index to financial statements of prudential insurance

F-1

INDEX TO FINANCIAL STATEMENTS

OF PRUDENTIAL INSURANCE

Page

Report of Independent Accountants as of December 31, 2003 and 2002 and for the years ended December 31, 2003 and 2002 .....................................................................................................................................F-2

Audited Statutory Financial Statements as of December 31, 2003 and 2002 and for the years ended December 31, 2003 and 2002: Statutory Statements of Admitted Assets, Liabilities and Surplus...................................................................................F-4 Statutory Statements of Operations and Changes in Surplus............................................................................................F-5 Statutory Statements of Cash Flows ......................................................................................................................................F-6 Notes to Statutory Financial Statements ...............................................................................................................................F-7

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Report of Independent Auditors

To the Board of Directors of The Prudential Insurance Company of America

We have audited the accompanying statutory statements of admitted assets, liabilities and capital and surplus of The Prudential Insurance Company of America (the "Company") as of December 31, 2003 and 2002, and the related statutory statements of operations and changes in capital and surplus, and cash flows for the years then ended. These financial statements are the responsibility of the Comp any's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in Note 2 to the financial statements, the Company prepared these financial statements using accounting practices prescribed or permitted by the New Jersey Department of Banking and Insurance (the "Department"), which practices differ from accounting principles generally accepted in the United States of America. The effects on the financial statements of the variances between the statutory basis of accounting and accounting principles generally accepted in the United States of America are material; they are described in Note 2.

In our opinion, because of the effects of the matter discussed in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with accounting principles generally accepted in the United States of America, the financial position of the Company as of December 31, 2003 and 2002, or the results of its operations or its cash flows for the years then ended.

In our opinion, the financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities and capital and surplus of the Company as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended, on the basis of accounting described in Note 2.

Our audit was conducted for the purpose of forming an opinion on the basic statutory basis financial statements taken as a whole. The accompanying Annual Statement Schedule 1 – Selected Financial Data, Supplemental Investment Risk Interrogatories and Summary Investment Schedule (collectively, the "Schedules") of the Company as of December 31, 2003 and for the year then ended are presented for purposes of additional analysis and are not a required part of the basic statutory basis financial statements. The effects on the Schedules of the variances between the statutory basis of accounting and accounting principles generally accepted in the United States of America are material; they are described in Note 2. As a consequence, the Schedules do not present fairly, in conformity with accounting principles generally accepted in the United States of America, such information of the Company as of December 31, 2003 and for the year then ended. The Schedules have been subjected to the auditing procedures applied in the audit of the basic statutory basis financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic statutory basis financial statements taken as a whole.

/s/ PricewaterhouseCoopers LLP New York, New York April 16, 2004

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THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (Parent Only)

STATUTORY FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION December 31, 2003 and 2002 and Report of Independent Auditors

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND CAPITAL AND SURPLUS

See Notes to Statutory Financial Statements

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December 31, 2003 2002 (In Millions) ASSETS

Bonds .............................................................................................................................. $ 83,825 $ 83,456 Preferred stocks............................................................................................................. 404 180 Common stocks............................................................................................................. 5,226 4,291 Mortgage loans on real estate..................................................................................... 13,740 13,702 Real estate ...................................................................................................................... 474 585 Policy loans and premium notes................................................................................. 6,359 7,216 Cash and short term investments................................................................................ 9,922 8,583 Other invested assets.................................................................................................... 5,109 5,944

Total cash and invested assets ..................................................................................... 125,059 123,957

Premiums due and deferred......................................................................................... 520 437 Accrued investment income ........................................................................................ 1,344 1,346 Federal income tax recoverable- ................................................................................ 1,166 719 Other assets .................................................................................................................... 567 1,040 Separate account assets ................................................................................................ 66,310 59,113

TOTAL ASSETS ............................................................................................................ $ 194,966 $ 186,612

LIABILITIES AND SURPLUS

Liabilities Policy liabilities and insurance reserves:

Future policy benefits and claims .......................................................................... $ 87,264 $ 86,577 Advanced premiums ................................................................................................. 28 69 Policy dividends........................................................................................................ 2,485 2,450 Policyholders' account balances ............................................................................. 10,175 8,945

Notes payable and other borrowings......................................................................... 684 230 Asset valuation reserve................................................................................................ 2,139 2,131 Federal income tax payable......................................................................................... 497 126 Interest maintenance reserve....................................................................................... 1,220 1,084 Transfers to separate accounts due or accrued......................................................... (143) (141) Cash collateral held for loaned securities ................................................................. 12,798 14,320 Other liabilities .............................................................................................................. 4,290 6,215 Separate account liabilities.......................................................................................... 66,058 58,907

Total liabilities ................................................................................................................. 187,495 180,913

Capital and Surplus

Common capital stock and gross paid in and contributed surplus....................... 4,307 4,276 Surplus notes.................................................................................................................. 691 990 Special surplus fund..................................................................................................... 916 853 Unassigned surplus....................................................................................................... 1,557 (420)

Total capital and surplus .............................................................................................. 7,471 5,699

TOTAL LIABILITIES, CAPITAL AND SURPLUS ........................................... $ 194,966 $ 186,612

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA STATUTORY STATEMENTS OF OPERATIONS AND CHANGES IN SURPLUS

See Notes to Statutory Financial State ments

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Years Ended December 31, 2003 2002 (In Millions) REVENUE Premiums and annuity considerations.................................................................................. $ 13,859 $ 16,218 Net investment income ........................................................................................................... 7,291 7,020 Other income ............................................................................................................................ 724 890 Total Revenue ......................................................................................................................... 21,874 24,128

BENEFITS AND EXPENSES

Death benefits........................................................................................................................... 4,424 4,165 Annuity benefits....................................................................................................................... 4,133 3,268 Disability benefits .................................................................................................................... 622 597 Other benefits ........................................................................................................................... 90 90 Surrenders, benefits and fund withdrawals ......................................................................... 7,906 8,699 Net (decrease) increase in reserves....................................................................................... (83) 3,351 Commissions............................................................................................................................ 253 228 Net transfer from separate accounts ..................................................................................... (1,532) (1,640) Other expenses ......................................................................................................................... 2,024 1,827 Total Benefits and Expenses ............................................................................................... 17,837 20,585

Operating income before dividends and income taxes ...................................................... 4,037 3,543 Dividends to policyholders..................................................................................................... 2,431 2,575

Operating income before income taxes ................................................................................ 1,606 968 Income tax provision............................................................................................................... 273 261

Income from Operation ....................................................................................................... 1,333 707 Net Realized Capital Losses ................................................................................................ (102) (1,197)

NET INCOME (LOSS) ........................................................................................................ $ 1,231 $ (490)

CAPITAL AND SURPLUS

Capital and Surplus, beginning of year ........................................................................... $ 5,699 $ 6,420 Capital paid in ...................................................................................................................... - 2 Surplus paid in ...................................................................................................................... 31 - Release of special surplus fund......................................................................................... - 538

Change in common capital stock and gross paid in and contributed surplus ...... 31 540 Change in surplus notes ....................................................................................................... (299) 1 Change in special surplus fund .......................................................................................... 64 (614) Net Income (Loss) ................................................................................................................... 1,231 (490) Change in net unrealized capital gains (losses).................................................................. 752 (24) Change in non-admitted assets .............................................................................................. 371 (829) Change in asset valuation reserve......................................................................................... (8) 216 Dividends to stockholders ...................................................................................................... - (228) Change in net deferred taxes .................................................................................................. 36 582 Change due to valuation method........................................................................................... (345) 26 Other changes, net ................................................................................................................... (61) 99 Change in unassigned surplus ............................................................................................ 1,976 (648) CAPITAL AND SURPLUS, END OF YEAR ................................................................ $ 7,471 $ 5,699

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA STATUTORY STATEMENTS OF CASH FLOWS

See Notes to Statutory Financial Statements

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Years Ended December 31, 2003 2002 (In Millions) CASH FLOWS FROM OPERATING ACTIVITIES Premiums and annuity considerations.................................................................................. $ 14,011 $ 16,551 Net investment income ........................................................................................................... 7,059 6,630 Other income received ............................................................................................................ 651 873 Separate account transfers...................................................................................................... 1,528 1,692 Benefits and claims paid ......................................................................................................... (17,510) (18,362) Policyholders' dividends paid ................................................................................................ (2,397) (2,645) Federal income taxes ............................................................................................................... 7 (162) Other operating expenses ....................................................................................................... (1,970) (2,059)

Net cash provided by operating activities ....................................................................... 1,379 2,518

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from investments sold, matured, or repaid Bonds ..................................................................................................................................... 86,876 59,646 Stocks..................................................................................................................................... 791 2,102 Mortgage loans on real estate............................................................................................ 1,779 1,513 Real estate ............................................................................................................................. 146 32 Miscellaneous proceeds...................................................................................................... 3,620 1,347

Payments for investments acquired ...................................................................................... Bonds ..................................................................................................................................... (90,001) (67,417) Stocks..................................................................................................................................... (1,134) (2,537) Mortgage loans on real estate............................................................................................ (1,803) (2,034) Real estate ............................................................................................................................. (38) (44) Miscellaneous applications................................................................................................ (430) 5,692

Net cash used in investing activities .................................................................................. (194) (1,700)

CASH FLOWS FROM FINANCING ACTIVITIES

Payments on borrowed money .............................................................................................. 454 (701) Net proceeds from surplus paid in ........................................................................................ (300) 3 Dividends paid to stockholder............................................................................................... - (228)

Net cash provided by (used in) financing activities ...................................................... 154 (926)

Net increase (decrease) in cash and short-term investment ....................................... 1,339 (108) Cash and short-term investments, beginning of year......................................................... 8,583 8,691

CASH AND SHORT-TERM INVESTMENTS, END OF YEAR ............................ $ 9,922 $ 8,583

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

NOTES TO STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 2003 and 2002

F-7

1. BUSINESS

The Prudential Insurance Company of America (the "Company" or "Prudential Insurance") is a wholly owned subsidiary of Prudential Holdings, LLC ("Prudential Holdings"), which is a wholly owned subsidiary of Prudential Financial, Inc. ("Prudential Financial"). The principal products and services of the Company include individual life insurance, annuities, group insurance and retirement services.

2. SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES

The Company, domiciled in the state of New Jersey, prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the New Jersey Department of Banking and Insurance (the "Department"). Prescribed statutory accounting practices ("SAP") include publications of the National Association of Insurance Commissioners ("NAIC"), state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. NAIC SAP reporting differs from accounting principles generally accepted in the United States ("GAAP"). NAIC SAP is designed to address the concerns of regulators. GAAP is designed to meet the varying needs of the different users of financial statements. NAIC SAP is considered to be more conservative than GAAP in certain respects and attempts to determine at the financial statement date an insurer's ability to pay claims in the future. GAAP, on the other hand, stresses measurement of emerging earnings of a business from period to period, by matching revenue to expense.

A. Basis of presentation

The Company prepares its statutory financial statements in conformity with accounting practices prescribed or permitted by the State of New Jersey ("NJ SAP"). Effective January 1, 2001, the State of New Jersey required that insurance companies domiciled in the State of New Jersey prepare their statutory basis financial statements in accordance with the NAIC "Accounting Practices and Procedures Manual" ("NAIC SAP" or the "Manual"), subject to any deviations prescribed or permitted by the Department. The Company's statutory accounting policies differ from the Manual due to deviations prescribed and permitted by the Department.

