 717 -- 717
------- -------- ------ ------- ------ -------
Total short-term
debt................. $11,131 $ -- $ -- $11,131 $ -- $11,131
======= ======== ====== ======= ====== =======
Long-term debt:
Senior debt............ $ 1,514 $ -- $ -- $ 1,514 $ -- $ 1,514
Surplus notes.......... 988 -- -- 988 -- 988
IHC debt............... -- -- -- -- 1,750 1,750
------- -------- ------ ------- ------ -------
Total long-term debt.. 2,502 -- -- 2,502 1,750 4,252
------- -------- ------ ------- ------ -------
Equity:
Preferred stock, par
value $.01 per share;
10 million shares
authorized; no shares
issued and
outstanding........... -- -- -- -- -- --
Common Stock, par value
$.01 per share; 1.5
billion shares
authorized; 543.6
million shares issued
and outstanding for
pro forma............. -- 4 1 5 -- 5
Class B Stock, par
value $.01 per share;
10 million shares
authorized; 2 million
shares issued and
outstanding for pro
forma................. -- -- -- -- 1 1
Capital in excess of
par value............. -- 15,316 2,561 17,877 170 18,047
Accumulated other
comprehensive income.. 234 -- -- 234 -- 234
Retained earnings...... 20,374 (20,374) -- -- -- --
------- -------- ------ ------- ------ -------
Total equity.......... 20,608 (5,054) 2,562 18,116 171 18,287
------- -------- ------ ------- ------ -------
Total capitalization.. $23,110 $ (5,054) $2,562 $20,618 $1,921 $22,539
======= ======== ====== ======= ====== =======

For an allocation of capital between the Financial Services Businesses and
the Closed Block Business, see the supplemental unaudited pro forma condensed
consolidated statement of financial position as of December 31, 2000 appearing
in "Unaudited Pro Forma Condensed Consolidated Financial Information".

SELECTED CONSOLIDATED FINANCIAL AND OTHER INFORMATION

We derived the selected consolidated income statement data and division and
segment operating results for the years ended December 31, 2000, 1999 and 1998
and the selected consolidated balance sheet data as of December 31, 2000 and
1999 from our audited consolidated financial statements included in this
prospectus. We derived the selected consolidated income statement data for the
years ended December 31, 1997 and 1996 and the selected consolidated balance
sheet data as of December 31, 1998, 1997 and 1996 from audited consolidated
financial statements not included in this prospectus.

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
underwriting and institutional fixed income businesses. These businesses
recorded 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
recorded pre-tax losses of $7 million in 2000, $72 million in 1999, $76
million in 1998 and $24 million in 1997. In 1996, we sold substantially all of
our Canadian life insurance operations and policies in force and our Canadian
property and casualty insurer. These divested Canadian businesses generated
pre-tax income of $85 million in 1996, which reflects a $116 million gain on
disposal. In 1996 we sold substantially all of the remaining mortgage
servicing rights from our residential first mortgage banking business that we
had previously sold, which resulted in a pre-tax gain of $229 million. We also
recognized 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.

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", "Unaudited Pro Forma Condensed
Consolidated Financial Information" and our consolidated financial statements
included in this prospectus.

As of or for the Year Ended December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in millions)

Income Statement Data:
Revenues:
Premiums................... $ 10,221 $ 9,528 $ 9,048 $ 9,043 $ 9,999
Policy charges and fee
income.................... 1,639 1,516 1,465 1,423 1,490
Net investment income...... 9,497 9,367 9,454 9,458 9,461
Realized investment gains
(losses), net............. (288) 924 2,641 2,168 1,128
Commissions and other
income.................... 5,475 5,233 4,416 4,381 4,512
-------- -------- -------- -------- --------
Total revenues............ 26,544 26,568 27,024 26,473 26,590
-------- -------- -------- -------- --------
Benefits and expenses:
Policyholders' benefits.... 10,640 10,226 9,786 9,956 11,094
Interest credited to
policyholders' account
balances.................. 1,751 1,811 1,953 2,170 2,251
Dividends to
policyholders............. 2,724 2,571 2,477 2,422 2,339
General and administrative
expenses.................. 10,083 9,530 9,037 8,525 8,241
Capital markets
restructuring............. 476 -- -- -- --
Sales practices remedies
and costs................. -- 100 1,150 2,030 1,125
Demutualization expenses... 143 75 24 -- --
-------- -------- -------- -------- --------
Total benefits and
expenses................. 25,817 24,313 24,427 25,103 25,050
-------- -------- -------- -------- --------
Income from continuing
operations before income
taxes...................... 727 2,255 2,597 1,370 1,540
-------- -------- -------- -------- --------
Income taxes................ 406 1,042 970 407 180
-------- -------- -------- -------- --------
Income from continuing
operations................. 321 1,213 1,627 963 1,360
-------- -------- -------- -------- --------
Discontinued operations:
Loss from healthcare
operations, net of taxes.. -- -- (298) (353) (282)
Gain (loss) on disposal of
healthcare operations, net
of taxes.................. 77 (400) (223) -- --
-------- -------- -------- -------- --------
Net gain (loss) from
discontinued operations,
net of taxes............. 77 (400) (521) (353) (282)
-------- -------- -------- -------- --------
Net income.................. $ 398 $ 813 $ 1,106 $ 610 $ 1,078
======== ======== ======== ======== ========
Division and Segment Data:
Income from continuing
operations before income
taxes(1):
Individual Life Insurance.. $ 108 $ 94 $ 196
Private Client Group....... 237 224 114
Retail Investments......... 233 180 343
Property and Casualty
Insurance................. 166 161 327
-------- -------- --------
Total U.S. Consumer....... 744 659 980
-------- -------- --------
Group Insurance............ 156 143 221
Other Employee Benefits.... 113 342 715
-------- -------- --------
Total Employee Benefits... 269 485 936
-------- -------- --------
International Insurance.... 281 227 153
International Securities
and Investments........... 26 15 13
-------- -------- --------
Total International....... 307 242 166
-------- -------- --------
Investment Management and
Advisory Services......... 155 156 145
Other Asset Management..... 122 97 22
-------- -------- --------
Total Asset Management.... 277 253 167
-------- -------- --------
Corporate and Other........ (1,063) 272 (1,319)
-------- -------- --------
Total--Financial Services
Businesses............... 534 1,911 930
-------- -------- --------
Traditional Participating
Products segment.......... 193 344 1,667
-------- -------- --------
Total..................... $ 727 $ 2,255 $ 2,597
======== ======== ========
Balance Sheet Data:
Total investments excluding
policy loans............... $140,469 $151,338 $148,837 $146,594 $134,123
Separate account assets..... 82,217 82,131 80,931 73,451 62,840
Total assets................ 272,753 285,094 279,422 259,571 228,867
Future policy benefits,
policyholders' account
balances and unpaid claims
and claim adjustment
expenses................... 104,130 102,887 104,301 105,615 105,816
Separate account
liabilities................ 82,217 82,131 80,931 73,451 62,840
Short-term debt............. 11,131 10,858 10,082 6,774 6,562
Long-term debt.............. 2,502 5,513 4,734 4,273 3,760
Total liabilities........... 252,145 265,803 259,027 239,853 210,344
Equity...................... 20,608 19,291 20,395 19,718 18,523
Equity excluding net
unrealized investment
gains and losses on
available-for-sale
securities................ 20,249 19,951 19,123 17,966 17,387

- --------
(1) Prepared in accordance with GAAP. Operating results by division and
segment for periods prior to 1998 are neither readily available nor
practicable to obtain.

In managing our business, we analyze our operating performance by separately
considering our Financial Services Businesses and our Traditional
Participating Products segment. In addition, within the Financial Services
Businesses and the Traditional Participating Products segment we analyze our
operating performance using a non-GAAP measure we call "adjusted operating
income". 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.

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.

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

Year Ended December 31,
--------------------------
2000 1999 1998
-------- ------- -------
(in millions)

Division and Segment Operating Results:
Financial Services Businesses:
Revenues(1):
Individual Life Insurance....................... $ 1,855 $ 1,723 $ 1,674
Private Client Group............................ 2,689 2,509 2,317
Retail Investments.............................. 1,631 1,551 1,532
Property and Casualty Insurance................. 1,840 1,747 1,812
-------- ------- -------
Total U.S. Consumer........................... 8,015 7,530 7,335
-------- ------- -------
Group Insurance................................. 2,801 2,428 2,205
Other Employee Benefits......................... 2,885 3,014 3,258
-------- ------- -------
Total Employee Benefits....................... 5,686 5,442 5,463
-------- ------- -------
International Insurance......................... 1,920 1,522 1,090
International Securities and Investments........ 704 580 532
-------- ------- -------
Total International........................... 2,624 2,102 1,622
-------- ------- -------
Investment Management and Advisory Services..... 874 768 740
Other Asset Management.......................... 470 369 253
-------- ------- -------
Total Asset Management........................ 1,344 1,137 993
-------- ------- -------
Corporate and Other............................. 283 566 313
-------- ------- -------
Total......................................... 17,952 16,777 15,726
-------- ------- -------
Other amounts included in consolidated revenues:
Realized investment gains (losses), net......... (379) 586 944
Revenues from divested businesses............... 269 511 325
-------- ------- -------
Total revenues--Financial Services
Businesses................................... 17,842 17,874 16,995
-------- ------- -------
Traditional Participating Products segment:
Revenues(1)....................................... 8,611 8,356 8,332
Other amounts included in consolidated revenues:
Realized investment gains, net.................. 91 338 1,697
-------- ------- -------
Total revenues--Traditional Participating
Products segment............................. 8,702 8,694 10,029
-------- ------- -------
Total consolidated revenues................... $ 26,544 $26,568 $27,024
======== ======= =======
Financial Services Businesses:
Adjusted operating income(2):
Individual Life Insurance....................... $ 114 $ 117 $ 178
Private Client Group............................ 237 224 114
Retail Investments.............................. 239 174 249
Property and Casualty Insurance................. 150 152 311
-------- ------- -------
Total U.S Consumer............................ 740 667 852
-------- ------- -------
Group Insurance................................. 158 128 98
Other Employee Benefits......................... 229 272 342
-------- ------- -------
Total Employee Benefits....................... 387 400 440
-------- ------- -------
International Insurance......................... 296 218 144
International Securities and Investments........ 26 15 13
-------- ------- -------
Total International........................... 322 233 157
-------- ------- -------
Investment Management and Advisory Services..... 154 155 144
Other Asset Management.......................... 122 97 22
-------- ------- -------
Total Asset Management........................ 276 252 166
-------- ------- -------
Corporate and Other............................. (4) 137 (34)
-------- ------- -------
Total......................................... 1,721 1,689 1,581
-------- ------- -------
Items excluded from adjusted operating income:
Realized investment gains, net of losses and
related charges:
Realized investment gains (losses), net......... (379) 586 944
Related charges(3).............................. (29) (142) (225)
-------- ------- -------
Total realized investment gains, net of losses
and related charges.......................... (408) 444 719
-------- ------- -------
Sales practices remedies and costs.............. -- (100) (1,150)
Divested businesses............................. (636) (47) (196)
Demutualization costs and expenses.............. (143) (75) (24)
-------- ------- -------
Income from continuing operations before income
taxes--Financial Services Businesses............. 534 1,911 930
-------- ------- -------
Traditional Participating Products segment:
Adjusted operating income(2)...................... 547 316 206
Items excluded from adjusted operating income:
Realized investment gains, net of losses and
related charges:
Realized investment gains, net.................. 91 338 1,697
Dividends to policyholders(4)................... (445) (310) (236)
-------- ------- -------
Total realized investment gains, net of losses
and related charges.......................... (354) 28 1,461
-------- ------- -------
Income from continuing operations before income
taxes--Traditional Participating Products
segment.......................................... 193 344 1,667
-------- ------- -------
Consolidated income from continuing operations
before income taxes.............................. $ 727 $ 2,255 $ 2,597
======== ======= =======

- --------
(1) Revenues by segment exclude (i) realized investment gains, net and (ii)
revenues from divested businesses. Revenues for the Traditional
Participating Products segment 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 impacts our reserves for future policy
benefits, our deferred policy acquisition costs, and our policyholder
dividends. We refer to these impacts collectively as the "related
charges". Related charges for the Financial Services Businesses consist of
the following:

Year Ended
December 31,
------------------
2000 1999 1998
---- ----- -----
(in millions)

Due to the planned issuance of the Class B Stock, we have included below
supplemental condensed financial information for the Financial Services
Businesses and the Traditional Participating Products segment. If we issue the
Class B Stock, the Common Stock is expected to reflect the performance of the
Financial Services Businesses only. After the demutualization and if the Class
B Stock is issued, the Financial Services Businesses will then include the
capital presently included in the Traditional Participating Products segment
in excess of the amount necessary to support the Closed Block Business.
Additionally, the minor portion of traditional insurance products historically
included within the Traditional Participating Products segment but which will
not be included in the Closed Block will then be reflected in the Financial
Services Businesses. Accordingly, the results of the Financial Services
Businesses and the Traditional Participating Products segment following the
demutualization and issuance of the Class B Stock will not be comparable to,
and may vary materially from, the results reflected below.

Year Ended
December 31, 2000
------------------------
Traditional
Financial Participating
Services Products
Businesses Segment
---------- -------------
(in millions)

Revenues(1)............................................ $17,952 $8,611
Expenses(2)............................................ 16,231 8,064
------- ------
Adjusted operating income.............................. $ 1,721 $ 547
======= ======

(1) Excludes realized investment gains, net of losses, and revenues from
divested businesses.
(2) Excludes impact of net realized investment gains on deferred acquisition
cost amortization; reserves and dividends to policyholders;
demutualization costs and expenses; and benefits and expenses of divested
businesses.

Other Data:

As of December 31,
--------------------
2000 1999 1998
------ ------ ------
(in billions)

Assets Under Management and Administration (at fair market
value):
Managed by Asset Management division:
Retail customers(1)...................................... $107.4 $108.5 $ 96.5
Institutional customers(2)............................... 95.1 96.8 92.0
General account.......................................... 110.0 107.9 119.8
------ ------ ------
Total proprietary ....................................... 312.5 313.2 308.3
Non-proprietary investment product assets(3).............. 11.0 8.9 7.8
Non-proprietary wrap-fee assets(4)........................ 39.4 35.5 25.2
Other(5).................................................. 8.2 5.7 7.5
------ ------ ------
Total assets under management............................ 371.1 363.3 348.8
Client assets under administration........................ 221.8 232.9 197.7
------ ------ ------
Total assets under management and administration......... $592.9 $596.2 $546.5
====== ====== ======

- --------
(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 funds invested in the non-proprietary options of our
investment products other than wrap-fee products.
(4) Consists of wrap-fee assets gathered by the Private Client Group and
Retail Investments segments.
(5) Consists primarily of general account assets supporting our International
Insurance segment and wind-down Canadian operations.

As of December 31,
----------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------

Employees and Representatives:
Prudential Agents............................ 6,086 7,818 8,868 10,115 12,126
Life Planners................................ 3,495 2,884 2,332 1,908 1,603
Financial Advisors........................... 6,653 6,649 6,584 6,473 6,209
Total employees(1)........................... 56,925 59,530 61,793 60,777 59,824

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

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION

The unaudited pro forma condensed consolidated financial information
presented below gives effect to the demutualization, this offering and the
issuances of the Class B Stock and IHC debt as if they had occurred as of
December 31, 2000 for purposes of the unaudited pro forma condensed
consolidated statement of financial position and as of January 1, 2000 for
purposes of the unaudited pro forma condensed consolidated statement of
operations. We prepared the pro forma information based on the plan of
reorganization and the assumptions set forth below. See "Demutualization and
Related Transactions" for a description of the demutualization, a summary of
the plan of reorganization and the issuances of the Class B Stock and IHC
debt.

The basic assumptions that we used in the pro forma information are as
follows:

. a total of 616.5 million notional shares of Common Stock are allocated to
eligible policyholders under the plan of reorganization; in this
allocation of notional shares we have assumed a price of $30.00 per share
of Common Stock:

. 36.9 million of these notionally allocated shares are not issued to
eligible policyholders who, under the plan of reorganization, are
required to receive payments in the form of policy credits rather than
in shares of Common Stock;

. 11.7 million of these notionally allocated shares are not issued to
eligible policyholders of certain policies that The Prudential
Insurance Company of America transferred to London Life Insurance
Company in connection with the sale of most of its Canadian branch
operations who, under the plan of reorganization, are required to
receive payments in the form of cash;

. 6.3 million of these notionally allocated shares are not issued to
eligible policyholders located outside of the United States who, under
the plan of reorganization, are required to receive payments in the
form of cash;

. 21.6 million of these notionally allocated shares are not issued to
eligible policyholders who, under the plan of reorganization, are
entitled to receive payments in the form of cash, but whom we cannot
locate and for whom a liability therefore is established;

. 85.4 million of these notionally allocated shares are not issued to
eligible policyholders who are allocated 30 or fewer shares and who,
under the plan of reorganization, will receive cash unless the eligible
policyholder affirmatively elects to receive Common Stock. For purposes
of the unaudited pro forma condensed consolidated statement of
financial position, we assume that 20% of policyholders eligible to
elect to receive shares actually elect to receive shares; and

. 454.6 million of these notionally allocated shares are issued to
eligible policyholders under the plan of reorganization;

. 89.0 million shares of Common Stock are sold to investors in this
offering at an assumed initial public offering price of $30.00 per share,
resulting in $2,670 million of gross proceeds, or $2,562 million of net
proceeds;

. the underwriters do not exercise their options to purchase additional
shares of Common Stock in this offering;

. an income tax rate of 41.87% is used to compute the income tax effect of
the pro forma adjustments for the year ended December 31, 2000; and

. the Closed Block is established and operated as described below.

Prudential Financial, Inc. will use the net proceeds of this offering of our
Common Stock to make cash payments to eligible policyholders who will receive
cash and will retain the remaining proceeds, if any, for general corporate
purposes. The pro forma information below does not give effect to any other
financing transaction, other than the issuances of Common Stock and Class B
Stock and IHC debt, that may be consummated at the time of the
demutualization.

We will account for the demutualization using the historical carrying values
of the assets and liabilities of The Prudential Insurance Company of America
including those attributable to the Closed Block. At the time of the
demutualization we are required to establish a Closed Block for the benefit of
holders of certain participating insurance and annuity policies. The
establishment of the Closed Block will have no impact on our consolidated

financial position or results of operations as of the date of demutualization.
Pro forma information for the Closed Block is presented below under "--
Unaudited Pro Forma Closed Block Information". The characteristics of the
major types of invested assets allocated to the Closed Block will be
substantially similar to the general account of The Prudential Insurance
Company of America.

We will determine the amount of cash or policy credits an eligible
policyholder will receive by multiplying the number of notional shares
allocated by the greater of:

. the initial public offering price, or

. an amount equal to the initial public offering price plus, if the average
closing price of the Common Stock for the first 20 days of trading is
greater than 110% of the initial public offering price, such excess above
110%, but not to exceed 10% of the initial public offering price.

For purposes of the pro forma financial statements, we have assumed the
amount of cash or policy credits is determined based upon an initial public
offering price of $30.00 per share.

The plan of reorganization provides that we will make cash payments in lieu
of Common Stock to each eligible policyholder who is allocated 50 or fewer
shares, or some other maximum cut-off number less than 50 that the Board of
Directors of The Prudential Insurance Company of America may specify, unless
the eligible policyholder affirmatively elects to receive shares. For purposes
of the unaudited pro forma condensed consolidated statement of financial
position, we assume that the Board of Directors establishes a cut-off of 30
shares or less. The actual amount of cash payments to eligible policyholders
will depend on the actual initial public offering price per share, the
elections made by eligible policyholders to receive Common Stock instead of
cash and whether the Board of Directors of The Prudential Insurance Company of
America lowers below 50 the cut-off number of shares for which cash payments
will be made in lieu of Common Stock.

In preparing the pro forma information for the issuances of the Class B
Stock and IHC debt, in addition to the assumptions above, we have assumed the
following:

. $175 million of gross proceeds, or $171 million of net proceeds, are
raised from the issuance of the Class B Stock, which are allocated to
the Financial Services Businesses;

. $1,750 million of gross proceeds, or $1,730 million of net proceeds, are
raised from the issuance of the IHC debt by the Closed Block Business,
which are allocated to the Financial Services Businesses; and

. we will not issue the Class B Stock or the IHC debt without issuing the
other.

We will allocate the entire net proceeds from the issuance of the Class B
Stock and the issuance of the IHC debt to our Financial Services Businesses,
which we believe should increase the value of the Financial Services
Businesses. The pro forma information does not reflect earnings on the net
proceeds of the Class B Stock or IHC debt, which would be included in the
Financial Services Businesses. Prudential Holdings, LLC will distribute most
of the net proceeds to Prudential Financial, Inc. for general corporate
purposes. Prudential Holdings, LLC will deposit a minority portion of the net
proceeds of the IHC debt in a debt service coverage account which, together
with reinvested earnings thereon, will constitute a source of payment and
security for the IHC debt. Since such net proceeds and earnings will be
allocated to the Financial Services Businesses, to the extent they are used to
service payments with respect to the IHC debt or to pay dividends to
Prudential Financial, Inc. 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 of issuances of the Class B
Stock and IHC debt will reflect capital in excess of that necessary to support
the Closed Block Business and that the Closed Block Business will have
sufficient assets and cash flows to service the IHC debt. The investors in the
Class B Stock have agreed to this allocation and usage of issuance proceeds.
The Closed Block Business will be financially leveraged through the issuance
of the IHC debt, and dividends on the Class B Stock will be subject to prior
servicing of the IHC debt.

The issuances of the Class B Stock and the IHC debt are not assured and are
not conditions to completion of this offering. If we proceed with this
offering but do not issue any Class B Stock, the Common Stock will reflect the
performance of all our businesses, including the Traditional Participating
Products segment, and we will not achieve the intended benefits of such
issuances.

We based the pro forma information on available information and assumptions
we believe are reasonable. The pro forma information is not necessarily
indicative of our consolidated financial position or results of operations had
the demutualization, this offering and the issuances of the Class B Stock and
IHC debt actually

occurred on the dates assumed, and does not project or forecast our
consolidated financial position or results of operations for any future date
or period.

Per share information within Pro Forma for Demutualization and the Offering
relates to the Common Stock assuming that the Class B Stock is not issued. The
per share information within Pro Forma for Demutualization, the Offering and
Issuances of Class B Stock and IHC Debt under Financial Services Businesses
relates to the Common Stock, while the information under Closed Block Business
relates to the Class B Stock. Income (loss) from continuing operations for the
Common Stock and Class B Stock is determined based on the earnings allocated
to those shares in accordance with their terms and represents the earnings
legally available for the payment of dividends to those shares, respectively.
For a discussion of our policies with respect to inter-business transfers and
accounting matters, including the allocation of earnings, see "Demutualization
and Related Transactions--Related Transactions--Class B Stock and IHC Debt
Issuances--Inter-Business Transfers and Allocation Policies".

If issued, 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 for
regulatory purposes. 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 and Prudential Financial, Inc. 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 The Prudential Insurance Company
of America under specified (but not all) provisions of New Jersey insurance
law. Subject to the discretion of the Board of Directors of Prudential
Financial, Inc., we currently anticipate that CB Distributable Cash Flow will
substantially exceed the Target Dividend Amount.

If the Class B Stock is issued, in the event of a liquidation, dissolution
or winding-up of Prudential Financial, Inc., holders of Common Stock and
holders of Class B Stock would be entitled to receive a proportionate share of
the net assets of Prudential Financial, Inc. that remains after paying all
liabilities and the liquidation preferences of any preferred stock, such
proportion being based on the market value per share of the Common Stock
determined over a specified trading period ending 60 days after this offering
and the issuance price per share of the Class B Stock. Assuming the Common
Stock were to have an average market value during the foregoing period of $30
per share, each share of Common Stock would have one liquidation unit and each
share of Class B Stock would have 2.91667 liquidation units (i.e., the $87.50
issuance price of the Class B Stock divided by $30). Since the number of
liquidation units of the Common Stock and Class B Stock is not determined at
the time of liquidation, the proportionate interests of the holders of Common
Stock and Class B Stock in the remaining assets of Prudential Financial, Inc.
in any liquidation will not reflect subsequent growth or decline in the equity
or market value of either the Financial Services Businesses or the Closed
Block Business. Accordingly, future changes in total attributed equity for the
Financial Services Businesses and the Closed Block Business presented
according to generally accepted accounting principles will not impact the
proportion of liquidation units afforded the Common Stock and the Class B
Stock.

You should read the pro forma information together with the consolidated
financial statements included in this prospectus and with the information
under "Demutualization and Related Transactions", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business".

Unaudited Pro Forma Condensed Consolidated Statement of Financial Position as
of December 31, 2000

Initial Public Pro Forma for Issuances of Class B
Demutualization Pro Forma for Offering Demutualization Stock and IHC Consolidated
Historical Adjustments Demutualization Adjustments and the Offering Debt Adjustments Pro Forma
---------- --------------- --------------- -------------- ---------------- -------------------- ------------
(in millions)

ASSETS
Total
investments..... $148,515 $ -- $148,515 $ -- $148,515 $ -- $148,515
Cash and cash
equivalents..... 7,676 (2,562)(E) 4,574 2,562(A) 7,136 171 (L) 9,037
(351)(C) 1,730 (M)
(189)(D)
Deferred policy
acquisition
costs........... 7,063 -- 7,063 -- 7,063 -- 7,063
Other assets..... 27,282 -- 27,282 -- 27,282 20 (M) 27,302
Separate account
assets.......... 82,217 -- 82,217 -- 82,217 -- 82,217
-------- -------- -------- ------ -------- ------ --------
TOTAL ASSETS...... $272,753 $ (3,102) $269,651 $2,562 $272,213 $1,921 $274,134
======== ======== ======== ====== ======== ====== ========
LIABILITIES AND
EQUITY
LIABILITIES
Future policy
benefits........ $ 69,288 $ 1,107 (F) $ 70,395 $ -- $ 70,395 $ -- $ 70,395
Policyholders'
account
balances........ 32,722 -- 32,722 -- 32,722 -- 32,722
Unpaid claims and
claim adjustment
expenses and
policyholders'
dividends....... 3,583 -- 3,583 -- 3,583 -- 3,583
Securities sold
under agreements
to repurchase... 15,010 -- 15,010 -- 15,010 -- 15,010
Short-term and
long-term debt.. 13,633 -- 13,633 -- 13,633 1,750 (M) 15,383
Other
liabilities..... 35,692 648 (G) 36,537 -- 36,537 -- 36,537
197 (H)
Separate account
liabilities..... 82,217 -- 82,217 -- 82,217 -- 82,217
-------- -------- -------- ------ -------- ------ --------
Total
liabilities.... 252,145 1,952 254,097 -- 254,097 1,750 255,847
-------- -------- -------- ------ -------- ------ --------
COMMITMENTS AND
CONTINGENCIES

EQUITY
Common Stock..... -- 4 (I) 4 1(A) 5 -- 5
Class B Stock.... -- -- -- -- -- 1 (L) 1
Additional paid-
in capital ..... -- 15,316 (I) 15,316 2,561(A) 17,877 170 (L) 18,047
Accumulated other
comprehensive
income.......... 234 -- 234 -- 234 -- 234
Retained
earnings........ 20,374 (20,374)(I) -- -- -- -- --
-------- -------- -------- ------ -------- ------ --------
Total equity.... 20,608 (5,054) 15,554 2,562 18,116 171 18,287
-------- -------- -------- ------ -------- ------ --------
TOTAL LIABILITIES
AND EQUITY....... $272,753 $ (3,102) $269,651 $2,562 $272,213 $1,921 $274,134
======== ======== ======== ====== ======== ====== ========

The accompanying Notes are an integral part of this Unaudited Pro Forma
Condensed Consolidated Statement of Financial Position

Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year
Ended December 31, 2000

Issuances
of Class B
Initial Public Pro Forma for Stock and IHC
Demutualization Pro Forma for Offering Demutualization Debt Consolidated
Historical Adjustments Demutualization Adjustments and the Offering Adjustments Pro Forma
---------- --------------- --------------- -------------- ---------------- ------------- ------------
(in millions, except per share information)

REVENUES
Premiums........... $10,221 $ -- $10,221 $ -- $10,221 $ -- $10,221
Policy charges and
fee income........ 1,639 -- 1,639 -- 1,639 -- 1,639
Net investment
income............ 9,497 (42)(J) 9,455 -- 9,455 -- 9,455
Realized investment
gains (losses),
net............... (288) -- (288) -- (288) -- (288)
Commissions and
other income...... 5,475 -- 5,475 -- 5,475 -- 5,475
------- ----- ------- ----- ----------- ----- -----------
Total revenues..... 26,544 (42) 26,502 -- 26,502 -- 26,502
------- ----- ------- ----- ----------- ----- -----------
BENEFITS AND
EXPENSES
Policyholders'
benefits.......... 10,640 -- 10,640 -- 10,640 -- 10,640
Interest credited
to policyholders'
account balances.. 1,751 -- 1,751 -- 1,751 -- 1,751
Dividends to
policyholders..... 2,724 -- 2,724 -- 2,724 -- 2,724
General and
administrative
expenses.......... 10,083 -- 10,083 -- 10,083 137 (M) 10,220
Capital markets
restructuring..... 476 -- 476 -- 476 -- 476
Demutualization
expenses.......... 143 -- 143 -- 143 -- 143
------- ----- ------- ----- ----------- ----- -----------
Total benefits and
expenses.......... 25,817 -- 25,817 -- 25,817 137 25,954
------- ----- ------- ----- ----------- ----- -----------
INCOME FROM
CONTINUING
OPERATIONS BEFORE
INCOME TAXES....... 727 (42) 685 -- 685 (137) 548
------- ----- ------- ----- ----------- ----- -----------
Income taxes ...... 406 (100)(K) 288 -- 288 (57)(M) 231
(18)(J)
------- ----- ------- ----- ----------- ----- -----------
INCOME FROM
CONTINUING
OPERATIONS......... $ 321 $ 76 $ 397 $ -- $ 397 $ (80) $ 317
======= ===== ======= ===== =========== ===== ===========
EARNINGS PER SHARE
INFORMATION
Common Stock:
Shares used in the
calculation of
basic and diluted
income per share
(B)............... 543,600,000 543,600,000
----------- -----------
Basic and diluted
income from
continuing
operations per
share............. $ 0.73 $ 0.87 (1)
----------- -----------
Class B Stock:
Shares used in the
calculation of
basic and diluted
loss per share
(L)............... 2,000,000
-----------
Basic and diluted
loss from
continuing
operations per
share............. $ (79.00)(1)
-----------

- -------

(1) In the calculation of earnings per share, income/(loss) from continuing
operations applicable to the Common Stock was $475 million and applicable
to the Class B Stock was $(158) million.

The accompanying Notes are an integral part of this Unaudited Pro Forma
Condensed Consolidated Statement of Operations

If we issue the Class B Stock and IHC debt, the consolidated financial
statements will contain supplemental consolidating financial information
separately reporting the financial position and results of operations of the
Financial Services Businesses and the Closed Block Business. Presented below
is supplemental unaudited pro forma condensed consolidated financial
information which gives effect to the separate allocation of results to the
Financial Services Businesses and the Closed Block Business. Historical
results of the Financial Services Businesses and the Closed Block Business are
presented within the Supplemental Combining Financial Information within the
consolidated financial statements of The Prudential Insurance Company of
America. The supplemental unaudited pro forma condensed consolidated financial
information presented below gives effect to the demutualization, this offering
of our Common Stock and the issuances of Class B Stock and IHC debt as if they
had occurred as of December 31, 2000 for purposes of the unaudited pro forma
condensed consolidated statement of financial position and as of January 1,
2000 for purposes of the unaudited pro forma condensed consolidated statement
of operations. We prepared the supplemental pro forma information based on the
plan of reorganization and the assumptions set forth above.

Unaudited Pro Forma Condensed Consolidated Statement of Financial Position as
of December 31, 2000

Financial Services Businesses Closed Block Business
--------------------------------------------------- ------------------------------------------------
Pro Forma for Historical Pro Forma for
Demutualization, Traditional Demutualization,
the Offering and Participating the Offering and
Issuances of Class B Products Issuances of Class B
Historical Adjustments Stock and IHC Debt Segment Adjustments Stock and IHC Debt
---------- ----------- -------------------- ------------- ----------- --------------------
(in millions)

ASSETS
Total
investments.... $ 86,242 $ 5,018 (N) $ 91,260 $62,273 $(5,018)(N) $57,255
Cash and cash
equivalents.... 5,165 1,157 (N) 7,683 2,511 (1,157)(N) 1,354
(540)(A,C,D,E)
1,901 (O)
Deferred policy
acquisition
costs.......... 5,389 -- 5,389 1,674 -- 1,674
Other assets.... 23,813 1,665 (N) 25,478 3,469 (1,665)(N) 1,824
20 (M)
Separate account
assets......... 82,217 -- 82,217 -- -- --
-------- ------- -------- ------- ------- -------
TOTAL ASSETS..... $202,826 $ 9,201 $212,027 $69,927 $(7,820) $62,107
======== ======= ======== ======= ======= =======
LIABILITIES AND
ATTRIBUTED
EQUITY
LIABILITIES
Future policy
benefits....... $ 23,274 $ 200 (N) $ 24,581 $46,014 $ (200)(N) $45,814
1,107 (F)
Policyholders'
account
balances....... 27,320 135 (N) 27,455 5,402 (135)(N) 5,267
Unpaid claims
and claim
adjustment
expenses and
policyholders'
dividends...... 2,342 -- 2,342 1,241 -- 1,241
Securities sold
under
agreements to
repurchase..... 11,162 380 (N) 11,542 3,848 (380)(N) 3,468
Short-term and
long-term
debt........... 12,369 967 (N) 13,336 1,264 (967)(N) 2,047
1,750 (M)
Other
liabilities.... 30,401 1,976 (N) 33,222 5,291 (1,976)(N) 3,315
845 (G,H)
Separate account
liabilities.... 82,217 -- 82,217 -- -- --
-------- ------- -------- ------- ------- -------
Total
liabilities.... 189,085 5,610 194,695 63,060 (1,908) 61,152
-------- ------- -------- ------- ------- -------
COMMITMENTS AND
CONTINGENCIES
ATTRIBUTED EQUITY
Common Stock..... -- 5 (A,P) 5 -- -- --
Class B Stock.... -- -- -- -- 1 (L) 1
Accumulated other
comprehensive
income/(loss)... 497 (254)(N) 243 (263) 254 (N) (9)
Other attributed
equity.......... 13,244 4,436 (N) 17,084 7,130 (4,436)(N) 963
2,561 (A) 170 (L)
(5,058)(P) (1,901)(O)
1,901 (O)
-------- ------- -------- ------- ------- -------
Total attributed
equity......... 13,741 3,591 17,332 6,867 (5,912) 955
-------- ------- -------- ------- ------- -------
TOTAL LIABILITIES
AND ATTRIBUTED
EQUITY.......... $202,826 $ 9,201 $212,027 $69,927 $(7,820) $62,107
======== ======= ======== ======= ======= =======

Consolidated
Pro Forma
------------

ASSETS
Total
investments.... $148,515
Cash and cash
equivalents.... 9,037
Deferred policy
acquisition
costs.......... 7,063
Other assets.... 27,302
Separate account
assets......... 82,217
------------
TOTAL ASSETS..... $274,134
============
LIABILITIES AND
ATTRIBUTED
EQUITY
LIABILITIES
Future policy
benefits....... $ 70,395
Policyholders'
account
balances....... 32,722
Unpaid claims
and claim
adjustment
expenses and
policyholders'
dividends...... 3,583
Securities sold
under
agreements to
repurchase..... 15,010
Short-term and
long-term
debt........... 15,383
Other
liabilities.... 36,537
Separate account
liabilities.... 82,217
------------
Total
liabilities.... 255,847
------------
COMMITMENTS AND
CONTINGENCIES
ATTRIBUTED EQUITY
Common Stock..... 5
Class B Stock.... 1
Accumulated other
comprehensive
income/(loss)... 234
Other attributed
equity.......... 18,047
------------
Total attributed
equity......... 18,287
------------
TOTAL LIABILITIES
AND ATTRIBUTED
EQUITY.......... $274,134
============

The accompanying Notes are an integral part of this Unaudited Pro Forma
Condensed Consolidated Statement of Financial Position

Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year
Ended December 31, 2000

Financial Services Businesses Closed Block Business
---------------------------------------- -------------------------------------------
Pro Forma for Pro Forma for
Demutualization, Historical Demutualization,
the Offering and Traditional the Offering and
Issuances of Participating Issuances of
Class B Stock Products Class B Stock Consolidated
Historical Adjustments and IHC Debt Segment Adjustments and IHC Debt Pro Forma
---------- ----------- ---------------- ------------- ----------- ---------------- ------------
(in millions, except per share information)

REVENUES
Premiums........... $ 5,901 $ 12 (N) $ 5,913 $4,320 $ (12)(N) $ 4,308 $ 10,221
Policy charges and
fee income........ 1,639 -- 1,639 -- -- -- 1,639
Net investment
income............ 5,325 342 (N) 5,625 4,172 (342)(N) 3,830 9,455
(42)(J)
Realized investment
gains (losses),
net............... (379) 111 (N) (268) 91 (111)(N) (20) (288)
Commissions and
other income...... 5,356 42 (N) 5,398 119 (42)(N) 77 5,475
------- ---- ------------ ------ ----- --------- ------------
Total revenues..... 17,842 465 18,307 8,702 (507) 8,195 26,502
------- ---- ------------ ------ ----- --------- ------------
BENEFITS AND
EXPENSES
Policyholders'
benefits.......... 6,157 21 (N) 6,178 4,483 (21)(N) 4,462 10,640
Interest credited
to policyholders'
account balances.. 1,618 -- 1,618 133 -- 133 1,751
Dividends to
policyholders..... 18 -- 18 2,706 -- 2,706 2,724
General and
administrative
expenses.......... 8,896 152 (N) 9,048 1,187 (152)(N) 1,172 10,220
137 (M)
Capital markets
restructuring..... 476 -- 476 -- -- -- 476
Demutualization
expenses.......... 143 -- 143 -- -- -- 143
------- ---- ------------ ------ ----- --------- ------------
Total benefits and
expenses.......... 17,308 173 17,481 8,509 (36) 8,473 25,954
------- ---- ------------ ------ ----- --------- ------------
INCOME / (LOSS) FROM
CONTINUING
OPERATIONS BEFORE
INCOME TAXES....... 534 292 826 193 (471) (278) 548
------- ---- ------------ ------ ----- --------- ------------
Income taxes....... 300 183 (N) 351 106 (183)(N) (120) 231
(114)(K) 14 (K)
(18)(J) (57)(M)
------- ---- ------------ ------ ----- --------- ------------
INCOME / (LOSS) FROM
CONTINUING
OPERATIONS......... $ 234 $241 $ 475 $ 87 $(245) $ (158) $ 317
======= ==== ============ ====== ===== ========= ============
EARNINGS PER SHARE
INFORMATION
Common Stock:
Shares used in the
calculation of
basic and diluted
income per share
(B)............... 543,600,000 543,600,000
------------ ------------
Basic and diluted
income from
continuing
operations per
share ............ $ 0.87 $ 0.87
------------ ------------
Class B Stock:
Shares used in the
calculation of
basic and diluted
loss per
share (L)......... 2,000,000 2,000,000
--------- ------------
Basic and diluted
loss from
continuing
operations per
share............. $ (79.00) $ (79.00)
--------- ------------

The accompanying Notes are an integral part of this Unaudited Pro Forma
Condensed Consolidated Statement of Operations

Notes to Unaudited Pro Forma Financial Information

Demutualization and Initial Public Offering Adjustments

The following adjustments reflect the pro forma effects of the
demutualization and the offering on the pro forma condensed consolidated
statement of financial position and pro forma condensed consolidated statement
of operations:

(A) The pro forma financial statements assume net proceeds of $2,562 million
from the initial public offering, resulting from gross proceeds of $2,670
million from the issuance of 89,000,000 shares of $.01 par value Common
Stock at an assumed initial public offering price of $30.00 per share,
less an assumed underwriting discount and estimated offering expenses
aggregating $108 million.

(B) The number of shares of Common Stock used in the calculation of the pro
forma basic and diluted income per share, assuming that 20% of
policyholders eligible to elect to receive shares actually elect to
receive shares, is as follows:

Shares notionally allocated to eligible policyholders......... 616,500,000
Less:
Shares notionally allocated to eligible policyholders who
receive cash or policy credits............................ 140,300,000
Shares notionally allocated to eligible policyholders whom
we cannot locate.......................................... 21,600,000
-----------
Shares issued to eligible policyholders....................... 454,600,000
-----------
Plus:
Shares issued in the initial public offering............... 89,000,000
-----------
Total shares of Common Stock outstanding after the initial
public offering.............................................. 543,600,000
===========

The pro forma financial information assumes that we use the net proceeds
of the offering to fund cash payments to those eligible policyholders
receiving cash who, although eligible to affirmatively elect to receive
Common Stock, do not so elect. If we issue more than 89,000,000 shares of
Common Stock (including, but not limited to, any shares issued pursuant to
the underwriters' options to purchase additional shares) and the
additional net proceeds are not used to fund payments to policyholders
receiving cash, then the pro forma basic and diluted income per share
would decline.

(C) Assuming an initial public offering price of $30.00 per share, we expect
to pay $351 million to holders of certain policies that The Prudential
Insurance Company of America transferred to London Life Insurance Company
in connection with the sale of most of its Canadian branch operations in
lieu of 11,700,000 notionally allocated shares of Common Stock. See
"Demutualization and Related Transactions--The Demutualization--Allocation
and Payment of Compensation to Eligible Policyholders".

These payments have been reflected as a reduction in cash and retained
earnings in the unaudited pro forma condensed consolidated statement of
financial position. The cash payments to certain former Canadian branch
policyholders will be recorded as an expense at the time of the
demutualization but have not been reflected within the pro forma statement
of operations as they will not have a continuing impact.

(D) Represents the cash payment in lieu of 6,300,000 notionally allocated
shares of Common Stock not issued to eligible policyholders located
outside of the United States who, under the plan of reorganization, are
required to receive payments in the form of cash, at an assumed price of
$30.00 per share.

(E) Represents the cash payment in lieu of 85,400,000 notionally allocated
shares of Common Stock not issued to eligible policyholders who, under the
plan of reorganization, will receive cash, at an assumed price of $30.00
per share, unless the eligible policyholder affirmatively elects to
receive Common Stock. For purposes of the unaudited pro forma condensed
consolidated statement of financial position, we assume, based upon common
stock election experience in recent demutualizations, that 20% of
policyholders eligible to elect to receive shares actually elect to
receive shares. If 100% of policyholders eligible to elect to receive
shares actually elect to receive shares, the number of shares to be issued
in the initial public offering would be decreased by the same number of
shares allocated to policyholders electing to receive shares. As a result,

based on the assumptions herein, there would be no impact on the pro forma
earnings per share if 100% of the policyholders eligible to elect to
receive shares actually elect to receive shares.

(F) Represents a liability of the Financial Services Businesses established to
fund policy credits in lieu of the distribution of 36,900,000 notionally
allocated shares of Common Stock.

(G) Represents a liability of the Financial Services Businesses of $648
million, to be settled through a cash payment, established to reflect
policyholders whom we cannot locate in lieu of the distribution of
21,600,000 notionally allocated shares of Common Stock. This liability
will be paid to policyholders as they are located. To the extent we are
unable to locate a policyholder within a prescribed period of time,
generally up to seven years, we will make a cash payment to the state of
the policyholder's last known address in accordance with that state's
escheat laws.

(H) Reflects estimated additional non-recurring expenses of $197 million, net
of tax benefit of $26 million, related to demutualization costs and
expenses assumed to be incurred at the date of the pro forma statement of
financial position. We have shown the additional non-recurring expenses as
the establishment of a liability and a decrease to retained earnings
within the pro forma statement of financial position. The additional non-
recurring expenses have not been reflected within the pro forma statement
of operations as they will not have a continuing impact.

In addition, subsequent to the demutualization we will incur additional
expenses associated with servicing our stockholder base, including mailing
and printing fees. These costs are expected to range from $30 million to
$80 million annually, depending on the number of shareholders, and will
decrease in future periods if there is a decrease in the number of
shareholders. As these expenses are not directly related to the
transaction, they have not been reflected within the pro forma condensed
consolidated statement of operations.

(I) Represents the reclassification of retained earnings of The Prudential
Insurance Company of America to reflect the demutualization, as follows:

Assuming 100% Assuming 120%
of Initial of Initial
Public Public
Offering Offering
Price Price
------------- -------------
(in millions)

Historical retained earnings................... $20,374 $20,374
Less:
Payment of cash in lieu of Common Stock to
former Canadian branch policyholders
(Note C)................................... 351 386
Payment of cash in lieu of Common Stock to
eligible policyholders located outside of
the United States (Note D)................. 189 208
Payment of cash in lieu of Common Stock
(Note E)................................... 2,562 2,818
Provision for policy credits in lieu of
Common Stock (Note F)...................... 1,107 1,218
Establishment of a liability for
policyholders whom we cannot locate (Note
G)......................................... 648 713
Additional demutualization expenses (net of
tax benefit of $26 million) (Note H)....... 197 197
------- -------
Retained earnings related to eligible
policyholders receiving Common Stock and
reclassified to Common Stock ($4 million) and
additional paid-in capital ($15,316 and
$14,830 million, respectively)................ $15,320 $14,834
======= =======

We will determine the amount of cash or policy credits an eligible
policyholder receives by multiplying the number of notional shares
allocated to the policyholder by the greater of:

.the initial public offering price; or

. an amount equal to the initial public offering price plus, if the
average closing price of the Common Stock for the first 20 days of
trading is greater than 110% of the initial public offering price,
such excess above 110%, but not to exceed 10% of the initial public
offering price.

The pro forma financial statements have assumed that the amount of cash or
policy credits is determined based upon 100% of the assumed initial public
offering price, or $30.00 per share. We have also presented above the
impact on the amount of cash, liability for policyholders whom we cannot
locate and policy credits, if the average closing price for the first 20
days is equal to or greater than 120% of the initial public offering price
and cash and policy credits are determined based upon a share price of
110% of the assumed initial public offering price, or $33.00 per share.

(J) Represents the decrease in net investment income of $42 million, and a
related tax benefit of $18 million, on the assets to be paid to former
Canadian branch policyholders and to eligible policyholders located
outside the United States. The decrease in net investment income assumes a
rate of return on those assets of 7.8%.

(K) Represents the elimination of the equity tax, a federal tax applicable to
mutual life insurance companies. The Prudential Insurance Company of
America will no longer be subject to the equity tax after the effective
date of the plan of reorganization.

Issuances of Class B Stock and IHC Debt Adjustments

The following adjustments reflect the pro forma effects of the issuances of
Class B Stock and IHC debt on the pro forma condensed consolidated statement
of financial position and pro forma condensed consolidated statement of
operations.

(L) Represents gross proceeds of $175 million from the issuance of 2,000,000
shares of $.01 par value Class B Stock at an issuance price of $87.50 per
share, less an assumed placement agent discount and estimated offering
expenses aggregating $4 million. Net proceeds from the issuance of the
Class B Stock are attributed to the Financial Services Businesses.

(M) Represents proceeds from the issuance of the IHC debt at an estimated
annual interest rate of 7.8%, which includes expenses of 0.75% related to
insurance we expect to purchase to insure timely payment of IHC debt
principal and interest. The pro forma statement of operations for the year
ended December 31, 2000 reflects interest expense on the debt of $137
million, and a related tax benefit of $57 million.

A one-eighth percentage point change in the interest rate assumed of 7.8%
would result in a change in the amount of interest expense of $2.2 million
($1.3 million net of related tax benefit) for the year ended December 31,
2000.

The pro forma statement of financial position also reflects debt issuance
costs estimated to be $20 million to be deferred and amortized over the
life of the debt of 22 years. Amortization of these costs, to be included
within general and administrative expenses within the statement of
operations, has not been reflected within the pro forma statement of
operations for the year ended December 31, 2000, as the amount is less than
$1 million per year.

Net proceeds of the issuance of the IHC debt of $1,730 million are
allocated to the Financial Services Businesses.

(N) The amounts within the historical column of these pro forma financial
statements for the Closed Block Business include the historical results of
the Traditional Participating Products segment. In order to establish the
Closed Block Business, it is necessary to remove certain items from the
Traditional Participating Products segment which are not components of the
Closed Block Business. After removal of these items, the Closed Block
Business will consist of assets, liabilities, attributed equity and
related revenues and expenses necessary for the funding of expenses, taxes
and guaranteed benefits and policyholder dividends of the Closed Block, as
well as assets, liabilities and related revenues and expenses supporting
the IHC debt service and dividends on the Class B Stock.

The items to be transferred from the Traditional Participating Products
segment to the Financial Services Businesses as part of the establishment
of the Closed Block Business consist primarily of net assets historically
included in the Traditional Participating Products segment that are in
excess of the amount necessary to support the operations of the Closed
Block Business, which will be reflected in the Financial Services
Businesses along with the earnings on these net assets. Additionally,
assets, liabilities, attributed equity, revenues and expenses associated
with the minor portion of traditional insurance products historically
included in the Traditional Participating Products segment but which will
not be included in the Closed Block, will be reflected in the Financial
Services Businesses.

(O) Represents the allocation of the net proceeds of the Class B Stock and the
IHC debt to the Financial Services Businesses, as follows:

(in millions)

Net proceeds of issuance of the Class B Stock.............. $ 171
Net proceeds of issuance of the IHC debt................... 1,730
------
Total proceeds transferred to the Financial Services
Businesses................................................ $1,901
======

(P) Represents the reclassification and distribution of attributed equity of
the Financial Services Businesses to reflect the demutualization, as
follows:

(in millions)
-------------

Payment of cash in lieu of Common Stock.................... $3,102
Provision for policy credits in lieu of Common Stock....... 1,107
Establishment of a liability for policyholders whom we
cannot locate............................................. 648
Additional demutualization costs and expenses (net of
income tax benefit of $26 million)........................ 197
Reclassification of amount to par value of Common Stock.... 4
------
$5,058
======

At the time, or within 30 days, of demutualization, The Prudential Insurance
Company of America expects to pay an extraordinary dividend to Prudential
Financial, Inc., in addition to the destacking, for use in the Financial
Services Businesses. The result of the extraordinary dividend and the
allocation of the net proceeds from the IHC debt in Note (O) is a transfer of
such dividend and such net proceeds, less amounts retained in the debt service
coverage account as security for the IHC debt, from The Prudential Insurance
Company of America or Prudential Holdings, LLC, a newly-formed intermediate
holding company, to Prudential Financial, Inc., as follows:

(in millions)

Extraordinary dividend........................................ $ 360
Proceeds of issuance of the IHC debt.......................... 1,298
------
Amount transferred to Prudential Financial, Inc. ........... $1,658
======

Unaudited Pro Forma Closed Block Information

Under the plan of reorganization, The Prudential Insurance Company of
America will establish a Closed Block for certain individual life insurance
policies and annuities issued by The Prudential Insurance Company of America.
The policies that we will include in the Closed Block are specified individual
life insurance policies and individual annuity contracts that are in force on
the effective date of the reorganization and on which we are currently paying
or expect 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 policies included in the
Closed Block. The establishment of the Closed Block, including the Closed
Block Assets and Closed Block Liabilities, is subject to the review and
approval of the New Jersey Department of Banking and Insurance. The Closed
Block will continue in effect until the date none of the included policies is
in force unless the Commissioner of the New Jersey Department of Banking and
Insurance consents to an earlier termination.

Presented below is pro forma financial information for the Closed Block
Assets and Closed Block Liabilities as of December 31, 2000, as well as Closed
Block revenues, benefits and expenses for the year ended December 31, 2000.
This pro forma information gives effect to the establishment of the Closed
Block as if it occurred as of December 31, 2000 for the pro forma Closed Block
Assets and Closed Block Liabilities and as of January 1, 2000 for the pro
forma Closed Block Revenues, Benefits and Expenses. The Closed Block Assets
and Closed Block Liabilities, as well as the Surplus and Related Assets
outside the Closed Block, are reflected in our Traditional Participating
Products segment. We are generally prohibited from distributing Closed Block
Assets to our stockholders and from using Closed Block Assets for any purpose
other than to fund Closed Block Liabilities.

As of
December 31, 2000
Closed Block Assets and Closed Block Liabilities -----------------
(in millions)

Closed Block Liabilities:
Future policy benefits..................................... $45,814
Policyholders' dividends payable........................... 1,241
Policyholders' account balances............................ 5,267
Other Closed Block liabilities............................. 7,080
-------
Total Closed Block Liabilities........................... 59,402
-------
Closed Block Assets:
Total investments.......................................... 53,582
Cash....................................................... 1,354
Accrued investment income.................................. 760
Other Closed Block assets.................................. 418
-------
Total Closed Block Assets................................ 56,114
-------
Excess of reported Closed Block Liabilities over Closed
Block Assets............................................... 3,288
Portion of above representing other comprehensive loss...... (717)
-------
Maximum future earnings to be recognized from Closed Block
Assets and Closed Block Liabilities(1)..................... $ 2,571
=======

Year Ended
December 31, 2000
Closed Block Revenues, Benefits and Expenses -----------------
(in millions)

Revenues:
Premiums.................................................... $4,308
Net investment income....................................... 3,558
Realized investment losses, net............................. (20)
Other income................................................ 77
------
Total Closed Block revenues............................... 7,923
------
Benefits and Expenses:
Policyholders' benefits..................................... 4,462
Interest credited to policyholders.......................... 133
Dividends to policyholders.................................. 2,706
General & administrative expense charge..................... 856
------
Total Closed Block benefits and expenses.................. 8,157
------
Closed Block benefits and expenses, net of Closed Block
revenues, before income taxes.............................. (234)
------
Income Tax Benefit........................................... 109
------
Closed Block benefits and expenses, net of Closed Block
revenues and income taxes................................... $ (125)
======

- --------
(1) Component of future earnings to be recognized for the Traditional
Participating Products segment, which will also include earnings from
other assets and equity outside the Closed Block.

The Closed Block will have an excess of Closed Block Liabilities over Closed
Block Assets. The Closed Block Business will include additional assets and
liabilities not included within the Closed Block which, we believe, will
result in sufficient capital to support the Closed Block Business and adequate
assets and cash flows to service the IHC debt. For a description of the Closed
Block Business assets and liabilities, see "Unaudited Pro Forma Condensed
Consolidated Information" and "Demutualization and Related Transactions--
Related Transactions--Class B Stock and IHC Debt Issuances".

The Closed Block will reflect those revenues, benefit payments, policyholder
dividends, expenses and taxes that we considered in funding the Closed Block.
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 such expenses vary in the future from those established
pursuant to formula, the variance (positive or negative) will inure to the
financial results of our Financial Services Businesses.

We will record the assets and liabilities that we allocate to the Closed
Block in our consolidated financial statements at their historical carrying
amount, which is on the same basis as similar other assets and liabilities.
The carrying amount of the Closed Block Assets will be less than the carrying
amount of the Closed Block Liabilities at the effective date of the
demutualization. The excess of the carrying amount of Closed Block

Liabilities over the carrying amount of Closed Block Assets at the effective
date, adjusted to eliminate the impact of related amounts in accumulated other
comprehensive income, represents the maximum future earnings from the assets
and liabilities designated to the Closed Block that we can recognize in our
consolidated net income over the period the policies in the Closed Block
remain in force. As indicated above, these earnings will be included in our
Traditional Participating Products segment.

As required by AICPA Statement of Position 00-3, "Accounting by Insurance
Enterprises for Demutualizations and Formations of Mutual Insurance Holding
Companies and for Certain Long-Duration Participating Contracts," as of the
date of demutualization, we will develop an actuarial calculation of the
timing of such maximum future earnings. If actual cumulative earnings in any
given period are greater than the cumulative earnings we expect, we will only
recognize the expected earnings in income. Any excess of actual cumulative
earnings over cumulative earnings we expect will represent undistributed
accumulated earnings attributable to policyholders. We will record this
excess, if any, as a policyholder dividend obligation because we will pay it
to Closed Block policyholders as an additional policyholder dividend unless it
is otherwise offset by future Closed Block performance that is less favorable
than we originally expected. If actual cumulative performance is less
favorable than we expected, we will only recognize actual earnings in income.

The principal cash flow items that will impact the amount of Closed Block
Assets and Closed Block Liabilities are premiums, net investment income,
purchases and sales of investments, policyholders' benefits, policyholders'
dividends, premium taxes, expenses and income taxes. The principal income and
expense items that we will exclude from the Closed Block are a portion of
management and maintenance expenses, commissions and net investment income and
realized investment gains and losses on invested assets outside the Closed
Block that support the Closed Block policies, all of which enter into the
determination of total gross margins of Closed Block policies for the purpose
of determining periodic amortization of deferred acquisition costs. The
amounts shown in the table above for Closed Block Assets and Closed Block
Liabilities are those that enter into the determination of amounts that are to
be paid to policyholders.

The pro forma Closed Block Assets reflect an allocation of assets necessary
to fund the Closed Block Liabilities. The Closed Block Liabilities reflect the
GAAP policyholder benefit reserves derived from our records for all policies
to be included in the Closed Block under the plan of reorganization. We
determined the Closed Block Assets necessary to fund the Closed Block
Liabilities based on actuarial cash flow models and related assumptions that
we believe are reasonable and which are documented in the plan of
reorganization. We used cash flow models to project all insurance cash flows
from the policies included in the Closed Block, which include premiums and
policy loans activity, less policy benefits, dividends and expenses. The
actuarial cash flow models contain various assumptions concerning mortality,
persistency, expenses, investment experience and other factors. After
projecting the insurance cash flows, we identified Closed Block Assets so that
cash flows from the assets, including both principal and income, together with
insurance cash flows and assets purchased with reinvested cash, would
reasonably be expected to fund all Closed Block Liabilities as well as
continuation of the dividend scales in effect in 2000 assuming the experience
underlying the 2000 dividend scales continues and assuming that the actual
reinvestment rate on our Closed Block invested assets is approximately 8.10%.
The final funding and selection of assets included in the Closed Block are
subject to the approval of the New Jersey Department of Banking and Insurance.

We will also establish 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. Because of the substantially
smaller number of outstanding Canadian policies, this separate closed block
will be insignificant in size, and it will be managed among our corporate
level activities rather than with the U.S. Closed Block. Accordingly, it is
not included in our Traditional Participating Products segment or the Closed
Block Business or reflected above.

The opinion of Daniel J. McCarthy, M.A.A.A., independent consulting actuary
associated with Milliman & Robertson, Inc., dated December 12, 2000, as
attached hereto as Annex A, states that the establishment and operation of the
Closed Block as the plan of reorganization contemplates makes adequate
provision for allocating assets to the Closed Block that will be reasonably
sufficient to enable the Closed Block to provide for the benefits we have
guaranteed, and certain expenses and taxes associated with Closed Block
policies, and to provide for the continuation of the dividend scales in effect
for 2000 if the experience underlying those scales continues.

UNAUDITED PRO FORMA SUPPLEMENTARY INFORMATION

We derived the pro forma supplementary information from our unaudited pro
forma condensed consolidated financial information and related notes included
in this prospectus. The pro forma supplementary information gives effect to
the demutualization and the offering as if they had occurred as of December
31, 2000, for purposes of the information derived from our unaudited pro forma
condensed consolidated statement of financial position and as of January 1,
2000 for purposes of the information derived from our unaudited pro forma
condensed consolidated statement of operations. The pro forma supplementary
information is not necessarily indicative of our consolidated financial
position or results of operations had the demutualization and the offering of
our Common Stock actually occurred on the dates assumed and does not project
or forecast our consolidated financial position or results of operations for
any future date or period. The pro forma supplementary information set forth
below should be read in conjunction with the information set forth under, or
referred to in, "Unaudited Pro Forma Condensed Consolidated Financial
Information".

The information set forth in the table below gives effect to the sale of
89,000,000 shares of Common Stock in this offering of our Common Stock and
Common Stock allocated to eligible policyholders, assuming 20% of
policyholders eligible to elect to receive shares actually elect to receive
shares, which assumption we believe is consistent with past demutualizations.
The information reflects assumed initial public offering prices per share of
Common Stock of $22.00, $30.00, and $38.00. These prices are for illustrative
purposes and are not intended to predict either the initial range of public
offering prices at the time of the offering or the actual public offering
price. The $38.00 and $22.00 prices are an approximation of our management's
best estimate of the high and low share prices in recent demutualizations,
when comparing the price to the pro forma book value of Prudential Financial,
Inc. For purposes of the unaudited pro forma supplementary information, we
have assumed the amount of cash or policy credits is determined based upon
100% of the initial public offering price. The information is intended to
illustrate how the Unaudited Pro Forma Condensed Consolidated Financial
Information would be affected by varying the price per share in the offering
of our Common Stock. The information also gives effect to the issuance of
2,000,000 shares of Class B Stock at an offering price of $87.50 per share, as
well as the issuance of the IHC debt. The issuances of the Class B Stock and
IHC debt are not assured and are not conditions to completion of this
offering. If we proceed with this offering but do not issue any Class B Stock
and IHC debt, we will not achieve the intended benefits of such issuances.

As of or for the Year
Ended December 31, 2000
-------------------------
Assuming the Following
Initial Public Offering
Price
-------------------------
$22.00 $30.00 $38.00
------- ------- -------
(Share data in
millions, dollars in
millions except per
share amounts)

DEMUTUALIZATION AND THE OFFERING
Income from continuing operations.................. $ 321 $ 321 $ 321
Transaction adjustments(1)......................... 76 76 76
------- ------- -------
Pro forma income from continuing operations........ $ 397 $ 397 $ 397
======= ======= =======
Total equity....................................... $20,608 $20,608 $20,608
------- ------- -------
Transaction adjustments for demutualization:
Gross proceeds.................................... 1,958 2,670 3,382
Underwriting expenses............................. (79) (108) (137)
Payment to eligible policyholders who do not elect
stock............................................ (1,879) (2,562) (3,245)
To support policy credits......................... (812) (1,107) (1,402)
To support unknown addresses...................... (475) (648) (821)
To support amounts owed to transferred Canadian
branch policyholders............................. (257) (351) (445)
To support amounts owed to other policyholders
located outside the United States................ (139) (189) (239)
Estimated demutualization expenses................ (197) (197) (197)
------- ------- -------
Subtotal of transaction adjustments............... (1,880) (2,492) (3,104)
------- ------- -------
Pro forma equity................................... $18,728 $18,116 $17,504
======= ======= =======
Pro forma book value per share of Common Stock..... $ 34.45 $ 33.33 $ 32.20
======= ======= =======
DEMUTUALIZATION, THE OFFERING AND ISSUANCES OF
CLASS B STOCK AND IHC DEBT
Pro forma income from continuing operations........ $ 397 $ 397 $ 397
Adjustments for issuances of Class B Stock and IHC
debt(2)........................................... (80) (80) (80)
------- ------- -------
Adjusted pro forma income from continuing
operations........................................ $ 317 $ 317 $ 317
======= ======= =======
Pro forma equity................................... $18,728 $18,116 $17,504
Adjustments for issuances of Class B Stock and IHC
debt.............................................. 171 171 171
------- ------- -------
Adjusted pro forma equity.......................... $18,899 $18,287 $17,675
======= ======= =======
Pro forma book value per share:
Common Stock....................................... $ 33.01 $ 31.88 $ 30.76
======= ======= =======
Class B Stock...................................... $477.50 $477.50 $477.50
======= ======= =======
Share Data
Shares allocated to eligible policyholders 616.5 616.5 616.5
Less:
Estimated shares allocated to eligible
policyholders who do not elect stock............. (85.4) (85.4) (85.4)
Estimated shares allocated to eligible
policyholders who receive cash or policy
credits.......................................... (76.5) (76.5) (76.5)
------- ------- -------
Shares issued to eligible policyholders............ 454.6 454.6 454.6
------- ------- -------
Shares issued in the offering...................... 89.0 89.0 89.0
------- ------- -------
Total shares of Common Stock outstanding........... 543.6 543.6 543.6
======= ======= =======
Total shares of Class B Stock outstanding.......... 2.0 2.0 2.0
======= ======= =======
Common Stock Ownership Percentage (excluding any
Class B Stock)
Eligible policyholders............................. 83.6% 83.6% 83.6%
Purchasers in the offering......................... 16.4% 16.4% 16.4%

- --------
(1) Represents the elimination of equity tax of $100 million, which is
applicable only to mutual life insurance companies, and the net investment
income of $24 million, net of tax benefit of $18 million, assumed to be
foregone due to cash payments to certain eligible policyholders. The equity
tax can vary significantly from year to year and will not be applicable
after we convert to a stock life insurance company.

(2) Represents interest expense of $137 million on the IHC debt, net of related
tax benefit of $57 million.

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
Consolidated Financial and Other Information" and the consolidated financial
statements included elsewhere in this prospectus. Our consolidated financial
condition and results of operations for all periods prior to the effective
date of the demutualization, including the years ended December 31, 2000, 1999
and 1998, represent the financial condition and results of operations of The
Prudential Insurance Company of America and its consolidated subsidiaries. On
the effective date of the demutualization, The Prudential Insurance Company of
America will become a wholly owned indirect subsidiary of Prudential
Financial, Inc. The consolidated financial statements of The Prudential
Insurance Company of America prior to the demutualization will become
Prudential Financial, Inc.'s consolidated financial statements upon
demutualization.

Overview

Business Divisions and Segments

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.

Traditional Participating Products Segment

In connection with the demutualization, we will cease offering domestic
participating products. The liabilities for our individual in force
participating products will then be segregated, together with assets which
will be used exclusively for the payment of guaranteed benefits and
policyholder dividends, expenses and taxes with respect to these products, in
a regulatory mechanism referred to as the "Closed Block". We have selected the
amount and type of assets and liabilities of the closed block, which we refer
to as the "Closed Block Assets" and "Closed Block Liabilities", so that these
assets, which initially will have a lower book value than the liabilities, are
expected to generate sufficient cash flow 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
products. We also will segregate for accounting purposes the surplus and
related assets that we will need to hold outside the Closed Block to meet
capital requirements related to the products included within the Closed Block.
We refer to these segregated assets outside the Closed Block as the "Surplus
and Related Assets". No new policies will be added to the Closed Block
following demutualization and its in force business is expected to ultimately
decline as policyholder benefits are paid 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
has consisted of other traditional insurance products that will not be
included in the Closed Block.

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 Traditional Participating Products segment, we share
experience on mortality, morbidity, persistency and investment results with
our customers, which can offset the impact of these factors on our
profitability from those products.

Historically, the participating products to be included in the Closed Block,
as well as the other products included in the Traditional Participating
Products segment, 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. If we issue the Class B Stock, however, the Common Stock issued in
this offering is expected to reflect the performance of our Financial Services
Businesses, which will then 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 will
also include other traditional insurance products previously included in the
Traditional Participating Products segment but which will not be included in
the Closed Block. The Class B Stock will be designed to reflect 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.

Demutualization and Related Transactions

On the effective date of the demutualization, which will occur at the time
of closing of the offering, The Prudential Insurance Company of America will
convert from a mutual life insurance company owned by its policyholders to a
stock life insurance company and become a wholly owned indirect subsidiary of
Prudential Financial, Inc.

The plan of reorganization requires 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 the holders of the policies included in the Closed Block by
allocating assets that will be used for the payment of benefits on those
policies. We will initially allocate assets to the Closed Block equal to
approximately 26% of The Prudential Insurance Company of America's general
account invested assets, in a mix approximately proportional to the invested
assets of Prudential's general account supporting our Traditional
Participating Products segment. See "Unaudited Pro Forma Condensed
Consolidated Financial Information--Unaudited Pro Forma Closed Block
Information" and "Demutualization and Related Transactions--The
Demutualization--The Closed Block" below for additional information regarding
the terms of the Closed Block and the assets and liabilities allocated
thereto. In connection with the demutualization, we intend, but are not
required, to "destack" or reorganize the ownership of various subsidiaries of
The Prudential Insurance Company of America so that they become indirect or
direct subsidiaries of Prudential Financial, Inc. rather than The Prudential
Insurance Company of America. See "Demutualization and Related Transactions--
Related Transactions--The Destacking" below for additional information
regarding the terms of the destacking and its pro forma effect on The
Prudential Insurance Company of America. Additionally, in connection with our
demutualization, we plan, but are not required, to issue shares of Class B
Stock of Prudential Financial, Inc. and the IHC debt in private placements.
See "Unaudited Pro Forma Condensed Consolidated Financial Information",
"Unaudited Pro Forma Supplementary Information" and "Demutualization and
Related Transactions--Related Transactions--Class B Stock and IHC Debt
Issuances" for information regarding the terms of these securities and the pro
forma effect of their issuances.

Consolidated Results of Operations

In managing our business, we analyze our operating performance by separately
considering our Financial Services Businesses and our Traditional
Participating Products segment. In addition, within both the Financial
Services Businesses and the Traditional Participating Products segment, we
analyze our operating performance using a non-GAAP measure we call "adjusted
operating income". 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.

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
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 Traditional
Participating Products segment. We also discuss the items excluded from
adjusted operating income, i.e., realized investment gains, sales practices
remedies and costs, demutualization 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 are allocated
between the Financial Services Businesses and the Traditional Participating
Products segment. 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 Traditional Participating Products
segment.

Net Income

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 Traditional
Participating Products segment. 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.

See "--Adjusted Operating Income" below for a discussion of the adjusted
operating income results of our divisions and Corporate and Other operations,
and our Traditional Participating Products segment.

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

1999 to 1998 Annual Comparison. Net income decreased $293 million, or 26%,
from $1.106 billion in 1998 to $813 million in 1999. This decrease reflects a
$342 million decrease in income from continuing operations before income taxes
and a $72 million increase in the related provision for income taxes as
discussed below under "--Taxes". A decrease of $121 million in the loss from
our discontinued healthcare operations, as discussed below under "--
Discontinued Operations", was a partial offset.

