Edgar Filing: PRUDENTIAL FINANCIAL INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

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

For the Transition Period from to

Commission File Number 001-16707

Prudential Financial, Inc.

(Exact Name of Registrant as Specified in its Charter)


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

751 Broad Street

Newark, New Jersey 07102

(973) 802-6000

(Address and Telephone Number of Registrant’s Principal Executive Offices)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of October 31, 2007, 452 million shares of the registrant’s Common Stock (par value $0.01) were outstanding. In addition, 2 million shares of the registrant’s Class B Stock, for which there is no established public trading market, were outstanding.

TABLE OF CONTENTS


			Page Number

PART I	FINANCIAL INFORMATION

	Item 1.	Financial Statements:	1
		Unaudited Interim Consolidated Statements of Financial Position as of September 30, 2007 and December 31, 2006	1
		Unaudited Interim Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006	2
		Unaudited Interim Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2007	3
		Unaudited Interim Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006	4
		Notes to Unaudited Interim Consolidated Financial Statements	5
		Unaudited Interim Supplemental Combining Financial Information:
		Unaudited Interim Supplemental Combining Statements of Financial Position as of September 30, 2007 and December 31, 2006	34
		Unaudited Interim Supplemental Combining Statements of Operations for the three months ended September 30, 2007 and 2006	35
		Unaudited Interim Supplemental Combining Statements of Operations for the nine months ended September 30, 2007 and 2006	36
		Notes to Unaudited Interim Supplemental Combining Financial Information	37
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	127
	Item 4.	Controls and Procedures	127

PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings	127
	Item 1A.	Risk Factors	128
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	129
	Item 6.	Exhibits	130

SIGNATURES			131

FORWARD-LOOKING STATEMENTS

Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon Prudential Financial, Inc. and its subsidiaries. There can be no assurance that future developments affecting Prudential Financial, Inc. and its subsidiaries will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (1) general economic, market and political conditions, including the performance and fluctuations of stock, real estate and other financial markets; (2) interest rate fluctuations; (3) reestimates of our reserves for future policy benefits and claims; (4) differences between actual experience regarding mortality, morbidity, persistency, surrender experience, interest rates or market returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (5) changes in our assumptions related to deferred policy acquisition costs, valuation of business acquired or goodwill; (6) changes in our claims-paying or credit ratings; (7) investment losses and defaults; (8) competition in our product lines and for personnel; (9) changes in tax law; (10) economic, political, currency and other risks relating to our international operations; (11) fluctuations in foreign currency exchange rates and foreign securities markets; (12) regulatory or legislative changes; (13) adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities, including in connection with our divestiture or winding down of businesses; (14) domestic or international military actions, natural or man-made disasters including terrorist activities or pandemic disease, or other events resulting in catastrophic loss of life; (15) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (16) effects of acquisitions, divestitures and restructurings, including possible difficulties in integrating and realizing the projected results of acquisitions; (17) changes in statutory or U.S. GAAP accounting principles, practices or policies; (18) changes in assumptions for retirement expense; (19) Prudential Financial, Inc.’s primary reliance, as a holding company, on dividends or distributions from its subsidiaries to meet debt payment obligations and continue share repurchases, and the applicable regulatory restrictions on the ability of the subsidiaries to pay such dividends or distributions; and (20) risks due to the lack of legal separation between our Financial Services Businesses and our Closed Block Business. Prudential Financial, Inc. does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2006 and in this Quarterly Report on Form 10-Q for discussion of certain risks relating to our businesses and investment in our securities.

Throughout this Quarterly Report on Form 10-Q, “Prudential Financial” and the “Registrant” refer to Prudential Financial, Inc., the ultimate holding company for all of our companies. “Prudential Insurance” refers to The Prudential Insurance Company of America, before and after its demutualization on December 18, 2001. “Prudential,” the “Company,” “we” and “our” refer to our consolidated operations before and after demutualization.

PART I— FINANCIAL INFORMATION

ITEM 1.

Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Financial Position

September 30, 2007 and December 31, 2006 (in millions, except share amounts)


	September 30, 2007			December 31, 2006
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost: 2007—$161,831; 2006—$158,828)	$	163,772		$	162,816
Held to maturity, at amortized cost (fair value: 2007—$3,411; 2006—$3,441)		3,473			3,469
Trading account assets supporting insurance liabilities, at fair value		14,612			14,262
Other trading account assets, at fair value		3,260			2,209
Equity securities, available for sale, at fair value (cost: 2007—$7,742; 2006—$6,824)		8,763			8,103
Commercial loans		28,336			25,739
Policy loans		9,214			8,887
Securities purchased under agreements to resell		111			153
Other long-term investments		5,483			4,745
Short-term investments		4,124			5,034