These financial statements were prepared on an unconsolidated basis. NAIC SAP and NJ SAP differs from GAAP primarily as follows:

• the Commissioner's Reserve Valuation Method ("CRVM") is used for the majority of individual insurance reserves under SAP, whereas for individual insurance, policyholder liabilities are generally established using the net level premium method under GAAP. Policy assumptions used in the estimation of policyholder liabilities are generally prescribed under SAP, but are based upon actual company experience under GAAP;

• the Commissioner's Annuity Reserve Valuation Method ("CARVM") is used for the majority of individual deferred annuity reserves under SAP, whereas for individual deferred annuities, policyholder liabilities are generally equal to the full fund value under GAAP;

• policy acquisition costs are expensed when incurred under SAP rather than being deferred and charged against earnings over the periods covered by the related policies as under GAAP;

• surplus notes are recorded as a component of surplus under SAP rather than being recorded as a liability under GAAP;

• certain "non-admitted assets", such as fixed assets, prepaid pensions, and other prepaid assets, must be excluded under SAP through a charge against surplus;



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• investments in the common stock of the Company's wholly owned subsidiaries are accounted for using the equity method under SAP rather than consolidated as under GAAP;

• bonds are carried at amortized cost under SAP, with the exception of certain below investment grade bonds which are carried at the lower of amortized cost or market value. Under GAAP, bonds are categorized as "held to maturity", "available for sale" or "trading". Bonds categorized as "held to maturity" are carried at amortized cost, and bonds categorized as "available for sale" or "trading" are carried at fair value;

• certain balances, in addition to those mentioned above, are classified differently in the financial statements under SAP and GAAP;

• reinsurance reserve credits taken by ceding entities as a result of reinsurance contracts are netted against the ceding entity's policy and claim reserves and unpaid claims. Under GAAP, reinsurance recoverables are reported as assets;

• the Asset Valuation Reserve ("AVR") and Interest Maintenance Reserve ("IMR") are required for life insurance companies under SAP.

The following is a summary of accounting practices permitted by the Department and reflected in the Company's statutory financial statements:

• On February 19, 1993, the Company received written approval from the Department to issue Fixed Rate Surplus Notes ("the Notes"). Interest and principal payments on the Notes are pre-approved by the Department. NAIC practices provide for Insurance Commissioner pre-approval of every interest payment, and principal, at the time the payment is made. The Notes matured in April of 2003; however, the Company made interest payments during the year.

• The Company sold synthetic guaranteed investment contracts ("GICs") containing minimum investment related guarantees on qualified pension plan assets. The assets are owned by the trustees of such plan, who invest the assets under the terms of investment guidelines agreed to with the Company. The investment related guarantees may include a minimum rate of return on the underlying assets and/or a guarantee of liquidity to meet plan cash flow requirements. The Company, with the approval of the Department, reports in Exhibit 7 of its Annual Statement the net reserve for these contracts. The net reserve is calculated as the excess, if any, of the present value of liability cash flows over the market value of the assets. NAIC guidance allows for an interest rate of up to 5% to be used for the calculation of the present value of liability cash flows. The practice permitted by the Department requires a 4.5% interest rate to be used.

• On November 20, 2001, the Company received approval from the Department to report as admitted assets on the Company's financial statements notes issued by the Company's ultimate parent, Prudential Financial. The request for a permitted practice was made as a result of the liability that was established on the books of the Company as a result of policyholder credits provided in connection with the demutualization. Pursuant to Statement of Statutory Accounting Principles ("SSAP") No. 25, Accounting for and Disclosures about Transactions with Affiliates and Other Related Parties, loans or advances made by a reporting entity from its parent or principal owner shall be admitted if approval for the transaction has been obtained from the domiciliary commissioner and the loan or advance is determined to be collectible based on the parent or principal owner's independent payment ability.

• On December 19, 2001, the Company received approval from the Department to report overnight loans from Prudential Financial as admitted assets of the Company. In order to facilitate this process, the intercompany cash management arrangement, called the Enterprise Liquidity Account ("ELA"), was



F-9

created to enable the Company, as well as other insurance and non-insurance entities that are affiliated with Prudential Financial, to advance and receive funds overnight to/from Prudential Financial. If an intercompany advance from Prudential Financial (an ELA Investment) is outstanding at quarter end or at year-end, the advance will be classified as an intercompany cash equivalent in "Cash and short-term investments". However, as of December 31, 2003 and 2002, there was no activity in this account for the Company.

• In conjunction with the Company's reinsurance of the Closed Block (See Note 2.H for further information regarding the Closed Block formation) in 2003, the Company received approval on January 29, 2004 from the Department to report the initial Modified Coinsurance ("MODCO") reserves ceded to the reinsurer as "Other income" in the revenue section of the Summary of Operations. Although not specifically outlined in statutory guidance, industry practice is to report this amount in "Premium and annuity considerations" in the Summary of Operations.

• The Company records leasehold improvements as admitted assets. NJ SAP allows insurance companies domiciled in New Jersey to admit leasehold improvements as admitted assets. Prescribed statutory accounting practices, per the Manual, require non-admittance of leasehold improvements.

A reconciliation of the Company's net income and capital and surplus at December 31, between NAIC SAP and NJ SAP is shown below:

2003 2002 (In Millions) Net Income, per the Manual ..................................................... $ 1,231 $ (490) State Prescribed Practices (Income)........................................... - - State Permitted Practices (Income)............................................ - -

Net (Loss) Income, NJ SAP ....................................................... $ 1,231 $ (490)

Statutory Surplus, per the Manual ......................................... $ 7,472 $ 5,297 State Prescribed Practices:

Admit leasehold improvements............................................... 81 102 State Permitted Practices:

Report notes in Surplus............................................................. - 300

Statutory Surplus, NJ SAP ....................................................... $ 7,391 $ 5,699

The effects of the difference on surplus and net income between accounting practices prescribed or permitted by the Department and GAAP are as follows:

• GAAP net income is decreased by $55 million and increased by $490 million, to $1,176 million and $0 million in 2003 and 2002, respectively.

• GAAP equity is increased by $10,495 million and $10,926 million, to $17,886 million and $16,625 million in 2003 and 2002, respectively.

B. Use of estimates

The preparation of financial statements in conformity with NJ SAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates.



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C. Investments

Bonds, which consist of long-term bonds, are stated primarily at amortized cost in accordance with the valuation prescribed by the Department and the NAIC. For other than temporary impairments, the cost basis of the bond is written down to fair market value as a new cost basis and the amount of the write down is accounted for as a realized loss.

Preferred stocks include unaffiliated preferred stocks and investments in subsidiaries. Unaffiliated preferred stocks rated by the NAIC are classified into six categories ranging from highest quality preferred stocks to those in or near default. Preferred stocks rated in the top three categories are generally valued at amortized cost while preferred stock rated in the lower three categories are valued at lower of amortized cost or market. Investments in subsidiaries are accounted for using an equity method as defined in SSAP No. 46, Investments in Subsidiary, Controlled and Affiliated Entities ("SSAP No. 46"). Investments in non-insurance subsidiaries that have no significant ongoing operations other than to hold assets that are primarily for the direct or indirect benefit or use of the reporting entity or its affiliates are recorded based on the underlying equity of the respective entity's financial statements adjusted to a statutory basis of accounting and the resultant proportionate share of the subsidiary's adjusted surplus, adjusted for unamortized goodwill as provided for in SSAP No. 68, Business Combinations and Goodwill ("SSAP No. 68").

Common Stocks includes unaffiliated common stocks and investments in subsidiaries. Unaffiliated common stocks are carried at fair value. Investments in subsidiaries are accounted for using an equity method as defined in SSAP No. 46. Investments in insurance subsidiaries are recorded based on the underlying statutory equity of the respective entity's financial statements, and adjusted for unamortized goodwill when required by SSAP No. 68. Investments in non-insurance subsidiaries that have no significant ongoing operations other than to hold assets that are primarily for the direct or indirect benefit or use of the Company or its affiliates are recorded based on the underlying equity of the respective entity adjusted to a statutory basis of accounting and the resultant proportionate share of the subsidiary's adjusted surplus, adjusted for unamortized goodwill as provided for in SSAP No. 68. Investments in non-insurance subsidiaries that have significant ongoing operations beyond the holding of assets that are primarily for the direct or indirect benefit or use of the Company or its affiliates are recorded based on the audited GAAP equity of the investee. The subsidiaries' change in net assets, excluding capital contributions and distributions, is included in "Change in net unrealized gains (losses)". Dividends are recognized in net investment income when declared. The subsidiaries are engaged principally in the business of life insurance and annuities.

Mortgage loans on real estate are stated primarily at unpaid principal balances, net of unamortized discounts and impairments. Impaired loans are identified by management as loans in which a probability exists that all amounts due according to the contractual terms of the loan agreement will not be collected.

Interest received on impaired loans, including loans that were previously modified in a troubled debt restructuring, is generally 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 substantial doubts about collectibility. When this interest is deemed uncollectible, it is reversed against interest income on loans for 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 interest has been interrupted for a substantial period, a regular payment performance has been established. Interest income on non-performing loans is generally recognized on a cash basis.

Real estate includes properties occupied by the Company, properties held for production of income and properties held for sale. Properties occupied by the Company and properties held for the production of



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income are carried at cost less accumulated straight-line depreciation, encumbrances and permanent impairments in value. Properties held for sale are valued at lower of depreciated cost or fair value less encumbrances and disposition costs.

Policy loans and premium notes are stated at unpaid principal balances.

Cash includes cash on deposit and cash equivalents. Cash equivalents are short-term, highly liquid investments, with original maturities of three months or less, that are both readily convertible to known amounts of cash and so near their maturity that they represent insignificant risk of changes in value because of changes in interest rates.

Short-term investments include money market funds and highly liquid debt instruments purchased with a remaining maturity of twelve months or less, excluding those investments classified as cash equivalents. They are stated at amortized cost, which approximates fair value.

Other invested assets include primarily the Company's investment in joint ventures, limited liability companies and other forms of partnerships. These investments, except for limited partnerships with a minor ownership interest, are accounted for using an equity method as defined in SSAP No. 46. Limited partnerships in which the entity has a minor ownership interest are valued based on the underlying audited GAAP equity of the investee. The cost method is used for all other assets.

Derivatives used by the Company include swaps, futures, forwards and option contracts and may be exchange-traded or contracted in the over-the-counter market. Derivatives are recognized on the Statements of Admitted Assets, Liabilities and Capital and Surplus at their estimated fair value in "Other invested assets" or "Other liabilities". Effective January 1, 2003 the company adapted SSAP 86, "Accounting for Derivative Instruments and Hedging Activities", and applied it to all derivative instruments held as of that date. The Company typically uses "to be announced" ("TBA") securities in reverse dollar repurchase agreements. In 2003, these securities were accounted for as derivatives and reported in "Other invested assets" with the change in value reported as "Change in net unrealized capital gains (losses)". Net realized capital gains (losses) are recorded upon termination of the agreements. In 2002, these securities were carried at amortized cost and included in "Bonds".

Securities lending is a program whereby the Company loans securities to third parties, primarily major brokerage firms. Company and NAIC policies require a minimum of 102% and 105% of the fair value of the domestic and foreign loaned securities, respectively, to be separately maintained as collateral for the loans. Cash collateral received of $4,824 million is not restricted and is invested in "Bonds", "Short-term investments" and "Cash"; the offsetting collateral liability of $4,824 million is included in "Cash collateral held for loaned securities". Non-cash collateral of $366 million is not reflected in the Statements of Assets, Liabilities and Capital and Surplus.

Reverse repurchase agreements are agreements between a seller and a buyer, whereby the seller of securities sells and simultaneously agrees to repurchase the same or substantially the same securities from the buyer at an agreed upon price and, usually, at a stated date. These securities are carried at amortized cost and included in "Bonds". Reverse dollar repurchase agreements involve debt instruments that are pay-through securities collateralized with GNMA, FNMA and FHLMC and similar securities.

Loan-backed and structured securities holdings are recalculated utilizing a retrospective method with the exception of interest only bonds. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield is applied at the time of acquisition. Outstanding principal factors from the time of acquisition to adjustment date were used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used to affect the calculation of projected



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payments for pass through, interest only and principal only security types. Interest only bond adjustments are developed on a prospective basis with adjustments made for permanent impairments, if needed.

Net realized capital gains/(losses) are computed using the specific identification method. Costs of investments are adjusted for impairments considered other than temporary. Interest rate related gains and losses are transferred to the IMR and amortized into net investment income over the expected remaining life of the investments sold.