The $342 million decrease in income from continuing operations before income
taxes resulted from a $1.323 billion decrease from the Traditional
Participating Products segment, partially offset by a $981 million

increase from the Financial Services Businesses. The $1.323 billion decline
from the Traditional Participating Products segment came from a $1.433 billion
decrease in realized investment gains, net of losses and related charges,
which was partially offset by a $110 million increase in adjusted operating
income. The $981 million increase from the Financial Services Businesses came
primarily from a $1.591 billion improvement from Corporate and Other
operations and increases in income from continuing operations before income
taxes of $86 million from our Asset Management division and $76 million from
our International division, partially offset by a $451 million decline from
our Employee Benefits division and a $321 million decline from our U.S.
Consumer division. The $1.591 billion improvement from Corporate and Other
operations came primarily from a decrease in charges for sales practices
remedies and costs of $1.050 billion, which is discussed below under "--Sales
Practices Remedies and Costs", a $272 million increase in realized investment
gains, net of losses, and a $171 million improvement in adjusted operating
income. The $86 million increase in income from continuing operations before
income taxes from our Asset Management division, and the $76 million increase
from our International division, came entirely from increases in adjusted
operating income. The $451 million decrease from our Employee Benefits
division came primarily from a $411 million decrease in realized investment
gains, net of losses and related charges. The $321 million decrease from our
U.S. Consumer division came from a $185 million decrease in adjusted operating
income and a $136 million decline in realized investment gains, net of losses
and related charges.

Adjusted Operating Income

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 Traditional Participating Products
segment and a $32 million increase from the Financial Services Businesses.

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 Traditional Participating Products segment
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.

1999 to 1998 Annual Comparison. On a consolidated basis, adjusted operating
income increased $218 million, or 12%, from 1998 to 1999. The increase came
from a $110 million increase from the Traditional Participating Products
segment and a $108 million increase from the Financial Services Businesses.

Adjusted operating income of our Financial Services Businesses increased
$108 million, or 7%, from 1998 to 1999. The increase came primarily from a
$171 million improvement from Corporate and Other operations, an $86 million
increase in adjusted operating income from our Asset Management division, and
a $76 million increase in adjusted operating income from our International
division, partially offset by a $185 million decrease from our U.S. Consumer
division.

Our adjusted operating income for 1999 included $137 million from Corporate
and Other operations, compared to a $34 million loss in 1998. The $171 million
improvement came primarily from corporate level activities, which included a
$114 million one-time benefit recognized in 1999 as a result of a reduction in
recorded liabilities for our own employee benefits. The $86 million increase
in adjusted operating income from our Asset Management division came primarily
from a $75 million increase from our Other Asset Management segment, which
includes our commercial mortgage securitization operations, hedge portfolios,
and equity sales and trading operations. The $76 million increase in adjusted
operating income from our International division came primarily from a $74
million increase from the International Insurance segment. The $185 million
decrease in adjusted operating income from our U.S. Consumer division came
from decreases of $159 million from the

Property and Casualty Insurance segment, $75 million from the Retail
Investments segment, and $61 million from the Individual Life Insurance
segment, partially offset by a $110 million increase from the Private Client
Group segment.

Adjusted operating income of the Traditional Participating Products segment
increased $110 million, or 53%, from 1998 to 1999, primarily as a result of a
decrease in operating expenses.

Realized Investment Gains

We generated significant realized investment gains in recent years prior to
2000, primarily as a result of our real estate sales and our strategies for
our fixed maturity portfolio and hedging. We carried out a program from 1997
through 1999 to reduce our exposure to illiquid direct real estate and real
estate related investments, which in the aggregate had appreciated in value,
by selling a substantial portion of these investments and investing in more
liquid fixed-income securities and, to a lesser extent, securities of real
estate investment trusts. As a result, the book value of our real estate
investments decreased by 41% to $2.0 billion at December 31, 1999 from $3.4
billion at January 1, 1997, and we generated net realized investment gains of
$982 million in 1997, $1.076 billion in 1998, and $703 million in 1999. We
believe that it is unlikely that the investments made and to be made to
replace the real estate sold will result in a similar level of realized
investment gains in the future. As a result of continuing sales, our real
estate and real estate related investments were further reduced to $1.6
billion at December 31, 2000.

We generated significant realized investment losses in 2000 and 1999 and
realized investment gains in 1998 in our fixed maturity portfolio primarily as
a result of our active bond management strategy. We generally use 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. See "Business--General
Account Investments--Fixed Maturity Securities" for a description of this
strategy. We expect our active management strategy to generate both gains, as
occurred in 1998, and losses, as occurred in 1999 and 2000. 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 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 $74 million of realized investment gains in 2000, $155
million in 1999, and $189 million in 1998.

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 as realized investment gains or losses
in our income statement, 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, deferred
acquisition costs, or DAC, and reserves for future policy benefits. 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. See "--Results of
Operations for Financial Services Businesses by Division and Traditional
Participating Products Segment--Traditional Participating Products Segment"
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 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.

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 Traditional Participating Products segment, 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. For additional information on the portfolio strategy relative to the
Other Employee Benefits segment, see "--Results of Operations for Financial
Services Businesses by Division and Traditional Participating Products
Segment--Employee Benefits Division--Other Employee Benefits". We recognized
impairments on fixed maturity investments of $540 million in 2000, primarily
on publicly traded high yield and other corporate bonds, compared to $266
million in 1999. These impairments are consistent with our expected levels,
with the increase reflecting a slowing of the economy. 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.

1999 to 1998 Annual Comparison. For the Financial Services Businesses,
realized investment gains, net of losses and related charges, declined $275
million from a net gain of $719 million in 1998 to a net gain of $444 million
in 1999. For the Traditional Participating Products segment, realized
investment gains, net of losses and related charges, declined $1.433 billion
from a net gain of $1.461 billion in 1998 to a net gain of $28 million in
1999.

On a consolidated basis, realized investment gains, net of losses and
related charges, declined $1.708 billion from $2.180 billion in 1998 to $472
million in 1999. Realized investment gains, net of losses but excluding
related charges, declined $1.717 billion from $2.641 billion in 1998 to $924
million in 1999. Realized investment gains in 1999 included a $201 million
release of our mortgage loan reserve, which reflected the continuing
improvement in the economic climate and a continuing significant decrease in
impaired loans. We believe that similar reserve releases are unlikely in the
near future.

We realized net losses of $557 million on fixed maturity investments for
1999, compared to net gains of $1.381 billion in 1998. This reflected the
impact of sales of fixed maturity investments in an increasing interest rate
environment during 1999, compared to a declining interest rate environment
during 1998. Also contributing to the 1999 net losses realized on fixed
maturity investments were impairments recognized, amounting to $266 million,
compared to impairments of $96 million in 1998. Net realized investment gains
on equity securities amounted to $223 million for 1999 and $427 million for
1998. The 1999 results included impairment losses of $205 million, primarily
on Asian private equity investments resulting from adverse economic conditions
in that region and on investments in securities of real estate investment
trusts. Net realized investment gains from direct real estate and real estate-
related joint ventures and limited partnerships amounted to $703 million in
1999

compared to $1.076 billion in 1998. We recorded net investment gains of $305
million on derivatives in 1999, primarily as a result of the increasing
interest rate environment, compared to net losses of $263 million for 1998
resulting from a decreasing interest rate environment.

Sales Practices Remedies and Costs

As of December 31, 2000, 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 did not record any incremental charges during
2000. 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 and ending in 2000. No additional net charges were recorded
in 2000. 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 17 of our audited
consolidated financial statements for a further description of these charges.

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

Year Ended December 31,
----------------------------------
2000 1999 1998 1997 1996
---- ------ ------ ------ ------
(in millions)

Liability balance at beginning of period.... $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............................... 448 1,708 147 -- --
Additional sales practices costs........... 190 559 498 440 162
---- ------ ------ ------ ------
Total amount paid or credited.............. 638 2,267 645 440 162
---- ------ ------ ------ ------
Liability balance at end of period.......... $253 $ 891 $3,058 $2,553 $ 963
==== ====== ====== ====== ======

See "Business--Litigation and Regulatory Proceedings--Insurance--Life
Insurance Sales Practices Issues" 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 and will continue to reduce 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 Traditional
Participating Products Segment--Traditional Participating Products Segment--
Policy Surrender Experience".

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

underwriting 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 underwriting and institutional fixed
income businesses of Prudential Securities recorded pre-tax losses of $620
million in 2000, pre-tax income of $23 million in 1999 and pre-tax losses of
$73 million in 1998. The losses from these operations in 2000 came primarily
from charges of $476 million associated with our termination and wind-down of
these activities. The losses in 1998 came primarily from $64 million in
proprietary fixed income trading losses from Russian bond exposure and other
fixed income losses. By the end of 1998, we terminated the proprietary fixed
income trading activities within these operations. Gibraltar recorded pre-tax
losses of $7 million in 2000, $72 million in 1999, and $76 million in 1998.
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. These results
relate primarily to our divested residential mortgage business, which incurred
a pre-tax loss of $41 million in 1998 primarily as a result of an increase in
reserves relating to our remaining exposures in that business.

Demutualization Costs and Expenses

We incurred expenses related to demutualization totaling $143 million in
2000, $75 million in 1999 and $24 million in 1998. These 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. We estimate that we will incur
approximately $574 million of additional demutualization costs and expenses,
before related tax benefits, including the payment of $351 million of
demutualization consideration to former Canadian branch 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, we must
estimate the current year's rate in determining our tax provision for the
current year for accounting purposes. When the actual rate is announced by the
IRS, we must recognize any difference between our estimated rate and the IRS's
actual rate in that year. We will no longer be 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 11 of the audited
consolidated financial statements.

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.

Income tax provisions increased $72 million, or 7%, in 1999 from 1998. The
income tax provisions represented 46% of income from continuing operations
before income taxes in 1999 and 37% of income from continuing operations
before income taxes in 1998. This increase in the effective rate was due
primarily to an increase in the provision for the mutual life insurance
company tax discussed above.

Discontinued Operations

In December 1998, we entered into a definitive agreement to sell our
healthcare operations as described under "Business--Discontinued Operations--
Healthcare". 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. While we believe
that, as of December 31, 2000, we have adequately reserved in all material
respects for remaining costs and liabilities associated with our healthcare
business, we might have to incur additional charges that might be material to
our results of operations.

Results of Operations for Financial Services Businesses by Division and
Traditional Participating Products Segment

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 Traditional Participating Products segment, for the
years ended December 31, 2000, 1999 and 1998, as well as their assets as of
those dates.

As of or for
Year Ended December 31,
---------------------------
2000 1999 1998
-------- -------- --------
(in millions)

Revenues(1):
Financial Services Businesses:
U.S. Consumer................................... $ 8,015 $ 7,530 $ 7,335
Employee Benefits............................... 5,686 5,442 5,463
International................................... 2,624 2,102 1,622
Asset Management................................ 1,344 1,137 993
Corporate and Other............................. 283 566 313
-------- -------- --------
Total Financial Services Businesses........... 17,952 16,777 15,726
Traditional Participating Products segment....... 8,611 8,356 8,332
-------- -------- --------
Total......................................... $ 26,563 $ 25,133 $ 24,058
======== ======== ========
Adjusted operating income(2):
Financial Services Businesses:
U.S. Consumer................................... $ 740 $ 667 $ 852
Employee Benefits............................... 387 400 440
International................................... 322 233 157
Asset Management................................ 276 252 166
Corporate and Other............................. (4) 137 (34)
-------- -------- --------
Total Financial Services Businesses........... 1,721 1,689 1,581
Traditional Participating Products segment....... 547 316 206
-------- -------- --------
Total......................................... $ 2,268 $ 2,005 $ 1,787
======== ======== ========
Income from continuing operations before income
taxes:
Financial Services Businesses:
U.S. Consumer................................... $ 744 $ 659 $ 980
Employee Benefits............................... 269 485 936
International................................... 307 242 166
Asset Management................................ 277 253 167
Corporate and Other............................. (1,063) 272 (1,319)
-------- -------- --------
Total Financial Services Businesses........... 534 1,911 930
Traditional Participating Products segment....... 193 344 1,667
-------- -------- --------
Total......................................... $ 727 $ 2,255 $ 2,597
======== ======== ========
Assets(3):
Financial Services Businesses:
U.S. Consumer................................... $ 73,223 $ 78,235 $ 68,546
Employee Benefits............................... 75,817 73,955 79,716
International................................... 10,370 9,275 7,789
Asset Management................................ 30,602 25,558 24,137
Corporate and Other............................. 12,814 29,498 33,454
-------- -------- --------
Total Financial Services Businesses........... 202,826 216,521 213,642
Traditional Participating Products segment....... 69,927 68,573 63,098
-------- -------- --------
Total......................................... $272,753 $285,094 $276,740
======== ======== ========

- --------
(l) Revenues exclude realized investment gains, net of losses, and revenues
from divested businesses.
(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 from divested businesses; and (iv)
demutualization expenses.
(3) Assets exclude $2.682 billion at December 31, 1998 related to our
discontinued healthcare operations.

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 statement 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 statement 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 and property and casualty
insurance businesses, 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 from higher productivity standards
and the dislocations in connection with our sales practices litigation as well
as our responsive actions to this litigation. This 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. However, we cannot predict whether these steps will succeed or
have the desired effects.

In recent years, we have 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 has been
partially offset by higher revenues resulting from market appreciation of
remaining assets, which has produced increases in assets under management.
Over the last several years, we have been building investment manager choice
into most of our Retail Investments products. This advised choice approach, in
which we retain the primary relationship with the customer, allows to us to
offer customers investment alternatives advised by third parties in our
products and asset management styles that we might not otherwise offer. Our
wrap-fee assets have 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 choice of investments. 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 implementing a newly designed equity-
market-linked, voluntary long-term deferred compensation plan effective
January 1, 2000, and expect that turnover rates will improve over time as
participation in this plan increases, although there can be no assurance of
this.

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 a limited number of 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 offer lower profitability than the assets we manage directly.

Division Results

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

Year Ended December
31,
----------------------
2000 1999 1998
------ ------ ------
(in millions)

Division operating results:
Revenues(1)........................................... $8,015 $7,530 $7,335
Benefits and expenses(2).............................. 7,275 6,863 6,483
------ ------ ------
Adjusted operating income............................. $ 740 $ 667 $ 852
====== ====== ======
Adjusted operating income by segment:
Individual Life Insurance............................. $ 114 $ 117 $ 178
Private Client Group.................................. 237 224 114
Retail Investments.................................... 239 174 249
Property and Casualty Insurance....................... 150 152 311
------ ------ ------
Total............................................... 740 667 852
Items excluded from adjusted operating income:
Realized investment gains, net of losses and related
charges:
Realized investment gains (losses), net............... 2 (9) 131
Related charges(3).................................... 2 1 (3)
------ ------ ------
Total realized investment gains, net of losses and
related charges.................................... 4 (8) 128
------ ------ ------
Income from continuing operations before income taxes.. $ 744 $ 659 $ 980
====== ====== ======
- --------
(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,
----------------------
2000 1999 1998
------ ------ ------
(in millions)

Amortization of deferred policy acquisition costs...... $ 6 $ 1 $ (3)
Reserves for future policy benefits.................... (4) -- --
------ ------ ------
Total................................................. $ 2 $ 1 $ (3)
====== ====== ======

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.

1999 to 1998 Annual Comparison. Adjusted operating income of our U.S.
Consumer division decreased $185 million, or 22%, in 1999 from 1998. The
decline resulted primarily from decreases in adjusted operating income in our
Property and Casualty Insurance, Retail Investments and Individual Life
Insurance segments, partially offset by increased adjusted operating income
from our Private Client Group segment. Income from continuing operations
before income taxes decreased $321 million, or 33%, from 1998 to 1999. This
decline resulted from the $185 million decrease in adjusted operating income
and a $136 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".

Individual Life Insurance

Operating Results

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

Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in millions)

Operating results:
Revenues(1)........................................... $ 1,855 $ 1,723 $ 1,674
Benefits and expenses................................. 1,741 1,606 1,496
------- ------- -------
Adjusted operating income............................. $ 114 $ 117 $ 178
======= ======= =======

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

Adjusted Operating Income

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.

1999 to 1998 Annual Comparison. Adjusted operating income for 1999 decreased
$61 million, or 34%, primarily from a $104 million increase in operating
expenses. The increase in operating expenses resulted primarily from costs of
a field management and agency restructuring program described below.

Revenues

2000 to 1999 Annual Comparison. Revenues, as shown in the table above under
"--Operating Results", increased $132 million, or 8%, in 2000 from 1999. The
increase came primarily from a $58 million increase in net investment income
and a $36 million increase in premiums.

Premiums increased $36 million, or 13%, from $269 million in 1999 to $305
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.

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.

1999 to 1998 Annual Comparison. Revenues were relatively unchanged from 1998
to 1999. Premiums increased $41 million, or 18%, from $228 million in 1998 to
$269 million in 1999. The increase was primarily due to an increase in
premiums for our term products.

Policy charges and fee income decreased $26 million, or 2%, from $1.056
billion in 1998 to $1.030 billion in 1999, reflecting the impact of policy
rescissions arising from the implementation of the alternative dispute
resolution process required under our principal sales practices class action
settlement.

Net investment income increased $16 million, or 5%, from $300 million in
1998 to $316 million in 1999. The increase resulted from an increase in the
base of general account invested assets, as investment yields were relatively
unchanged.

Benefits and Expenses

2000 to 1999 Annual Comparison. Benefits and expenses, as shown in the table
above under "--Operating Results", increased $135 million, or 8%, in 2000 from
1999. The increase came primarily from an increase in policyholder benefits
and related changes in reserves of $131 million, from $519 million in 1999 to
$650 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 our
program to restructure our field management and agency structure. This program
resulted in a reduction in the number of sales territories, establishing a
smaller number of larger field offices, and eliminated approximately 1,700
non-agent positions, as well as targeting cost level reductions for product
manufacturing support commencing in 2000. The expenses related to this program
amounted to $107 million in 2000 and $116 million in 1999. We expect to incur
additional costs of approximately $130 million for related and additional
initiatives in 2001. While there can be no assurance, we believe these
initiatives will reduce operating expenses below 2000 levels by approximately
$200 million on an annual basis in 2002, and that reduced expenses resulting
from these initiatives will similarly benefit results thereafter.

1999 to 1998 Annual Comparison. Benefits and expenses increased $110
million, or 7%, in 1999 from 1998. Operating expenses increased $104 million,
or 16%, from $660 million in 1998 to $764 million in 1999, primarily as a
result of charges reflected in 1999 operating expenses in connection with the
implementation of the program described above. The cost of implementing this
program was $21 million in 1998 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 the business
unit, while revenues reflect, predominantly in our case, the renewal
persistency and aging of in force policies written in prior years and net
investment income, as well as current sales.

Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in millions)

Sales(1):
Variable life.......................................... $328 $ 301 $ 313
Term life.............................................. 59 74 88
------- ------- -------
Total................................................ $387 $ 375 $ 401
======= ======= =======

- --------
(1) Statutory first year premiums and deposits.

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 alternative sales 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. 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 year, divided by the number of those Prudential Agents.

1999 to 1998 Annual Comparison. Sales of new life insurance decreased $26
million, or 6%, in 1999 from 1998. As part of the program to restructure our
field management and agency structure as described above, we restructured our
retail distribution channel during the first half of 1999, which adversely
affected new sales by Prudential Agents. In addition, we continued to take
actions intended to improve Prudential Agent productivity, including
increasing the minimum production level required for continuation of agents'
employment contracts. Reflecting these actions and continued attrition
generally among Prudential Agents, particularly those with lower levels of
sales production, the number of Prudential Agents continued to decline in
1999, from approximately 8,900 at December 31, 1998 to approximately 7,800 at
December 31, 1999. However, while the number of Prudential Agents continued to
decline, Prudential Agent productivity, measured as described above, increased
12%, from $28,000 in 1998 to $31,300 in 1999. Partially offsetting the decline
in sales from Prudential Agents was a higher level of third-party sales
through our PruSelect alternative sales channels, which grew by $14 million,
or 19%, from 1998 to 1999. PruSelect accounted for 23% of Individual Life's
sales in 1999, compared to 18% in 1998.

Policy Surrender Experience

The following table sets forth the Individual Life Insurance segment's
policy surrender experience for variable life insurance, measured by cash
value of surrenders, for the periods indicated. These amounts do not
correspond to expenses under GAAP. In managing this business, we analyze the
cash value of surrenders because it is a measure of the degree to which
policyholders are maintaining their in force business with us, a driver of
future profitability. Our term life insurance products do not provide for cash
surrender values.

Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
(in millions)

Cash value of surrenders............................ $ 641 $ 597 $ 554
======= ======= =======
Cash value of surrenders as a percentage of mean
future policy benefit reserves, policyholders'
account balances, and separate account balances.... 3.7% 3.7% 3.8%
======= ======= =======

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.

1999 to 1998 Annual Comparison. The total cash value of surrenders increased
$43 million, or 8%, in 1999 from 1998. The levels of surrenders as a
percentage of mean future policy benefit reserves, policyholders' account
balances and separate account balances remained relatively constant from 1998
to 1999.

Private Client Group

Operating Results

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

Year Ended December
31,
--------------------
2000 1999 1998
------ ------ ------
(in millions)

Operating results:
Non-interest revenues.................................... $2,390 $2,240 $2,062
Net interest revenues.................................... 299 269 255
------ ------ ------
Total revenues, net of interest expense................ 2,689 2,509 2,317
Total non-interest expenses.............................. 2,452 2,285 2,203
------ ------ ------
Adjusted operating income................................ $ 237 $ 224 $ 114
====== ====== ======

Adjusted Operating Income

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 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.

1999 to 1998 Annual Comparison. Adjusted operating income increased $110
million, or 96%, from 1998 to 1999. Adjusted operating income from our
domestic securities brokerage operations increased $64 million, from $140
million in 1998 to $204 million in 1999. The increase came primarily from
higher commission revenues, reflecting increased transaction volume, greater
asset management and service fees on wrap assets under management and higher
net interest income reflecting higher margin lending balances as the business
benefited from the active over-the-counter equity markets. The remaining $46
million of the increase in adjusted operating income came from our consumer
banking operations, which had a loss of $26 million in 1998 and adjusted
operating income of $20 million in 1999. The 1998 loss resulted from reserve
increases relating to a loss-sharing agreement entered into in connection with
the 1997 sale of the bank's broad market credit card portfolio. In 1999, the
loss sharing agreement expired, at which time we released remaining reserves
of $18 million.

Revenues

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

Year Ended
December 31,
--------------------
2000 1999 1998
------ ------ ------
(in millions)

Commissions............................................... $1,789 $1,751 $1,659
Fees...................................................... 464 327 256
Other..................................................... 137 162 147
------ ------ ------
Total non-interest revenues.............................. 2,390 2,240 2,062
Net interest revenues..................................... 299 269 255
------ ------ ------
Total revenues, net of interest expense.................. $2,689 $2,509 $2,317
====== ====== ======

2000 to 1999 Annual Comparison. Total revenues, net of interest expense, as
shown in the table above under "--Operating Results", increased $180 million,
or 7%, from 1999 to 2000. The increase came primarily from our domestic
securities brokerage operations, which recorded an increase of $177 million,
or 7%, from $2.420 billion in 1999 to $2.597 billion in 2000.

Commission revenues increased slightly in 2000 from 1999, as increases of
$54 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. Although an increasing
proportion of Private Client Group revenues are derived from wrap-fee assets
and asset management services, commissions accounted for 75% of total segment
non-interest revenues for 2000. Accordingly, we expect that a continued trend
of reduced transaction volume would have a negative impact on our revenues and
adjusted operating income.

Fee revenues, comprised of asset management and portfolio service fees,
increased $137 million, or 42%, from 1999 to 2000. This increase resulted
primarily from a $4.7 billion increase in wrap-fee assets under management to
$26.4 billion at December 31, 2000 from $21.7 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 5,883 at December 31, 2000, a
decrease of 3% from 6,072 a year earlier. As discussed above, in response to
recruiting efforts by our competitors, we have introduced 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 $16 billion to $272
billion at December 31, 2000 from $288 billion a year earlier, primarily as a
result of overall market value declines.

1999 to 1998 Annual Comparison. Total revenues, net of interest expense,
increased $192 million, or 8%, from 1998 to 1999. Substantially all of the
increase came from our domestic securities brokerage operations.

Commission revenues increased $92 million, or 6%, from 1998 to 1999. The
increase came from commissions from equity securities transactions, which
increased by $99 million, reflecting favorable over-the-counter equity markets
and increased transaction volume.

Fee revenues, comprised of asset management and portfolio service fees,
increased $71 million, or 28%, in 1999 from 1998. This increase resulted
primarily from an increase in wrap-fee assets under management to $21.7
billion at December 31, 1999 from $13.5 billion a year earlier, as well as
higher account service fees.

Net interest revenues increased $14 million, or 5%, from 1998 to 1999. The
increase was primarily a consequence of an increase in average customer margin
lending balances at the domestic securities brokerage operations from $4.07
billion in 1998 to $5.06 billion in 1999. Partially offsetting the increase in
average customer margin lending balances was a decrease in the spread earned
on customer margin lending balances, reflecting competitive pressures related
to the rate charged to clients who buy securities on margin. Net interest
revenues from the consumer banking operations decreased $15 million, primarily
from lower credit card finance charge income in 1999 compared to 1998.

Assets under management and client assets increased $35 billion, to $288
billion at December 31, 1999 from $253 billion a year earlier.

Non-Interest Expenses

2000 to 1999 Annual Comparison. Total non-interest expenses, as shown in the
table above under "--Operating Results", increased $167 million, or 7%, 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 $83 million, or 10%, primarily as a result of
higher operations and administrative support costs, higher equity research
costs, and increased investment in our branch office technology platform.

1999 to 1998 Annual Comparison. Total non-interest expenses increased $82
million, or 4%, from 1998 to 1999. The increase came primarily from employee
compensation and benefits at our retail securities brokerage operations, which
increased by $96 million, or 8%, due to higher commissions paid to Financial
Advisors on higher fee and commission revenues and higher incentive and other
compensation resulting from improved overall profitability of the operations.
Additionally, other non-interest expenses at the domestic securities brokerage
operations increased $32 million, or 4%, primarily as a result of increased
investment in our branch office technology platform. These increases were
partially offset by a decrease in non-interest expenses at the consumer
banking operations of $46 million as costs for servicing and maintaining the
credit card portfolio sold in 1998 were not recurring in 1999.

Retail Investments

Operating Results

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

Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in millions)

Operating results:
Revenues(1)........................................... $ 1,631 $ 1,551 $ 1,532
Benefits and expenses(2).............................. 1,392 1,377 1,283
------- ------- -------
Adjusted operating income............................. $ 239 $ 174 $ 249
======= ======= =======

- --------
(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

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.

1999 to 1998 Annual Comparison. Adjusted operating income declined by $75
million, or 30%, in 1999 from 1998. Adjusted operating income in 1998
benefited $9 million from a change in reserves arising from refinements in our
calculations of GAAP annuity reserves. Excluding this change, adjusted
operating income declined by $66 million, or 28%, from $240 million in 1998 to
$174 million in 1999.

The $66 million decline in adjusted operating income came from a decline of
that amount in adjusted operating income from our annuity business, primarily
due to increased amortization of deferred policy acquisition costs, as well as
other costs associated with an annuity exchange program we initiated in 1997
to help retain annuity business and increased renewal commissions related to
assets retained under this program. Reduced spread income from our fixed
annuities and the fixed rate option of our variable annuities, resulting from
net asset outflows, also contributed to this decline in adjusted operating
income. Greater fee revenues from variable annuities, resulting from an
increase in average account values, less the impact of related amortization of
previously deferred selling costs, partially offset this decline.

Adjusted operating income from our mutual funds and wrap-fee products
business was unchanged.

Revenues

2000 to 1999 Annual Comparison. Revenues, as shown in the table above under
"--Operating Results", 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.

1999 to 1998 Annual Comparison. Revenues remained relatively unchanged from
1998 to 1999. Fee-based revenues increased $101 million, from $906 million in
1998 to $1.007 billion in 1999. The increase came primarily from asset
management and service fees for our mutual funds and wrap-fee products, and
our variable annuity products, reflecting market appreciation in our assets
under management. Net investment income declined $76 million, from $567
million in 1998 to $491 million in 1999, primarily as a result of reductions
in our base of fixed annuity business due to withdrawals and scheduled benefit
payments as well as a decline in investment yield.

Benefits and Expenses

2000 to 1999 Annual Comparison. Benefits and expenses, as shown in the table
above under "--Operating Results", 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 to reduce the emphasis on equity investments. 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.

1999 to 1998 Annual Comparison. Benefits and expenses increased $94 million,
or 7%, from 1998 to 1999. The increase includes a $9 million benefit in 1998
from refinements in our annuity reserve calculations, as noted above.
Excluding the impact of this change, the increase in benefits and expenses was
$85 million, or 7%. Commissions and other expenses increased $124 million, or
14%, from $864 million in 1998 to $988 million in 1999. The increase came
primarily from costs for development of third-party distribution, increased
mutual fund service and sub-advisory fees associated with the growth of assets
under management, a $50 million increase in amortization of deferred policy
acquisition costs reflecting lapse activity and exchange redemptions, and
increased commissions associated with a change in mutual fund commission
structure as well as the annuity exchange program discussed above. Interest
credited to policyholders' account balances declined $23 million, or 8%, from
$294 million in 1998 to $271 million in 1999, as a result of the reductions in
our base of fixed rate annuity business.

Sales Results and Assets Under Management

The following table sets forth the changes in the total proprietary assets,
excluding wrap-fee products, and the balance of wrap-fee product assets, at
fair market value for mutual funds and account value for annuities, and net
sales of our proprietary Retail Investments products for the periods
indicated. Net sales (redemptions) are gross sales minus redemptions or
surrenders and withdrawals, as applicable. Neither sales nor net sales are
revenues under GAAP; they are, however, relevant measures of sales and
business activity. Revenues are derived from fees and spread income as
discussed above.

Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
(in millions)

Mutual Funds and Wrap-fee Products(1):
Proprietary assets, excluding wrap-fee products:
Beginning total proprietary assets................ $55,245 $53,412 $46,715
Sales (other than money market)................... 5,378 3,773 3,829
Redemptions (other than money market)............. (5,561) (4,872) (3,478)
Reinvestment of distributions and change in
market value..................................... 726 3,744 1,271
Net money market sales............................ 1,976 (812) 5,075
------- ------- -------
Ending total proprietary assets................. 57,764 55,245 53,412
Wrap-fee product assets at end of period(2)........ 19,621 16,723 11,458
------- ------- -------
Total proprietary and wrap-fee product assets at
end of period..................................... $77,385 $71,968 $64,870
======= ======= =======
Net proprietary sales (redemptions) other than
money market(3)................................... $ (183) $(1,099) $ 351
======= ======= =======
Variable Annuities(1):
Beginning total account value...................... $22,614 $19,919 $17,608
Sales, excluding exchanges......................... 1,809 2,025 2,276
Exchanges sales.................................... 481 1,402 988
Surrenders, withdrawals and exchange redemptions... (2,989) (3,432) (2,528)
Change in market value, interest credited and
other activity(4)................................. (856) 2,700 1,575
------- ------- -------
Ending total account value...................... $21,059 $22,614 $19,919
======= ======= =======
Net sales (redemptions)............................ $ (699) $ (5) $ 736
======= ======= =======
Fixed Annuities:
Beginning total account value...................... $ 3,020 $ 3,249 $ 3,723
Sales.............................................. 221 160 56
Surrenders, withdrawals and exchange redemptions... (361) (425) (575)
Interest credited and other activity(4)............ 46 36 45
------- ------- -------
Ending total account value...................... $ 2,926 $ 3,020 $ 3,249
======= ======= =======
Net sales (redemptions)............................ $ (140) $ (265) $ (519)
======= ======= =======

- --------
(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 $3.4 billion at
December 31, 2000, $3.5 billion at December 31, 1999, and $3.1 billion at
December 31, 1998.
(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.

2000 to 1999 Annual Comparison. Proprietary 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. Proprietary
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 proprietary 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.

1999 to 1998 Annual Comparison. Mutual fund proprietary and wrap-fee product
assets under management increased $7.1 billion, or 11%, from December 31,
1998, primarily as a result of an increase in assets invested in wrap-fee
products. Proprietary assets under management increased $1.8 billion, or 3%,
from December 31, 1998. The increase came from market appreciation and amounts
reinvested, as we experienced net mutual fund redemptions of $1.9 billion,
including net money market fund redemptions of $812 million, for 1999.
Redemptions, other than money market funds, increased $1.4 billion from $3.5
billion in 1998 to $4.9 billion in 1999. Wrap-fee product assets increased
$5.3 billion, or 46%, from $11.5 billion at December 31, 1998 to $16.7 billion
at December 31, 1999, as a result of net sales of our wrap-fee products, as
well as market appreciation.

Our domestic Financial Advisors are the principal distribution channel for
our retail mutual funds. In 1999 and 2000, we continued to experience turnover
of our domestic Financial Advisors, including experienced Financial Advisors.
In addition to the impact of this turnover, we believe that our historic focus
on the value style of investment in our equity mutual funds, as well as the
unfavorable performance of fixed income mutual funds, have adversely affected
our sales of mutual funds and our growth and retention of assets under
management in these products.

Total account values for variable and fixed annuities increased $2.5
billion, or 11%, from December 31, 1998. The increase came from market
appreciation and interest credited on our variable annuity products, as we
experienced net outflows of $270 million in 1999. This resulted primarily from
an increase in redemptions consistent with the maturation of the business
because a larger percentage of the business is no longer subject to surrender
charges. We also experienced a decline in sales of annuities, which were
affected by the lower number of Prudential Agents in 1999, our primary
distribution channel for annuities.

We experienced net outflows of $5 million for variable annuities during
1999, versus net sales of $736 million for 1998 consistent with the increase
in surrenders and withdrawals noted above. In an effort to increase our
retention of annuity business, we commenced a program in 1997 to offer clients
who had either fixed or variable annuities with us for which the surrender
period had ended or was close to ending, the option to exchange their current
contract for a Discovery Select variable annuity. Our withdrawals of variable
and fixed annuities include exchanges of $1.4 billion in 1999 and $1.0 billion
in 1998.

We experienced net outflows in our fixed annuities of $265 million in 1999
and $519 million in 1998, continuing a trend of the past several years, which
reflects the exchange program as well as the low interest rate environment and
the desire of investors to move to equity investments with perceived higher
returns. However, surrenders, withdrawals and exchanges for 1999 decreased to
$425 million, from $575 million for 1998.

Property and Casualty Insurance

Operating Results

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

Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in millions)

Operating results:
Revenues(1)........................................... $ 1,840 $ 1,747 $ 1,812
Benefits and expenses................................. 1,690 1,595 1,501
------- ------- -------
Adjusted operating income............................. $ 150 $ 152 $ 311
======= ======= =======

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

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 $93 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.

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 segment. While, as discussed under "--Revenues" below,
this acquisition had an effect on the comparison of revenues for 2000 to 1999,
it did not have a material impact on adjusted operating income.

Commencing in 1996, we made a number of improvements in our underwriting
practices and instituted several claims management initiatives, such as early
contact and settlement programs, reduced settlement authority for casualty
field adjusters, increased field training and stronger fraud detection
programs. We believe these developments, as well as industry factors such as
tort reforms and a stronger economy, favorably affected our loss experience
relative to the historical loss development patterns we used to establish
reserves in prior

years. Nevertheless, while the factors discussed above have led to the
favorable reserve development for prior years, accident year combined ratios
as defined below did not improve from 1998 through 2000, primarily due to
increases in the overall expense ratio which reflected our expenses to expand
distribution channels and the impact of a prolonged period of intense price
competition.

1999 to 1998 Annual Comparison. Adjusted operating income decreased $159
million, or 51%, from 1998 to 1999. Results in 1999 reflect favorable prior
accident year reserve development of $150 million, and our 1998 results
reflect similar favorable development of $245 million.

The decrease in adjusted operating income in 1999 resulted primarily from
the $95 million lower benefit from prior accident year reserve development
compared to 1998, a $64 million increase in operating expenses, which included
expenses to expand our distribution channels as mentioned above, a $26 million
reduction in investment income and the negative impact of greater claim
severity on our loss experience for 1999 that was partially offset by an
improvement in claim frequency. A $107 million reduction in our ceded premiums
for reinsurance, from $168 million in 1998 to $61 million in 1999, partially
offset the impact of those variances. Approximately $79 million of the
reduction in ceded premiums came from stop-loss reinsurance and supplemental
catastrophe covers, reflecting more favorable pricing in 1999 compared to
1998. The remainder of the reduction came primarily from the expiration of a
quota-share reinsurance agreement, a return of hurricane fund premium and
lower assessments from reinsurance pools.

Revenues

The following table sets forth the Property and Casualty Insurance segment's
earned premiums, which are net of reinsurance ceded, for the periods
indicated.

Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in millions)

Automobile............................................. $ 1,193 $ 1,069 $ 1,119
Homeowners............................................. 413 447 431
Other.................................................. 33 32 31
------- ------- -------
Total earned premiums................................. $ 1,639 $ 1,548 $ 1,581
======= ======= =======

2000 to 1999 Annual Comparison. Revenues, as shown in the table above under
"--Operating Results", increased $93 million, or 5%, from 1999 to 2000. Total
revenues of $1.840 billion for 2000 include revenues of $178 million from the
subsidiary we acquired in May 2000 that specializes in non-standard automobile
business. Excluding the impact on revenues from this newly-acquired
subsidiary, revenues declined by $85 million, or 5%, from $1.747 billion in
1999 to $1.662 billion in 2000, due principally to a $77 million decrease in
earned premiums on our existing automobile and homeowners business. The $77
million decline in earned premiums resulted in part from a $30 million
increase in reinsurance premiums ceded due to our purchase of additional
reinsurance coverage in 2000.

Total earned premiums, as shown in the immediately preceding table,
increased by $91 million, or 6%, from 1999 to 2000. Excluding the impact on
earned premiums from the acquisition noted above, earned premiums declined $77
million, or 5%, from $1.548 billion in 1999 to $1.471 billion in 2000,
continuing the decline that we have experienced over the past several years.

Automobile earned premiums increased $124 million, or 12%, from 1999 to
2000. Excluding the impact of the acquisition 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 has been 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. This stabilization of our policies in force
represents an

improvement compared to the declines in prior years, which reflected intense
rate competition that attracted customers to other companies. The improvement
came from better persistency in 2000 and an increase in new policies sold.

Net investment income was $193 million for 2000, relatively unchanged from
$197 million in 1999.

1999 to 1998 Annual Comparison. Revenues decreased $65 million, or 4%, from
1998 to 1999. Revenues were adversely affected by a decline in earned premiums
of $33 million, or 2%. Revenues are net of reinsurance premiums ceded of $61
million in 1999 and $168 million in 1998.

Automobile earned premiums decreased $50 million, or 4%, from 1998 to 1999.
Excluding the impact of reinsurance premiums ceded, which declined in 1999,
automobile earned premiums declined $118 million, or 11%. Ceded premiums were
lower primarily due to more favorable pricing for reinsurance coverage in
1999. The automobile earned premium decline resulted from a 6% decrease in the
number of policies in force and a decline in average premiums due in part to
price competition. The decline in average premiums also partially resulted
from the mandated 15% premium reduction for New Jersey policyholders described
above. We estimate that this required premium reduction lowered our earned
premiums by about $24 million for 1999.

Homeowners earned premiums increased $16 million, or 4%, in 1999. Excluding
the impact of reinsurance premiums ceded, which declined in 1999, homeowners
earned premiums declined $16 million, or 3%, reflecting a 4% decrease in
policies in force primarily due to price competition. Ceded premiums were
lower due to more favorable pricing for reinsurance coverage in 1999 as well
as a reduction in reinsurance premiums resulting from the expiration of a
reinsurance agreement and a return of hurricane fund premium.

Revenues were also adversely affected by a decline in net investment income
of $26 million, or 12%, from $223 million in 1998 to $197 million in 1999,
reflecting a decline in the amount of invested assets due to the decline in
business in force as well as a lower yield on investments in 1999.

Benefits and Expenses

The following table shows our calendar year loss, expense and combined
ratios, the impact on these calendar year ratios of catastrophic losses and
our accident year combined ratios based on loss experience for the periods
indicated (all based on statutory accounting principles).

Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------

Loss ratio(1):
Automobile........................................ 62.0% 71.1% 66.1%
Homeowners........................................ 72.4 70.7 69.8
Overall......................................... 64.3 71.1 67.7
Expense ratio(2):
Automobile........................................ 37.3 30.5 26.1
Homeowners........................................ 45.3 39.1 34.2
Overall......................................... 39.2 33.1 28.7
Combined ratio(3):
Automobile........................................ 99.3 101.6 92.2
Homeowners........................................ 117.7 109.8 104.0
Overall......................................... 103.5 104.2 96.4
Effect of catastrophic losses included in combined
ratio(4):......................................... 2.6 3.3 3.9
Accident year combined ratio(5):................... 113.1 110.6 107.1

- --------
(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 $165 million in the year ended
December 31, 2000, $150 million in 1999 and $245 million in 1998 and, in
2000, the $80 million recovery from our stop-loss reinsurance contract
noted above.
(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. 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, 2000. The ratio for the year
ended December 31, 2000 reflects the $80 million recovery from our stop-
loss reinsurance contract 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.

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 8.1% for 2000 and an increase of 2.6% for 1999. See
"Business--U.S. Consumer Division--Property and Casualty Insurance--
Catastrophe Exposure Risk Management Program and Reinsurance" for a
description of the Property and Casualty Insurance segment's reinsurance
program.

Our overall expense ratio for 2000 increased in comparison to 1999 mainly
because of the impact of increased operating expenses as discussed above.

1999 to 1998 Annual Comparison. Our automobile and total combined ratios, as
shown in the table immediately above, increased in 1999 from 1998 as a result
of the lower benefit of $150 million from favorable development on prior
accident year reserves in 1999 as compared to $245 million in 1998. The
increase in the loss ratio for homeowners business came primarily from a 3%
increase in claim severity, primarily from fire and extended coverage claims,
partially offset by a 2% decrease in claim frequency.

Our catastrophe losses, net of reinsurance, amounted to $51 million for 1999
compared to $62 million for 1998.

Losses that we ceded through reinsurance resulted in an increase in the
total combined ratio of 2.6% in 1999 and a reduction of 2.5% in 1998.

Our overall expense ratio for 1999 increased in comparison to 1998
principally because the decline in premiums earned was not accompanied by a
commensurate decline in our overhead and other fixed expenses, and because of
the impact of increased operating expenses to expand our distribution
channels.

The increase in the accident year combined ratio was principally driven by
these increases in the overall expense ratio.

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 statement of
operations.

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 statement of operations.

The Group Insurance and Other Employee Benefits segments pay the expenses of
their own proprietary sales forces for distribution of products, and pay the
Individual Life Insurance and Private Client Group segments within the U.S.
Consumer division for distribution of their products through Prudential Agents
and Financial Advisors. These segments also pay our Investment Management and
Advisory Services segment for management of proprietary assets. These fees
result in expenses to the segments of the Employee Benefits division and
revenues to the Asset Management division. We reflect all of the intra-company
services at rates that we determined with reference to market rates. The Other
Employee Benefits segment also pays third-party managers for management of
non-proprietary assets that support some of its defined contribution
retirement products.

Division Results

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

Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
(in millions)

Division operating results:
Revenues(1)........................................ $ 5,686 $ 5,442 $ 5,463
Benefits and expenses(2)........................... 5,299 5,042 5,023
------- ------- -------
Adjusted operating income.......................... $ 387 $ 400 $ 440
======= ======= =======
Adjusted operating income by segment:
Group Insurance.................................... $ 158 $ 128 $ 98
Other Employee Benefits............................ 229 272 342
------- ------- -------
Total............................................ 387 400 440
Items excluded from adjusted operating income:
Realized investment gains, net of losses and
related charges:
Realized investment gains (losses), net.......... (87) 228 718
Related charges(3)............................... (31) (143) (222)
------- ------- -------
Total realized investment gains, net of losses
and related charges............................. (118) 85 496
------- ------- -------
Income from continuing operations before income
taxes.............................................. $ 269 $ 485 $ 936
======= ======= =======

- --------
(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:

Year Ended December 31,
---------------------------
2000 1999 1998
------- -------- --------
(in millions)

Reserves for future policy benefits............ $ (32) $ (147) $ (218)
Amortization of deferred policy acquisition
costs......................................... 1 4 (4)
------- -------- --------
Total......................................... $ (31) $ (143) $ (222)
======= ======== ========

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. 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".

1999 to 1998 Annual Comparison. Adjusted operating income of our Employee
Benefits division decreased $40 million, or 9%, from 1998 to 1999, as a $70
million decrease in adjusted operating income from our Other Employee Benefits
segment was partially offset by improved results from our Group Insurance
segment. Income from continuing operations before income taxes decreased by
$451 million, or 48%, from 1998 to 1999. This decrease resulted primarily from
a $411 million decline in realized investment gains, net of losses and related
charges.

Group Insurance

Operating Results

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

Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in millions)

Operating results:
Revenues(1)........................................... $ 2,801 $ 2,428 $ 2,205
Benefits and expenses................................. 2,643 2,300 2,107
------- ------- -------
Adjusted operating income............................. $ 158 $ 128 $ 98
======= ======= =======

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

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.

1999 to 1998 Annual Comparison. Adjusted operating income increased $30
million, or 31%, from 1998 to 1999. We experienced growth in earned premiums
on both group life and disability products, accompanied by improved mortality
and morbidity experience during 1999. As discussed below, the growth in earned
premiums reflected increased sales of both life and disability products as
well as strong persistency. However, increased operating expenses of $54
million partially offset these developments. Expenses in 1998 included a
charge of $18 million to establish a reserve to settle certain liabilities and
a charge of $12 million to increase reserves for disability as discussed below
under "--Benefits and Expenses".

Revenues

2000 to 1999 Annual Comparison. Revenues, as shown in the table above under
"--Operating Results", 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 90% 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.

1999 to 1998 Annual Comparison. Revenues increased by $223 million, or 10%,
from 1998 to 1999. Group life premiums increased by $126 million, or 9%, to
$1.466 billion primarily due to new sales in 1999. Persistency declined
slightly from 97% for 1998 to 94% for 1999. Group disability premiums
increased by $35 million, or 10%, also reflecting increased new sales in 1999.
Persistency declined slightly from 90% in 1998 to 88% for 1999. Net investment
income increased $29 million, or 7%, from $441 million in 1998 to $470 million
in 1999, which is largely offset by corresponding expense charges for interest
credited.

Benefits and Expenses

The following table sets forth the Group Insurance segment's benefits and
administrative operating expense ratios for the periods indicated.

Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------

Benefits ratio(1):
Group life......................................... 85.8% 88.3% 89.9%
Group disability................................... 101.9 102.7 109.6
Administrative operating expense ratio(2):
Group life......................................... 11.6 11.4 10.9
Group disability................................... 21.0 23.5 21.2

- --------
(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.

2000 to 1999 Annual Comparison. Benefits and expenses, as shown in the table
above under "--Operating Results", 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.

1999 to 1998 Annual Comparison. Benefits and expenses increased $193
million, or 9%, from 1998 to 1999. The increase resulted in large part from an
increase of $109 million, or 7%, in policyholders' benefits, including policy
reserves. This increase reflected the growth in business in force, partially
offset by the impact of a reserve increase of $12 million in 1998 that did not
recur in 1999 as a result of longer life expectancies of disabled insureds due
to medical advances in the treatment of AIDS, as well as improved mortality
and morbidity

experience in 1999. Interest credited to policyholders increased $29 million,
or 18%, corresponding to the increase in investment income referred to above.
The increase also resulted from an increase of $55 million, or 18%, in
operating expenses.

The increase in operating expenses, from $299 million in 1998 to $354
million in 1999, reflected the costs to administer the increased business in
force as well as our continued investment in processes and technologies to
support actual and intended growth in business, partially offset by the impact
of a charge of $18 million in 1998 to establish a reserve to settle
liabilities in connection with certain contracts. The investments in processes
and technologies relate in part to our need to develop autonomous
administrative systems to replace support previously shared with our
healthcare business that we sold in August 1999.

The group life benefits ratio improved by 1.6 percentage points from 1998 to
1999 due to better mortality experience. The group disability benefits ratio
improved by 6.9 percentage points, with about half of the improvement related
to the 1998 reserve increase for longer life expectancies as discussed above.
The remainder of this improvement came from better morbidity experience.
However, our group disability benefits ratio continued to remain high
primarily due to the continuing effect of long-term disability claims we
incurred from business we wrote in the early and mid-1990s, largely in the
healthcare, legal and securities industries. We believe our experience
parallels the industry's experience during this period. Also, as a result of
an increase in administrative operating expenses, the administrative operating
expense ratios for both group life and disability insurance increased in 1999.

Sales Results

The following table sets forth the Group Insurance segment's new annualized
premiums for the periods indicated. In managing our group insurance business,
we analyze new annualized premiums, which do not correspond to revenues under
GAAP, as well as revenues, because new annualized premiums measure the current
sales performance of the business unit, while revenues reflect the renewal
persistency and aging of in force policies written in prior years and net
investment income in addition to current sales.

Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in millions)

New annualized premiums:
Group life(1).......................................... $ 321 $ 262 $ 245
Group disability(2).................................... 162 105 86
------- ------- -------
Total................................................ $ 483 $ 367 $ 331
======= ======= =======

- --------
(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.

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.

1999 to 1998 Annual Comparison. Total new annualized premiums increased $36
million, or 11%, from 1998 to 1999. An increase in sales to new customers,
including $40 million from one sale, reflecting an expansion of the dedicated
Group Insurance sales force and greater productivity as well as availability
of a new disability contract that was approved for sale by regulators in 1999,
more than offset a lower level of additional sales to existing group life
customers.

Other Employee Benefits

Operating Results

The following table sets forth the Other Employee Benefits segment's
operating results for the periods indicated.

Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in millions)

Operating results:
Revenues(1)........................................... $ 2,885 $ 3,014 $ 3,258
Benefits and expenses(2).............................. 2,656 2,742 2,916
------- ------- -------
Adjusted operating income............................. $ 229 $ 272 $ 342
======= ======= =======

Adjusted Operating Income

2000 to 1999 Annual Comparison. Adjusted operating income decreased $43
million, or 16%, from 1999 to 2000. 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 a result of our
restructuring of the investment portfolio supporting these products to reduce
the emphasis on equity investments. 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. We expect to continue to have
low sales of general account GICs, unless and until our ratings improve.
Losses from our full service defined contribution business were $42 million in
2000, relatively unchanged from $39 million in 1999.

1999 to 1998 Annual Comparison. Adjusted operating income declined by $70
million, or 20%, in 1999 from 1998. Adjusted operating income benefited $54
million in 1999 and $46 million in 1998 primarily from refinements in our
calculation of annuity reserves. Excluding these changes, adjusted operating
income declined by $78 million, or 26%, from $296 million in 1998 to $218
million in 1999. The decrease reflected a decline of $115 million in adjusted
operating income from our guaranteed products business, which was negatively
affected by a $37 million charge in 1999 to establish reserves for guaranteed
benefits on several separate account contracts. The remainder of the decrease
reflects the continuing scheduled runoff of our general account GIC business
as noted above and a decline in mortgage prepayment fees received in 1999. The
decrease in adjusted operating income from our guaranteed products business
was partially offset by a $23 million decrease in losses from our full service
defined contribution business, reflecting higher asset and participant-based
fee revenues as a result of the growth of our full service defined
contribution business and a reduced level of cost per participant. The results
of our defined contribution business include commissions and selling costs
that, for sales of products for which we are not reimbursed for these costs by
future distribution fees and contingent deferred sales charges, we charge
immediately to expense under GAAP (rather than capitalizing and recognizing
over time) resulting in a loss in the year of sale.

Revenues

2000 to 1999 Annual Comparison. Revenues, as shown in the table above under
"--Operating Results", 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. We expect this business
to continue to runoff. 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.

1999 to 1998 Annual Comparison. Revenues decreased $244 million, or 7%, from
1998 to 1999. Net investment income decreased $270 million, or 10%, from
$2.730 billion in 1998 to $2.460 billion in 1999. The majority of this decline
relates to the runoff of our general account GIC business. The decline in
investment income also reflects a decline in mortgage prepayment fees received
in 1999. Fee-based revenue increased $17 million, or 4%, from $457 million in
1998 to $474 million in 1999, primarily as a result of growth of our full
service defined contribution business.

Benefits and Expenses

2000 to 1999 Annual Comparison. Benefits and expenses, as shown in the table
above under "--Operating Results", 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.

1999 to 1998 Annual Comparison. Benefits and expenses decreased $174
million, or 6%, from 1998 to 1999. This decrease includes the changes in
reserves from refinements in the reserve calculations for our annuity business
as noted above, which reduced our expenses by $54 million in 1999 and $32
million in 1998. Excluding these changes, the decrease in total benefits and
expenses was $152 million, or 5%. Interest credited to policyholders decreased
$168 million, reflecting the attrition of our general account GIC business and
a reduction in credited rates for a majority of our fixed rate defined
contribution business. A $37 million charge in 1999 to establish reserves for
guaranteed benefits on several separate account contracts partially offset
this decrease.

Sales Results and Assets Under Management

The following table shows the changes in the account values and net sales of
Other Employee Benefits segment products for the periods indicated. Net sales
are total sales minus withdrawals or withdrawals and benefits, as applicable.
As noted above under "--U.S. Consumer Division--Retail Investments--Sales
Results and Assets Under Management", neither sales nor net sales are revenues
under GAAP.

Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
(in millions)

Defined Contribution:
Beginning total account value....................... $25,788 $21,527 $17,737
Sales............................................... 5,439 4,736 4,939
Withdrawals......................................... (3,937) (3,287) (2,585)
Change in market value and interest credited........ (1,244) 2,812 1,436
------- ------- -------
Ending total account value......................... $26,046 $25,788 $21,527
======= ======= =======
Net sales........................................... $ 1,502 $ 1,449 $ 2,354
======= ======= =======
Guaranteed Products(1):
Beginning total account value....................... $41,757 $45,560 $47,723
Sales............................................... 2,024 1,951 2,511
Withdrawals and benefits............................ (5,279) (7,244) (9,487)
Change in market value and interest income.......... 2,997 2,070 4,020
Other(2)............................................ 78 (580) 793
------- ------- -------
Ending total account value......................... $41,577 $41,757 $45,560
======= ======= =======
Net sales........................................... $(3,255) $(5,293) $(6,976)
======= ======= =======

- --------
(1) Prudential's retirement plan accounted for 27% of sales for the year ended
December 31, 2000, 28% for 1999 and 25% for 1998. Ending total account
value includes assets of Prudential's retirement plan of $8.2 billion at
December 31, 2000, $8.2 billion at December 31, 1999 and $7.8 billion at
December 31, 1998.
(2) Changes in asset balances for externally managed accounts.

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.

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.

As of December 31, 2000, our guaranteed products assets under management
included $10.4 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 years ended December 31, 2000, 1999 and 1998. Commencing in the third
quarter of 2000, we have initiated strategic actions including the sale of
some of the investments underlying these products and reinvestment of the
proceeds at a higher yield which, while resulting in realized investment
losses, are intended to result in improved operating profitability in the
future. There can be no assurance that these actions will result in improved
overall profitability, however.

1999 to 1998 Annual Comparison. Assets under management in our full service
defined contribution business amounted to $25.8 billion at December 31, 1999,
an increase of $4.3 billion, or 20%, from December 31, 1998. The increase is
primarily due to market appreciation and interest credited of $2.8 billion,
primarily due to market appreciation in equity funds, as well as net sales of
$1.4 billion. Net sales in 1999 decreased by $905 million from 1998,
reflecting the inclusion in 1998 results of a sale to one customer totaling
$1.3 billion. Excluding the impact of this single sale in 1998, sales
increased $1.1 billion, or 30%, in 1999 from 1998, which we believe reflects
our offering of more competitive products. Net sales were also affected by a
higher absolute level of withdrawals in 1999, although the rate of withdrawal
compared to average assets under management was consistent with prior years.

Assets under management for guaranteed products decreased $3.8 billion, or
8%, from December 31, 1998. The decrease is primarily a result of a $1.7
billion decrease in separate account annuity assets, a $1.0 billion decrease
in assets related to our general account GIC business and withdrawals from our
synthetic and separate account GIC business. The decrease in separate account
annuity assets came primarily from scheduled annuity benefits. The decrease in
general account GIC assets reflected the continued scheduled runoff of that
business. Withdrawals and benefits from guaranteed products for 1999 totaled
$7.2 billion, $2.2 billion or 24% less than those of 1998, reflecting the
declining volume of remaining general account GIC contracts. Sales of
guaranteed products in 1999 were $560 million or 22% lower than 1998,
primarily due to a decrease in sales of floating rate non-traditional GIC
products.

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 statement of operations.

The International Insurance and International Securities and Investments
segments pay the expenses of their own proprietary sales forces, consisting of
Life Planners 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.

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. The
excluded item is 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, from adjusted
operating income because the timing of transactions resulting in recognition
of gains or losses is largely at our discretion and the amount of these gains
or losses is heavily influenced by and fluctuates in part according to the
availability of market opportunities. Including the fluctuating effects of
these transactions could distort trends in the underlying profitability of our
businesses.

Year Ended December 31,
------------------------
2000 1999 1998
------- ------- -------
(in millions)

Division operating results:
Revenues(1)......................................... $ 2,624 $ 2,102 $ 1,622
Benefits and expenses............................... 2,302 1,869 1,465
------- ------- -------
Adjusted operating income........................... $ 322 $ 233 $ 157
======= ======= =======
Adjusted operating income by segment:
International Insurance............................. $ 296 $ 218 $ 144
International Securities and Investments............ 26 15 13
------- ------- -------
Total............................................. 322 233 157
Item excluded from adjusted operating income:
Realized investment gains, net of losses............ (15) 9 9
------- ------- -------
Income from continuing operations before income tax-
es.................................................. $ 307 $ 242 $ 166
======= ======= =======

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

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. For a discussion of realized investment gains and
losses, see "--Consolidated Results of Operations--Realized Investment Gains".

1999 to 1998 Annual Comparison. Adjusted operating income of our
International division increased $76 million, or 48%, from 1998 to 1999. The
increase came primarily from an increase in adjusted operating income of $74
million from our International Insurance segment. Income from continuing
operations before income taxes increased by $76 million, or 46%, from 1998 to
1999 as a result of the increase in adjusted operating income.

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
1998, 1999 and 2000. 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, 2000.

Operating Results

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

Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in millions)

Operating results:
Revenues(1)........................................... $ 1,920 $ 1,522 $ 1,090
Benefits and expenses................................. 1,624 1,304 946
------- ------- -------
Adjusted operating income............................. $ 296 $ 218 $ 144
======= ======= =======

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

Adjusted Operating Income

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 $45 million, or 19%.

1999 to 1998 Annual Comparison. Adjusted operating income increased $74
million, or 51%, from 1998 to 1999. The increase resulted primarily from
continuing improved results from our Japanese operations, from $161 million in
1998 to $240 million in 1999, which experienced continued growth in insurance
in force due to increased sales and favorable persistency as well as improved
mortality experience, partially offset by costs associated with expanding
operations to other countries. Our operations in countries other than Japan
resulted in operating losses of $22 million in 1999 and $17 million in 1998.
The increase in these operating losses reflected higher 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 $70 million, or 43%.

Revenues

2000 to 1999 Annual Comparison. Revenues, as shown in the table above under
"--Operating Results", 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 $306 million, or 19%, from 1999 to 2000.

1999 to 1998 Annual Comparison. Revenues increased $432 million, or 40%,
from 1998 to 1999. The growth in revenues came primarily from an increase of
$386 million, or 40%, in premium income, from $959 million in 1998 to $1.345
billion in 1999. Premiums in Japan increased $312 million, from $855 million
in 1998 to $1.167 billion in 1999, as a result of growth in sales and
continued strong persistency as well as the favorable impact of currency
exchange fluctuations. Premiums in all other countries increased $74 million,
from $104 million in 1998 to $178 million in 1999, primarily as a result of
growth in business and new sales in Korea and Taiwan. Net investment income
increased $34 million, from $65 million in 1998 to $99 million in 1999, 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 $302 million, or 23%.

Benefits and Expenses

2000 to 1999 Annual Comparison. Benefits and expenses, as shown in the table
above under "--Operating Results", increased $320 million, or 25%, from 1999
to 2000. The increase in benefits and expenses came primarily from an increase
of $235 million in policyholders' benefits, which includes the change in
reserves for future policy benefits. Policyholders' benefits increased from
$1.032 billion in 1999 to $1.267 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 $261 million, or 19%.

1999 to 1998 Annual Comparison. Benefits and expenses increased $358
million, or 38%, from 1998 to 1999. The increase in benefits and expenses came
primarily from an increase of $287 million in policyholders' benefits, which
includes the change in reserves for future policy benefits. Policyholders'
benefits increased from $745 million in 1998 to $1.032 billion in 1999
primarily as a result of the greater volume of business in force. The
remaining increase came primarily from administrative expenses associated with
the growth of business in force and expenses related to our expansion into
additional countries. On a constant exchange rate basis, benefits and expenses
increased $233 million, or 21%.

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.

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 $93 million, or 22%. For all
countries other than Japan, on a constant exchange rate basis, new annualized
premiums increased $51 million, or 52%, 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 $42
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.

1999 to 1998 Annual Comparison. New annualized premiums increased $128
million, or 47%, from $270 million in 1998 to $398 million in 1999, including
the favorable impact of currency exchange fluctuations. On a constant exchange
rate basis, new annualized premiums increased $92 million, or 28%. In Japan,
new annualized premiums on a constant exchange rate basis increased $47
million, or 17%, from 1998 to 1999. For all other countries combined, also on
a constant exchange rate basis, new annualized premiums increased $45 million,
or 83%, with $33 million of the increase from our operations in Korea. These
increases are primarily a result of new business generated by increased
numbers of Life Planners.

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 products. Interest rates guaranteed in our
Japanese insurance contracts are regulated by Japanese authorities. Between
July 1, 1996 and April 1, 1999, we credited an interest rate of 3.1% on most
of the products we sell 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, the profitability of these products in Japan continues to
result primarily from margins on mortality charges and expenses.

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 the years ended December 31, 2000,
1999 and 1998 was well within our pricing assumptions and below the guaranteed
levels reflected in the premiums we charge.

International Securities and Investments

Operating Results

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

Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in millions)

Operating results:
Revenues.............................................. $ 704 $ 580 $ 532
Expenses.............................................. 678 565 519
------- ------- -------
Adjusted operating income............................. $ 26 $ 15 $ 13
======= ======= =======

Adjusted Operating Income

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 London Stock Exchange and Hong Kong Stock and Futures
Exchange seats into listed shares and trading rights. 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.

1999 to 1998 Annual Comparison. Adjusted operating income was essentially
unchanged in 1999 from 1998. Adjusted operating income from our international
securities operations, including our futures operations, increased $26 million
in 1999 from 1998. Our international securities operations benefited from
active U.S. equity markets, and 1998 results for these operations include a
loss of $28 million from the sale and final closure of our Australian
securities operations. A $26 million decline in adjusted operating income from
our futures operations, resulting primarily from the introduction of the Euro
which decreased activity in the global foreign exchange markets in 1999, was a
partial offset. Losses from our international investments operations increased
$24 million, from $8 million in 1998 to $32 million in 1999, reflecting
increased expenses from the expansion of this developing business.

Revenues

2000 to 1999 Annual Comparison. Revenues, as shown in the table above under
"--Operating Results", 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, which include our futures 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 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.

1999 to 1998 Annual Comparison. Revenues increased $48 million, or 9%, from
1998 to 1999. Revenues for 1998 include $21 million related to the Australian
securities operations, which were closed in the fourth quarter of 1998.
Excluding the impact of 1998 revenues of the Australian securities operations,
revenues increased by $69 million, or 14%, from $511 million in 1998 to $580
million in 1999. This increase was primarily driven by an $84 million increase
in revenues from the remaining international securities operations, reflecting
increased transaction volume primarily associated with active U.S. equity
markets, and growth in assets under management and client assets of
approximately $9 billion which included nearly $4 billion of assets under
management and client assets of a London-based broker and asset manager that
we acquired in 1999. The increases in assets under management and client
assets, and revenues, reflected an increase in the number of international
Financial Advisors from 456 at the end of 1998 to 577 at the end of 1999. A
$20 million decrease in revenues from our futures operations, due to lower
levels of activity in the global foreign exchange markets in 1999, partially
offset the increased revenues from international securities operations.

Expenses

2000 to 1999 Annual Comparison. Expenses, as shown in the table above under
"--Operating Results", 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.

1999 to 1998 Annual Comparison. Expenses increased $46 million, or 9%, from
1998 to 1999. Expenses for 1998 included approximately $50 million related to
the Australian securities operations, which were closed in the fourth quarter
of 1998. Excluding the impact of 1998 expenses of the Australian securities
operations, expenses increased $96 million, or 20%, from $469 million in 1998
to $565 million in 1999. The increase was primarily driven by a $59 million
increase from our remaining international securities operations, reflecting
higher compensation paid to Financial Advisors on higher commission revenues,
increased formula-based and incentive compensation on higher revenues and
earnings, and expansion of our product, distribution and research
capabilities, including the acquisition noted above. Expenses of our
international investment operations increased $29 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 Traditional Participating Products segment. 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 efforts are attractive to issuers and lead underwriters,
engages in equity securities sales and trading, manages our hedge portfolios,
and engages in proprietary investments and syndications. We include the
division's asset-based management fees in the line captioned "commissions and
other income" in our consolidated statement of operations.

The Asset Management division pays the expenses of its own portfolio
managers for asset management and the expenses of its own proprietary sales
force for distribution of products to third parties.

Profitability of the Asset Management division depends primarily on our
ability to develop and retain a base of assets under management, both through
the U.S. Consumer and Employee Benefits divisions and directly from third
parties, on which we can earn asset-based fees, and to manage the level of
expenses incurred in the management of those assets. We generally base asset
management fees on the market value of the underlying assets and, accordingly,
profitability varies as these market values change due to external factors,
such as securities market conditions and interest rates and other factors that
may affect the values of particular investments. We also earn transaction-
based and performance-based fees which depend on such external factors. In
addition, revenue streams, including mark-to-market adjustments, from our
commercial mortgage securitizations and hedge portfolios are subject to market
fluctuations.

Division Results

The following table sets forth the Asset Management division's results for
the periods indicated.

Year Ended December 31,
-------------------------
2000 1999 1998
-------- -------- -------
(in millions)

Division operating results:
Revenues(1)......................................... $ 1,344 $ 1,137 $ 993
Benefits and expenses............................... 1,068 885 827
-------- -------- ------
Adjusted operating income........................... $ 276 $ 252 $ 166
======== ======== ======
Adjusted operating income by segment:
Investment Management and Advisory Services......... $ 154 $ 155 $ 144
Other Asset Management.............................. 122 97 22
-------- -------- ------
Total............................................. 276 252 166
Items excluded from adjusted operating income:
Realized investment gains, net of losses............ 1 1 1
-------- -------- ------
Income from continuing operations before income
taxes............................................... $ 277 $ 253 $ 167
======== ======== ======

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

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.

1999 to 1998 Annual Comparison. Adjusted operating income of our Asset
Management division increased $86 million, or 52%, in 1999 from 1998,
primarily due to an increase of $75 million from the Other Asset Management
segment. Income from continuing operations before income taxes increased $86
million, or 51%, as a result of the increase in adjusted operating income.

Investment Management and Advisory Services

Operating Results

The following table sets forth the Investment Management and Advisory
Services segment's operating results for the periods indicated.

Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in millions)

Operating results:
Revenues(1)........................................... $ 874 $ 768 $ 740
Benefits and expenses................................. 720 613 596
------- ------- -------
Adjusted operating income............................. $ 154 $ 155 $ 144
======= ======= =======

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

Adjusted Operating Income

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.

1999 to 1998 Annual Comparison. Adjusted operating income increased $11
million, or 8%, from 1998 to 1999. The increase resulted primarily from
increased revenues from management of institutional and retail customer
assets, reflecting growth in assets under management partially offset by a
decline in revenues from management of our general account and increased
expenses associated with the expansion of our asset management capabilities
and compensation charges that are linked to revenues.

Revenues

The following table sets forth the Investment Management and Advisory
Services segment's revenues, as shown in the table above under "--Operating
Results", by source for the periods indicated.

Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in millions)

Revenues:
Retail customers(1).................................... $ 244 $ 225 $ 203
Institutional customers................................ 409 322 296
General account........................................ 221 221 241
------- ------- -------
Total revenue........................................ $ 874 $ 768 $ 740
======= ======= =======

- --------
(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.

2000 to 1999 Annual Comparison. Revenues, as shown in the table above under
"--Operating Results", 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.

1999 to 1998 Annual Comparison. Revenues increased $28 million, or 4%, from
1998 to 1999. Increases of $26 million from management of institutional
customer assets, primarily from our real estate advisory business, and $22
million from management of retail customer assets were partially offset by a
$20 million decline in revenues from management of our general account assets
due to a decline in market value of fixed income securities from rising
interest rates as well as net asset outflows.

Expenses

2000 to 1999 Annual Comparison. Expenses, as shown in the table above under
"--Operating Results", 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.

1999 to 1998 Annual Comparison. Expenses increased $17 million, or 3%, from
1998 to 1999, primarily as a result of increased expenses associated with the
expansion of our domestic and international asset management capabilities and
compensation charges that are linked to revenues.

Other Asset Management

Operating Results

The following table sets forth the Other Asset Management segment's
operating results for the periods indicated.

Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in millions)

Operating results:
Revenues.............................................. $ 470 $ 369 $ 253
Benefits and expenses................................. 348 272 231
------- ------- -------
Adjusted operating income............................. $ 122 $ 97 $ 22
======= ======= =======

Adjusted Operating Income

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. Subject to market conditions and
other considerations, we currently expect to increase the assets of these
portfolios to a maximum of about $20 billion during the year 2001.