Total investments		241,148			235,417
Cash and cash equivalents		9,905			8,589
Accrued investment income		2,251			2,142
Reinsurance recoverables		2,149			1,958
Deferred policy acquisition costs		12,001			10,863
Other assets		17,636			17,834
Separate account assets		195,324			177,463

TOTAL ASSETS	$	480,414		$	454,266

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Future policy benefits	$	109,081		$	106,951
Policyholders’ account balances		82,658			80,652
Policyholders’ dividends		3,690			3,982
Reinsurance payables		1,593			1,458
Securities sold under agreements to repurchase		12,502			11,481
Cash collateral for loaned securities		8,642			7,365
Income taxes		2,968			3,108
Securities sold but not yet purchased		204			277
Short-term debt		13,484			12,536
Long-term debt		11,521			11,423
Other liabilities		15,770			14,678
Separate account liabilities		195,324			177,463

Total liabilities		457,437			431,374

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 9)
STOCKHOLDERS’ EQUITY
Preferred Stock ($.01 par value; 10,000,000 shares authorized; none issued)		—			—
Common Stock ($.01 par value; 1,500,000,000 shares authorized; 604,901,326 and 604,900,423 shares issued as of September 30, 2007 and December 31, 2006, respectively)		6			6
Class B Stock ($.01 par value; 10,000,000 shares authorized; 2,000,000 shares issued and outstanding as of September 30, 2007 and December 31, 2006, respectively)		—			—
Additional paid-in capital		20,788			20,666
Common Stock held in treasury, at cost (150,823,793 and 133,795,373 shares as of September 30, 2007 and December 31, 2006, respectively)		(9,004	)		(7,143	)
Accumulated other comprehensive income (loss)		(324	)		519
Retained earnings		11,511			8,844

Total stockholders’ equity		22,977			22,892

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	480,414		$	454,266

See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Operations

Three and Nine Months Ended September 30, 2007 and 2006 (in millions, except per share amounts)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2007			2006		2007		2006
REVENUES
Premiums	$	3,472		$	3,364	$	10,660	$	10,331
Policy charges and fee income		729			583		2,299		1,921
Net investment income		3,076			2,881		9,090		8,410
Realized investment gains (losses), net		(84	)		389		453		246
Asset management fees and other income		1,200			1,144		3,091		2,553

Total revenues		8,393			8,361		25,593		23,461

BENEFITS AND EXPENSES
Policyholders’ benefits		3,543			3,516		10,961		10,631
Interest credited to policyholders’ account balances		820			918		2,388		2,123
Dividends to policyholders		765			729		2,081		1,877
General and administrative expenses		2,145			1,725		6,473		5,813

Total benefits and expenses		7,273			6,888		21,903		20,444

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		1,120			1,473		3,690		3,017

Income tax expense		316			384		1,063		826

INCOME FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		804			1,089		2,627		2,191
Equity in earnings of operating joint ventures, net of taxes		67			50		200		146

INCOME FROM CONTINUING OPERATIONS		871			1,139		2,827		2,337
Income (loss) from discontinued operations, net of taxes		(4	)		66		6		54

NET INCOME	$	867		$	1,205	$	2,833	$	2,391

EARNINGS PER SHARE (See Note 6)
Financial Services Businesses
Basic:
Income from continuing operations per share of Common Stock	$	1.92		$	2.29	$	5.96	$	4.61
Income (loss) from discontinued operations, net of taxes		(0.01	)		0.14		0.01		0.11

Net income per share of Common Stock	$	1.91		$	2.43	$	5.97	$	4.72

Diluted:
Income from continuing operations per share of Common Stock	$	1.89		$	2.25	$	5.85	$	4.51
Income (loss) from discontinued operations, net of taxes		(0.01	)		0.13		0.01		0.11

Net income per share of Common Stock	$	1.88		$	2.38	$	5.86	$	4.62

Closed Block Business
Basic and Diluted:
Income (loss) from continuing operations per share of Class B Stock	$	(3.00	)	$	18.50	$	34.50	$	44.50
Income from discontinued operations, net of taxes		—			—		1.00		—

Net income (loss) per share of Class B Stock	$	(3.00	)	$	18.50	$	35.50	$	44.50

See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statement of Stockholders’ Equity

Nine Months Ended September 30, 2007 (in millions)