D. 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 primarily of common stocks, long-term bonds, real estate, mortgages and short-term investments. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. The liabilities include reserves established to meet withdrawal and future benefit payment contractual provisions. Investment risks associated with fair value changes are generally borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Mortality, policy administration and surrender charges on the accounts are included in "Other income."

The following table provides the Company's separate accounts premiums, considerations or deposits and reserves as of December 31:

2003 Nonindexed

Guarantee Less than/

equal to 4%

Nonindexed Guarantee

More than 4%

Nonguaranteed Separate Accounts Total

(In Millions) Premiums, considerations or deposits for year ended December 31, 2003....................... $ 656 $ - $ 5,078 $ 5,734

Reserves at December 31, 2003: For accounts with assets at:

Market value ................................................. $ 21,931 $ 386 $ 35,957 $ 58,274 Amortized cost.............................................. 499 - - 499

Total reserves .................................................... $ 22,430 $ 386 $ 35,957 $ 58,274

By withdrawal characteristics With market value adjustment ...................... $ 452 $ - $ - $ 452 At book value without market value

adjustment ................................................. 499 - - 499 At market value............................................. 2,828 386 35,294 38,508 Subtotal ......................................................... 3,779 386 35,294 39,459 Not subject to discretionary withdrawal ....... 18,651 - 663 19,314

Total reserves .................................................... $ 22,430 $ 386 $ 35,957 $ 58,773



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2002 Nonindexed


equal to 4%


More than 4%


(In Millions) Premiums, considerations or deposits for year ended December 31, 2002....................... $ 533 $ - $ 6,728 $ 7,261

Reserves at December 31, 2002: For accounts with assets at:

Market value ................................................. $ 20,800 $ 375 $ 31,620 $ 52,795 Amortized cost.............................................. 501 - - 501

Total reserves .................................................... $ 21,301 $ 375 $ 31,620 $ 53,296

By withdrawal characteristics With market value adjustment ...................... $ 451 $ - $ - $ 451 At book value without market value

adjustment ................................................. 501 - - 501 At market value............................................. 1,185 375 31,021 32,581 Subtotal ......................................................... 2,137 375 31,021 33,533 Not subject to discretionary withdrawal ....... 19,164 - 599 19,763

Total reserves .................................................... $ 21,301 $ 375 $ 31,620 $ 53,296

2002 Nonindexed


equal to 4%


More than 4%


(In Millions)

Transfers to separate accounts.......................... $ 533 $ - $ 6,652 $ 7,185 Transfers from separate accounts...................... 495 4 8,326 8,825 Net transfers to (from) separate accounts ......... $ 38 $ (4) $ (1,674) $ (1,640)

E. Policyholders' dividends

The amount of 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 statutory results and past experience of the Company, including investment income, net realized investment gains or losses over a number of years, mortality experience and other factors. Dividends declared by the Board of Directors, which have not been paid, are included in "Policy dividends" in the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.

F. Insurance revenue and expense recognition

Life premiums are recognized as income over the premium paying period of the related policies. Annuity considerations are recognized as revenue when received. Health premiums are earned ratably over the terms of the related insurance and reinsurance contracts or policies. Expenses incurred in connection with



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acquiring new insurance business, including acquisition costs such as sales commissions, are charged to operations as incurred.

G. Income taxes

The Company and its domestic subsidiaries file a consolidated federal income tax return with Prudential Financial Inc. The Internal Revenue Code (the "Code") taxes the Company on operating income after dividends to policyholders.

Deferred income taxes are recognized in accordance with SSAP No. 10, based upon enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. Income from sources outside the United States is taxed under applicable foreign statutes.

Pursuant to a tax allocation arrangement, total federal income tax expense is determined on a separate company basis . Members with losses record current tax benefits to the extent such losses are recognized in the consolidated federal and state and local provision.

H. Closed Block

On December 18, 2001 (the "date of demutualization") the Company converted from a mutual life insurance company to a stock life insurance company and became a direct, wholly owned subsidiary of Prudential Holdings, which became a direct wholly owned subsidiary of Prudential Financial. The demutualization was completed in accordance with the Company's Plan of Reorganization, which was approved by the Commissioner of Banking and Insurance of the State of New Jersey in October 2001.

On the date of demutualization, the Company established a closed block for certain individual life insurance policies and annuities issued by the Company in the United States and a separate closed block for participating individual life insurance policies issued by the Company's Canadian branch (collectively the "closed block"). The policies included in the closed block are specified individual life insurance policies and individual annuity contracts that were in force on the effective date of the Plan of Reorganization and on which the Company is currently paying or expects to pay experience-based policy dividends. Assets have been allocated to the closed block in an amount that has been determined to produce cash flows which, together with revenues from policies included in the closed block, are reasonably expected to be sufficient to support obligations and liabilities relating to these policies, including provision for payment of benefits, certain expenses, and taxes and to provide for continuation of the policyholder dividend scales in effect in 2000, if experience underlying such scale continues and for appropriate adjustments in such scales if the experience changes. The closed block assets, the cash flows generated by the closed block assets and the anticipated revenues form the policies in the closed block will benefit only the policyholders in the closed block. To the extent that, over time, cash flows from the assets allocated to the closed block and claims and other experience related to the closed block are, in the aggregate, more or less favorable than what was assumed when the closed block was established, total dividends paid to closed block policyholders in the future may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect in 2000 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to closed block policyholders and will not be available to stockholders. If the closed block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside of the closed block. The closed block will continue in effect as long as any policy in the closed block remains in-force.

I. Reclassification

Certain amounts in the prior year have been reclassified to conform to the current year presentation.



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3. INVESTED ASSETS

A. Bonds and stocks

The Company invests in both investment grade and non-investment grade public and private bonds. The Securities Valuation Office of the NAIC rates the bonds held by insurers for regulatory purposes and classifies investments into six categories ranging from highest quality bonds to those in or near default. The lowest three NAIC categories represent primarily high-yield securities and are defined by the NAIC as including any security with a public agency rating equivalent to B+ or B1 or less. Securities in these lowest three categories approximated 4.4% and 4.5% of the Company's bonds at December 31, 2003 and 2002, respectively.

The following tables provide additional information relating to bonds and unaffiliated preferred stocks as of December 31:

2003

Carrying Amount

Gross Unrealized

Gains

Gross Unrealized

Losses

Estimated Fair

Value (In Millions) Bonds U.S. government ................................................................... $ 7,139 $ 461 $ 17 $ 7,583 All other governments........................................................... 1,139 167 1 1,305 States, territories and possessions ........................................ 616 110 - 720 Political subdivisions of states, territories and

possessions........................................................................ 16 1 - 17 Special revenue and special assessment obligations and

all non guaranteed obligations of agencies ....................... 3,430 252 10 3,672 Public utilities ....................................................................... 6,284 629 23 6,889 Industrial and miscellaneous (unaffiliated)........................... 63,241 4,426 351 67,317 Credit tenant loans (unaffiliated) .......................................... 34 7 - 41 Parent, subsidiaries and affiliates .......................................... 1,926 81 1 2,006 Total bonds............................................................................ $ 83,825 $ 6,134 $ 403 $ 89,556

Unaffiliated Preferred Stocks Redeemable ........................................................................... 74 5 - 79 Non-redeemable .................................................................... 8 1 - 9 Total unaffiliated preferred stocks........................................ $ 82 $ 6 $ - $ 88



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2002

Carrying Amount

Gross Unrealized

Gains

Gross Unrealized

Losses

Estimated Fair

Value (In Millions) Bonds U.S. government .................................................................... $ 8,620 $ 739 $ 0 $ 9,359 All other governments............................................................ 902 120 25 997 States, territories and possessions ......................................... 716 134 8 842 Political subdivisions of states, territories and

possessions......................................................................... 24 0 2 22 Special revenue and special assessment obligations and

all non guaranteed obligations of agencies ........................ 6,535 327 3 6,859 Public utilities ........................................................................ 6,076 521 34 6,563 Industrial and miscellaneous (unaffiliated)............................ 59,857 3,951 655 63,153 Credit tenant loans (unaffiliated) ........................................... 37 7 0 44 Parent, subsidiaries and affiliates ........................................... 689 52 1 740 Total bonds............................................................................. $ 83,456 $ 5,851 $ 728 $ 88,579

Unaffiliated Preferred Stocks Redeemable ............................................................................ 130 4 1 133 Non-redeemable ..................................................................... 50 10 0 60 Total unaffiliated preferred stocks......................................... $ 180 $ 14 $ 1 $ 193

The carrying value and estimated fair value of bonds at December 31, 2003, categorized by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may prepay obligations with or without call or prepayment penalties.

Carrying Amount

Estimated Fair Value

(In Millions) Due in one year or less................................................... $ 5,429 $ 5,485 Due after one year through five years ......................... 23,840 25,078 Due after five years through ten years......................... 24,203 26,126 Due after ten years .......................................................... $ 28,038 $ 30,452

$ 81,510 $ 87,141

Mortgage-backed securities .......................................... 2,315 2,415

Total .................................................................................. $ 83,825 $ 89,556

Proceeds from the sale and maturity of bonds during 2003 and 2002 were $99,200 million and $65,125 million, respectively. Gross gains of $759 million and $630 million and gross losses of $285 million and $863 million were realized on such sales during 2003 and 2002, respectively.

Write-downs for impairments, which were deemed to be other than temporary, for bonds were $298 million and $569 million, for preferred stocks were $4 million and $47 million, and for unaffiliated common stocks were $62 million and $179 million for the years 2003 and 2002, respectively.

Additional information relating to the amortized cost and fair value of bond, unaffiliated preferred stock, and common stock lots held for which the estimated fair value had temporarily declined and remained below cost as of December 31, 2003 are shown below. The following table reflects the difference of cost and fair value for such lots and differs from gross unrealized losses reported in the previous table, which reflects the unrealized losses of aggregate lots of the identical bonds, unaffiliated preferred stocks, and common stocks, due to the varying costs associated with each lot purchased:



F-17

Declines For Less Than Twelve Months Declines For Greater Than Twelve Months Cost Fair Value Difference Cost Fair Value Difference

Bonds ...................................... $ 7,823 $ 7,608 $ (215) $ 1,416 $ 1,348 $ (68) Unaffiliated Preferred and Common Stocks ...................... 143 128 (15) 50 41 (9)

Total ........................................ $ 7,966 $ 7,736 $ (230) $ 1,466 $ 1,389 $ (77)

B. Mortgage Loans

The maximum and minimum lending rates for mortgage loans during 2003 were: Agricultural loans 18.0% and 3.8%; Commercial loans 7.2% and 3.2%. There were no purchase money mortgages loaned during the year. During 2002 the maximum and minimum lending rates were: Agricultural loans 7.9% and 4.5%; Commercial loans 8.5% and 2.8%

During 2003, the Company did not reduce interest rates of outstanding mortgage loans.

The maximum percentage of any one loan to the value of security at the time of the loan, exclusive of insured or guaranteed or purchase money mortgages was: 80% except loans made pursuant to title 17B, Chapter 20, Section 1h, Revised Statutes of New Jersey. The mortgage loans are geographically dispersed or distributed throughout the United States and Canada with the largest concentration in California (26.9%) and New York (9.1%).

Mortgages with interest more than 180 days past due totaled $28 million and interest past due on these mortgages totaled $2 million. Taxes, assessments, and other amounts advanced by the Company on account of mortgage loans outstanding are included in the mortgage loan total.