1999 to 1998 Annual Comparison. Adjusted operating income increased $75
million from 1998 to 1999. The increase came from improvements in adjusted
operating income from each of the segment's business lines. The commercial
mortgage securitization operations produced $41 million of the increase, with
an additional $21 million from our hedge portfolios.

Our commercial mortgage securitization operation reported adjusted operating
income of $22 million for 1999, which came primarily from market value
increases on financial instruments used to hedge the value of mortgages in
inventory due to tightening of credit spreads and a rise in interest rates,
compared to $19 million of losses in 1998.

The hedge portfolios initiated investing activities during the second
quarter of 1998 and had no significant results during 1998. The portfolios'
trading strategies resulted in adjusted operating income of $21 million in
1999. At December 31, 1999, the portfolios held assets, including both
principal positions and securities financing positions, of approximately $5.9
billion, compared to $3.9 billion a year earlier.

Revenues

2000 to 1999 Annual Comparison. Revenues, as shown in the table above under
"--Operating Results", increased $101 million, or 27%, 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.

1999 to 1998 Annual Comparison. Revenues increased $116 million, or 46%,
from 1998 to 1999. Revenues from our commercial mortgage securitization
operations increased $49 million, primarily from market value increases on
financial instruments used to hedge the value of mortgages in inventory as
noted above. Revenues from our equity sales and trading operations increased
$46 million, primarily due to increased transaction volume. Revenues from the
hedge portfolios increased $21 million.

Expenses

2000 to 1999 Annual Comparison. Expenses, as shown in the table above under
"--Operating Results", increased $76 million, or 28%, 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.

1999 to 1998 Annual Comparison. Expenses increased $41 million, or 18%, from
1998 to 1999. The increase came primarily from an increase of $35 million in
our equity sales and trading operations, from $213 million in 1998 to $248
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 underwriting 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 expenses.

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 expenses
because they are directly related to our demutualization and could distort the
trends associated with our business operations.

Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
(in millions)

Adjusted operating income:
Corporate-level activities(1)..................... $ (22) $ 126 $ (141)
Other businesses:
International ventures.......................... (32) (11) (2)
Other........................................... 50 22 109
------- ------- -------
Total......................................... (4) 137 (34)
Items excluded from adjusted operating income:
Sales practices remedies and costs................ -- (100) (1,150)
Realized investment gains, net of losses.......... (280) 357 85
Divested businesses............................... (636) (47) (196)
Demutualization expenses.......................... (143) (75) (24)
------- ------- -------
Income (loss) from continuing operations before
income taxes...................................... $(1,063) $ 272 $(1,319)
======= ======= =======

- --------
(1) Includes consolidating adjustments.

Corporate-level activities consist primarily of corporate-level expenses not
allocated to any of our business segments, including costs for company-wide
initiatives such as enhancement of our Internet capabilities, and investment
returns on our unallocated equity, which is capital that is not deployed in
any of our segments, returns

from 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.

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
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. 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. We expect general and administrative expenses at the
corporate level, including costs for company-wide technology development, to
continue in 2001 at approximately the same level as those incurred during
2000. The decrease in investment income net of interest expense, from $386
million in 1999 to $287 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, which we
include in "divested businesses", as well as the $141 million decline in
adjusted operating income and a $68 million increase in demutualization
expenses.

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".

1999 to 1998 Annual Comparison. Corporate and Other operations resulted in
pre-tax income of $137 million in 1999, compared to a $34 million pre-tax loss
in 1998, on an adjusted operating income basis. The $171 million improvement
came primarily from corporate-level activities.

Corporate-level activities resulted in pre-tax income of $126 million in
1999, compared to a pre-tax loss of $141 million in 1998. The $267 million
improvement in these results was due in part to a one-time $114 million
reduction of liabilities for our own employee benefits arising from a
clarification of law that led us to take into account previously unrecognized
assets in that amount. In addition, investment income, net of interest expense
at the corporate level, increased $63 million from $323 million in 1998 to
$386 million in 1999 primarily as a result of expansion of our debt-financed
corporate investment portfolio, lower average interest rates on corporate
borrowings and a greater level of unallocated equity. The remainder of the
reduction in pre-tax losses from corporate-level activities came primarily
from a $37 million improvement from currency fluctuation exposure assumed from
our International Insurance segment under an internal hedging program. Results
from corporate-level activities benefited from income related to our own
qualified pension plan amounting to $197 million in 1999 and $179 million in
1998. This income is partially offset in our consolidated results by charges
for our

100

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 $201 million in 1999 and $159 million in
1998. General and administrative expenses at the corporate level, on a gross
basis before qualified pension plan income, amounted to $576 million in 1999
and $570 million in 1998.

Other businesses included in Corporate and Other operations contributed pre-
tax income of $22 million in 1999 compared to $109 million in 1998. The $87
million decline was primarily due to results from our wind-down group credit
insurance operations and our remaining Canadian insurance operations. Our
wind-down group credit insurance operations recorded a pre-tax loss of $6
million in 1999, compared to a pre-tax gain of $53 million in 1998. The 1998
pre-tax income came from a $55 million release of reserves for credit
insurance premium refunds and related administration costs that were
established in 1997 under a remediation program. Our remaining Canadian
insurance operations recorded pre-tax income of $19 million in 1999, compared
to $60 million pre-tax income in 1998. The $41 million decrease primarily
resulted from inclusion in 1998 results of a $39 million reduction in the
reserves relating to this retained business that we originally established at
the time of the sale of the Canadian branch of The Prudential Insurance
Company of America, in 1996.

Income from continuing operations before income taxes improved $1.591
billion, from a loss of $1.319 billion in 1998 to $272 million in 1999. The
improvement came primarily from a $1.050 billion decrease in charges for sales
practices remedies and costs, an increase of $272 million in realized
investment gains, net of losses, and the $171 million improvement in adjusted
operating income, as well as a $149 million reduction in losses from divested
businesses, partially offset by a $51 million increase in demutualization
expenses.

Traditional Participating Products Segment

The Traditional Participating Products segment includes our domestic in
force participating policies and assets that will be used for the payment of
benefits on these policies, including policyholder dividends, as well as other
assets and equity that support these policies. In connection with our
demutualization, we will cease offering these domestic participating products.

In December of each year, the Board of Directors of The Prudential Insurance
Company of America 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.

Operating Results

The following table sets forth the Traditional Participating Products
segment's operating results for the periods indicated.

Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
(in millions)

Operating results:
Revenues(1)......................................... $ 8,611 $ 8,356 $ 8,332
Benefits and expenses(2)............................ 8,064 8,040 8,126
------- ------- -------
Adjusted operating income........................... 547 316 206
Items excluded from adjusted operating income:
Realized investment gains, net of losses and
related charges:
Realized investment gains, net of losses............ 91 338 1,697
Related charges(3).................................. (445) (310) (236)
------- ------- -------
Total realized investment gains, net of losses and
related charges.................................. (354) 28 1,461
------- ------- -------
Income from continuing operations before income
taxes............................................... $ 193 $ 344 $ 1,667
======= ======= =======

- --------
(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.

101

Adjusted Operating Income and Income from Continuing Operations Before
Income Taxes

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. 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".

1999 to 1998 Annual Comparison. Adjusted operating income increased $110
million, or 53%, in 1999 from 1998. The increase was primarily a result of a
$121 million decrease in operating expenses. Income from continuing operations
before income taxes decreased $1.323 billion, or 79%, from 1998 to 1999,
primarily as a result of a $1.433 billion decline in realized investment
gains, net of losses and related charges, partially offset by the increase in
adjusted operating income.

Revenues

2000 to 1999 Annual Comparison. Revenues, as shown in the table above under
"--Operating Results", increased $255 million, or 3%, in 2000 from 1999.
Premiums were relatively unchanged, amounting to $4.320 billion in 2000 and
$4.276 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.

1999 to 1998 Annual Comparison. Revenues remained relatively unchanged in
1999 as compared to 1998. Premiums decreased $84 million, or 2%, from $4.360
billion in 1998 to $4.276 billion in 1999, as an increase in paid-up additions
was more than offset by the attrition of traditional whole life business that
resulted in a decline in renewal premiums from $2.780 billion in 1998 to
$2.633 billion in 1999. The decline in renewal premiums reflects the trend
from traditional whole life to variable life as discussed above, as well as
the impact of policy rescissions arising from the implementation of the
alternative dispute resolution process required under our principal life
insurance sales practices class action settlement. Most of the sales practices
related rescissions took place in 1999, and the process was substantially
completed in early 2000. These rescissions in the aggregate will have a
negative impact on renewal premiums of about $45 million on an annual basis,
and we do not expect that they will result in a material adverse impact on our
future results. The attrition was partially offset by an increase in paid-up
additions from $1.503 billion in 1998 to $1.577 billion in 1999.

Net investment income increased $117 million, or 3%, from $3.794 billion in
1998 to $3.911 billion in 1999. The increase resulted from an increase in the
base of general account invested assets, offset in part by a slight decline in
investment yield.

Benefits and Expenses

2000 to 1999 Annual Comparison. Benefits and expenses, as shown in the table
above under "--Operating Results", 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 $66 million, from $4.550 billion in 1999 to $4.616
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 $93 million, or 11%, from $859
million in 1999 to $766 million in 2000, as a result of our continued efforts
to reduce operating cost levels which resulted in reduced employee costs.

102

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.

1999 to 1998 Annual Comparison. Benefits and expenses remained relatively
unchanged from 1998 to 1999. Operating expenses, including distribution costs
that we charge to expense, decreased $121 million, or 12%, from $980 million
in 1998 to $859 million in 1999, as a result of continued efforts to reduce
costs associated with this business and the impact of costs incurred in 1998
toward this objective. Policyholder benefits and related changes in reserves
and interest credited to policyholders increased $57 million, from $4.493
billion in 1998 to $4.550 billion in 1999, reflecting the continued increase
in the length of time that policies have been in force.

Dividends to policyholders, net of dividends related to net realized
investment gains, amounted to $2.246 billion in 1999, relatively unchanged
from $2.229 billion in 1998. There was no significant adjustment to the
dividend scale for 1999 from the scale for 1998. Mortality experience for both
1999 and 1998 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 $49 million for 2000, $61 million for
1999, and $58 million for 1998. 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 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. As
indicated above, we will cease sales of traditional participating products in
connection with our demutualization.

Policy Surrender Experience

The following table sets forth policy surrender experience for the
Traditional Participating Products segment, measured by cash value of
surrenders, for the periods indicated. These amounts do not correspond to the
income statement impact of surrenders under GAAP. In managing this business,
we analyze the cash value of surrenders because it is a measure of the degree
to which policyholders are maintaining their in force business with us, a
driver of future profitability.

Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
(in millions)

Cash value of surrenders........................... $ 1,217 $ 1,226 $ 1,219
======= ======= =======
Cash value of surrenders as a percentage of mean
future policy benefit reserves.................... 2.7% 2.9% 2.9%
======= ======= =======

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.

1999 to 1998 Annual Comparison. The total cash value of surrenders in 1999
was approximately equal to 1998. Traditional life policy surrenders reflected
$123 million of incremental surrenders in 1999 associated with the
implementation of the sales practices remediation program. Absent this
activity, the cash value of surrenders of traditional whole life and term life
would have decreased $116 million in 1999 from 1998, which we believe reflects
the impact of customer retention programs that we implemented in late 1997.
The levels of surrenders as a percentage of mean future policy benefit
reserves remained constant from 1998 to 1999.

Liquidity and Capital Resources

Prudential Financial, Inc.'s principal source of revenues to meet its
obligations, including the payment of shareholder dividends and operating
expenses, will be dividends and interest income from its direct and indirect
subsidiaries. In addition, we anticipate that upon completion of the
demutualization, Prudential Financial, Inc.

103

will have approximately $1.4 to $1.5 billion in net proceeds from the Class B
Stock and IHC debt if they are issued, as well as proceeds from the additional
extraordinary dividend if it is declared and paid. Prudential Financial,
Inc.'s 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. One purpose of the destacking is to enable each entity to
pay dividends to Prudential Financial, Inc. according to its own financial
condition and permitted dividend capacity, rather than from and through The
Prudential Insurance Company of America according to its financial condition
and permitted dividend capacity. See "Demutualization and Related
Transactions--Related Transactions--The Destacking" for a discussion of the
destacking. For the reason noted in the following paragraph, the ability of
The Prudential Insurance Company of America to pay stockholder dividends will
be constrained in the initial years following demutualization, and the
principal sources of funds to meet Prudential Financial, Inc.'s obligations,
including the payment of stockholder dividends, will be the net proceeds from
issuances of the Class B Stock and IHC debt, the extraordinary dividend and
dividends from the destacked subsidiaries.

New Jersey insurance law provides that, except in the case of extraordinary
dividends or distributions, all dividends or distributions paid by The
Prudential Insurance Company of America 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 will be reduced to zero, thereby limiting
The Prudential Insurance Company of America's ability to pay a dividend
immediately following demutualization. Unassigned surplus is expected to grow
thereafter in the ordinary course of business over time, including gains from
operations and any realized capital gains. The Prudential Insurance Company of
America 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 will also contain restrictions potentially limiting dividends by The
Prudential Insurance Company of America applicable to the Financial Services
Businesses in the event the Closed Block Business is in financial distress.
For further discussion of The Prudential Insurance Company of America's
results according to statutory accounting principles, see "Demutualization and
Related Transactions--Related Transactions--Extraordinary Dividend".

Other states 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 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, Inc.

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.

104

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 our
current credit ratings. We manage our borrowing according to company-wide,
legal entity and business borrowing limits, which are monitored by our
Treasurer's department and reviewed regularly by the Committee on Finance and
Dividends 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.

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, LLC, a wholly owned subsidiary of The Prudential
Insurance Company of America, historically has served as a financing company
for The Prudential Insurance Company of America 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,
Euro medium-term notes and master notes and lends the proceeds of its
borrowings to The Prudential Insurance Company of America and its
subsidiaries, generally at cost. Borrowings of the destacked subsidiaries from
Prudential Funding will be repriced to market terms upon the destacking.
Prudential Securities also engages in external unsecured financing. Following
the effective date of the demutualization, we anticipate that Prudential
Funding's outstanding borrowings will decline over time as it transitions into
a financing company primarily for The Prudential Insurance Company of America
and its remaining subsidiaries. We anticipate that our other companies,
including the destacked subsidiaries, will borrow on market terms from third
parties or their affiliates.

Under a support agreement, The Prudential Insurance Company of America 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.

The Prudential Insurance Company of America and Prudential Funding have
unsecured committed lines of credit as of December 31, 2000 with 36 banks
totaling $3.5 billion, of which $1.0 billion expires in May 2001, $1.5 billion
expires in May 2002 and the remaining $1.0 billion expires in May 2004. 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 The Prudential Insurance Company of America of at least $8.5 billion
of combined surplus and asset valuation reserve based on statutory accounting
principles prescribed under New Jersey law ("statutory accounting
principles"). We expect that the combined surplus and asset valuation reserve
that is required to be maintained under these facilities will be reduced upon
renewal of our credit lines prior to demutualization from $8.5 billion to a
level that The Prudential Insurance Company of America can meet on a pro forma
basis after giving effect to the destacking and related transactions. As of
December 31, 2000, The Prudential Insurance Company of America's combined
surplus and asset valuation reserve, based on statutory accounting principles,
was $11.708 billion. On a pro forma basis, giving effect to the destacking and
transactions related to the demutualization, this amount would be $6.979
billion. These transactions include payments to former Canadian branch
policyholders and eligible policyholders located outside the United States,
and extraordinary dividends assumed to be paid at the time of the
demutualization to Prudential Financial, Inc. by The Prudential Insurance
Company of America based upon its financial condition and risk-based capital
ratio at December 31, 2000. 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 billion. Our actual ability to
borrow under this facility depends on market conditions. This facility expires
in July 2001. Prudential Securities Group, which includes the principal
operating subsidiaries that conduct our Private Client Group and International
Securities and Investments activities, also

105

maintains an $800 million committed line of credit with a syndicate of banks,
which expires in June 2001. We also use uncommitted lines of credit from banks
and other financial institutions.

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

As of December 31,
-------------------
2000 1999
--------- ---------
(in millions)

Borrowings:
Short-term debt............................................ $11,131 $10,858
Long-term debt:
Senior debt............................................... 1,514 4,526
Surplus notes............................................. 988 987
--------- ---------
Total long-term debt...................................... 2,502 5,513
--------- ---------
Total borrowings........................................ 13,633 16,371
--------- ---------
Total asset-based financing............................... 32,590 43,645
--------- ---------
Total borrowing and asset-based financings.............. $ 46,223 $ 60,016
========= =========

Our total borrowings consist of amounts used for general corporate purposes,
investment related debt and securities business related debt. Borrowings used
for general corporate purposes include those used for investing 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, institutional spread lending investment portfolios and
real estate related investments held in consolidated joint ventures.
Securities business related borrowings consist of debt issued to finance
primarily the liquidity of our broker-dealers, and our capital markets and
other securities business related operations.

We classified $2.5 billion of commercial paper at December 31, 1999 as long-
term debt based on our intent and ability as of that date to refinance these
borrowings under long-term syndicated credit line agreements. Subsequently,
these borrowings have been classified as short-term debt since, although we
continue to have the ability to refinance a portion of our commercial paper
borrowings under these credit line agreements, we no longer intend to do so in
the ordinary course of business. We will determine whether to utilize these
credit line agreements to refinance these borrowings based on future market
conditions, our future funding needs and other considerations.

Total borrowings and asset-based financing at December 31, 2000 decreased
approximately $13.8 billion, or 23%, from December 31, 1999, reflecting a $2.7
billion decrease in short-term and long-term debt and an $11.1 billion
decrease in asset-based financing. The decrease in short-term and long-term
debt came primarily from a decrease in outstanding commercial paper issued in
connection with short-term investment positions in our insurance operations.
The decrease in asset-based financing largely reflected the termination of the
institutional fixed income capital markets activities of Prudential Securities
Group. The remainder of our asset-based financing relates primarily to the
hedge portfolios and to "matched book" transactions in our broker-dealer
operations. The matched book transactions are principally utilized to
facilitate customer transactions. 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 6.31% for the year ended
December 31, 2000, 5.11% for 1999 and 5.48% for 1998. The total principal
amount of debt outstanding under Prudential Funding's medium-term note
programs was $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 6.67% for the year ended December 31, 2000,
5.61% for 1999 and 6.39% for 1998. See Note 9 of our audited consolidated
financial statements for additional information on our short-term and long-
term debt.

We had outstanding surplus notes totaling $988 million at December 31, 2000
and $987 million at December 31, 1999. These debt securities, which are
included as surplus of The Prudential Insurance Company of America 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. See
"Business--Ratings" for a discussion of our credit ratings.

106

We use interest rate swaps to convert some of our fixed rate long-term debt
to floating 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 "--Risk Management, Market Risk and Derivative
Instruments--Market Risk--Other Than Trading Activities--Market Risk Related
to Foreign Currency Exchange Rates" below.

Intermediate Holding Company Debt

As described in more detail under "Demutualization and Related
Transactions--Related Transactions--Class B Stock and IHC Debt Issuances", we
plan to issue shares of Class B Stock of Prudential Financial, Inc. to
institutional investors in a private placement concurrently with or within 30
days following this offering of our Common Stock. In connection with the
issuance of the Class B Stock, we also plan to issue debt securities through a
newly-formed intermediate holding company of The Prudential Insurance Company
of America, which debt we refer to as the "IHC debt", prior to, concurrently
with or within 30 days following the demutualization, and we currently intend
that the IHC debt will be insured by a bond insurer. If issued, 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.
The issuances of the Class B Stock and IHC debt are not assured and are not
conditions to completion of this offering. See "Demutualization and Related
Transactions--Related Transactions--Class B Stock and IHC Debt Issuances" for
a further discussion of the IHC debt.

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 to finance on
a secured basis through securities lending, repurchase, and dollar roll
transactions, and, through Prudential Funding, on an unsecured basis for
temporary cash flow mismatch coverage and to earn additional spread income,
primarily through our debt-financed investment portfolio included in Corporate
and Other operations.

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 amounted to $8.165 billion in 2000, $10.594
billion in 1999 and $12.079 billion in 1998. These withdrawals include
contractually scheduled maturities of traditional guaranteed investment
contracts totaling $1.785 billion in 2000, $2.620 billion in 1999 and $4.465
billion in 1998. 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.

107

In addition, many of our contracts contain provisions that discourage early
surrender. Market value adjustment features in some contracts provide for
adjustments of the amount available in the event of surrender to reflect
changes in the value of the underlying investments. We deduct policy loans,
which we report as assets, from amounts available on surrender. Some contracts
impose surrender charges that we deduct in the event of surrender before
specified dates.

We use these surrender charges and other contract provisions to mitigate the
extent, timing and profitability impact of withdrawals of funds by customers
from annuity contracts. The following table sets forth withdrawal
characteristics of our annuity reserves and deposit liabilities (based on
statutory liability values) as of the dates indicated.

As of December 31,
---------------------------
2000 1999
------------- -------------
% of % of
Amount Total Amount Total
------- ----- ------- -----
($ in millions)

Not subject to discretionary withdrawal
provisions........................................ $38,184 41% $37,990 40%
Subject to discretionary withdrawal, with
adjustment:
With market value adjustment...................... 22,602 24% 24,185 25%
At market value................................... 25,508 27% 25,544 27%
At contract value, less surrender charge of 5%
or more.......................................... 1,330 1% 1,380 1%
------- ---- ------- ----
Subtotal........................................ 87,624 93% 89,099 93%
Subject to discretionary withdrawal at contract
value with no surrender charge or surrender charge
of less than 5%................................... 6,746 7% 6,799 7%
------- ---- ------- ----
Total annuity reserves and deposit liabilities..... $94,370 100% $95,898 100%
======= ==== ======= ====

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, 2000 and 1999,
general account balances for variable life insurance products other than
single-payment life were $1.791 billion and $1.636 billion, respectively,
while separate account balances were $13.886 billion and $14.049 billion,
respectively.

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, 2000 and
1999, we had short-term investments of approximately $5 billion and $3
billion, respectively, and fixed maturity investments classified as "available
for sale" with fair values of $84 billion and $79 billion at those dates,
respectively. 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 $25.8 billion at December 31, 2000 and $45.3 billion at December 31,
1999. Prudential Securities Group's total capitalization, including equity,
subordinated debt and long-term debt, was $3.4 billion at December 31, 2000
and $3.2 billion at December 31, 1999. 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, 2000,
Prudential Securities Group had remaining assets amounting to approximately
$2.0 billion related to its institutional fixed income activities, as compared
to $17 billion at December 31, 1999. Substantially all of these assets were
financed by means of asset-based borrowings.

108

Prudential Securities Group finances its balance sheet principally through
asset-backed financing, including repurchase transactions, securities lending
arrangements and free credit balances in customers' accounts. Prudential
Securities Group may supplement these sources of funding through 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. Prudential Securities Group maintains a contingency
funding plan that is designed to permit it to repay obligations using
alternative forms of financing rather than by raising cash through the sale of
assets in the event that it experiences restrictions in access to unsecured,
uncommitted lines of credit and alternative forms of financing, including an
$800 million committed line of credit with a syndicate of banks that
terminates in June 2001.

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.

Deferred Acquisition Costs

We capitalize costs that vary with and are directly related to the
production of new insurance and annuity business. These costs include
commissions paid, 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 $7.063 billion at December
31, 2000 compared to $7.324 billion at December 31, 1999. Approximately 44% of
our total DAC at December 31, 2000 relates to our Individual Life Insurance
segment, and approximately 24% relates to our Traditional Participating
Products segment. Excluding the impact of unrealized investment gains and
losses, our total DAC increased $95 million, from $7.018 billion at December
31, 1999 to $7.113 billion at December 31, 2000. The $95 million increase came
primarily from growth of our international life insurance business. To date,
our experience on an overall basis has been generally consistent with our
assumptions used in determining the periods over which we write off this DAC.
However, 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.

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 businesses.

The primary risks inherent in our operations are market risk, product risk,
credit risk, and operating risk. We discuss various product risks, credit
risks and operating risks under "Risk Factors". We discuss various market
risks below.

109

Market Risk

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 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.

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 matching the relative
sensitivity of asset and liability values to interest rate changes, or
controlling "duration mismatch" of assets and liabilities. We have a target
duration mismatch constraint of plus or minus 0.5 years. As of December 31,
2000, the difference between the pre-tax duration of assets and the target
duration of liabilities in our duration managed portfolio was less than 0.2
years. We consider risk-based capital implications in our asset/liability
management strategies.

110

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 63% of our
consolidated assets, other than assets that we held in separate accounts, as
of December 31, 2000 and 58% as of December 31, 1999.

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, 2000 and 1999, 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.

This presentation does not include approximately $77 billion of insurance
reserve and deposit liabilities at December 31, 2000 and $75 billion at
December 31, 1999. 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 the following tables.

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)
Mortgage loans on real
estate................ 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)
========

111

December 31, 1999
--------------------------------------------------------
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..... $ 79,130 $ 74,968 $ (4,162)
Held to maturity....... 14,112 13,550 (562)
Mortgage loans on real
estate................ 15,826 15,104 (722)
Mortgage securitization
inventory............. 803 751 (52)
Policy loans........... 7,462 7,060 (402)
Derivatives:
Swaps.................. $ 4,205 124 265 141
Futures................ 4,579 (37) (240) (203)
Options................ 33 -- -- --
Forwards............... 3,424 (19) (19) --
Financial liabilities
with interest rate
risk:
Short-term and long-
term debt............. (16,563) (16,454) 109
Investment contracts... (25,394) (25,121) 273
--------
Total estimated
potential loss......... $ (5,580)
========

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, 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. Our estimated equity price risk using this
methodology at December 31, 1999 was $326 million, representing a hypothetical
decline in fair market value of equity securities we held at that date from
$3.264 billion to $2.938 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.

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

112

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 operations in Japan, which are
the most significant of these operations, 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, 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. Our estimated VaR
at December 31, 1999 for foreign currency assets not hedged to U.S. dollars,
measured at the 95% confidence level and using a one-month time horizon, was
$23 million, representing a hypothetical decline in fair market value of these
foreign currency assets from $752 million to $729 million. These calculations
use historical price volatilities and correlation data at a 95% confidence
level. We discuss limitations of VaR models below.

Our average monthly Value-at-Risk from foreign currency exchange rate
movements measured at the 95% confidence level over a one month time horizon
was $16 million during 2000 and $18 million during 1999.

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 15 of our audited consolidated financial
statements for a summary of our derivative positions as of December 31, 2000
and 1999. Under insurance statutes, our insurance companies may use derivative
securities in hedging activities that are intended to offset changes in the
market value of assets held, obligations and anticipated transactions and
certain income-generating activities. These statutes 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.

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.

113

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 are
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 $6 million at
December 31, 2000 and $13 million at December 31, 1999. 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 $9 million
during 2000 and $14 million during 1999. The following table sets forth a
breakdown of this VaR by risk component as follows:

As of Average As of Average
December 31, for December 31, for
2000 2000 1999 1999
------------ ------- ------------ -------
(in millions)

Interest rate risk................... $ 4 $ 6 $10 $12
Equity risk.......................... 2 3 3 2
--- --- --- ---
Total(1)............................ $6 $ 9 $13 $14
=== === === ===

- --------
(1) At December 31, 2000 and 1999, 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.

Recent Accounting Pronouncements

See Note 2 of our audited consolidated financial statements for a discussion
of recently issued accounting pronouncements.

114

RECENT DEVELOPMENTS

First Quarter 2001 Estimated Results

We have not yet completed preparing our financial results for the first
quarter of 2001 and the following information is subject to change pending
such completion. On a preliminary basis, we estimate that our adjusted
operating income, which excludes realized investment gains and losses and
related charges, demutualization expenses and results of divested businesses,
will be approximately $575 million in the first quarter of 2001 compared to
$861 million in the first quarter of 2000. Weak equity securities market
conditions during the first three months of 2001, characterized in particular
by significant declines in equity market valuations and retail clients'
transactions volume, had a significant adverse effect on the results of our
U.S. Consumer and Asset Management divisions. In contrast, market conditions
during the first quarter of 2000 were exceptionally strong. The most
significant effect of the weak market conditions was on commission revenues
from securities transactions. In addition, we continued to experience
Financial Advisor turnover during the first quarter of 2001 at a level
comparable to that in 2000. Declining equity securities prices also
contributed to a decline in assets under management, which in turn had a
negative effect on fees we earn based on asset values in our U.S. Consumer,
Employee Benefits, and Asset Management divisions. If the relatively
unfavorable securities market conditions that prevailed during the first
quarter of 2001 continue, our operating results will continue to be negatively
affected.

The decline in adjusted operating income was offset by an increase in net
realized investment gains. Consequently, we estimate that income from
continuing operations before taxes will be approximately $715 million compared
to $692 million in the comparable 2000 period. Net income for the three months
ended March 31, 2001 is estimated to be approximately $435 million compared to
$376 million in the comparable 2000 three-month period.

Acquisition of Kyoei Life Insurance Co., Ltd.

In the following discussion, U.S. dollar amounts are translated from
Japanese Yen amounts at a rate approximating the rate on the date of our
investment, i.e., $1 = (Yen)124.0.

On April 20, 2001, we completed the acquisition of Kyoei Life Insurance Co.,
Ltd. ("Kyoei"), a financially troubled Japanese life insurer now renamed
"Gibraltar Life Insurance Co., Ltd." or "Gibraltar Life." Our financial
commitment in Gibraltar Life totals approximately $1.2 billion. The
reorganization proceedings under the Corporate Reorganization Law of Japan
(which we refer to as the "Reorganization Law"), which substantially
restructured the assets and liabilities of Kyoei, were officially concluded on
April 23, 2001. Pursuant to these proceedings, on April 2, 2001, the Tokyo
District Court approved a reorganization plan ("Reorganization Plan")
providing for the restructuring of Kyoei's assets and liabilities. The
Reorganization Plan included the extinguishment of all existing stock for no
consideration and the issuance of one million new shares of common stock.
Under the Reorganization Plan, we contributed (Yen)50 billion ($403 million)
in cash to Gibraltar Life's capital and acquired 100% of Gibraltar Life's
newly issued common stock and provided (Yen)98 billion ($790 million) to
Gibraltar Life in the form of a subordinated loan. The new shares of common
stock were issued to Prudential Holdings of Japan, K.K., an indirect wholly
owned subsidiary of The Prudential Insurance Company of America. Gibraltar
Life will be included in our consolidated GAAP financial statements based on
the date of acquisition. On April 23, 2001, Moody's assigned an A2 insurance
financial strength rating to Gibraltar Life.

Gibraltar Life

Kyoei, now renamed Gibraltar Life, was incorporated in 1947 and at the
beginning of April 2001 had over five million policies in force and
approximately 9,800 employees, including 8,100 agents and sales management, in
approximately 590 offices across Japan. The company has business relationships
with a number of affinity groups or "associations", which provide Gibraltar
Life with access to their members or employees. Gibraltar Life's business
consists mainly of individual protection products, which account for over 80%
of the total number of in force policies.

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. Gibraltar Life distributes products
through an agency force and affinity channels. Some products are created
specifically for the affinity channels. In addition to offering insurance
products to individuals and groups, Gibraltar Life underwrites life
reinsurance. Gibraltar Life also has domestic and foreign subsidiaries,
including non-insurance businesses, which are not material to its financial
results. The foreign businesses include operations in Brazil and Indonesia.

115

Japanese life insurance companies offer products with guaranteed interest
rates to policyholders. The primary cause for Kyoei's gradual financial
deterioration over the past few years has been that the investment returns it
achieved on invested assets purchased with premiums and deposits received from
policyholders were lower than the guaranteed rates it had to pay to
policyholders (a so-called "negative spread"). For many years, insurance was
written with guaranteed rates to policyholders of up to 6.25%. With the
decline of the Japanese economy and Japanese financial and real estate markets
in the 1990s, together with low interest rates, Kyoei was unable to achieve
investment returns on its invested assets at least equal to the guaranteed
rates, and Kyoei experienced substantial negative spreads. Kyoei's average
investment returns fell from 3.82% for the fiscal year ended March 31, 1997 to
2.89%, 2.01% and 1.54%, for the fiscal years ended March 31, 1998, 1999 and
2000, respectively. The decline of the Japanese economy and of the Japanese
financial and real estate markets also resulted in a substantial deterioration
in the value in Kyoei's investment assets, and Kyoei experienced significant
and growing amounts of assets with impaired value. Finally, owing to its
deteriorating financial condition, lowered financial credit ratings, and
decreased public confidence in its financial viability, Kyoei's premiums and
other revenue declined over 23% from fiscal years 1996 to 1999, from (Yen)815
billion ($6.6 billion) to (Yen)627 billion ($5.1 billion), as reported by
Kyoei.

Kyoei was downgraded by Moody's to Caal in June 1999, indicating Moody's
belief that Kyoei offered "very poor" financial security (C is the lowest
rating). Kyoei's March 31, 2000 solvency margin of 211% was one of the weakest
in the Japanese life insurance industry. Kyoei's revenues, results of
operations and financial condition continued to deteriorate materially after
the announcement of its financial results for the fiscal year ended March 31,
2000, including material increases in surrenders and withdrawals prior to the
commencement of reorganization proceedings.

Kyoei's Financial Statements

Historically, Kyoei prepared financial statements in accordance with
generally accepted accounting principles in Japan, which we refer to as J
GAAP. J GAAP differs in material respects from U.S. GAAP. Kyoei's historical
financial statements were never reconciled to U.S. GAAP. Further, in
performing audits of Kyoei, its independent auditors did not follow U.S.
generally accepted auditing standards, so the audits performed would not
necessarily have resulted in identification and resolution of issues regarding
the appropriateness of accounting policies or procedures or the adequacy or
sufficiency of financial presentation in accordance with U.S. standards. For
the foregoing reasons, Kyoei's historically reported financial statements do
not reflect Kyoei's past financial performance in accordance with U.S. GAAP.
Furthermore, Kyoei's historical J GAAP financial statements do not reflect the
effects of Kyoei's restructuring pursuant to the Reorganization Plan.
Accordingly, we believe historical financial information regarding Kyoei is
not comparable to or indicative of Gibraltar Life's future financial condition
or operating results on a post-reorganization basis in accordance with U.S.
GAAP. For the foregoing reasons, we did not rely on historically reported
financial information in making our decision to acquire Kyoei.

Background and Strategy

We have had significant life insurance operations in Japan for approximately
20 years, as discussed under "Business--International Division". This has
positioned us to work with Kyoei to restore its financial viability and to
grow our position in the Japanese life insurance marketplace. After Kyoei's
announcement of its results for the fiscal year ended March 31, 2000, Kyoei's
financial situation deteriorated to the point that only a restructuring of its
in force business, combined with a substantial investment, appeared to be
adequate to revitalize the company. Kyoei filed a petition to commence
reorganization proceedings with the Tokyo District Court on October 20, 2000,
and the Tokyo District Court issued an order commencing the proceedings on
October 23, 2000. At the commencement of the proceedings, we were selected as
Kyoei's "Business Sponsor" (an informal status under the Reorganization Law)
which has allowed us to work with the reorganization trustee to restructure
Kyoei on a mutually acceptable basis, as described under "--Reorganization
Proceedings and Reorganization Plan" below.

We anticipate that our pre-acquisition Japanese operations and those of
Gibraltar Life will have different target markets; accordingly, the field
forces will remain separate and we intend that they be perceived as autonomous
in the marketplace. While we intend to continue Gibraltar Life's traditional
agent distribution system, we also plan to make changes to streamline its
management, to strengthen its compliance monitoring and to change its agent
compensation system to provide increased incentives for sales. We also intend
to enhance

116

Gibraltar Life's product portfolio by introducing new life insurance products
and, possibly, investment trust products from our International Investments
business. In addition, we plan to improve service levels, increase operating
efficiency and reduce expenses, and to use our global investment experience
and resources to improve Gibraltar Life's investment performance, including
realigning its portfolio to reduce risk, improve returns and better align
assets with liabilities; however, there is no assurance that we will be
successful in doing so.

Reorganization Proceedings and Reorganization Plan

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. The reorganization trustee
determines the extent and nature of claims against the company, identifies the
assets which the company owns or to which it is entitled, determines the
current value of the company's assets on a going concern basis, and prepares a
plan of reorganization that may adjust the liabilities owed creditors.
Following approval of the plan by the interested parties and the formal
recognition of the plan by the Tokyo District Court, the company re-emerges
from the reorganization and begins conducting business in an ordinary fashion.
In Kyoei's restructuring, the assets of Kyoei were written down to the value
set forth in the Reorganization Plan and the benefits to policyholders were
reduced. The restructuring eliminated Kyoei's negative net worth, and we
expect that its in force business will become profitable.

On October 20, 2000, upon Kyoei's filing under the Reorganization Law, the
Tokyo District Court issued an order generally freezing Kyoei's assets and
appointed an interim trustee who, on October 23, 2000, was appointed as sole
trustee. The trustee then commenced the formulation of the Reorganization
Plan. Prior to the October 23, 2000 order, in connection with our appointment
as Business Sponsor, we entered into an agreement with the interim trustee
providing, among other things, that the Reorganization Plan to be submitted to
the Tokyo District Court for approval would not require funds to be
contributed by the Life Insurance Policyholders Protection Corporation of
Japan.

On February 14, 2001, the trustee submitted the Reorganization Plan to the
Tokyo District Court. According to the adjusted asset valuation provided in
the Reorganization Plan, assets totaled (Yen)4,089 billion ($33.0 billion) as
of October 23, 2000, which included (Yen)364 billion ($2.9 billion) of an
intangible asset recognized for regulatory purposes under J GAAP (but not U.S.
GAAP). Prior to the policy reserve reductions and other liability adjustments
provided under the Reorganization Plan, Kyoei's liabilities totaled
(Yen)4,414.5 billion ($35.6 billion) as of October 23, 2000, resulting in a
negative net worth of (Yen)325.5 billion ($2.6 billion).

Kyoei's creditors approved the Reorganization Plan and on April 2, 2001 the
Tokyo District Court issued its official recognition order approving the
Reorganization Plan. The Reorganization Plan became effective immediately upon
the issuance of the recognition order, and is binding upon Kyoei, its
creditors, including policyholders, its shareholders and other interested
parties, whether or not they submitted claims or voted for or against the
plan. The newly appointed Gibraltar Life management team formally took control
of Kyoei on April 2, 2001 and on the same date Kyoei's name was changed to
"Gibraltar Life Insurance Co., Ltd.". We completed our acquisition of the
stock of Gibraltar Life on April 20, 2001, and the reorganization proceedings
were declared concluded by the Tokyo District Court on April 23, 2001.

Under the Reorganization Plan, Kyoei has been restructured as follows:

. Kyoei was discharged from all financial indebtedness, retaining only
liabilities under insurance policies and contracts, 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 remains responsible for pension liabilities, which we
currently believe to be understated by at least (Yen)68 billion ($548
million).

. An intangible asset of approximately (Yen)364 billion ($2.9 billion) was
established for regulatory reporting purposes under J GAAP and will be
written off over the applicable period. Neither the intangible asset nor
its amortization is recognized under U.S. GAAP financial reporting.

. We contributed (Yen)50 billion ($403 million) in cash to Gibraltar Life's
capital and acquired 100% of Gibraltar Life's newly issued common stock,
and we further provided (Yen)98 billion ($790 million) to Gibraltar Life
in the form of a subordinated loan.

. There are no policy changes for group life, collective term and
reinsurance policies.

. The guaranteed rate on all other in force policies has been reduced to
1.75%.

117

. Statutory reserves were first reduced to the lowest level allowed by
Japanese regulation and then reduced by an additional 8% on restructured
policies except individual annuities (these annuities will only be
subject to the reserve reductions if they are surrendered).

. Special surrender penalties will be imposed on existing policies
according to the following schedule (for each fiscal year ending March
31):

2002 2003 2004 2005 2006 2007 2008 2009
---- ---- ---- ---- ---- ---- ---- ----

15% 14% 12% 10% 8% 6% 4% 2%

. Although participating policies retain their current participating
status, it is not anticipated that policy dividends will be paid until
such time as Gibraltar Life's remaining intangible asset is fully
amortized, Gibraltar Life has reached the standard reserve level as
defined in the Japanese insurance business law, and Gibraltar Life has
achieved cumulative profits equal to our aggregate initial investment on
a J GAAP basis.

. In years four and eight following the recognition of the Reorganization
Plan by the Tokyo District Court, a special dividend to policyholders
will be payable based on 70% of net gains, if any, over the
Reorganization Plan valuation of real estate and loans, net of
transaction costs and taxes.

. No funds were requested from the Life Insurance Policyholders Protection
Corporation of Japan.

While there can be no assurance, we believe that the Reorganization Plan has
eliminated Kyoei's existing "negative spread" and that the in force business
will become profitable. While the surrender penalties are intended to limit
policyholder surrenders and withdrawals following implementation of the
Reorganization Plan, we anticipate that significant policyholder surrenders
and withdrawals will occur, further reducing the size and ongoing premium
income of the business we have purchased. While we believe we will be able to
operate Gibraltar Life on a profitable basis after the acquisition, there is
no assurance we will achieve that objective.

Pursuant to the Reorganization Plan, Kyoei's balance sheet was restructured
to reflect the write-down of its assets, the modification of its liabilities
and our capital and loan commitment as discussed above. The table below
compares Kyoei's assets as of October 23, 2000 (i) based on information
obtained from Kyoei and contained in the Reorganization Plan and (ii)
according to the asset valuation adopted in the Reorganization Plan. Columns B
and D below show the financial information in Columns A and C converted to
U.S. dollars based on the exchange rate approximating the rate as of the date
of our investment ($1=(Yen)124.0).

As of October 23, 2000
In accordance with J GAAP
(unaudited)

(A) (B) (C) (D)
-------------- ---------------- --------------- ----------------
Asset Balances Adjusted Assets
as of 10/23/00 Provided under
Provided by Column A Amounts Reorganization Column C Amounts
Kyoei ((Yen) in US$ Millions Plan ((Yen) in US$ Millions
Account millions) ($1=(Yen) 124.0) millions) ($1=(Yen) 124.0)
------- -------------- ---------------- --------------- ----------------

Assets
Cash and Deposits....... 83,489 673 83,489 673
Call Loans.............. 335,000 2,702 335,000 2,702
Monetary Claims Bought.. 13,096 106 11,899 96
Money in Trust.......... 386,011 3,113 386,011 3,113
Securities.............. 1,745,671 14,077 1,703,212 13,736
Loans................... 1,365,299 11,010 1,088,467 8,778
Policy Loans........... 58,108 469 58,108 469
Corporate/General
Loans................. 1,307,191 10,541 1,030,359 8,309
Real Estate............. 144,534 1,166 39,024 315
Accounts Receivable from
Agencies............... 294 2 294 2
Accounts Receivable from
Reinsurers............. 1,348 11 56,446 455
Other Assets............ 27,849 225 19,158 155
Customers' Liabilities
for Acceptance &
Guarantee.............. 2,000 16 2,000 16
Reserves for Bad Debt... (19,767) (159) 0 0
Intangible Asset........ 0 0 364,000 2,935
--------- ------ --------- ------
Total Assets............ 4,084,824 32,942 4,089,000 32,976

118

Prior to the policy reserve reductions and other liability adjustments
provided under the Reorganization Plan, Kyoei's liabilities totaled
(Yen)4,414.5 billion ($35.6 billion) as of October 23, 2000. The policy
reserve reductions and other liability adjustments under the Reorganization
Plan resulted in total liabilities equaling total assets (i.e., (Yen)4,089
billion as noted above). Gibraltar Life's immediate post-reorganization equity
is therefore equal to our contribution of (Yen)50 billion ($403 million) in
cash to Gibraltar Life's capital to acquire 100% of Gibraltar Life's newly
issued common stock.

The information contained in Column A above was prepared based upon
information obtained from Kyoei. The information contained in Column C above
is based on the Reorganization Plan. In assessing this information, you should
consider the following:

. the information was prepared in accordance with J GAAP which, as noted
above, differs in material respects from information prepared in
accordance with U.S. GAAP;

. the adjustments reflected in the Reorganization Plan were determined
based upon information and advice from consultants of the trustee
(accountants, investment bankers and actuaries) and the trustee's best
judgment and are not necessarily adjustments that would have been
prepared had the information been prepared in accordance with pro forma
requirements established by the U.S. Securities and Exchange Commission;
and

. for U.S. GAAP accounting purposes, the assets and liabilities of
Gibraltar Life will be adjusted to their fair value. The fair value of
assets and liabilities may differ significantly from those reflected
above due to changes in market values and changes in the composition of
assets and liabilities.

Employees

As of April 1, 2001, Gibraltar Life employed approximately 9,800 employees.
The employees of Gibraltar Life, excluding select members of senior
management, are covered by agreements between Gibraltar Life and Gibraltar
Life Labor Union, a group consisting of Gibraltar Life employees that
establishes basic terms of employment and work rules. The agreement relating
to the terms of employment will be in effect until February 28, 2002. The work
rules are subject to revision from time to time.

Risks of Acquisition

The acquisition involves a number of risks:

. Our belief that we can operate Gibraltar Life on a profitable basis
after its reorganization may be wrong, and Gibraltar Life could
experience post-reorganization policyholder surrenders and withdrawals
materially different than those we anticipate and/or incur material
losses, including deterioration of assets and/or lower than expected
investment returns.

. The reorganization proceedings did not extinguish the liabilities of
Gibraltar Life's affiliates. While there can be no assurance, we do not
believe any existing or contingent liabilities of Gibraltar Life's
affiliates involve exposures that are material to our consolidated
financial position or results of operations.

119

DEMUTUALIZATION AND RELATED TRANSACTIONS

The demutualization will be consummated pursuant to a plan of
reorganization. The following is a summary of the material terms of the
demutualization and the plan of reorganization, including the destacking, the
issuances of Class B Stock and IHC debt and the extraordinary dividend. The
statements below concerning the plan of reorganization are only a summary, and
reference is made to the plan of reorganization, a copy of which is filed as
an exhibit to the registration statement of which this prospectus forms a
part. Each statement is qualified in its entirety by such reference.

The Demutualization

Summary of the Plan of Reorganization

Upon effectiveness of the plan of reorganization, The Prudential Insurance
Company of America will convert from a mutual life insurance company owned by
its policyholders to a stock life insurance company and become a wholly owned
indirect subsidiary of Prudential Financial, Inc. Eligible policyholders as
defined in the plan of reorganization will receive shares of Prudential
Financial, Inc.'s Common Stock, cash or policy credits upon the extinguishment
of all membership interests in The Prudential Insurance Company of America. In
addition, two closed blocks will be established for the benefit of certain
participating individual life insurance policies and annuities issued by The
Prudential Insurance Company of America and its Canadian branch, respectively.
Concurrently, we will sell Common Stock in the offering.

Approval of the Plan of Reorganization

We expect the Commissioner of Banking and Insurance of the State of New
Jersey to hold a public hearing regarding the plan of reorganization
commencing on July 17, 2001. We expect the policyholder vote on the plan of
reorganization to be held at a policyholders' meeting on July 31, 2001.

Allocation and Payment of Compensation to Eligible Policyholders

Eligible policyholders entitled to receive compensation in the
demutualization consist of:

. policyholders of The Prudential Insurance Company of America;

. U.S. policyholders of Pruco Life Insurance Company, Pruco Life Insurance
Company of New Jersey and Prudential Select Life Insurance Company of
America, each of which is a direct or indirect subsidiary of The
Prudential Insurance Company of America;

. holders of certain policies that The Prudential Insurance Company of
America transferred to London Life Insurance Company in 1996 in
connection with the sale of most of its Canadian branch operations and
certain successor policies thereto;

. holders of health insurance policies transferred to Aetna remaining in
Prudential's name or issued by Aetna following notice of non-renewal or
cancellation; and

. holders of policies that The National Life Assurance Company of Canada
and The Prudential Insurance Company of America jointly issued pursuant
to a reinsurance agreement.

In certain situations involving group policies issued to trusts established
by Prudential, we will distribute demutualization compensation directly to
certain participants (which may be either employers or individuals depending
on the nature of the group), rather than the group policyholder, as if each
participant were a separate policyholder.

In addition, we have offered to certain former policyholders who rescinded
their policies, or who gave up their right to acquire policies, through the
alternative dispute resolution process that we established in connection with
the settlement of our principal life insurance sales practices litigation, the
opportunity to repurchase their policies and participate in the
demutualization as eligible policyholders.

The compensation an eligible policyholder receives under the plan of
reorganization will be based on the number of shares of Common Stock
notionally allocated to that eligible policyholder. The formula for allocating
notional shares of Common Stock among eligible policyholders has two
components. Every eligible policyholder will be entitled to receive a minimum
allocation of eight notional shares, which we refer to as the basic fixed

120

component of compensation. Every eligible policyholder will receive only one
basic fixed component regardless of the number of eligible policies the
eligible policyholder owns or their value. Eligible policyholders will also be
entitled to receive an allocation of notional shares, which we refer to as the
basic variable component, if the eligible policies they own have contributed,
or are expected to contribute, to Prudential's surplus. We will calculate the
amount of the basic variable component, if any, for each eligible policyholder
based upon actuarial formulas. In addition, eligible policyholders receiving
cash or policy credits but not Common Stock will be entitled to an additional
allocation of notional shares equal to approximately 10% of the aggregate of
such policyholder's basic fixed and variable components, subject to a minimum
of two additional notional shares.

We will distribute to all eligible policyholders actual shares of Common
Stock with respect to the number of shares notionally allocated to them in the
demutualization, except as follows:

. We will provide policy credits with respect to policies that are tax-
qualified individual retirement annuities, tax-deferred annuities or
individual life insurance policies or individual annuity contracts issued
in connection with specified tax-qualified plans.

. We will pay cash to each eligible policyholder whose address for mailing
purposes, as of the effective date of the demutualization, as shown on
our records is outside the United States or is shown on our records to be
an address at which mail to such eligible policyholder is undeliverable
within the United States and to each eligible policyholder who holds a
policy that was issued by the Canadian branch of The Prudential Insurance
Company of America and is denominated in Canadian dollars. Cash that we
cannot provide to eligible policyholders because we cannot locate them
will be subject to the unclaimed property acts and escheat laws of
applicable jurisdictions.

. Each eligible policyholder to whom we allocate 50 (or such lower number
as The Prudential Insurance Company of America's Board of Directors
specifies) or fewer shares will receive cash unless such eligible
policyholder affirmatively elects to receive shares.

. We will pay cash to each eligible policyholder whose policy is subject to
a judgment lien, creditor lien (other than a policy loan made by
Prudential) or bankruptcy proceeding as of the effective date of the
demutualization.

We will determine the amount of cash or policy credits an eligible
policyholder will receive by multiplying the number of notional shares
allocated with respect to policies receiving cash or policy credits pursuant
to the foregoing by the greater of:

. the initial public offering price, or

. an amount equal to the initial public offering price plus, if the average
closing price of the Common Stock for the first 20 days of trading is
greater than 110% of the initial public offering price, such excess, but
not to exceed 10% of the initial public offering price.

We fixed the right of eligible policyholders to receive compensation as of
December 15, 2000, the date on which The Prudential Insurance Company of
America's Board of Directors adopted the plan of reorganization. Except for
the former policyholders who rescinded policies, or who gave up their right to
acquire policies, in the sales practices alternative dispute resolution
process and elect to repurchase their policies to participate in the
demutualization, an eligible policyholder must own one or more eligible
policies that were in force, or were deemed to have been in force under the
plan of reorganization, on the board adoption date in order to be eligible to
receive compensation. We expect to distribute demutualization compensation to
eligible policyholders within 45 days of the effective date, except that where
the amount of compensation to be received by an eligible policyholder cannot
be determined until after the effective date, because of the provision
discussed above that applies if the Common Stock trades at a price greater
than the specified amount over the first 20 trading days, we expect to
distribute compensation within 45 days of the date that such amount and type
are determined.

We have retained Milliman & Robertson, Inc., an actuarial consulting firm,
to advise us in connection with actuarial matters involved in the development
of the plan of reorganization and the payment of compensation to eligible
policyholders. The opinion of Daniel J. McCarthy, M.A.A.A., an independent
consulting actuary associated with Milliman & Robertson, Inc., dated December
12, 2000 states that the methodology and underlying assumptions used to
allocate compensation among eligible policyholders set forth in the plan of
reorganization are reasonable and appropriate as required by the New Jersey
demutualization law. We have included a copy of this opinion as Annex A of
this prospectus.

121

Commission-Free Program and Sales Facility

The plan of reorganization requires us to establish one or more commission-
free programs under which eligible policyholders receiving 99 or fewer shares
of Common Stock in the demutualization, and other shareholders holding 99 or
fewer shares, may sell all, but not less than all, of their shares without
paying brokerage commissions or similar expenses. The commission-free program
will also permit policyholders receiving 99 or fewer shares to purchase enough
additional shares to own exactly 100 shares. In the event that, on any
particular day, the number of shares to be sold under the commission-free
program exceeds the number of shares to be purchased, we will be offered the
opportunity to buy back all or any portion of the excess shares. The sales and
purchases made under the commission-free program will be at prevailing market
prices without brokerage commissions or similar expenses. The commission-free
program will involve transactions effected on a periodic basis on the NYSE.
The first commission-free program will begin no sooner than 90 days after the
effective date of demutualization and not later than the second anniversary of
the effective date of the demutualization and will last for not less than
three months. We estimate that upon consummation of the demutualization we
will have approximately 4 million policyholders who will in total receive in
excess of 165.5 million shares that we believe would be eligible to
participate in the commission-free program. In addition to the commission-free
program, we will arrange procedures for policyholders to obtain share
certificates from the transfer agent or request transfer of their shares from
the transfer agent to brokerage accounts. In addition, our transfer agent is
expected to offer a sales facility for policyholders holding 1,000 shares of
Common Stock or less, to sell shares, at their own expense, through the
transfer agent. The sales facility will not be available until at least 30
days after the effective date of the demutualization.

The Closed Block

Under the plan of reorganization, The Prudential Insurance Company of
America will establish a Closed Block for certain participating individual
life insurance policies and annuities issued by The Prudential Insurance
Company of America in the United States. The policies that we will include in
the Closed Block are specified participating individual life insurance
policies and individual annuity contracts that are in force on the effective
date of the reorganization and on which we are currently paying or expect 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 policies included in the Closed Block.
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 none of the included policies is in force unless the
Commissioner of the New Jersey Department of Banking and Insurance consents to
an earlier termination.

We will also establish 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. Our objective in establishing
a separate closed block for these Canadian policies is to maintain consistency
with the way we have 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 will operate this closed block, which,
because of the substantially smaller number of outstanding Canadian policies,
will be insignificant in size, in a similar manner as the U.S. Closed Block
and reflect it in our Corporate and Other operations of our Financial Services
Businesses; it is not included in our Traditional Participating Products
segment or the Closed Block Business.

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

See "Unaudited Pro Forma Condensed Consolidated Financial Information--
Unaudited Pro Forma Closed Block Information" for pro forma financial
information and the funding of the Closed Block.

122

Related Transactions

. on or within 30 days following the date of the demutualization, the
"destacking" or reorganization of the ownership of various subsidiaries
of The Prudential Insurance Company of America so that they become
direct or indirect subsidiaries of Prudential Financial, Inc.,

. concurrently with or within 30 days following the date of the
demutualization, the issuance of Class B Stock designed to reflect the
performance of the Closed Block Business and prior to, concurrently with
or within 30 days following the date of the demutualization, the
issuance of IHC debt, and

. on or within 30 days following the date of the demutualization, the
payment by The Prudential Insurance Company of America of an
extraordinary dividend, in addition to the destacking, not to exceed
$2.5 billion to Prudential Financial, Inc. for use in the Financial
Services Businesses.

The Destacking

The first planned change is the "destacking". The following chart
illustrates the organization of our principal operating companies prior to the
demutualization.

[CHART]

In connection with the demutualization, Prudential Financial, Inc. will
become the ultimate holding company for all of our companies. The destacking
will establish Prudential Financial, Inc.'s ownership of The Prudential
Insurance Company of America and the destacked subsidiaries in parallel
ownership chains, rather than "stacked" ownership through The Prudential
Insurance Company of America. The destacking will be accomplished as an
extraordinary dividend concurrently with, or within 30 days following, the
demutualization. Destacking requires regulatory review separate from the
approval required for demutualization and, if it is disapproved prior to
demutualization, we will proceed with the demutualization without the
destacking or, subject to the appropriate regulatory approvals, with a partial
destacking. To effect the destacking, The Prudential Insurance Company of
America will distribute to Prudential Financial, Inc., 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,

123

. our principal asset management operations, and

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

The following chart illustrates the principal elements of our organization
after giving effect to the demutualization and the complete destacking.

[CHART]

Class B Stock and IHC Debt Issuances

General

We plan to issue shares of Class B Stock of Prudential Financial, Inc. to
institutional investors in a private placement concurrently with or within 30
days following this offering of our Common Stock. We also plan to issue the IHC
debt prior to, concurrently with or within 30 days following the
demutualization, and we currently intend that the IHC debt will be insured by a
bond insurer. If issued, the Class B Stock will be designed to reflect the
performance of the Closed Block Business, including the Closed Block Assets and
Closed Block Liabilities and the Surplus and Related Assets as well as other
related assets and liabilities noted below, including the IHC debt. If issued,
the IHC debt is expected to be serviced by, and the dividends to the holders of
the Class B Stock are expected to reflect, the net cash flows of the Closed
Block Business over time. If we issue the Class B Stock, the Common Stock
issued in this offering would then reflect the performance of our Financial
Services Businesses, which will then 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 will also include other traditional insurance products previously
included in the Traditional Participating Products segment but which will not
be included in the Closed Block, and the proceeds of issuing the Class B Stock
and IHC debt.

We believe the sale of the Class B Stock and IHC debt will improve the value
and investment attributes of the Common Stock distributed to eligible
policyholders in our demutualization and in this offering, and this is the
purpose of their issuances. If we issue the Class B Stock, we expect the Common
Stock will then reflect the performance of our post-demutualization Financial
Services Businesses without reflecting the relatively lower returns of the
participating products included in the Closed Block. Further, we will allocate
the entire net proceeds from the issuances of the Class B Stock and the IHC
debt to our Financial Services Businesses. We will use most of these proceeds
in our Financial Services Businesses, which should further increase the value
of the Financial Services Businesses, although a minority portion of the
proceeds of the IHC debt will secure servicing thereof as discussed below.

124

For this purpose, on April 25, 2001, we entered into a subscription
agreement pursuant to which American International Group, Inc. and Pacific
LifeCorp agreed to purchase 1.8 million and 0.2 million shares of Class B
Stock, respectively, for a purchase price of $87.50 per share at the time of
our demutualization, which will generate aggregate gross proceeds of $175
million. We also are negotiating a commitment with a bond insurer to insure
approximately $1.75 billion of IHC debt, which debt we plan to market prior to
this offering. The subscription agreement contains various conditions to the
investors' commitments, including the absence of specified material adverse
changes affecting us or the Closed Block, the absence of material changes to
the proposed terms of the Class B Stock or IHC debt, and the maintenance of
credit ratings. Successful conclusion of negotiations with the bond insurer is
not assured and any commitment of the bond insurer obtained will also contain
conditions to its obligations. We also retain discretion not to issue the
Class B Stock or IHC debt. Accordingly there is no assurance that the Class B
Stock or the IHC debt will ultimately be issued. Furthermore, the investors'
commitments expire on April 30, 2002 unless extended by the investors in
specified circumstances.

If the Class B Stock is issued, dividends declared and paid on the Common
Stock will then 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.

If issued, 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. 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, Inc. 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 The
Prudential Insurance Company of America under specified (but not all)
provisions of New Jersey insurance law. We currently anticipate that CB
Distributable Cash Flow will substantially exceed the Target Dividend Amount.
Subject to the discretion of the Board of Directors of Prudential Financial,
Inc., we currently anticipate paying dividends on the Class B Stock at the
Target Dividend Amount for the foreseeable future.

If we issue the IHC debt, the issuer would be Prudential Holdings, LLC.
Prudential Holdings, LLC will distribute most of the net proceeds to
Prudential Financial, Inc. for use for general corporate purposes. Prudential
Holdings, LLC will deposit a minority portion of the net proceeds of the IHC
debt in a debt service coverage account which, together with reinvested
earnings thereon, will constitute a source of payment and security for the IHC
debt. Since such net proceeds and earnings will be allocated to the Financial
Services Businesses, to the extent they are used to service payments with
respect to the IHC debt or to pay dividends to Prudential Financial, Inc. 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 of issuances of the Class B Stock and IHC debt
will reflect capital in excess of that necessary to support the Closed Block
Business and that the Closed Block Business will have sufficient

125

assets and cash flows to service the IHC debt. The investors in the Class B
Stock have agreed to this allocation and usage of issuance proceeds. The
Closed Block Business will be financially leveraged through the issuance of
the IHC debt, and dividends on the Class B Stock will be subject to prior
servicing of the IHC debt.

The issuances of the Class B Stock and the IHC debt are not assured and are
not conditions to completion of this offering. If we proceed with this
offering but do not issue any Class B Stock, the Common Stock will reflect the
performance of all our businesses, including the Traditional Participating
Products segment, and we will not achieve the intended benefits noted above.
If we issue the Class B Stock, we will refer to the Financial Services
Businesses and the Closed Block Business as the "Businesses".

If the Class B Stock is issued, in order to separately reflect the financial
performance of the Financial Services Businesses and the Closed Block
Business, we will allocate all our assets and liabilities and earnings between
the two Businesses and account for them as if they are separate legal
entities. Assets and liabilities allocated to the Closed Block Business will
be those that we consider appropriate to operate that business. You can see
pro forma information regarding this allocation under "Unaudited Pro Forma
Condensed Consolidated Financial Information". After giving effect to the
demutualization and the issuance of Class B Stock and the IHC debt, the Closed
Block Business would consist principally of:

. Within Prudential Holdings, LLC, the principal amount of the IHC debt and
related unamortized debt issuance costs.

The following table sets forth the allocation of assets and liabilities to
the Closed Block Business on a pro forma basis as of December 31, 2000:

Assets Liabilities
------- -----------
(in millions)

Traditional Participating Products segment within The
Prudential Insurance Company of America(1):
Closed Block Assets...................................... $56,114 --
Surplus and Related Assets............................... 3,671 --
Closed Block Liabilities................................. $59,402
Deferred policy acquisition costs and other assets....... 2,302 --
Prudential Holdings, LLC:
IHC debt................................................. -- 1,750
Unamortized debt issuance costs.......................... 20 --
Prudential Financial, Inc.:
Dividends received from Prudential Holdings, LLC......... -- --
------- -------
Closed Block Business(1).................................. $62,107 $61,152
======= =======

- --------
(1) Closed Block Business amounts exclude certain assets and liabilities
allocated to the Financial Services Businesses at the time of the
establishment of the Closed Block.

All assets and liabilities of Prudential Financial, Inc. and its
subsidiaries not included in the Closed Block Business will constitute the
Financial Services Businesses. If the Class B Stock is issued, the Financial
Services Businesses will include the capital previously included in the
Traditional Participating Products segment in excess of the amount necessary
to support the Closed Block Business. Additionally, the minor portion of
traditional insurance products historically included in the Traditional
Participating Products segment but which will not be included in the Closed
Block would be reflected in our Individual Life Insurance segment.

126

It is expected that any inter-business loan referred to above will be repaid
in full out of Surplus and Related Assets, but not Closed Block Assets. Such
loan will be subordinate to the IHC debt.

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

[DIAGRAM]

If we issue the Class B Stock, you should understand that there will be no
legal separation of the two Businesses. The foregoing allocation of assets and
liabilities would not require Prudential Financial, Inc., The Prudential
Insurance Company of America, any of their subsidiaries, or the Closed Block
to transfer any specific assets or liabilities to a new entity.

The Class B Stock will be 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, Inc. 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
separation of the Businesses would cease and the intended benefits of such
separation noted above would also cease.

Financial Reporting

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

Even though Prudential Financial, Inc. will allocate all of its consolidated
assets, liabilities, revenue, expenses and cash flow between the Financial
Services Businesses and the Closed Block Business, there will be no legal
separation of the two Businesses, and holders of Common Stock and holders of
Class B Stock will be common stockholders of Prudential Financial, Inc. and,
as such, will be subject to all risks associated with an investment in
Prudential Financial, Inc. and all of its businesses, assets and liabilities.
Holders of Common Stock and holders of Class B Stock will vote together as one
class, except as otherwise required by law and except that the holders of
Class B Stock will have class voting or consent rights with respect to
specified matters directly affecting the Class B Stock. Holders of Common
Stock and Class B Stock will also have dividend and liquidation

127

rights with respect to Prudential Financial, Inc., as further described under
"Description of Capital Stock--Common Stock". This means that:

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

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

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

Within the Closed Block Business the assets and cash flows attributable to
the Closed Block will 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 will 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 will be reported as part of the Closed
Block Business, although no cash flows or assets of the Closed Block will
inure to the benefit of the holders of Common Stock or Class B Stock. The
Closed Block Assets will not be available to service interest and principal of
the IHC debt or dividends on the Class B Stock.

Inter-Business Transfers and Allocation Policies

If the Class B Stock is issued, while all our assets and liabilities will be
allocated between the Businesses, we will be 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 will retain discretion over accounting policies and the
appropriate allocation of earnings between the two Businesses.

If the Class B Stock is issued, the Board of Directors will adopt certain
policies with respect to inter-business transfers and accounting and tax
matters, including the allocation of earnings. Such policies are summarized
below. In the future, the Board of Directors may modify, rescind or add to any
of these policies, although it has no present intention to do so. However, the
decision of the Board of Directors to modify, rescind or add to any of these
policies would be subject to the Board of Directors' general fiduciary duties.
In addition, we have agreed, or expect to agree, with the investors in the
Class B Stock and the IHC debt that, in most instances, these policies may not
be changed without their consent.

Inter-Business Transactions and Transfers

The transactions which will be permitted between the Financial Services
Businesses and the Closed Block Business, subject to any required regulatory
approvals, 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 The Prudential Insurance Company of America may
be for the benefit of either the Financial Services Businesses or the
Closed Block Business and assets of the Financial Services Businesses
within The Prudential Insurance Company of America may be transferred to
the Closed Block Business within The Prudential Insurance Company of
America 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, Inc. 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, Inc.

128

. 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, Inc. and, if applicable, The Prudential Insurance
Company of America.

. 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 will be 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,
will be based upon actual expenses incurred under 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 GAAP 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, will be 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.

Allocation Policies

Policies relating to the allocation of assets, liabilities, equity and
earnings between the two Businesses include:

. All our assets, liabilities, equity and earnings will be allocated
between the two Businesses and accounted for as if the Businesses were
separate legal entities. Assets and liabilities allocated to the Closed
Block Business will be those that we consider appropriate to operate that
Business. All remaining assets and liabilities of Prudential Financial,
Inc. and its subsidiaries will constitute the Financial Services
Businesses.

. For financial reporting purposes, revenues, administrative, overhead and
investment expenses, taxes other than income taxes, and certain
commissions and commission-related expenses associated with the Closed
Block Business will be 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 is considered directly attributable to the Closed Block Business
and is therefore allocated in its entirety to the Closed Block Business.

. 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 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, or expect to
agree, to indemnify the investors with respect to certain matters, and
such indemnification will be borne by the Financial Services Businesses.

Taxes

The Closed Block Business within each legal entity will be treated as if it
were a consolidated subsidiary of Prudential Financial, Inc. Accordingly, if
the Closed Block Business has taxable income, it will recognize its share of
income tax as if it were a stand-alone company. If the Closed Block Business
has losses or credits, it will recognize a current income tax benefit.

If the Closed Block Business within any legal entity has taxable income, it
will pay its share of income tax in cash to the Financial Services Businesses.
If it has losses or credits, it will receive its benefit in cash from the
Financial Services Businesses. If the losses or credits cannot be currently
utilized in the consolidated federal

129

income tax return of Prudential Financial, Inc. for the year in which such
losses or credits arise, the Closed Block Business will still 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, Inc. 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 attributable to tax periods after this
offering, except to the extent that such tax or interest is directly
attributable to the characterization of the IHC debt for tax purposes, in
which case such tax or interest shall be borne by the Financial Services
Businesses.

Class B Stock

You should read "Description of Capital Stock--Common Stock" below for a
further description of the terms of the Class B Stock that may be issued and
how such terms may affect your rights as a holder of our Common Stock.

IHC debt

We plan to issue the IHC debt through Prudential Holdings, LLC, a newly-
formed intermediate holding company of The Prudential Insurance Company of
America, whose principal asset will be 100% of the stock of The Prudential
Insurance Company of America. If issued, the IHC debt will be sold in a
private placement to institutional investors prior to, concurrently with or
within 30 days following this offering of our Common Stock. We expect that the
IHC debt will be serviced by the net cash flows of the Closed Block Business,
and that principal and interest payments on the IHC debt will be insured by a
bond insurer. Most of the net proceeds of the IHC debt will be distributed to
Prudential Financial, Inc. for use for general corporate purposes. A minority
portion of the net proceeds of the IHC debt will be deposited by Prudential
Holdings, LLC in a debt service coverage account which, together with
reinvested earnings thereon, will constitute a source of payment and security
for the IHC debt. The issuance of the IHC debt is not assured and is not a
condition to completion of this offering.

The IHC debt will be senior, secured indebtedness of Prudential Holdings,
LLC. Its maturity is expected to be 22 years, although we expect that it will
be callable at a premium at our option. We expect that the IHC debt will be
secured by such proportion of the outstanding shares of The Prudential
Insurance Company of America as represents adequate collateral for the holders
of IHC debt, which proportion of shares may not exceed 49%. We anticipate that
the terms of the IHC debt will contain various covenants, such as prohibitions
on Prudential Holdings, LLC's incurrence of indebtedness other than the IHC
debt, limitations on dividend payments by The Prudential Insurance Company of
America with respect to the Closed Block Business, and limitations on the
business activities of Prudential Holdings, LLC and the non-insurance business
activities of The Prudential Insurance Company of America.