	Common Stock		Class B Stock		Additional Paid-in Capital			Retained Earnings			Common Stock Held In Treasury			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance, December 31, 2006	$	6	$	—	$	20,666		$	8,844		$	(7,143	)	$	519		$	22,892
Common Stock acquired		—		—		—			—			(2,250	)		—			(2,250	)
Stock-based compensation programs		—		—		123			(33	)		254			—			344
Conversion of Senior Notes		—		—		(1	)		(90	)		135			—			44
Cumulative effect of changes in accounting principles, net of taxes		—		—		—			(43	)		—			—			(43	)
Comprehensive income:
Net income		—		—		—			2,833			—			—			2,833
Other comprehensive loss, net of taxes		—		—		—			—			—			(843	)		(843	)

Total comprehensive income																		1,990

Balance, September 30, 2007	$	6	$	—	$	20,788		$	11,511		$	(9,004	)	$	(324	)	$	22,977

See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2007 and 2006 (in millions)


	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,833		$	2,391
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment (gains) losses, net		(453	)		(246	)
Policy charges and fee income		(664	)		(511	)
Interest credited to policyholders’ account balances		2,388			2,123
Depreciation and amortization		159			272
Change in:
Deferred policy acquisition costs		(955	)		(1,011	)
Future policy benefits and other insurance liabilities		1,942			1,917
Trading account assets supporting insurance liabilities and other trading account assets		(1,572	)		(1,059	)
Income taxes		(82	)		698
Securities sold but not yet purchased		(73	)		(58	)
Other, net		578			(2,495	)

Cash flows from operating activities		4,101			2,021

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available for sale		68,107			72,303
Fixed maturities, held to maturity		203			228
Equity securities, available for sale		4,091			3,039
Commercial loans		3,805			3,580
Policy loans		951			888
Other long-term investments		863			1,371
Short-term investments		12,729			8,924
Payments for the purchase/origination of:
Fixed maturities, available for sale		(69,999	)		(75,765	)
Fixed maturities, held to maturity		(165	)		(461	)
Equity securities, available for sale		(4,271	)		(3,242	)
Commercial loans		(6,014	)		(4,461	)
Policy loans		(957	)		(1,014	)
Other long-term investments		(1,351	)		(925	)
Short-term investments		(11,650	)		(9,264	)
Acquisition of businesses, net of cash acquired		—			724
Other, net		152			111

Cash flows used in investing activities		(3,506	)		(3,964	)

CASH FLOWS FROM FINANCING ACTIVITIES
Policyholders’ account deposits		15,358			17,505
Policyholders’ account withdrawals		(15,324	)		(15,392	)
Net change in securities sold under agreements to repurchase and cash collateral for loaned securities		1,431			2,584
Cash dividends paid on Common Stock		(83	)		(53	)
Net change in financing arrangements (maturities 90 days or less)		918			(796	)
Common Stock acquired		(2,250	)		(1,855	)
Common Stock reissued for exercise of stock options		175			117
Proceeds from the issuance of debt (maturities longer than 90 days)		3,803			2,357
Repayments of debt (maturities longer than 90 days)		(3,728	)		(1,058	)
Cash payments to or in respect of eligible policyholders		(2	)		(93	)
Excess tax benefits from share-based payment arrangements		88			51
Other, net		362			337

Cash flows from financing activities		748			3,704

Effect of foreign exchange rate changes on cash balances		(27	)		7
NET INCREASE IN CASH AND CASH EQUIVALENTS		1,316			1,768
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		8,589			7,799

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	9,905		$	9,567

See Notes to Unaudited Interim Consolidated Financial Statements

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements

1. BUSINESS AND BASIS OF PRESENTATION

Prudential Financial, Inc. (“Prudential Financial”) and its subsidiaries (collectively, “Prudential” or the “Company”) provide a wide range of insurance, investment management, and other financial products and services to both individual and institutional customers throughout the United States and in many other countries. Principal products and services provided include life insurance, annuities, mutual funds, pension and retirement-related services and administration, and investment management. In addition, the Company provides retail securities brokerage services indirectly through a minority ownership in a joint venture. The Company has organized its principal operations into the Financial Services Businesses and the Closed Block Business. The Financial Services Businesses operate through three operating divisions: Insurance, Investment, and International Insurance and Investments. The Company’s real estate and relocation services business as well as businesses that are not sufficiently material to warrant separate disclosure and businesses to be divested are included in Corporate and Other operations within the Financial Services Businesses. The Closed Block Business, which includes the Closed Block (see Note 4), is managed separately from the Financial Services Businesses. The Closed Block Business was established on the date of demutualization and includes the Company’s in force participating insurance and annuity products and assets that are used for the payment of benefits and policyholders’ dividends on these products, as well as other assets and equity that support these products and related liabilities. In connection with the demutualization, the Company has ceased offering these participating products.

Basis of Presentation

The Unaudited Interim Consolidated Financial Statements include the accounts of Prudential Financial, entities over which the Company exercises control, including majority-owned subsidiaries and minority-owned entities such as limited partnerships in which the Company is the general partner, and variable interest entities in which the Company is considered the primary beneficiary. The Unaudited Interim Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated.