Impaired mortgage loans and the related allowance for losses at December 31 are as follows:

2003 2002 (In Millions)

Current year impaired loans with a related allowance for credit losses ........ $ 91 $ 110

Related allowance for credit losses...................................................................... $ 15 $ 14

Impaired mortgage loans without an allowance for credit losses................... $ 85 $ 140

Average recorded investment in impaired loans............................................. $ 213 $ 317

Interest income recognized during the period the loans were impaired ...... $ 13 $ 22 Amount of interest income recognized on a cash basis during the period

the loans were impaired ................................................................................... $ 13 $ 22 Activity in the allowance for credit losses for all mortgage loans is summa rized as follows:


Balance, January 1 .................................................................................................. $ 14 $ 62 Additions charged / (Reductions credited) to operations................................. 1 (48)

Balance, December 31 ........................................................................................... $ 15 $ 14

C. Debt restructuring

There were no restructured mortgage loans at December 31, 2003 or December 31, 2002.



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D. Loan-backed securities

The Company has elected to use the book value as of January 1, 1994 as the cost for applying the retrospective adjustment method to securities purchased prior to that date. Prepayment assumptions for single class and multi-class mortgage-backed/asset-backed securities were obtained from broker dealer survey values or internal estimates.

E. Repurchase agreements

The Company’s policies require a minimum of 100% of the fair value of securities purchased under repurchase agreements to be maintained as collateral. Securities subject to reverse repurchase agreements and dollar reverse repurchase agreements as of December 31:

2003

Book Value Fair Value Maturities

Weighted Average Interest Rate

(In Millions) Reverse repurchase agreements..........................$ 7,451 $ 7,846 28 Years 3.76% Dollar reverse repurchase agreements................................12 12 26 Years 5.53%

2002

Book Value Fair Value Maturities

Weighted Average Interest Rate

(In Millions) Reverse repurchase agreements..........................$ 7,763 $ 8,405 14 Years 4.85% Dollar reverse repurchase agreements................................2,003 2,010 27 Years 6.04%

F. Real estate

Impairment losses of $12 million and $14 million at December 31, 2003 and 2002 respectively, were recognized on real estate and are included in "Net realized capital losses". The impairments were the result of unfavorable market conditions and fair value was determined via internal appraisals.

G. Restricted assets and special deposits

Assets in the amount of $328 million and $334 million at December 31, 2003 and 2002, respectively, were on deposit with government authorities or trustees as required by law. Assets valued at $71 million and $119 million at December 31, 2003 and 2002, respectively, were maintained as compensating balances or pledged as collateral for bank loans and other financing agreements. Restricted stocks amounted to $8 million in 2003 and $14 million in 2002.

Restricted stocks by asset class at December 31 are as follows:

2003 2002 (In Millions) Common Stocks ................................................................$ 3 $ 7 Preferred Stocks ................................................................ 5 7

Total ................................................................................................$ 8 $ 14



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H. Accrued investment income

Due and accrued income was excluded from investment income on the following bases:

Mortgage loans - Interest overdue is accrued up to a maximum of three months. If this interest subsequently becomes greater than 180 days overdue it is non-admitted and therefore excluded from investment income. The total amount of non-admitted interest on mortgage loans at December 31, 2003 and 2002, was $1.7 million and $0.8 million, respectively.

Real estate - Rent that is in arrears for more than three months or the collection of rent that is uncertain is non-admitted and excluded from investment income. Non-admitted due and accrued rental income on real estate at December 31, 2003 and 2002, was $0.02 million and $0.01 million, respectively.

Bonds - Income is not accrued on bonds in or near default and is excluded from net investment income. Income not accrued on bonds at December 31, 2003 and 2002, were $80 million and $50 million, respectively.

I. Wash sales

In the course of the Company’s asset management, securities are sold and reacquired within 30 days of the sale date. The details by NAIC designation 3 or below of securities sold during 2003 and 2002, respectively, and reacquired within 30 days of the sale date are:

2003

Number of

Transactions

Book Value of

Securities Sold

Cost of Securities

Repurchased (In Millions) Gain/(Loss)

(In Millions) Bonds NAIC 3................................................................ 26 $ 6 $ 6 $ - NAIC 4................................................................ 8 4 4 - Total bonds................................................................ 34 $ 10 $ 10 $ -

2002

Number of

Transactions

Book Value of

Securities Sold

Cost of Securities

Repurchased (In Millions) Gain/(Loss)

(In Millions) Bonds NAIC 3................................................................ 53 $ 17 $ 17 $ - NAIC 4................................................................ 33 8 8 - Total bonds................................................................ 86 $ 25 $ 25 $ -

There were no wash sales for preferred stocks in 2003 and 2002.



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4. RESERVES FOR LIFE CONTRACTS AND DEPOSIT-TYPE CONTRACTS

A. Life and annuity contracts’ reserves

Claims reserves for life insurance and annuities include estimates of benefits on reported claims and those that are incurred but not reported.

Individual life insurance future policy benefit reserves are calculated using various methods, interest rates and mortality tables, which are prescribed by the Department and produce reserves that in the aggregate meet the requirements of state laws and regulations. Approximately 46% and 48% at December 31, 2003 and 2002, respectively, of individual life insurance reserves are determined using the net level premium method, or by using the greater of the net level premium method reserve or the policy cash value. About 54% and 52% of individual life insurance reserves are calculated according to the Commissioner’s Reserve Valuation Method (“CRVM”), or methods, which compare CRVM to policy cash values at December 31, 2003 and 2002, respectively.

For group life insurance, about 50% and 31% of the reserves at December 31, 2003 and 2002, respectively, are associated with extended death benefits. These reserves are primarily calculated using modified 1970 Group Life Disability Valuation Table at various interest rates. The remainder are unearned premium reserves (calculated using the 1960 Commissioner’s Standard Group Table), reserves for group life fund accumulations and other miscellaneous reserves.

Reserves for other supplementary benefits relative to the Company’s life insurance contracts are calculated using methods, interest rates, and tables appropriate for the benefit provided.

Reserves for individual deferred annuity contracts are determined based on the Commissioner’s Annuity Reserve Valuation Method. These account for 61% and 66% of the individual annuity reserves at December 31, 2003 and 2002, respectively. The remaining reserves are equal to the present value of future payments using prescribed annuity mortality tables and interest rates.

Reserves for annuities purchased under group contracts are equal to the present value of future payments, using prescribed mortality tables and interest rates. Reserves for other deposit funds reflect the contract deposit account or experience accumulation for the contract.

The reserve for guaranteed interest contracts, deposit funds and other liabilities without life contingencies equal either the present value of future payments discounted at the appropriate interest rate or the fund value, if greater.

The reserve for waiver of the deduction of deferred fractional premiums upon death of the insured, and for return of a portion of final premium for periods beyond the date of death is at least as great as that computed using the minimum standards of mortality, interest and valuation method, taking into account the aforementioned treatment of premiums. The Company does not promise surrender values in excess of the legally computed reserves.

Reserves on policies issued at or subsequently subject to a premium for extra mortality or otherwise issued on lives classed as substandard for the plan of contract issued or on special class lives, including paid-up insurance, are reported in “Future policy benefits and claims” in the Statutory Statements of Assets, Liabilities and Capital and Surplus according to mortality and interest bases applicable to the respective years of issue. In addition, an extra mortality reserve is held for ordinary life insurance policies classed as group conversions, contractual conversions from Ordinary term insurance, or otherwise substandard, equal to the excess, if any, over a basic reserve, of a substandard reserve based on mortality rates appropriately increased over the standard class mortality rates. For all other such policies, the extra mortality reserve is



F-21

one-half the appropriate net additional premium. Weekly premium policies issued at ages higher than true ages are valued according to the higher ages as are Ordinary second-to-die policies.

The reserve items above have been determined using accepted actuarial methods applied on a basis consistent with the appropriate Standards of Practice as promulgated by the Actuarial Standards Board and with accounting practices prescribed or permitted by the Department. These actuarial methods have been applied on a basis consistent with the prior year’s methods except for changes in bases of valuation as of December 31, 2003, resulting in a net $345 million increase in reserves. These changes in bases of valuation were approved by the Department. Additionally, as a result of these basis changes, premium deficiency reserves decreased by approximately $258 million, and additional reserves due to asset adequacy testing decreased by approximately $206 million, as of December 31, 2003.

As of December 31, 2003 and 2002, the Company had $22.4 billion and $18.7 billion, respectively, of insurance in force for which gross premiums for the life insurance benefits are less than the net premiums according to the standard of valuation required by the Department.

The Tabular Interest has been determined by formula as prescribed by the NAIC except for individual unmatured annuities, group universal life insurance and group annuity fund accumulation reserves, for which tabular interest has been determined from the basic data. The Tabular Less Actual Reserve Released has been determined by formula as prescribed by the NAIC. The Tabular Cost has been determined by formula as described in the instructions prescribed by the NAIC except for certain variable and universal life insurance policies for which tabular cost has been determined from the basic data for the calculation of policy reserves.

The following table is an analysis of annuity actuarial reserves and deposit liabilities by withdrawal characteristics as of December 31:

2003 2002

Amount Percentage

of Total Amount Percentage

of Total (In Millions) (In Millions) Subject to discretionary withdrawal-with adjustment

With market value adjustment......................................................$ 10,988 $ 10,418 At book value less surrender charges of 5% or more........................ 1,429 13% 1,419 13% At market value ......................................................................... 19,743 2% 16,481 2% Total with adjustment or at market value................................ 32,160 23% 28,317 20% At book value without adjustment (minimal or no charge or

adjustment)........................................................................... 16,284 19% 15,316 19% Not subject to discretionary withdrawal provision ................................ 37,415 43% 37,303 46% Total gross annuity reserves ................................................................ 85,859 100% 80,936 100%

Reinsurance Ceded............................................................................. - - Total net annuity reserves................................................................$ 85,859 $ 80,936

Reconciliation of total annuity actuarial reserves and deposit liabilities

Life and Accident & Health Annual Statement $ 41,712 $ 39,676 Separate Accounts Annual Statement............................................ 44,147 41,259

Total annuity actuarial reserves and deposit liabilities..............................$ 85,859 $ 80,936

B. Accident and health

Accident and health reserves represent the estimated value of the future payments, adjusted for contingencies and interest. The remaining reserves for active life reserves and unearned premiums are



F-22

valued using the preliminary term method, gross premium valuation method, or a pro rata portion of gross premiums. Reserves are also held for amounts not yet due on hospital benefits and other coverages.

The Company anticipates investment income as a factor in the premium deficiency calculation, in accordance with SSAP No. 54, Individual and Group Accident and Health Contracts.

Claim reserves for Group Long Term Disability are discounted at interest rates ranging from 3.5% to 6.75%, depending on the year in which the disability occurred. Group Long Term Disability reserves are discounted using the 2000 Company modification of the 1987 GLTD Table.

Reserves for Single Premium policies are discounted using 1958 CSO at an interest rate of 4.5% and 1971 IAM at an interest rate of 5.5%.

Active Life reserves for Long Term Care policies are discounted at interest rates ranging from 4.5% to 5.5% depending on the effective date of coverage of each participant.

Claim reserves for Long Term Care policies are discounted using 1983 GAM mortality at interest rates ranging from 4.5% to 5.5%, depending on the year of benefit incurral.

Claim reserves for Individual Disability are discounted using the 1964 Commissioner Disability Table at interest rates ranging from 3.5% to 6%, depending on year of coverage.

Claim reserves for other Individual Guaranteed Renewable Accident and Health policies are discounted at interest rates ranging from 3.5% to 6% from the assumed date of payment to the year incurred. The applicable interest rate depends on the year of coverage, except for Major Medical Expense and Extended Medical Expense, which use 3.5%.

Claim reserves for Individual Cancelable Accident and Health policies are discounted at 3.5% from the assumed date of payment to the year incurred.

The following table provides a reconciliation of the activity in the liability for unpaid claims and claim adjustment expenses for accident and health business (included in “Future policy benefits and claims”) at December 31:

2003 2002 (In Millions) Balance at January 1......................................................... $ 50 $ 161

Less reinsurance recoverables ................................................................11 119 Net balance at January 1 ................................................................ 39 42 Incurred related to:

Current year ................................................................................................465 468 Prior years ................................................................................................4 (5)

Total incurred ................................................................................................469 463 Paid related to:

Current year ................................................................................................143 150 Prior years ................................................................................................333 316

Total paid................................................................................................ 476 466 Net balance at December 31 ................................................................ 32 39

Plus reinsurance recoverables................................................................3 11

Balance at December 31................................................................$ 35 $ 50



F-23

The reinsurance recoverable balances include amounts attributable to the Company’s healthcare business sold to Aetna of $1 million and $9 million at December 31, 2003 and 2002, respectively.