Extraordinary Dividend

At the time of our demutualization or within 30 days thereafter, we expect
that The Prudential Insurance Company of America will pay an extraordinary
dividend, in addition to the destacking, not to exceed $2.5 billion to
Prudential Financial, Inc. for use in the Financial Services Businesses. The
amount actually paid will be based on the capital and risk positions of The
Prudential Insurance Company of America at the time of or shortly prior to
this offering and is intended to be the maximum amount that, together with the
demutualization and the destacking, would maintain capital adequacy of The
Prudential Insurance Company of America at levels consistent with our
financial strength ratings objectives. We estimate that this extraordinary
dividend would have been in the amount of $360 million if it had occurred on
December 31, 2000; however, that amount could be substantially larger by the
time of this offering. Following the destacking and the additional
extraordinary dividend, The Prudential Insurance Company of America's
statutory net income and surplus will be significantly reduced. The following
table reflects historical statutory financial information for The Prudential
Insurance Company of America and pro forma statutory financial information
reflecting the demutualization, the destacking

130

and the extraordinary dividend as if they had occurred on January 1, 2000 for
purposes of statutory net gain/(loss) from operations and net income (loss)
and on December 31, 2000 for statutory adjusted capital purposes:

As of and for
the Year Ended
December 31, 2000
--------------------
Historical Pro Forma
---------- ---------
(in millions)

Surplus and Asset Valuation Reserve (1)................... $11,741 $7,012
One-half dividend liability (2)........................... 1,289 1,289
------- ------
Total Adjusted Capital................................... 13,030 8,301
Net (loss) from operations (3)............................ (134) (334)
Net realized capital gains................................ 283 283
------- ------
Net income (loss)........................................ $ 149 $ (51)
======= ======

- --------
(1) Includes asset valuation reserve for subsidiaries of $33 million not
included in The Prudential Insurance Company of America's asset valuation
reserve.
(2) One-half of the policyholder dividends apportioned for payment to December
31 of the following year and policyholder dividends not yet apportioned.
(3) Pro forma net loss from operations does not include $351 million we expect
to pay to holders of certain policies that The Prudential Insurance
Company of America transferred to London Life Insurance Company in
connection with the sale of most of its Canadian branch operations. These
payments will be recorded as an expense at the time of the demutualization
but have not been reflected in the pro forma net loss from operations as
they will not have a continuing impact.

In addition to the adjustments for the destacking and the additional
extraordinary dividend, pro forma 2000 net (loss) from operations and net
income (loss) above has been adjusted to reflect the elimination of the equity
tax because The Prudential Insurance Company of America will no longer be
subject to equity taxes after demutualization, and the related earnings on
these adjustments.

As discussed under "Management's Discussion and Analysis of Financial
Condition and Results of Operations", the current statutory limitation on the
payment of non-extraordinary dividends by The Prudential Insurance Company of
America is that dividends be paid from unassigned surplus in an amount not
greater than the greater of (1) 10% of surplus as regards policyholders as of
the December 31 next preceding the date of the proposed dividend 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.

For purposes of (1) of the foregoing limitation, The Prudential Insurance
Company of America's surplus was $8.640 billion at December 31, 2000 and, on a
pro forma basis, giving effect to the foregoing assumptions, would have been
$5.110 billion at December 31, 2000. We anticipate that surplus will be
adequate to provide for dividends to Prudential Financial, Inc. after
demutualization.

With respect to (2) of the foregoing limitation, The Prudential Insurance
Company of America's 2000 net (loss) from operations reflected the negative
impact of significant non-recurring items including charges associated with
the restructuring of the capital markets activities of Prudential Securities,
a wholly-owned subsidiary, and the establishment of additional insurance
reserves due to a portfolio strategy we implemented to sell securities with
lower investment income yields underlying some of our long duration products
in the Retail Investments and Other Employee Benefits segments and to reinvest
the proceeds in higher yielding securities. Statutory accounting changes that
became effective on January 1, 2001 allow for the reduction of certain
significant tax provisions included in net (loss) from operations. In 2001,
statutory net gain from operations will be negatively affected by the expense
associated with payments of demutualization consideration to be made to
holders of certain policies that The Prudential Insurance Company of America
transferred to London Life Insurance Company in connection with the sale of
most of its Canadian branch operations.

With respect to the "unassigned surplus" requirement, while unassigned
surplus will be reduced to zero upon demutualization, we expect it will grow
thereafter in the ordinary course of business over time, including gains from
operations and any realized capital gains.

After giving effect to the above transactions, we believe that The
Prudential Insurance Company of America will be adequately capitalized to meet
all regulatory requirements and to carry out its business plan.

Federal Income Tax Consequences to Policyholders

It is a condition to the effectiveness of the plan of reorganization that we
receive either rulings from the Internal Revenue Service or opinions from one
or more nationally recognized independent tax counsel substantially to the
effect that:

. policies issued or purchased before the demutualization will not be
deemed newly issued, issued in exchange for existing policies or newly
purchased for any material federal income tax purpose as a result

131

of the conversion of The Prudential Insurance Company of America from a
mutual to a stock life insurance company under the plan of reorganization
or, in the case of the policies described in the following paragraph, the
crediting of compensation in the form of policy credits; and

. the crediting of compensation in the form of policy credits to tax-
qualified individual retirement annuities (under section 408 or 408A),
tax deferred annuities (under section 403(b)), or individual life
insurance policies or individual annuity contracts issued in connection
with plans qualified under section 401(a) or 403(a) of the Internal
Revenue Code will not adversely affect the tax-favored status accorded to
such contracts under the Internal Revenue Code, and will not be treated
as a distribution under, or a contribution to, such contracts under the
Internal Revenue Code.

By letters dated April 26, 2000 and June 12, 2000, we received these rulings
from the IRS. We have requested a supplemental ruling letter from the IRS
confirming that certain changes that have been made to the proposed structure
since we received the ruling letters, such as the issuance of the Class B
Stock, would not change these rulings.

It is also a condition to the effectiveness of the plan of reorganization
that a nationally recognized independent tax counsel opines that the summary
of the principal federal income tax consequences to eligible policyholders of
their receipt of compensation under the plan of reorganization that is set
forth in the policyholder information booklet is accurate as of the date of
such policyholder information booklet and remains accurate in all material
respects under the applicable federal income tax law in effect as of the
effective date of the plan of reorganization, with the exception of
developments between the mailing date and the effective date of the plan of
reorganization that The Prudential Insurance Company of America determines to
be not materially adverse to the interests of the eligible policyholders.

Federal Income Tax Consequences to Prudential

By letter dated April 26, 2000, we received rulings from the IRS
substantially to the effect that:

. no income, gain or loss should be recognized by Prudential Financial,
Inc. or The Prudential Insurance Company of America for federal income
tax purposes as a result of the conversion of The Prudential Insurance
Company of America from a mutual to a stock life insurance company or the
distribution of Common Stock to eligible policyholders in exchange for
their membership interests in The Prudential Insurance Company of
America;

. the federal income tax attributes of The Prudential Insurance Company of
America, including its tax basis and holding period of its assets,
carryforwards of tax losses or other tax benefits (if any) and accounting
methods should not be affected by its conversion from a mutual to a stock
life insurance company;

. the affiliated federal income tax group of which The Prudential Insurance
Company of America is the common parent immediately before the
reorganization will remain in existence and will continue to be able to
file a consolidated federal income tax return, with Prudential Financial,
Inc. as the new common parent of the group and The Prudential Insurance
Company of America as an eligible member for inclusion in the group; and

. the major distributions in connection with the destacking described in
this prospectus are tax-free to Prudential Financial, Inc., The
Prudential Insurance Company of America and its affiliates.

We have requested a supplemental ruling letter from the IRS confirming that
certain changes that have been made to the proposed structure since we
received the ruling letter, such as the issuance of the Class B Stock, would
not change these rulings.

With respect to the Class B Stock, the IRS will not issue advance rulings on
the classification of an instrument whose dividend rights are determined by
reference to the earnings of a segregated portion of the issuing corporation's
assets, including assets held by a subsidiary, and accordingly, no ruling has
been sought from the IRS. In addition, there are no court decisions or other
authorities bearing directly on the classification of instruments with
characteristics similar to those of the Class B Stock. However, we believe
that the Class B Stock should be treated as common stock of Prudential
Financial, Inc., and that the issuance of the Class B Stock should not result
in taxation to us.

The preceding summary of the federal income tax consequences to
policyholders and Prudential is based on the Internal Revenue Code,
regulations thereunder, administrative interpretations thereof and judicial
interpretations with respect thereto, all of which are subject to change. In
particular, Congress could enact legislation affecting the treatment of stock
with characteristics similar to the Class B Stock, or the Treasury Department
could issue regulations that change current law. Any future legislation or
regulations could, but are unlikely to, apply retroactively. We may issue
additional Common Stock in exchange for Class B Stock if the enactment of
legislative or administrative changes would adversely affect us.

The opinions of our special tax counsel are not binding on the IRS. The
opinions of our special tax counsel, and any IRS rulings obtained, are based
on the accuracy of representations, statements and undertakings by us.

132

BUSINESS

We are one of the largest financial services institutions in the United
States. We provide a wide range of insurance, investment management and other
financial products and services and have more than 15 million individual and
institutional customers in the United States and over 30 foreign countries. We
have one of the largest distribution forces in the financial services
industry, with approximately 16,250 sales people worldwide at December 31,
2000, including approximately

. 6,100 Prudential Agents,

. 3,500 international Life Planners, and

. 6,650 domestic and international Financial Advisors.

We also distribute our retail products through a number of alternative
channels, including PruSelect and our workplace marketing platforms. We have a
leading or significant market presence in most of the markets we serve.

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

FINANCIAL SERVICES BUSINESSES Primary Products Primary Sales Channels Other Sales Channels
- ------------------------------------------------------------------------------------------------------------------------

U.S. Consumer Division
- ------------------------------------------------------------------------------------------------------------------------
Individual Life Insurance .Variable life .Prudential Agents .PruSelect
.Term life .Financial Advisors
.Universal life
- ------------------------------------------------------------------------------------------------------------------------
Private Client Group .Financial advisory and .Financial Advisors .Internet (securities
brokerage services transactions only)
----------------------------------------------------------------------------------------
.Consumer banking .Direct sales .Telemarketing
.Internet
.Financial Advisors
.Prudential Agents
- ------------------------------------------------------------------------------------------------------------------------
Retail Investments .Mutual funds .Financial Advisors .Independent financial
.Wrap-fee products .Prudential Agents advisors
.Variable annuities .Independent registered
.Fixed annuities representatives
.Unit investment trusts
- ------------------------------------------------------------------------------------------------------------------------
Property and Casualty Insurance .Automobile .Prudential Agents .Property and casualty
.Homeowners .Direct distribution agents
.Independent agents
.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
----------------------------------------------------------------------------------------
.Real estate franchises .Institutional sales forces
and relocation services
- ------------------------------------------------------------------------------------------------------------------------
International Division
- ------------------------------------------------------------------------------------------------------------------------
International Insurance .Traditional whole life .Life Planners
.Term life
- ------------------------------------------------------------------------------------------------------------------------
International Securities and .International securities .Financial Advisors .Internet
Investments 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

133

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 variable life,
term 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 and distributes mutual funds, variable
and fixed annuities, wrap-fee products and unit investment trusts to
U.S. retail customers.

. Property and Casualty Insurance manufactures and distributes automobile
and homeowners insurance products 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 in excess of
$100,000 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. 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 this market as
well as in the emerging affluent and pre-retirement markets. Our
domestic customer base today includes over 2.5 million mass affluent
customers. We have taken several steps to improve the quality of
services provided to the mass affluent market by our Prudential Agent
and Financial Advisor distribution system. First, we are targeting new
hires for our Prudential Agent force with college educations and prior
experience and are enhancing the training and product choices available
to them. Second, we have increased the productivity standards for our
Prudential Agents several times in the past few years. The actions we
have taken to improve the quality and productivity of our Prudential
Agent force have resulted in a reduction in the size of the agency
force. In 2001, we have again increased the productivity standards.
Third, we have begun to transition our Prudential Agents from a
transaction focus using proprietary products to meet our customers'
financial needs to an approach of offering advice on an array of
products manufactured by Prudential as well as other companies. We call
this strategy "Advised Choice" and believe it enables our customers to
make more informed decisions about investment and insurance choices. We
also have begun to transition our Financial Advisors from a transaction
focus to an approach emphasizing fee-based financial advisory services
to better meet the needs of the mass affluent market.

. Improve the profitability of our existing U.S. consumer franchise. In
addition to our 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. In addition, we
will seek to sell certain commodity products to the mass market through
telemarketing, the Internet and our workplace marketing and employee
benefits platform.

134

other than money market funds, through this channel totaled $1.2 billion
in 2000. We also seek to expand sales of our mutual funds and separate
account products by participating in competitors' variable annuities and
wrap-fee programs. We have invested in workplace/payroll deduction models
with the acquisition of a property and casualty subsidiary that
specializes in workplace marketing and our minority investment in an
Internet-based employee benefits broker.

Prudential Securities was one of the first full-service brokerage
firms to develop and offer electronic choices in connection with full-
service brokerage accounts. We believe that Internet technology and
electronic commerce will continue to provide us with new and more
efficient ways to communicate with and distribute products to our
customers.

. Reposition Prudential Securities' domestic businesses to focus on
investors rather than issuers. In the fourth quarter of 2000, we exited
Prudential Securities' lead-managed underwriting and institutional fixed
income businesses. We continue to provide fixed income products and
services and are increasing the resources for fixed income research and
portfolio capabilities to support our individual investor clients. We
also continue to engage in underwritings and syndications led by
investment banks to generate new issues market products for our investor
clients. Our equity research group, which previously focused on
supporting our investment bank, will be refocused on providing objective
investment advice to both our individual and institutional investor
clients. We believe that this strategic repositioning, through which we
will seek to enhance the quality of advice and service that we provide
to our clients, will differentiate us from our competitors, and will
reduce our earnings volatility.

. Utilize common processes and tools across businesses. For each of our
customer markets, we seek to make our customers' experiences consistent
regardless of how they access Prudential. Our U.S. retail businesses
will utilize standard processes and tools, such as financial planning,
estate planning, and trust capabilities to serve the needs of our mass
affluent customers. All businesses will operate a common customer
account platform through an Internet foundation and linkage that will
serve the needs of our mass affluent and mass market customers.

. Improve retention and persistency. We have undertaken a number of
initiatives to improve retention and persistency. For example, we seek
to contact policyholders in our Individual Life Insurance and
Traditional Participating Products segments who wish to terminate a
policy and offer alternate solutions to meet their needs. We believe
that these efforts have reduced our life insurance premium outflows in
recent years. Further, 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. We believe that this process contributes to
improved persistency. Between 1997 and 2000, first year persistency of
our individual life insurance products, including in our Traditional
Participating Products segment, improved from 87.5% to 92.9%.

Individual Life Insurance

Our Individual Life Insurance segment manufactures and distributes
individual variable life, term life, recently introduced 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 affluent market through PruSelect. Going forward, we will
seek to sell certain commodity products to the mass market through
telemarketing, the Internet and our workplace marketing and employee benefits
platform. Historically we have written most of our traditional individual life
insurance products on a participating basis and, for financial reporting
purposes, these products are included in our Traditional Participating
Products segment. Upon demutualization, these policies, together with the
assets supporting them, will be segregated for accounting purposes from our
other assets and liabilities in the Closed Block. Following demutualization,
we will continue to service policyholders with policies in the Closed Block
through our Prudential Agents and other distributors as well as centralized
service centers. However, following demutualization, traditional participating
products will not be written and are not part of our growth strategy.

Unless otherwise indicated in the discussion below, we include historical
information regarding both our non-participating policies included in the
Individual Life Insurance segment and participating policies included in our
Traditional Participating Products segment, reflecting the historical
development of our business through the initial establishment of the Closed
Block. However, unless otherwise indicated, statements below relating to

135

our current strategy relate only to the Individual Life Insurance segment. The
future operation of the Traditional Participating Products segment is
discussed separately under "--Traditional Participating Products" below.

At December 31, 1999 we had the largest individual life insurance business
in the United States in terms of statutory in force premiums according to A.M.
Best. At December 31, 2000 we had the largest individual variable life
insurance business in the United States in terms of variable life insurance
assets according to Tillinghast-Towers Perrin. In 2000, in the United States,
we were the sixth largest seller of individual variable life insurance, the
fifth largest seller of individual term life insurance and the eighth largest
seller of all types of individual life insurance combined, in each case in
terms of new annualized premiums according to LIMRA.

Life Insurance Industry

Individual life insurance in the United States is, in aggregate, a mature
industry. According to A.M. Best, new ordinary life policies issued, including
whole, variable and term life, declined at an annual rate of 1.2% between 1995
and 1999. During this period new annualized premiums for variable and term
life increased by an average of 22.9% and 10.2% per year, respectively,
according to LIMRA.

Operating Data

The following table sets forth premium, product mix and other information
for Individual Life Insurance and the life insurance products included in the
Traditional Participating Products segment as of and for the periods
indicated.

As of or for the Year Ended December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------

Statutory first year
premiums and deposits (in
millions)(1)............... $ 436 $ 436 $ 459 $ 432 $ 495
Average face amount per
policy sold................ $189,884 $164,307 $149,560 $128,262 $ 95,528
Average annual premium per
policy sold................ $ 2,777 $ 2,158 $ 1,639 $ 1,358 $ 1,155
New policies (in
thousands)................. 157 202 280 318 429
Product mix by percentage of
statutory first year
premiums and deposits:
Variable life.............. 77% 69% 70% 69% 69%
Term life.................. 13% 17% 20% 17% 15%
Traditional whole life..... 10% 14% 10% 14% 16%
In force face amount (in
billions).................. $ 391 $ 393 $ 394 $ 389 $ 389
Statutory in force premiums
(in millions)(2)........... $ 4,574 $ 4,456 $ 4,907 $ 4,935 $ 5,070
Total policies in force (in
thousands)................. 13,443 14,060 14,779 15,364 16,041
Number of Prudential
Agents..................... 6,086 7,818 8,868 10,115 12,126
Prudential Agent termination
or loss.................... 4,018 4,049 4,229 4,602 4,699
New hires................... 2,286 2,999 2,982 2,591 3,297
-------- -------- -------- -------- --------
Net change in Prudential
Agents..................... (1,732) (1,050) (1,247) (2,011) (1,402)
Base force retention(3)..... 63% 63% 67% 67% 74%
Prudential Agent
productivity(4)............ $ 34,700 $ 31,300 $ 28,000 $ 21,500 $ 18,700
Policy persistency(5):
First year................. 92.9% 92.1% 89.0% 87.5% n/a
Second year................ 94.5% 94.1% 92.6% 91.6% n/a
Renewal.................... 95.0% 95.0% 94.2% 93.6% n/a

- --------
(1) Excludes life insurance issued with respect to Prudential employees of
$277 million for the year ended December 31, 1999 and $195 million for the
year ended December 31, 1998.
(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.
(5) Percentage of premiums that remain in force at the first, second and
subsequent policy anniversary in relation to the amount of in force
premiums at the beginning of the year.

As shown in the foregoing table, our statutory first year premiums and
deposits declined 3% from 1996 to 2000, on a compound annual basis. A 22%
decline in new policies issued was partially offset by a 19% increase in the
average face amount and a 25% increase in the average premium of policies sold
each on a compound annual basis. These improvements in part reflect the
growing importance of the PruSelect distribution channel. The decline in new
policies reflects in part a substantial decline in the number of Prudential
Agents, at a rate of 16% compounded annually. This decline was due to a number
of factors, including recent actions to improve agent productivity, the
negative publicity associated with sales practices issues and our responsive
corrective actions, as well as a general industry-wide reduction in the number
of career agents. Our actions to improve Prudential Agent productivity and
profitability included increasing the minimum production level required for

136

continuation of Prudential Agents' contracts in 1999 and 1998. These actions
resulted in an increased level of Prudential Agent attrition particularly
among Prudential Agents with lower levels of sales production, causing our
statutory first year premiums and deposits in 2000 to decline from their 1998
level. At the same time, productivity of Prudential Agents remaining with us
increased, continuing a trend that began during 1996.

Business Initiatives

We are taking various steps to improve our business as follows:

. Reorganizing to Improve Profitability. In 2000, we removed significant
marketing, operations, and systems infrastructure that was no longer
required to support the goals of each business and aligned the remaining
functions with the businesses to support our strategy. Our goal is to
continue to reduce infrastructure and other costs supporting our
businesses to improve operating margins.

Commencing in 1999, we restructured our field operations by reducing
the number of sales territories from 16 to 6 and by consolidating our
field offices from 266 to 79. These efforts resulted in the elimination
of 600 management positions and approximately 1,100 non-agent positions
across our businesses through the end of 2000.

. Refocusing of the Prudential Agents. In 1999, we developed a new
recruiting, selection and training process in pursuit of our objective
of distributing to mass affluent customers a choice of insurance,
investment and other financial services products. The key elements of
this initiative are improving our candidate profile and instituting a
new training program. During an initial two-year period, newly hired
agents receive broad training on our financial products and services. At
the end of two years, they may select from a number of career paths, all
of which emphasize protection products. In an effort to attract and
retain productive agents, we introduced a program in 2000 which allows
Prudential Agents who are vested to transfer the equity in their
practice to an approved successor when they leave the business. In
addition, we are designing field management compensation to focus on
profitability, long-term growth and targeted sales. In 1998 and 1999, we
raised our minimum sales productivity requirements for agents, and are
doing so again in 2001. We have also completed a project to provide all
of our agents with laptop computers and assistance with marketing and
customer support.

. Alternative Sales Channels. We are focusing on growing sales from third-
party distribution channels including general agencies, producer groups,
broker-dealers and independent brokers who have a significant customer
base in the affluent and mass affluent market. We have expanded our
access to the independent broker-dealer marketplace through an Internet-
based service platform. We anticipate rolling out this platform to our
high potential broker-dealers over the balance of the year.

. Market Segmentation and Redesign of Product Portfolio. In 1999, we began
focusing our product design according to market segments. We will
continue to tailor products targeted for the affluent and mass affluent
markets. We have introduced new products, including a survivorship
variable universal life product, corporate-owned life insurance,
universal life insurance and enhanced term products. Additionally, we
are providing proprietary products to selected distributors for
exclusive distribution through their systems. The first product will be
introduced in April 2001. For the mass market segment, we are
simplifying and reducing the number of products. We have stopped selling
certain low-face amount products and increased the minimum face amount
we sell on other existing products.

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,
2000, our statutory in force premium for variable life insurance was
approximately $1.76 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. Term insurance

137

does not generate a cash value. As of December 31, 2000, our statutory in
force premium for term life insurance was $385 million.

Universal Life Insurance. In late 2000, we introduced our 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 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 67% of individual life insurance 2000 sales,
based on statutory first year premiums and deposits, down from 84% in 1997.
The following table sets forth the number of Prudential Agents, field
managers, home office and field staff and field offices as of the dates
indicated.

As of December 31,
---------------------------------
2000 1999 1998 1997 1996
----- ------ ------ ------ ------

Prudential Agents.......................... 6,086 7,818 8,868 10,115 12,126
Field management........................... 542 811 1,176 1,279 1,589
Home office and field staff................ 1,173 2,051 2,285 2,986 3,999
Prudential Field offices................... 79 150 266 282 331

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 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 33% of individual life
insurance sales in 2000, based on statutory first year premiums and deposits,
an increase from 12% in 1996. PruSelect sells products through a variety of
channels, including independent brokers, general agencies, producer groups and
broker-dealers. PruSelect's sales are relatively balanced among these
wholesale channels and do not depend upon a particular wholesaler or producer.
PruSelect focuses 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. PruSelect
generally sells the same life insurance products that Prudential Agents sell.
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.

In 1997, we implemented a new process for underwriting and issuing
individual life insurance that we call the Client Acquisition Process. We
believe we were the first major life insurer to implement such a process. We
designed the Client Acquisition Process to streamline the new business process
and to increase customer understanding of the products they purchase.
Following the gathering and transfer of client information from the agent to
the home office in the initial stage of the sales process, a Prudential
underwriter contacts the client by telephone to confirm the purpose of the
life insurance purchase, verify the initial and ongoing source of payment,

138

and complete the medical portion of the application. Because of this direct
interaction between a Prudential underwriter and the client, we have
significantly reduced our need to order additional underwriting information,
including attending physician statements, and less time is required for the
underwriting process. The Client Acquisition Process permits Prudential Agents
to spend more time pursuing sales and less time processing applications for
completed sales. In 1999 and 2000, we processed approximately 95% of all
individual life insurance applications through this process. The remaining 5%
was made up of large amount and complex cases such as corporate-owned life
insurance that are better suited to a more traditional underwriting approach.

Our life insurance policies, both participating and non-participating,
generally provide us the flexibility to adjust dividend scales and/or adjust
charges and credits to reflect changes from expected mortality and expense
experience or higher or lower investment returns. However, contractual maximum
charges and minimum credits and state regulatory limits on increasing charges
after a policy is issued limit this flexibility. Some of our more recently
issued term insurance policies do not include this flexibility.

We price new products to achieve a target return on equity based on
assumptions regarding mortality, expenses, investment return, persistency and
required reserves and equity. We develop these assumptions based on regular
reviews of company experience. We periodically revise in force products, both
participating and non-participating, with dividends or other non-guaranteed
charges or credits to reflect changes in experience and preserve the margins
originally priced into the product.

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, 2000, we
had reinsured $43.6 billion, or 11.2%, 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.

Reserves

We establish reserve and policyholder fund liabilities to recognize our
future benefit obligations under both participating and non-participating 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. For
participating traditional whole life contracts, which are included in our
Traditional Participating Products segment, we calculate future policy
benefits using the net level premium method based on the interest rates and
mortality rates that we use in calculating the guaranteed cash surrender
values as described in each contract. The interest rates generally range from
2.5% to 7.5%. In addition, we include a liability for terminal dividends.

Private Client Group

The Private Client Group provides full service securities brokerage and
financial advisory services to individuals and businesses. At December 31,
2000, the Private Client Group served approximately 1.2 million households in
the United States through our domestic Prudential Securities Financial Advisor
force and network of branch offices. In this business, in addition to market
trading volume and volatility, the number of Financial Advisors, their
productivity and attrition are significant drivers of profitability. In recent
years, we have experienced continuing turnover among domestic Financial
Advisors, including experienced Financial Advisors, due in part to the lack of
a stock-based compensation program. This turnover increased in 1999 and
remained at high levels in 2000 due in part to greater industry competition
for productive Financial Advisors. In response, we have introduced a new
voluntary equity-market-linked deferred compensation program to seek to
improve the retention of our Financial Advisors and increase recruitment of
experienced Financial Advisors. This 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

139

Client Group client assets in Command accounts were approximately $166 billion
as of December 31, 2000, representing 61% 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, PrudentialSecurities.com.

In May 1999, we introduced Prudential Advisor, a program that redefines full
service brokerage by combining a sliding scale asset-based fee for advice with
a fixed fee for transaction execution. Clients have the choice of executing
transactions directly through PrudentialSecurities.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, 2000 we had approximately 5,900 retail Financial Advisors
and 120 Financial Advisors-in-Training in our 295 U.S. branch offices. Our
Financial Advisor force is the primary sales channel for our mutual funds and
wrap-fee products and 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 recently introduced equity-market-linked long-term deferred
compensation plan.

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

As of or for the
Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------

Financial Advisors (end of period).................... 5,883 6,072 6,128
Financial Advisors trained(1)......................... 652 1,202 1,217
Financial Advisor average client assets (in
millions)(2)......................................... $ 46 $ 48 $ 42
Average annual retail Financial Advisor productivity
(in thousands)(3).................................... $ 401 $ 367 $ 336
Branches.............................................. 295 275 272
Client accounts (in millions)......................... 2.2 2.1 2.1
Client assets, including managed assets (in
billions)............................................ $ 272 $ 288 $ 253

- --------
(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 gross revenues, excluding revenues generated by the
consumer bank, divided by average number of domestic Financial Advisors
for the year.

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

140

asset retention and asset growth. We intend to focus primarily on the
development and marketing of products and services such as deposits, secured
lending and trust capabilities.

Prior to 1997, we offered credit cards on a broad-market basis to customers
other than Prudential customers. This strategy resulted in delinquencies and
losses on credit cards significantly greater than the industry average, and
resulted in significant losses in 1996 and 1997. In 1997 and 1998, we sold
substantially all of our broad-market credit card portfolio in two separate
transactions, which resulted in losses in those years. In 2000, the remaining
consumer credit card portfolio was sold at a gain. At December 31, 2000, our
banking operations had approximately $734 million of home equity, credit card,
and other receivables and $620 million of deposits, compared to $1.2 billion
of receivables and $853 million of deposits, at January 1, 1998.

Retail Investments

We manufacture, distribute and service investment management products
utilizing proprietary and non-proprietary asset management expertise to 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 70 mutual funds, eight
annuity products, four wrap-fee products and over one hundred unit investment
trusts as of December 31, 2000. These products cover a wide array of
investment styles and objectives designed to attract and retain assets from
individuals with varying objectives and to accommodate investors' changing
financial needs.

Operating Data

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

As of December 31,
--------------------
2000 1999 1998
------ ------ ------
(in billions)

Retail Investments:
Mutual funds(1).......................................... $57.8 $ 55.2 $ 53.4
Wrap-fee products(2)..................................... 19.6 16.7 11.5
Variable annuities....................................... 21.1 22.6 19.9
Fixed annuities.......................................... 2.9 3.0 3.2
Unit investment trusts................................... 1.6 3.2 4.3

- --------
(1) Mutual funds includes only those sold as retail investment products.
(2) Wrap-fee product assets include $3.4 billion, $3.5 billion and $3.1
billion of proprietary assets at December 31, 2000, 1999 and 1998,
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 advised by third parties in our products and
in asset management styles that we may or may not offer. Most importantly, we
maintain the primary relationship with the customer. We believe this advised
choice approach provides the potential for higher sales and client asset
retention.

Products

Mutual Funds

As of December 31, 2000, we sponsored 70 mutual fund portfolios covering all
major asset classes and a wide array of investment styles and objectives.
These offerings consisted of:

. 22 domestic equity funds,

. 9 global/international equity funds,

. 4 asset allocation funds,

. 8 general taxable bond funds,

141

. 2 global bond funds,

. 9 tax-exempt municipal bond funds,

. 9 taxable money market funds, and

. 7 tax-exempt money market funds.

The following table sets forth the net sales (redemptions) of our retail
mutual funds by asset class for the periods indicated. Net sales (redemptions)
are equal to gross sales minus redemptions. This data excludes mutual funds
sold through defined contribution plan products.

Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
(in millions)

Equity............................................. $ 985 $ (349) $ 469
Fixed income....................................... (1,168) (750) (118)
------- ------- -------
Total proprietary net sales (redemptions) other
than money market................................ (183) (1,099) 351
Money market....................................... 1,976 (812) 5,075
------- ------- -------
Total net sales (redemptions)..................... $ 1,793 $(1,911) $ 5,426
======= ======= =======

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

As of December 31,
--------------------
2000 1999 1998
------ ------ ------
(in billions)

Equity.................................................... $20.8 $ 20.0 $ 17.5
Fixed income.............................................. 7.1 8.8 10.2
Money market.............................................. 29.9 26.4 25.7
------ ------ ------
Total assets under management............................ $57.8 $ 55.2 $ 53.4
====== ====== ======

Our equity funds have historically focused on the value style of investment.
Through most of the periods shown in the table above, growth stocks generally
outperformed value stocks and large capitalization stocks generally
outperformed medium and small capitalization stocks. As a result, new
investments into mutual funds flowed disproportionately into large
capitalization growth stock funds and large capitalization index funds that
seek to match the performance of the major market averages. Given our
historical emphasis on the value style of investing and our lack of emphasis
on index funds, these trends were unfavorable to us in these periods.

In response to these trends, from 1998 to 2000 we introduced a variety of
new mutual funds, many with growth-oriented objectives, including health
sciences, financial services and technology sector funds, a tax-managed equity
fund and others. These funds had over $4.2 billion in assets as of December
31, 2000. We believe that our family of mutual funds now includes a greater
variety of investing styles.

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, legal, accounting and
auditing 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

142

minimum investment levels than our mutual funds and variable annuities, and
offer a choice of both proprietary and non-proprietary investment management.
Our principal mutual fund wrap-fee product is PruChoice, which provides
investors with more than 400 investment options from more than 70 fund
managers, including 55 Prudential funds. Our principal separate account wrap-
fee product is Managed Assets Consulting Services, which provides investors
with over 50 portfolio managers and more than 100 investment strategies from
which to select. Net sales of our wrap-fee products were $4.8 billion in 2000,
$3.0 billion in 1999 and $1.9 billion in 1998.

Annuities

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

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

Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
(in millions)

Variable annuities............................... $(699) $ (5) $ 736
Fixed annuities.................................. (140) (265) (519)
------- ------- -------
Total net sales (redemptions)................... $(839) $ (270) $ 217
======= ======= =======

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

Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in billions)

Variable annuities:
Proprietary separate account....................... $14.8 $ 16.7 $ 15.1
General account(1)................................. 3.1 3.1 3.3
Non-proprietary.................................... 3.2 2.8 1.5
------- ------- -------
Total variable annuities........................... $21.1 $ 22.6 $ 19.9
======= ======= =======
Fixed annuities..................................... $ 2.9 $ 3.0 $ 3.2
======= ======= =======

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

Our principal annuity product from a historical sales perspective is
Discovery Select, a flexible payment variable deferred annuity. Discovery
Select offers investors a broad range of investment alternatives through two
fixed-rate options and 24 separate equity and fixed income investment
portfolios. We manage 11 of these portfolios and the remaining 13 are sub-
advised by unaffiliated fund managers. As of December 31, 2000, approximately
67% of Discovery Select annuity deposits were invested in a Prudential-managed
portfolio. In the fourth quarter of 2000, we introduced a new flexible payment
variable annuity product, Strategic Partners Annuity One. This product offers
investors a choice of features including a bonus program, enhanced death
benefits, and a retirement income guarantee. In addition, the product provides
a broad selection of investment options including two fixed rate investment
options and 25 variable investment portfolios managed by well known, highly
regarded asset managers.

Our primary fixed annuity product is Discovery Classic, which we introduced
in 1998. Discovery Classic is a flexible payment annuity that provides a
specified fixed interest rate for the first year. After the first year, the
interest crediting rate changes at our discretion, subject to a minimum. Our
fixed annuity products also include a single premium annuity that offers the
customer a choice of deferred or immediate annuities. 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,
which

143

is a maximum of nine years for Strategic Partners Annuity One annuities, seven
years for Discovery Select annuities and six years for Discovery Classic
annuities. Our single premium fixed annuities do not permit withdrawals.

Unit Investment Trusts

We serve as the sponsor to 138 unit investment trusts with a market value of
$1.6 billion as of December 31, 2000. Unit investment trusts invest in fixed
portfolios of either equity securities, municipal bonds or a combination of
zero-coupon government bonds and equity securities known as government
securities equity trusts. The unit investment trusts offer only redeemable
units with a pre-determined maturity date.

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. We
conduct ongoing training to Financial Advisors and Prudential Agents that
provides them with knowledge of our new products and helps them develop better
relationship management techniques that foster greater customer satisfaction.

Our marketing emphasizes investor education, individual retirement planning,
diversification and asset allocation, and tax-efficient investing.

In mid-1998, the Retail Investments segment began to develop and implement
plans for sales through third parties. We believe that diversifying our
distribution channels will enable us to grow revenues and enhance the
Prudential name and its association with investment advice and choice. Such
sales were responsible for approximately 8% of the segment's 2000 overall
gross sales, excluding money market funds. Net sales of mutual funds, other
than money market funds, through third-party channels totaled $1.2 billion in
2000 and represents 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. In December 1999, we
expanded our alternative distribution for our mutual funds and annuities by
acquiring an 80% interest in Hochman & Baker, Inc., a broker-dealer that
recruits and trains public accountants as its registered representatives to
sell investment and insurance products to their clients.

Property and Casualty Insurance

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

The personal lines property and casualty insurance industry in the United
States is mature, and in 2000, according to A.M. Best, we were the 19th
largest writer with a market share of 1%.

144

Operating Data

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

As of and for the Year Ended December 31,
--------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
($ in millions)

Net written premium(1):
Automobile....................... $1,189.8 $1,031.2 $1,081.4 $1,253.3 $1,383.0
Homeowners....................... 414.6 436.1 437.6 426.3 456.1
Other............................ 32.7 33.0 29.3 31.4 37.8
-------- -------- -------- -------- --------
Total.......................... $1,637.1 $1,500.3 $1,548.3 $1,711.0 $1,876.9
Number of Prudential Agents
authorized to sell Property and
Casualty Insurance policies..... 4,705 6,106 6,427 6,368 8,018

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

From 1996 through 2000, our annual total net written premiums declined 21%
and our total number of policies in force declined 17%, excluding those
relating to a subsidiary we acquired in 2000 as discussed below. The decline
in net written premiums is primarily a result of a decline in policies, as the
number of policies not renewed exceeded the number of new policies written, as
well as increased rate competition.

Historically, a significant portion of our property and casualty insurance
business has been concentrated in New Jersey. Our New Jersey automobile
coverages accounted for 20% of our property and casualty net written premiums
in 2000. New Jersey law requires an insurance company to provide automobile
insurance to every applicant that meets certain minimum eligibility criteria;
therefore, we are compelled to provide insurance coverage at rates that may
not be sufficient for the risks we insure. New Jersey law also caps profits on
automobile coverages under an excess profits law and caps the rates that may
be charged in certain territories regardless of the loss experience of the
territory.

Products

Our primary property and casualty products are automobile and homeowners
insurance. We also offer specialty property and casualty coverages that are
written by us or by other insurers.

We segment our automobile customers based upon 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 intend to write all of our non-standard business through this
unit.

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 implemented a new product pricing policy to achieve targeted
geographical growth and shifted our focus to automobile coverage, which, over
the last decade, has generally produced more stable results than homeowners.
As a result, since 1996, we have lowered our automobile rates in over 40
states.

Prudential Agents

Historically, we relied primarily on Prudential Agents to distribute our
property and casualty products to the mass market. In 2000, Prudential Agents
accounted for 38% of first year direct written premiums and 83% of total
direct written premiums of the Property and Casualty Insurance segment.

To supplement sales growth, we are seeking to develop other distribution
channels, including a career agent channel focused solely on selling
automobile and homeowners insurance, workplace and affinity marketing,
independent agents, and direct distribution. In 2000, these alternative
distribution channels accounted for 62% of

145

first year direct written premiums. In June 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. As of December 31, 2000, this business accounted for 1.9% of
first year direct written premiums. In 1999, we began to access the mass
market segment using direct distribution which, in 2000, accounted for 11.4%
of first year direct written premiums as a result of increased emphasis. In
1999, we also began our automobile and homeowners insurance career agent
channel, and at December 31, 2000, we had 213 salaried agents dedicated to
selling our automobile and homeowners products; in 2000, they accounted for
6.2% of first year direct written premiums. In 1999, we also began offering
products through small- to medium-sized independent insurance agencies which,
in 2000, accounted for 5.8% of total first year net written premiums. Our
acquisition of THI, which sells non-standard automobile policies through
independent agents and on a direct basis, has broadened the scope of our mass
market. First year direct written premiums through THI, from its acquisition
in May 2000 through December 31, 2000, accounted for 37.1% of total first year
direct written premiums in 2000.

Underwriting and Pricing

Our agents are responsible for field underwriting by following the risk
selection guidelines developed and provided by the underwriting department.
The underwriting department performs a final review of all applications other
than applications processed through an on-line system that is now in place in
several states. For agents with binding authority, coverage becomes effective
immediately upon taking an application from an applicant that meets the
selection guidelines for the quoted rate. However, the underwriting department
may ultimately reject coverage for an applicant based upon its review of the
application.

We seek to price our products to be competitive with the industry, 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. 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.

Catastrophe Exposure Risk Management Program and Reinsurance

Hurricane Andrew, which struck southern portions of Florida and Louisiana in
August 1992, resulted in $15.5 billion of losses to the U.S. property and
casualty insurance industry, according to Property Claims Service, the largest
aggregate insurance loss due to a single catastrophe in U.S. history. We
suffered pre-tax losses, net of reinsurance, of $908 million. The losses
eliminated the surplus of our property and casualty insurance subsidiaries,
which was replenished by a capital infusion of $733 million from The
Prudential Insurance Company of America in 1992.

We have taken significant steps to reduce our exposure to catastrophic
losses since Hurricane Andrew, 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, 2000, we believe we have limited our pre-tax catastrophe exposure from a
single one-in-250 year catastrophe to approximately $365 million, or
approximately $235

146

million on an after-tax basis representing approximately 1% of our
consolidated equity as of December 31, 2000. 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 July 1, 2001, consists of an excess of loss
reinsurance contract with a consortium of U.S. and international reinsurers,
including Lloyds of London syndicates. In addition, we currently have two
annual aggregate stop-loss reinsurance contracts with a U.S. reinsurer.

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 Traditional Participating Products Segment--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
1,360 claims associates based in 21 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 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 automobile and homeowners property and casualty
beginning and ending reserves, determined on the basis of statutory accounting
principles for the periods indicated.

Year Ended December 31,
------------------------
2000 1999 1998
------- ------- -------
(in millions)

Reserves for loss and loss adjustment expenses,
beginning of the year.............................. $1,439 $ 1,622 $ 1,856
Loss and loss adjustment expenses:
Provision attributable to the current year......... 1,271 1,249 1,325
Increase (decrease) in provision attributable to
prior years....................................... (165) (150) (245)
------- ------- -------
Total loss and loss adjustment expenses.......... 1,106 1,099 1,080
------- ------- -------
Payments:
Loss and loss adjustment expenses attributable to
current year...................................... 841 700 725
Loss and loss adjustment expenses attributable to
prior years....................................... 583 582 605
------- ------- -------
Total payments................................... 1,424 1,282 1,330
------- ------- -------
Acquisition of Merastar............................. -- -- 16
Acquisition of THI holdings......................... 119
------- ------- -------
Reserve for loss and loss adjustment expenses, end
of year(1)(2)...................................... $1,240 $ 1,439 $ 1,622
======= ======= =======

147

- --------
(1) Total reserves are net of reinsurance recoverables of $608 million at
December 31, 2000, $330 million at December 31, 1999 and $416 million at
December 31, 1998.

(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 $25 million as of December 31, 2000, on
both a net and gross basis. Based on currently available information, we
believe approximately 80% of the liabilities on these contracts,
representing $20 million or less than 2% 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 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 $165 million in 2000, $150 million in 1999 and $245 million in 1998.

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 in 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 Property and Casualty Insurance'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 seeks to be a leading non-medical employee
benefits provider to companies throughout the United States. Our goal is to
help 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.

Our strategy includes the following components:

. Improve and Grow Our Product Businesses. We seek to strengthen our
leadership position in Group Insurance by focusing on growth segments. We
are investing in technology, product development and Internet
distribution to achieve these goals. We are also exploring partnerships
and acquisitions that will help us increase scale and expand
distribution, both domestically and internationally. In addition, we seek
to improve the capital efficiency of our businesses.

. Leverage Our Institutional Positioning to Grow Our Client Base. We seek
to increase the number of Prudential products purchased by our clients
and their employees through the coordinated efforts of a dedicated
relationship management team and our existing sales forces and account
management teams. We seek to better understand client needs and refine
our market segmentation based on client information, which will also aid
in our national advertising and direct mail campaigns as well as in sales
force management.

148

. Become an eBusiness Workplace Marketing Leader. 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.

The group life insurance industry in the United States is relatively mature.
In 1999, the five largest writers accounted for nearly two-thirds of new sales
according to LIMRA. The group disability industry is more concentrated than
the group life industry, with one company accounting for 32.5% of industry new
sales in 1999 according to John Hewitt & Associates, Inc. For the nine months
ended September 30, 2000, according to LIMRA, we were the second largest group
life insurer, based on new sales, and the fifth largest group disability
insurer according to John Hewitt & Associates, Inc., based on new sales
through June 30, 2000.

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, which resulted in sales increases
in 1998, 1999 and 2000. In addition, we refocused group life on premium growth
and improved persistency and refocused group disability on improved risk
selection and reduced benefits ratios. We believe these actions have
repositioned Group Insurance and have facilitated our retention of existing
relationships notwithstanding the sale of our healthcare business.

Operating Data

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

Year Ended December 31,
------------------------
2000 1999 1998
-------- ------- -------
($ in millions)

Group Life Insurance:
Gross premiums(1)(2).................................. $ 1,913 $ 1,872 $ 1,691
New annualized premiums(3)............................ $ 321 $ 262 $ 245
Group Disability Insurance:
Gross premiums(1)(4).................................. $ 472 $ 413 $ 370
New annualized premiums............................... $ 162 $ 105 $ 86

- --------
(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 2000, $24 million in 1999 and $20 million in 1998
from Prudential employee benefit plans. Also includes $136 million in
2000, $165 million in 1999 and $171 million in 1998 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 18% 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 premium, 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 $23 million in 2000, $28 million in 1999 and $36 million in 1998
from Prudential employee benefit plans.

149

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. We believe that we
pioneered this benefit in the group insurance industry.

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, or in 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

As is common in the industry, we segment the market by employer or group
size. We generally refer to employers or groups with 5,000 or more employees
or members as the jumbo case market; 1,000 to 4,999 as the large case market;
250 to 999 as the medium case market; and less than 250 as the small case
market. We tailor our product features to the different needs of each market
segment, with significant standardization in the small case market and full
flexibility for jumbo clients. Historically, the majority of our premiums have
come from customers in the large and jumbo case market segments. We are
seeking to increase our sales in the small and medium case markets,
particularly in disability and supplemental life, because we believe these
segments are under-penetrated and growing, and present a greater opportunity
for profit than the larger segments. We have become more selective in
marketing group disability to the large and jumbo case markets.

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 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, and individual long-term care products through Prudential
Agents and PruSelect. At December 31, 2000, 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 either a guaranteed cost basis or an experience-
rated participating basis, in which case the policyholder bears some of the
risk associated with claim experience fluctuations during the policy period.
At December 31, 2000, approximately 62% of our group life insurance premiums
and 16% of our group disability insurance premiums were attributable to
experience-rated participating policies as compared to 73% and 30% at December
31, 1996. We base product pricing of group insurance products on the expected
pay-out of benefits that we calculate using assumptions for mortality,
morbidity, expenses and persistency, depending upon the specific product
features.

The adequacy of our initial pricing of non-participating 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

150

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.

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 our disability insurance risks with third-party
reinsurers. As of December 31, 2000, the amount of ceded in force disability
insurance premiums totaled $5.8 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 GICs, funding agreements and group annuities for
defined contribution plans, defined benefit pension plans and non-qualified
entities. However, the downgrade of our claims-paying rating to below double-A
has substantially limited our ability to market traditional guaranteed
products, which are backed by our general account.

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

As of December 31,
---------------------------
2000 1999 1998
--------- -------- --------
($ in billions)

Defined contribution products account value(1):
Proprietary....................................... $ 19.1 $ 20.5 $ 18.1
Non-proprietary................................... 6.9 5.3 3.4
--------- -------- --------
Total account value............................. $ 26.0 $ 25.8 $ 21.5
========= ======== ========
Number of defined contribution plans............... 8,127 7,868 7,613
Number of defined contribution plan participants... 1,027,948 939,579 869,089
Guaranteed products total account value(2)(3):
Spread Lending Products............................ $ 19.2 $ 20.0 $ 21.3
Fee-Based Products................................. 22.4 21.8 24.3
--------- -------- --------
Total account value............................. $ 41.6 $ 41.8 $ 45.6
========= ======== ========

- --------
(1) Includes mutual fund investments through defined contribution plan
products.
(2) Includes $4.7 billion in 2000, $4.6 billion in 1999 and $5.2 billion in
1998 of externally managed separate accounts.
(3) Includes $8.2 billion at December 31, 2000, $8.2 billion at December 31,
1999 and $7.8 billion at December 31, 1998 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.

151

Clients can customize PruArray through the addition of optional services
which include Goalmaker, our proprietary asset allocation program, as well as
a self-directed brokerage option that allows participants to trade stocks in
their accounts at Prudential Securities. We provide secure access to our
website for plan sponsors and plan participants who can obtain plan and
account information, undertake transactions, and obtain tools, to aid in
financial and retirement planning. Many of these capabilities are also
available to plan participants via wireless Internet access.

We offer general account GICs and funding agreements, through which
customers deposit funds with us under contracts that 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 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,
$506 million, of our in force GIC business at December 31, 2000 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
interest 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 30 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 S&P, Moody's and A.M. Best 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 salaried 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.

152

As of December 31, 2000, there were approximately 1,585 franchise offices and
42,000 sales associates in the franchise network. The relocation group is the
second largest provider of comprehensive global relocation services to
institutional clients throughout North America in connection with the transfer
of their employees according to Relocation Information Service Incorporated.

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. Our franchise group network has grown
significantly since it began offering franchises in 1988 and is now one of the
largest real estate brokerage franchise networks in North America.

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, and client
cost-tracking and a variety of relocation policy and group move consulting
services. For a number of clients, our relocation services are provided at the
client's workplace.

International Division

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

. International Insurance manufactures and distributes principally 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.

. International Securities and Investments offers brokerage, 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 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.
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 is 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.

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 U.S. 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. 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. In Brazil we operate through a joint venture
with Bradesco Seguros, Brazil's largest insurer based on total premium
according to the Brazilian National Federation of Insurance Companies. To
date, our Japanese operation has driven International Insurance's premium
revenue and adjusted operating income.

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 Tokyo and Newark. Each operation has its own

153

marketing, underwriting and claims and investment management functions. Each
operation invests predominantly in local currency securities, typically bonds
issued by the local government or its agencies. In our larger operations, we
have more diversified portfolios.

Operating Data

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

Japan All Other Countries Total
-------------------- -------------------- --------------------
As of or for Year As of or for Year As of or for Year
Ended December 31, Ended December 31, Ended December 31,
-------------------- -------------------- --------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------ ------ ------ ------ ------ ------ ------ ------ ------
($ in millions unless otherwise noted)

GAAP exchange rate
basis(1):
Net premiums, policy
charges and fee
income................ $1,486 $1,244 $ 906 $ 287 $ 178 $ 104 $1,773 $1,422 $1,010
Annualized new business
premiums.............. $ 359 $ 302 $ 223 $ 150 $ 96 $ 47 $ 509 $ 398 $ 270
Constant exchange rate
basis(2):
Net premiums, policy
charges and fee
income................ $1,486 $1,308 $1,101 $ 287 $ 185 $ 118 $1,773 $1,493 $1,219
Annualized new business
premiums.............. $ 359 $ 318 $ 271 $ 150 $ 99 $ 54 $ 509 $ 417 $ 325
Face amount of policies
in force at year end
($ in billions)....... $ 126 $ 111 $ 95 $ 28 $ 18 $ 12 $ 154 $ 129 $ 107
Average policy size ($
in thousands)......... $ 157 $ 158 $ 159 $ 74 $ 69 $ 66 $ 130 $ 134 $ 137
Number of policies in
force (in thousands).. 805 701 597 376 261 179 1,181 962 776
Number of Life
Planners.............. 1,811 1,681 1,479 1,684 1,203 853 3,495 2,884 2,332
Number of field
managers.............. 286 225 193 448 364 197 734 589 390
Number of agencies...... 41 37 34 88 68 43 129 105 77

- --------
(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,
2000.

International Insurance has grown significantly since 1998. While the
Japanese life insurance market is saturated and new annualized premiums have
been decreasing industry-wide in Japan for the past several years, our new
annualized premiums in Japan increased by an annual average of 15.1% per year
from 1998 to 2000 on a constant exchange rate basis. Of the approximately 45
established life insurance companies operating in Japan, we ranked third in
the increase in the amount of insurance in force in fiscal year 1999 according
to the Life Insurance Association of Japan. The number of our Life Planners in
Japan increased by 10.7% per year from 1998 to 2000. The increase in Life
Planners results from both strong recruiting and high retention, and is the
primary driver of our growth.

Other International Insurance operations also are growing. The strongest
growth outside Japan has been in Korea. From 1998 to 2000, our new annualized
premiums in Korea increased by an annual average of 74.5% per year and the
face amount of our policies in force grew 72.8% per year on a constant
exchange rate basis. This growth results primarily from a significant increase
in the number of Life Planners, which increased 34% from 1998 to 2000. In
Taiwan, our sales force increased by an annual average of 20% per year, which
contributed to an annual average growth in new annualized premiums of 30% per
year.

Not all of our international start-up operations have been successful. We
are currently restructuring our Italian operations to adhere more closely to
the Life Planner model by replacing inadequately performing Life Planners. Our
strategy is to adhere to a disciplined approach to expense control and
business expansion evaluation and to close new operations if we determine that
the Life Planner model is not being successfully implemented in a new country.

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 in Japan. Our policies generally are non-
participating. In connection with our Brazilian joint venture, we co-insure
certain personal lines property and casualty coverages written through the
Bradesco group. Generally, our international insurance products are
denominated in local currency, with the

154

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.

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. 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 Life
Planner model relies in part on significant motivational training of the
career force in order to instill belief in the product. We train Life Planners
to help customers understand their needs for life insurance, help customers
meet their needs through the purchase of selected products and provide
continuing service to customers so that the customer's program remains
current. We believe that customers who understand their needs and purchase
policies based on their needs are more likely to keep their policies in force.

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

Japan All Other Countries Total
---------------- ------------------------ ----------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
---- ---- ---- ------ ------ ------ ---- ---- ----

Life Planner Retention:
12 Month............... 92% 91% 93% 66% 72% 79% 75% 79% 86%
24 Month............... 83% 84% 89% 54% 60% 49% 65% 72% 69%
Life Planner
Productivity(1): 6.7 7.0 7.2 8.4 8.3 7.0 7.5 7.5 7.1
Policy Persistency(2):
13 Months.............. 95% 95% 95% 90% 87% 83% 94% 94% 93%
25 Months.............. 90% 89% 90% 82% 74% 74% 88% 86% 88%

- --------
(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.

In 2000, our average 12- and 24-month Life Planner retention rates in Japan
were 92% and 83%, respectively, compared to 41% and 19% for all life agents in
Japan according to Gyomu Kondan-Kai, a Japanese life insurance industry trade
association. In 2000, our average Life Planner in Japan sold approximately 6.7
policies per month compared to a 2.7 policy average for all life agents in
Japan according to Gyomu Kondan-Kai. In 2000, we generated 13-month and 25-
month policy persistency rates of 95% and 90%, respectively, compared to 86%
and 74% for the entire life insurance industry in Japan according to Gyomu
Kondan-Kai. These numbers compare our 2000 calendar year data with the most
recent competitor data available from Japan, which is for the year ending
March 31, 2000.

In 1998, International Insurance developed the "Top Gun" training program to
meet the growing need for field managers as it expands. This program is
designed to provide intensive management training for specially recruited
candidates who we believe will make leading managers. Managers trained in the
Top Gun program will start new operations where International Insurance is
expanding and will recruit and train new Life Planners. In areas where
International Insurance has existing operations, we expect that managers
trained in this program will strengthen existing management and increase our
expansion capacity.

Underwriting and Pricing

Our International Insurance segment is subject to substantial local
regulation that is generally more restrictive of product offerings, pricing
and structure than U.S. insurance regulation. Each International Insurance

155

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.

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
third-party reinsurers and The Prudential Insurance Company of America 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 The Prudential Insurance Company of America for U.S. dollar
denominated business in Japan. As of December 31, 2000, the amount of ceded
business in force totaled $9.1 billion to third-party reinsurers and $43.3
billion to The Prudential Insurance Company of America, representing 6.3% and
30.0% of International Insurance's gross 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 operations through a network of 29 branch offices in Europe,
Asia and Latin America. At December 31, 2000, we had 620 international
Financial Advisors and $23 billion of client assets and assets under
management outside the United States. Our international operations also
include a private bank based in London with an office in Luxembourg and a
private trust 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 PrudentialSecurities.com. In the United Kingdom and Hong Kong, we
also provide full service retail brokerage 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 and compensate our international Financial Advisors in a manner
similar to our domestic Financial Advisor force. 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, 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

156

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 around the world in order to expand our affluent customer base
outside the U.S. and to increase our global assets under management.

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 and the Traditional Participating Products
segment. 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. In 1998, we formed our Investment
Management and Advisory Services segment by aggregating asset management
units into a single organization.

. 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
engages in commercial mortgage securitization operations, manages our
hedge portfolios and engages in proprietary investments and syndications.

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

Initiatives

We have completed the following initiatives:

. In 2000, the segment consolidated substantially all of our public equity
management capabilities into our wholly owned subsidiary, Jennison, a
widely recognized institutional manager of growth stocks.

. During 1999, the segment consolidated three fixed income functions
serving separate customer constituents into one organization.

157

Operating Data

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

December 31, 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
====== ====== ====== ======

December 31, 1998
---------------------------------
Fixed Real
Equity(1) Income(2) Estate Total
--------- --------- ------ ------
(in billions)

Retail customers(3).......................... $ 49.8 $ 46.7 $ -- $ 96.5
Institutional customers...................... 46.4 37.6 8.0 92.0
General account.............................. 2.6 113.4 3.8 119.8
------ ------ ------ ------
Total........................................ $ 98.8 $197.7 $ 11.8 $308.3
====== ====== ====== ======

- --------
(1) Includes private equity investments of institutional customers of $0.6
billion as of December 31, 2000, $1.2 billion as of December 31, 1999 and
$0.8 billion as of December 31, 1998, and private equity assets in our
general account of $1.3 billion, $1.2 billion and $0.8 billion, as of
those dates.
(2) Includes private fixed income assets of institutional customers of $4.2
billion as of December 31, 2000, $3.4 billion as of December 31, 1999 and
$3.2 billion as of December 31, 1998, and private fixed income assets in
our general account of $45.9 billion, $46.1 billion and $53.8 billion, as
of those dates.
(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" 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 and are managed by the
Asset Management division.

The following is a description of the Asset Management segment's products
and services. We discuss our general account below under "--General Account
Investments".

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 $80.3 billion of our $95.1 billion
of institutional assets under management as of December 31, 2000. Of the $80.3
billion, $59.7 billion was gathered by the Asset Management division's sales
force and $20.6 billion was acquired 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. We tailor investment portfolios to
the specific objectives and risk tolerance levels of each client.

158

As noted above, substantially all of our public equity asset management
capabilities were consolidated into Jennison during 2000. Jennison is a widely
recognized manager of institutional assets, although increasingly the firm
acts as a subadvisor for mutual funds. Under former arrangements with
Jennison, we received a specified share of the gross revenues generated and
its remaining revenues were used by Jennison to pay compensation and other
operating expenses. As part of the consolidation, commencing in 2001,
Jennison's compensation arrangements are based on investment and operating
performance, consistent with current industry standards.

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,
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 institutional private equity unit manufactures and manages a variety of
investment vehicles for investment in private equities. The private equities
include venture capital, leveraged buyouts, development capital, mezzanine
debt and special situation subclasses. These subclasses share attributes of
illiquidity, less efficient markets, high risk and high target returns.

Commercial Mortgage Origination and Servicing

Our commercial mortgage banking business provides mortgage origination and
servicing for our general account and institutional clients. At December 31,
2000, we serviced a commercial mortgage loan portfolio of approximately $14
billion. The unit also originates and purchases commercial mortgages for sale
in securitization transactions. Origination and servicing activity is included
in this segment. Securitization activity is included in the Other Asset
Management segment, as described below under "--Other Asset Management--
Commercial Mortgage Securitization".

In May 2000, the business 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. WMF was the largest of the 26 Fannie Mae Delegated
Underwriter/Servicer companies.

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 545 NASDAQ securities.

Investment Research

Research is an important component of our advice-based strategy. Our
analysts, which numbered approximately 63 as of December 31, 2000, 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. As of December 31, 2000, our equity
research group covered a broad range of industries and more than 700
companies. In the past we focused our research on many of the same industries
and market segments that were covered by our former lead-managed underwriting
and institutional fixed income businesses. In the future, we expect to
increasingly focus our research on companies of interest to our retail and
institutional customers, as our research is intended to provide information
and advice to 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.
Since we commenced operations, we have completed six securitizations involving
a total of $2.4 billion of mortgages. As of December 31, 2000, our warehouse
balance of mortgages pending securitization and interim loans totaled
approximately $1.2 billion.

159

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 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 $10 billion. As of
December 31, 2000 the hedge portfolios had a total carrying value of
approximately $7.9 billion, reflecting both principal positions and securities
financing positions, and a principal position carrying value of $5.1 billion.

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,
2000, we had invested approximately $29 million in this portfolio. After sale
or syndication, these assets will be managed by our Investment Management and
Advisory Services segment.

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 expenses not
allocated to any of our business segments, including costs for company-wide
initiatives such as enhancement of our Internet capabilities, as well as
investment returns on our capital that is not deployed in any of our business
segments. We engage in corporate investment activities, in which we borrow
funds and use our asset/liability management techniques to earn additional
spread income on the borrowed funds. These activities accounted for
approximately $3.8 billion of indebtedness as of December 31, 2000 and
contributed $77 million to adjusted operating income. In addition, we maintain
an equity portfolio in which we intend to invest up to $100 million. As of
December 31, 2000, we had invested $80 million in this portfolio, which had a
carrying value of $114 million. 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 writing new business in our group credit insurance operations in
1996. These operations consisted primarily of credit life insurance, which
upon the insured's death pays off the insured's debt to the creditor through
which the coverage was purchased, and credit disability insurance, which pays
the insured's monthly minimum debt payment to the creditor for a specified
period while the insured borrower is disabled. Although we ceased writing new
business in 1996, our existing contracts permitted new insured borrowers to be
added under those contracts in 1997. We ceded through assumption reinsurance,
pursuant to which the reinsurer assumes the role of the insurer, or terminated
substantially all of our outstanding balance business in 1997 and 1998. In
1998, we entered into a service agreement with a third-party administrator to
administer the runoff of our remaining in force business. For business in
which the borrower paid a single premium for insurance coverage on a loan, the
insurance coverage remains in force until the debt is discharged or the final
maturity date. 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 2026. As of December 31, 2000, our reserves for future
policy benefits and claims for the remaining in force group credit insurance
business totaled approximately $28.5 million.

Individual Health

We began selling individual health and disability income policies in the
early 1950s. 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

160

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, 2000, we had
reserves of $97 million for approximately 49,000 individual health policies
and reserves of $54 million for approximately 33,000 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 $129 million of policy liabilities at December 31, 2000. These
blocks of insurance include the policies that we will include in the Canadian
closed block described above under "Demutualization and Related Transactions--
The Demutualization--The Closed Block". 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.

Lead-Managed Underwriting 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 underwriting and institutional fixed
income businesses. The total reduction in staffing from the former lead-
managed underwriting and institutional fixed income businesses of Prudential
Securities involves 700 positions. See "Business--U.S. Consumer Division--
Division Strategy" for a discussion of this restructuring.

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'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'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 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'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 The Prudential
Insurance Company of America 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 Insurance Company. 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

161

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 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.

While we were actively engaged in this business, Prudential Home Mortgage
sold a portion of its mortgage loans with full or partial recourse that
requires Prudential Home Mortgage to either repurchase or indemnify the
purchaser for losses incurred with respect to any of the sold loans that
become non-performing. For a loan sold with full recourse, this contingent
obligation continues until Prudential Home Mortgage either discharges or
repurchases the loan. The last scheduled maturity date of a loan sold with
full recourse is in 2029. For a loan sold with partial recourse, the
repurchase obligation generally ends after a specified period of time. The
aggregate principal amount of the remaining outstanding loans that we sold
with full and partial recourse totaled approximately $119 million at December
31, 2000.

We also 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 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 actions 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, 2000 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.

Traditional Participating Products

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 have historically been included in our Traditional
Participating Products segment. In connection with the demutualization, we
will cease offering domestic participating products. The liabilities for our
individual in force participating products will then be segregated, together
with assets which will be used exclusively for the payment of guaranteed
benefits and policyholder dividends, expenses and taxes with respect to these
products, in a regulatory mechanism referred to as the "Closed Block". We have
selected the amount and type of assets and liabilities of the Closed Block,
which we refer to as the "Closed Block Assets" and "Closed Block Liabilities",
so that these assets, which initially will have a lower book value than the
liabilities, are expected to generate sufficient cash flow 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
products. We also will segregate for accounting purposes the surplus and
related assets that we will need to hold outside the Closed Block to meet
capital requirements related to the products included within the Closed Block.
We refer to these segregated assets outside the Closed Block as the "Surplus
and Related Assets". No new policies will be added to the Closed Block
following demutualization and its in force business is expected to ultimately
decline as policyholder benefits are paid 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
has consisted of other traditional insurance products that will not be
included in the Closed Block.

162

You can see historical information regarding both our participating and non-
participating life insurance policies under "--U.S. Consumer Division--
Individual Life Insurance" above and both our participating and non-
participating individual annuities under "--U.S. Consumer Division--Retail
Investments" above. You can see a discussion regarding the future operation of
the Closed Block under "Demutualization and Related Transactions--The
Demutualization--The Closed Block".

Our strategy for the Traditional Participating Products segment is to
maintain the Closed Block included in the segment as required by our plan of
reorganization over the time period of the gradual diminishment as
policyholder benefits are paid in full. As discussed under "Unaudited Pro
Forma Condensed Consolidated Financial Information--Unaudited Pro Forma Closed
Block Information", 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. If we issue the Class B Stock, it will be designed
to reflect the performance of our participating products to be included in the
Closed Block and other related assets and liabilities. Following such
issuance, we will refer to this business as the "Closed Block Business".

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. Aetna paid $500 million of cash, $500 million of senior
notes maturing on August 6, 2002 and stock appreciation rights covering one
million shares of Aetna common stock, valued at approximately $30 million at
the date of closing.

The sale included the following principal transactions:

. We transferred to Aetna the operating subsidiaries that collectively
accounted for most of our fully insured managed medical and dental
business and a related pharmacy service company.

. We entered into a coinsurance agreement with Aetna Life Insurance
Company under which Aetna Life Insurance reinsures 100% of the risk, in
exchange for 100% of the premiums, on our group indemnity medical and
dental business and the remaining portion of our managed medical and
dental business. Under this agreement, Aetna Life Insurance may require
us to issue additional policies for:

. medical and dental insurance coverages for new customers in response
to proposals made to brokers or customers within six months after
the closing date, or later in certain limited circumstances, and
renewals of these coverages, and

. renewals of medical and dental insurance coverages in effect on the
closing date,

provided that the renewals have effective dates no later than two years
after the closing date and provided that certain other conditions are
satisfied. We will not receive any additional consideration for the
issuance of these additional policies, which Aetna Life Insurance will
reinsure fully under this agreement.

. We entered into a risk sharing agreement with Aetna U.S. Healthcare,
Inc. whereby each party agreed to pay the other a specified amount of
money in the event that the medical loss ratio for substantially all of
the healthcare business that we sold deviates from specified levels
between the closing date and December 31, 2000. The medical loss ratio
is equal to the amount of medical claims paid plus an actuarial estimate
of claims incurred but not paid, divided by the premiums earned.
Pursuant to the agreement, we have made payments to Aetna of $212
million through December 31, 2000, including initial payments with
respect to the year 2000 described below.

Aetna U.S. Healthcare will calculate, and an independent accounting firm
will audit, the final ratio calculation for the year 2000 based on the
actual payment experience for premiums and medical claims

163

through September 30, 2001 and reserve estimates as of September 30, 2001
for any remaining uncollectible premium receivables and any remaining
unpaid medical claims. The resulting settlement will take place in
November 2001.

. We and Aetna Life Insurance Company entered into an administrative
services agreement, under which Aetna Life Insurance is providing
specified administrative services, including services required to
perform administrative services contracts under which we provide
administrative services only to healthcare self-insurance plans of third
parties. In exchange for the services relating to these administrative
services contracts, we pass on to Aetna Life Insurance all of the fees
that we receive under the contracts, and we agreed to pay Aetna Life
Insurance approximately an additional $263 million that we paid in
installments through February 28, 2001.

. We agreed not to re-enter, directly or through acquisitions, the group
managed or indemnity medical or dental business for a period of five
years after the closing date.

. We entered into a trademark license agreement that grants Aetna and
Aetna Life Insurance 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.

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

Contingent Exposures

We have remaining exposure under the risk sharing agreement described above
in the event that the medical loss ratio exceeds the specified levels for the
year 2000. The medical loss ratio for 1999 exceeded the level that requires us
to pay Aetna, resulting in initial payments to Aetna with respect to 1999 of
$80 million. Through December 31, 2000, the medical loss ratio for 2000
exceeded the level that requires us to pay Aetna, resulting in initial
payments to Aetna with respect to 2000 of $132 million. The remaining exposure
under this agreement relates to the final payment that may be due under the
risk sharing agreement as discussed above.

We agreed to indemnify Aetna and Aetna Life Insurance for actual losses they
may incur as a result of any inaccurate representations that we may have made
in the sale agreement. This indemnification obligation is limited to $595
million and is subject to a $23 million deductible.

We retained all liabilities associated with litigation that existed at the
closing date or commences within two years of that date with respect to claims
relating to events that occurred prior to the closing date. These liabilities
are not subject to, and do not count toward, the limitation discussed in the
previous paragraph. As of December 31, 2000, there were approximately 192
matters under litigation with respect to healthcare claims. See "--Litigation
and Regulatory Proceedings--Discontinued Operations".

Financial Impact

The assets that we sold or transferred to Aetna had an aggregate book value
of approximately $2.15 billion as of the closing date and exceeded by
approximately $700 million the aggregate book value of the liabilities assumed
by or transferred to Aetna. We also transferred approximately 14,000 employees
to Aetna.