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s audited Consolidated Financial Statements for the year ended December 31, 2006 included in the Company’s Current Report on Form 8-K dated October 4, 2007.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The most significant estimates include those used in determining deferred policy acquisition costs, goodwill, valuation of business acquired, valuation of investments including derivatives, future policy benefits including guarantees, pension and other postretirement benefits, provision for income taxes, reserves for contingent liabilities and reserves for losses in connection with unresolved legal matters.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Reclassifications

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

2. ACCOUNTING POLICIES AND PRONOUNCEMENTS

Share-Based Payments

The Company issues employee share-based compensation awards, under a plan authorized by the Board of Directors, that are subject to specific vesting conditions; generally the awards vest ratably over a three-year period, “the nominal vesting period,” or at the date the employee retires (as defined by the plan), if earlier. For awards granted between January 1, 2003 and January 1, 2006 that specify an employee vests in the award upon retirement, the Company accounts for those awards using the nominal vesting period approach. Under this approach, the Company records compensation expense over the nominal vesting period. If the employee retires before the end of the nominal vesting period, any remaining unrecognized compensation cost is recognized at the date of retirement.

Upon the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” on January 1, 2006, the Company revised its approach to the recognition of compensation costs for awards granted to retirement-eligible employees and awards that vest when an employee becomes retirement-eligible to apply the non-substantive vesting period approach to all new share-based compensation awards granted on or after January 1, 2006. Under this approach, all compensation cost is recognized on the date of grant for awards issued to retirement-eligible employees, or over the period from the grant date to the date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period.

If the Company had accounted for all share-based compensation awards granted after January 1, 2003 under the non-substantive vesting period approach, net income of the Financial Services Businesses for the three months ended September 30, 2007 would have been increased by $3 million, or $0.01 per share of Common Stock, on both a basic and diluted basis. Net income of the Financial Services Businesses for the nine months ended September 30, 2007 would have been increased by $7 million, or $0.02 per share of Common Stock, on both a basic and diluted basis. Net income of the Financial Services Businesses for the three and nine months ended September 30, 2006 would have been increased by $3 million and $9 million, or $0.01 and $0.02 per share of Common Stock, respectively, on both a basic and diluted basis.

Accounting Pronouncements Adopted

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes,” an Interpretation of FASB Statement No. 109. This interpretation prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. The Company adopted FIN No. 48 on January 1, 2007, which resulted in a decrease to its income tax liability and an increase to retained earnings of $61 million as of January 1, 2007.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The Company had the following amounts of unrecognized tax benefits as of the date of adoption of FIN No. 48:


	Unrecognized tax benefits		Unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate
	(in millions)
Amounts related to tax years prior to 2002	$	389	$	389
Amounts related to tax years 2002 and forward		175		94

Total Unrecognized Tax Benefits all years	$	564	$	483

The Company classifies all interest and penalties related to tax uncertainties as income tax expense. As of the date of adoption of FIN No. 48, the Company had recorded $23 million in liabilities for tax-related interest and penalties.

The Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by the Internal Revenue Service (“Service”) or other taxing jurisdictions. Audit periods remain open for review until the statute of limitations has passed. Generally, for tax years which produce net operating losses, capital losses or tax credit carryforwards (“tax attributes”), the statute of limitations does not close, to the extent of these tax attributes, until the tax year in which they are fully utilized. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to our liability for income taxes. Any such adjustment could be material to our results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. The Company does not anticipate any significant changes to its total unrecognized tax benefits within the next 12 months.

On January 26, 2006, the Service officially closed the audit of the Company’s consolidated federal income tax returns for the 1997 to 2001 periods. As a result of certain favorable resolutions, the Company’s consolidated statement of operations for the year ended December 31, 2005 included an income tax benefit of $720 million, reflecting a reduction in the Company’s liability for income taxes. The statute of limitations has closed for these tax years; however, there were tax attributes which were utilized in subsequent tax years for which the statute of limitations remains open.