The provision for claims and claim adjustment expenses decreased by $2 million in 2003 and 2002, primarily due to changes in claim costs trends in health care and a declining inforce.

5. REINSURANCE

The Company participates in reinsurance in order to provide greater diversification of business, provide additional capacity for future growth, limit the maximum net loss potential arising from large risks, and generally manage certain risks associated with its products. Life reinsurance is accomplished through various plans of reinsurance, primarily yearly renewable term and coinsurance.

Most of the Company’s ceded reinsurance is undertaken as indemnity reinsurance, which does not discharge the Company as the primary insurer. Ceded balances would represent a liability to the Company in the event the reinsurers were unable to meet their obligations to the Company under the terms of the reinsurance agreements. The Company periodically reviews the financial condition of its reinsurers and amounts recoverable there from, recording an allowance when necessary for uncollectible reinsurance.

There are no non-affiliated reinsurers that were owned in excess of 10% or controlled, either directly or indirectly, by the Company or by any representative, officer, trustee, or director of the Company.

6. NOTES PAYABLE AND OTHER BORROWINGS

Notes payable and other borrowings consisted of the following as of December 31:

2003

Debt Name Date Issued Kind of

Borrowing Original

Face Amount Carrying

Value Rate of Interest

(In Millions) Structured Principal Unit Redeemable Securities................................07/30/98 Debenture $ 393 $ 172 6.375% Prudential Funding, LLC (a wholly owned subsidiary)................................07/21/03 - 12/31/03 Cash $ 504 $ 504 0.94% -1.02% 2002

Debt Name Date Issued Kind of

Borrowing Original

Face Amount Carrying

Value Rate of Interest

(In Millions) Structured Principal Unit Redeemable Securities................................07/30/98 Debenture $ 393 $ 222 6.375%

Accrued interest expense of $8 million in 2003 and $7 million in 2002 is included in “Notes payable and other borrowings” in the Statutory Statements of Admitted Assets, Liabilities and Capital and Surplus. Interest paid for notes payable and other borrowings was $45 million and $74 million for the year ended December 31, 2003 and 2002, respectively.

Scheduled principal repayments on debt as of December 31, 2003 are as follows: $558 million in 2004, $57 million in 2005, $61 million in 2006, $0 in 2007 and 2008.



F-24

7. EMPLOYEE BENEFIT PLANS

A. Pension plans and other postretirement benefits

The Company has funded non-contributory defined benefit pension plans which cover substantially all of its employees. The Company also has several non-funded non-contributory defined benefit plans covering certain executives. For some employees, benefits are based on final average earnings and length of service, while other employees are based on a notional account balance that takes into consideration age, service and salary during their careers. The Company’s funding policy is to contribute annually an amount necessary to satisfy the Code contribution guidelines applicable to such plans. During 2003 and 2002, benefit payments under non-funded non-contributory defined benefit plans totaled $30 million and $11 million, respectively.

The Company provides certain life insurance and health care 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.

Postretirement benefits are accounted for in accordance with prescribed NAIC policy. The Company has elected to amortize its transition obligation over 20 years. During 2003 and 2002, funding of postretirement benefit obligations totaled $5 million and $3 million, respectively.

The status of these plans as of September 30, adjusted for fourth quarter activity, is summarized below:

Pension Benefits Other

Postretirement Benefits 2003 2002 2003 2002 (In Millions) Change in benefit obligation: Benefit obligation at the beginning of period ..... $ (6,539) $ (5,474) $ (2,170) $ (1,871) Service cost............................................................... (148) (139) (21) (19) Interest cost............................................................... (418) (411) (137) (137) Contributions by plan participants........................ - - (11) (8) Actuarial loss............................................................ (651) (372) (535) (332) Foreign currency exchange rate changes............. (1) - (4) (2) Benefits paid ............................................................. 602 370 168 160 Plan amendments ..................................................... (11) (218) 65 134 Transfer of postemployment benefits................... - - - (95) Business combinations, divestitures, curtailments, settlements and special termination benefits ................................................. 70 (1) (22) - Variable Annuity Purchase..................................... 3 68 - - Transfer from subsidiary ........................................ - (362) (1) -

Benefit obligation at end of period ....................... $ (7,093) $ (6,539) $ (2,668) $ (2,170)

Change in plan assets: Fair value of plan assets at beginning of period . $ 7,837 $ 8,628 $ 1,156 $ 1,343 Actual return on plan assets ................................... 1,381 (364) 127 (37) Foreign currency exchange rate changes............. - - - - Employer contribution ............................................ 30 11 5 3



F-25


Postretirement Benefits

2003 2002 2003 2002 (In Millions) Plan participants contribution................................ - - 11 8 Benefits paid ............................................................. (602) (370) (168) (160) Business combinations, divestitures and settlements................................................................. - - - - Variable Annuity Purchase..................................... (3) (68) - -

Fair value of plan assets at end of period............. $ 8,643 $ 7,837 $ 1,131 $ 1,157

Funded status: Funded status at end of period............................... $ 1,550 $ 1,298 $ (1,537) $ (1,013) Unrecognized transition liability........................... - - 29 58 Unrecognized prior service cost............................ 146 181 (42) 1 Unrecognized actuarial net gain ............................ 3,903 3,911 1,121 674 Effects of 4th quarter activity ................................ 6 6 1 2

Net amount recognized ........................................... $ 5,605 $ 5,396 $ (428) $ (278) Amounts recognized in the Statutory Statements of Admitted Assets, Liabilities and Capital and Surplus consist of: Prepaid benefit cost ................................................. $ 5,899 $ 5,707 $ - $ - Accrued benefit liability ......................................... (394) (371) (428) (278) Intangible asset......................................................... 100 60 - -

Net amount recognized ........................................... $ 5,605 $ 5,396 $ (428) $ (278)

Benefit obligation for non vested employees...... $ (8) $ (7) $ (191) $ (201)

The prepaid benefit cost at December 31, 2003 and 2002 of $5,899 million and $5,707 million, respectively, is a non-admitted asset and, therefore, is not reflected in total assets in the Statutory Statement of Admitted Assets, Liabilities and Capital and Surplus.

Pension plan assets consist primarily of equity securities, bonds, real estate and short-term investments, of which $7,216 million and $6,385 million are included in separate account assets and liabilities at December 31, 2003 and 2002, respectively.

In 2003 and 2002, the pension plan purchased annuity contracts from the Company for $3 million and $68 million, respectively. The approximate future annual benefit payment for the annuity contracts was $22 million and $20 million in 2003 and 2002, respectively.

The benefit obligation for pensions increased by $11 million in the year 2003 for an amendment related to a non-qualified pension obligation transferred from a subsidiary. The benefit obligation for pensions increased by $218 million in the year 2002 for an amendment related to the distribution of value to the pension plan upon demutualization of $200 million and $18 million related to Prudential Securities Inc. cash balance feature, which increased the amount of earnings considered pensionable.

Other postretirement plan assets consist of group and individual life insurance policies, common stocks, corporate debt securities, U.S. government securities, short-term investments and tax-exempt municipal debt. Plan assets include $404 million and $347 million of Company insurance policies at September 30, 2003 and 2002, respectively.



F-26

The benefit obligation for other postretirement benefits decreased by $65 million in the year 2003 for changes in the substantive plan made to medical, dental, and life insurance benefits. There was a reduction in cost related to changes in prescription drug program provisions of $32 million and a reduction of $34 million for cost sharing shifts to certain retirees for medical and dental benefits. There was an increase in cost of $1 million associated with providing Prudential Financial benefits to former Prudential Securities Inc. employees that transferred to Prudential Financial effective July 1, 2003. The benefit obligation for other postretirement benefits decreased by $134 million in the year 2002 for changes in the substantive plan made to medical and dental. The significant cost reduction related to changes in the prescription drug program for co-payments and cost sharing shifts to certain retirees for medical and dental benefits. Also in 2002, the Company approved the establishment of a new category of retiree called disabled retirees. Based on this new category, $95 million of medical and dental benefits were transferred from postemployment benefits to postretirement benefits.

The pension benefits were amended during the time period presented for 2002 to provide contractual termination benefits to certain plan participants whose employment had been terminated. Costs related to these amendments are reflected in the contractual termination benefits in the table below.

Net periodic benefit cost included in “Other expenses” in the Company’s Statements of Operations and Changes in Capital and Surplus for the years ended December 31, includes the following components:


Postretirement Benefits 2003 2002 2003 2002 (In Millions) Components of net periodic benefits costs: Service cost............................................................... $ 148 $ 139 $ 21 $ 19 Interest cost............................................................... 418 411 137 137 Expected return on plan assets............................... (855) (961) (83) (115) Amortization of transition amount........................ - - 6 19 Amortization of prior service cost ........................ 17 - - - Amortization of actuarial net (gain) loss............. 22 20 43 23 Special termination benefits................................... 44 - 13 - Curtailment gain ....................................................... 19 - 10 - Contractual termination benefits ........................... - 1 - -

Net periodic (benefit) cost...................................... $ (187) $ (390) $ 147 $ 83

The net change in surplus relating to the Company’s pension plans is a $45 million decrease and a $87 million decrease in 2003 and 2002, respectively, which considers the increases in the non-admitted prepaid pension asset and intangible asset of $231 million and $476 million in 2003 and 2002, respectively.

The net reduction to surplus relating to the Company’s postretirement benefit plans is $147 million and $83 million in 2003 and 2002, respectively.

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:


Postretirement Benefits 2003 2002 2003 2002 Weighted-average assumptions: Discount rate (beginning of period)...................... 6.50% 7.25% 6.50% 7.25% Discount rate (end of period)................................. 5.75% 6.50% 5.75% 6.50%



F-27


Postretirement Benefits

2003 2002 2003 2002 Rate of increase in compensation levels (beginning of period)............................................... 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% Expected return on plan assets............................... 8.75% 9.50% 7.75% 9.00% Health care cost trend rates .................................... - - 6.05-10.00% 6.40-10.00% Ultimate health care cost trend rate after gradual decrease until 2007.................................... - - 5.00% 5.00%

The expected rates of return for 2004 for pension benefits and other postretirement benefits are 8.75% and 7.75%, respectively.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point increase and decrease in assumed health care cost trend rates would have the following effects:

Other Postretirement

Benefits

Other Postretirement

Benefits

2003 2002 (In Millions) One percentage point increase Increase in total service and interest costs $ 11 $ 12 Increase in postretirement benefit obligation $ 226 $ 172

One percentage point decrease Decrease in total service and interest costs $ 11 $ 12 Decrease in postretirement benefit obligation $ 193 $ 153

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, 2003 and 2002 was $52 million and $84 million, respectively, and is included in “Other liabilities.”

The Company sponsors voluntary savings plans for employees (401(k) plans). The plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary for 2003 and 2002. The matching contributions by the Company included in “Other expenses” are $54 million and $55 million for 2003 and 2002, respectively.