In 1998 and 1999, we recognized an aggregate pre-tax loss of $994 million,
$623 million after tax, in connection with the healthcare sale. This pre-tax
loss reflects the difference between the consideration that Aetna paid us and
the sum of:

(1) the $700 million difference between the assets and liabilities of the
healthcare business;

(2) the operating losses of the healthcare business in 1999 prior to the
closing date, including a strengthening of healthcare reserves of $160
million;

(3) the $263 million of payments made to Aetna Life Insurance under the
administrative services agreement;

(4) reserves for possible payments to Aetna under the risk sharing
agreement, including the $212 million paid to date by us in that
regard;

164

(5) reserves for the litigation for which we remain liable and the
indemnification provisions of the sale agreement; and

(6) other payments and reserves for closing, transition and employee-
related costs.

In 2000, upon the completion of the period covered by the risk sharing
agreement and taking into consideration other costs incurred compared with
those estimated in 1998 and 1999, we reduced the loss on disposal by $77
million, net of taxes. While we believe that at December 31, 2000 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 domestic insurance
companies to support our liabilities to customers in our U.S. Consumer and
Employee Benefit divisions as well as certain of our Corporate and Other
operations and our other general liabilities. Our general account does not
include assets of our securities brokerage, international securities,
international insurance and 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

Our long-term objective in managing our general account is to maximize our
total return through asset-liability management and strategic and tactical
asset allocations within a disciplined risk management framework, and subject
to our adjusted operating income objectives. We design asset mix strategies 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. 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 general
account. The Investment Committee annually approves the investment policy for
the general account that includes investment guidelines, a target asset mix,
risk tolerances and performance benchmarks. It also reviews performance and
risk positions quarterly. Our Senior Vice President, Asset Liability and Risk
Management, oversees the investment management process for our general
account. Under his direction the Asset Liability and Risk Management Group
develops investment policies and asset allocation ranges.

The Asset Liability and Risk Management Group works closely with the
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 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
their investments locally.

Asset/Liability Management

The Asset Liability and Risk Management Group has used a disciplined, risk-
controlled approach to asset/liability management for over a decade. The
methodology, which we continually refine, 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 unanticipated
changes in the market environment occur.

165

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 group life products, in which customers
participate in actual investment and business results through annual
dividends or interest, such as traditional whole life insurance;

. 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 even as some asset classes behaved in an unexpectedly volatile manner.

Summary of Investments

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

As of December 31,
----------------------------------------
2000 1999
-------------------- -------------------
Amount % of Total Amount % of Total
--------- ---------- -------- ----------
($ in millions)

Fixed maturities:
Public available for sale, at fair
value.............................. $ 62,454 47.6% $ 58,555 46.0%
Public held to maturity, at
amortized cost..................... 757 0.6 25 --
Private available for sale, at fair
value.............................. 21,294 16.2 20,411 16.1
Private held to maturity, at
amortized cost..................... 11,686 8.9 14,208 11.2
Trading account assets, at fair
value............................... 3 0.0 4 0.0
Equity securities, at fair value..... 2,315 1.8 3,262 2.6
Mortgage loans on real estate, at
book value.......................... 15,418 11.8 15,850 12.5
Other long-term investments(1)....... 4,259 3.2 4,457 3.5
Policy loans, at outstanding
balance............................. 8,046 6.1 7,590 6.0
Short-term investments, at amortized
cost................................ 4,963 3.8 2,770 2.1
--------- ----- -------- -----
Total investments................... $ 131,195 100.0% $127,132 100.0%
========= ===== ======== =====

- --------
(1) Other long-term investments consist of real estate related interests,
largely through joint ventures and partnerships, oil and gas investments
and venture capital and private equity funds and investment real estate
held through direct ownership.

The overall income yield on our general account invested assets after
investment expenses, but excluding realized investment gains/losses, was 6.85%
for 2000 and 7.02% for 1999. Although the yield before investment expenses was
relatively unchanged in 2000 from 1999, investment expenses as a proportion of
gross yield increased, primarily due to interest charges related to our
securities lending program, which we expanded in 2000. The following table
sets forth the income yield and investment income, excluding realized
investment gains/losses, for each major asset category of our general account
for the periods indicated.

As of December 31,
-----------------------------
2000 1999
-------------- --------------
Yield Amount Yield Amount
----- ------- ----- -------
($ in millions)

Fixed maturities.................................. 7.54% $ 6,958 7.39% $ 6,811
Equity securities................................. 2.42 67 2.61 63
Mortgage loans on real estate..................... 8.23 1,255 8.68 1,327
Policy loans...................................... 6.34 478 6.11 448
Short-term investments and cash equivalents....... 7.58 683 6.13 484
Other investments................................. 9.54 420 14.59 514
---- ------- ----- -------
Total before investment expenses................. 7.54% $ 9,861 7.52% $ 9,647
Total after investment expenses.................. 6.85% $ 8,990 7.02% $ 9,031

166

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 Asset Management segment. The size of our portfolio enables us to invest
in asset classes that may be unavailable to the typical investor because of
cost and/or volatility.

Fixed Maturity Securities

We held approximately 73% of general account assets in fixed maturity
securities at December 31, 2000, unchanged from 73% a year earlier. These
securities include both publicly traded and privately placed debt securities.

Subject to our adjusted operating income objectives, we actively manage our
public portfolio using a relative value strategy while maintaining a risk
profile directed by the Asset Liability and Risk Management Group. Generally,
we use proprietary models to help us purchase securities that we believe will
out-perform broad market benchmarks and combine them into portfolios that
otherwise match the risk characteristics of each benchmark and dispose of
securities when they no longer meet those criteria. One effect of this
strategy is that the yield we earn on this portfolio is not fully reflected as
investment income because a portion is reflected as realized investment gain
or loss. 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. 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.

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

As of December 31,
---------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
Amortized % of Amortized % of
Cost Total Cost Fair Value Cost Total Cost Fair Value
--------- ---------- ---------- --------- ---------- ----------
($ in millions)

U.S. Government......... $10,109 10.6% $10,639 $ 8,089 8.5% $ 7,809
Manufacturing........... 18,864 19.7 18,689 21,469 22.5 20,686
Utilities............... 15,688 16.4 15,771 12,874 13.5 12,717
Finance................. 11,792 12.3 11,931 12,663 13.3 12,454
Services................ 11,264 11.8 11,204 10,767 11.3 10,376
Mortgage-backed......... 6,495 6.8 6,669 6,546 6.8 6,507
Foreign government...... 4,650 4.9 4,853 4,804 5.0 4,864
Retail and wholesale.... 4,022 4.2 4,005 4,572 4.8 4,421
Asset-backed
securities............. 6,063 6.4 6,068 5,784 6.1 5,687
Transportation.......... 3,233 3.4 3,199 3,718 3.9 3,600
Energy.................. 937 1.0 947 1,104 1.2 1,065
Other................... 2,361 2.5 2,382 2,927 3.1 2,890
------- -------- ------- ------- ------- -------
Total.................. $95,478 100.0% $96,357 $95,317 100.0% $93,076
======= ======== ======= ======= ======= =======

The amortized cost of our below-investment grade fixed maturities as of
December 31, 2000 totaled $10.2 billion or 10.7% of total fixed maturities on
that date, compared to $10.8 billion or 11.4% as of December 31, 1999.

167

At year-end 2000, securities backed by residential mortgage loans made up
less than 7% of our fixed maturity investments. Nearly 94% of the mortgage-
backed securities in the general account were publicly traded agency pass-
through securities. Collateralized mortgage obligations represented only 6% of
our total mortgage-backed securities, and less than 0.4% 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 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 following tables set forth our
public and private fixed maturity portfolios by NAIC rating as of the dates
indicated.

Public Fixed Maturities by Credit Quality

As of December 31,
---------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
NAIC Amortized % of Amortized % of
Rating Rating Agency Equivalent Cost Total Cost Fair Value Cost Total Cost Fair Value
------ ------------------------ --------- ---------- ---------- --------- ---------- ----------
($ in millions)

1 Aaa, Aa, A.............. $42,311 67.6% $43,208 $38,255 63.5% $37,336
2 Baa..................... 15,346 24.5 15,273 16,344 27.1 15,730
3 Ba...................... 2,427 3.9 2,401 2,795 4.7 2,712
4 B....................... 2,125 3.4 2,004 2,628 4.4 2,597
5 C and lower............. 369 0.6 331 176 0.3 182
6 In or near default...... 12 0.0 11 24 0.0 25
------- ------ ------- ------- ------ -------
Total................... $62,590 100.0% $63,228 $60,222 100.0% $58,582
======= ====== ======= ======= ====== =======

Private Fixed Maturities by Credit Quality

1 Aaa, Aa, A.............. $12,242 37.2% $12,517 $11,846 33.8% $11,807
2 Baa..................... 15,390 46.8 15,501 18,026 51.2 17,625
3 Ba...................... 2,766 8.4 2,709 3,435 9.8 3,341
4 B....................... 1,893 5.8 1,792 1,321 3.8 1,290
5 C and lower............. 405 1.2 382 379 1.1 350
6 In or near default...... 192 0.6 228 88 0.3 81
------- ------- ------- ------- ------- -------
Total................... $32,888 100.0% $33,129 $35,095 100.0% $34,494
======= ======= ======= ======= ======= =======

We maintain separate monitoring processes for public and private fixed
maturities and create watch lists to highlight securities which require
special scrutiny and management. Our 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. When a decline in value of a security is
deemed to be other than temporary, we record an impairment loss in our
Consolidated Statement of Operations within "realized investment gains, 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.

168

Our private fixed maturity asset managers conduct specific servicing tests
on each investment on a quarterly 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 classification to those
issuers that have failed a servicing test or experienced a minor covenant
default, and we continue to monitor them for improvement or deterioration. In
certain situations, the general account benefits from negotiated rate
increases or fees resulted 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.

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

Fixed Maturities--Watch List

As of December 31,
-------------------------------------------
2000 1999
--------------------- ---------------------
Book Value % of Total Book Value % of Total
---------- ---------- ---------- ----------
($ in millions)

Closely monitored.................. $1,147 1.2% $1,034 1.1%
Not in good standing............... 209 0.2 125 0.1
------ ------ ------ ------
Total............................. $1,356 1.4% $1,159 1.2%
====== ====== ====== ======

Mortgage Loans

As of December 31, 2000, we held approximately 12% of our general account
portfolio in mortgage loans, essentially unchanged from December 31, 1999. The
portfolio as of December 31, 2000 consisted of approximately 1,200 commercial
mortgage loans with a carrying value of $13.6 billion and $2.0 billion of
residential and agricultural loans. These values are gross of a $221 million
mortgage loan loss reserve.

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.

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

As of December 31,
----------------------------------
2000 1999
---------------- ----------------
Carrying % of Carrying % of
Value Total Value Total
-------- ------- -------- -------
($ in millions)

Region:
Pacific.................................. $ 3,863 28.5% $ 3,832 27.6%
South Atlantic........................... 2,488 18.3 2,709 19.6
Middle Atlantic.......................... 2,490 18.4 2,542 18.4
East North Central....................... 1,440 10.6 1,556 11.2
Mountain................................. 846 6.2 772 5.6
West South Central....................... 828 6.1 893 6.4
West North Central....................... 579 4.3 598 4.3
New England.............................. 662 4.9 537 3.9
East South Central....................... 316 2.3 332 2.4
Other.................................... 55 0.4 81 0.6
------- ------- ------- -------
Total................................... $13,567 100.0% $13,852 100.0%
======= ======= ======= =======

Commercial mortgage loans on properties in the California and New York areas
accounted for $2.8 billion and $1.6 billion, respectively, of the foregoing as
of December 31, 2000. See Note 5 to the audited consolidated financial
statements for information on the property types collectively collateralizing
our mortgage loan portfolios, including commercial, residential and
agricultural mortgage loans.

169

As of December 31,
----------------------------------
2000 1999
---------------- ----------------
Carrying % of Carrying % of
Value Total Value Total
-------- ------- -------- -------
($ in millions)

Property Type:
Apartment complexes...................... $ 4,455 32.8% $ 4,508 32.5%
Office buildings......................... 3,719 27.4 3,948 28.5
Retail stores............................ 2,465 18.2 2,627 19.0
Industrial buildings..................... 2,331 17.2 2,157 15.6
Other.................................... 597 4.4 612 4.4
------- ------- ------- -------
Total................................... $13,567 100.0% $13,852 100.0%
======= ======= ======= =======

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

Commercial Mortgage Loan Maturities

As of December 31,
------------------------------------
2000 1999
----------------- -----------------
Principal Principal
Balance % of Balance % of
Maturing Total Maturing Total
--------- ------- --------- -------
($ in millions)

Due in one year or less.................. $ 405 3.0% $ 742 5.4%
Due in two to three years................ 827 6.1 631 4.6
Due in three to four years............... 712 5.2 804 5.8
Due in four to five years................ 1,422 10.5 735 5.3
Due in five to six years................. 1,273 9.4 1,374 9.9
Due in six to seven years................ 939 6.9 1,197 8.6
Due in seven to eight years.............. 1,070 7.9 908 6.6
Due in eight to nine years............... 1,335 9.8 1,034 7.5
Due in nine to ten years................. 1,500 11.1 1,339 9.7
Due in more than ten years............... 4,084 30.1 5,088 36.6
------- ------- ------- -------
Total................................... $13,567 100.0% $13,852 100.0%
======= ======= ======= =======

We evaluate our 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. An experienced staff of workout professionals actively manages
the loans in the closely monitored category.

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

Commercial Mortgage Loan Comparisons

As of December 31,
-------------------------------------------
2000 1999
--------------------- ---------------------
ACLI ACLI
Prudential Average(1) Prudential Average(1)
---------- ---------- ---------- ----------

Delinquent, not in foreclosure..... 0.13% 0.28% 0.61% 0.16%
Delinquent, in foreclosure......... 0.00 0.15 0.00 0.09
Restructured....................... 1.45 1.50 2.09 2.04
---- ---- ---- ----
Subtotal.......................... 1.58 1.93 2.70 2.29
Loans foreclosed during period..... 0.38 0.22 0.06 0.30
---- ---- ---- ----
Total............................. 1.96% 2.15% 2.76% 2.59%
==== ==== ==== ====

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

170

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 1999 and 2000.

Equity Securities

We held approximately 2% of general account assets in equity securities as
of December 31, 2000, essentially unchanged from December 31, 1999. These
securities consist of investments in common stock, including shares of real
estate investment trusts. Approximately 80% of our equity securities are
publicly traded on national securities exchanges. In 2000 and 1999, net
realized investment gains from sales of equity securities were $450 million
and $223 million.

Other Long-Term Investments

Through the mid-1990s, we were a major investor in equity real estate, both
wholly owned and through joint ventures. Beginning in 1997, we implemented a
real estate sales program, which significantly reduced our exposure to real
estate, and have deemphasized direct real estate investments. We now look to
other forms of exposure to real estate markets, such as shares of real estate
investment trusts. From January 1, 1997 to December 31, 2000, largely as a
result of a program to dispose of our real estate holdings, we reduced the
book value of these holdings from approximately $3.4 billion to $1.6 billion,
with aggregate sales proceeds of approximately $2.5 billion in 1997, $2.7
billion in 1998, $1.4 billion in 1999 and $0.5 billion in 2000. We used the
proceeds from these real estate sales to invest in public and private fixed
maturities and shares in real estate investment trusts.

As of December 31, 2000, the book value of our foreclosed real estate was
$111 million. Our policy is generally to sell any foreclosed real estate,
seeking to maximize the residual value of our interest.

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 The Prudential Insurance Company of America
and its 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 A.M. Best, S&P,
Moody's and Fitch (formerly Duff & Phelps) for our rated U.S. insurance
companies, The Prudential Insurance Company of America's outstanding rated
debt securities, the indebtedness issued through Prudential Funding, LLC and
the long-term counterparty rating of Prudential Securities Group. You can read
an explanation of these ratings in the Glossary under the definitions "claims-
paying ratings" and "credit ratings".

A.M. Best S&P Moody's Fitch
--------- --- ------- -----

Insurance Claims-Paying Ratings:
The Prudential Insurance Company of America........ A A+ A1 AA-
Pruco Life Insurance Company....................... A A+ A1 NR*
Pruco Life Insurance Company of Arizona............ A A+ A1 NR
Prudential Property & Casualty Insurance Company of
Indiana........................................... A- A+ A1 NR
Prudential Property & Casualty Insurance Company of
New Jersey........................................ B++ NR A1 NR
Prudential Life Insurance Co. Ltd. (Prudential of
Japan)............................................ NR AA- NR NR

Credit Ratings:
The Prudential Insurance Company of America:
Capital and surplus notes, due 2000-2005.......... NR A- A3 NR
Prudential Funding, LLC:
Commercial Paper.................................. NR A1 P1 NR
Long-Term Senior Debt............................. NR A+ A2 NR
Prudential Securities Group Inc. .................. NR BBB NR NR

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

171

Insurance Claims-Paying Ratings

Since the mid 1990s the rating agencies have each downgraded our ratings,
including as recently as 1998, at different times, in different degrees and
sometimes for different reasons. The most recent downgrades occurred in 1997
and 1998 and were based primarily on disappointment in The Prudential
Insurance Company of America's financial performance and concerns regarding
the life insurance sales practices litigation. In particular, the rating
agencies were concerned with financial results that were below expectations
and/or those of competitors in the Individual Life Insurance segment and
healthcare. These downgrades resulted in the ratings of A+ from S&P, A1 from
Moody's and AA- from Fitch. In 1998, the rating agencies also noted that the
process of reorganizing our Individual Life Insurance segment and our efforts
to reposition ourselves with respect to distribution and markets to address
sales force productivity, sales distribution inefficiencies, alternative
distribution channels and increased competition in the financial services
arena, also posed threats to our financial strength and claims-paying ability.
The rating agencies' concerns regarding the reorganization of Individual Life
Insurance and our efforts to reposition ourselves will not be resolved before
we complete this process.

The rating agencies based earlier downgrades between 1991 and 1997 on our
exposures to catastrophe risk, heightened by geographic concentration, as was
highlighted by our Hurricane Andrew losses, exposure to real estate and high
yield securities in our investment portfolio and limited partnership sales
practices litigation at Prudential Securities.

The ratings set forth above with respect to The Prudential Insurance Company
of America and its insurance and financing subsidiaries reflect current and
past 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. You should not rely upon the
ratings in making a decision whether or not to purchase shares of Common
Stock.

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, 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 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.

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

172

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 underwriting 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. 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, and further reduction in our claims-
paying ratings could adversely affect our ability to sell our insurance
products and reduce our profitability.

Internationally, our international life insurance business 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 and
U.S. territories and possessions supervise our insurance operations. The
Prudential Insurance Company of America 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 foreign
insurance regulatory authorities in the jurisdiction in which they operate,
including the Japanese Ministry of Finance and Financial Supervisory Agency.
Our insurance products are substantially affected by federal, state and
foreign 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 foreign authorities regulate and supervise these products.

Asset Management Operations. Our investment products and services, including
mutual funds, are subject to federal, state and foreign securities, fiduciary,
including ERISA, and other laws and regulations. The SEC, the NASD, state
securities commissions, the Department of Labor and similar foreign
authorities are the principal regulators that regulate and supervise our Asset
Management Operations. Federal, state and foreign 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, are subject to federal, state and foreign securities,
commodities and related laws. The SEC, the CFTC, state securities authorities,
the NYSE, the NASD and similar foreign authorities 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

173

regulations may become more restrictive or otherwise adversely affect our
operations. 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.

Regulation Affecting Prudential Financial, Inc.

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

Insurance Holding Company Regulation

Prudential Financial, Inc. will be 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, 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 effective date of the
demutualization, no person, other than Prudential Financial, Inc., its
subsidiaries or any employee benefit plans or trusts sponsored by us, may
offer to acquire 5% or more of Prudential Financial, Inc.'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, Inc.'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, Inc. 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,
Inc. 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, Inc. 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

174

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, Inc. may require prior notification
in those states that have adopted preacquisition notification laws.

These laws may discourage potential acquisition proposals and may delay,
deter or prevent a change of control of Prudential Financial, Inc., including
through transactions, and in particular unsolicited transactions, that some or
all of the stockholders of Prudential Financial, Inc. 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, The Prudential Insurance Company of America
currently is, and Prudential Financial, Inc. will be, 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., The Prudential Insurance Company of America is, and
Prudential Financial, Inc. will be, a savings and loan holding company.
Federal and state banking laws generally provide that no person may acquire
control of Prudential Financial, Inc., 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. Beneficial
ownership of 10% or more of the voting securities of Prudential Financial,
Inc., among other things, generally would be presumed to constitute control of
Prudential Financial, Inc.

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 The Prudential
Insurance Company of America 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 The Prudential Insurance
Company of America and our other insurance companies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources--Prudential Financial, Inc." for more detail.

175

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 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 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 effective as of January 1, 2001. Certain of the adopted principles
could have an impact on the measurement of statutory capital which, in turn,
could affect the RBC ratios of insurance companies. The NAIC is currently
reviewing the RBC formulas for possible changes as a result of the adoption of
these codified statutory accounting principles. We currently cannot estimate
the potential impact of the implementation of these principles on our RBC
position.

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. New Jersey insurance law and the laws of several other
states 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 would establish new minimum statutory reserve
requirements for individual life insurance policies written in the future. If
these reserve standards are enacted by the states in their current form,
insurers selling some individual life insurance products such as term life
insurance with guaranteed premium periods will need to adjust reserves. While
we expect that the model regulation will be enacted by the states in which we
have domestic companies, we do not expect the enactment of the regulation 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

176

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 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, 2000 and 1998, we paid approximately $8.5 million and
$44.8 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 and 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.

Potential 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 has, from time to time, considered possible
legislation that would 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 April 2001, the House of Representatives passed
legislation that would eliminate, over time, the estate, gift and generation-
skipping taxes. In March 2001, the House of Representatives passed legislation
that would lower individual tax rates. In addition, there have been proposals
from time to time that would increase the tax costs of insurance companies.
See "Risk Factors--Changes in federal income tax law could make some of our
products less attractive to consumers and increase our tax costs" for a
discussion of this proposed tax legislation.

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). Among ERISA's requirements are 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. Prudential's
insurance, asset management, group administrative services and brokerage
businesses all provide services to employee benefit plans subject to ERISA,
including services where Prudential may act as an ERISA fiduciary. In addition
to ERISA regulation of those businesses in the sales of products to and
servicing of ERISA plans, Prudential and its affiliates will become parties in
interest to those plans and subject to ERISA's prohibited transaction rules
for transactions with those plans, which may affect the

177

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. Insurers may also be subject to the fiduciary
requirements of ERISA with respect to certain contracts issued from the
insurer's general account unless the insurer meets certain requirements.
Prudential intends to satisfy the regulation's requirements to be exempted
from the fiduciary obligations of ERISA for certain pre-1999 contracts. The
cancellation options provided for under the regulations, if exercised by the
policyholders, would reduce policy persistency.

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 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

178

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, Inc. As of December 31, 2000, 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 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 bank in the United Kingdom is subject to
banking and securities regulation. The sale of real estate franchises by our
real estate 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.

Litigation and Regulatory Proceedings

We are subject to legal and regulatory actions in the ordinary course of our
businesses, including class actions. 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 actions and individual suits involving a
variety of issues, including sales practices, underwriting practices, claims
payment, premium charges for premiums paid on a periodic basis, denial or
delay of benefits and breaching fiduciary duties to customers. In addition to
the types of claims generally affecting our insurance

179

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
asset management operations, we are subject to litigation involving commercial
disputes with counterparties or partners and class action 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 suits, 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 and breaching fiduciary duties to customers. We may be a defendant in,
or be contractually responsible to third parties for, class action 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.

Insurance

Life Insurance Sales Practices Issues

We have experienced substantial regulatory investigations and civil
litigation involving allegations of deceptive life insurance sales practices
by us and our insurance agents in violation of state and federal laws. The
sales practices alleged to have occurred were and are contrary to our policy.

In July 1996, a task force consisting of insurance regulators from 29 states
and the District of Columbia released a report that found that some of our
life insurance sales had been improper. The report focused on
misrepresentations concerning the use of existing life insurance policies to
fund additional policies, the number of out-of-pocket cash premium payments
required to fund life insurance policies, and the characterization of policies
as investments rather than insurance policies. The task force found that our
efforts to prevent these types of misrepresentations were not sufficiently
effective.

Based on these findings, the task force recommended, and we agreed to,
various changes in our sales and other business practices controls and a
series of fines allocated to all 50 states and the District of Columbia. In
addition, the task force and we agreed upon a remediation program pursuant to
which we would offer relief to policyholders who were misled when they
purchased individual permanent life insurance policies in the United States
from 1982 through 1995. By March 1997, we had entered into consent orders with
insurance regulatory authorities in all 50 states and the District of Columbia
in which such authorities adopted the task force report and agreed to accept
this remediation program as enhanced by the class action settlement we discuss
below and the payment of approximately $65 million in fines, penalties and
related payments to resolve with these authorities the sales practices issues
identified by the task force's examination.

Commencing in February 1995, a number of individual and alleged class civil
actions were filed against us alleging improprieties in connection with our
sale, servicing and operation of permanent individual life insurance policies.
Many of these actions were consolidated and transferred to the United States
District Court for the District of New Jersey. The principal allegations in
the consolidated class action were that we improperly sold individual
permanent life insurance, citing misrepresentations like those identified in
the state insurance task force report.

180

In October 1996, we entered into a Stipulation of Settlement in the
consolidated class action covering all persons who own or owned at termination
of the policy an individual permanent life insurance policy issued in the
United States during the period January 1, 1982 through December 31, 1995,
other than:

. policyholders opting out of the class action settlement;

. policyholders who had previously settled with us who were represented by
counsel;

. the owners of certain corporate-owned life insurance or trust-owned life
insurance policies; and

. a limited number of other specified policyholders.

The Stipulation of Settlement settled the class action by adopting the
remediation program that was described in the task force report, as modified
by specified enhancements and changes, including some additional remedies. The
Stipulation of Settlement releases us from all claims that have been asserted
by class members and bars class members from asserting any other claims with
respect to the sale, servicing or administration of the policies that the
settlement covers.

In October 1996, we provided notice of the class action and proposed class
action settlement to the owners of the approximately 10.7 million covered
policies, giving each owner the opportunity to opt out of the class action in
order to pursue alternative remedies. In March 1997, the district court issued
an order certifying the class for settlement purposes only and approving the
amended class action settlement as fair to class members. After subsequent
appellate court review, the approval of the class action settlement became
final and unappealable, although the district court has retained jurisdiction
over the administration, execution, enforcement and interpretation of the
settlement. As of December 31, 2000, virtually all aspects of the settlement
have been satisfied.

The remediation program offered policyholders the right to participate in
the alternative dispute resolution process. The alternative dispute resolution
process provided for an individual review of each claim with remedies tailored
to the type of claim and the available evidence concerning the claim.

Pursuant to the alternative dispute resolution process, eligible
policyholders completed and returned approximately 646,000 claim forms and,
approximately 565,000 of them were determined to warrant claim relief.
Virtually all aspects of the alternative dispute resolution process are now
complete.

Approximately 325,000 alternative dispute resolution claimants who elected
to cancel their policies or chose not to reinstate them and to receive a
refund of the premiums they paid are being offered the opportunity to
reinstate these policies so they may participate in the demutualization as
owners of eligible policies. Claimants that elect to reinstate will have to
pay us to reinstate their policies. The amount each claimant must pay includes
the premiums that he or she would have had to pay to maintain continuous
coverage under the canceled policy for the period from cancellation through
reinstatement. Claimants must also repay us any money that we refunded in
connection with the cancellation through the remedy process plus interest from
the date of refund.

In a related matter, the NASD examined our sales practices with respect to
SEC-registered variable life insurance products sold in the United States from
1983 through 1995, as well as the adequacy of sales supervision within the
broker-dealer through which we distributed these products to the public. In
July 1999, our individual life insurance broker-dealer, Pruco Securities
Corporation, entered into a settlement agreement with the NASD that included
findings by the NASD of inadequate supervision and improper sales practices in
connection with the sale of some of our variable life insurance products
similar to those cited by the state insurance task force. This settlement
agreement censured us, required us to retain an independent consultant to
review Pruco Securities' policies and procedures relevant to the NASD's
findings, and levied a $20 million fine. This settlement did not change the
remediation program or add to our obligations to claimants in the remediation
program or to other policyholders.

On September 2, 1999, the Insurance Department of the State of New York
formally adopted a report of examination based on the department's review, for
the years 1996 and 1997, of our individual life insurance sales practices
controls and various company recordkeeping, reporting and filing requirements.
Significantly, the examination report did not identify problems with our sales
practices controls or the steps we have taken to implement the recommendations
contained in the task force report. However, the examiners did cite violations
relating to some of our advertisements and advertising files, the use of
unfiled policy forms in what is now a discontinued line of business, various
problems related to the back-office maintenance of new business and complaint
files, and our inability to produce all requested documents and data in a
timely manner. The department

181

also concluded that we failed to adequately facilitate its examination. We
resolved these matters by entering into a stipulation in which we agreed to
pay a fine of $1.5 million and agreed that the audit committee of our board of
directors would provide semi-annual reports for a three year period to the New
York department describing the status of steps we have taken to remedy the
issues cited in the examination report and the status of our regulatory
compliance procedures generally.

We remain subject to oversight and review by insurance regulators and other
regulatory authorities with respect to our sales practices and the conduct of
the remediation program. The releases granted by the state insurance
regulatory authorities pursuant to our settlements with them do not become
final until the remediation program has been completed without any material
changes to which those regulators have not agreed. As noted above, as of
December 31, 2000, virtually all aspects of the remediation program had been
satisfied.

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 December 31, 2000, we remained a party to approximately 61 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 48 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. Ten such cases pending in Palm Beach
County, Florida Circuit Court have been consolidated for trial. 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.

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 settlements is subject to
many uncertainties, and, given the complexity and scope of these suits, we
cannot predict their outcome with precision. For 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 and London Life Insurance Company,
to whom we sold most of our Canadian life insurance policies in 1996. As we
discuss above under "--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 litigation, 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
involving policies sold by National Life Insurance Company of Canada which
were jointly issued under the reinsurance agreement with Prudential. 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.

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, 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
breach 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

182

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 summary judgment to plaintiffs as to liability, permitting us
to appeal the order and staying the case pending completion of the appeal
proceeding, including the decision by the appeals court whether to hear the
appeal.

Securities

In November 1998, plaintiffs filed a purported class action 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 have 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. The issuer cases remain pending before the court. Prudential
Securities has also been named in other purported class actions alleging
similar claims.

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
investigations.

Beginning in 1991, Prudential Securities became the subject of numerous
regulatory investigations and civil lawsuits which principally involved
alleged misrepresentations and unsuitable recommendations in sales of oil and
gas, real estate and aircraft leasing limited partnerships in the 1980s. These
lawsuits and regulatory investigations are now resolved.

Corporate and Other Operations

In November 1996, plaintiffs filed a purported class action against
Prudential, 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, 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. On May
10, 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. On June 9, 2000, defendants filed a motion to dismiss the
amended complaint that is still pending. See "--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 employee and several Prudential retirees filed
an action in the United States District Court for the Southern District of
Florida, Dupree, et al., v. Prudential, et al., against Prudential and its
Board of Directors in connection with a group annuity contract entered into in
1989 between the Prudential Retirement Plan and Prudential. The suit alleges
that this annuitization of certain retirement benefits violates ERISA and
that, in the event of demutualization, Prudential will retain shares
distributed under the annuity contract in violation of ERISA's fiduciary duty
requirements. On August 1, 2000, defendants' motion to stay or dismiss the
complaint was granted in part and the case was stayed pending exhaustion of
plaintiffs' administrative remedies.

Discontinued Operations

As discussed under "--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 actions and individual suits involving various issues, including payment
of claims, denial of benefits, vicarious liability for malpractice

183

claims, contract disputes with provider groups and former policyholders,
purported class actions challenging practices of our former managed care
operations, including the class actions described below, and coordination of
benefits with other carriers.

Three purported nationwide class action lawsuits have been filed against us
in 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 healthcare
companies, in the United States District Court for the Southern District of
Florida in a consolidated proceeding captioned In re Managed Care Litigation.

Williamson v. Prudential alleges violations of RICO and ERISA through
alleged misrepresentations of the level of healthcare 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 Prudential and other major healthcare
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 is
pending. Plaintiffs' motion for class certification is also pending. McCarron
v. Prudential, et al. alleges violations of ERISA in making coverage
determinations and seeks injunctive relief, money damages in an unspecified
amount, restitution and disgorgement of profits, and attorneys' fees. Our
motion to dismiss this complaint is also pending. Romero v. Prudential, et al.
alleges ERISA violations based on cost containment policies and seeks
injunctive relief, compensatory damages in an unspecified amount and
attorneys' fees.

In Batas & Vogel v. Prudential, a case filed in a New York state court in
1997 based on some 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.

We have also been sued in Shane v. Humana, et al., a purported nationwide
class action 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. The amended complaint, naming additional plaintiffs,
including three state medical associations, and an additional defendant, was
filed on March 26, 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.

Summary

Our litigation is subject to many uncertainties, and given their complexity
and scope, we cannot predict the outcomes. It is possible that our results of
operations or cash flow, in particular quarterly or annual periods, 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. We believe, 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.

Properties

We own our headquarters building located at 751 Broad Street, Newark, New
Jersey. Our headquarters are approximately one half million square feet. In
addition, we own other properties that we use for home office

184

functions. Excluding properties used for the International division and
Prudential Securities' operations, we own 16 and lease 21 properties. Our
insurance operations use approximately 700 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, Korea, The Philippines,
Poland and Taiwan. In addition, we have purchased an 80% beneficial interest
in a 38-story office, residential and retail development that is currently
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 will have paid
approximately (Yen)40.8 billion (approximately $329 million at a conversion
rate of $1=(Yen)124.0) through April 27, 2001, including advance payments to
the builder of approximately (Yen)14.4 billion (approximately $116 million).
On completion of the building and full occupancy, we expect that the major
portion of our total acquisition and development costs, estimated at (Yen)54.4
billion (approximately $439 million), will be financed through non-recourse
borrowings and that our equity investment in this property will be
approximately (Yen)16.3 billion (approximately $132 million). We also own one
field office and lease approximately 135 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 15 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 350 other locations throughout the United
States and approximately 35 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.

Employees

As of December 31, 2000, we employed approximately 56,925 employees.
Approximately 4,050 Prudential Agents are covered by the terms of collective
bargaining agreements between us and the United Food and Commercial Workers
International Union. We last negotiated these contracts, which have been in
effect since the 1950s, in November 1999. These contracts will be due for
renegotiation in September 2001. We believe our relations with our unionized
and non-unionized employees are satisfactory.

185

MANAGEMENT

Directors and Executive Officers

Each of the following individuals is currently a director or officer of The
Prudential Insurance Company of America and of Prudential Financial, Inc.

Name Age Title Other Directorships
- ------------------------ --- -------------------------- ---------------------------------

Arthur F. Ryan.......... 58 Chairman, Chief Executive None
Officer and President

Franklin E. Agnew....... 66 Director . Bausch & Lomb, Inc.

Frederic K. Becker...... 65 Director None

Gilbert F. Casellas..... 48 Director . The Swarthmore Group, Inc.
. Net Base Corporation

James G. Cullen......... 58 Director . Quantum Bridge Communications
. Johnson & Johnson
. Agilent Technologies, Inc.

Carolyne K. Davis....... 69 Director . Beckman Coulter Instruments,
Inc.
. Beverly Enterprises
. Minimed Incorporated
. Science Applications
International Corporation

Allan D. Gilmour........ 66 Director . DTE Energy Company
. The Dow Chemical Company
. Whirlpool Corporation

William H. Gray III..... 59 Director . Viacom, Inc.
. Electronic Data Systems
. Ezgov.com Inc.
. Municipal Bond Investors
Assurance Corporation
. Rockwell International
Corporation
. JP Morgan Chase & Co.
. Dell Computer Corporation
. Pfizer, Inc.
. Visteon Corporation

Jon F. Hanson........... 64 Director . CDL, Inc.

Glen H. Hiner........... 66 Director . Owens Corning
. Dana Corporation
. Kohler, Co.

Constance J. Horner..... 59 Director . Foster Wheeler Corporation
. Ingersoll-Rand Company
. Pfizer, Inc.

Gaynor N. Kelley........ 69 Director . Alliant Techsystems
. Hercules Incorporated

Burton G. Malkiel....... 68 Director . Baker Fentress & Company
. The Jeffrey Company
. Vanguard Group, Inc.
. NeuVis, Inc.

Ida F. S. Schmertz...... 66 Director None

186

Name Age Title Other Directorships
- -------------------------- --- -------------------------- ---------------------------------

Charles R. Sitter......... 70 Director None

Donald L. Staheli......... 69 Director None

Richard M. Thomson........ 67 Director . The Toronto-Dominion Bank
. Canada Pension Plan Investment
Board
. Nexen, Inc.
. INCO, Limited
. Ontario Power Generation, Inc.
. S.C. Johnson & Son, Inc.
. The Thomson Corporation
. TrizecHahn Corporation
. Stuart Energy Systems, Inc.

James A. Unruh............ 59 Director . Moss Software, Inc.
. Apex Microtechnology
Corporation

P. Roy Vagelos............ 71 Director . Regeneron Pharmaceuticals, Inc.

Stanley C. Van Ness....... 67 Director . Jersey Central Power & Light

Paul A. Volcker........... 73 Director . Genosys Technology Management,
Inc.

Vivian L. Banta........... 49 Executive Vice President None

Michele S. Darling........ 47 Executive Vice President None

Robert Charles Golden..... 54 Executive Vice President None

Mark B. Grier............. 48 Executive Vice President . RGS Energy Group Incorporated
. Annuity and Life Re (Holding),
Ltd.

Jean D. Hamilton.......... 54 Executive Vice President . RewardsPlus of America
Corporation

Rodger A. Lawson.......... 54 Executive Vice President None

Kiyofumi Sakaguchi........ 57 Executive Vice President None

John R. Strangfeld, Jr. .. 47 Executive Vice President . Schroder Ventures Investment
Trust (U.K.)

Richard J. Carbone........ 53 Senior Vice President and None
Chief Financial Officer

John M. Liftin............ 57 Senior Vice President and None
General Counsel

187

Biographical information about Prudential Financial, Inc.'s directors and
executive officers is as follows:

Arthur F. Ryan was elected Chairman, Chief Executive Officer and President
of Prudential Financial, Inc. in December 2000 and served as President and
Chief Executive Officer of Prudential Financial, Inc. from January 2000 to
December 2000. He joined The Prudential Insurance Company of America 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, Inc. in December 1999 and has been a director of The
Prudential Insurance Company of America since December 1994.

Franklin E. Agnew was elected as a director of Prudential Financial, Inc. in
January 2001 and was appointed by the Chief Justice of the New Jersey Supreme
Court as a director of The Prudential Insurance Company of America in June
1994. He has been an independent business consultant since January 1987. Mr.
Agnew was the Chief Financial Officer of H.J. Heinz Co. from July 1971 to June
1973 and a Senior Vice President and Group Executive from July 1973 through
1986.

Frederic K. Becker was elected as a director of Prudential Financial, Inc.
in January 2001 and was appointed by the Chief Justice of the New Jersey
Supreme Court as a director of The Prudential Insurance Company of America in
June 1994. He has served as President of the law firm of Wilentz Goldman &
Spitzer since 1989 and has been with the firm since 1960.

Gilbert F. Casellas was elected as a director of Prudential Financial, Inc.
in January 2001 and has been a director of The Prudential Insurance Company of
America since April 1998. Since January 2001, he has served as President and
Chief Executive Officer of Q-linx, Inc. (software development). He has served
as the President and Chief Operating Officer of The Swarthmore Group, Inc.
(investment company) from January 1999 to December 2000. Mr. Casellas was a
partner in the law firm of McConnell Valdes LLP from 1998 to 1999; Chairman,
U.S. Equal Employment Opportunity Commission from 1994 to 1998; and General
Counsel, U.S. Department of Air Force from 1993 to 1994.

James G. Cullen was elected as a director of Prudential Financial, Inc. in
January 2001 and was appointed by the Chief Justice of the New Jersey Supreme
Court as a director of The Prudential Insurance Company of America in April
1994. He served as the President and Chief Operating Officer of Bell Atlantic
Corporation (global telecommunications) from December 1998 until his
retirement in June 2000. Mr. Cullen was the President and Chief Executive
Officer, Telecom Group, Bell Atlantic Corporation from 1997 to 1998; Vice
Chairman of Bell Atlantic Corporation from 1995 to 1997; and President of Bell
Atlantic Corporation from 1993 to 1995. He joined the Bell Atlantic division
of AT&T in 1964 and served in various positions with both companies.

Carolyne K. Davis was elected as a director of Prudential Financial, Inc. in
January 2001 and has been a director of The Prudential Insurance Company of
America since April 1989. She was an Independent Health Care Advisor and a
Scholar in Residence at Cornell University from 1997 to 1999. Dr. Davis was a
Health Care Advisor with Ernst & Young, LLP from 1985 to 1997. She was
Administrator, Health Care Financing Administration, U.S. Department of Health
and Human Services from 1981 to 1985.

Allan D. Gilmour was elected as a director of Prudential Financial, Inc. in
January 2001 and has been a director of The Prudential Insurance Company of
America since April 1995. He retired as the Vice Chairman of Ford Motor
Company in 1995. During his 34-year career with Ford Motor Company (automotive
industry), Mr. Gilmour held a number of executive positions, including that of
Chief Financial Officer and President of Ford Automotive Group.

William H. Gray III was elected as a director of Prudential Financial, Inc.
in January 2001 and has been a director of The Prudential Insurance Company of
America since September 1991. He has served as President and Chief Executive
Officer of The College Fund/UNCF (philanthropic foundation) since 1991. Mr.
Gray was a U.S. Congressman from 1979 to 1991.

Jon F. Hanson was elected as a director of Prudential Financial, Inc. in
January 2001 and was appointed by the Chief Justice of the New Jersey Supreme
Court as a director of The Prudential Insurance Company of America in April
1991. He has served as the Chairman of Hampshire Management Company (real
estate investment and property management) since 1976. Mr. Hanson served as
the Chairman and Commissioner of the New Jersey Sports and Exposition
Authority from 1982 to 1994.

188

Glen H. Hiner was elected as a director of Prudential Financial, Inc. in
January 2001 and has been a director of The Prudential Insurance Company of
America since April 1997. He has been the Chairman and Chief Executive Officer
of Owens Corning (advanced glass and building material systems) having served
in that capacity since joining the Company in 1992. Owens Corning filed for
protection under the federal bankruptcy code on October 5, 2000. Prior to
joining Owens, Mr. Hiner worked at General Electric Company starting in 1957.
He served as Senior Vice President and Group Executive, Plastics Group from
1983 to 1991.

Constance J. Horner was elected as a director of Prudential Financial, Inc.
in January 2001 and has been a director of The Prudential Insurance Company of
America since April 1994. She has been a Guest Scholar at The Brookings
Institution (non-partisan research institute) since 1993, after serving as
Assistant to the President of the United States and Director, Presidential
Personnel from 1991 to 1993; Deputy Secretary, U.S. Department of Health and
Human Services from 1989 to 1991; and Director, U.S. Office of Personnel
Management from 1985 to 1989. Ms. Horner was a Commissioner, U.S. Commission
on Civil Rights from 1993 to 1998 and taught at Princeton University in 1994
and John Hopkins University in 1995.

Gaynor N. Kelley was elected as a director of Prudential Financial, Inc. in
January 2001 and has been a director of The Prudential Insurance Company of
America since April 1997. He retired as the Chairman of The Perkin-Elmer
Corporation (development, manufacture and marketing of analytical instruments
and life science systems) in 1996 after having served in that position from
1990. Prior to that, Mr. Kelley held other executive management positions with
Perkin-Elmer, having joined the company in 1950.

Burton G. Malkiel was elected as a director of Prudential Financial, Inc. in
January 2001 and has been a director of The Prudential Insurance Company of
America since April 1978. He is the Chemical Bank Chairman's Professor of
Economics at Princeton University, where he has served on the faculty from
1988 to the present and at other times since 1964. He was the Dean of the
School of Organization and Management at Yale University from 1981 to 1988,
and he was a member of the President's Council of Economic Advisors from 1975
to 1977.

Ida F. S. Schmertz was elected as a director of Prudential Financial, Inc.
in January 2001 and was appointed by the Chief Justice of the New Jersey
Supreme Court as a director of The Prudential Insurance Company of America in
April 1997. She has been a Principal of Investment Strategies International
(investment consultant) since 1994 and Chairman of the Volkhov International
Business Incubator since 1995. Ms. Schmertz was with American Express Company
from 1979 to 1994, holding several management positions including Senior Vice
President, Corporate Affairs.

Charles R. Sitter was elected as a director of Prudential Financial, Inc. in
January 2001 and has been a director of The Prudential Insurance Company of
America since April 1995. He retired as the President of Exxon Corporation
(oil and gas industry) in 1996. Mr. Sitter joined Exxon in 1957 and held
various financial and management positions with Exxon in the United States,
Europe, Asia and Australia.

Donald L. Staheli was elected as a director of Prudential Financial, Inc. in
January 2001 and has been a director of The Prudential Insurance Company of
America since April 1995. He served as Chairman and Chief Executive Officer of
Continental Grain Company (international agribusiness and financial services)
from June 1994 until his retirement in July 1997, and as President and Chief
Executive Officer from April 1988 to June 1994. Mr. Staheli began his career
at Continental in 1969.

Richard M. Thomson was elected as a director of Prudential Financial, Inc.
in January 2001 and has been a director of The Prudential Insurance Company of
America since April 1976. He retired as Chairman of The Toronto-Dominion Bank
(banking and financial services) in 1998, having retired as the Chief
Executive Officer in 1997. He had served as Chairman and Chief Executive
Officer since 1978. Prior to that time he held other management positions at
The Toronto-Dominion Bank, which he joined in 1957.

James A. Unruh was elected as a director of Prudential Financial, Inc. in
January 2001 and has been a director of The Prudential Insurance Company of
America since April 1996. He became a founding member of Alerion Capital
Group, LLC (private equity group) in 1998. Mr. Unruh was with Unisys
Corporation (information technology services, hardware and software) from 1987
to 1997, serving as Chairman and Chief Executive Officer from 1990 to 1997.

P. Roy Vagelos, M.D. was elected as a director of Prudential Financial, Inc.
in January 2001 and has been a director of The Prudential Insurance Company of
America since April 1989. Dr. Vagelos has been the Chairman of Regeneron
Pharmaceuticals, Inc. since 1995 and the Chairman of Advanced Medicines, Inc.
since 1997. He

189

retired as the Chairman, Chief Executive Officer and President of Merck & Co.,
Inc. (pharmaceuticals) in 1994 after serving in that position since 1985.
Prior to that, Dr. Vagelos was the Senior Vice President, Research Division of
Merck Sharp and Dome Research Laboratories, which he joined in 1975.

Stanley C. Van Ness was elected as a director of Prudential Financial, Inc.
in January 2001 and was appointed by the Chief Justice of the New Jersey
Supreme Court as a director of The Prudential Insurance Company of America in
April 1990. He has been a partner in the law firm of Herbert, Van Ness, Cayci
& Goodell since 1998. From 1990 to 1998, Mr. Van Ness was a partner in the law
firm of Picco Herbert Kennedy and from 1984 to 1990 was a partner with
Jamieson, Moore, Peskin and Spicer. He was a professor at Seton Hall
University Law School from 1982 to 1984. Prior to that time he worked for the
State of New Jersey, where he served as the first Public Advocate.

Paul A. Volcker was elected as a director of Prudential Financial, Inc. in
January 2001 and has been a director of The Prudential Insurance Company of
America since July 1988. He has been a business consultant to various
companies since 1997. Mr. Volcker was the Chairman and Chief Executive Officer
of Wolfensohn & Co., Inc. (investment firm) from 1995 to 1996 and Chairman of
James D. Wolfensohn, Inc. from 1988 to 1995. From 1979 to 1988, Mr. Volcker
was the Chairman of the Board of Governors of the Federal Reserve System,
President of the Federal Reserve Bank of New York from 1975 to 1979 and
Undersecretary of the U.S. Department of Treasury.

Vivian L. Banta was elected Executive Vice President of Prudential
Financial, Inc. in February 2001 and was elected Executive Vice President,
U.S. Consumer Group of The Prudential Insurance Company of America in March
2000. She served as Senior Vice President, Individual Financial Services from
January 2000 to March 2000. Prior to joining Prudential she was an independent
consultant from 1998 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, Inc. in February 2001 and was elected Executive Vice President,
Human Resources and Corporate Governance of The Prudential Insurance Company
of America in March 2000, having served as Executive Vice President, Human
Resources since February 1997. Prior to joining Prudential she was the
Executive Vice President, Human Resources of Canadian Imperial Bank of
Commerce from 1991 to 1997.

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

Mark B. Grier was elected Executive Vice President of Prudential Financial,
Inc. in December 2000. He served as a director of Prudential Financial, Inc.
from December 1999 to January 2001 and as Vice President of Prudential
Financial, Inc. from January 2000 to December 2000. He was elected Executive
Vice President of The Prudential Insurance Company of America 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, Inc. in February 2001 and was elected Executive Vice President,
Prudential Institutional of The Prudential Insurance Company of America 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, Inc. in February 2001 and was elected Executive Vice President,
International Investments and Global Marketing Communications of The
Prudential Insurance Company of America in October 1998. He was Executive Vice
President, Marketing and Planning of Prudential 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 from January
1992 to April 1994; Managing Director and Chief Executive Officer

190

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.

Kiyofumi Sakaguchi was elected Executive Vice President of Prudential
Financial, Inc. in February 2001 and was elected Executive Vice President,
International Insurance of The Prudential Insurance Company of America in
September 1998. Mr. Sakaguchi has served as the executive in charge of
Prudential's international insurance operations since 1995 and has held
various senior management positions in that area since joining Prudential in
March 1980. Mr. Sakaguchi had previously worked in the insurance industry in
Japan and the United States with Sakaguchi & Associates from 1977 to 1980 and
Occidental International Enterprises, Inc. from 1974 to 1977.

John R. Strangfeld, Jr. was elected Executive Vice President of Prudential
Financial, Inc. in February 2001 and was elected Executive Vice President,
Asset Management of The Prudential Insurance Company of America in October
1998 and Chairman and CEO of Prudential Securities in December 2000. He has
been with Prudential since July 1977, serving in various management positions,
including the executive in charge of Prudential Global Asset Management 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 of Prudential
Financial, Inc. in December 2000 and was elected Senior Vice President and
Chief Financial Officer of The Prudential Insurance Company of America 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, Inc. in December 2000. He served as a director of
Prudential Financial, Inc. from December 1999 to January 2001 and as Vice
President of Prudential Financial, Inc. from January 2000 to December 2000. He
was elected Senior Vice President and General Counsel of The Prudential
Insurance Company of America 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.

Composition of the Board of Directors and Committees

Prudential Financial, Inc.'s Board of Directors consists of 21 directors,
divided into three classes. Following the demutualization, the term of the
first class will expire at the annual meeting of shareholders to be held in
2002, the term of the second class will expire at the annual meeting of
shareholders in 2003 and the term of the third class will expire at the annual
meeting of shareholders in 2004.

Messrs. Cullen, Hiner, Thomson, Unruh, Van Ness, and Volcker and Ms. Davis
are members of the first class, Messrs. Becker, Gray, Hanson, Kelley, Malkiel,
and Staheli and Ms. Horner are members of the second class, and Messrs. Agnew,
Casellas, Gilmour, Ryan, and Sitter, Ms. Schmertz and Dr. Vagelos will be
members of the third class. Directors are elected for a three year term.

Under New Jersey insurance law, the Chief Justice of the Supreme Court of
New Jersey appoints six of the directors of a mutual insurer with more than
ten million policies in force. The Chief Justice appointed Messrs. Agnew,
Becker, Cullen, Hanson, and Van Ness and Ms. Schmertz directors of The
Prudential Insurance Company of America prior to its demutualization pursuant
to this provision. This provision will no longer apply to The Prudential
Insurance Company of America after its demutualization and will not apply to
Prudential Financial, Inc.

Executive officers are elected annually.

191

The following table sets forth the chair and membership of each of the
committees of Prudential Financial, Inc.'s Board of Directors.

Corporate
Name Audit Business Ethics Compensation Governance Executive Finance Investment
-------------------------------------------------------------------------------------------

A. Ryan X X X X
-------------------------------------------------------------------------------------------
F. Agnew X X
-------------------------------------------------------------------------------------------
F. Becker X X
-------------------------------------------------------------------------------------------
G. Casellas X X
-------------------------------------------------------------------------------------------
J. Cullen X X
-------------------------------------------------------------------------------------------
C. Davis X X
-------------------------------------------------------------------------------------------
A. Gilmour X X
-------------------------------------------------------------------------------------------
W. Gray III X X* X
-------------------------------------------------------------------------------------------
J. Hanson X X
-------------------------------------------------------------------------------------------
G. Hiner X
-------------------------------------------------------------------------------------------
C. Horner X X
-------------------------------------------------------------------------------------------
G. Kelley X
-------------------------------------------------------------------------------------------
B. Malkiel X X X*
-------------------------------------------------------------------------------------------
I. Schmertz X
-------------------------------------------------------------------------------------------
C. Sitter X X
-------------------------------------------------------------------------------------------
D. Staheli X X
-------------------------------------------------------------------------------------------
R. Thomson X* X*
-------------------------------------------------------------------------------------------
J. Unruh X X
-------------------------------------------------------------------------------------------
P. R. Vagelos X* X X
-------------------------------------------------------------------------------------------
S. Van Ness X X* X
-------------------------------------------------------------------------------------------
P. Volcker X X X*

--------
* Chair

The primary responsibilities of each of the committees of Prudential Financial,
Inc's. Board of Directors are set forth below. Each such committee is currently
a committee of The Prudential Insurance Company of America's Board of
Directors.

Audit Committee:

The primary purpose of the Audit Committee is to assist the Board of
Directors in its oversight of internal controls, the financial statements and
the audit process. To that end, the Audit Committee:

. recommends to the Board of Directors the selection of independent
certified public accountants;

. reviews reports prepared by management and the independent certified
public accountants on systems of internal control and the audit and
compliance process; and

. reviews the financial statements, which are prepared by management and
audited by the independent certified public accountants.

No member of the Audit Committee is a Prudential officer or employee.

Business Ethics Committee:

. reviews policies relating to business ethics; and

. monitors compliance with our published statement on business ethics
through reports prepared by management.

192

Compensation Committee:

. approves, changes or terminates employee benefit and compensation plans
and programs;

. oversees compensation and benefit plan administration; and

. reviews and approves compensation of certain senior officers and makes
recommendations to the board about the compensation of certain other
officers, including the chief executive officer.

No member of the Compensation Committee is a Prudential officer or employee.

Corporate Governance Committee:

. makes recommendations to the board regarding corporate governance issues
and practices, nominations for election as directors, the composition of
standing committees and the appointment of chairpersons for any committee
of the board.

No member of the Corporate Governance Committee is a Prudential officer or
employee.

Executive Committee:

. between meetings of the board, has authority to exercise the corporate
powers of the corporation except for those powers reserved to the Board
of Directors by the by-laws or otherwise.

Finance Committee:

. receives reports from management and oversees capital structure,
including borrowing levels, subsidiary structure, major capital
expenditures and funding of the pension plan.

Investment Committee:

. periodically receives reports from management and oversees the management
and disposition of invested assets and the investments of the funded
employee welfare and pension benefit plans; and

. periodically receives reports from management on investment risks and
exposures, as well the investment performance of products and accounts
managed on behalf of third parties.

Compensation of Directors and Management

Compensation of Directors

Each director who is not an officer or employee of Prudential receives an
annual retainer fee of $85,000. The chairperson of each committee receives an
additional annual retainer fee of $10,000. We currently intend to adopt a
stock plan for non-employee directors that will cause at least one-half of
each director's compensation to be paid in the form of stock options and stock
grants payable upon retirement. Such changes are anticipated to take effect
one year after the effective date of the demutualization.

Deferred Compensation and Pension Plans

The Deferred Compensation Plan for Non-Employee Directors provides a method
of deferring payment to non-employee directors of their fees until termination
of their services on the Board of Directors or a certain date selected by the
director. Fees deferred under this plan are deemed to accrue interest at the
same rate as in effect from time to time offered under the Fixed Rate Fund
under the Prudential Employee Savings Plan.

The Pension Plan for Non-Employee Directors provides retirement income for
non-employee members of the Board of Directors after completion of their
services on the board. It provides an annual benefit equal to the lower of the
basic annual retainer fee as of the date a director retires and $30,000 for
the life of the retired director. We currently intend to terminate this plan
with respect to active directors one year after the effective date of the
demutualization and replace it with a one-time grant of stock (valued at the
then current market price) payable upon cessation of service to such active
directors in consideration of the termination of the plan.

We intend the Deferred Compensation and Pension Plans to be unfunded plans
maintained for the purpose of providing deferred compensation and retirement
benefits for the non-employee directors and we administer them as such. They
are not "employee benefit plans" within the meaning of ERISA.

193

Management Compensation

Currently, Mr. Ryan and the four other most highly paid (in 2000) executive
officers of Prudential Financial, Inc. participate in certain pension and
profit sharing retirement plans sponsored by The Prudential Insurance Company
of America that are either intended to qualify for tax-favored treatment under
Section 401(a) of the Internal Revenue Code or are nonqualified arrangements
which, by their design, do not result in current taxation to such executives
of any accrued but unpaid benefits. These include: (a) The Prudential
Retirement Plan Document (a component of The Prudential Merged Retirement
Plan), a defined benefit pension plan intended to qualify under Section 401(a)
of the Internal Revenue Code (the "Merged Retirement Plan"); (b) The
Prudential Supplemental Retirement Plan, a nonqualified retirement plan
designed to provide benefits to eligible employees in excess of the amounts
permitted to be paid by the Merged Retirement Plan under Internal Revenue Code
Section 401(a) (the "Supplemental Retirement Plan"); (c) the Prudential
Employee Savings Plan, a defined contribution profit sharing plan intended to
qualify under Section 401(a) of the Internal Revenue Code and to be subject to
the requirements of Section 401(k) of the Internal Revenue Code ("PESP"); and
(d) the Prudential Supplemental Employee Savings Plan, a nonqualified profit
sharing plan designed to provide benefits to eligible employees in excess of
certain amounts permitted to be contributed under PESP ("SESP"). The named
executives also participate in other nonqualified deferred compensation
arrangements sponsored by The Prudential Insurance Company of America. In
connection with the demutualization, we currently intend to continue to
sponsor these qualified and nonqualified retirement plans, and to amend and
adopt certain executive incentive compensation and stock option arrangements,
described in more detail below. You should note, however, that the plan
sponsor of each such plan has reserved the right to amend or terminate any
such plan at any time, to the extent permissible under applicable law.

The following Summary Compensation Table includes individual compensation
information on Mr. Ryan and the four other most highly paid executive officers
in 2000.

Summary Compensation Table

Long-Term
Annual Compensation Compensation
---------------------------------- ------------
Other Annual LTIP All Other
Name and Principal Salary Bonus Compensation Payouts Compensation
Position Year ($) ($)(1) ($) ($)(2) ($)(3)
- ------------------------ ---- ---------- ---------- ------------ ------------ ------------

Arthur F. Ryan.......... 2000 $1,000,000 $4,000,000 -- $3,395,000 $ 28,477
Chairman of the Board,
President and Chief
Executive Officer
John R. Strangfeld,
Jr..................... 2000 $ 484,038 $2,000,000 -- $1,493,800 $ 14,521
Executive Vice
President, Global
Asset Management and
CEO, Prudential
Securities, Inc.
Vivian L. Banta......... 2000 $ 459,026 $1,600,000 -- $1,455,776 $1,011,821
Executive Vice
President, U.S.
Consumer Group
Mark B. Grier........... 2000 $ 489,038 $1,500,000 -- $1,629,600 $ 5,100
Executive Vice
President, Financial
Management
Kiyofumi Sakaguchi...... 2000 $ 425,000 $1,300,000 -- $1,222,200 $ 12,750
Executive Vice
President,
International
Insurance

- --------
(1) The Annual Incentive Plan is applicable to all senior officers, including
all named executive officers. Payments under the Annual Incentive Plan are
allocated from a bonus pool. The initial size of the pool is based on the
aggregate incentive target funding amount established for each
participant. The bonus pool is then adjusted by a performance factor that
ranges from 0 to 4.0. This factor represents the assessed performance of
Prudential and its businesses versus defined performance targets. The
resultant pool is then allocated to participants in accordance with the
Plan's terms based on individual performance and contribution to the
results achieved during the performance year.
(2) The LTIP amounts shown represent actual payments made pursuant to the 1998
Prudential Long-Term Performance Unit Plan. The 1998 Plan measured
performance over a three year period from 1998 to 2000. The number of
performance units a participant was granted depended on the individual's
performance, the value of the position within Prudential and market
considerations. The value of the performance units under the 1998 Plan was
based principally on operating earnings versus plan targets for the
cumulative three year performance period.
(3) Includes payments to Mr. Ryan, Mr. Strangfeld, Ms. Banta, Mr. Grier and
Mr. Sakaguchi, respectively, of (i) employer contributions under PESP in
the amounts of $3,577, $5,100, $3,150, $5,100, and $5,100, and (ii)
employer contributions to Prudential's SESP in the amounts of $24,900,
$9,421, $8,671, $0, and $7,650, respectively. The amount for Ms. Banta
also includes a $1,000,000 payment made pursuant to her agreement to join
Prudential.

194

Long-Term Incentive Plan

The following table shows the performance units granted in 2000 to Mr. Ryan
and the four other most highly paid executive officers under the Prudential
Long-Term Performance Unit Plan (the "PUP"):

Estimated Future Payouts
Under Non-
Stock Price Based Plans(1)
Performance or Other ---------------------------
Number of Shares, Period Until Threshold Target
Name Units or Other Rights Maturation or Payout ($) ($)
---- --------------------- -------------------- ---------------------------

Arthur F. Ryan.......... 5,129 2000-2002 $2,000,310 $ 4,000,620
John R. Strangfeld,
Jr..................... 2,471 2000-2002 963,690 1,927,380
Vivian L. Banta......... 1,800 2000-2002 702,000 1,404,000
Mark B. Grier........... 2,350 2000-2002 916,500 1,833,000
Kiyofumi Sakaguchi...... 2,016 2000-2002 786,240 1,572,480

- --------
(1) The PUP recognizes and rewards the contributions that participants make
towards the long term growth of The Prudential Insurance Company of
America. Grants under the PUP are made every year for three year periods.
The 2000 PUP measures performance over a three year period from 2000 to
2002. Under the 2000 PUP, participants are granted performance units from
100,000 total performance units. The number of performance units a
participant is granted depends on the individual's performance, the value
of the position within Prudential and market considerations. The value of
the performance units is based principally on operating earnings. The
final value of the units is not subject to any limitations. Awards under
the 2000 PUP are payable in accordance with the PUP's terms in the first
quarter of 2003. As described in greater detail below, under "--Long-Term
Incentive Plans--Prudential Long-Term Performance Unit Plan", it is
expected that a future grants under the PUP will be replaced in whole or
in part with stock options.

Each of the foregoing persons also has awards outstanding under the 1999
PUP, reflecting performance from 1999-2001, which will be payable in the first
quarter of 2002 and reflected in the Summary Compensation Table for 2001. Mr.
Ryan has 5,129 units, with a threshold of $2,000,310 and a target of
$4,000,620; Mr. Strangfeld, 2,425 units, with a threshold of $945,750, and a
target of $1,891,500; Ms. Banta, 1,795 units, with a threshold of $769,860 and
a target of $1,539,720; Mr. Grier, 1,974 units, with a threshold of $769,860
and a target of $1,539,720; and Mr. Sakaguchi, 2,016 units, with a threshold
of $786,240 and a target of $1,572,480.

Retirement Plan

The following table shows the estimated annual retirement benefits payable,
assuming retirement at age 65, to participants under the Prudential Merged
Retirement Plan and the Prudential Supplemental Retirement Plan (collectively,
the "Retirement Plans") at the levels of Final Average Earnings and years of
credited service contained in the respective plans.

Estimated Annual Retirement Plans Benefits

Years of Credited Service
-----------------------------------------------------------------
Final Average Earnings 5 10 15 20 25(1) 30
- ---------------------- ---------- ---------- ---------- ---------- ---------- ----------

$ 800,000 $ 78,791 $ 157,581 $ 236,372 $ 315,162 $ 393,953 $ 433,488
1,200,000 118,791 237,581 356,372 475,162 593,953 653,488
1,600,000 158,791 317,581 476,372 635,162 793,953 873,488
2,000,000 198,791 397,581 596,372 795,162 993,953 1,093,488
2,400,000 238,791 477,581 716,372 955,162 1,193,953 1,313,488
2,800,000 278,791 557,581 836,372 1,115,162 1,393,953 1,533,488
3,200,000 318,791 637,581 956,372 1,275,162 1,593,953 1,753,488
3,600,000 358,791 717,581 1,076,372 1,435,162 1,793,953 1,973,488
4,000,000 398,791 797,581 1,196,372 1,595,162 1,993,953 2,193,488
4,400,000 438,791 877,581 1,316,372 1,755,162 2,193,953 2.413,488
4,800,000 478,791 957,581 1,436,372 1,915,162 2,393,953 2,633,488

- --------
(1) The highest attainable benefit under the Retirement Plans for a named
executive does not exceed 25 years.

The benefits shown above are stated in the form of a straight life annuity
for the participant. Other optional forms of payment are available. Benefits
payable under the Merged Retirement Plan are subject to offset for Social
Security benefits; benefits payable under the Supplemental Retirement Plan are
not subject to such offset. Final Average Earnings is generally defined as the
average of annual earnings during the Earnings Base Period, not including the
two years of lowest annual earnings. The Earnings Base Period for 2000 begins
on January 1, 1993. Compensation considered in determining annual earnings
includes base salary and payments earned under the Annual Incentive Plan.

195

As of January 1, 2001, the estimated Final Average Earnings and years of
credited service of each of the Named Executives under the Retirement Plans
was: Mr. Ryan, $3,919,692 and six years; Mr. Strangfeld, $1,059,543 and 23
years; Ms. Banta, $2,117,040 and one year; Mr. Grier, $1,437,173 and five
years; and Mr. Sakaguchi, $914,930 and 20 years.

Long-Term Incentive Plans

Prudential Long-Term Performance Unit Plan

As indicated above, we have a long-term incentive program called the
Prudential Long-Term Performance Unit Plan. Under the PUP, select employees at
the vice president level and all or substantially all employees above that
level will receive additional compensation if stated performance objectives
are achieved or exceeded over a three-year performance period. The performance
objectives are based on Cumulative Operating Earnings and Cumulative Operating
Margin. "Cumulative Operating Earnings" is combined income before tax and
capital gains, subject to appropriate accounting adjustments over the three
year performance period, as defined under the PUP. "Cumulative Operating
Margin" is "operating earnings" divided by revenue over the three-year
performance period as defined under the PUP. A targeted level of Cumulative
Operating Earnings and a targeted percentage of Cumulative Operating Margin
are established for each performance period. If 75% of the targeted level of
Cumulative Operating Earnings is achieved, a specified dollar amount will be
allocated to a notional incentive pool under the PUP. For performance above
this threshold, a percentage of the incremental amount is credited to the
notional pool, with different percentages used below and above the target
level of performance. If the Cumulative Operating Margin percentage is
achieved or exceeded, the amount allocated to the notional pool for exceeding
the threshold level of Cumulative Operating Earnings will be increased by a
specified percentage based on the improvement in Cumulative Operating Margin.

The notional pool is allocated to eligible participants based on the number
of performance units awarded to each employee and to all employees. The number
of units each eligible employee receives is determined by our Compensation
Committee. Generally, an employee loses the units awarded if he or she is not
employed by us at the end of the performance period. Employees whose
terminations of employment occur because of retirement, death or disability
are permitted to keep a portion of their units based on the portion of the
performance period during which they were employed. The Compensation Committee
may also authorize a payment to any employee whose employment is involuntarily
terminated without cause, but such amount will not reduce the notional pool
credited for the PUP.

Amounts payable under the PUP will be paid at the end of the performance
period, in a single payment, after our Compensation Committee approves the
amount allocable to the notional pool. Up to one-half of the amount that is
payable may be paid in shares of our Common Stock following the
demutualization.

It is generally expected that following the demutualization, stock options
granted under the Stock Option Plan, as described below, will be the principal
basis on which long-term incentive compensation opportunities are made
available to our officers and other key employees. Therefore, the use of the
PUP and other long-term incentive cash plans available at certain business
units will be reduced over time.

Annual Incentive Plan

As indicated above, we also have an annual incentive program called the
Prudential Annual Incentive Plan (the "AIP"). Under the AIP, management
employees are eligible to receive additional compensation if stated annual
performance objectives are achieved or exceeded. We have established several
different notional bonus pools under the AIP. One notional pool has been
created for the Chief Executive Officer and other senior executives (the
"Senior Executive Pool"). Others have been established for each of our
business groups and another is established for employees in our corporate
functions. Each notional pool is credited at the end of each year with an
aggregate amount equal to the target bonus opportunities for each participant
in that pool. This amount is then adjusted to either reflect a performance
factor established by our Compensation Committee for the entire company, for
the relevant business unit or for a corporate function. Prudential's overall
performance objectives, which are applied to adjust the Senior Executive Pool,
will be focused primarily on financial results achieved as compared with pre-
established targets. For a business group pool, it will generally be the case
that approximately one-quarter of the adjustment will be made based on
company-wide objectives, with the remainder based on the performance
objectives specific to that business unit.

196

The amounts credited to the applicable notional pool following the
adjustment for the performance factor are allocated among the eligible
participants. These allocations will be made at the discretion of the persons
responsible for making the allocations, based on their assessment of several
factors, including the individual's performance. Our Compensation Committee
decides the allocations for the participants in the Senior Executive Pool.
Amounts payable are generally paid to active employees in the first quarter of
the year following the year for which they are payable. If an eligible
employee terminates employment prior to receiving a payment in respect of the
AIP, that employee will generally lose his or her right to receive any
payment. In the case of employees whose employment terminates due to death,
disability, retirement or involuntary termination of employment unrelated to
job performance, an award may be paid at the discretion of the Compensation
Committee.