In December 2006, the Service completed all fieldwork with regards to its examination of the consolidated federal income tax returns for tax years 2002-2003. The final report was submitted to the Joint Committee on Taxation for their review in April 2007. In July 2007, the Joint Committee returned the report to the Service for additional review of an industry issue regarding the methodology for calculating the dividends received deduction related to variable life insurance and annuity contracts. The Company is responding to the Service’s request for additional information. In August 2007, the Service subsequently issued Revenue Ruling 2007-54. Revenue Ruling 2007-54 included among other items, guidance on the methodology to be followed in calculating the dividends received deduction related to variable life insurance and annuity contracts. In September 2007, the Service released Revenue Ruling 2007-61. Revenue Ruling 2007-61 suspended Revenue Ruling 2007-54 and informed taxpayers that the U.S. Treasury Department and the Service intend to address through new regulations the issues considered in Revenue Ruling 2007-54, including the methodology to be followed in determining the dividends received deduction related to variable life insurance and annuity contracts. These activities had no impact on the Company’s 2007 results.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The Company’s affiliates in Japan file separate tax returns and are subject to audits by the local taxing authority. For tax years after April 1, 2004 the general statute of limitations is 5 years from when the return is filed. For tax years prior to April 1, 2004 the general statute of limitations is 3 years from when the return is filed.

In July 2006, the FASB issued FASB Staff Position (“FSP”) SFAS 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,” an amendment of FASB Statement No. 13. FSP SFAS 13-2 indicates that a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease would require a recalculation of cumulative and prospective income recognition associated with the transaction. FSP SFAS 13-2 is effective for fiscal years beginning after December 15, 2006. The Company adopted FSP SFAS 13-2 on January 1, 2007 and the adoption resulted in a net after-tax reduction to retained earnings of $84 million, as of January 1, 2007.

In September 2005, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts.” SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract, and is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The Company adopted SOP 05-1 on January 1, 2007 and the adoption resulted in a net after-tax reduction to retained earnings of $20 million, as of January 1, 2007.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.” This statement requires that servicing assets or liabilities be initially measured at fair value, with subsequent changes in value reported based on either a fair value or amortized cost approach for each class of servicing assets or liabilities. Under previous guidance, such servicing assets or liabilities were initially measured at historical cost and the amortized cost method was required for subsequent reporting. The Company adopted this guidance effective January 1, 2007, and elected to continue reporting subsequent changes in value using the amortized cost approach. Adoption of this guidance had no material effect on the Company’s consolidated financial position or results of operations.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments.” This statement eliminates an exception from the requirement to bifurcate an embedded derivative feature from beneficial interests in securitized financial assets. The Company has used this exception for investments the Company has made in securitized financial assets in the normal course of operations, and thus has not previously had to consider whether such investments contain an embedded derivative. The new requirement to identify embedded derivatives in beneficial interests will be applied on a prospective basis only to beneficial interests acquired, issued, or subject to certain remeasurement conditions after the adoption of the guidance. This statement also provides an election, on an instrument by instrument basis, to measure at fair value an entire hybrid financial instrument that contains an embedded derivative requiring bifurcation, rather than measuring only the embedded derivative on a fair value basis. If the fair value election is chosen, changes in unrealized gains and losses are reflected in the Consolidated Statements of Operations. The Company adopted this guidance effective January 1, 2007. The Company’s adoption of this guidance did not have a material effect on the Company’s consolidated financial position or results of operations.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not change which assets and liabilities are required to be recorded at fair value, but the application of this statement could change current practices in determining fair value. This statement is effective for fiscal years beginning after November 15, 2007 with early adoption permitted. The Company plans to adopt this guidance effective January 1, 2008. The Company is currently assessing the impact of SFAS No. 157 on the Company’s consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement provides companies with an option to report selected financial assets and liabilities at fair value, with the associated changes in fair value reflected in the Consolidated Statements of Operations. This statement is effective for fiscal years beginning after November 15, 2007 with early adoption permitted. The Company plans to adopt this guidance effective January 1, 2008. The Company is currently assessing the impact of SFAS No. 159 on its consolidated financial position and results of operations.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” an amendment of FASB Statements No. 87, 88, 106 and 132(R). This statement requires an employer on a prospective basis to recognize the overfunded or underfunded status of its defined benefit pension and postretirement plans as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. The Company adopted this requirement, along with the required disclosures, on December 31, 2006. SFAS No. 158 also requires an employer on a prospective basis to measure the funded status of its plans as of its fiscal year-end. This requirement is effective for fiscal years ending after December 15, 2008. The Company expects to adopt this guidance on December 31, 2008 and is currently assessing the impact that changing from a September 30 measurement date to a December 31 measurement date will have on the Company’s consolidated financial position and results of operations.

In June 2007, the AcSEC issued SOP 07-1, “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies.” This SOP provides guidance for determining whether an entity should apply the specialized industry accounting for investment companies (referred to as investment company accounting) in the preparation of its stand-alone financial reporting. SOP 07-1 also provides guidance for determining whether investment company accounting should be retained in the consolidated financial statements of the investment company’s parent, or in the application of the equity method to an equity interest in the investment company. The SOP is effective for fiscal years beginning after December 15, 2007, with early adoption permitted. In October 2007, the FASB proposed an indefinite delay of the effective dates of SOP 07-1 and, for entities that meet the definition of an investment company in SOP 07-1, of FSP FIN 46(R)-7, “Application of FASB Interpretation No. 46(R) to Investment Companies.” The Company continues to assess the impact of this SOP on its consolidated financial position and results of operations.