8. INCOME TAXES

The components of the current income tax provision for the years ended December 31, are as follows:

2003 2002 Change (In Millions) Current year expense................................................................ $ 419 $ 323 $ 96 Tax credits.................................................................................. (37) (32) (5) Prior year taxes.......................................................................... (24) (5) (19) Current income taxes incurred................................................ $ 358 $ 286 $ 72



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2003 2002 Change (In Millions)

Less: Tax impact on realized capital losses.......................... (85) (25) (60) Income tax provision................................................................ $ 273 $ 261 $ 12

The Company's income tax expense (benefit) differs from the amount obtained by applying the statutory rate of 35% to pretax net income for the following reasons at December 31,:

2003 2002 Change (In Millions) Expected federal income tax expense................................... $ 667 $ (140) $ 807 Non taxable investment income ............................................. (233) (122) (111) Non deductible expenses ......................................................... (50) (19) (31) Tax credits.................................................................................. (37) (32) (5) Other amounts ........................................................................... (24) 17 (41)

Total incurred income tax expense........................................ $ 323 $ (296) $ 619

The components of the net deferred tax assets and (liabilities) at December 31, are as follows:

2003 2002 Change (In Millions) Total admitted and non-admitted deferred tax asset........... $ 4,920 $ 4,621 $ 299 Total deferred tax liability....................................................... (3,132) (2,765) (367) Net deferred tax asset............................................................... $ 1,788 $ 1,856 (68) Non-admitted portion of the deferred tax asset in accordance with SSAP No. 10 -Income Taxes, and as permitted by the Department .................................................. (623) (1,137) 514

Net admitted deferred tax asset .............................................. $ 1,165 $ 719 $ 447

The main components of deferred tax assets at December 31, are as follows:

2003 2002 Change (In Millions) Deferred tax assets resulting from book and tax differences in: Invested assets........................................................................... $ 2,700 $ 2,223 $ 477 Policyholder dividends............................................................. 653 619 34 Deferred acquisition costs ....................................................... 497 518 (21) Insurance reserves..................................................................... 436 556 (120) Employee benefits .................................................................... 379 316 63 Net operating loss carryforwards ........................................... - 79 (79) Other............................................................................................ 255 310 (55)

Total deferred tax assets .......................................................... $ 4,920 $ 4,621 $ 299



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The main components of deferred tax liabilities at December 31, are as follows:

2003 2002 Change (In Millions) Deferred tax liabilities resulting from book and tax differences in: Invested assets........................................................................... $ (2,778) $ (2,422) $ (356) Insurance reserves..................................................................... (156) (327) 171 Depreciation............................................................................... (13) (13) - Other............................................................................................ (185) (3) (182)

Total deferred tax liabilities .................................................... $ (3,132) $ (2,765) $ (367)

The Internal Revenue Service (the “Service”) has completed all examinations of the consolidated federal income tax returns through 1996. The Service has begun its examination of 1997 through 2001. Management believes sufficient provisions have been made for potential adjustments.



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The Company files a consolidated federal income tax return, which includes the following companies:

American Skandia Advisory Services, Inc American Skandia Fund Services, Inc. American Skandia Information Services & Technology Corp American Skandia Investment Services Incorporated American Skandia Marketing Inc. American Skandia, Inc. ARL Holdings, Inc. Braeloch Holdings Inc. Braeloch Successor Corporation Capital Agricultural Property Services, Inc. Colico II, Inc. COLICO, Inc. CommQuote, Inc. Corporate America Reality, Inc. Dryden Finance, Inc. Dryden Holdings Corporation Flor-Ag Corporation Gateway Holdings, Inc. Gibraltar Properties, Inc. Graham Depository Company II Graham Energy, Ltd. Graham Exploration, Ltd. Graham Resources, Inc. Graham Royalty, Ltd. Hochman & Baker Insurance Services, Inc. Hochman & Baker Investment Advisory Services, Inc. Hochman & Baker Securities, Inc. Hochman & Baker, Inc. Human Resource Finance Company, Inc. Merastar Corporation Merastar Insurance Company ML/MSB Acquisition, Inc. Mulberry Muni Investors DA No. 1, Inc Mulberry Muni Investors GLTC No. 1, Inc. Mulberry Muni Investors GLTC No. 2, Inc. Mulberry Muni Investors ILLT No. 1, Inc. Mulberry Muni Investors ILST No. 1, Inc. Mulberry Muni Investors PA No. 1, Inc. Mulberry Muni Investors PLAZIL No. 1, Inc. Mulberry Muni Investors PLAZIL No. 2, Inc. PB Financial Services, Inc. PBT Home Equity Holdings, Inc. PBT Mortgage Corporation PGA European Holdings, Inc. PGLH of Delaware, Inc. PGR Advisors I, Inc. PGR Advisors, Inc. PHMC Services Corporation PIC Realty Corporation

PIFM Holdco, Inc. PIM Foreign Investment, Inc. PIM Global Financial Strategies, Inc. PIM Investment, Inc. PIM Warehouse, Inc. PMCC Holding Company PREI Acquisition I, Inc. PREI Acquisition II, Inc. PREI International, Inc. ProVictor Property Fund VII Management, Inc. Pruco Life Insurance Company Pruco Life Insurance Company of New Jersey PRUCO, Inc. Prudential Agricultural Credit, Inc. Prudential Asset Management Holding Company Prudential Asset Resources, Inc. Prudential-Bache Energy Corp. Prudential-Bache Energy Production Inc. Prudential-Bache Futures Asia Pacific, Ltd. Prudential-Bache Global Markets Inc. Prudential-Bache International Banking Corporation Prudential-Bache Leasing Inc. Prudential-Bache Program Services Inc. Prudential-Bache Properties, Inc. Prudential-Bache Securities (Germany), Inc. Prudential-Bache Securities (Holland), Inc. Prudential-Bache Singapore Holdings, Ltd. Prudential-Bache Trade Services Prudential-Bache Transfer Agent Services, Inc. Prudential Carbon Mesa, Inc. Prudential Direct Insurance Agency of Alabama, Inc. Prudential Direct Insurance Agency of Massachusetts, Inc. Prudential Direct Insurance Agency of New Mexico, Inc. Prudential Direct Insurance Agency of Ohio, Inc. Prudential Direct Insurance Agency of Wyoming, Inc. Prudential Direct, Inc. Prudential Equity Group, Inc. Prudential Equity Investors, Inc. Prudential Financial, Inc. Prudential General Insurance Agency of Florida, Inc. Prudential General Insurance Agency of Kentucky, Inc. Prudential General Insurance Agency of Massachusetts, Inc. Prudential General Insurance Agency of Mississippi, Inc. Prudential General Insurance Agency of Nevada, Inc. Prudential General Insurance Agency of New Mexico, Inc.



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Prudential General Insurance Agency of Ohio, Inc. Prudential General Insurance Agency of Wyoming, Inc. Prudential Global Funding, Inc. Prudential Home Building Investors, Inc. Prudential Homes Corporation Prudential Huntoon Paige Associates, Ltd. Prudential IBH Holdco, Inc. Prudential Insurance Brokerage, Inc. Prudential International Insurance Holdings, Ltd. Prudential International Investments Corporation Prudential International Investments Services Corporation Prudential Investment Management, Inc. Prudential Investment Management Japan, Inc. Prudential Mortgage Capital Company, Inc. Prudential Mortgage Capital Holdings, Inc. Prudential Multifamily Mortgage, Inc. Prudential Mutual Fund Distributors, Inc. Prudential Private Placement Investors, Inc. Prudential Property and Casualty General Agency, Inc. Prudential Property and Casualty Insurance Company Prudential Realty Securities II, Inc. Prudential Referral Services, Inc. Prudential Relocation, Inc. Prudential Relocation of Texas, Inc. Prudential Securities (Japan) Ltd. Prudential Securities CMO Issuer Inc. Prudential Securities Futures Management Inc. Prudential Securities Group Inc. Prudential Securities Municipal Derivatives, Inc. Prudential Securities Secured Financing Corporation Prudential Securities Structured Assets, Inc. Prudential Select Holdings, Inc. Prudential Select Life Insurance Company of America Prudential Structured Settlement Company Prudential Texas Residential Services Corporation Prudential Timber Investments, Inc. Prudential Trust Company PTC Services, Inc. Residential Information Services, Inc. Residential Services Corporation of America Seaport Futures Management, Inc. Securitized Asset Sales, Inc. Skandia U.S., Inc. SMP Holdings, Inc. SVIIT Holdings, Inc. Texas Rio Grande Other Asset Group The Prudential Asset Management Company, Inc. The Prudential Assigned Settlement Services Corp. The Prudential Bank and Trust Company The Prudential Commercial Insurance Company The Prudential Commercial Insurance Company of New Jersey The Prudential General Insurance Company

The Prudential General Insurance Company of New Jersey The Prudential Home Mortgage Company, Inc. The Prudential Home Mortgage Securities Corp., Inc. The Prudential Property and Casualty Insurance Company of New Jersey The Prudential Property and Casualty New Jersey Holdings, Inc. The Prudential Property and Casualty NJ Insurance Brokerage, Inc. The Prudential Real Estate Affiliates, Inc. The Prudential Real Estate Financial Services of America, Inc. The Prudential Savings Bank, F.S.B. The Robert C. Wilson Company THI Holdings (Delaware), Inc. Titan Auto Agency, Inc. Titan Auto Insurance of Arizona, Inc. Titan Auto Insurance of Nevada, Inc. Titan Auto Insurance of New Mexico, Inc. Titan Auto Insurance of Pennsylvania, Inc. Titan Auto Insurance, Inc. of Colorado Titan Holdings Service Corporation Titan Indemnity Company Titan Insurance Company Titan Insurance Services, Inc. Titan National Auto Call Center, Inc. TMW Capital Corporation, Inc. TMW Investments, Inc. TMW Real Estate Management, Inc. U.S. High Yield Management Company, Inc. Vantage Casualty Insurance Company Victoria Automobile Insurance Company Victoria Financial Corporation Victoria Fire & Casualty Company Victoria Insurance Agency Victoria National Insurance Company Victoria Select Insurance Company Victoria Specialty Insurance Company W.I. of Florida, Inc. WHI of New York, Inc. Whitehall Holdings, Inc. Whitehall Insurance Agency of Texas, Inc. Whitehall of Indiana, Inc.

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9. CAPITAL AND SURPLUS AND SHAREHOLDERS’ DIVIDENDS RESTRICTIONS

A. Surplus notes

The following table provides information relating to the outstanding surplus notes as of December 31, 2003:

Date Issued

Interest Rate

Amount of Notes

Statement Value

Interest Paid

Current Year

Total Interest

Paid Accrued Interest

Date of Maturity

(In Millions) 07/01/95 8.30% 350 342 29 232 15 07/01/25 07/01/95 7.65% 250 249 19 153 10 07/01/07 07/15/95 8.10% 100 100 8 65 4 07/15/15 Totals $ 700 $ 691 $ 56 $ 450 $ 29

The surplus notes in the aggregate principal amounts of $350 million, $250 million, and $100 million, listed in the table above were distributed pursuant to Rule 144A under the Securities Act of 1933, underwritten by Goldman Sachs & Co., CS First Boston, Merrill Lynch & Co., J.P. Morgan Securities Inc., and Prudential Securities Incorporated (a former affiliate), and are administered by the Company as a registrar/paying agent.

The surplus notes are subordinate in right of payment to policy claims, prior claims, and senior indebtedness.

The surplus notes have the following restrictions on payment:

Each payment of principal and interest on the surplus notes may be made only with the prior written approval of the Commissioner, which approval will only be granted if, in the judgment of the Commissioner, the then current and projected financial condition of the Company warrants such payment; pursuant to applicable New Jersey law, any payment of principal or interest on the surplus notes may be only out of surplus, earnings, or profits of the Company.

If these conditions to payment are not met, the applicable scheduled maturity date or scheduled interest payment date will be extended until such time, if any, at which conditions are met. Interest will continue to accrue on any unpaid principal amount of the surplus notes during the period of any such extension. Interest will not accrue on interest.

B. Special surplus fund

In accordance with the requirements of various states, a special surplus fund has been established for contingency reserves of $916 million and $853 million as of December 31, 2003 and 2002, respectively.

C. Unassigned surplus at December 31:

2003 2002 (In Millions) Accumulated earnings.............................................................. $ 946 $ 146 Separate account surplus......................................................... 50 4 Unrealized gains (losses)......................................................... 624 (128) Provision for reinsurance......................................................... 20 5 Nonadmitted asset values ........................................................ (285) (657) Asset valuation reserve............................................................ 202 210

Total unassigned surplus......................................................... $ 1,557 $ (420)

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D. Capital

The Company has 500,000 common shares authorized, issued and outstanding with a total par value of $2.5 million at December 31, 2003.