Stock-Based Plans

Upon demutualization, we will use Prudential Financial, Inc. Common Stock
and stock options as components of our total compensation package for
employees.

New Jersey law prohibits any current member of the Board of Directors of The
Prudential Insurance Company of America, including our chairman and chief
executive officer, to be included in any grant of Prudential Financial, Inc.
stock options that takes effect at the time of demutualization. However, the
plan of reorganization provides that current members of the Board of Directors
may participate in our stock option plan beginning one year after the
effective date of the demutualization. In addition, our plan of reorganization
further limits our ability to grant stock options to officers in the following
manner. Senior officers of Prudential or their equivalent are precluded from
receiving any grant of stock options under the Stock Option Plan for the same
one-year period. Officers of Prudential below the level of senior officers or
their equivalent are precluded from receiving any grant of stock options for
at least 183 days from the effective date of Prudential's demutualization.

The stock-based compensation programs will be structured as follows:

We have adopted a stock option plan (the "Stock Option Plan") that will take
effect as part of the plan of reorganization. The Stock Option Plan will have
two components through which no more than 7% of the total number of shares of
Common Stock notionally allocable to eligible policyholders in the
demutualization may be issued upon exercise of the options. The "total number
of shares of Common Stock", for purposes of this 7% calculation, includes both
the actual shares of Common Stock issued to eligible policyholders and the
notional shares of Common Stock that could have been issued to eligible
policyholders that are actually receiving demutualization compensation in the
form of either cash or policy credits under the terms of the plan of
reorganization. Assuming 161.9 million notional shares are allocated to
eligible policyholders receiving cash or policy credits and 89.0 million
shares are issued in the offering, the shares reserved for grants under the
Stock Option Plan would constitute approximately 8% of the outstanding shares
of Common Stock upon the completion of the demutualization and the offering,
without giving any effect to shares of Class B Stock. The issuance of options
will not reduce the amount of stock allocated among, or issued to, eligible
policyholders in our demutualization.

The first component is the associates options grant, known under the Stock
Option Plan as the "Associates Grant". Under this component, a one-time grant
of Prudential Financial, Inc. stock options, in an amount to be determined by
the Board of Directors, or a committee of the Board, in its discretion, will
be made as of the effective date of the demutualization to a substantial and
broad classification of employees of Prudential Financial, Inc. and its
affiliates, but not to individuals who are officers or who, by their
positions, are eligible for consideration for regular option grants under the
officer stock option component described below. Subject to the employee's
continued employment with Prudential Financial, Inc. or one of its affiliates,
this associates option grant will become exercisable ratably over no longer
than a three-year period (although the Board of Directors or a committee of
the Board may, at the time of the grant, specify a future performance goal
that, if attained, could shorten the vesting period) and have ten-year maximum
terms. The Board of Directors currently intends to make the associates option
grant as of the date of demutualization of up to 2% of the total number of
shares of Common Stock notionally allocable to eligible policyholders in the
demutualization. If the associates option grant is made on the effective date
of the plan of reorganization, the exercise price of the stock option will be
the initial public offering price. Otherwise, the exercise price of the stock
option will be at least equal to the fair market value of the Common Stock
(generally the market price for our Common Stock on the date of the grant).

197

The second component is the officer stock option program. Under this
program, grants of stock options (which may include incentive stock options as
defined under the Internal Revenue Code) or stock appreciation rights
("SARs"), in amounts to be determined by the Board of Directors, or a
committee of the Board or an officer to whom authority is delegated, will be
made to officers of Prudential Financial, Inc. and its affiliates and to other
selected individuals as determined by the Board of Directors, such committee
or officer. This program has two aspects. First, it is ultimately intended to
provide for the grant of stock options in lieu of all cash-based incentive
compensation awards now made annually under the PUP. However, as noted above,
we will defer the adoption of this practice for at least 183 days from the
effective date of our demutualization for otherwise-eligible officers of
Prudential and its affiliates, and for at least one year from the effective
date of our demutualization for senior officers of Prudential. Second, the
Board of Directors, or a committee of the Board or officer, in its discretion,
may make periodic grants of stock options to select employees to reward
significant individual performance. The stock options awarded under the
officer stock option program after the effective date of demutualization will
have an exercise price at least equal to the fair market value of the Common
Stock at the date of the grant (generally the market price for our Common
Stock on the day of the grant). Subject to the grantees' continued employment
with Prudential Financial, Inc. or one of its affiliates, these stock options
will become exercisable over no longer than a three-year period (although the
Board of Directors or a committee of the Board may, at the time of the grant,
specify a future performance goal that, if attained, could shorten the vesting
period) and have ten-year maximum terms. Finally, in the event of a "change of
control" of Prudential Financial, Inc., generally any outstanding stock option
or SAR will become immediately exercisable by the holder. However, the Board
of Directors or a committee of the Board administering the Stock Option Plan
may provide for the cash-out of such outstanding options in an amount equal to
the excess of the "change of control" price for the Common Stock over the
exercise price for the option or base price for the SAR. In the absence of a
cash-out and provided the successor company satisfies certain requirements,
the Stock Option Plan provides for the issuance of an alternative award in
lieu of the stock options and SARs by the participant's employer immediately
following the change of control. Under the Stock Option Plan, officer stock
options will be limited to up to 5% of the total number of shares of Common
Stock notionally allocable to eligible policyholders in the demutualization.
We anticipate that officers and other selected employees normally eligible for
option grants under the Stock Option Plan will receive such grants after 183
days, and the senior officers will receive stock option grants after one year
from the effective date of our demutualization. The exercise price of such
option grants will be at least equal to the fair market value of the Common
Stock at the date of grant.

The Stock Option Plan is intended to satisfy the general requirements of
Section 162(m) of the Internal Revenue Code when, and to the degree, the
exercise of stock options by the chairman and chief executive officer and the
four most highly compensated executive officers may trigger compensation
subject to the limits of such section.

In addition, on or after the effective date of the demutualization, we may
substitute Common Stock on a current or deferred basis, as appropriate in our
discretion, for:

. a portion of our employer match contributions in our PESP, and

. payment of all or part of outstanding awards, otherwise payable in cash,
that mature after demutualization under the PUP.

Beginning one year after demutualization, we also may substitute Common Stock
on a current or deferred basis, as appropriate in our discretion, to:

. convert the present value of existing, non-employee directors' retirement
benefits to a stock-based award;

. make a lump sum stock-based award to new non-employee directors; and

. replace all or a portion of the annual cash retainer for our non-employee
directors.

Participants in the PESP will also have the opportunity to invest their
individual contributions and account balances in Common Stock.

Prudential Severance and Senior Executive Severance Plan; Change of Control
Program

Currently, each of the five most highly compensated executive officers,
other than the chairman and chief executive officer, is eligible for benefits
under the Prudential Severance Plan (the "Severance Plan") and the Prudential
Severance Plan for Senior Executives (the "Senior Executive Severance Plan")
if such executive

198

incurs an "Eligible Termination." An "Eligible Termination" is defined as an
involuntary termination of employment with Prudential or any "participating
company" that is a result of: (a) the closing of an office or business
location; (b) a reduction in force or downsizing; (c) the restructuring,
reorganization or reengineering of a business group, unit or department; (d) a
job elimination; or (e) such other factors and circumstances as we determine
in our sole discretion. The amount of severance payments under the plan is
generally based on two variables-- the executive's years of service with
Prudential and his or her "Weeks of Eligible Compensation". This is calculated
by determining the individual's annual base salary, a three-year average of
the individual's bonus payments under the AIP, plus any amount due under the
terms of the PUP otherwise payable immediately after termination of
employment, divided by 52. The Senior Executive Severance Plan provides a
minimum guarantee of 52 Weeks of Eligible Compensation for any participant; an
additional 26 weeks may be added to the minimum guarantee, in the sole
discretion of Prudential. Payments under the Senior Executive Severance Plan
are reduced, however, by the amount of any severance or similar benefits from
The Prudential Insurance Company of America or any affiliate, including the
change of control program described below and by any amounts owed to
Prudential, by the affected employee.

We have also adopted an Executive Change of Control Severance Program (the
"Program") that permits a committee of the Board to select and designate
employees of Prudential as participants in the Program. Presently, eleven
individuals, including the chairman and chief executive officer and the four
most highly compensated named executive officers, have been so designated. A
potential of 400 additional persons may be designated as participants under
the Program in the future. There are two requirements under the Program that
must be satisfied before any termination payments are made to eligible
officers:

. there must be a "Change of Control", as defined under the Program and as
described below; and

. within two years following the Change of Control, either the eligible
officer's employment with Prudential Financial, Inc. or any of its
affiliates must be terminated without cause or the eligible officer must
terminate his or her employment for "good reason".

A Change of Control includes any one of several events or occurrences:

. any person becoming the beneficial owner, directly or indirectly, of
securities representing 25% or more of the combined voting stock of our
securities;

. a change in a majority of the persons who serve as members of the Board
of Directors, excluding newly elected directors who are elected to the
Board of Directors, or nominated for election to the Board of Directors,
by a majority of those directors who were in office at the beginning of
the period or who were previously elected or nominated for election by
such directors, within any 24-month period commencing after the
demutualization; or

. consummation of a merger, consolidation, sale or other disposition of all
or substantially all of our assets or similar corporate transaction, if,
immediately following the consummation of that transaction, our
policyholders or stockholders, as the case may be, do not, directly or
indirectly, control the voting power of the surviving, resulting or
acquiring corporation.

Additionally, the Board of Directors reserves the right to designate any other
event as a Change of Control. However, the consummation of the demutualization
and the offering will not be deemed a Change of Control.

An officer has "good reason" to terminate his or her employment if one of
several specified, adverse changes in the terms and conditions of the
officer's employment occurs without his or her consent, e.g., a reduction in
the officer's base salary, annual bonus opportunity and other material
benefits or title, position, duties or responsibilities. Terminations by
reason of death, disability, retirement, involuntary terminations for cause or
voluntary terminations other than for good reason are excluded under the
Program.

The severance payment will be equal to a specified multiple of the sum of
the officer's annual base salary and a bonus amount pursuant to the AIP,
depending upon the individual's selection to a particular "tier" under the
program by the committee of the Board of Directors administering the
arrangement. The bonus amount is equal to the greater of (x) the officer's
actual annual bonus for the calendar year prior to the year in which his or
her employment terminates, or (y) the average of the annual bonuses payable to
such officer for the last three calendar years. The multiple used to determine
the severance payment for employees appointed as "Tier 1 Participants"
(anticipated to be Prudential's most senior officers), is generally two, but
increases to three if the officer agrees to be bound by a noncompetition and
nonsolicitation agreement, which restricts his or her ability to work for a
competitor for up to one year following the date of termination. Lower
multiples are used for other

199

covered employees depending on their appointment to a particular tier by the
committee of the Board of Directors, their position and whether he or she has
entered into a similar agreement.

The program also provides for other benefits and payments related to an
officer's prior service. In addition to base salary through the date of
termination, eligible officers are entitled to receive the target annual bonus
for the year of termination, pro-rated to reflect his or her period of
employment, and a pro-rated long-term incentive amount in respect of any
performance periods then in effect. Any stock options will become immediately
exercisable and will remain exercisable for one year thereafter. In addition,
upon termination, a covered employee will be entitled to amounts accrued under
the Prudential Deferred Compensation Plan and/or its predecessor, the
Prudential Consolidated Deferred Compensation Plan, payable in a lump sum
regardless of the employee's previous distribution election under such plans.
The terminated officer will also receive an additional payment equal to the
present value of the additional retirement benefits under the Retirement Plans
that he or she would have accrued assuming that (a) he or she continued to
work for the period of time in respect of which the severance benefits are
payable, e.g., the third anniversary of the officer's termination, if the
multiple used for severance is three, the second anniversary if the multiple
used is two, and (b) that the severance benefits were paid ratably over that
period. Payments under the program are, however, offset against any payment
such eligible officers may otherwise be entitled to under Prudential
Financial, Inc.'s, or any of its affiliates' severance plans.

Notwithstanding the foregoing, the amount of the benefits payable to the
officer under the Program will be reduced if (a) the aggregate value of all
compensation, payments or benefits payable to an officer under the change of
control program results in the officer becoming subject to federal excise
taxes on "parachute payments" under Section 280G of the Internal Revenue Code
and (b) limiting such benefits would result in the officer receiving a greater
net after-tax benefit. The reduced amount will be equal to the maximum amount
that could be paid without the officer being subject to excise taxes. To the
extent any benefits paid are subject to federal excise taxes, Prudential will
not be permitted to deduct such amounts against its federal income tax
liability.

200

OWNERSHIP OF COMMON STOCK

The following table sets forth information regarding the beneficial
ownership of our Common Stock as of the effective date of the demutualization
by:

. each director and each named executive officer; and

. all directors and executive officers of Prudential Financial, Inc. as a
group.

We base the number of shares of Common Stock beneficially owned by each
director and each named executive officer upon an estimate of the number of
shares they will receive as eligible policyholders under the plan of
reorganization. We believe that no person will beneficially own more than 5%
of the outstanding shares of Common Stock as a result of share distributions
made under the plan of reorganization and shares sold in this offering. For
purposes of this table, beneficial ownership is determined in accordance with
SEC rules. Each holder listed below will have sole investment and voting power
with respect to the shares listed as beneficially owned by that holder.

Number of shares to
Name be beneficially owned
- ---- ---------------------

Arthur F. Ryan.......................................... *
Franklin E. Agnew....................................... *
Frederic K. Becker...................................... *
Gilbert F. Casellas..................................... *
James G. Cullen......................................... *
Carolyne K. Davis....................................... *
Allan D. Gilmour........................................ *
William H. Gray III..................................... *
Jon F. Hanson........................................... *
Glen H. Hiner........................................... *
Constance J. Horner..................................... *
Gaynor N. Kelley........................................ *
Burton G. Malkiel....................................... *
Ida F. S. Schmertz...................................... *
Charles R. Sitter....................................... *
Donald L. Staheli....................................... *
Richard M. Thomson...................................... *
James A. Unruh.......................................... *
P. Roy Vagelos.......................................... *
Stanley C. Van Ness..................................... *
Paul A. Volcker......................................... *
John R. Strangfeld, Jr. ................................ *
Vivian L. Banta......................................... *
Mark B. Grier........................................... *
Kiyofomi Sakaguchi...................................... *
All directors and executive officers as a group (31
persons)............................................... *

- --------
*Less than 1% of the shares of Common Stock expected to be outstanding at the
time of the offering.

201

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In the ordinary course of business, we from time to time may engage in
transactions with other corporations or financial institutions whose officers
or directors are also directors of Prudential Financial, Inc. Transactions
with such corporations and financial institutions are conducted on an arm's
length basis and may not come to the attention of the directors of Prudential
Financial, Inc. or of the other corporations or financial institutions
involved. In addition, from time to time executive officers and directors of
Prudential Financial, Inc. may engage in transactions in the ordinary course
of business involving services we offer, such as insurance and investment
services, on terms similar to those extended to employees of Prudential
Financial, Inc. generally.

As of December 31, 2000, Prudential holds $32,081,707 aggregate principal
amount of notes issued or supported by affiliates of Owens Corning. Mr. Glen
H. Hiner, a director of Prudential Financial, Inc., and a director of The
Prudential Insurance Company of America since 1997, has been the Chairman and
Chief Executive Officer of Owens Corning since 1992. Prior to Mr. Hiner
joining the Board of Directors of The Prudential Insurance Company of America,
Prudential entered into several transactions with Owens Corning affiliates. On
November 29, 1994, Prudential purchased $47,987,817 aggregate principal amount
of 9.00% notes of Owens-Corning Finance (U.K.) PLC due November 28, 2001. The
notes were guaranteed by Owens-Corning Fiberglas Corporation. The financing
was also supported by letters of credit issued by Credit Suisse and its
affiliates. The largest amount outstanding during fiscal year 2000 was
$16,840,504. On October 5, 2000, Owens Corning and certain of its domestic
affiliates filed for relief under the federal bankruptcy code. As a result of
the filing, on November 24, 2000 we drew under our letters of credit and
received payment in full of all principal, accrued interest and the yield
maintenance amount totaling $13,619,147.

On December 29, 1993, Prudential purchased $26,551,000 aggregate principal
amount of 6.58% notes of The Industrial Development Board of the City of
Jackson due March 31, 2004. On December 23, 1996, Prudential purchased
$32,200,000 aggregate principal amount of 7.31% notes of The Industrial
Development Board of the City of Jackson, also due March 31, 2004. The
Industrial Development Board of the City of Jackson entered into a Head Lease
Agreement with Owens-Corning Fiberglas Corporation, dated as of December 15,
1993, as amended on December 23, 1996, pursuant to which Owens-Corning
Fiberglas Corporation became a lessee to the issuer under both the 1993
financing and 1996 financing. The largest amounts outstanding during fiscal
year 2000 were $14,416,525 and $23,769,260 for the 1993 financing and 1996
financing, respectively. The principal amounts outstanding as of December 31,
2000 were $12,131,908 and $19,949,799 for the 1993 financing and 1996
financing, respectively.

SHARES ELIGIBLE FOR FUTURE SALE

In addition to the shares of Common Stock offered by this offering in the
United States and internationally, Prudential Financial, Inc. expects to issue
approximately 454.6 million shares of Common Stock in the demutualization.
Substantially all the shares of Common Stock outstanding after the offering,
including the shares issued in the demutualization, will be eligible for
resale in the public market without restriction. Prior to the offering and the
demutualization there has been no market for the Common Stock.

The plan of reorganization requires us to establish a commission-free
program, which we describe above under "Demutualization and Related
Transactions--The Demutualization--Commission-Free Program and Sales
Facility". We estimate that upon consummation of the demutualization we will
have approximately 4 million policyholders who will receive in excess of 165.5
million shares that we believe would be eligible to sell their shares through
this program.

202

DESCRIPTION OF CAPITAL STOCK

Prudential Financial, Inc.'s authorized capital stock consists of 1.5
billion shares of Common Stock and 10 million shares of preferred stock. We
also intend to authorize 10 million shares of another class of common stock of
Prudential Financial, Inc., the Class B Stock, which we plan to sell in a
private placement completed concurrently with or within 30 days following this
offering of our Common Stock. The completion of the sale of the shares of
Class B Stock is not a condition to the completion of our demutualization and
this offering of Common Stock. As described in more detail above under
"Demutualization and Related Transactions--Related Transactions--Class B Stock
and IHC Debt Issuances", if we issue the Class B Stock, the Common Stock
issued by this offering and distributed to our policyholders in our
demutualization is then expected to reflect the performance of our Financial
Services Businesses and the Class B Stock is then expected to reflect the
performance of the Closed Block Business.

Common Stock

All shares of Common Stock offered hereby and to be issued in the
demutualization will be validly issued, fully paid and non-assessable. We
refer to both the Common Stock and any Class B Stock as "common stock".

Dividend Rights

Holders of Common Stock are entitled to dividends if and when declared by
Prudential Financial, Inc.'s Board of Directors out of funds legally available
to pay dividends. See "Dividend Policy" above.

If shares of Class B Stock are issued, the holders of Common Stock and Class
B Stock will be entitled to dividends if and when declared by Prudential
Financial, Inc.'s Board of Directors out of funds legally available to pay
those dividends, resulting in a reduction of the amount legally available for
dividends on the Common Stock 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. In addition, payment of dividends would be subject to the
following additional conditions:

. Common Stock will be entitled to receive dividends, if and when declared
by Prudential Financial, Inc.'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, Inc.'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 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, as defined
below. 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, Inc.
chooses not to pay dividends on the Class B Stock in an aggregate amount at
least equal to the lesser of CB Distributable Cash Flow or the Target Dividend
Amount for that period, then cash dividends may not be paid on the Common
Stock for that period. "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 The Prudential Insurance Company of America, to the extent that The
Prudential Insurance Company of America is able to distribute such excess as a
dividend to Prudential Holdings, LLC 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 Prudential Holdings, LLC 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 Block Business within The Prudential Insurance
Company of America that would be required to maintain a quotient (expressed as
percentage) of (i) the "Total Adjusted Capital" applicable to the Closed Block
Business within The Prudential Insurance Company of America (including any
applicable dividend reserves) divided by (ii) the "Company Action Level RBC"
applicable to the Closed Block Business within The Prudential Insurance
Company of America, 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 will be
determined according to statutory accounting principles.

203

In addition, any dividends on any class of common stock are subject to any
preferential dividend rights granted to the holders of any preferred stock.

We have the right to, and expect to, pay dividends on the Common Stock and
Class B Stock in unequal amounts. We have the right to pay dividends on the
Class B Stock without paying dividends on the Common Stock, as well as the
right to not pay dividends on the Class B Stock even when CB Distributable
Cash Flow exists.

Voting Rights

Each share of Common Stock gives the owner of record one vote on all matters
submitted to a shareholder vote. If shares of Class B Stock are issued, each
share of Common Stock and Class B Stock will give the respective owner of
record one vote on all matters submitted to a shareholder vote. The two
classes of common stock will vote together as a single class on all matters
submitted to a shareholder vote, except as otherwise required by law and
except that the holders of the Class B Stock will have certain class voting or
consent rights, including as noted below. Accordingly, the holders of a
majority of the outstanding shares of common stock voting for the election of
directors can elect all of the directors if they choose to do so, subject to
any voting rights granted to holders of preferred stock. Actions requiring
approval of shareholders will generally require approval by a majority vote at
a meeting at which a quorum is present. Prudential Financial, Inc.'s by-laws
provide that, except as otherwise set forth in its certificate of
incorporation, the holders of 25% of the shares entitled to cast votes at a
meeting constitute a quorum. Prudential Financial, Inc.'s certificate of
incorporation initially specifies a quorum of 25% of the shares entitled to
cast votes at a meeting of shareholders. The certificate of incorporation
further provides that, in the event that the holders of at least the
percentage of shares entitled to cast votes at a meeting of shareholders set
forth in Column A below are present or represented at a meeting of
shareholders, the quorum shall be increased to the percentage listed in Column
B below, effective commencing the next succeeding annual or special meeting of
shareholders:

Column A Column B
-------- --------

25% 25%
35% 30%
45% 40%
55% 50%

In addition to any class voting rights provided by law, holders of the Class
B Stock will be entitled to vote as a class with respect to: (i) any proposal
by the Board of Directors to issue (1) shares of Class B Stock in excess of an
aggregate of two million outstanding shares (other than issuances pursuant to
a stock split or stock dividend paid ratably to all holders of Class B Stock),
(2) any shares of preferred stock which are exchangeable for or convertible
into Class B Stock, or (3) any debt securities, rights, warrants or other
securities which are convertible into, exchangeable for or provide a right to
acquire shares of Class B Stock or (ii) the approval of the actuarial or other
competent firm selected for purposes of determining the "Fair Market Value" of
the Class B Stock in connection with any exchanges or conversions discussed
below. In addition, pursuant to the subscription agreement for the Class B
Stock, the approval or consent of the holders of the Class B Stock is required
for various matters affecting the Class B Stock or the Closed Block Business,
including material changes in the investment policies for the Surplus and
Related Assets. The approvals or consents of the Class B Stockholders require
the approval of the shares having a majority of the voting power of the Class
B Stock.

Liquidation Rights

In the event of a liquidation, dissolution or winding-up of Prudential
Financial, Inc., holders of Common Stock and any Class B Stock, respectively,
would be entitled to receive a proportionate share in the net assets of
Prudential Financial, Inc. that remain after paying all liabilities and the
liquidation preferences of any preferred stock, such proportion being
determined as specified in the following paragraph. If no Class B Stock is
outstanding at the time of a liquidation, dissolution or winding-up of
Prudential Financial, Inc., each share of Common Stock would be entitled to an
equal share of any net assets of Prudential Financial, Inc. after paying all
of Prudential Financial, Inc.'s liabilities and the liquidation preference of
any preferred stock.

204

If shares of Class B Stock are outstanding at the time of a liquidation,
dissolution or winding-up of Prudential Financial, Inc., 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 a number of liquidation units (including a fraction of one
liquidation unit) equal to the quotient (rounded to the nearest five decimal
places) of (i) the issuance price per share of the Class B Stock divided by
(ii) the average market value of one share of Common Stock during the 20
consecutive trading day period ending on (and including) the trading day
immediately preceding the 60th day after this offering. Pursuant to the
foregoing formula, assuming the Common Stock were to have an average market
value during the foregoing period of $30 per share, each share of Common Stock
would have one liquidation unit and each share of Class B Stock would have
2.91667 liquidation units (i.e., $87.50 divided by $30).

The liquidation formula above will only be used if shares of Class B Stock
are outstanding at the time of a liquidation, dissolution or winding-up of
Prudential Financial, Inc. and is then intended to provide liquidation rights
for each of the Common Stock and the Class B Stock proportionate to the
respective relative market values indicated above at the time of liquidation.

Neither a merger nor a consolidation of Prudential Financial, Inc. with any
other entity, nor a sale, transfer or lease of all or any part of the assets
of Prudential Financial, Inc. would alone be deemed a liquidation, dissolution
or winding-up for these purposes.

Preemptive Rights

Holders of Common Stock and, if any, holders of Class B Stock have no
preemptive rights, or rights to buy stock before non-shareholders have a
chance to buy stock, with respect to any shares of capital stock that
Prudential Financial, Inc. may issue in the future.

Exchange and Conversion Provisions

The Common Stock is not convertible.

Prudential Financial, Inc. may, at its option, at any time, exchange all
outstanding shares of Class B Stock, if any, 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, Inc. sells or otherwise disposes
of all or substantially all of the Closed Block Business or (2) a "change of
control" of Prudential Financial, Inc. occurs, Prudential Financial, Inc. 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): (a)(i) any person(s) (as
defined) (excluding Prudential Financial, Inc. 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, Inc.; or (ii) Prudential Financial, Inc.
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, Inc. 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, Inc. (together with any new directors whose election by such Board
of Directors or whose nomination for election by the shareholders of
Prudential Financial, Inc. was approved by a vote of a majority of the
directors of Prudential Financial, Inc. 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.

205

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, Inc. 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, Inc.'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, Inc. 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.

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, Inc. 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 The Prudential Insurance Company
of America 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.

Provisions of Prudential Financial, Inc.'s Certificate of Incorporation and
By-laws

A number of provisions of Prudential Financial, Inc.'s certificate of
incorporation and by-laws concern corporate governance and the rights of
shareholders. Some provisions, including those granting the Board of

206

Directors the ability to issue shares of preferred stock and to set the voting
rights, preferences and other terms of preferred stock without shareholder
approval, may be viewed as having an anti-takeover effect and may discourage
takeover attempts not first approved by the Board of Directors, including
takeovers that some shareholders may consider to be in their best interests.
To the extent takeover attempts are discouraged, fluctuations in the market
price of the Common Stock, which may result from actual or rumored takeover
attempts, may be inhibited. The certificate of incorporation and by-laws have
provisions that also could delay or frustrate the removal of directors from
office or the taking of control by shareholders, even if that action would be
beneficial to shareholders. These provisions also could discourage or make
more difficult a merger, tender offer or proxy contest, even if they were
favorable to the interests of shareholders, and could potentially depress the
market price of the Common Stock.

The following is a summary of the material terms of these provisions of
Prudential Financial, Inc.'s certificate of incorporation and by-laws. The
statements below are only a summary, and we refer you to the certificate of
incorporation and by-laws, copies of which are filed as exhibits to the
registration statement of which this prospectus forms a part. Each statement
is qualified in its entirety by such reference. See "Available Information"
below for information about where you can obtain a copy of these documents.

Classified Board of Directors; Number of Directors; Removal; Vacancies

Prudential Financial, Inc.'s certificate of incorporation provides that the
directors will be divided into three classes, as nearly equal in number as
possible, with the term of office of each class to be three years. The classes
serve staggered terms, so that the term of one class of directors expires each
year. As a result of this provision, at least two annual meetings of
shareholders may be required for shareholders to change a majority of the
Board of Directors. Prudential Financial, Inc.'s by-laws provide that the
Board of Directors shall consist of not less than 10 nor more than 24 members,
with the exact number to be determined by the Board of Directors from time to
time. Our shareholders can remove a director or the entire Board of Directors
from office, but only for cause and with the affirmative vote of 80% of the
votes cast by shareholders who are entitled to vote for the election of
directors; provided, however, that the number of affirmative votes cast at
such meeting of shareholders is at least 50% of the total number of issued and
outstanding shares entitled to vote thereon. Unless otherwise required by law,
vacancies on the Board of Directors, including vacancies resulting from an
increase in the number of directors or the removal of directors, may only be
filled by an affirmative vote of a majority of the directors then in office or
by a sole remaining director. The classification of directors, the ability of
the Board of Directors to increase the number of directors and the inability
of the shareholders to remove directors without cause or fill vacancies on the
Board of Directors will make it more difficult to change the Board of
Directors, and will promote the continuity of existing management.

Limitations on Call of Special Meetings of Shareholders

The by-laws provide that special meetings of shareholders may only be called
by the chairman of the Board of Directors, the chief executive officer, the
president, or the Board of Directors or shareholders representing at least 25%
of the shares outstanding.

Limitation on Written Consent of Shareholders

The certificate of incorporation generally provides that action by holders
of common stock cannot be taken by written consent without a meeting unless
such written consents are signed by all shareholders entitled to vote on the
action to be taken.

Advance Notice Requirements for Nomination of Directors and Presentation of
New Business at Meetings

Prudential Financial, Inc.'s by-laws establish advance notice procedures for
shareholder proposals concerning nominations for election to the Board of
Directors and new business to be brought before meetings of shareholders.
These procedures require that notice of such shareholder proposals must be
timely given in writing to the secretary of Prudential Financial, Inc. prior
to the meeting at which the action is to be taken. Generally, to be timely, we
must receive the notice at Prudential Financial, Inc.'s principal executive
offices not less than 120 nor more than 150 days prior to the anniversary date
of the annual meeting of shareholders before the one in which the shareholder
proposal is to be considered. The notice must contain information required by

207

the by-laws. These provisions make it procedurally more difficult for a
shareholder to place a proposed nomination or new business proposal on the
meeting agenda and therefore may reduce the likelihood that a shareholder will
seek to take independent action to replace directors or with respect to other
matters that are not supported by management.

Supermajority Voting Requirement for Certain Amendments to the By-laws and
Charter

The certificate of incorporation and by-laws require the approval of at
least 80% of the votes cast at a meeting of shareholders to amend certain
provisions of the certificate of incorporation and by-laws, including those
described in this section "Provisions of Prudential Financial, Inc.'s
Certificate of Incorporation and By-laws", provided, that the number of votes
cast at such meeting of shareholders is at least 50% of the total number of
issued and outstanding shares entitled to vote thereon. This requirement
exceeds the majority vote that would otherwise be required under the New
Jersey Business Corporation Act. This supermajority requirement will make it
more difficult for shareholders to reduce the anti-takeover effects of the
certificate of incorporation and by-laws.

Limitation on Directors' Liability and Indemnification

The certificate of incorporation states that a director will not be held
personally liable to Prudential Financial, Inc. or any of its shareholders for
damages for a breach of duty as a director except for liability based upon an
act or omission:

. in breach of the director's duty of loyalty to Prudential Financial, Inc.
or its shareholders,

. not in good faith or involving a knowing violation of law, or

. resulting in receipt by such director of an improper personal benefit.

This provision prevents a shareholder from pursuing an action for damages for
breach of duty against a director of Prudential Financial, Inc. unless the
shareholder can demonstrate one of these specified bases for liability. The
inclusion of this provision in the certificate of incorporation may discourage
or deter shareholders or management from bringing a lawsuit against a director
for a breach of his or her duties, even though an action, if successful, might
otherwise benefit Prudential Financial, Inc. and its shareholders. This
provision does not affect the availability of non-monetary remedies like an
injunction or rescission based upon a director's breach of his or her duty of
care.

The by-laws provide that we shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding because such person is or was a director or officer
of Prudential Financial, Inc., or is or was serving at the request of
Prudential Financial, Inc. as director or officer, employee or agent of
another entity. This indemnification covers expenses, judgments, fines,
penalties and amounts paid in settlement actually and reasonably incurred by
the indemnified person in connection with such action, suit or proceeding. To
receive indemnification, a person must have acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of Prudential Financial, Inc. In the case of any criminal action or
proceeding, the indemnified person also must have had no reasonable cause to
believe his or her conduct was unlawful. The by-laws limit indemnification in
cases when a person has been held liable to Prudential Financial, Inc.

Anti-Takeover Effects of New Jersey Business Corporation Act

New Jersey Shareholders Protection Act

Upon completion of the demutualization, Prudential Financial, Inc. will be
subject to the provisions of Section 14A-10A of the New Jersey Business
Corporation Act, which is known as the "Shareholders Protection Act".

Generally, the Shareholders Protection Act prohibits a publicly held New
Jersey corporation with its principal executive offices or significant
business operations in New Jersey, like Prudential Financial, Inc., from
engaging in any "business combination" with any "interested stockholder" of
that corporation for a period of five years following the time at which that
stockholder became an "interested stockholder" unless the business combination
is approved by the Board of Directors before the stockholder becomes an
"interested stockholder". Covered business combinations include certain
mergers, dispositions of assets or shares and recapitalizations. An
"interested stockholder" is (1) any person that directly or indirectly
beneficially owns 10% or more of the voting power of the outstanding voting
stock of Prudential Financial, Inc.; or (2) any "affiliate" or "associate"

208

of Prudential Financial, Inc. that directly or indirectly beneficially owned
10% or more of the voting power of the then-outstanding stock of Prudential
Financial, Inc. at any time within a five-year period immediately prior to the
date in question.

In addition, under the Shareholders Protection Act, Prudential Inc. may not
engage in a business combination with an interested stockholder at any time
unless:

. the Board of Directors approved the business combination prior to the
time the stockholder became an interested stockholder;

. the holders of two-thirds of Prudential Financial, Inc.'s voting stock
not beneficially owned by the interested stockholder affirmatively vote
to approve the business combination at a meeting called for that purpose;
or

. the consideration received by the non-interested stockholders in the
business combination meets the standards of the statute, which is
designed to ensure that all other shareholders receive at least the
highest price per share paid by the interested stockholder.

A New Jersey corporation that has publicly traded voting stock may not opt out
of these restrictions.

Board Consideration of Certain Factors

Under the New Jersey Business Corporation Act, in discharging his or her
duties, a director of Prudential Financial, Inc. may consider the effects that
an action taken by Prudential Financial, Inc. may have on interests and people
in addition to Prudential Financial, Inc.'s shareholders, such as employees,
customers and the community. The directors may also consider the long-term as
well as the short-term interests of Prudential Financial, Inc. and its
shareholders, including the possibility that these interests may best be
served by the continued independence of Prudential Financial, Inc.

Shareholders Rights Plan

Prudential Financial, Inc.'s Board of Directors has authorized Prudential
Financial, Inc. to enter into a shareholder rights agreement that will become
effective on the effective date of the demutualization. The following is a
summary of the material terms of this agreement. The statements below are only
a summary, and we refer you to the shareholder rights agreement, a copy of
which is filed as an exhibit to the registration statement of which this
prospectus forms a part. Each statement is qualified in its entirety by such
reference. See "Available Information" below for information about where you
can obtain a copy of this document.

Under the shareholder rights agreement, one shareholder protection right
will be attached to each share of Common Stock. The shareholder rights
agreement will not be applicable to any issued Class B Stock. The shareholder
protection rights will be transferable only with the Common Stock until they
become exercisable, are redeemed or expired.

Each right will initially entitle the holder to purchase one one-thousandth
of a share of a series of Prudential Financial, Inc. preferred stock upon
payment of the exercise price. The initial exercise price will be determined
by Prudential Financial, Inc.'s Board of Directors prior to the effective date
of the demutualization.

The shareholder protection rights are not exercisable until the distribution
date, when they will separate from the Common Stock and become transferable.
The distribution date will occur upon the earlier of:

. the tenth business day after the first public announcement that a person
or group has become the beneficial owner of an amount of Common Stock,
Class B Stock and/or other Prudential Financial, Inc. stock that
represents 10% or more of the total voting power of all outstanding
Prudential Financial, Inc. stock. The rights plan refers to the day of
public announcement as the "stock acquisition date" and the person or
group as an "acquiring person"; or

. the tenth business day after the commencement of a tender or exchange
offer for an amount of Common Stock, Class B Stock and/or other
Prudential Financial, Inc. stock that represents 10% or more of the total
voting power of all outstanding Prudential Financial, Inc. stock.

If any person or group becomes an acquiring person, instead of thousandths
of shares of preferred stock, each shareholder protection right will then
represent the right to receive upon exercise an amount of Common Stock having
a market value equal to twice the exercise price, subject to certain
exceptions. In the event that

209

Prudential Financial, Inc. does not have a sufficient number of authorized and
unissued and unreserved shares of Common Stock, Prudential Financial, Inc.
will substitute cash or other securities or assets and/or reduce the exercise
price for all or a portion of the Common Stock that would be issuable upon
exercise.

If after a stock acquisition date Prudential Financial, Inc. is acquired in
a merger or other business combination or 50% or more of our consolidated
assets or earnings power are sold or transferred, each shareholder protection
right will then represent the right to receive upon exercise an amount of
Common Stock of the acquiring person having a value equal to twice the
exercise price.

In addition, at any time after any person or group becomes an acquiring
person but before that person or group becomes the beneficial owner of 50% or
more of the outstanding Common Stock, the Board of Directors of Prudential
Financial, Inc. may at its option exchange the shareholder protection rights,
in whole or in part, for Common Stock at an exchange ratio of one share of
Common Stock per right.

The exercise price payable, the number of thousandths of shares of preferred
stock and the amount of Common Stock, cash or securities or assets issuable
upon exercise of, or exchange for, shareholder protection rights and the
number of outstanding rights are subject to adjustment to prevent dilution if
certain events occur.

Prudential Financial, Inc.'s Board of Directors may redeem the shareholder
protection rights in whole, but not in part, for one cent ($.01) per right at
any time until the tenth business day after the stock acquisition date. Unless
earlier redeemed by Prudential Financial, Inc., the shareholder protection
rights will expire on the tenth anniversary of the effective date of the
demutualization.

Prudential Financial, Inc.'s transfer agent, EquiServe Trust Company, N.A.,
will be the rights agent under the shareholder rights agreement.

The shareholder protection rights will not prevent a takeover of Prudential
Financial, Inc. However, the rights may render an unsolicited takeover of
Prudential Financial, Inc. more difficult or less likely to occur or might
prevent such a takeover, even though such takeover may offer shareholders the
opportunity to sell their shares at a price above the prevailing market rate
and/or may be favored by a majority of the shareholders.

Transfer Agent and Registrar

EquiServe Trust Company, N.A. is the transfer agent and registrar for the
Common Stock.

UNDERWRITING

Prudential Financial, Inc. and the underwriters for the U.S. offering named
below (the "U.S. Underwriters") have entered into an underwriting agreement
with respect to the shares being offered in the United States. Subject to
certain conditions, each U.S. Underwriter has severally agreed to purchase the
number of shares indicated in the following table. Goldman, Sachs & Co.,
Prudential Securities Incorporated and are the representatives of the
U.S. Underwriters.

Underwriters Number of Shares
- ------------ ----------------

Goldman, Sachs & Co...........................................
Prudential Securities Incorporated............................
----
Total........................................................
====

If the U.S. Underwriters sell more shares than the total number set forth in
the table above, the U.S. Underwriters have an option to buy up to an
additional shares from Prudential Financial, Inc. to cover such sales.
They may exercise that option for 30 days. If any shares are purchased
pursuant to this option, the U.S. Underwriters will severally purchase shares
in approximately the same proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts and
commissions to be paid to the U.S. Underwriters by Prudential Financial, Inc.
Such amounts are shown assuming both no exercise and full exercise of the U.S.
Underwriters' option to purchase additional shares.

210

Paid by Prudential Financial, Inc.

No Exercise Full Exercise
----------- -------------

Per Share............................................. $ $
Total................................................. $ $

Shares sold by the Underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the Underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the Underwriters
to certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all the shares are not sold at the
initial offering price, the representatives may change the offering price and
the other selling terms.

Prudential Financial, Inc. also has entered into an underwriting agreement
with Underwriters for the sale of shares outside of the United States. The
terms and conditions of both offerings are the same and the sale of shares in
both offerings are conditioned on each other. Goldman Sachs International
and are representatives of the Underwriters for the international offering
outside the United States (the "International Underwriters"). Prudential
Financial, Inc. has granted the International Underwriters a similar option to
purchase up to an aggregate of an additional shares.

The Underwriters for both of the offerings have entered into an agreement in
which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer shares as a part of the distribution of the
shares. The Underwriters also have agreed that they may sell shares among each
of the underwriting groups.

Prudential Financial, Inc. has agreed with the Underwriters not to dispose
of or hedge any of its Common Stock or securities convertible into or
exchangeable for shares of Common Stock during the period from the date of
this prospectus continuing through the date days after the date of this
prospectus, except with the prior written consent of the representatives. This
agreement does not apply to any existing employee benefit plans.

Prior to the offerings, there has been no public market for the shares. The
initial public offering price will be negotiated among Prudential Financial,
Inc. and the representatives. Among the factors to be considered in
determining the initial public offering price of the shares, in addition to
prevailing market conditions, will be our historical performance, estimates of
our business potential and earnings prospects, an assessment of our management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.

An application will be made to list the Common Stock on the NYSE under the
symbol "PRU". In order to meet one of the requirements for listing the Common
Stock on the NYSE, the Underwriters have undertaken to sell lots of 100 or
more shares to a minimum of 2,000 beneficial holders.

In connection with the offerings, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions created
by short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the offerings.
"Covered" short sales are sales made in an amount not greater than the
Underwriters' options to purchase additional shares from Prudential Financial,
Inc. in the offerings. The Underwriters may close out any covered short
position by either exercising their options to purchase additional shares or
purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the Underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
overallotment options. "Naked" short sales are any sales in excess of the
purchase options. The Underwriters must close out any naked short position by
purchasing shares in the open market. A naked short position is more likely to
be created if the Underwriters are concerned that there may be downward
pressure on the price of the Common Stock in the open market after pricing
that could adversely affect investors who purchase in the offerings.
Stabilizing transactions consist of various bids for or purchases of Common
Stock made by the Underwriters in the open market prior to the completion of
the offerings.

The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the
underwriting discount received by it because the representatives have
repurchased shares sold by or for the account of such Underwriter in
stabilizing or short covering transactions.

211

Purchases to cover short positions and stabilizing transactions may have the
effect of preventing or retarding a decline in the market price of the Common
Stock, and together with the imposition of the penalty bid, may stabilize,
maintain or otherwise affect the market price of the Common Stock. As a
result, the price of the Common Stock may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued at any time. These transactions may be effected on
the NYSE, in the over-the-counter market or otherwise.

Because of the relationship between Prudential Securities and Prudential
Financial, Inc., the offering is being conducted in accordance with Rule 2720
of the NASD. That rule requires that the initial public offering price can be
no higher than that recommended by a "qualified independent underwriter", as
defined by the NASD. Goldman, Sachs & Co. has served in that capacity and
performed due diligence investigations and reviewed and participated in the
preparation of the registration statement of which this prospectus forms a
part. Goldman, Sachs & Co. has received $10,000 from Prudential Financial,
Inc. as compensation for such role.

The Underwriters may not confirm sales to discretionary accounts without the
prior written approval of the customer.

Prudential Financial, Inc. estimates that its share of the total expenses of
the offerings, excluding underwriting discounts and commissions, will be
approximately $ .

Prudential Financial, Inc. has agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.

This prospectus may be used by the Underwriters and other dealers in
connection with offers and sales of the shares, including sales of shares
initially sold by the Underwriters in the offering being made outside of the
United States, to persons located in the United States.

VALIDITY OF COMMON STOCK

The validity of the Common Stock offered hereby will be passed upon for
Prudential Financial, Inc. by Sullivan & Cromwell, New York, New York, and
McCarter & English, LLP, Newark, New Jersey. Certain legal matters will be
passed upon for the underwriters by Cleary, Gottlieb, Steen & Hamilton, New
York, New York. Sullivan & Cromwell and Cleary, Gottlieb, Steen & Hamilton
will rely as to all matters of New Jersey law upon the opinion of McCarter &
English, LLP.

EXPERTS

The consolidated financial statements of Prudential as of December 31, 2000
and 1999 and for each of the three years in the period ended December 31, 2000
and the supplemental combining financial information as of and for the year
ended December 31, 2000 included in this prospectus and the related financial
statement schedules included in the registration statement have been included
in reliance upon the reports, included in this prospectus or the registration
statement relating thereto, of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in auditing and
accounting.

The Prudential Insurance Company of America has retained Milliman &
Robertson, Inc., an actuarial consulting firm, to advise it in connection with
actuarial matters involved in the development of the plan of reorganization
and the establishment and operation of the closed blocks. The opinion of
Daniel J. McCarthy, M.A.A.A., of Milliman & Robertson, Inc. is included as
Annex A of this prospectus in reliance upon his authority as an expert in
actuarial matters generally and in the application of actuarial concepts to
insurance matters.

AVAILABLE INFORMATION

Upon completion of the offering, Prudential Financial, Inc. will file
annual, quarterly and current reports, proxy statements and other information
with the SEC. You may read and copy any documents filed by Prudential
Financial, Inc. at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room. Our SEC filings will also be
available over the internet at the SEC's website at http://www.sec.gov.
Prudential Financial, Inc. intends to list the Common Stock on the New York
Stock Exchange. Upon listing, periodic reports, proxy statements and

212

other information concerning Prudential Financial, Inc. will be available for
review at the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005. After the offering, we expect to provide annual reports to our
shareholders that include financial information reported on by our independent
public accountants.

Prudential Financial, Inc. has filed a registration statement on Form S-1
with the SEC. This prospectus is a part of the registration statement and does
not contain all of the information in the registration statement. Whenever a
reference is made in this prospectus to one of our contracts or other
documents, please be aware that the reference is not necessarily complete and
that you should refer to the exhibits that are a part of the registration
statement for a copy of the contract or other document. You may review a copy
of the registration statement at the SEC's public reference room in
Washington, D.C. as well as through the SEC's internet site.

213

CONSOLIDATED FINANCIAL STATEMENTS

INDEX

Report of Independent Accountants........................................ F-2
Consolidated Statements of Financial Position as of December 31, 2000 and
1999.................................................................... F-3
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998..................................................... F-4
Consolidated Statements of Changes in Equity for the years ended December
31, 2000, 1999 and 1998................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Supplemental Combining Financial Information:
Supplemental Combining Statement of Financial Position as of December
31, 2000.............................................................. F-54
Supplemental Combining Statement of Operations for the year ended
December 31, 2000..................................................... F-55
Notes to Supplemental Combining Financial Information.................. F-56
Prudential Financial, Inc. Financial Statement:
Report of Independent Accountants...................................... F-59
Prudential Financial, Inc. Statement of Financial Position as of
December 31, 2000..................................................... F-60
Prudential Financial, Inc. Notes to Statement of Financial Position.... F-61

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Policyholders of
The Prudential Insurance Company of America

In our opinion, the accompanying consolidated statements of financial
position and the related consolidated statements of operations, of changes in
equity and of cash flows present fairly, in all material respects, the
financial position of The Prudential Insurance Company of America and its
subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements 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
March 13, 2001, except for Note 18, as to which the date is April 2, 2001.

F-2

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Consolidated Statements of Financial Position
December 31, 2000 and 1999 (In Millions)

Pro Forma
2000
(Unaudited)
(see Note 19) 2000 1999
------------- -------- --------

ASSETS
Fixed maturities:
Available for sale, at fair value (amortized
cost, 2000: $83,115; 1999: $81,248)......... $ 83,827 $ 83,827 $ 79,130
Held to maturity, at amortized cost (fair
value, 2000: $12,615; 1999: $14,112)........ 12,448 12,448 14,237
Trading account assets, at fair value......... 7,217 7,217 9,741
Equity securities, available for sale, at fair
value (cost, 2000: $2,266; 1999: $2,531)..... 2,317 2,317 3,264
Mortgage loans on real estate................. 15,919 15,919 16,268
Policy loans.................................. 8,046 8,046 7,590
Securities purchased under agreements to
resell....................................... 5,395 5,395 13,944
Cash collateral for borrowed securities....... 3,858 3,858 7,124
Other long-term investments................... 4,459 4,459 4,857
Short-term investments........................ 5,029 5,029 2,773
-------- -------- --------
Total investments............................ 148,515 148,515 158,928
Cash and cash equivalents..................... 4,574 7,676 6,427
Accrued investment income..................... 1,916 1,916 1,836
Broker-dealer related receivables............. 11,860 11,860 11,346
Deferred policy acquisition costs............. 7,063 7,063 7,324
Other assets.................................. 13,506 13,506 17,102
Separate account assets....................... 82,217 82,217 82,131
-------- -------- --------
TOTAL ASSETS................................. $269,651 $272,753 $285,094
======== ======== ========
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits........................ $ 70,395 $ 69,288 $ 67,278
Policyholders' account balances............... 32,722 32,722 32,780
Unpaid claims and claim adjustment expenses... 2,120 2,120 2,829
Policyholders' dividends...................... 1,463 1,463 1,484
Securities sold under agreements to
repurchase................................... 15,010 15,010 24,598
Cash collateral for loaned securities......... 11,053 11,053 10,775
Income taxes payable.......................... 1,584 1,610 804
Broker-dealer related payables................ 5,965 5,965 5,839
Securities sold but not yet purchased......... 4,959 4,959 6,968
Short-term debt............................... 11,131 11,131 10,858
Long-term debt................................ 2,502 2,502 5,513
Other liabilities............................. 12,976 12,105 13,946
Separate account liabilities.................. 82,217 82,217 82,131
-------- -------- --------
Total liabilities............................ 254,097 252,145 265,803
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (See Notes 15
and 17)
EQUITY
Accumulated other comprehensive income
(loss)....................................... 234 234 (685)
Common stock.................................. 4 -- --
Additional paid-in capital.................... 15,316 -- --
Retained earnings............................. -- 20,374 19,976
-------- -------- --------
Total equity................................. 15,554 20,608 19,291
-------- -------- --------
TOTAL LIABILITIES AND EQUITY................. $269,651 $272,753 $285,094
======== ======== ========

See Notes to Consolidated Financial Statements

F-3

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Consolidated Statements of Operations
Years Ended December 31, 2000, 1999 and 1998 (In Millions)

2000 1999 1998
------- ------- -------

REVENUES
Premiums........................................... $10,221 $ 9,528 $ 9,048
Policy charges and fee income...................... 1,639 1,516 1,465
Net investment income.............................. 9,497 9,367 9,454
Realized investment gains (losses), net............ (288) 924 2,641
Commissions and other income....................... 5,475 5,233 4,416
------- ------- -------
Total revenues.................................... 26,544 26,568 27,024
------- ------- -------
BENEFITS AND EXPENSES
Policyholders' benefits............................ 10,640 10,226 9,786
Interest credited to policyholders' account
balances.......................................... 1,751 1,811 1,953
Dividends to policyholders......................... 2,724 2,571 2,477
General and administrative expenses................ 10,083 9,530 9,037
Capital markets restructuring...................... 476 -- --
Sales practices remedies and costs................. -- 100 1,150
Demutualization expenses........................... 143 75 24
------- ------- -------
Total benefits and expenses....................... 25,817 24,313 24,427
------- ------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES............................................. 727 2,255 2,597
------- ------- -------
Income taxes
Current........................................... 434 690 1,085
Deferred.......................................... (28) 352 (115)
------- ------- -------
Total income taxes.............................. 406 1,042 970
------- ------- -------
INCOME FROM CONTINUING OPERATIONS.................. 321 1,213 1,627
------- ------- -------
DISCONTINUED OPERATIONS
Loss from healthcare operations, net of taxes...... -- -- (298)
Gain (loss) on disposal of healthcare operations,
net of taxes...................................... 77 (400) (223)
------- ------- -------
Net gain (loss) from discontinued operations...... 77 (400) (521)
------- ------- -------
NET INCOME......................................... $ 398 $ 813 $ 1,106
======= ======= =======

See Notes to Consolidated Financial Statements

F-4

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Consolidated Statements of Changes in Equity
Years Ended December 31, 2000, 1999 and 1998 (In Millions)

Accumulated Other Comprehensive Income (Loss)
-----------------------------------------------
Net Total
Foreign Unrealized Accumulated
Currency Investment Pension Other
Translation Gains Liability Comprehensive Retained Total
Adjustments (Losses) Adjustment Income (Loss) Earnings Equity
----------- ---------- ---------- ------------- -------- --------

Balance, December 31,
1997................... $ (85) $ 1,752 $ (6) $ 1,661 $ 18,057 $ 19,718
Comprehensive income:
Net income............. 1,106 1,106
Other comprehensive
loss, net of tax:
Change in foreign
currency translation
adjustments........... 54 54 54
Change in net
unrealized investment
gains................. (480) (480) (480)
Additional pension
liability adjustment.. (3) (3) (3)
--------
Other comprehensive
loss.................. (429)
--------
Total comprehensive
income................. 677
------ ------- ----- ------- -------- --------
Balance, December 31,
1998................... (31) 1,272 (9) 1,232 19,163 20,395
Comprehensive income:
Net income............. 813 813
Other comprehensive
loss, net of tax:
Change in foreign
currency translation
adjustments........... 13 13 13
Change in net
unrealized investment
gains................. (1,932) (1,932) (1,932)
Additional pension
liability adjustment.. 2 2 2
--------
Other comprehensive
loss.................. (1,917)
--------
Total comprehensive
loss................... (1,104)
------ ------- ----- ------- -------- --------
Balance, December 31,
1999................... (18) (660) (7) (685) 19,976 19,291
Comprehensive income:
Net income............. 398 398
Other comprehensive
income, net of tax:
Change in foreign
currency translation
adjustments........... (89) (89) (89)
Change in net
unrealized investment
gains................. 1,019 1,019 1,019
Additional pension
liability adjustment.. (11) (11) (11)
--------
Other comprehensive
income................ 919
--------
Total comprehensive
income................. 1,317
------ ------- ----- ------- -------- --------
Balance, December 31,
2000................... $ (107) $ 359 $ (18) $ 234 $ 20,374 $ 20,608
====== ======= ===== ======= ======== ========

See Notes to Consolidated Financial Statements

F-5

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Consolidated Statements of Cash Flows
Years Ended December 31, 2000, 1999 and 1998 (In Millions)

2000 1999 1998
--------- --------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 398 $ 813 $ 1,106
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized investment (gains) losses, net...... 288 (915) (2,671)
Policy charges and fee income................ (57) (237) (232)
Interest credited to policyholders' account
balances.................................... 1,751 1,811 1,953
Depreciation and amortization................ 507 489 337
Loss (gain) on disposal of healthcare
operations, net of taxes.................... (77) 400 223
Change in:
Deferred policy acquisition costs............ (228) (178) (174)
Future policy benefits and other insurance
liabilities................................. 1,514 788 648
Trading account assets....................... 2,524 (853) (2,540)
Income taxes payable......................... 199 933 895
Broker-dealer related receivables/payables... (388) (1,898) 1,495
Securities purchased under agreements to
resell...................................... 8,549 (3,692) (1,591)
Cash collateral for borrowed securities...... 3,266 (1,502) (575)
Cash collateral for loaned securities........ 278 3,643 (6,985)
Securities sold but not yet purchased........ (2,009) 1,197 2,122
Securities sold under agreements to
repurchase.................................. (9,588) 3,112 9,139
Other, net................................... 1,223 (3,286) (5,736)
--------- --------- ---------
Cash flows from (used in) operating
activities................................. 8,150 625 (2,586)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale......... 99,971 122,790 125,694
Fixed maturities, held to maturity........... 3,266 4,957 4,466
Equity securities, available for sale........ 3,025 3,190 2,792
Mortgage loans on real estate................ 1,632 2,640 4,090
Other long-term investments.................. 2,044 2,169 3,337
Payments for the purchase of:
Fixed maturities, available for sale......... (103,086) (124,759) (128,938)
Fixed maturities, held to maturity........... (1,544) (2,414) (2,244)
Equity securities, available for sale........ (2,316) (2,779) (2,547)
Mortgage loans on real estate................ (1,334) (2,595) (3,719)
Other long-term investments.................. (1,374) (2,280) (1,873)
Short-term investments........................ (2,257) (1,138) 4,745
--------- --------- ---------
Cash flows from (used in) investing
activities................................. (1,973) (219) 5,803
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits............... 6,507 7,667 7,949
Policyholders' account withdrawals............ (8,165) (10,594) (12,079)
Net increase (decrease) in short-term debt.... (2,678) 444 2,422
Proceeds from the issuance of long-term debt.. 638 1,844 1,940
Repayments of long-term debt.................. (1,230) (919) (418)
--------- --------- ---------
Cash flows (used in) financing activities... (4,928) (1,558) (186)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 1,249 (1,152) 3,031
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.. 6,427 7,579 4,548
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR........ $ 7,676 $ 6,427 $ 7,579
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (received).................. $ 248 $ (344) $ 163
--------- --------- ---------
Interest paid................................. $ 1,040 $ 824 $ 864
--------- --------- ---------

See Notes to Consolidated Financial Statements

F-6

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

1. BUSINESS

The Prudential Insurance Company of America and its subsidiaries
(collectively, "Prudential" or the "Company") provide financial services
throughout the United States and in many foreign countries. The Company's
businesses provide a full range of insurance, investment, securities and other
financial products and services to both retail and institutional customers.
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.

Demutualization

On February 10, 1998, the Board of Directors of Prudential authorized its
management to take the preliminary steps necessary to permit Prudential to
demutualize and become a stock company. On July 1, 1998, legislation was
enacted in New Jersey that would permit the demutualization to occur and that
specified the process for demutualization. On December 15, 2000, the Board of
Directors of Prudential unanimously adopted a Plan of Reorganization, which
provides the framework under which Prudential will convert from a mutual
structure to stock ownership. Demutualization is a complex process involving
development of a plan of reorganization, a public hearing, approval by two-
thirds of the qualified policyholders who vote on the plan (with at least one
million qualified policyholders voting) and review and approval by the New
Jersey Commissioner of Banking and Insurance. Prudential is working toward
completing this process in 2001. However, there is no certainty that the
demutualization will be completed in this time frame or that the necessary
approvals will be obtained. It is also possible that after careful review,
Prudential could decide not to demutualize or could decide to delay its plans.

Prudential's management currently anticipates that Prudential's proposed
plan of reorganization will include the establishment of a new holding
company, Prudential Financial, Inc. ("PFI"), whose stock will be publicly
traded. Prudential will become a direct or indirect wholly-owned subsidiary of
PFI. Prudential's management also currently intends to propose that a
corporate reorganization occur concurrently or within 30 days of the
demutualization whereby the stock of various of Prudential's subsidiaries
(including its property and casualty insurance companies, its principal
securities brokerage companies, its international insurance companies, its
principal asset management operations, and its international securities and
investments, domestic banking, real estate franchise and relocation management
operations), together with certain related assets and liabilities, would be
dividended to PFI. If effected, the corporate reorganization can be expected
to materially reduce invested assets, net income and total equity of
Prudential, which would be an insurance subsidiary of PFI after the corporate
reorganization, although it would have no effect on the consolidated assets,
net income or total equity of PFI.

The terms of the foregoing transactions have not been finalized by
Prudential or approved by the applicable regulatory authorities and may be
subject to change as the transactions develop. Prudential's demutualization
could proceed without any one or all of these transactions, and there is no
assurance that such transactions will be pursued.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of The Prudential
Insurance Company of America, a mutual life insurance company, 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"). All significant intercompany balances and transactions have been
eliminated.

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

F-7

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

costs ("DAC") and future policy benefits, and 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.

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." 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 "Realized investment gains (losses), net" below for a
discussion of 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 a separate
component of equity, "Accumulated other comprehensive income (loss)." See
"Realized investment gains (losses), net" below for a discussion of impairment
adjustments.

Mortgage loans on real estate are stated primarily at unpaid principal
balances, net of unamortized discounts and an allowance for losses. 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 all amounts
due according to the contractual terms of the loan agreement will not 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 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. Assets to be repurchased are
the same, or substantially the same, as the assets transferred and the
transferor, through right of substitution, maintains the right and ability to
redeem the collateral on short notice. The market value of securities to be
repurchased or resold is monitored, and additional collateral is obtained,
where appropriate, to protect against credit exposure.

F-8

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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. Non-cash collateral received is not reflected in the consolidated
statements of financial position because the debtor typically has the right to
redeem the collateral on short notice. Substantially all of the Company's
securities borrowed contracts are with other brokers and dealers, commercial
banks and institutional clients. Substantially all of the Company's securities
loaned 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 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. 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 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, including highly liquid debt instruments, other than
those held in "Cash and cash equivalents," with a maturity of twelve months or
less when purchased, 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. Allowances for losses on mortgage loans on real
estate are netted against asset categories to which they apply and provisions
for losses on investments 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."

F-9

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 are subject to recognition testing at the
time of policy issue and recoverability and premium deficiency 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, deferred policy acquisition costs are
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 periodically. The average rate of assumed
future investment yield used in estimating expected gross margins was 7.83% at
December 31, 2000. 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. Deferred policy acquisition
costs related to non-participating term insurance are amortized over the
expected life of the contracts in proportion to premium income.

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, deferred policy acquisition
costs are amortized over the period in which related premiums are earned.
Future investment income is considered in determining the recoverability of
deferred policy acquisition costs.

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

F-10

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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, and property and
equipment. During the year, the Company sold $15 billion of commercial
mortgage loans and other securities in securitization transactions. 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
losses of $6 million (including related hedge activity) in connection with
securitization activity which are recorded in "Commissions and other income."
At December 31, 2000, the mortgage servicing portfolio totaled $14 billion and
related mortgage servicing assets were $111 million. 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, and reserves for
sales practices remedies and costs.

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 is determined
annually by the Company's Board of Directors. The aggregate amount of
policyholders' dividends is based on the Company's statutory results and past
experience, including investment income, net realized investment gains or
losses over a number of years, mortality experience and other factors.

Insurance Revenue and Expense Recognition

Premiums from participating insurance policies 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 due. For single premium immediate annuities and structured
settlements with life contingencies, premiums are recognized when due with any
excess profit deferred and recognized 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 deferred
policy acquisition costs.

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.

F-11

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Premiums, benefits and expenses are stated net of reinsurance ceded to other
companies. Estimated reinsurance receivables 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.

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)," a separate component of equity.

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. The Company uses 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
currency exposures arising from mismatches between assets and liabilities.
Additionally, derivatives are used in the Company's broker-dealer operations
and in a limited-purpose subsidiary for trading purposes.

To qualify for hedge accounting treatment, derivatives must be designated as
hedges for existing assets, liabilities, firm commitments or anticipated
transactions which are identified and probable to occur, and effective in
reducing the market risk to which the Company is exposed. The effectiveness of
the derivatives is evaluated at the inception of the hedge and throughout the
hedge period.

Derivatives held for trading purposes are used in the Company's securities
operations and in a limited-purpose subsidiary primarily 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 derivative positions are valued daily,
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. The Company monitors
these exposures through the use of various analytical techniques.

Derivatives held for trading purposes are included at fair value in "Trading
account assets," "Other liabilities" or "Broker-dealer related
receivables/payables" in the Consolidated Statements of Financial Position,
and realized and unrealized changes in fair value are included in "Commissions
and other income" of 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 primarily 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. Additionally, other than trading derivatives are used
to change the characteristics of the Company's asset/liability mix as part of
the Company's risk management activities.

See Note 15 for a discussion of the accounting treatment of derivatives that
qualify for hedge accounting treatment. If the Company's use of other than
trading derivatives does not meet the criteria to apply hedge accounting, the
derivatives are recorded at fair value in "Other long-term investments" or
"Other liabilities" in

F-12

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

the Consolidated Statements of Financial Position, and changes in their fair
value are included in "Realized investment gains (losses), net" without
considering changes in fair value of the hedged assets or liabilities. Cash
flows from other than trading derivatives are reported in the investing
activities section in the Consolidated Statements of Cash Flows.

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. The provision for income taxes includes an estimate for
changes in the total equity tax to be paid for current and 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 Expenses

Demutualization 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
Department of Insurance in the demutualization process and related matters as
well as other administrative costs. Future demutualization expenses will also
include the cost of printing and postage for communications with policyholders
and the payment of demutualization consideration to former Canadian branch
policyholders.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and, in June 2000, SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities--an amendment of FASB Statement No. 133". SFAS No. 133, as amended
by SFAS No. 138 (collectively, "SFAS No. 133"), requires that companies
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. SFAS No. 133 does not apply to
most traditional insurance contracts. However, certain hybrid contracts that
contain features which may affect settlement amounts similarly to derivatives
may require separate accounting for the "host contract" and the underlying
"embedded derivative" provisions. The latter provisions would be accounted for
as derivatives as specified by the statement.

SFAS No. 133 provides, if certain conditions are met, that a derivative may
be specifically designated as (1) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment (fair value hedge), (2) a hedge of the exposure to variable cash
flows of a forecasted transaction (cash flow hedge), or (3) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security or a foreign-
currency-denominated forecasted transaction (foreign currency hedge). Under
SFAS No. 133, the accounting for changes in fair value of a derivative depends
on its intended use and designation. For a fair value hedge, the gain or loss
is recognized in earnings in the period of change together with the offsetting
loss or gain on the hedged item. For a cash flow hedge, the effective portion
of the derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into earnings when the
forecasted transaction affects earnings. For a foreign currency hedge of a net
investment in a foreign subsidiary, the gain or loss is reported in other
comprehensive income as part of the foreign currency translation adjustment.
The accounting for a fair value hedge described above applies to a derivative
designated as a hedge of the foreign currency exposure of a recognized asset
or liability, an unrecognized firm commitment or an available-for-sale
security. Similarly, the

F-13

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

accounting for a cash flow hedge described above applies to a derivative
designated as a hedge of the foreign currency exposure to variability in the
foreign-currency-equivalent cash flows associated with a forecasted
transaction, a recognized asset or liability, an unrecognized firm commitment,
or a forecasted intercompany transaction. For all other derivatives not
designated as hedging instruments, the gain or loss is recognized in earnings
in the period of change.

The Company adopted SFAS No. 133, as amended, as of January 1, 2001. The
adoption of this statement did not have a material impact on the results of
operations of the Company. As part of the implementation, the Company
reclassified certain held-to-maturity securities, amounting to approximately
$12.1 billion at January 1, 2001, to the available-for-sale category. This
reclassification resulted in the recognition of a net unrealized gain of $94
million, net of tax, which was recorded as a component of "Accumulated other
comprehensive income (loss)" on the implementation date. As permitted under
SFAS No. 133, the Company has elected to select January 1, 1999 as the
transition date for embedded derivatives. Accordingly, only those derivatives
embedded in hybrid contracts issued, acquired, or substantively modified by
the Company on or after this date will be separated from their host contracts
and separately recognized as assets and liabilities.

In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
replacement of FASB Statement No. 125". The Company is currently evaluating
the effect of adopting the provisions of SFAS No. 140 relating to transfers
and extinguishments of liabilities which are effective for periods occurring
after March 31, 2001. The Company has adopted in these financial statements
disclosures about securitizations and collateral and for recognition and
reclassification of collateral required under the statement for fiscal years
ending after December 15, 2000.

In December 2000, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 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").
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 the demutualization. The Company has adopted the provisions of
the statement related to demutualization expenses in these financial
statements (See "Demutualization Expenses" above). The Company will adopt the
remaining provisions of SOP 00-3 upon demutualization and is currently
assessing the effect that the statement will have on its results of
operations.

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB No. 101"). SAB No. 101 provides guidance for revenue
recognition and related disclosure in the financial statements. The Company
adopted SAB No. 101, and its related interpretations, as of October 1, 2000.
The adoption of SAB No. 101 did not have a material effect on the Company's
financial position or results of operations.

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, with a measurement date
of December 31, 1998.

Proceeds from the sale were $500 million of cash, $500 million of Aetna
three-year senior notes and stock appreciation rights covering one million
shares of Aetna common stock, valued at approximately $30 million at the date
of closing. The aggregate loss on disposal of $546 million, net of taxes,
includes operating losses of the healthcare business subsequent to December
31, 1998 (the measurement date) through the date of the sale, as well as other
costs in connection with the disposition of the business. These include
facilities closure and systems

F-14

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

3. DISCONTINUED OPERATIONS (continued)

termination costs, severance and termination benefits, payments to Aetna
related to the 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 which existed at August 6, 1999 or commences 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 (see
Note 17 for a discussion of such matters). 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 also includes the positive impact of the net curtailment gains from
expected modifications of certain pension and other postretirement benefit
plans in which employees of the healthcare business participated (see Note
10).

The following table presents the results of the Company's healthcare
business up to the December 31, 1998 measurement date and the loss on disposal
determined as of the measurement date and subsequently adjusted, which are
included in "Discontinued Operations" in the Consolidated Statements of
Operations.

2000 1999 1998
----- ----- -------
(In Millions)

Revenues.............................................. $ -- $ -- $ 7,461
Policyholder benefits................................. -- -- (6,064)
General and administrative expenses................... -- -- (1,822)
----- ----- -------
Loss before income taxes.............................. -- -- (425)
Income tax benefit.................................... -- -- 127
----- ----- -------
Loss from operations.................................. -- -- (298)
Gain (loss) on disposal, net of tax expense of $44 in
2000 and tax benefits of $240 in 1999 and $131 in
1998................................................. 77 (400) (223)
----- ----- -------
Gain (loss) from discontinued operations, net of
taxes................................................ $ 77 $(400) $ (521)
===== ===== =======

The loss on disposal recorded in 1998 ($223 million, net of taxes) 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.

Upon the closing of the sale of the healthcare business, the Company entered
into a coinsurance agreement with Aetna. The agreement is 100% indemnity
reinsurance on a coinsurance basis for all of the Company's insured medical
and dental business in-force upon completion of the sale of the business on
August 6, 1999. The agreement required the Company 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 are 100% coinsured by Aetna, when issued. The purpose of the
agreement is 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 $1,872 million and $1,418 million,
respectively, for the twelve months ended December 31, 2000. Premiums and
benefits ceded 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 $355 million at December
31, 2000 and $500 million at December 31, 1999.