3. ACQUISITIONS AND DISPOSITIONS

Sale of Oppenheim Joint Ventures

On July 12, 2007, the Company sold its 50% interest in its operating joint ventures Oppenheim Pramerica Fonds Trust GmbH and Oppenheim Pramerica Asset Management S.a.r.l., which the Company accounted for

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

under the equity method, to its partner Oppenheim S.C.A. for $121 million. These businesses establish, package and distribute mutual fund products to German and other European retail investors. The Company recorded a pre-tax gain on sale of $37 million and related taxes of $22 million, of which $9 million was recorded in the second quarter of 2007 related to a change in the repatriation assumptions for this investment.

Acquisition of The Allstate Corporation’s Variable Annuity Business

On June 1, 2006 (the “date of acquisition”), the Company acquired the variable annuity business of The Allstate Corporation (“Allstate”) through a reinsurance transaction for $635 million of total consideration, consisting primarily of a $628 million ceding commission. The reinsurance arrangements with Allstate include a coinsurance arrangement associated with the general account liabilities assumed and a modified coinsurance arrangement associated with the separate account liabilities assumed. The assets acquired and liabilities assumed have been included in the Company’s Consolidated Financial Statements as of the date of acquisition. The Company’s results of operations include the results of the acquired variable annuity business beginning from the date of acquisition. Pro forma information for this acquisition is omitted as the impact is not material.

Acquisition of CIGNA Corporation’s (“CIGNA”) Retirement Business

The Company acquired the retirement business of CIGNA for cash consideration of $2.1 billion on April 1, 2004 and the results of this business have been included in the Company’s consolidated results since the date of acquisition. As an element of the acquisition, the Company had the right, beginning two years after the acquisition, to commute the modified-coinsurance-with-assumption arrangement related to the acquired defined benefit guaranteed-cost contracts in exchange for cash consideration from CIGNA. Effective April 1, 2006, the Company reached an agreement with CIGNA to convert the modified-coinsurance-with-assumption arrangement to an indemnity coinsurance arrangement, effectively retaining the economics of the defined benefit guaranteed-cost contracts for the life of the block of business. Upon conversion, the Company extinguished its reinsurance receivable and payable with CIGNA related to the modified-coinsurance-with-assumption arrangement. Concurrently, the Company assumed $1.7 billion of liabilities from CIGNA under the indemnity coinsurance arrangement and received the related assets.

Discontinued Operations

Income (loss) from discontinued businesses, including charges upon disposition, are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Equity sales, trading and research operations	$	(1	)	$	(3	)	$	(104	)	$	13
Real estate investments sold or held for sale		—			96			62			96
Philippine insurance operations		—			2			—			(13	)
Canadian intermediate weekly premium and individual health operations		(1	)		(5	)		(1	)		(11	)
Other		(2	)		7			4			(2	)

Income (loss) from discontinued operations before income taxes		(4	)		97			(39	)		83
Income tax expense (benefit)		—			31			(45	)		29

Income (loss) from discontinued operations, net of taxes	$	(4	)	$	66		$	6		$	54

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The nine months ended September 30, 2007 includes a $26 million tax benefit associated with a discontinued international business.

The Company’s Unaudited Interim Consolidated Statements of Financial Position include total assets and total liabilities related to discontinued businesses of $439 million and $215 million, respectively, as of September 30, 2007 and $450 million and $215 million, respectively, as of December 31, 2006. Charges recorded in connection with the disposals of businesses include estimates that are subject to subsequent adjustment. It is possible that such adjustments might be material to future net results of operations of a particular quarterly or annual period.

On June 6, 2007, the Company announced its decision to exit the equity sales, trading and research operations of the Prudential Equity Group (“PEG”). PEG’s operations were substantially wound down by June 30, 2007. Included within the table above for the three and nine months ended September 30, 2007 are $1 million and $107 million, respectively, of pre-tax losses incurred in connection with this decision, primarily related to employee severance costs. The results of PEG, which were previously included in the Financial Advisory segment, are reflected in discontinued operations for all periods presented. The Company does not anticipate significant additional costs will be incurred in connection with this decision.

Real estate investments sold or held for sale reflects the income from discontinued real estate investments.

4. CLOSED BLOCK

On the date of demutualization, Prudential Insurance established a Closed Block for certain individual life insurance policies and annuities issued by Prudential Insurance in the U.S. The recorded assets and liabilities were allocated to the Closed Block at their historical carrying amounts. The Closed Block forms the principal component of the Closed Block Business.