E. Dividend restrictions

New Jersey insurance law provides that dividends or distributions may be declared or paid by the Company without prior regulatory approval only from unassigned surplus, as determined pursuant to statutory accounting principles, less unrealized capital gains and certain other adjustments. In addition, the Company must obtain approval from the New Jersey insurance regulator prior to paying a dividend if the dividend, together with other dividends or distributions made within the preceding twelve months, would exceed the greater of 10% of the Company’s surplus as of the preceding December 31. Based on 2003 earnings, there is capacity to pay a dividend of $933 million without prior approval in 2004. The laws regulating dividends of the Company’s insurance subsidiaries domiciled in other states are similar, but not identical to New Jersey’s.

The portion of profits on participating policies and contracts is limited pursuant to N.J.S.A. 17B:18-46. The limitations would not restrict the Company's ability to dividend the amounts referenced above.

10. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values presented below have been determined using available information and reasonable valuation methodologies. Considerable judgment is applied in interpreting data to develop the estimates of fair value. Accordingly, such estimates presented 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 fair values. For all other financial instruments presented in the table, the carrying value approximates estimated fair value.

Bonds and preferred stocks. Estimated fair values for bonds, including loan-backed securities and preferred stocks, other than private placement securities, are based on quoted market prices or estimates from independent pricing services. Fair values for private placement securities are estimated using a discounted cash flow model that 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 estimated fa ir value of certain non-performing private placement securities is based on amounts provided by state regulatory authorities.

Unaffiliated common stocks. Fair value of unaffiliated common stock is based on quoted market prices, where available, or prices provided by state regulatory authorities.

Mortgage loans on real estate. The estimated fair value of residential mortgages is primarily based upon the present value of the scheduled future cash flows discounted at the appropriate U.S. Treasury rates, adjusted for the current market and prepayment spreads. The fair value of the commercial mortgage and agricultural loan portfolio is primarily based upon the present value of the scheduled future cash flows discounted at the appropriate U.S. Treasury rate, and adjusted for current market spreads. For certain non-performing and other loans, fair value is based upon the value of the underlying collateral.

Policy loans and premium notes. 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 repayments.

Derivative financial instruments. The fair value of swap, forward, and option contracts are estimated on pricing models or markets quotes. The fair value of futures contracts are estimated based on market quotes.

Deposit-type 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

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interest rates being offered for similar contracts with maturities consistent with those of the contracts being valued. For individual deferred annuities, fair value approximates fund balance. For other deposit liabilities, fair value approximates carrying value.

Notes payable and other borrowings. The estimated fair value of notes payable is derived 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:

2003 2002

Carrying Amount


Carrying Amount


(In Millions) FINANCIAL ASSETS:

Bonds ......................................................................... $ 83,825 $ 89,556 $ 83,456 $ 88,579 Preferred stocks........................................................ 82 88 180 193 Unaffiliated Common stocks ................................. 2,282 2,282 1,500 1,500 Mortgage loans on real estate................................ 13,740 14,962 13,702 15,238 Policy loans and premium notes............................ 6,359 7,679 7,216 8,885 Cash and short term investments........................... 9,922 9,922 8,583 8,583 Separate account assets ........................................... 66,310 66,310 59,113 59,113 Derivative financial instruments ........................... 846 850 854 858

FINANCIAL LIABILITIES:

Deposit-type contracts............................................. $ 26,789 $ 27,503 $ 25,411 $ 26,207 Notes payable and other borrowings.................... 677 688 230 184 Separate account liabilities..................................... 66,058 66,058 58,907 58,907 Dollar and reverse repurchase agreements .......... 7,973 7,973 10,415 10,415 Derivative financial instruments ........................... 260 272 97 97

Excluded from preferred stock is affiliated preferred stock in the amount of $322 million at December 31, 2003. Excluded from common stock is affiliated common stock in the amount of $2,944 million and $2,791 million at December 31, 2003 and 2002, respectively.

11. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS

The Company, in connection with its insurance operations, uses derivatives to reduce market risks from changes in interest rates or foreign currency values, to alter interest rate or currency exposures arising from mismatches between assets and liabilities (including duration mismatches), to hedge against changes in the value of assets it anticipates acquiring and other anticipated transactions and commitments, and to replicate the investment performance of otherwise permissible investments. Insurance statutes restrict the Company's use of derivative securities primarily to hedging activities intended to offset changes in the market value of assets held, obligations, and anticipated transactions and prohibit the use of derivatives for speculation.

The Company, at inception, designates derivatives as either (1) a hedge of the fair value of a recognized asset or liability or unrecognized firm commitment (“fair value” hedge); (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); (3) a foreign-currency fair value or cash flow hedge (“foreign currency” hedge); (4) a hedge of the foreign currency exposure of a net investment in a foreign operation (“net investment” hedge) or (5) a derivative that does not qualify for hedge accounting. The majority of the Company’s derivatives fall under the last category and do not qualify for hedge accounting.

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To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged item. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship.

For the years ended December 31, 2003 and 2002, derivative instruments used by the Company in its cash flow, fair value and foreign currency and net investment hedge transactions included currency swaps, interest rate swaps, treasury futures, equity futures, options, credit default swaps, TBAs, and currency forwards. For those hedge transactions which meet the criteria of a highly effective hedge, the change in the carrying value or cash flow of the derivative was recorded in a manner consistent with the changes in the carrying value or cash flow of the hedged asset, liability, firm commitment or forecasted transaction. For hedges of net investments in a foreign operation, changes in fair value of such derivatives, to the extent effective, are recorded in “Change in net unrealized capital gains (losses)”. In measuring effectiveness, no component of the derivative’s gain or loss is excluded.

Upon termination of a derivative that qualified for hedge accounting, the gain or loss is reflected as an adjustment to the basis of the hedged item and is recognized in income consistent with the hedged item. There were no cash flow hedge transactions that were terminated for which the hedged item was not also terminated. In addition, there were no instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur. The Company did not have any hedging relationships that no longer qualified for hedge accounting due to ineffectiveness or designation.

To the extent that the Company chooses not to designate its derivatives for hedge accounting or designated derivatives no longer meet the criteria of an effective hedge, the changes in their fair value are included in “Change in net unrealized capital gains (losses)” without considering changes in fair value of the hedged assets or liabilities. Accruals of interest income, expenses and related cash flows on swaps are reported in "Net investment income". In addition, when the realized gains or losses on interest-rate related derivatives are recognized, they are amortized through the IMR. Prior to the adoption of SSAP No. 86, the changes in fair value of derivatives which were not designated for hedge accounting or that no longer met the criteria of an effective hedge were recorded to “Net realized capital gains or losses”.

Interest rate swaps are used by the Company to reduce market risks from changes in interest rates and to alter interest rate exposures arising from mismatches between assets and liabilities . 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. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counter-party at each due date. The fair value of swap agreements is estimated based on proprietary pricing models or market quotes.

Exchange-traded futures, including Treasury futures, and options are used by the Company to reduce market risks from changes in interest rates, to alter mismatches between the duration of assets in a portfolio and the duration of liabilities supported by those assets and to hedge against changes in the value of securities it anticipates acquiring or selling. In exchange-traded futures transactions, the Company agrees to purchase a specified number of contracts with other parties 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 with regulated futures commissions merchants who are members of a trading exchange. The fair value of exchange-traded futures and options is based on market quotes.

Treasury futures typically are used to reduce duration mismatches between assets and liabilities. Treasury futures change 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.

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Currency derivatives, including currency forwards and currency swaps, are used to reduce market risks from changes in currency values of investments denominated in foreign currencies that the Company either holds or intends to acquire or sell and to alter the currency exposures arising from mismatches between such foreign currencies and the U.S. Dollar.

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. 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.

Under currency forwards, the Company agrees with other parties upon delivery of a specified amount of an identified currency at an agreed upon 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.

The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is twenty years.

The Company uses TBA forward contracts to gain exposure to the investment risk and return of the mortgage-backed securities market and modify portfolio duration. TBA transactions enable the Company to achieve better diversification and to enhance the return on its investment portfolio. TBAs provide a more liquid and cost effective method of achieving these goals than purchasing or selling individual mortgage-backed pools. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date.

Credit default swaps are used by the Company in conjunction with bonds as replication synthetic asset transactions (“RSAT”). RSAT’s are derivative transactions entered into in conjunction with other investments in order to produce the investment characteristics of otherwise permissible investments. Credit default swaps used in RSAT’s are carried at amortized cost with premium income recorded to investment income over the life of the contract and loss payouts, if any, are recorded as realized losses.

During 2003, the average fair value of derivatives used for other then hedging purposes, which includes credit default swaps used in RSATs, was $1.3 million. As of December 31, 2003, the net fair value of these derivatives was $2.8 million, which includes of $3.1 million of assets and $0.3 million of liabilities.

The Company is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings. The credit exposure of interest rate swaps, currency forwards and currency swaps 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 are affected through a regulated exchange and positions are marked to market on a daily basis, with daily margin posting, 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 current credit exposure of the Company's derivative contracts is limited to the fair value at the reporting date. The Company manages credit risk by entering into transactions with creditworthy counterparties and by obtaining collateral where appropriate and customary. The Company also attempts to minimize exposure to credit risk through the use of various credit monitoring techniques. At December 31, 2003, substantially all of the net credit exposure from derivative contracts is 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 at each due date. Likewise, the Company affects exchange-traded futures and options through a regulated exchange 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 functions and periodic management review, including quarterly

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review of exposures by the Investment Committee of the Board of Directors, as well as monitoring for compliance with authorization and operating guidelines.

Derivative Financial Instruments at December 31, 2003 2002 (In Millions)

National Carrying Amount

Estimated Fair Value National

Carrying Amount


Options: Assets....................... $ 342 $ 11 $ 11 $ 233 $ 8 $ 8 Liabilities.................. - - - - - - Swaps: Assets....................... 1,574 40 42 1,064 100 101 Liabilities.................. 2,078 244 255 1,055 75 75 Forwards: Assets....................... 4,698 795 795 1,347 746 746 Liabilities.................. 1,153 16 16 848 22 22 Futures: Assets....................... 1,453 - 2 982 - 2 Liabilities.................. 724 - 1 234 - - Totals: Assets....................... $ 8,067 $ 846 $ 850 $ 3,626 $ 854 $ 857

Liabilities.................. $ 3,955 $ 260 $ 272 $ 2,137 $ 97 $ 97

During the normal course of its business, the Company utilizes financial instruments with off-balance sheet credit risk such as commitments and financial guarantees. Commitments include commitments to purchase mortgage loans and the unfunded portion of commitments to fund investments in private placement securities and limited partnerships. These mortgage loan and private commitments were $3,284 million and $1,899 million of which $2,897 million and $1,287 million remained available at December 31, 2003 and 2002, respectively. The Company also provides financial guarantees incidental to other transactions. 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, 2003 and 2002 financial guarantees issued by the Company were $599 million and $517 million, respectively.

12. 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, 2003, future minimum lease payments under non-cancelable operating leases are estimated as follows:

(In Millions) 2004 ................................................................$ 108 2005 ................................................................ 94 2006 ................................................................ 78 2007 ................................................................ 66 2008 ................................................................ 38 Remaining years after 2008................................ 100

Total................................................................$ 484

Rental expense incurred for the years ended December 31, 2003 and 2002 was approximately $74 million and $69 million, respectively.

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13. RELATED PARTY TRANSACTIONS

A. Service agreements

The Company has service agreements with Prudential Financial and certain subsidiaries of Prudential Financial. These subsidiaries include, along with their subsidiaries, PRUCO Inc. (includes Prudential Securities Group Inc. and Prudential Property and Casualty Holdings, Inc.), Prudential Asset Management Holding Company, Prudential International Investments Corporation and Prudential Japan Holdings, Inc. Under the agreements, the Company furnishes the services of its officers and employees, provides supplies, use of equipment, office space, accounts payable processing functions, makes operating advances, and other transactions in the normal course of business. The Company charges these companies based on the level of service provided and amounts advanced.