F-15

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

4. CAPITAL MARKETS RESTRUCTURING

In the fourth quarter of 2000, Prudential Securities Group exited the lead-
managed underwriting and institutional fixed income businesses. Exiting these
businesses will result in staff reductions of approximately 700 positions,
including 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" in
the Consolidated Statements of Operations. 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, 2000, approximately 350 employees had been terminated in
connection with the restructuring and remaining reserves for capital markets
restructuring costs were $286 million, including $176 million for employee
related costs.

See Note 16, Segment Information, for information pertaining to the
operating results of these exited businesses.

5. INVESTMENTS

Fixed Maturities and Equity Securities

The following tables provide additional information relating to fixed
maturities and equity securities (excluding trading account assets) as of
December 31,

2000
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Millions)

Fixed maturities available for
sale
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies........ $ 7,068 $ 358 $ 2 $ 7,424
Obligations of U.S. states and
their political subdivisions..... 3,012 164 3 3,173
Foreign government bonds.......... 4,457 228 38 4,647
Corporate securities.............. 62,066 1,205 1,374 61,897
Mortgage-backed securities........ 6,512 188 14 6,686
------- ------ ------ -------
Total fixed maturities available
for sale......................... $83,115 $2,143 $1,431 $83,827
======= ====== ====== =======
Equity securities available for
sale............................. $ 2,266 $ 239 $ 188 $ 2,317
======= ====== ====== =======

2000
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Millions)

Fixed maturities held to maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies........ $ 7 $ -- $ -- $ 7
Obligations of U.S. states and
their political subdivisions..... 40 1 1 40
Foreign government bonds.......... 193 13 -- 206
Corporate securities.............. 12,208 343 189 12,362
------- ------ ------ -------
Total fixed maturities held to
maturity......................... $12,448 $ 357 $ 190 $12,615
======= ====== ====== =======

F-16

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

5. INVESTMENTS (continued)

1999
-----------------------------------------
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........ $ 5,594 $ 36 $ 236 $ 5,394
Obligations of U.S. states and
their political subdivisions..... 2,437 41 118 2,360
Foreign government bonds.......... 4,590 140 90 4,640
Corporate securities.............. 62,061 580 2,432 60,209
Mortgage-backed securities........ 6,566 96 135 6,527
------- ------- ------- -------
Total fixed maturities available
for sale......................... $81,248 $ 893 $ 3,011 $79,130
======= ======= ======= =======
Equity securities available for
sale............................. $ 2,531 $ 829 $ 96 $ 3,264
======= ======= ======= =======

1999
-----------------------------------------
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........ $ 5 $ -- $ -- $ 5
Obligations of U.S. states and
their political subdivisions..... 81 1 3 79
Foreign government bonds.......... 214 11 1 224
Corporate securities.............. 13,937 280 413 13,804
------- ------- ------- -------
Total fixed maturities held to
maturity......................... $14,237 $ 292 $ 417 $14,112
======= ======= ======= =======

The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 2000, is shown below:

Available for Sale Held to Maturity
-------------------- --------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ---------- ---------- ---------
(In Millions) (In Millions)

Due in one year or less........... $ 9,169 $ 9,191 $ 713 $ 717
Due after one year through five
years............................ 18,412 18,492 3,477 3,490
Due after five years through ten
years............................ 19,396 19,441 4,804 4,846
Due after ten years............... 29,626 30,017 3,454 3,562
Mortgage-backed securities........ 6,512 6,686 -- --
------- ------- ------- -------
Total............................ $83,115 $83,827 $12,448 $12,615
======= ======= ======= =======

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
2000, 1999 and 1998 were $3,266 million, $4,957 million, and $4,466 million,
respectively. Gross gains of $8 million, $73 million, and $135 million, and
gross losses of $0 million, $0 million, and $2 million were realized on
prepayment of held to maturity fixed maturities during 2000, 1999 and 1998,
respectively.

Proceeds from the sale of available for sale fixed maturities during 2000,
1999 and 1998 were $93,653 million, $117,685 million and $119,524 million,
respectively. Proceeds from the maturity of available for sale

F-17

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

5. INVESTMENTS (continued)

fixed maturities during 2000, 1999 and 1998 were $6,318 million, $5,105
million and $6,170 million, respectively. Gross gains of $909 million, $884
million and $1,765 million, and gross losses of $1,408 million, $1,231 million
and $443 million were realized on sales and prepayments of available for sale
fixed maturities during 2000, 1999 and 1998, respectively.

Write-downs for impairments which were deemed to be other than temporary for
fixed maturities were $540 million, $266 million and $96 million, and for
equity securities were $34 million, $205 million and $95 million for the years
2000, 1999 and 1998, respectively.

During the years ended December 31, 2000, 1999 and 1998, certain securities
classified as held to maturity were either sold or transferred to the
available for sale portfolio. These actions were taken as a result of a
significant deterioration in creditworthiness. The aggregate amortized cost of
the securities sold or transferred was $133 million in 2000, $230 million in
1999 and $73 million in 1998. Gross unrealized investment losses of $4 million
in 2000, $5 million in 1999 and $.4 million in 1998 were recorded in
"Accumulated other comprehensive income (loss)" at the time of the transfer.
Realized gains on securities sold were $0 million, $3 million and $0 million
in 2000, 1999 and 1998, respectively.

Mortgage Loans on Real Estate

The Company's mortgage loans were collateralized by the following property
types at December 31,

2000 1999
--------------- ---------------
Amount Amount
(In % of (In % of
Millions) Total Millions) Total
--------- ----- --------- -----

Office buildings.......................... $ 3,727 23.1% $ 3,960 24.1%
Retail stores............................. 2,465 15.3% 2,627 15.9%
Residential properties.................... 713 4.4% 662 4.0%
Apartment complexes....................... 4,455 27.6% 4,508 27.3%
Industrial buildings...................... 2,331 14.4% 2,161 13.1%
Agricultural properties................... 1,856 11.5% 1,959 11.9%
Other..................................... 597 3.7% 612 3.7%
------- ----- ------- -----
Subtotal................................. 16,144 100.0% 16,489 100.0%
===== =====
Allowance for losses...................... (225) (221)
------- -------
Net carrying value........................ $15,919 $16,268
======= =======

The mortgage loans are geographically dispersed throughout the United States
and Canada with the largest concentrations in California (24.0%) and New York
(10.7%) at December 31, 2000.

Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:

2000 1999 1998
---- ----- ----
(In Millions)

Allowance for losses, beginning of year................... $221 $ 427 $450
Increase (decrease) in allowance for losses............... 17 (201) --
Charge-offs, net of recoveries............................ (13) (5) (23)
---- ----- ----
Allowance for losses, end of year......................... $225 $ 221 $427
==== ===== ====

F-18

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

5. INVESTMENTS (continued)

Impaired mortgage loans identified in management's specific review of
probable loan losses and the related allowance for losses at December 31, are
as follows:

2000 1999
------ ------
(In Millions)

Impaired mortgage loans with allowance for losses............ $192 $411
Impaired mortgage loans with no allowance for losses......... 247 283
Allowance for losses, end of year............................ (35) (24)
------ ------
Net carrying value of impaired mortgage loans................ $404 $670
====== ======

Impaired mortgage 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 $565
million, $884 million and $1,329 million during 2000, 1999 and 1998,
respectively. Net investment income recognized on these loans totaled $37
million, $55 million and $94 million for the years ended December 31, 2000,
1999 and 1998, respectively.

Restricted Assets and Special Deposits

Assets of $2,538 million and $4,463 million at December 31, 2000 and 1999,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $1,227
million and $2,342 million at December 31, 2000 and 1999, respectively, were
held in voluntary trusts. Of these amounts, $470 million and $1,553 million at
December 31, 2000 and 1999, respectively, related to the multi-state
policyholder settlement described in Note 17. The remainder relates to trusts
established to fund guaranteed dividends to certain policyholders and to fund
certain employee benefits. Assets valued at $48 million and $128 million at
December 31, 2000 and 1999, respectively, were pledged as collateral for bank
loans and other financing agreements. Letter stock or other securities
restricted as to sale amounted to $779 million in 2000 and $673 million in
1999. Restricted cash and securities of $2,196 million and $4,082 million at
December 31, 2000 and 1999, respectively, were included in the Consolidated
Statements of Financial Position in "Other assets." The restricted cash
represents funds deposited by clients and funds accruing to clients as a
result of trades or contracts.

Other Long-Term Investments

The Company's "Other long-term investments" include investments in joint
ventures and limited partnerships of $2,391 million and $1,947 million as of
December 31, 2000 and 1999, respectively. These investments include $1,363
million and $1,002 million in real estate related interests and $1,028 million
and $945 million in non-real estate related interests. The Company's share of
net income from such entities was $187 million, $217 million and $223 million
for 2000, 1999 and 1998, respectively, and is reported in "Net investment
income."

F-19

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

5. INVESTMENTS (continued)

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:

As of
December 31,
-------------
2000 1999
------ ------
(In Millions)

STATEMENTS OF FINANCIAL POSITION
Investments in real estate.................................... $ 638 $1,253
Investments in securities..................................... 1,427 1,398
Cash and cash equivalents..................................... 99 98
Other assets.................................................. 43 75
------ ------
Total assets.................................................. $2,207 $2,824
====== ======
Borrowed funds-third party.................................... $ 90 $ 81
Other liabilities............................................. 142 87
------ ------
Total liabilities............................................. 232 168
------ ------
Partners' capital............................................. 1,975 2,656
------ ------
Total liabilities and partners' capital....................... $2,207 $2,824
====== ======
Equity in partners' capital included above.................... $ 467 $ 657
Equity in limited partnership interests not included above.... 1,924 1,290
------ ------
Carrying value................................................ $2,391 $1,947
====== ======

For the years
ended
December 31,
------------------
2000 1999 1998
---- ----- -----
(In Millions)

STATEMENTS OF OPERATIONS
Income of real estate joint ventures................... $112 $ 108 $ 110
Income of other limited partnership interests.......... 149 514 366
Interest expense-third party........................... (4) (4) (1)
Other expenses......................................... (29) (105) (209)
---- ----- -----
Net earnings........................................... $228 $ 513 $ 266
==== ===== =====
Equity in net earnings included above.................. $ 70 $ 125 $ 59
Equity in net earnings of limited partnership interests
not included above.................................... 117 92 164
---- ----- -----
Total equity in net earnings........................... $187 $ 217 $ 223
==== ===== =====

"Other long-term investments" also includes investments in the Company's
separate accounts of $1,077 million and $1,040 million, investment real estate
of $239 million and $322 million which is held through direct ownership and
other miscellaneous investments of $752 million and $1,548 million at December
31, 2000 and 1999, respectively. Of the Company's real estate, $181 million
and $293 million consists of commercial and agricultural assets held for
disposal at December 31, 2000 and 1999, respectively. Impairment losses were
$0 million, $3 million and $8 million for the years ended December 31, 2000,
1999 and 1998, respectively, and are included in "Realized investment gains
(losses), net."

F-20

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

5. INVESTMENTS (continued)

Investment Income and Investment Gains and Losses

Net investment income arose from the following sources for the years ended
December 31:

2000 1999 1998
------- ------- -------
(In Millions)

Fixed maturities--available for sale............. $ 5,938 $ 5,602 $ 5,464
Fixed maturities--held to maturity............... 1,028 1,217 1,406
Trading account assets........................... 734 622 677
Equity securities--available for sale............ 67 63 54
Mortgage loans on real estate.................... 1,370 1,401 1,525
Policy loans..................................... 478 448 410
Securities purchased under agreements to resell.. 28 25 18
Broker-dealer related receivables................ 1,222 976 836
Short-term investments........................... 683 490 627
Other investment income.......................... 479 455 660
------- ------- -------
Gross investment income.......................... 12,027 11,299 11,677
Less investment expenses......................... (2,530) (1,881) (2,116)
------- ------- -------
Subtotal........................................ 9,497 9,418 9,561
Less amount relating to discontinued operations.. -- (51) (107)
------- ------- -------
Net investment income............................ $ 9,497 $ 9,367 $ 9,454
======= ======= =======

Realized investment gains (losses), net, for the years ended December 31,
were from the following sources:

2000 1999 1998
------- ------- -------
(In Millions)

Fixed maturities................................. $(1,066) $ (557) $ 1,381
Equity securities--available for sale............ 450 223 427
Mortgage loans on real estate.................... (5) 209 22
Investment real estate........................... 49 106 642
Joint ventures and limited partnerships.......... 124 656 454
Derivatives...................................... 165 305 (263)
Other............................................ (5) (27) 8
------- ------- -------
Subtotal........................................ (288) 915 2,671
Less amount related to discontinued operations... -- 9 (30)
------- ------- -------
Realized investment gains (losses), net.......... $ (288) $ 924 $ 2,641
======= ======= =======

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,
"Other long-term investments," amounting to $91 million, $114 million and $177
million in 2000, 1999 and 1998, respectively.

Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 2000 included in fixed maturities, equity
securities, mortgage loans on real estate and other long-term investments
totaled $25 million, $8 million, $21 million and $16 million, respectively.

F-21

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

5. INVESTMENTS (continued)

Net Unrealized Investment Gains (Losses)

Net unrealized investment gains and losses on securities available for sale
and certain other long-term investments are included in the Consolidated
Statements of Financial Position as a component of "Accumulated other
comprehensive income (loss)." Changes in these amounts include
reclassification adjustments to exclude from "Other comprehensive income
(loss)" those items that are included as part of "Net income" for a period
that had been part of "Other comprehensive income (loss)" in earlier periods.
The amounts for the years ended December 31, are as follows:

Impact of unrealized investment gains (losses) on:
------------------------------------------------------------
Accumulated
other
comprehensive
Deferred income (loss)
Unrealized Deferred income related to net
gains policy Future tax unrealized
(losses) on acquisition policy (liability) investment
investments costs benefits benefit gains (losses)
----------- ----------- -------- ----------- --------------
(In Millions)

Balance, December 31,
1997................... $ 4,208 $ (349) $ (1,144) $ (963) $ 1,752
Net investment gains
(losses) on investments
arising during the
period................. 804 -- -- (282) 522
Reclassification
adjustment for (gains)
losses included in net
income................. (1,675) -- -- 588 (1,087)
Impact of net unrealized
investment (gains)
losses on deferred
policy acquisition
costs.................. -- 89 -- (34) 55
Impact of net unrealized
investment (gains)
losses on future policy
benefits............... -- -- 49 (19) 30
------- ------ -------- ------ -------
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
======= ====== ======== ====== =======

F-22

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

5. INVESTMENTS (continued)

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

As of December 31,
----------------------
2000 1999 1998
---- -------- ------
(In Millions)

Fixed maturities.................................... $712 $ (2,118) $3,161
Equity securities................................... 51 733 176
Other long-term investments......................... (32) 37 --
---- -------- ------
Unrealized gains (losses) on investments............ $731 $(1,348) $3,337
==== ======== ======

Securities Pledged to Creditors

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, 2000,
the carrying value of investments pledged to third parties as reported in the
Consolidated Statements of Financial Position included the following:

(In Millions)

Fixed maturities available for sale.......................... $20,080
Trading account assets....................................... 5,796
Separate account assets...................................... 2,558
-------
Total securities pledged..................................... $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,
2000, the fair value of this collateral was approximately $19 billion of which
$13 billion had either been sold or repledged.

6. 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:

2000 1999 1998
------- ------- -------
(In Millions)

Balance, beginning of year...................... $ 7,324 $ 6,462 $ 6,083
Capitalization of commissions, sales and issue
expenses....................................... 1,324 1,333 1,313
Amortization.................................... (1,096) (1,155) (1,139)
Change in unrealized investment gains and
losses......................................... (356) 566 89
Foreign currency translation.................... (154) 118 116
Acquisition of subsidiary ...................... 21 -- --
------- ------- -------
Balance, end of year............................ $ 7,063 $ 7,324 $ 6,462
======= ======= =======

7. POLICYHOLDERS' LIABILITIES

Future policy benefits at December 31, are as follows:

2000 1999
------- -------
(In Millions)

Life insurance............................................... $53,453 $51,512
Annuities.................................................... 13,398 13,502
Other contract liabilities................................... 2,437 2,264
------- -------
Total future policy benefits................................. $69,288 $67,278
======= =======

F-23

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

7. POLICYHOLDERS' LIABILITIES (continued)

The Company's participating insurance is included within the Traditional
Participating Products segment. Participating insurance represented 40% and
43% of domestic individual life insurance in force at December 31, 2000 and
1999, respectively, and 95%, 94% and 93% of domestic individual life insurance
premiums for 2000, 1999 and 1998, 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.

The following table highlights the key assumptions generally utilized in
calculating these reserves:

Product Mortality Interest Rate Estimation Method
- ------- --------- ------------- -----------------

Life insurance.......... Generally, rates 2.5% to 12.0% Net level premium based
guaranteed in calculating on non- forfeiture
cash surrender values interest rate

Individual annuities.... Generally, 1971 and 1983 3.5% to 13.4% Present value of expected
Individual Annuity future payments based on
Mortality Tables with historical experience
certain modifications

Group annuities......... 1950 and 1971 Group 4.0% to 17.3% Present value of expected
Annuity Mortality Tables future payments based on
with certain historical experience
modifications

Other contract Present value of expected
liabilities............ 2.5% to 11.5% future payments based on
historical experience

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 $2,002 million and $1,930
million are included in "Future policy benefits" with respect to these
deficiencies at December 31, 2000 and 1999, respectively.

Policyholders' account balances at December 31, are as follows:

2000 1999
------- -------
(In Millions)

Individual annuities....................................... $ 5,097 $ 5,248
Group annuities............................................ 2,022 2,176
Guaranteed investment contracts and guaranteed interest
accounts.................................................. 12,852 13,429
Interest-sensitive life contracts.......................... 3,809 3,609
Dividend accumulations and other........................... 8,942 8,318
------- -------
Policyholders' account balances............................ $32,722 $32,780
======= =======

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.

F-24

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

7. POLICYHOLDERS' LIABILITIES (continued)

Certain contract provisions that determine the policyholder account balances
are as follows:

Product Interest Rate Withdrawal/Surrender Charges
- ------- ------------- ----------------------------

Individual annuities........ 3.0% to 16.0% 0% to 7% for up to 9 years

Group annuities............. 2.0% to 14.0% Contractually limited or subject to
market value adjustment

Guaranteed investment Generally, subject to market value
contracts and guaranteed withdrawal provisions for any funds
interest accounts.......... 2.0% to 15.4% withdrawn other than for benefit
responsive and contractual payments

Interest-sensitive life
contracts.................. 2.0% to 10.8% Various up to 10 years

Dividend accumulations and Withdrawal or surrender
other...................... 2.5% to 11.5% contractually limited or subject to
market value adjustment

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:

2000 1999 1998
----------------------- ----------------------- -----------------------
Accident Property Accident Property Accident Property
and Health and Casualty and Health and Casualty and Health and Casualty
---------- ------------ ---------- ------------ ---------- ------------
(In Millions)

Balance at January 1.... $420 $2,409 $1,090 $2,716 $1,857 $2,956
Less reinsurance
recoverables, net...... 378 451 52 533 810 535
---- ------ ------ ------ ------ ------
Net balance at January
1...................... 42 1,958 1,038 2,183 1,047 2,421
---- ------ ------ ------ ------ ------
Incurred related to:
Current year........... 410 1,271 4,110 1,249 6,132 1,314
Prior years............ (21) (150) (72) (54) (15) (154)
---- ------ ------ ------ ------ ------
Total incurred.......... 389 1,121 4,038 1,195 6,117 1,160
---- ------ ------ ------ ------ ------
Paid related to:
Current year........... 380 842 3,397 700 5,287 717
Prior years............ 25 634 672 720 839 681
---- ------ ------ ------ ------ ------
Total paid.............. 405 1,476 4,069 1,420 6,126 1,398
---- ------ ------ ------ ------ ------
Acquisitions
(dispositions) (a)..... -- (363) (965) -- -- --
---- ------ ------ ------ ------ ------
Net balance at December
31..................... 26 1,240 42 1,958 1,038 2,183
Plus reinsurance
recoverables, net...... 246 608 378 451 52 533
---- ------ ------ ------ ------ ------
Balance at December 31.. $272 $1,848 $420 $2,409 $1,090 $2,716
==== ====== ====== ====== ====== ======

- --------
(a) 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, 2000
and 1999 includes $239 million and $371 million, respectively, attributable to
the Company's discontinued healthcare business. The Accident and Health
balance at December 31 and January 1, 1998 includes amounts attributable to
the Company's discontinued healthcare business of $1,026 million and $1,693
million, respectively.

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 Statement 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%.

F-25

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

7. POLICYHOLDERS' LIABILITIES (continued)

In 2000, 1999 and 1998, 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 expense for Accident
and Health related to prior years are primarily due to favorable changes in
claim cost trends.

8. 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:

2000 1999 1998
------- ------- ------
(In Millions)

Direct premiums.................................... $10,726 $10,121 $9,661
Reinsurance assumed............................... 86 66 65
Reinsurance ceded................................. (591) (659) (678)
------- ------- ------
Premiums........................................... $10,221 $ 9,528 $9,048
======= ======= ======
Policyholders' benefits ceded...................... $ 642 $ 483 $ 510
======= ======= ======

Reinsurance recoverables, included in "Other assets" in the Company's
Consolidated Statements of Financial Position at December 31, were as follows:

2000 1999
------ ------
(In Millions)

Life insurance................................................. $ 674 $ 576
Property and casualty.......................................... 628 473
Other reinsurance.............................................. 76 90
------ ------
$1,378 $1,139
====== ======

Three major reinsurance companies account for approximately 57% of the
reinsurance recoverable at December 31, 2000. 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.

F-26

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

9. SHORT-TERM AND LONG-TERM DEBT

Debt consists of the following at December 31:

Short-term debt

2000 1999
------- -------
(In Millions)

Commercial paper (a)........................................ $ 7,686 $ 7,506
Notes payable............................................... 2,728 2,598
Current portion of long-term debt........................... 717 754
------- -------
Total short-term debt....................................... $11,131 $10,858
======= =======

The weighted average interest rate on outstanding short-term debt was
approximately 6.4% and 5.2% at December 31, 2000 and 1999, respectively.

Long-term debt

Maturity
Description Dates Rate 2000 1999
----------- --------- ----------- ------ ------
(In Millions)

Fixed rate notes...................... 2001-2023 5.89%-12.28% $ 758 $1,161
Floating rate notes ("FRN")........... 2001-2003 (b) 756 865
Surplus notes......................... 2003-2025 6.875%-8.30% 988 987
Commercial paper backed by long-term
credit agreements (a)................ -- 2,500
------ ------
Total long-term debt.................. $2,502 $5,513
====== ======

- --------
(a) At December 31, 1999, the Company classified $2.5 billion of its
commercial paper as long-term debt. This classification was supported by
long-term syndicated credit line agreements. The Company had the ability
and intent to use those agreements, as necessary, to refinance debt on a
long-term basis. As of December 31, 2000, the Company continues to have
that ability, but no longer has the intention to use those agreements in
the ordinary course of business.
(b) Floating interest rates are generally based on rates such as LIBOR,
Constant Maturity Treasury and the Federal Funds Rate. Interest on the
FRNs ranged from 0.10% to 7.08% for 2000 and from 6.17% to 14.00% for
1999. Included in the FRNs is an S&P 500 index linked note of $29 million
with an interest rate based on the appreciation of the S&P 500 index,
with a contractual cap of 14%. At December 31, 2000 and 1999, the rate
was 0.10% and 14%, respectively. Excluding this note, floating interest
rates ranged from 5.99% to 7.08% for 2000 and 6.17% to 7.56% for 1999.

Several long-term debt agreements have restrictive covenants related to the
total amount of debt, net tangible assets and other matters. At December 31,
2000 and 1999, the Company was in compliance with all debt covenants.

Payment of interest and principal on the surplus notes issued after 1993, of
which $689 million and $688 million were outstanding at December 31, 2000 and
1999 respectively, may be made only with the prior approval of the
Commissioner of 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. As of
December 31, 2000 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
are determined by formulas and may be subject to certain minimum or maximum
rates.

(In Millions)

Scheduled principal repayment of long-term debt
2002........................................................... $ 756
2003........................................................... 650
2004........................................................... 55
2005........................................................... 58
2006 and thereafter............................................ 983
------
Total.......................................................... $2,502
======

F-27

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

9. SHORT-TERM AND LONG-TERM DEBT (continued)

At December 31, 2000, the Company had $4,332 million in 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. A portion of commercial paper borrowings are
supported by $3,500 million of the Company's existing lines of credit. At
December 31, 2000 and 1999, the weighted average maturity of commercial paper
outstanding was 25 and 23 days, respectively.

Interest expense for short-term and long-term debt was $1,056 million, $863
million and $917 million, for the years ended December 31, 2000, 1999 and
1998, respectively. Securities business related interest expense of $456
million, $312 million and $369 million in 2000, 1999 and 1998, respectively,
is included in "Net investment income."

10. 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.
Benefits are generally based on career average earnings and credited length of
service. 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 healthcare benefits ("Other
postretirement benefits") for its retired employees, their beneficiaries and
covered dependents. The healthcare plan is contributory; the life insurance
plan is non-contributory.

Substantially all of the Company's employees may become eligible to receive
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.

The Company has elected to amortize its transition obligation for other
postretirement benefits over 20 years.

F-28

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

10. EMPLOYEE BENEFIT PLANS (continued)

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:

Pension Other
Benefits Postretirement Benefits
---------------- ------------------------
2000 1999 2000 1999
------- ------- ----------- -----------
(In Millions)

Change in benefit obligation:
Benefit obligation at the
beginning of period........... $(5,430) $(6,309) $ (1,941) $ (2,213)
Service cost................... (140) (193) (29) (39)
Interest cost.................. (427) (410) (151) (141)
Plan participants'
contributions................. -- -- (7) (6)
Amendments..................... 112 (2) 221 (2)
Actuarial gains (losses)....... 34 974 (262) 312
Contractual termination
benefits...................... (17) (53) -- --
Special termination benefits... -- (51) -- (2)
Curtailment.................... -- 206 -- 43
Benefits paid.................. 407 408 172 108
Foreign currency changes....... -- -- 1 (1)
------- ------- ----------- -----------
Benefit obligation at end of
period........................ $(5,461) $(5,430) $ (1,996) $ (1,941)
======= ======= =========== ===========
Change in plan assets:
Fair value of plan assets at
beginning of period........... $ 9,468 $ 8,427 $ 1,548 $ 1,422
Actual return on plan assets... 1,270 1,442 170 213
Transfer to third party........ -- (14) -- --
Employer contributions......... 25 21 7 15
Plan participants'
contributions................. -- -- 7 6
Benefits paid.................. (407) (408) (172) (108)
------- ------- ----------- -----------
Fair value of plan assets at
end of period................. $10,356 $ 9,468 $ 1,560 $ 1,548
======= ======= =========== ===========
Funded status:
Funded status at end of
period........................ $ 4,895 $ 4,038 $ (436) $ (393)
Unrecognized transition (asset)
liability..................... (342) (448) 207 462
Unrecognized prior service
costs......................... 65 225 1 2
Unrecognized actuarial net
(gain)........................ (2,956) (2,514) (498) (746)
Effects of fourth quarter
activity...................... 9 (3) 2 --
------- ------- ----------- -----------
Net amount recognized.......... $ 1,671 $ 1,298 $ (724) $ (675)
======= ======= =========== ===========
Amounts recognized in the
Statements of Financial
Position consist of:
Prepaid benefit cost........... $ 2,022 $ 1,601 $ -- $ --
Accrued benefit liability...... (382) (316) (724) (675)
Intangible asset............... 7 6 -- --
Accumulated other comprehensive
income........................ 24 7 -- --
------- ------- ----------- -----------
Net amount recognized.......... $ 1,671 $ 1,298 $ (724) $ (675)
======= ======= =========== ===========

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 $464 million, $384 million and $1
million, respectively, as of September 30, 2000 and $401 million, $309 million
and $0 million, respectively, as of September 30, 1999.

Pension plan assets consist primarily of equity securities, bonds, real
estate and short-term investments, of which $7,381 million and $6,534 million
are included in Separate Account assets and liabilities at September 30, 2000
and 1999, respectively.

F-29

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

10. EMPLOYEE BENEFIT PLANS (continued)

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 plan assets consist of group and individual life
insurance policies, group life and health contracts, common stocks, corporate
debt securities, U.S. government securities and short-term investments. During
1999, the assets of group life and health contracts were transferred into
common stocks, debt securities and short-term investments. Plan assets include
$463 million and $434 million of Company insurance policies and contracts at
September 30, 2000 and 1999, respectively.

The benefit obligation for other postretirement benefits decreased by $221
million in the year 2000 for changes in the substantive plan made to medical,
dental and life benefits for individuals retiring on or after January 1, 2001.
The significant cost reduction features relate to the medical and life
benefits. The Company adopted a cap that limits its long-term cost commitment
to retiree medical coverage. The cap is defined as two times the estimated
Company contribution toward the cost of coverage per retiree in 2000. The new
life insurance plan provides a reduced benefit of $10,000 of life insurance to
retirees.

The pension benefits were amended during the time period presented to
provide contractual termination benefits to certain plan participants whose
employment had been terminated. Costs related to these amendments are
reflected in contractual termination benefits in the table below.

Net periodic benefit cost included in "General and administrative expenses"
in the Company's Consolidated Statements of Operations for the years ended
December 31, includes the following components:

Other
Pension Benefits Postretirement Benefits
------------------- -------------------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ------- ------- -------
(In Millions)

Components of net periodic
benefits costs:
Service cost................ $ 140 $ 193 $ 159 $ 29 $ 39 $ 35
Interest cost............... 427 410 397 150 141 142
Expected return on plan
assets..................... (799) (724) (674) (133) (121) (119)
Amortization of transition
amount..................... (106) (106) (106) 36 47 47
Amortization of prior
service cost............... 47 45 45 -- -- --
Amortization of actuarial
net (gain) loss............ (77) 4 1 (24) (10) (13)
Special termination
benefits................... -- 51 -- -- 2 --
Curtailment (gain) loss..... -- (122) 5 -- 108 --
Contractual termination
benefits................... 6 48 14 -- -- --
----- ----- ----- ------- ------- -------
Subtotal................... (362) (201) (159) 58 206 92
Less amounts related to
discontinued operations.... -- 84 25 -- (130) (34)
----- ----- ----- ------- ------- -------
Net periodic (benefit)
cost....................... $(362) $(117) $(134) $ 58 $ 76 $ 58
===== ===== ===== ======= ======= =======

Discontinued operations amounts for 1998 were included in loss from
healthcare operations. The 1999 amounts were included in loss on disposal of
healthcare operations. See Note 3 for a discussion of the disposal of the
Company's healthcare business. Discontinued operations for pension benefits in
1999 includes $122 million of curtailment gains and $51 million of special
termination benefit costs. Discontinued operations for postretirement benefits
in 1999 includes $108 million of curtailment losses and $2 million of special
termination benefit costs.

F-30

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

10. EMPLOYEE BENEFIT PLANS (continued)

The assumptions at September 30, used by the Company to calculate the
benefit obligations as of that date and to determine the benefit cost in the
subsequent year are as follows:

Pension Benefits Other Postretirement Benefits
----------------- ----------------------------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ---------- ----------- -----------

Weighted-average
assumptions:
Discount rate (beginning
of period)............. 7.75% 6.50% 7.25% 7.75% 6.50% 7.25%
Discount rate (end of
period)................ 7.75% 7.75% 6.50% 7.75% 7.75% 6.50%
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.................. -- -- -- 7.10-9.50% 7.50-10.30% 7.80-11.00%
Ultimate health care
cost trend rate after
gradual decrease until
2006................... -- -- -- 5.00% 5.00% 5.00%

Assumed healthcare cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage point increase and
decrease in assumed health care cost trend rates would have the following
effects:

Other
Postretirement Benefits
-----------------------
2000
-----------------------
(In Millions)

One percentage point increase
Increase in total service and interest costs......... $ 11
Increase in postretirement benefit obligation........ 140

One percentage point decrease
Decrease in total service and interest costs......... $ 10
Decrease in postretirement benefit obligation........ 123

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, 2000 and 1999 was
$152 million and $157 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 3% of annual salary. The matching
contributions by the Company included in "General and administrative expenses"
are as follows:

401(k) Company Match
------------------------
2000 1999 1998
------ ------ -------
(In Millions)

Company match.................................... $62 $60 $ 54
Less amounts related to discontinued operations.. -- (8) (14)
------ ------ -------
401(k) Company match included in general and
administrative expenses......................... $62 $52 $ 40
====== ====== =======

Discontinued operations amounts for 1998 were included in loss from
healthcare operations. The 1999 amount was included in loss on disposal of
healthcare operations.

F-31

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

11. INCOME TAXES

The components of income tax expense for the years ended December 31, were
as follows:

2000 1999 1998
---- ------ ------
(In Millions)

Current tax expense (benefit):
U.S.................................................. $362 $ 614 $ 883
State and local...................................... 31 84 54
Foreign.............................................. 41 (8) 148
---- ------ ------
Total................................................ 434 690 1,085
Deferred tax expense (benefit):
U.S.................................................. (86) 206 (93)
State and local...................................... (37) 44 (6)
Foreign.............................................. 95 102 (16)
---- ------ ------
Total................................................ (28) 352 (115)
---- ------ ------
Total income tax expense.............................. $406 $1,042 $ 970
==== ====== ======

The Company's actual income tax expense 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:

2000 1999 1998
---- ------ ----
(In Millions)

Expected federal income tax expense..................... $254 $ 789 $909
Equity tax.............................................. 100 190 75
Non-deductible expenses................................. 61 33 15
Non-taxable investment income........................... (42) (78) (62)
State and local income taxes............................ (4) 83 31
Other................................................... 37 25 2
---- ------ ----
Total income tax expense............................... $406 $1,042 $970
==== ====== ====

Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:

2000 1999
------ ------
(In Millions)

Deferred tax assets
Insurance reserves......................................... $1,371 $1,582
Net operating loss carryforwards........................... 353 280
Policyholder dividends..................................... 297 277
Litigation related reserves................................ 32 61
Other...................................................... 121 32
------ ------
Deferred tax assets before valuation allowance............. 2,174 2,232
Valuation allowance........................................ (38) (24)
------ ------
Deferred tax assets after valuation allowance.............. 2,136 2,208
------ ------
Deferred tax liabilities
Deferred policy acquisition cost........................... 1,858 1,942
Net unrealized investment gains (losses)................... 273 (497)
Investments................................................ 129 307
Depreciation............................................... 71 59
------ ------
Deferred tax liabilities................................... 2,331 1,811
------ ------
Net deferred tax asset (liability).......................... $ (195) $ 397
====== ======

F-32

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

11. 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, 2000 and
1999, respectively, the Company had federal life net operating loss
carryforwards of $848 million and $660 million, which expire in 2012. At
December 31, 2000 and 1999, respectively, the Company had state operating loss
carryforwards for tax purposes approximating $509 million and $570 million,
which expire between 2001 and 2020.

Deferred taxes are not provided on the undistributed earnings of foreign
subsidiaries (considered to be permanent investments), which at December 31,
2000 were $743 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 begun its examination of 1996.

12. STATUTORY NET INCOME AND SURPLUS

Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following
tables reconcile the Company's statutory net income and surplus determined in
accordance with accounting practices prescribed or permitted by the New Jersey
Department of Banking and Insurance, to net income and equity determined using
GAAP:

2000 1999 1998
------- ------- -------
(In Millions)

Statutory net income........................... $ 149 $ 333 $ 1,247
Adjustments to reconcile to net income on a
GAAP basis:
Insurance revenues and expenses............... 525 136 (117)
Income taxes.................................. (47) 436 128
Valuation of investments...................... (135) (27) (143)
Realized investment gains (losses)............ (494) 73 1,162
Litigation and other reserves................. -- (102) (1,150)
Discontinued operations and other, net........ 400 (36) (21)
------- ------- -------
GAAP net income................................ $ 398 $ 813 $ 1,106
======= ======= =======

2000 1999
------- -------
(In Millions)

Statutory surplus.............................. $ 8,640 $ 9,249
Adjustments to reconcile to equity on a GAAP
basis:
Deferred policy acquisition costs............. 6,989 7,295
Valuation of investments...................... 4,968 2,909
Future policy benefits and policyholder
account balances............................. (952) (1,544)
Non-admitted assets........................... 2,693 2,069
Income taxes.................................. (136) 522
Surplus notes................................. (988) (987)
Discontinued operations and other, net........ (606) (222)
------- -------
GAAP equity.................................... $20,608 $19,291
======= =======

The New York State Insurance Department recognizes only statutory accounting
for determining and reporting the financial condition of an insurance company,
for determining its solvency under the New York Insurance Law and for
determining whether its financial condition warrants the payment of a dividend
to its policyholders. No consideration is given by the New York State
Insurance Department to financial statements prepared in accordance with GAAP
in making such determinations.

F-33

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

12. STATUTORY NET INCOME AND SURPLUS (continued)

In March 1998, the National Association of Insurance Commissioners ("NAIC")
adopted the Codification of Statutory Accounting Principles guidance
("Codification"), which replaces the current Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting as of
January 1, 2001. The Codification provides guidance for areas where statutory
accounting has been silent and changes current statutory accounting in certain
areas. The Company has adopted the Codification guidance effective January 1,
2001, except the guidance related to pension and post-employment benefits
which was adopted January 1, 2000. The Company has estimated the potential
effect of the Codification guidance to have a favorable impact of at least $1
billion on the Company's surplus position, primarily as the result of the
recognition of deferred tax assets.

13. OPERATING LEASES

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. At December 31, 2000, future minimum
lease payments under non-cancelable operating leases are as follows:

(In Millions)

2001........................................................... $ 319
2002........................................................... 269
2003........................................................... 227
2004........................................................... 190
2005........................................................... 178
Remaining years after 2005..................................... 897
-------
Total.......................................................... $ 2,080
=======

Rental expense incurred for the years ended December 31, 2000, 1999 and 1998
was $498 million, $456 million and $424 million, respectively, excluding
expenses relating to the Company's healthcare business.

14. 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
following methods and assumptions were used in calculating the estimated fair
values (for all other financial instruments presented in the table, the
carrying values approximate estimated fair values).

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.

Mortgage loans on real estate

The estimated fair value of mortgage loans on real estate is primarily based
upon the present value of the expected future cash flows discounted at the
appropriate U.S. Treasury rate, adjusted for the current market spread for
similar quality mortgages.

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.

F-34

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

14. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

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,

2000 1999
------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In Millions)

FINANCIAL ASSETS:
Other than trading:
Fixed maturities:
Available for sale................ $83,827 $83,827 $79,130 $79,130
Held to maturity.................. 12,448 12,615 14,237 14,112
Equity securities.................. 2,317 2,317 3,264 3,264
Mortgage loans on real estate...... 15,919 15,308 16,268 15,826
Policy loans....................... 8,046 8,659 7,590 7,462
Short-term investments............. 5,029 5,029 2,773 2,773
Mortgage securitization inventory.. 1,448 1,448 803 803
Cash and cash equivalents.......... 7,676 7,676 6,427 6,427
Restricted cash and securities..... 2,196 2,196 4,082 4,082
Separate account assets............ 82,217 82,217 82,131 82,131

Trading:
Trading account assets............. $ 7,217 $ 7,217 $ 9,741 $ 9,741
Broker-dealer related receivables.. 11,860 11,860 11,346 11,346
Securities purchased under
agreements to resell.............. 5,395 5,395 13,944 13,944
Cash collateral for borrowed
securities........................ 3,858 3,858 7,124 7,124

FINANCIAL LIABILITIES:
Other than trading:
Investment contracts............... $25,033 $25,359 $25,206 $25,394
Securities sold under agreements to
repurchase........................ 7,162 7,162 4,260 4,260
Cash collateral for loaned
securities........................ 4,762 4,762 2,582 2,582
Short-term and long-term debt...... 13,633 13,800 16,371 16,563
Securities sold but not yet
purchased......................... 157 157 -- --
Separate account liabilities....... 82,217 82,217 82,131 82,131

Trading:
Broker-dealer related payables..... $ 5,965 $ 5,965 $ 5,839 $ 5,839
Securities sold under agreements to
repurchase........................ 7,848 7,848 20,338 20,338
Cash collateral for loaned
securities........................ 6,291 6,291 8,193 8,193
Securities sold but not yet
purchased......................... 4,802 4,802 6,968 6,968

15. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS

A derivative is a financial instrument whose price, performance or cash flow
is based upon the actual or expected price, level, performance, value or cash
flow of some external benchmark, such as interest rates, foreign exchange
rates, securities, commodities, or various financial indices. Derivative
financial instruments can be exchange-traded or contracted in the over-the-
counter market and include swaps, futures, forwards and options contracts.

F-35

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

15. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)

Interest Rate Swaps

The Company uses interest rate swaps to reduce market risk from changes in
interest rates, 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 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.

If swap agreements meet the criteria for hedge accounting, net interest
receipts or payments are accrued and recognized over the life of the swap
agreements as an adjustment to interest income or expense of the hedged item.
Any unrealized gains or losses are not recognized until the hedged item is
sold or matures. Gains or losses on early termination of interest rate swaps
are deferred and amortized over the remaining period originally covered by the
swaps. If the criteria for hedge accounting are not met, the swap agreements
are accounted for at fair value with changes in fair value reported in current
period earnings.

Futures and Options

The Company uses exchange-traded Treasury futures and options 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.

If exchange-traded financial futures and options meet hedge accounting
criteria, changes in their fair value are deferred and recognized as an
adjustment to the carrying value of the hedged item. Deferred gains or losses
from the hedges for interest-bearing financial instruments are amortized as a
yield adjustment over the remaining lives of the hedged item. Financial
futures that do not qualify as hedges are carried at fair value with changes
in value reported in current earnings. The gains and losses associated with
anticipatory transactions are not material.

F-36

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

15. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)

Currency Derivatives

The Company uses currency derivatives, including exchange-traded currency
futures and options, currency forwards and currency swaps, 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.

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.

If currency derivatives are effective as hedges of foreign currency
translation and transaction exposures, gains or losses are recorded in a
manner similar to the hedged item. If currency derivatives do not meet hedge
accounting criteria, gains or losses from those derivatives are recognized in
"Realized investment gains (losses), net."

Forwards

The Company uses forwards to manage market risks relating to interest rates
and commodities and trades in mortgage-backed securities forward contracts.
The latter activity has been exited in connection with the restructuring of
Prudential Securities Group'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.

If the forwards qualify for hedge accounting treatment, gains or losses are
recorded in a manner similar to the hedged items. If forwards do not meet
hedge accounting criteria, gains or losses from those forwards are recognized
in current period earnings.

F-37

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

15. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)

The tables below summarize the Company's outstanding positions by derivative
instrument types as of December 31, 2000 and 1999. 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 notional amounts. 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.

Derivative Financial Instruments
December 31, 2000

Trading Other than Trading Total
------------------- --------------------------------------- -------------------
Non-Hedge
Hedge Accounting Accounting
------------------- -------------------
Estimated Estimated Estimated Estimated
Notional Fair Value Notional Fair Value Notional Fair Value Notional Fair 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
======= ==== ==== ==== ====== ==== ======= ======

F-38

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

15. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)

Derivative Financial Instruments
December 31, 1999

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.................. $ 7,116 $151 $ -- $ -- $2,185 $146 $ 9,301 $297
Liability.............. 6,490 137 -- -- 1,261 32 7,751 169
Currency
Asset.................. 24 45 343 30 -- -- 367 75
Liability.............. 77 51 369 33 -- -- 446 84
Equity and commodity
Asset.................. 8 9 -- -- 47 13 55 22
Liability.............. 8 5 -- -- -- -- 8 5
Forward contracts
Interest rate
Asset.................. 14,837 105 -- -- -- -- 14,837 105
Liability.............. 12,459 84 -- -- -- -- 12,459 84
Currency
Asset.................. 11,181 275 54 2 1,182 16 12,417 293
Liability.............. 10,377 247 841 16 1,347 21 12,565 284
Equity and commodity
Asset.................. 1,664 68 -- -- -- -- 1,664 68
Liability.............. 1,592 60 -- -- -- -- 1,592 60
Futures contracts
Interest rate
Asset.................. 2,374 2 -- -- 800 14 3,174 16
Liability.............. 3,017 3 -- -- 3,696 44 6,713 47
Equity and commodity
Asset.................. 2,283 44 -- -- 71 4 2,354 48
Liability.............. 837 57 -- -- 12 11 849 68
Option contracts
Interest rate
Asset.................. 3,725 22 -- -- -- -- 3,725 22
Liability.............. 2,185 11 -- -- 13 -- 2,198 11
Currency
Asset.................. 613 5 -- -- 10 -- 623 5
Liability.............. 4,439 5 -- -- 10 -- 4,449 5
Equity and commodity
Asset.................. 340 6 -- -- -- -- 340 6
Liability.............. 366 3 -- -- -- -- 366 3
------- ---- ------ ----- ------ ---- ------- ----
Total Derivatives:
Assets................. $44,165 $732 $ 397 $ 32 $4,295 $193 $48,857 $957
======= ==== ====== ===== ====== ==== ======= ====
Liabilities............ $41,847 $663 $1,210 $ 49 $6,339 $108 $49,396 $820
======= ==== ====== ===== ====== ==== ======= ====

F-39

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

15. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)

The following table discloses net trading revenues by derivative instrument
types for the years ended December 31,

2000 1999 1998
----- ----- -----
(In Millions)

Swaps................................................... $ (17) $ 16 $ (13)
Forwards................................................ 51 53 67
Futures................................................. (85) 80 (5)
Options................................................. (1) (14) --
----- ----- -----
Net trading revenues.................................... $ (52) $ 135 $ 49
===== ===== =====

Average fair values for trading derivatives in an asset position during the
years ended December 31, 2000 and 1999 were $579 million and $789 million,
respectively, and for derivatives in a liability position were $630 million
and $766 million, respectively. The average fair values do not reflect the
netting of amounts pursuant to the right of offset or qualifying master
netting agreements. Of those derivatives held for trading purposes at December
31, 2000, 72% of the notional amount consisted of interest rate derivatives,
20% consisted of foreign currency derivatives and 8% consisted of equity and
commodity derivatives. Of those derivatives held for purposes other than
trading at December 31, 2000, 66% of notional consisted of interest rate
derivatives, 33% consisted of foreign currency derivatives, and 1% consisted
of equity and commodity derivatives.

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. The Company also attempts to minimize its exposure to credit risk
through the use of various credit monitoring techniques. At December 31, 2000
and 1999, approximately 96% and 81%, respectively, of the net credit exposure
for the Company from derivative contracts was with investment-grade
counterparties. 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 positions are marked to market on a daily basis. These
additional controls further reduce the Company's credit risk to derivatives
counterparties. Internal controls are in place to ensure that derivative
transactions are conducted in accordance with Company policy and guidelines.
Those controls include limits, segregation of function and periodic management
review, including quarterly review of General Account exposures by the
Investment Committee of the Board of Directors, as well as daily monitoring
for compliance with authorization and operating guidelines.

Off-Balance-Sheet Credit-Related Instruments

During the normal course of its business, the Company utilizes financial
instruments with off-balance-sheet credit risk such as commitments, financial
guarantees, loans sold with recourse 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.

F-40

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

15. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)

In connection with the Company's consumer banking business, loan commitment
for credit cards and 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 $1.6 billion, of which $0.8 billion remains available
at December 31, 2000.

Also, the Company enters into agreements with mortgage originators and
others to provide financing on both a secured and an unsecured basis.
Aggregate financing commitments on a secured basis, for periods of less than
one year, approximate $3.3 billion, of which $1.8 billion remains available at
December 31, 2000. Unsecured commitments approximate $0.1 billion,
substantially all of which remains available at December 3l, 2000. This
activity is being exited in conjunction with the restructuring of Prudential
Securities capital markets activities, as discussed in Note 4.

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 $2.0 billion, of which $0.9 billion remain available at December 31,
2000. Additionally, mortgage loans sold with recourse were $0.1 billion at
December 31, 2000.

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, 2000 financial guarantees and letters
of credit issued by the Company were $0.8 billion.

16. SEGMENT INFORMATION

The Company has organized its principal operations into Financial Services
Businesses and a Traditional Participating Products segment. 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. The segments within the
Financial Services Businesses as well as the Traditional Participating
Products segment correspond to businesses for which discrete financial
information is available and reviewed by management. Businesses that are not
sufficiently material to warrant separate disclosure are included in Corporate
and Other results. Collectively, the businesses that comprise the four
operating divisions and Corporate and Other are referred to as the Financial
Services Businesses.

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 and other non-participating life insurance protection
products to the United States retail market and distributes investment and
protection products for other segments. The Private Client Group segment
provides 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 provides 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

F-41

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

16. SEGMENT INFORMATION (continued)

in connection with employee and member benefit plans. The Other Employee
Benefits segment provides 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.

The International division consists of the International Insurance and
International Securities and Investments segments. The International Insurance
segment manufactures and distributes individual life insurance products to the
affluent retail market in Japan, Korea and six other Asian, Latin American and
European countries. The International Securities and Investments segment
provides full service securities brokerage, 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 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 underwriting and institutional fixed income
businesses of the Prudential Securities Group (see Note 4), Gibraltar Casualty
(see Note 17), residential first mortgage banking and certain Canadian
businesses. Corporate-level activities include corporate 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.

As a mutual insurance company, most of the Company's individual life
insurance and certain annuity products have been written on a "participating"
basis, whereby policyholders are eligible to receive policyholder dividends
reflecting policy experience. The Company will cease offering domestic
participating insurance and annuity products in connection with the
demutualization, if consummated. The liabilities of the individual in force
participating products, together with the assets supporting them, will then be
segregated for accounting purposes from the Company's other assets and
liabilities. The liabilities and assets to be segregated, as well as other
assets and equity that support these policies, and their financial results are
reflected in the Traditional Participating Products segment, which is managed
separately from the Financial Services Businesses.

The following summary presents certain financial data of our operations
based on their location:

2000 1999 1998
------- ------- -------
(In Millions)

Revenues:
Domestic.......................................... $23,704 $24,382 $25,368
International..................................... 2,840 2,186 1,656
------- ------- -------
Total revenues................................... $26,544 $26,568 $27,024
======= ======= =======
Income from continuing operations before income
taxes:
Domestic.......................................... $ 368 $ 1,939 $ 2,372
International..................................... 359 316 225
------- ------- -------
Total income from continuing operations before
income taxes.................................... $ 727 $ 2,255 $ 2,597
======= ======= =======

F-42

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

16. SEGMENT INFORMATION (continued)

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 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 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
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 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 financial results of the International Insurance segment reflect the
impact of currency hedging strategies, including internal hedges, whereby
currency fluctuation exposure within annual reporting periods is assumed by
Corporate and Other Operations.

F-43

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

16. SEGMENT INFORMATION (continued)

The Investment Management and Advisory Services segment revenues include
intersegment revenues of $404 million, $381 million and $414 million in 2000,
1999 and 1998, respectively, which primarily consist of asset-based management
fees from the businesses of the U.S. Consumer and Employee Benefits divisions
and the Traditional Participating Products segment. Management has determined
the intersegment fees for the various asset classes with reference to market
rates. These fees are eliminated in consolidation.

As discussed in Note 4, Capital Markets Restructuring, the Company has
exited the lead-managed underwriting 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 a loss of $73 million in 1998, income of $23
million in 1999 and a loss of $620 million in 2000. The loss in 2000 includes
a restructuring charge of $476 million.

The summary below reconciles adjusted operating income to income from
continuing operations before income taxes:

Year ended December 31, 2000
-----------------------------------------------------------------------------------------
Reconciling Items
-----------------------------------------------------------------------------------------
Charges Divested Income from
Realized Related to Sales Business Continuing
Adjusted Investment Realized Practices and Related Operations
Operating Gains Gains Remedies Runoff Demutualization 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
------ ----- ----- ----- ----- ----- ------
Traditional
Participating Products
segment................ 547 91 (445) -- -- -- 193
------ ----- ----- ----- ----- ----- ------
Total.................. $2,268 $(288) $(474) $ -- $(636) $(143) $ 727
====== ===== ===== ===== ===== ===== ======

F-44

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

16. SEGMENT INFORMATION (continued)

Year ended December 31, 1999
-----------------------------------------------------------------------------------------
Reconciling Items
-----------------------------------------------------------------------------------------
Charges Divested Income from
Realized Related to Sales Business Continuing
Adjusted Investment Realized Practices and Related Operations
Operating Gains Gains Remedies Runoff Demutualization 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
------ ---- ----- ----- ----- ----- ------
Traditional
Participating Products
segment................ 316 338 (310) -- -- -- 344
------ ---- ----- ----- ----- ----- ------
Total.................. $2,005 $924 $(452) $(100) $ (47) $ (75) $2,255
====== ==== ===== ===== ===== ===== ======

F-45

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

16. SEGMENT INFORMATION (continued)

Year ended December 31, 1998
-----------------------------------------------------------------------------------------
Reconciling Items
-----------------------------------------------------------------------------------------
Charges Divested Income from
Realized Related to Sales Business Continuing
Adjusted Investment Realized Practices and Related Operations
Operating Gains Gains Remedies Runoff Demutualization Before Income
Income (Losses), Net (Losses), Net and Costs Operations Expenses Taxes
--------- ------------- ------------- --------- ----------- --------------- -------------
(In Millions)

Individual Life
Insurance.............. $ 178 $ 18 $ -- $ -- $ -- $ -- $ 196
Private Client Group.... 114 -- -- -- -- -- 114
Retail Investments...... 249 97 (3) -- -- -- 343
Property and Casualty
Insurance.............. 311 16 -- -- -- -- 327
------ ------ ----- ------- ----- ----- -------
Total U.S. Consumer
Division.............. 852 131 (3) -- -- -- 980
------ ------ ----- ------- ----- ----- -------
Group Insurance......... 98 123 -- -- -- -- 221
Other Employee
Benefits............... 342 595 (222) -- -- -- 715
------ ------ ----- ------- ----- ----- -------
Total Employee Benefits
Division.............. 440 718 (222) -- -- -- 936
------ ------ ----- ------- ----- ----- -------
International
Insurance.............. 144 9 -- -- -- -- 153
International Securities
and Investments........ 13 -- -- -- -- -- 13
------ ------ ----- ------- ----- ----- -------
Total International
Division.............. 157 9 -- -- -- -- 166
------ ------ ----- ------- ----- ----- -------
Investment Management
and Advisory Services.. 144 1 -- -- -- -- 145
Other Asset Management.. 22 -- -- -- -- -- 22
------ ------ ----- ------- ----- ----- -------
Total Asset Management
Division.............. 166 1 -- -- -- -- 167
------ ------ ----- ------- ----- ----- -------
Corporate and Other..... (34) 85 -- (1,150) (196) (24) (1,319)
------ ------ ----- ------- ----- ----- -------
Total -- Financial
Services Businesses... 1,581 944 (225) (1,150) (196) (24) 930
------ ------ ----- ------- ----- ----- -------
Traditional
Participating Products
segment................ 206 1,697 (236) -- -- -- 1,667
------ ------ ----- ------- ----- ----- -------
Total.................. $1,787 $2,641 $(461) $(1,150) $(196) $ (24) $ 2,597
====== ====== ===== ======= ===== ===== =======

F-46

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

16. SEGMENT INFORMATION (continued)

The summary below presents certain financial information for the Company's
reportable segments:

Year ended December 31, 2000
--------------------------------------------------------------------------------------
Interest Amortization
Credited to of Deferred
Net Policyholders' Policy
Investment Policyholders' Account Dividends to Interest Acquisition
Revenues Income Benefits Balances Policyholders Expense Costs
-------- ---------- -------------- -------------- ------------- -------- ------------
(In Millions)

Financial Services
Businesses:
Individual Life
Insurance............. $ 1,855 $ 374 $ 650 $ 131 $ 12 $ 10 $ 172
Private Client Group... 2,689 299 -- -- -- -- --
Retail Investments..... 1,631 478 152 264 1 1 212
Property and Casualty
Insurance............. 1,840 193 1,045 -- -- -- 365
------- ------ ------- ------ ------ ---- ------
Total U.S. Consumer
Division.............. 8,015 1,344 1,847 395 13 11 749
------- ------ ------- ------ ------ ---- ------
Group Insurance........ 2,801 485 2,042 200 -- (1) 1
Other Employee
Benefits.............. 2,885 2,332 930 1,024 -- 44 22
------- ------ ------- ------ ------ ---- ------
Total Employee Benefits
Division.............. 5,686 2,817 2,972 1,224 -- 43 23
------- ------ ------- ------ ------ ---- ------
International
Insurance............. 1,920 129 1,265 2 1 4 145
International
Securities and
Investments........... 704 66 -- -- -- -- 1
------- ------ ------- ------ ------ ---- ------
Total International
Division.............. 2,624 195 1,265 2 1 4 146
------- ------ ------- ------ ------ ---- ------
Investment Management
and Advisory
Services.............. 874 21 -- -- -- 5 --
Other Asset
Management............ 470 31 -- -- -- -- --
------- ------ ------- ------ ------ ---- ------
Total Asset Management
Division.............. 1,344 52 -- -- -- 5 --
------- ------ ------- ------ ------ ---- ------
Corporate and Other.... 283 816 23 (3) 4 385 (84)
------- ------ ------- ------ ------ ---- ------
Total.................. 17,952 5,224 6,107 1,618 18 448 834
------- ------ ------- ------ ------ ---- ------
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..... -- -- -- -- -- -- (7)
------- ------ ------- ------ ------ ---- ------
Total realized
investment gains, net
of losses and related
charges.............. (379) -- 36 -- -- -- (7)
------- ------ ------- ------ ------ ---- ------
Divested businesses and
related runoff
operations............ 269 101 14 -- -- -- --
------- ------ ------- ------ ------ ---- ------
Total -- Financial
Services Businesses.. 17,842 5,325 6,157 1,618 18 448 827
------- ------ ------- ------ ------ ---- ------
Traditional
Participating Products
segment................ 8,611 4,172 4,483 133 2,261 152 269
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 -- Traditional
Participating
Products segment..... 8,702 4,172 4,483 133 2,706 152 269
------- ------ ------- ------ ------ ---- ------
Total per Consolidated
Financial
Statements........... $26,544 $9,497 $10,640 $1,751 $2,724 $600 $1,096
======= ====== ======= ====== ====== ==== ======

F-47

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

16. SEGMENT INFORMATION (continued)

Year ended December 31, 1999
-------------------------------------------------------------------------------------
Interest Amortization
Credited to of Deferred
Net Policyholders' Policy
Investment Policyholders' Account Dividends to Interest Acquisition
Revenues Income Benefits Balances Policyholders Expense Costs
-------- ---------- -------------- -------------- ------------- -------- ------------
(In Millions)

Financial Services
Businesses:
Individual Life
Insurance............. $ 1,723 $ 316 $ 519 $ 126 $ 8 $ 4 $ 185
Private Client Group... 2,509 269 -- -- -- -- --
Retail Investments..... 1,551 491 118 271 -- 5 230
Property and Casualty
Insurance............. 1,747 197 1,100 -- -- -- 350
------- ------ ------- ------ ------ ---- ------
Total U.S. Consumer
Division.............. 7,530 1,273 1,737 397 8 9 765
------- ------ ------- ------ ------ ---- ------
Group Insurance........ 2,428 470 1,749 197 -- -- --
Other Employee
Benefits.............. 3,014 2,460 997 1,086 -- 51 10
------- ------ ------- ------ ------ ---- ------
Total Employee Benefits
Division.............. 5,442 2,930 2,746 1,283 -- 51 10
------- ------ ------- ------ ------ ---- ------
International
Insurance............. 1,522 99 1,031 1 2 -- 102
International
Securities and
Investments........... 580 54 -- -- -- -- 1
------- ------ ------- ------ ------ ---- ------
Total International
Division.............. 2,102 153 1,031 1 2 -- 103
------- ------ ------- ------ ------ ---- ------
Investment Management
and Advisory
Services.............. 768 3 -- -- -- -- --
Other Asset
Management............ 369 29 -- -- -- -- --
------- ------ ------- ------ ------ ---- ------
Total Asset Management
Division.............. 1,137 32 -- -- -- -- --
------- ------ ------- ------ ------ ---- ------
Corporate and Other.... 566 926 80 -- 5 420 (32)
------- ------ ------- ------ ------ ---- ------
Total.................. 16,777 5,314 5,594 1,681 15 480 846
------- ------ ------- ------ ------ ---- ------
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..... -- -- -- -- -- -- (5)
------- ------ ------- ------ ------ ---- ------
Total realized
investment gains, net
of losses and related
charges.............. 586 -- 147 -- -- -- (5)
------- ------ ------- ------ ------ ---- ------
Divested businesses and
related runoff
operations............ 511 142 65 -- -- -- --
------- ------ ------- ------ ------ ---- ------
Total -- Financial
Services Businesses.. 17,874 5,456 5,806 1,681 15 480 841
------- ------ ------- ------ ------ ---- ------
Traditional
Participating Products
segment................ 8,356 3,911 4,420 130 2,246 71 314
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 -- Traditional
Participating
Products segment..... 8,694 3,911 4,420 130 2,556 71 314
------- ------ ------- ------ ------ ---- ------
Total per Consolidated
Financial
Statements........... $26,568 $9,367 $10,226 $1,811 $2,571 $551 $1,155
======= ====== ======= ====== ====== ==== ======

F-48

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

16. SEGMENT INFORMATION (continued)

Year ended December 31, 1998
-------------------------------------------------------------------------------------
Interest Amortization
Credited to of Deferred
Net Policyholders' Policy
Investment Policyholders' Account Dividends to Interest Acquisition
Revenues Income Benefits Balances Policyholders Expense Costs
-------- ---------- -------------- -------------- ------------- -------- ------------
(In Millions)

Financial Services
Businesses:
Individual Life
Insurance............. $ 1,674 $ 300 $ 525 $ 117 $ 5 $ 4 $ 185
Private Client Group... 2,317 255 -- -- -- -- --
Retail Investments..... 1,532 567 125 294 -- 3 180
Property and Casualty
Insurance............. 1,812 223 1,070 -- -- -- 340
------- ------ ------ ------ ------ ---- ------
Total U.S. Consumer
Division.............. 7,335 1,345 1,720 411 5 7 705
------- ------ ------ ------ ------ ---- ------
Group Insurance........ 2,205 441 1,650 158 -- 1 --
Other Employee
Benefits.............. 3,258 2,730 991 1,278 -- 28 10
------- ------ ------ ------ ------ ---- ------
Total Employee Benefits
Division.............. 5,463 3,171 2,641 1,436 -- 29 10
------- ------ ------ ------ ------ ---- ------
International
Insurance............. 1,090 65 742 3 2 -- 103
International
Securities and
Investments........... 532 55 -- -- -- -- 1
------- ------ ------ ------ ------ ---- ------
Total International
Division.............. 1,622 120 742 3 2 -- 104
------- ------ ------ ------ ------ ---- ------
Investment Management
and Advisory
Services.............. 740 2 -- -- -- -- 5
Other Asset
Management............ 253 9 -- -- -- -- --
------- ------ ------ ------ ------ ---- ------
Total Asset Management
Division.............. 993 11 -- -- -- -- 5
------- ------ ------ ------ ------ ---- ------
Corporate and Other.... 313 894 20 -- 5 446 (50)
------- ------ ------ ------ ------ ---- ------
Total.................. 15,726 5,541 5,123 1,850 12 482 774
------- ------ ------ ------ ------ ---- ------
Items Excluded From
Adjusted Operating
Income:
Realized investment
gains, net of losses
and related charges:
Realized investment
gains (losses), net... 944 -- -- -- -- -- --
Related Charges:
Reserves............... -- -- 218 -- -- -- --
Amortization of
deferred policy
acquisition costs..... -- -- -- -- -- -- 7
------- ------ ------ ------ ------ ---- ------
Total realized
investment gains, net
of losses and related
charges.............. 944 -- 218 -- -- -- 7
------- ------ ------ ------ ------ ---- ------
Divested businesses and
related runoff
operations............ 325 119 55 -- -- -- --
------- ------ ------ ------ ------ ---- ------
Total -- Financial
Services Businesses.. 16,995 5,660 5,396 1,850 12 482 781
------- ------ ------ ------ ------ ---- ------
Traditional
Participating Products
segment................ 8,332 3,794 4,390 103 2,229 66 358
Items Excluded From
Adjusted Operating
Income:
Realized investment
gains, net of losses
and related charges:
Realized investment
gains (losses), net... 1,697 -- -- -- -- -- --
Related Charges:
Dividends to
policyholders......... -- -- -- -- 236 -- --
------- ------ ------ ------ ------ ---- ------
Total realized
investment gains, net
of losses and related
charges.............. 1,697 -- -- -- 236 -- --
------- ------ ------ ------ ------ ---- ------
Total -- Traditional
Participating
Products segment..... 10,029 3,794 4,390 103 2,465 66 358
------- ------ ------ ------ ------ ---- ------
Total per Consolidated
Financial
Statements........... $27,024 $9,454 $9,786 $1,953 $2,477 $548 $1,139
======= ====== ====== ====== ====== ==== ======

F-49

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

16. SEGMENT INFORMATION (continued)

The summary below presents total assets for the Company's reportable
segments as of December 31, 2000, 1999 and 1998.

Assets
-----------------------------
2000 1999 1998
--------- --------- ---------
(In Millions)

Individual Life Insurance..................... $ 22,992 $ 22,040 $ 20,406
Private Client Group.......................... 18,426 23,157 17,681
Retail Investments............................ 27,042 28,658 25,594
Property and Casualty Insurance............... 4,763 4,380 4,865
--------- --------- ---------
Total U.S. Consumer Division................. 73,223 78,235 68,546
--------- --------- ---------
Group Insurance............................... 15,891 13,850 12,014
Other Employee Benefits....................... 59,926 60,105 67,702
--------- --------- ---------
Total Employee Benefits Division............. 75,817 73,955 79,716
--------- --------- ---------
International Insurance....................... 6,726 5,804 4,329
International Securities and Investments...... 3,644 3,471 3,460
--------- --------- ---------
Total International Division................. 10,370 9,275 7,789
--------- --------- ---------
Investment Management and Advisory Services... 20,251 18,174 18,421
Other Asset Management........................ 10,351 7,384 5,716
--------- --------- ---------
Total Asset Management Division.............. 30,602 25,558 24,137
--------- --------- ---------
Corporate and Other........................... 12,814 29,498 36,136
--------- --------- ---------
Total--Financial Services Businesses......... 202,826 216,521 216,324
--------- --------- ---------
Traditional Participating Products segment.... 69,927 68,573 63,098
--------- --------- ---------
Total Assets................................. $ 272,753 $ 285,094 $ 279,422
========= ========= =========

17. CONTINGENCIES AND LITIGATION

Contingencies

On September 19, 2000, the Company sold Gibraltar Casualty Company
("Gibraltar"), 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's carried
reserves as of the closing of the sale.

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.

The Company has reviewed its obligations retained in the sale of the
healthcare operations under certain managed care arrangements for possible
failure to comply with contractual and regulatory requirements.

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.

F-50

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

17. 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, 2000, the Company remained a party to approximately 61
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 48 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, 2000, are adequate. No incremental provisions were recorded in
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.

F-51

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

17. CONTINGENCIES AND LITIGATION (continued)

The following table summarizes the Company's charges for the estimated total
costs of sales practices remedies and additional sales practices costs and
related liability balances as of the dates indicated:

Year Ended December 31,
--------------------------------------
2000 1999 1998 1997 1996
----- ------- ------- ------- ------
(In Millions)

Liability balance at beginning of
period.............................. $ 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........................ 448 1,708 147 -- --
Additional sales practices costs.... 190 559 498 440 162
----- ------- ------- ------- ------
Total amounts paid or credited...... 638 2,267 645 440 162
----- ------- ------- ------- ------
Liability balance at end of period... $ 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 (i) estimates derived from an analysis of claims actually
remedied (including interest); (ii) a sample of claims still to be remedied;
(iii) an estimate of additional liabilities associated with a claimant's right
to "appeal" the Company's decision; and (iv) 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 was 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 was partially 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 is commenced within two years of
that 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

F-52

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Consolidated Financial Statements

17. CONTINGENCIES AND LITIGATION (continued)

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 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. This litigation is in the preliminary
stages.

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.

18. OTHER EVENTS

The Company is currently seeking to acquire Kyoei Life Insurance Co., Ltd.
("Kyoei"), a financially troubled Japanese life insurer, subject to final
completion of reorganization proceedings involving Kyoei under the Corporate
Reorganization Law of Japan ("Reorganization Law"). Pursuant to these
proceedings, on April 2, 2001, the Tokyo District Court approved a
reorganization plan ("Reorganization Plan") providing for the restructuring of
Kyoei's assets and liabilities. The Reorganization Plan is expected to become
effective in April 2001. The Reorganization Plan includes the extinguishment
of all existing stock of Kyoei for no consideration and the issuance of one
million new shares of common stock. Under the Reorganization Plan, the Company
will contribute approximately $437 million in cash to Kyoei's capital and
acquire 100% of Kyoei's newly issued common stock and provide approximately
$857 million to Kyoei in the form of a subordinated loan. There is no
assurance that the Company will complete the proposed acquisition.

19. PRO FORMA INFORMATION (unaudited)

The pro forma Statement of Financial Position as of December 31, 2000 gives
effect to the demutualization as if it had occurred as of December 31, 2000.
As a result of the demutualization, there will be a significant change to the
capitalization of the Company. Accordingly, an unaudited pro forma column is
shown to reflect that change in capitalization. The pro forma Statement of
Financial Position is based on available information, including the plan of
reorganization and other assumptions believed to be reasonable. However, the
pro forma information does not reflect the proceeds of the initial public
offering of the Common Stock or any other securities that may be issued at the
time of demutualization. The pro forma Statement of Financial Position is not
necessarily indicative of the consolidated financial position had the
demutualization actually occurred on the date assumed and does not project or
forecast the consolidated financial position for any future date.