The policies included in the Closed Block are specified individual life insurance policies and individual annuity contracts that were in force on the effective date of the Plan of Reorganization and for which Prudential Insurance is currently paying or expects to pay experience-based policy dividends. Assets have been allocated to the Closed Block in an amount that has been determined to produce cash flows which, together with revenues from policies included in the Closed Block, are expected to be sufficient to support obligations and liabilities relating to these policies, including provision for payment of benefits, certain expenses, and taxes and to provide for continuation of the policyholder dividend scales in effect in 2000, assuming experience underlying such scales continues. To the extent that, over time, cash flows from the assets allocated to the Closed Block and claims and other experience related to the Closed Block are, in the aggregate, more or less favorable than what was assumed when the Closed Block was established, total dividends paid to Closed Block policyholders in the future may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect in 2000 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to Closed Block policyholders and will not be available to stockholders. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside of the Closed Block. The Closed Block will continue in effect as long as any policy in the Closed Block remains in force unless, with the consent of the New Jersey insurance regulator, it is terminated earlier.

The excess of Closed Block Liabilities over Closed Block Assets at the date of the demutualization (adjusted to eliminate the impact of related amounts in “Accumulated other comprehensive income (loss)”) represented the estimated maximum future earnings at that date from the Closed Block expected to result from

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

operations attributed to the Closed Block after income taxes. In establishing the Closed Block, the Company developed an actuarial calculation of the timing of such maximum future earnings. If actual cumulative earnings of the Closed Block from inception through the end of any given period are greater than the expected cumulative earnings, only the expected earnings will be recognized in income. Any excess of actual cumulative earnings over expected cumulative earnings will represent undistributed accumulated earnings attributable to policyholders, which are recorded as a policyholder dividend obligation. The policyholder dividend obligation represents amounts to be paid to Closed Block policyholders as an additional policyholder dividend unless otherwise offset by future Closed Block performance that is less favorable than originally expected. If the actual cumulative earnings of the Closed Block from its inception through the end of any given period are less than the expected cumulative earnings of the Closed Block, the Company will recognize only the actual earnings in income. However, the Company may reduce policyholder dividend scales in the future, which would be intended to increase future actual earnings until the actual cumulative earnings equaled the expected cumulative earnings. The Company recognized a policyholder dividend obligation of $680 million and $483 million as of September 30, 2007 and December 31, 2006, respectively, to Closed Block policyholders for the excess of actual cumulative earnings over the expected cumulative earnings. Additionally, net unrealized investment gains that have arisen subsequent to the establishment of the Closed Block were reflected as a policyholder dividend obligation of $1.218 billion and $1.865 billion as of September 30, 2007 and December 31, 2006, respectively, to be paid to Closed Block policyholders unless otherwise offset by future experience, with an offsetting amount reported in “Accumulated other comprehensive income (loss).” See the table below for changes in the components of the policyholder dividend obligation for the nine months ended September 30, 2007.

Closed Block Liabilities and Assets designated to the Closed Block, as well as maximum future earnings to be recognized from Closed Block Liabilities and Closed Block Assets, are as follows:


	September 30, 2007		December 31, 2006
	(in millions)
Closed Block Liabilities
Future policy benefits	$	50,963	$	50,705
Policyholders’ dividends payable		1,190		1,108
Policyholder dividend obligation		1,898		2,348
Policyholders’ account balances		5,553		5,562
Other Closed Block liabilities		12,063		10,800

Total Closed Block Liabilities		71,667		70,523


Closed Block Assets
Fixed maturities, available for sale, at fair value		46,869		46,707
Other trading account assets, at fair value		142		—
Equity securities, available for sale, at fair value		3,998		3,684
Commercial loans		7,004		6,794
Policy loans		5,399		5,415
Other long-term investments		1,067		922
Short-term investments		902		1,765

Total investments		65,381		65,287
Cash and cash equivalents		1,991		1,275
Accrued investment income		677		662
Other Closed Block assets		577		277

Total Closed Block Assets		68,626		67,501

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)


	September 30, 2007			December 31, 2006
	(in millions)
Excess of reported Closed Block Liabilities over Closed Block Assets		3,041			3,022
Portion of above representing accumulated other comprehensive income:
Net unrealized investment gains		1,165			1,844
Allocated to policyholder dividend obligation		(1,218	)		(1,865	)

Future earnings to be recognized from Closed Block Assets and Closed Block Liabilities	$	2,988		$	3,001

Information regarding the policyholder dividend obligation is as follows:


	Nine months ended September 30, 2007
	(in millions)
Balance, January 1, 2007	$	2,348
Impact on income before gains allocable to policyholder dividend obligation		197
Change in unrealized investment gains		(647	)