Prudential Financial and certain of its subsidiaries have service agreements with the Company. Under these agreements, the Company receives the services of the officers and employees of Prudential Financial, asset management services from Prudential Asset Management Holding Company and Prudential Financial makes tax payments under the consolidated federal income tax return for the Company. The Company is charged based on the level of service received and payments made on its behalf.

B. Net worth maintenance agreements

The Company has entered into a support agreement with Prudential Funding, LLC (“Funding”), a wholly owned subsidiary, under which it has agreed to cause Funding to maintain its tangible net worth, including subordinated debt, at not less than $1.00. As of December 31, 2003 and 2002, the tangible net worth of Funding was $7 million and $6 million, respectively. Since the inception of the agreement, no support payments have been required.

C. Derivative financial instruments

The counterparty for the majority of all derivative financial instruments is an affiliate of the Company, Prudential Global Funding, Inc. See Notes 2 and 11 for additional information on derivative financial instruments.

D. Other related party transactions

The Company had no transactions with affiliates involving more than half of one percent of total admitted assets of the Company:

At December 31, 2003 and 2002, the Company included amounts receivable from parents, subsidiaries and affiliates of $188 million and $240 million, respectively, in “Other assets” and amounts payable to parents, subsidiaries and affiliates of $357 million and $205 million, respectively, in “Other liabilities” in the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.

14. DISCONTINUED OPERATIONS

Healthcare Sale

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. Included in this transaction were the Co mpany’s managed medical care, point of service, preferred provider organization and indemnity health lines, dental business, as well as the Company’s Administrative Services Only (“ASO”) business.

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 which were valued at approximately $30 million at the date of closing. The sale resulted in a loss of $369 million, net of tax, in 1999. This loss

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included the difference between proceeds received and the carrying value of the business sold as well as the estimated cost of the medical loss ratio agreement (“the MLR agreement”), payments to Aetna related to the ASO business and other costs incurred associated with the sale, including those attributable to severance and termination benefits and facilities closure and system terminations.

The loss recorded in 1999 was reduced by $202 million in 2000, $16 million in 2001, $46 million in 2002, and $6 million in 2003. The reduction was attributable to (1) a reduction in the liability for the MLR in 2000 (upon the completion of the period covered by the MLR agreement and taking into consideration the costs incurred compared to those estimated in 1999) and the completion of the final settlement of the MLR Agreement in 2001, (2) reductions due to favorable developments in various remaining liabilities in 2002 and 2003, (3) tax benefits (recorded when MLR, ASO, and other costs are actually paid), and (4) a gain on the sale of the Health Venture Partners, Inc. joint venture related to the Company’s divested healthcare business.

The MLR agreement provided for the payments to Aetna in the event that medical loss ratios (i.e. incurred medical expense divided by earned premiums for covered business) 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 commenced within two years of that date with respect to claims that were incurred prior to August 6, 1999.

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 the completion of the sale of the business on August 6, 1999. The agreement requires 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 the Company. The operation of the business and the attendant risks, except for the existence of the MLR Agreement as discussed above, 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 ($2) million and ($7) million, respectively, for the twelve months ended December 31, 2003. Premiums and benefits ceded for the year 2002 were $27 million and $17 million, respectively. Premiums and benefits ceded for the year 2001 were $953 million and $820 million, respectively. At December 31, 2000 premiums and benefits ceded were $1,800 million and $1,419 million, respectively and premiums and benefits ceded for the period from August 6, 1999 through December 31, 1999 were $1,373 million and $1,139 million, respectively.

Web-based Voluntary Benefits

In the third quarter of 2002, the Company discontinued its web-based business for the workplace distribution of voluntary benefits. The loss for the year ended December 31, 2002 includes a pretax charge of approximately $14 million. Additionally, there was an impairment charge of $30 million on the Company's investment in a vendor of the distribution platform.

The Company’s group health operations and web based business for the workplace distribution of voluntary benefits have been classified as Discontinued Operations and have been reported consistently with the Company’s reporting of continuing operations.

15. PARTICIPATING POLICIES AND RETROSPECTIVELY RATED CONTRACTS

For the period ended December 31, 2003, premiums under group life participating policies were $566 million, or 18% of total group life premiums earned. The Company accounts for its policyholder dividends based on actual experience of the group and a predetermined dividend formula. The Company paid and accrued dividends in the amount of $49 million to policyholders.

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For the period ended December 31, 2003, premiums under group accident and health participating policies were $33 million, or 5% of total group accident and health premiums earned. The Company accounts for its policyholder dividends based on actual experience of the group and a pre-determined dividend formula. The Company paid and accrued dividends in the amount of $1 million to policyholders.

A retrospectively rated contract is one which has the final policy premium calculated based on the loss experience of the insured during the term of the policy (including loss development after the term of the policy) and the stipulated formula set forth in the policy. The periodic adjustments may involve either the payment of return premium to the insured or payment of an additional premium by the insured, or both, depending on experience. Retrospective rating features are found in the Company’s group life, and group accident and health contracts.

The Company estimates accrued retrospective premium adjustments through a mathematical approach using an algorithm of the Company’s underwriting rules and experience rating practices.

The amount of group life net premiums written by the Company for the period ended December 31, 2003 that are subject to retrospective rating features was $844 million. This represented 29% of the total net premiums written for group life.

The amount of group accident and health net premiums written by the Company for the period ended December 31, 2003 and 2002 that are subject to retrospective rating features was $46 million and $43 million, respectively. This represented 7% of the total net premiums written for group accident and health for the year ended December 31, 2003 and 2002.

16. PREMIUM AND ANNUITY CONSIDERATIONS DEFERRED AND UNCOLLECTED

The Company classifies gross life insurance premiums that are due and unpaid, net of loading, as deferred and uncollected. Loading represents the net impact of allowances for acquisition costs and other expenses as well as the differences in mortality and interest rate assumptions.

Deferred and uncollected life insurance premiums and annuity considerations as of December 31, were as follows:


Type Gross Net of

Loading Gross Net of

Loading Ordinary - New Business................... $ 3 $ 3 $ 3 $ 3 Ordinary - Renewal Business........... 107 101 138 127 Group Life ............................................ 13 13 170 170

17. SEPTEMBER 11 EVENTS

The Company’s gross losses from insurance claims arising in connection with the September 11, 2001 terrorist attacks totaled approximately $165 million. Losses recognized net of release of existing reserves and reinsurance recoveries totaled approximately $39 million. The insurance claims arise from group life and individual life claims. The Company suffered no material injury to personnel or properties used in our business operations from the attacks.

There are no material contingencies or unpaid claims or losses that have not yet been recognized. The losses shown above include a provision for unpaid claims.

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18. OTHER COMMITMENTS

The Company has established a dividend trust with an affiliate, The Prudential Bank and Trust Company, as Trustee. Assets with a par value of $562 million and a market value of $588 million as of December 31, 2003 are being held in this trust. These assets are being used solely to satisfy the liabilities associated with the guarantee of certain minimum amounts of annual and termination dividends (“Minimum Guaranteed Dividends”) as declared by the Company’s Board of Directors. The entire liability associated with this trust is included in policy dividends in the Statutory Statement of Admitted Assets, Liabilities and Capital and Surplus. The Company may substitute assets held in the trust subject to the terms of the Trust Agreement. The Company may only terminate the Trust Agreement (1) when there is no remaining trust property or (2) upon satisfaction of its obligation to pay each Minimum Guaranteed Dividend which became the subject of the trust. Assets remaining in the trust under condition (2) above revert to the Company.

As of December 31, 2002, there was $2,437 million of forward commitments not in the nature of derivative instruments included in Bonds in the Statutory Statement of Admitted Assets, Liabilities, and Capitaland Surplus. In 2003, these securities were accounted for as derivatives and reported in “Other invested assets” with the change in value reported as “change in net unrealized capital gains (losses).

19. CONTINGENCIES AND LITIGATION

A. Contingencies

The Company has entered into reinsurance agreements with The Prudential Life Insurance Company, Ltd., The Prudential Life Insurance Company of Korea, Ltd., and The Prudential Life Insurance Company of Taiwan, all of which are affiliates of the Company. In each case the Company has agreed to reinsure certain individual life insurance policies through a yearly renewable term contract. In addition, the Company has agreed to co-insure U.S. dollar-denominated policies sold by The Prudential Life Insurance Company, Ltd.

The Company has entered into an agreement with Prudential Select Life Insurance Company (“PSL”), an indirect wholly owned subsidiary, whereby the Company provides assumption reinsurance for all of PSL’s insurance policy obligations, other than obligations with respect to variable products, if specified events occur. Events that would trigger the agreement include (1) PSL fails certain financial tests, (2) the Company and its affiliates cease to control a majority of PSL’s outstanding voting stock, or (3) PSL fails to maintain a license to sell insurance in New Jersey. To date this agreement has not been triggered.

Dryden Holdings Corporation, a wholly owned subsidiary, is subject to a “Capitalization Condition” that requires it to hold assets having an aggregate principal amount of at least $1,100 million on July 23, 2006. The Company is obligated to satisfy any deficit in this "Capitalization Condition".

The Company has committed to repurchase securities under master repurchase agreements in the amount of $7,451 million and $8,405 million as of December 31, 2003 and 2002, respectively.

The Company has committed no surplus funds to reserve for the contingent arrangements mentioned above or any other contingent arrangement.

B. Assessments

In 1991, the Company established an insolvency liability for Executive Life Insurance Company (“Executive Life”). As of December 31, 2003 the amount of the liability was $100 million. In addition, as of December 31, 2003, the Company held a related asset of $93 million for premium tax credits for Executive Life.

There were no insolvencies during 2003 and 2002 that would result in a material guaranty fund assessment being charged to the Company.

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C. 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 addition, the Company retained all liabilities for the litigation associated with its discontinued healthcare business that existed at the date of closing with Aetna (August 6, 1999), or commenced within two years of that 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. In October 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. The policyholder actions have been resolved. The class actions brought by the physicians allege, among other things, breach of contract, violations of ERISA, violations of and conspiracy to violate RICO, and industry-wide conspiracy to defraud physicians by failing to pay under provider agreements and by unlawfully coercing providers to enter into agreements with unfa ir and unreasonable terms. The remedies sought include unspecified damages, restitution, disgorgement of profits, treble damages, punitive damages and injunctive relief. In September 2002, the court granted plaintiffs’ motion for certification of a nationwide class of physicians. The Company and the other managed care defendants have appealed the certification to the United States Court of Appeals for the Eleventh Circuit. That appeal is pending.

In November 2003, an action was commenced in the United States Bankruptcy Court for the Southern District of New York, Enron Corp v. J.P. Morgan Securities, Inc., et al., against approximately 100 defendants, including the Company and other affiliated entities, who invested in Enron's commercial paper. The compla int alleges that Enron's October 2001 prepayment of its commercial paper is a voidable preference under the bankruptcy laws and constitutes a fraudulent conveyance. The complaint alleges that the Company received prepayments of approximately $100 million.

The Company's litigation is subject to many uncertainties, and given its 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.

20. SUBSEQUENT EVENTS

On November 17, 2003, the Company announced that it had entered into a definite Stock Purchase and Asset Transfer Agreement with CIGNA Corporation (“CIGNA”) and certain of its affiliates, pursuant to which the Company will acquire CIGNA’s retirement business. On April 1, 2004, the Company completed the acquisition of the retirement business of CIGNA for a cash consideration of $2.1 billion. As per the Stock Purchase and Asset Transfer Agreement with CIGNA, the Company acquired as a wholly owned subsidiary, CIGNA Life Insurance Company, which holds the acquired retirement business.

On April 6, 2004, the Company requested the permission of the Department to distribute up to $600 million to Prudential Holdings. On April 23, 2004, the Department granted approval for the distribution, and a $590 million distribution was made on April 28, 2004 to Prudential Holdings.

index to financial statements of prudential insurance

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