The pro forma Statement of Financial Position assumes the following:

. payment of $3,102 million to eligible policyholders who will receive
cash, based upon an assumed initial public offering price of $30.00 per
share;

. establishment of a liability of $1,107 million to fund policy credits to
be distributed to certain policyholders in lieu of cash or Common Stock;

. establishment of a liability of $648 million for cash payments to be made
to or on behalf of policyholders whom we cannot locate;

. establishment of a liability for non-recurring expenses of $197 million,
net of tax benefit of $26 million, related to demutualization costs and
expenses assumed to be incurred at the date of the demutualization; and

. adjustment of retained earnings to reflect the above assumptions and
reclassification of the remaining retained earnings to "Common stock" and
"Additional paid-in capital" to reflect the demutualization.

This pro forma information reflects the distribution to eligible
policyholders and the reclassification of equity that is expected to occur at
the time of demutualization.

******

F-53

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Supplemental Combining Statement of Financial Position
December 31, 2000 (In Millions)

Financial Traditional
Services Participating
Businesses Products Consolidated
---------- ------------- ------------

ASSETS
Fixed maturities:
Available for sale, at fair value....... $ 46,172 $ 37,655 $ 83,827
Held to maturity, at amortized cost..... 7,172 5,276 12,448
Trading account assets, at fair value.... 7,217 -- 7,217
Equity securities, available for sale, at
fair value.............................. 855 1,462 2,317
Mortgage loans on real estate............ 8,177 7,742 15,919
Policy loans............................. 2,336 5,710 8,046
Securities purchased under agreements to
resell.................................. 5,395 -- 5,395
Cash collateral for borrowed securities.. 3,858 -- 3,858
Other long-term investments.............. 2,562 1,897 4,459
Short-term investments................... 2,498 2,531 5,029
-------- -------- --------
Total investments....................... 86,242 62,273 148,515
Cash and cash equivalents................ 5,165 2,511 7,676
Accrued investment income................ 1,002 914 1,916
Broker-dealer related receivables........ 11,860 -- 11,860
Deferred policy acquisition costs........ 5,389 1,674 7,063
Other assets............................. 10,951 2,555 13,506
Separate account assets.................. 82,217 -- 82,217
-------- -------- --------
TOTAL ASSETS............................ $202,826 $ 69,927 $272,753
======== ======== ========
LIABILITIES AND ATTRIBUTED EQUITY
LIABILITIES
Future policy benefits................... $ 23,274 $ 46,014 $ 69,288
Policyholders' account balances.......... 27,320 5,402 32,722
Unpaid claims and claim adjustment
expenses................................ 2,120 -- 2,120
Policyholders' dividends................. 222 1,241 1,463
Securities sold under agreements to
repurchase.............................. 11,162 3,848 15,010
Cash collateral for loaned securities.... 9,283 1,770 11,053
Income taxes payable..................... 1,041 569 1,610
Broker-dealer related payables........... 5,965 -- 5,965
Securities sold but not yet purchased.... 4,959 -- 4,959
Short-term debt.......................... 10,893 238 11,131
Long-term debt........................... 1,476 1,026 2,502
Other liabilities........................ 9,153 2,952 12,105
Separate account liabilities............. 82,217 -- 82,217
-------- -------- --------
Total liabilities....................... 189,085 63,060 252,145
-------- -------- --------
COMMITMENTS AND CONTINGENCIES
ATTRIBUTED EQUITY
Accumulated other comprehensive income
(loss).................................. 497 (263) 234
Attributed Equity........................ 13,244 7,130 20,374
-------- -------- --------
Total attributed equity................. 13,741 6,867 20,608
-------- -------- --------
TOTAL LIABILITIES AND ATTRIBUTED
EQUITY................................. $202,826 $69,927 $272,753
======== ======== ========

See Notes to Supplemental Combining Financial Information

F-54

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Supplemental Combining Statement of Operations
Year Ended December 31, 2000 (In Millions)

Financial Traditional
Services Participating
Businesses Products Consolidated
---------- ------------- ------------

REVENUES
Premiums................................ $ 5,901 $4,320 $10,221
Policy charges and fee income........... 1,639 -- 1,639
Net investment income................... 5,224 4,172 9,396
Commissions and other income............ 5,188 119 5,307
------- ------ -------
Total revenues......................... 17,952 8,611 26,563
------- ------ -------
BENEFITS AND EXPENSES
Policyholders' benefits................. 6,107 4,483 10,590
Interest credited to policyholders'
account balances....................... 1,618 133 1,751
Dividends to policyholders.............. 18 2,261 2,279
General and administrative expenses..... 8,488 1,187 9,675
------- ------ -------
Total benefits and expenses............ 16,231 8,064 24,295
------- ------ -------
ADJUSTED OPERATING INCOME............... 1,721 547 2,268
------- ------ -------
Items excluded from adjusted operating
income
Realized investment gains, net of
losses and related charges:
Realized investment gains (losses)
net.................................. (379) 91 (288)
Related charges....................... (29) (445) (474)
------- ------ -------
Total realized investment gains, net
of losses and related charges........ (408) (354) (762)
------- ------ -------
Divested businesses.................... (636) -- (636)
Demutualization........................ (143) -- (143)
------- ------ -------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES........................... 534 193 727
------- ------ -------
Income tax expense..................... 300 106 406
------- ------ -------
INCOME FROM CONTINUING OPERATIONS....... $ 234 $ 87 $ 321
======= ====== =======

See Notes to Supplemental Combining Financial Information

F-55

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Supplemental Combining Financial Information

1. BASIS OF PRESENTATION

The supplemental financial information presents, on a combining basis, the
consolidated GAAP results of The Prudential Insurance Company of America,
separately reporting the results of the Financial Services Businesses and the
Traditional Participating Products segment. The Financial Services Businesses
and Traditional Participating Products segment are both fully integrated
operations of The Prudential Insurance Company of America (the "Company") and
are not separate legal entities.

The Traditional Participating Products segment has historically sold
participating insurance and annuity products, which, upon demutualization,
will no longer be offered. The liabilities for these products will then be
segregated, together with assets which will be used exclusively for the
payment of guaranteed benefits and policyholder dividends, expenses and taxes
with respect to these products, in a regulatory mechanism referred to as the
"Closed Block." A minor portion of our Traditional Participating Products
segment historically has consisted of other traditional insurance products
that will not be included in the Closed Block. The Financial Services
Businesses consist of the Company's individual life insurance operations
(other than participating insurance products), mutual funds, fixed and
variable annuities (other than participating annuity products), defined
contribution and other retirement products, brokerage and financial advisory
services and asset management services. The schedule presents the results of
the Financial Services Businesses and Traditional Participating Products
segment, as if they were separate reporting entities. This schedule is
provided as supplemental information to the consolidated financial statements
of the Company and should be read in conjunction with the audited consolidated
financial statements of the Company.

This combining supplemental schedule reflects the assets, liabilities,
revenues and expenses directly attributable to the Financial Services
Businesses and Traditional Participating Products segment, as well as
allocations 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 capital structure of the Financial Services Businesses and Traditional
Participating Products segment is determined based upon attributed equity,
which is established at a level that management deems necessary to support the
business risks of each.

General corporate overhead not directly attributable to a specific business
but which has been incurred in connection with the generation of the
businesses revenues has generally been 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
Traditional Participating Products segment as if they were separate companies
based on the taxable income, losses and other tax characterizations of each
business. If a business generates benefits (such as net operating losses), it
will be entitled to record such tax benefits to the extent they are expected
to be utilized on a consolidated basis.

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;
demutualization 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." The Company's discontinued
healthcare operations are excluded from "income from continuing operations
before income taxes."

F-56

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Supplemental Combining Financial Information

1. BASIS OF PRESENTATION (continued)

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
demutualization expenses as they are directly related to demutualization and
could distort the trend associated with business operations. The Company
excludes the gains and losses and contribution to income/loss of divested
business 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 the net realized investment gains relate
to policyholders' dividends, amortization of deferred policy acquisition
costs, and reserves for future policy benefits. Net realized investment 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 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. The reserves for certain policies are adjusted 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.

2. DEMUTUALIZATION AND RECAPITALIZATION

Upon demutualization, the Traditional Participating Products segment will be
referred to as the "Closed Block Business" and will reflect the assets and
liabilities of the Closed Block, the Surplus and Related Assets held outside
of the Closed Block necessary to meet insurance regulatory capital
requirements related to the products included within the Closed Block, and the
initial excess of the book value of the Closed Block Liabilities over the
Closed Block Assets. The Financial Services Businesses will then include the
capital included in the Traditional Participating Products segment in excess
of the amount necessary to support the Closed Block Business, and the other
traditional insurance products previously included in the Traditional
Participating Products segment but which will not be included in the Closed
Block.

In addition to Common Stock, the Company intends to issue Class B Stock, a
separate class of common stock, in connection with its planned
demutualization. If the Class B Stock is issued, the Common Stock will be
designed to reflect the performance of the Financial Services Businesses
without reflecting the returns of the Closed Block Business while the Class B
Stock will be designed to reflect the performance of the Closed Block
Business.

The Company also intends to issue, upon demutualization, debt securities
(the "IHC debt") through a newly-formed intermediate holding company of The
Prudential Insurance Company of America. The proceeds of the IHC debt would be
included in the Financial Services Businesses, while the liability reflecting
the IHC debt would be included in the Closed Block Business.

The issuance of the Class B Stock is not assured and is not a condition to
completion of the offering of the Common Stock. If the Company proceeds with
the offering of the Common Stock but does not issue any Class B Stock, the
Common Stock will reflect the performance of all the Company's businesses,
including the Traditional Participating Products segment.

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.

F-57

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

Notes to Supplemental Combining Financial Information

2. DEMUTUALIZATION AND RECAPITALIZATION (continued)

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 for
regulatory purposes. 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, the Company
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, Inc. 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 The
Prudential Insurance Company of America under specified (but not all)
provisions of New Jersey insurance law. The Company currently anticipates that
CB Distributable Cash Flow will substantially exceed the Target Dividend
Amount.

Since there is no legal separation of the two businesses, holders of Common
Stock and holders, if any, of Class B Stock are common stockholders of
Prudential Financial, Inc. and have a residual interest therein. Holders of
Common Stock will have no interest in a legal entity representing the
Financial Services Businesses and holders, if any, of Class B Stock have no
interest in a legal entity representing the Closed Block Business and holders
of each class of common stock will be subject to all of the risks associated
with an investment in Prudential Financial, Inc.

Net income for the Closed Block Business will be determined in accordance
with GAAP, including expenses for the normal levels of amortization of
deferred policy acquisition costs, investment management fees and interest
expense associated with debt obligations. Cash flow between the Closed Block
Business and the Financial Services Businesses will be determined based upon
cash flows from the Closed Block using a policy servicing fee arrangement, a
charge based upon insurance in-force and a charge determined based upon
statutory cash premiums. To the extent actual expenses vary from these cash
flow amounts, the difference will be recorded, on an after tax basis, as
direct equity adjustments of the respective GAAP equity balances of each
business.

F-58

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of Prudential Financial, Inc.

In our opinion, the accompanying statement of financial position presents
fairly, in all material respects, the financial position of Prudential
Financial, Inc. at December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. This financial statement
is the responsibility of the Company's management; our responsibility is to
express an opinion on this financial statement based on our audit. We
conducted our audit of this statement 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 statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit of the statement of
financial position provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

New York, New York
April 6, 2001

F-59

PRUDENTIAL FINANCIAL, INC.

Statement of Financial Position
December 31, 2000
(In dollars)

ASSETS
Cash...................................................................... $500
----
TOTAL ASSETS............................................................. $500
====
STOCKHOLDER'S EQUITY
Common Stock, par value $1.00 per share, 500 shares authorized, issued and
outstanding.............................................................. $500
Additional paid-in capital................................................ --
----
TOTAL STOCKHOLDER'S EQUITY............................................... $500
====

See Notes to Statement of Financial Position

F-60

PRUDENTIAL FINANCIAL, INC.

Notes to Statement of Financial Position

1. ORGANIZATION

Prudential Financial, Inc. (the "Holding Company") was incorporated on
December 28, 1999 as a wholly- owned subsidiary of The Prudential Insurance
Company of America ("Prudential"), a New Jersey mutual life insurance company.
The Holding Company was organized for the purpose of becoming the ultimate
parent company of Prudential and its subsidiaries upon the completion of
Prudential's reorganization from a mutual life insurance company to a stock
life insurance company.

Assuming Prudential's reorganization to a stock life insurance company
becomes effective, Prudential will become an indirect wholly-owned subsidiary
of the Holding Company. In addition, pursuant to the destacking of
subsidiaries included within the Plan of Reorganization, the companies
constituting Prudential's property and casualty insurance companies, principal
securities brokerage companies, international insurance companies, principal
asset management operations, and international securities and investments,
domestic banking, and real estate franchise and relocation management
operations also will become indirect wholly owned subsidiaries of the Holding
Company.

Other than its initial funding, the Holding Company has been inactive and
will remain inactive until the effective date of Prudential's reorganization.
Since its inception and while it remains inactive, all of the Holding
Company's obligations are borne by Prudential.

2. BASIS OF PRESENTATION

These financial statements have been prepared consistent with, and should be
read in conjunction with The Prudential Insurance Company of America's
Consolidated Financial Statements and Notes thereto presented elsewhere in
this registration statement.

3. DIVIDEND RESTRICTIONS

The Holding Company's principal sources of revenues 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, which will become subsidiaries of the
Holding Company, will be subject to regulatory limitations on their payment of
dividends and other transfers of funds to the Holding Company.

New Jersey insurance law provides that dividends or distributions may be
declared or paid by Prudential without prior regulatory approval only from
unassigned surplus, as determined pursuant to statutory accounting principles
("SAP"), less unrealized capital gains and certain other adjustments. Upon
demutualization, unassigned surplus will be reduced to zero, thereby limiting
Prudential's ability to pay a dividend immediately following demutualization.
Prudential must obtain prior approval of the New Jersey insurance regulator
prior to paying a dividend and if the dividend, together with other dividends
or distributions made within the preceding twelve months, would exceed the
above limit, obtain a non-disapproval from the New Jersey insurance regulator.
Upon reorganization, any dividends or distributions paid by Prudential to the
Holding Company will be subject to the above restrictions.

The laws regulating dividends of the Holding Company's other insurance
subsidiaries domiciled in other states are similar, but not identical, to New
Jersey's. In addition, upon reorganization, the net capital rules to which the
broker-dealer subsidiaries are subject may limit their ability to pay
dividends to the Holding Company. 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, Inc.

F-61

ACTUARIAL OPINIONS

[LOGO]
Milliman & Robertson, Inc.
Actuarial & Consultants
Internationally WOODROW MILLIMAN

December 12, 2000

The Board of Directors
The Prudential Insurance Company of America
Prudential Plaza
Newark, NJ 07102

Re: Plan of Reorganization of The Prudential Insurance Company of America

STATEMENT OF ACTUARIAL OPINION

Subject of this Opinion

This opinion letter relates to the actuarial aspects of the proposed
Reorganization of The Prudential Insurance Company of America ("Prudential")
pursuant to its Plan of Reorganization (the "Plan") as presented to
Prudential's Board of Directors on December 12, 2000 for its consideration and
adoption. The specific opinions set forth herein relate to the proposed
allocation of consideration among Eligible Policyholders and the creation and
funding of a Closed Block, each of which is described in the Plan.

Capitalized items have the same meaning in this opinion as they have in the
Plan.

Qualifications and Usage

I, Daniel J. McCarthy, am associated with the firm of Milliman & Robertson,
Inc., ("M&R") and am a Member of the American Academy of Actuaries, qualified
under the Academy's Qualification Standards to render the opinions set forth
herein. The Plan is based on authority in Chapter 17C of Title 17 of the New
Jersey Revised Statutes ("Chapter 17C"). The opinions set forth herein are not
legal opinions concerning the Plan but rather reflect the application of
actuarial concepts and standards of practice to the provisions thereof.

I am aware that this opinion letter will be furnished to the New Jersey
Department of Banking and Insurance for its use in determining the fairness of
the Plan, and to Prudential's Eligible Policyholders as part of the
Policyholder Information Booklet that will be delivered to them, and I consent
to the use of this letter for those purposes.

Reliance

In forming the opinions set forth in this memorandum, I have received from
Prudential extensive information concerning Prudential's past and present
practices and financial results. I, and other M&R staff acting under my
direction, met with Prudential personnel and defined the information we
require; in all cases, we were provided with the information we requested to
the extent that it was available or could be developed from Prudential's
records. We have made no independent verification of this information,
although we have reviewed it where practicable for general reasonableness and
internal consistency. I have relied on this information, which was provided
under the general direction of Helen Galt, Prudential's Company Actuary. My
opinions depend on the substantial accuracy of this information.

Process

In all cases, I and other M&R staff acting under my direction either derived
the results on which my opinions rest or reviewed derivations carried out by
Prudential employees.

A-1

Opinion #1

Under the Plan, consideration is to be distributed to each Eligible
Policyholder in exchange for his or her Membership Interest. In my opinion,
the methodology and underlying assumptions for allocation of consideration
among Prudential's Eligible Policyholders that are set forth in Article VII of
the Plan (including the Allocation Principles and Methodology, an Exhibit
thereto) are reasonable and appropriate, and the resulting allocation of
consideration is fair and equitable.

Discussion

General description of the method of allocation. Section 3(c)(2) of Chapter
17C requires that "the method for allocating consideration among eligible
policyholders shall be fair and equitable", and requires that "the method
shall provide for each eligible policyholder to receive (a) a fixed component
of consideration or a variable component of consideration, or both; or (b) any
other component of consideration acceptable to the commissioner". Under the
Plan, each Eligible Policyholder will be allocated a Basic Fixed Component of
consideration; i.e., a value, expressed in terms of shares of stock, that is
independent of the Eligible Policyholder's Actuarial Contribution. In
addition, each Eligible Policyholder will be allocated a Basic Variable
Component of consideration if the Actuarial Contribution of any of the
Eligible Policies owned by the Eligible Policyholder is positive. As defined
in the Plan, Actuarial Contribution means, with respect to a particular
Eligible Policy, the contribution that such Eligible Policy is estimated to
have made to the Company's surplus, plus the estimated contribution that such
Eligible Policy is expected to make to surplus in the future, in each case as
determined in accordance with the principles and methodology set forth in
Article VII and the "Allocation Principles and Methodology" Exhibit of the
Plan. For each Eligible Policyholder who received a Basic Variable Component
of consideration, that Eligible Policyholder's share of the sum of all
consideration distributed via the Basic Variable Component is the ratio of:

(a) the sum of the positive Actuarial Contributions of all Eligible
Policies owned by the Eligible Policyholder, to

(b) the sum of all positive Actuarial Contributions of all Eligible
Policies owned by all Eligible Policyholders.

Appropriateness of the "contribution to surplus" method. Most of the
consideration allocated to Eligible Policyholders is allocated via the Basic
Variable Component, using the "contribution to surplus" method. The
contribution to surplus method is recognized in the actuarial literature as an
appropriate allocation method. In particular, Actuarial Standard of Practice
37 ("ASOP 37"), which is the most authoritative guidance available to
actuaries on this subject, states in part, "The variable component of
consideration should be allocated on the basis of the actuarial contribution."
ASOP 37 (which was adopted by the Actuarial Standards Board in June, 2000 with
an effective date of December 15, 2000) defines "actuarial contribution," in
the relevant part, to be "The contributions that a particular policy . . . has
made to the company's statutory surplus . . . plus the present value of
contributions that the same policy . . . is expected to make in the future."
This is consistent with the definition in the Plan. I therefore find that the
use of "contribution to surplus" as the principal basis underlying the
allocation of consideration is reasonable and appropriate. I further find
that, in the Plan, the contribution to surplus method has been implemented in
a reasonable manner, consistent with Prudential's past and present business
practices and consistent with relevant actuarial literature.

Appropriateness of the Basic Fixed Component. Consideration is also allocated
to Eligible Policyholders via the Basic Fixed Component, in which each
Eligible Policyholder is allocated a fixed number of shares of common stock
without regard to the Actuarial Contribution of that Eligible Policyholder or
of the class or classes in which policies held by the Eligible Policyholder
happen to reside. This element of the allocation assures that each Eligible
Policyholder will receive some distribution, and is consistent with overall
concepts of equity. Under the Plan, the percentage of the total consideration
that is allocated in this manner is small relative to that allocated in
proportion to positive actuarial contributions, which is appropriate. I find
that including a minimum allocation to each Eligible Policyholder using the
Basic Fixed Component is reasonable and appropriate.

Appropriateness of certain adjustments provided for in the Plan. The Plan
provides for certain adjustments to the amount otherwise calculated (i.e., the
sum of the Basic Fixed Component and any Basic Variable Component) with
respect to certain Eligible Policyholders. These adjustments, and the Eligible
Policyholders to which each applies, are discussed below.

a. Additional Components. Section 7.1 of the Plan defines the basis under
which an Additional Fixed Component and an Additional Variable Component
will be allocated to Eligible Policyholders who do not

A-2

receive shares of stock as a form of consideration with respect to any of
his or her Eligible Policies. (For purposes of this opinion, I will refer
to the Additional Fixed Component and the Additional Variable Component
together as "Additional Components".) This adjustment has the effect of
increasing the amount of consideration by approximately 10% of the amount
otherwise calculated, subject to a minimum of two additional shares. The
aggregate amount of the Additional Components reasonably reflects the value
of the savings that Prudential expects to achieve by virtue of providing
shareholder services to smaller number of shareholders than there would
have been if all Eligible Policyholders had received shares of stock and
how that value might be reflected in Prudential's IPO price.

b. Top-up Period. Section 7.5 of the Plan defines the basis under which
this adjustment is made with respect to Eligible Policyholders who receive
cash or policy credits as a form of consideration with respect to any of
his or her Eligible Policies if the average trading price of the stock in
the 20 days following the IPO exceeds the Initial Stock Price by more than
10%. In such event, such Eligible Policyholders receive additional
consideration equal to the product of (x) and (y), where (x) equals the
excess of (i) the ratio of the average trading price to the Initial Stock
Price over (ii) 1.1, and (y) equals the amount of their calculated
consideration (i.e., the sum of the Basic Fixed Component, any Basic
Variable Component, and any Additional Components) on such Eligible
Policies. This adjustment cannot exceed 10% of the calculated consideration
(i.e., if the rate of appreciation exceeds 20%, the adjustment is 10%).

I have considered the effect of these two adjustments. I note that:

a. The Additional Components adjustment has the effect of reflecting, in
the allocation of consideration provided to each Eligible Policyholder who
does not receive shares of stock in exchange for his or her membership
interest, the value associated with anticipated savings in shareholder
servicing costs that they make possible by not receiving shares of stock.

b. The Top-up Period adjustment has the effect of providing assurance to
Eligible Policyholders who receive cash or policy credits that if the use
of the Initial Stock Price of the stock in determining the value
distributed to such Eligible Policyholders in exchange for their membership
interests does not fully reflect the value of those interests--as would be
demonstrated if the price of the stock rises significantly during a short
period after the IPO--the amount distributed to them will be adjusted to
reflect appropriately the value of their membership interests.

c. The Top-up Period adjustment is integrated with the Additional
Components adjustment. It takes into account that by virtue of the
Additional Components adjustment, Eligible Policyholders who do not receive
shares of stock, who constitute the vast majority of those to whom the Top-
up Period adjustment applies, will already have been allocated value that
is approximately equal to the additional value they would have derived from
receiving shares of stock if any short-term increase in the price of the
stock is 10% or less. It thus provides additional consideration only if any
short-term increase in the price of the stock exceeds 10%.

I find that the application of these adjustments in determining the amount of
consideration allocable to Eligible Policyholders who receive cash or policy
credits is fair and equitable because:

i. it reflects, in valuing their Membership Interests, the element of that
value that is associated with savings in shareholder servicing costs, and

ii. it enables an adjustment in valuing their Membership Interests,
essentially analogous to the adjustment that takes place on the part of
Eligible Policyholders who receive only shares of stock, in the event that
there is a significant increase in the price of the stock in the short
term.

In making this finding, I have taken into account the history of short-term
Post-IPO price movements of the shares of stock of demutualized life insurers.

The effect of different forms of consideration. As noted above, in considering
the fairness of the allocation I have taken into account that different
classes of Eligible Policyholders will receive one or more different forms of
consideration. I find that the above-described allocation of demutualization
consideration among Eligible Policyholders results in a distribution to each
class of Eligible Policyholders in exchange for their Membership Interests,
whether in stock, policy credits or cash, that appropriately reflects their
share of the aggregate value that is being distributed in the exchange.

A-3

Appropriateness of the definition of "Eligible Policyholder." In considering
the fairness of the allocation, I have taken into account the definition of
"Eligible Policyholder" set forth in the Plan. This definition differs in
certain respects from definitions used in some prior demutualizations, but I
consider it to be consistent with Prudential's business practices, consistent
with approaches prescribed or permitted by the Chapter 17C, and reasonable
when taken in conjunction with the overall method for allocation of
consideration. I have also considered that, under the Plan, Eligible Policies
affect the allocation of the Aggregate Basic Variable Component, if their
Actuarial Contributions are positive, whether they are "participating" or
"non-participating" policies. In light of Prudential's business practices, I
find this approach to be fair and equitable.

Opinion #2

In my opinion:

A. The purpose of the Closed Block, as set forth in Article IX of the Plan,
is appropriate.

B. The arrangements for the establishment, operation and funding of the
Closed Block as set forth in Article IX of the Plan (including the
Closed Block Memorandum, and Exhibit thereto), are reasonable.

C. The selection of the assets used to fund Prudential's Closed Block as of
July 1, 2000 is consistent with the Plan of Reorganization and with the
actuarial assumptions (as described in the Closed Block Memorandum) that
were used for funding the Closed Block.

D. The $48.7 billion of assets used to fund the Closed Block is an amount
that is expected to be reasonably sufficient to meet the objective of
supporting the Closed Block Policies (including but not limited to the
payment of claims, certain expenses, and taxes) and providing for
continuation of the dividend scales in effect on the Adoption Date if
the experience underlying such dividend scales continues. Attachment 1
to this letter provides the Closed Block statutory balance sheet as of
July 1, 2000, consistent with the funding of the Closed Block.

E. Article IX of the Plan also provides for the appropriate adjustment of
the dividend scales if the underlying experience changes from that
underlying the dividend scales in effect for 2000 and is in conformity
with the provisions of Chapter 17C dealing with closed blocks.

F. The Funding Adjustment Charges specified for the Closed Block (set forth
in Attachment 2 to this letter) are consistent with the Plan of
Reorganization and with the actuarial assumptions that were used for the
establishment of these charges.

Discussion

Appropriateness of the purpose of the Closed Block. As to (A) above, Section
3(d) of Chapter 17C requires that the Plan provide for the reasonable dividend
expectations of policyholders through establishment of a closed block or other
method acceptable to the commissioner. Chapter 17C also provides that any such
method may be limited to participating individual life insurance policies and
participating individual annuity contracts with experience-based dividend
scales. Further, Chapter 17C provides that assets are to be allocated to the
Closed Block in an amount expected to be reasonably sufficient to meet the
objective of supporting the Closed Block Policies and providing for
continuation of the dividend scales in effect on the Adoption Dated if the
experience underlying such dividend scales continues. Article IX of the Plan
makes provision for establishing a Closed Block having a purpose consistent
with that specified by Chapter 17C. My opinion that the purpose is appropriate
is based on this consistency as well as its consistency with Actuarial
Standard of Practice 33 ("ASOP 33"), with the report of the Society of
Actuaries Task Force on Mutual Life Insurance Company Conversion, and with the
purposes of other closed blocks that have been established in recent years.

Appropriateness of the arrangements for the establishment, operation and
funding of the Closed Block. As to (B), (C), (D), and (E) above, the Closed
Block Memorandum describes the process by which assets will be allocated to
the Closed Block as of the Closed Block Funding Date, July 1, 2000. The
process has three essential steps:

1. Defining the elements that constitute the experience underlying the
dividend scales in effect for 2000.

2. Defining the projection process used, in conjunction with (1), to determine
the cash flow requirements of the Closed Block for each year of its
projected future existence.

A-4

3. Selecting assets whose cash flows, when taken in conjunction with
anticipated future revenues from Closed Block Policies and future
reinvestment of available Closed Block assets, will provide funds to meet
the cash requirements of the Closed Block.

I find that the elements of experience underlying the dividend scales in
effect for 2000 have been determined correctly and that the process is
consistent with normal actuarial techniques for determining cash flow
requirements. In particular, I find that--because the dividend scales adopted
by Prudential have been essentially unchanged for the four-year period 1997-
2000--it is appropriate to determine the elements of experience by averaging,
for each element, the experience underlying the scales adopted in the four
years ending with year 2000.

I find that the funding of the Closed Block is appropriate, because the
initial Closed Block assets are reasonably sufficient to enable the Closed
Block to provide for the guaranteed benefits, certain expenses and taxes
associated with Closed Block policies, and to provide for the continuation of
the dividend scales in effect for the year 2000 if the experience underlying
those scales (including the portfolio interest rates) continues. In connection
with these findings, I have noted that the funding of the Closed Block
provides for a fixed cost of servicing the policies included in it and the
Closed Block Memorandum provides specifically that such fixed administrative
expenses shall be charged to the Closed Block. I have considered these
arrangements in light of the fact that Prudential, rather than the Closed
Block policyholders, bears the financial risk for future changes in
administrative expense levels.

I have also taken into account the fact that the investment policies and
guidelines that the Investment Committee of the Board adopted for the Closed
Block represent a general continuation of the investment policies and
guidelines that have been applicable in the past for the portfolio of assets
associated with Prudential's obligations for policies that have been placed in
the Closed Block.

I also find that the criteria set forth in Article IX of the Plan for
modifying the dividend scales if the experience changes are such that, if
followed, the Closed Block Policies will be treated in a manner consistent
with Prudential's current dividend practices. In connection with this finding,
I have noted that the Plan requires Prudential to submit by June 1 of the
fifth calendar year following the calendar year of the Effective Date and
every five years thereafter a report, prepared in accordance with applicable
actuarial standards, of an independent actuary, who shall be a member of the
American Academy of Actuaries, concerning the operations of the Closed Block.
The presence of this requirement helps to assure that Closed Block operations
in general, and dividend scale changes in particular, are consistent with the
purpose of the Closed Block.

Finally, I find that the funding and operation of the Closed Block as set
forth in Article IX of the Plan are consistent with current actuarial practice
as set forth in ASOP 33. In particular, I find that--under the circumstances
described above--the use of the four-year averaging technique in determining
the elements of experience is consistent with the guidance of ASOP 33 that
experience elements should reflect ". . .recent experience underlying the
current dividend scales."

Appropriateness of Funding Adjustment Charges. As to (F) above, the Funding
Adjustment Charges are appropriate because, with respect to Closed Block
Policies issued on or after the Closed Block Funding Date (July 1, 2000) and
prior to the Effective Date, they will place the Closed Block in a neutral
financial position--i.e., the Closed Block's assets will be neither more nor
less sufficient in relation to its obligations by virtue of the inclusion of
these policies in the Closed Block than would have been the case had the
policies not been included in the Closed Block. The Funding Adjustment Charges
have been calculated so that they remove from the Closed Block, with respect
to policies to which they apply, the sum of (a) expenses and commissions
provided for in the pricing of the policies for which the Closed Block is not
financially responsible, and (b) the present value of any expected future
profits that would enure to Prudential after provision for policyholder
dividends.

Opinion #3

In my opinion, the definition of the Closed Block Policies included in the
Closed Block as set forth in Article I of the Plan is fair and reasonable, and
is consistent with the provisions of Chapter 17C. Section 9.5 of the Plan
provides other methods for protecting the reasonable dividend expectations for
certain dividend-paying policies not in the Closed Block. In my opinion, these
other methods are reasonable and appropriate.

A-5

Discussion

Article I of the Plan defines the Closed Block Policies referred to in Article
IX of the Plan. This definition provides that certain classes of policies in
force on the Closed Block Funding Date, or on any date between that date and
the Effective Date, will be included in the Closed Block provided that they
are in force on the Effective Date. The policies so provided for are, in
general, individual life insurance policies and certain retirement annuity
contracts in classes for which Prudential's 2000 dividend scale provides for
experience-based dividends. This is consistent with the purpose of the Closed
Block, which is to provide assurance of the future dividend treatment of such
policies and contracts.

For certain small classes of individual life policies, individual health
policies, individual annuity contracts, and supplementary contracts with
current dividend scales but which are excluded from the Closed Block, the Plan
provides reasonable assurances as to the continuation of the current dividend
practices in the future. Such assurances are an appropriate way in which to
deal with special classes of policies.

Scope of Opinions #2 and #3

Section 9.4 of the Plan provides for the establishment of a Canadian Closed
Block. The Canadian Closed Block was funded with assets in the amount of C$170
million as of July 1, 2000. Attachment 3 to this letter provides the statutory
balance sheet for the Canadian Closed Block as of July 1, 2000 consistent with
the funding of the Canadian Closed Block. Such funding was based on experience
appropriate for the Canadian Closed Block. Opinions #2 and #3 above apply both
to the Canadian Closed Block and to the Closed Block covering all other Closed
Block Policies.

Yours sincerely

/s/ Daniel J. McCarthy
Daniel J. McCarthy
Consulting Actuary

A-6

Attachment 1

US Closed Block
Balance Sheet--July 1, 2000
(amounts in $ millions)

Assets
Bonds................................................................. 34,250
Preferred Stock....................................................... 17
Common Stock--Unaffiliated............................................ 1,581
Mortgage Loans........................................................ 5,120
Investment Real Estate................................................ 38
Policy Loans--Non-securitized......................................... 5,670
Policy Loans--Securitized............................................. 169
Cash and Other Short-term Investments................................. 4
Other Long-term Investments .......................................... 1,072
Accrued Investment Income............................................. 683
Other Miscellaneous Assets............................................ 12
Premiums Receivable................................................... 93
-------
Total Assets............................................................ 48,709
=======
Liabilities
Future Policy Benefits/Aggregate Reserve.............................. 43,131
Policyholder Account Balance (Dividend Accumulations)................. 5,205
Unpaid Claims......................................................... 68
Policyholder Dividends................................................ 2,415
Other Policyholder Related Liabilities................................ 23
General Expenses Due & Accrued........................................ 1
Unearned Investment Income............................................ 5
-------
Total Liabilities....................................................... 50,848
=======
Surplus................................................................. (2,139)

A-7

Attachment 2

Funding Adjustment Charges

Funding Adjustment charges for Closed Block Policies that are issued on or
after the Closed Block Funding Date, but on or before the Effective Date of the
Plan are as follows:

Percent of First Year
Recurring Premium
(Annualized, including
riders, modal loadings
Series and policy fees)
- ------ ----------------------

Gibraltar................................................ 125%
Estate................................................... 151%
Legacy................................................... 182%

A-8

Attachment 3

Canadian Closed Block
Balance Sheet--July 1, 2000
(amounts in C$millions)

Assets
Bonds..................................................................... 143
Preferred Stock........................................................... 0
Common Stock--Unaffiliated................................................ 21
Mortgage Loans............................................................ 0
Investment Real Estate.................................................... 0
Policy Loans--Non-securitized............................................. 4
Policy Loans--Securitized................................................. 0
Cash and Other Short-term Investments..................................... 0
Other Long-term Investments............................................... 0
Accrued Investment Income................................................. 2
Other Miscellaneous Invested Assets....................................... 0
Premiums Receivable....................................................... 0
---
Total Assets................................................................ 170
===
Liabilities
Future Policy Benefits/Aggregate Reserve.................................. 157
Policyholder Account Balance (Dividend Accumulations)..................... 0
Unpaid Claims............................................................. 0
Policyholder Dividends.................................................... 4
Other Policyholder Related Liabilities.................................... 1
General Expenses Due & Accrued............................................ 0
Unearned Investment Income................................................ 0
Remittances & Items Not Allocated......................................... 0
---
Total Liabilities........................................................... 162
===
Surplus..................................................................... 8

A-9

GLOSSARY

The following Glossary includes definitions of certain insurance and other
terms.

A.M. Best............. A.M. Best Company, a rating agency. See "claims-paying
ratings" for an explanation of A.M. Best's ratings.
A.M. Best does not provide credit ratings.

account values........ the amounts of investment products held for the
benefit of policyholders or contractholders. For
mutual funds, account value is equal to fair market
value.

annuity............... a contract that provides for periodic payments to an
annuitant for a specified period of time, often until
the annuitant's death.

asset valuation
reserve (or AVR)......
a reserve required under statutory accounting
principles designed to offset potential credit-related
and equity-related investment losses on all invested
asset categories excluding cash, policy loans, premium
notes, collateral notes and income receivables; the
reserve is not included in financial statements
prepared in accordance with generally accepted
accounting principles.

assets under
management (or AUM)... assets we manage directly in our proprietary products,
such as our mutual funds and variable annuities, in
our separate accounts and in our general account, and
assets invested in investment options included in our
products that are managed by third-party sub-managers
(i.e., the non-proprietary investment options in our
products).

cede.................. reinsuring with another insurance company all or a
portion of the risk we insure.
claims-paying
ratings............... the opinions of rating agencies regarding the
financial ability of an insurance company to meet its
obligations under its insurance policies.

A.M. Best's 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 and
"B++" companies to have a good ability to meet their
ongoing obligations to policyholders.

Fitch's 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.

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 sometime in the future.

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,

G-1

"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.

corporate-owned life
insurance............. life insurance policies on a company's employees that
are owned by a company and often used to fund employee
benefits.

crediting rate........ the interest rate credited on a life insurance policy
or annuity contract, which may be a guaranteed fixed
rate, a variable rate or some combination of both.

credit ratings........ the opinions of rating agencies regarding an entity's
ability to repay its indebtedness.

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.

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.

deferred policy
acquisition costs (or
DAC).................. commissions and other selling expenses that vary with
and are directly related to the production of business
and that are deferred and amortized to achieve a
matching of revenues and expenses when reported in
financial statements prepared in conformity with
generally accepted accounting principles.

defined benefit
retirement plan....... a pension plan that promises to pay a specified amount
to each eligible plan member who retires.

defined contribution
plan.................. a plan established under Section 401(a), 401(k),
403(b) or 457(b) of the Internal Revenue Code, under
which the benefits to a participant depend on the
investment return on the participant's account.

earned premiums....... the portion of a premium, net of any amount ceded,
that represents coverage already provided or that
belongs to the insurer based on the part of the policy
period that has passed.

first year direct
written premium....... total annual premiums on new sales of our own property
and casualty insurance products before consideration
of reinsurance assumed or ceded.

Fitch................. Fitch, Inc. (formerly Duff & Phelps, Inc.), a rating
agency. See "claims-paying ratings" for an explanation
of Fitch's ratings.

fixed annuities....... an annuity under which the interest rate credited on
the annuity during the accumulation phase is a fixed
rate, which may change periodically, until it matures.

G-2

general account...... all of the assets of our insurance companies recognized
for statutory accounting purposes other than those
specifically allocated to a separate account. We bear
the risk of our investments held in our general
account.

general account
GIC.................. a guaranteed investment rate contract under which the
guaranteed return is supported by general account
investments.

guaranteed
investment contract
(or GIC)............. a group contract that guarantees a minimum rate of
return, which may be fixed or floating, on the amount
invested.

guaranteed
products............. group annuity contracts, guaranteed investment
contracts, structured settlements and funding
agreements.

immediate
annuities............ annuity contracts under which the benefits payable to
the annuitant begin to be paid within one year of
contract issuance.

incurred losses...... the total losses and loss adjustment expenses paid,
plus the change in loss and loss adjustment expense
reserves, including incurred but not reported losses,
sustained by an insurance or reinsurance company under
its policies or other insurance or reinsurance
contracts.

in force............. policies and contracts reflected on our applicable
records that have not expired or been terminated as of
a given date.

interest maintenance
reserve.............. 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.

interest-sensitive
life insurance....... a cash value life insurance policy with a separately
identified policyholder fund to which interest is
credited and charges are deducted and with benefits
that are tied to the fluctuation in investment result.

LIMRA................ Life Insurance Marketing and Research Association.

long-term care
insurance............ insurance that protects the insured from certain costs
of care at home or in an outside facility, but not
medical insurance.

loss adjustment
expense.............. the expense involved in settling a property and
casualty loss, excluding the actual value of the loss.

market-making........ maintaining bids and offer prices in a given security.

Moody's.............. Moody's Investors Service, Inc., a rating agency. See
"claims-paying ratings" and "credit ratings" for an
explanation of Moody's ratings.

morbidity............ the incidence of disease or disability in a specific
population over a specific period of time.

mortality............ the number of deaths in a specific population over a
specific period of time.

new annualized
premium.............. premium payments related only to new sales and
calculated as if they were consistently paid for the
year of the sale even if they were actually paid for
only a portion of the year of the sale.

non-participating
policy or annuity.... policies and annuities under which the
policyholder/contractholder does not have a right to
participate in the divisible surplus of the issuer to
the extent dividends are apportioned thereon.

G-3

non-proprietary (or
non-proprietary
product or non-
proprietary
investment option).... those of our investment products, or investment
options within our investment products, that are
managed by a third party.
participating policy
or annuity............ policies and annuities under which the
policyholder/contractholder has a right to participate
in the divisible surplus of the issuer to the extent
dividends are apportioned thereon.

permanent life a general term for life policies, including
insurance............. traditional whole, variable and universal life, that
remain in force so long as their premiums are paid or
achieve paid-up status.

persistency........... measurement by premiums of the percentage of insurance
policies or annuity contracts remaining in force
between specified measurement dates.

personal lines
property and casualty property and casualty insurance sold to individuals
insurance............. rather than businesses, including homeowners and
automobile insurance.

plan of dated as of December 15, 2000 (together with all
reorganization........ exhibits and schedules), as originally adopted, and
amended, supplemented or modified from time to time.

policy charges........ fees from an insurance policy or annuity contract
other than for insurance risks, for example, penalties
for early surrender or late premium payment.

policy loans.......... loan from an insurer secured by the cash surrender
value of a life insurance policy.

premiums.............. payments and considerations received on insurance
policies issued or reinsured by an insurance company.
Under generally accepted accounting principles,
premiums on variable life and other investment-type
contracts are not accounted for as revenues.

proprietary (or
proprietary product
or proprietary
option)...............

those of our investment products, or investment
options within our investment products, that we manage
directly on behalf of our clients (rather than
depositing them to be managed by a third-party).

reinsurance........... the ceding by one insurance company (the "reinsured")
to another (the "reinsurer") of all or a portion of a
risk for a premium. The ceding of risk to a reinsurer,
other than in the case of assumption reinsurance, does
not relieve the original insurer (i.e., the reinsured)
of its liability to the insured.

repurchase
agreement............. an agreement between a seller and a buyer, whereby the
seller agrees to sell securities and to repurchase
them at an agreed upon price and generally at a stated
time.

reserves.............. amounts recorded as a liability in order to provide
for anticipated pay-outs such as benefits, dividends
or contingencies.

reverse repurchase
agreement............. an agreement between a seller and a buyer, whereby the
buyer agrees to purchase securities and to resell them
at an agreed upon price and generally at a stated
time.

risk-based capital
(or RBC) ratio........ a tool used by insurance regulators to analyze an
insurance company's total adjusted capital, taking
into consideration the risks associated with the
company's particular assets, the risk that losses will
be worse than expected, the company's exposure to
interest rate risks, and other business risks. The
risk based capital ratio is a well accepted measure of
the strength of a company's capitalization.

G-4

S&P.................. Standard & Poor's Ratings Group, a rating agency. See
"claims-paying ratings" and "credit ratings" for an
explanation of S&P's ratings.

separate accounts.... assets of our insurance companies allocated under
certain policies and contracts that are segregated from
the general account and other separate accounts. The
policyholder or contractholder bears the risk of
investments held in a separate account.

statutory accounting
principles........... accounting practices prescribed or permitted by an
insurer's domiciliary state insurance regulator for
purposes of financial reporting to regulators.

structured customized annuities used to provide to a claimant
settlements.......... ongoing periodic payments instead of a lump sum
payment.

surrender charge..... an amount specified in our insurance policies and
annuity contracts that we charge a policyholder or
contractholder for early cancellation of or withdrawal
under that policy or contract.

surrenders and
withdrawals.......... amounts taken from life insurance policies and annuity
contracts representing the full or partial values of
these policies or contracts.

term life life insurance written for a specified period and under
insurance............ which no cash value is generally available on
surrender.

traditional whole
life insurance....... a life insurance policy that offers the beneficiary
benefits in the event of the insured's death for the
whole of life, provided premiums have been paid when
due; it also allows for the buildup of cash value but
has no investment feature.

trust-owned life
insurance............ life insurance policies on a company's employees owned
by a trust created by the company and generally used to
fund employee benefits.

underwriting......... the process of examining, accepting or rejecting
insurance risks and classifying those risks that are
accepted, in order to charge policyholders an
appropriate premium.

unit investment
trust................ unit investment trusts purchase a fixed portfolio of
income-producing securities, such as corporate,
municipal, or government bonds, mortgage-backed
securities, common stock or preferred stock. Unit
holders receive an undivided interest in both the
principal and the income portion of the portfolio in
proportion to the amount of capital they invest.

universal life interest-sensitive life insurance under which
insurance............ separately identified interest and mortality and
expense charges are made to the policy fund, typically
with flexible premiums.

variable annuity..... an annuity contract under which values during the
accumulation phase fluctuate according to the
investment performance of a separate account or
accounts supporting such contract that is/are
designated by the contractholder.

variable life
insurance............ life insurance policy under which the benefits payable
to the beneficiary upon the death of the insured or the
surrender of the policy will vary to reflect the
investment performance of a separate account or
accounts supporting such policy that is/are designated
by the contractholder.

variable universal
life insurance....... a form of variable life insurance where the timing or
amount of one or more premium payments may be varied.

wrap-fee products.... investment products generating asset-based fees in
which the funds of the customer are generally invested
in other investment products such as mutual funds.

written premiums..... the aggregate amount of premiums written by an insurer
during a specific period of time, including both earned
and unearned premiums.

G-5

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

No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.

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

TABLE OF CONTENTS

Page
----

Prospectus Summary....................................................... 1
Risk Factors............................................................. 20
Use of Proceeds.......................................................... 35
Dividend Policy.......................................................... 35
Capitalization........................................................... 37
Selected Consolidated Financial and Other Information.................... 38
Unaudited Pro Forma Condensed Consolidated Financial Information......... 44
Unaudited Pro Forma Supplementary Information............................ 57
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 59
Recent Developments...................................................... 115
Demutualization and Related Transactions................................. 120
Business................................................................. 133
Management............................................................... 186
Ownership of Common Stock................................................ 201
Certain Relationships and Related Transactions........................... 202
Shares Eligible for Future Sale.......................................... 202
Description of Capital Stock............................................. 203
Underwriting............................................................. 210
Validity of Common Stock................................................. 212
Experts.................................................................. 212
Available Information.................................................... 212
Consolidated Financial Statements........................................ F-1
Actuarial Opinions....................................................... A-1
Glossary................................................................. G-1

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

Through and including , 2001 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.

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

89,000,000 Shares

Prudential Financial, Inc.

Common Stock

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

[LOGO]

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

Goldman, Sachs & Co.

Representatives of the Underwriters

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

The following is a statement of the estimated expenses, other than
underwriting discounts and commissions, to be incurred in connection with the
distribution of the securities registered under this Registration Statement.

Amount
to be paid
----------

Securities and Exchange Commission registration fee................. $ *
NASD fees and expenses.............................................. *
Legal fees and expenses............................................. *
Fees and expenses of qualification under state securities laws (in-
cluding legal fees)................................................ *
NYSE listing fees and expenses...................................... *
Accounting fees and expenses........................................ *
Printing and engraving fees......................................... *
Registrar and transfer agent's fees................................. *
Miscellaneous....................................................... *
----
Total.............................................................. $ *
====

- --------
* To be completed by amendment.

Item 14. Indemnification of Directors and Officers

The New Jersey Business Corporation Act provides that a New Jersey
corporation is required to indemnify a director or officer against his or her
expenses to the extent that such director or officer has been successful on
the merits or otherwise in any proceeding against such director or officer as
by reason of his or being or having been such director or officer. A New
Jersey corporation also has the power to indemnify a director or officer
against his or her expenses and liabilities in connection with any proceeding
involving the director or officer by reason of his or her being or having been
such a director or officer if such a director or officer acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation (or in the case of a proceeding by or in the
right of the corporation, upon an appropriate determination by a court); and
with respect to any criminal proceeding, such director or officer had no
reasonable cause to believe his or her conduct was unlawful. No
indemnification shall be made to or on behalf of a director or officer if a
judgment or other final adjudication adverse to the director or officer
establishes that his or her omissions (a) were in breach of his or her duty of
loyalty to the corporation or its shareholders, (b) were not in good faith or
involved a knowing violation of law or (c) resulted in receipt by the director
or officer of an improper personal benefit.

Prudential Financial, Inc.'s certificate of incorporation provides that no
director shall be personally liable to Prudential Financial, Inc. or any of
its shareholders for damages for breach of duty as a director, except for
liability based upon an act or omission (i) in breach of the director's duty
of loyalty to Prudential Financial, Inc. or its stockholders, (ii) not in good
faith or involving a knowing violation of law, or (iii) resulting in receipt
by such director of an improper personal benefit.

The by-laws of Prudential Financial, Inc. provide that Prudential Financial,
Inc. shall indemnify the following persons:

(a) any person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative, arbitrative or investigative (including any
appeal thereon) (other than an action by or in the right of Prudential
Financial, Inc.) by reason of the fact that such person is or was a director,
officer, or employee of Prudential Financial, Inc., or is or was serving at
the request of Prudential Financial, Inc. as a director or officer, employee
or agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses (including reasonable
costs, disbursements and attorneys' fees), judgments, fines, penalties and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of Prudential Financial, Inc., and, with respect to any
criminal action or proceeding, such person has no reasonable cause to believe
his or her conduct was unlawful; or

II-1

(b) any person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit (whether civil, criminal,
administrative, arbitrative or investigative) by or in the right of Prudential
Financial, Inc. to procure a judgment in its favor by reason of the fact that
such person is or was a director, officer, or employee of Prudential
Financial, Inc., or is or was serving at the request of Prudential Financial,
Inc. as director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including reasonable costs, disbursements and attorneys'
fees) judgments, fines, penalties and amounts paid in settlement actually and
reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of Prudential Financial, Inc.; provided, however, that no
indemnification shall be made in respect of any claim, issue or matter if a
judgment or final adjudication adverse to such person establishes that his or
her acts or omissions (i) were in breach of his or her duty of loyalty to
Prudential Financial, Inc. or its shareholders, (ii) were not in good faith or
involved a knowing violation of law or (iii) resulted in receipt by such
person of an improper personal benefit.

For directors and officers of the level of Senior Vice President or above,
the determination of entitlement to indemnification must be made (i) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (ii) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion, or (iii) by the shareholders.

Policies of insurance are maintained by the Registrant with unrelated
insurers under which its directors and officers are insured, within the limits
and subject to the limitations of the policies, against certain expenses in
connection with the defense of, and certain liabilities which might be imposed
as a result of, actions, suits or proceedings to which they are parties by
reason of being or having been such directors or officers.

Reference is also made to Section of the Underwriting Agreement filed as
Exhibit 1.1 to the Registration Statement for information concerning the
Underwriters' obligation to indemnify the Registrant and its officers and
directors in certain circumstances.

Item 15. Recent Sales of Unregistered Securities

The Registrant will distribute to certain eligible policyholders
approximately 455 million shares of Common Stock in the demutualization.
Exemption from registration under the Securities Act for such distribution
will be available under Section 3(a)(10) of the Securities Act based on the
New Jersey Insurance Commissioner's approval of the Plan of Reorganization.

The Registrant expects to sell approximately 2.0 million shares of Class B
Stock to institutional accredited investors concurrently with or within 30
days following the offering of the Common Stock at an aggregate offering price
of approximately $175 million. The shares of Class B Stock will be offered and
sold pursuant to the exemption from registration available under Section 4(2)
of the Securities Act.

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

II-2

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).**
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).**
21.1 Subsidiaries of Prudential Financial, Inc.*
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Sullivan & Cromwell (included in Exhibit 5.1).*
23.3 Consent of McCarter & English, LLP (included in Exhibit 5.2).*
23.4 Consent of Milliman & Robertson, Inc.**
24.1 Powers of Attorney.**

(b) Financial Statement Schedules

Schedule I Summary of Investments Other Than Investments in Related Parties
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance
Schedule V Valuation and Qualifying Accounts

- --------
*To be filed by amendment.

**Previously filed.

Item 17. Undertakings

The undersigned Registrant hereby undertakes:

(a) To provide to the underwriters at the closing specified in the
underwriting agreements, certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to
each purchaser.

(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions
described under "Item 14, Indemnification of Directors and Officers" above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment to the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will
be governed by the final adjudication of such issue.

(c)(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-3

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Newark, New Jersey on
the 25th day of April, 2001.

Prudential Financial, Inc.

/s/ Mark B. Grier
By: _____________________________
Name: Mark B. Grier
Title: Executive Vice President

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on April 9, 2001:

Name Title
---- -----

Arthur F. Ryan* Chairman, Chief Executive
______________________________________ Officer, President and
Arthur F. Ryan Director

Richard J. Carbone* Chief Financial Officer
______________________________________ (Principal Financial
Richard J. Carbone Officer)

Anthony S. Piszel* Controller
______________________________________ (Principal Accounting
Anthony S. Piszel Officer)

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

II-4

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

Pindaros R. Vagelos* Director
______________________________________
Pindaros R. Vagelos

Stanley C. Van Ness* Director
______________________________________
Stanley C. Van Ness

Paul A. Volcker* Director
______________________________________
Paul A. Volcker

/s/ Mark B. Grier
By: *_________________________________
Mark B. Grier, Attorney-in-fact

II-5

Report of Independent Accountants on
Financial Statement Schedules

To the Board of Directors and Policyholders of
The Prudential Insurance Company of America

Our audits of the consolidated financial statements referred to in our
report dated March 13, 2001, except for Note 18, as to which the date is April
2, 2001, appearing in the prospectus also included an audit of the Financial
Statement Schedules listed in Item 16(b) of this Registration Statement. In
our opinion, these Financial Statement Schedules present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

New York, New York
March 13, 2001

II-6

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Schedule I
Summary of Investments Other Than Investments in Related Parties
As of December 31, 2000 (In Millions)

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...................... $ 7,068 $ 7,424 $ 7,424
States, municipalities and political
subdivisions.................................. 3,012 3,173 3,173
Foreign governments............................ 4,393 4,570 4,570
Mortgage-backed securities..................... 6,512 6,686 6,686
Public utilities............................... 13,185 13,110 13,110
Convertibles and bonds with warrants
attached...................................... 95 110 110
All other corporate bonds...................... 48,499 48,364 48,364
Certificates of deposit........................ -- -- --
Redeemable preferred stock..................... 351 390 390
-------- ------- --------
Total fixed maturities, available for sale... $ 83,115 $83,827 $ 83,827
-------- ------- --------
Fixed maturities, held to maturity:
Bonds:
United States Government and government
agencies and authorities...................... $ 7 $ 7 $ 7
States, municipalities and political
subdivisions.................................. 40 40 40
Foreign governments............................ 193 206 193
Mortgage-backed securities..................... -- -- --
Public utilities............................... 2,421 2,579 2,421
Convertibles and bonds with warrants
attached...................................... -- -- --
All other corporate bonds...................... 9,787 9,783 9,787
Certificates of deposit........................ -- -- --
Redeemable preferred stock..................... -- -- --
-------- ------- --------
Total fixed maturities, held to maturity..... $ 12,448 $12,615 $ 12,448
-------- ------- --------
Equity securities:
Common Stocks:
Public utilities............................... $ 43 $ 44 $ 44
Banks, trust and insurance companies........... 134 209 209
Industrial, miscellaneous and other............ 1,976 1,944 1,944
Nonredeemable preferred stocks................. 113 120 120
-------- ------- --------
Total equity securities...................... $ 2,266 $ 2,317 $ 2,317
-------- ------- --------
Mortgage loans on real estate................... $ 15,919 $ 15,919
Policy loans.................................... 8,046 8,046
Cash collateral for borrowed securities......... 3,858 3,858
Securities purchased under agreements to
resell......................................... 5,395 5,395
Trading account assets (2)...................... 7,217 7,217
Short-term investments.......................... 5,029 5,029
Other long-term investments..................... 4,459 4,459
-------- --------
Total investments............................ $147,752 $148,515
======== ========

- --------
(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) At fair value.

II-7

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Schedule III
Supplementary Insurance Information
As of and for the year ended December 31, 2000 (In Millions)

Premiums,
Deferred Policy Benefits, Claims,
Policy Future Policy Other Policy Charges Net Losses and
Acquisition Benefits, Losses, Unearned Claims and and Fee Investment Settlement Amortization
Segment Costs Claims, Expenses Premium Benefits Payable Income Income Expenses of DAC
------- ----------- ----------------- -------- ---------------- --------- ---------- ----------------- ------------

Individual Life
Insurance........ $3,090 $ 1,541 -- $ 3,532 $1,328 $ 374 $ 793 $ 172
Private Client
Group............ -- -- -- -- -- 299 -- --
Retail
Investments...... 682 795 -- 4,907 355 478 421 206
Property and
Casualty
Insurance........ 137 1,837 $577 -- 1,639 193 1,045 365
------ ------- ---- ------- ------ ----- ------ -----
U.S. Consumer
Division........ 3,909 4,173 577 8,439 3,322 1,344 2,259 743
------ ------- ---- ------- ------ ----- ------ -----
Group Insurance.. 12 2,822 113 3,546 2,292 485 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 2,441 2,817 4,228 22
------ ------- ---- ------- ------ ----- ------ -----
International
Insurance........ 1,425 4,536 -- 131 1,773 129 1,268 145
International
Securities and
Investments...... -- -- -- -- -- 66 -- 1
------ ------- ---- ------- ------ ----- ------ -----
International
Division........ 1,425 4,536 -- 131 1,773 195 1,268 146
------ ------- ---- ------- ------ ----- ------ -----
Investment
Management and
Advisory
Services......... -- -- -- -- -- 21 -- --
Other Asset
Management....... -- -- -- -- -- 31 -- --
------ ------- ---- ------- ------ ----- ------ -----
Asset Management
Division........ -- -- -- -- 52 -- --
------ ------- ---- ------- ------ ----- ------ -----
Corporate and
Other............ (33) 574 18 88 4 917 38 (84)
------ ------- ---- ------- ------ ----- ------ -----
Total Financial
Services
Businesses....... 5,389 24,686 708 27,542 7,540 5,325 7,793 827
------ ------- ---- ------- ------ ----- ------ -----
Traditional
Participating
Products......... 1,674 46,014 -- 6,643 4,320 4,172 7,322 269
------ ------- ---- ------- ------ ----- ------ -----
Total........... 7,063 70,700 708 34,185 11,860 9,497 15,115 1,096
====== ======= ==== ======= ====== ===== ====== =====

Other
Operating Premiums
Segment Expenses Written
------- --------- --------

Individual Life
Insurance........ $ 776 --
Private Client
Group............ 2,452 --
Retail
Investments...... 764 --
Property and
Casualty
Insurance........ 280 $1,637
--------- --------
U.S. Consumer
Division........ 4,272 1,637
--------- --------
Group Insurance.. 400 --
Other Employee
Benefits......... 681 --
--------- --------
Employee
Benefits
Division........ 1,081 --
--------- --------
International
Insurance........ 211 --
International
Securities and
Investments...... 677 --
--------- --------
International
Division........ 888 --
--------- --------
Investment
Management and
Advisory
Services......... 719 --
Other Asset
Management....... 348 --
--------- --------
Asset Management
Division........ 1,067 --
--------- --------
Corporate and
Other............ 1,380 --
--------- --------
Total Financial
Services
Businesses....... 8,688 1,637
--------- --------
Traditional
Participating
Products......... 918 --
--------- --------
Total........... 9,606 $1,637
========= ========

II-8

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Schedule III
Supplementary Insurance Information
As of and for the year ended December 31, 1999 (In Millions)

Individual Life
Insurance........ $2,807 $ 1,360 -- $ 3,303 $ 1,299 $ 316 $ 653 $ 185
Private Client
Group............ -- -- -- -- -- 269 -- --
Retail
Investments...... 693 782 -- 5,065 316 491 389 229
Property and
Casualty
Insurance........ 110 1,758 $494 -- 1,548 197 1,100 350
------ ------- ---- ------- ------- ------ ------- ------
U.S. Consumer
Division........ 3,610 3,900 494 8,368 3,163 1,273 2,142 764
------ ------- ---- ------- ------- ------ ------- ------
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 6
------ ------- ---- ------- ------- ------ ------- ------
Employee
Benefits
Division........ 105 15,298 117 19,240 2,090 2,930 4,176 6
------ ------- ---- ------- ------- ------ ------- ------
International
Insurance........ 1,325 3,971 1 55 1,422 99 1,034 102
International
Securities and
Investments...... -- -- -- -- -- 54 -- 1
------ ------- ---- ------- ------- ------ ------- ------
International
Division........ 1,325 3,971 1 55 1,422 153 1,034 103
------ ------- ---- ------- ------- ------ ------- ------
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 (32)
------ ------- ---- ------- ------- ------ ------- ------
Total Financial
Services
Businesses....... 5,031 24,840 652 27,779 6,768 5,456 7,502 841
------ ------- ---- ------- ------- ------ ------- ------
Traditional
Participating
Products......... 2,293 44,615 -- 6,485 4,276 3,911 7,106 314
------ ------- ---- ------- ------- ------ ------- ------
Total........... $7,324 $69,455 $652 $34,264 $11,044 $9,367 $14,608 $1,155
====== ======= ==== ======= ======= ====== ======= ======

Other
Operating Premiums
Segment Expenses Written
------- --------- --------

Individual Life
Insurance........ $ 768 --
Private Client
Group............ 2,285 --
Retail
Investments...... 756 --
Property and
Casualty
Insurance........ 145 $1,500
--------- --------
U.S. Consumer
Division........ 3,954 1,500
--------- --------
Group Insurance.. 354 --
Other Employee
Benefits......... 649 --
--------- --------
Employee
Benefits
Division........ 1,003 --
--------- --------
International
Insurance........ 168 --
International
Securities and
Investments...... 564 --
--------- --------
International
Division........ 732 --
--------- --------
Investment
Management and
Advisory
Services......... 613 --
Other Asset
Management....... 271 --
--------- --------
Asset Management
Division........ 884 --
--------- --------
Corporate and
Other............ 1,102 --
--------- --------
Total Financial
Services
Businesses....... 7,675 1,500
--------- --------
Traditional
Participating
Products......... 930 --
--------- --------
Total........... $8,605 $1,500
========= ========

II-9

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Schedule III
Supplementary Insurance Information
As of and for the year ended December 31, 1998 (In Millions)

Individual Life
Insurance........ $2,748 $ 1,144 -- $ 3,146 $ 1,284 $ 300 $ 647 $ 185
Private Client
Group............ -- -- -- -- -- 255 -- --
Retail
Investments...... 621 860 -- 5,475 284 567 419 183
Property and
Casualty
Insurance........ 108 2,025 $547 -- 1,581 223 1,070 340
------ ------- ---- ------- ------- ------ ------- ------
U.S. Consumer
Division 3,477 4,029 547 8,621 3,149 1,345 2,136 708
------ ------- ---- ------- ------- ------ ------- ------
Group Insurance.. -- 2,496 18 3,253 1,755 441 1,808 --
Other Employee
Benefits......... 60 13,868 -- 17,246 156 2,730 2,487 14
------ ------- ---- ------- ------- ------ ------- ------
Employee
Benefits
Division........ 60 16,364 18 20,499 1,911 3,171 4,295 14
------ ------- ---- ------- ------- ------ ------- ------
International
Insurance........ 972 2,672 -- 97 1,010 65 747 103
International
Securities and
Investments...... -- -- -- -- -- 55 -- 1
------ ------- ---- ------- ------- ------ ------- ------
International
Division........ 972 2,672 -- 97 1,010 120 747 104
------ ------- ---- ------- ------- ------ ------- ------
Investment
Management and
Advisory
Services......... -- -- -- -- (3) 2 -- 5
Other Asset
Management....... -- -- -- -- -- 9 -- --
------ ------- ---- ------- ------- ------ ------- ------
Asset Management
Division........ -- -- -- -- (3) 11 -- 5
------ ------- ---- ------- ------- ------ ------- ------
Corporate and
Other............ (21) 2,761 95 67 86 1,013 80 (50)
------ ------- ---- ------- ------- ------ ------- ------
Total Financial
Services
Businesses....... 4,488 25,826 660 29,284 6,153 5,660 7,258 781
------ ------- ---- ------- ------- ------ ------- ------
Traditional
Participating
Products......... 1,974 43,579 -- 6,397 4,360 3,794 6,958 358
------ ------- ---- ------- ------- ------ ------- ------
Total........... $6,462 $69,405 $660 $35,681 $10,513 $9,454 $14,216 $1,139
====== ======= ==== ======= ======= ====== ======= ======

Other
Operating Premiums
Segment Expenses Written
------- --------- --------

Individual Life
Insurance........ $ 664 --
Private Client
Group............ 2,203 --
Retail
Investments...... 684 --
Property and
Casualty
Insurance........ 91 $1,548
--------- --------
U.S. Consumer
Division 3,642 1,548
--------- --------
Group Insurance.. 299 --
Other Employee
Benefits......... 637 --
--------- --------
Employee
Benefits
Division........ 936 --
--------- --------
International
Insurance........ 96 --
International
Securities and
Investments...... 519 --
--------- --------
International
Division........ 615 --
--------- --------
Investment
Management and
Advisory
Services......... 591 --
Other Asset
Management....... 231 --
--------- --------
Asset Management
Division........ 822 --
--------- --------
Corporate and
Other............ 1,997 --
--------- --------
Total Financial
Services
Businesses....... 8,012 1,548
--------- --------
Traditional
Participating
Products......... 1,045 --
--------- --------
Total........... $9,057 $1,548
========= ========

II-10

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Schedule IV
Reinsurance
For the Years Ended December 31, 2000, 1999 and 1998 (In Millions)

Percentage of
Ceded to Other Assumed from Amount Assumed
Gross Amount Companies Other Companies Net Amount to Net
------------ -------------- --------------- ---------- --------------

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............. 1,691 93 41 1,639 2.5%
---------- ------- ------ ---------- ---
Total Premiums......... $ 10,726 $ 591 $ 86 $ 10,221 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%
========== ======= ====== ========== ===
1998
Life Insurance Face
Amount In Force........ $1,128,919 $65,317 $7,168 $1,070,771 0.7%
========== ======= ====== ========== ===
Premiums:
Life Insurance......... $ 7,537 $ 506 $ 24 $ 7,055 0.3%
Accident and Health
Insurance............. 409 4 -- 405 --
Property & Liability
Insurance............. 1,715 168 41 1,588 2.6%
---------- ------- ------ ---------- ---
Total Premiums......... $ 9,661 $ 678 $ 65 $ 9,048 0.7%
========== ======= ====== ========== ===

II-11

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Schedule V
Valuation and Qualifying Accounts
For the years ended December 31, 2000, 1999 and 1998 (In Millions)

Additions
----------------------------------------------------
Balance Charged to Charged Balance
at Beg. Costs to Other at End
Description of Period and Expenses Accounts Deductions of Period
- ----------- --------- ------------ -------- ---------- ---------

2000
Allowance for losses on
mortgage loans on real
estate.................. $221 $ 17 $ -- $ 13(a) $225
Valuation allowance on
deferred tax asset...... 24 18 -- 4(c) 38
---- ----- ----- ---- ----
$245 $ 35 $ -- $ 17 $263
==== ===== ===== ==== ====
1999
Allowance for losses on
mortgage loans on real
estate.................. $427 $ -- $ -- $206(b) $221
Valuation allowance on
deferred tax asset...... 13 17 -- 6(c) 24
---- ----- ----- ---- ----
$440 $ 17 $ -- $212 $245
==== ===== ===== ==== ====
1998
Allowance for losses on
mortgage loans on real
estate.................. $450 $ -- $ -- $ 23(d) $427
Valuation allowance on
deferred tax asset...... 18 1 -- 6(c) 13
---- ----- ----- ---- ----
$468 $ 1 $ -- $ 29 $440
==== ===== ===== ==== ====

- --------
(a) Represents $13 million of charge-offs, net of recoveries.
(b) Represents $201 million of release of allowance for losses and $5 million
of charge-offs, net of recoveries.

(c) Represents utilization of foreign tax credit ($4 million, $6 million and $6
million in 2000, 1999 and 1998, respectively).
(d) Represents $23 million of charge-offs, net of recoveries.

II-12

Index to Exhibits

Sequentially
Exhibit Numbered
No. Description Page
------- ------------------------------------------------------- ------------

1.1 Form of Underwriting Agreement (U.S. Version).*
2.1 Plan of Reorganization.
3.1 Form of proposed Certificate of Incorporation of
Prudential Financial, Inc.
3.2 Form of By-laws of Prudential Financial, Inc.
4.1 Form of certificate for the Common Stock of Prudential
Financial, Inc., par value $.01 per share.*
4.2 Shareholders' Rights Plan.*
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 Subscription Agreement for Class B Stock.
5.1 Opinion of Sullivan & Cromwell.*
5.2 Opinion of McCarter & English, LLP.*
10.1 Support Agreement between The Prudential Insurance
Company of America and Prudential Funding Corporation
dated as of March 18, 1982.**
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).**
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).**
21.1 Subsidiaries of Prudential Financial, Inc.*
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Sullivan & Cromwell (included in Exhibit
5.1).*
23.3 Consent of McCarter & English, LLP (included in Exhibit
5.2).*
23.4 Consent of Milliman & Robertson, Inc.**
24.1 Powers of Attorney.**

- --------
*To be filed by amendment.

**Previously filed.