Balance, September 30, 2007	$	1,898

Closed Block revenues and benefits and expenses for the three and nine months ended September 30, 2007 and 2006 were as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2007			2006		2007			2006
	(in millions)
Revenues
Premiums	$	797		$	814	$	2,580		$	2,617
Net investment income		891			844		2,616			2,544
Realized investment gains (losses), net		117			160		310			196
Other income		15			11		39			38

Total Closed Block revenues		1,820			1,829		5,545			5,395

Benefits and Expenses
Policyholders’ benefits		910			894		2,933			2,898
Interest credited to policyholders’ account balances		34			34		105			105
Dividends to policyholders		726			697		1,985			1,803
General and administrative expenses		190			176		538			545

Total Closed Block benefits and expenses		1,860			1,801		5,561			5,351

Closed Block revenues, net of Closed Block benefits and expenses, before income taxes and discontinued operations		(40	)		28		(16	)		44
Income tax expense (benefit)		(32	)		28		(27	)		(5	)

Closed Block revenues, net of Closed Block benefits and expenses and income taxes, before discontinued operations		(8	)		—		11			49
Income from discontinued operations, net of taxes		—			—		2			—

Closed Block revenues, net of Closed Block benefits and expenses, income taxes and discontinued operations	$	(8	)	$	—	$	13		$	49

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

5. STOCKHOLDERS’ EQUITY

The Company has outstanding two classes of common stock: the Common Stock and the Class B Stock. The changes in the number of shares issued, held in treasury and outstanding are as follows for the periods indicated:


	Common Stock					Class B Stock
	Issued	Held In Treasury		Outstanding		Issued and Outstanding
	(in millions)
Balance, December 31, 2006	604.9	133.8		471.1		2.0
Common Stock acquired	—	24.3		(24.3	)	—
Stock-based compensation programs(1)	—	(4.9	)	4.9		—
Convertible senior notes(2)	—	(2.4	)	2.4		—

Balance, September 30, 2007	604.9	150.8		454.1		2.0

(1)	Represents net shares issued from treasury pursuant to the Company’s stock-based compensation program.

(2)	Represents shares issued in conjunction with the conversion of the November 2005 convertible senior notes, as discussed in Note 6 to the Unaudited Interim Consolidated Financial Statements.

Common Stock Held in Treasury

In November 2006, Prudential Financial’s Board of Directors authorized the Company to repurchase up to $3.0 billion of its outstanding Common Stock in calendar year 2007. The timing and amount of any repurchases under this authorization will be determined by management based upon market conditions and other considerations, and the repurchases may be effected in the open market, through derivative, accelerated repurchase and other negotiated transactions and through prearranged trading plans complying with Rule 10b5-1(c) of the Securities Exchange Act of 1934, as amended (“the Exchange Act”). The 2007 stock repurchase program supersedes all previous repurchase programs. During the nine months ended September 30, 2007, the Company acquired 24.3 million shares of its Common Stock at a total cost of $2.3 billion.

Comprehensive Income

The components of comprehensive income are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Net income	$	867		$	1,205		$	2,833		$	2,391
Other comprehensive income (loss), net of taxes:
Change in foreign currency translation adjustments		236			(59	)		85			139
Change in net unrealized investments gains (losses)(1)		(415	)		1,101			(955	)		(472	)
Change in pension and postretirement unrecognized net periodic benefit		3			—			27			—
Additional minimum pension liability adjustment		—			(3	)		—			(7	)

Other comprehensive income (loss)(2)		(176	)		1,039			(843	)		(340	)

Comprehensive income	$	691		$	2,244		$	1,990		$	2,051

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

(1)	Includes cash flow hedges of $(49) million and $7 million for the three months ended September 30, 2007 and 2006, respectively, and $(51) million and $(34) million for the nine months ended September 30, 2007 and 2006, respectively.

(2)	Amounts are net of taxes of $(229) million and $517 million for the three months ended September 30, 2007 and 2006, respectively, and $(443) million and $(280) million for the nine months ended September 30, 2007 and 2006, respectively.

The balance of and changes in each component of “Accumulated other comprehensive income (loss)” for the nine months ended September 30, 2007 are as follows (net of taxes):


	Accumulated Other Comprehensive Income (Loss)
	Foreign Currency Translation Adjustments		Net Unrealized Investment Gains (Losses)(1)			Pension and Postretirement Unrecognized Net Periodic Benefit (Cost)			Total Accumulated Other Comprehensive Income (Loss)
	(in millions)
Balance, December 31, 2006	$	122	$	1,171		$	(774	)	$	519
Change in component during period		85		(955	)		27			(843	)

Balance, September 30, 2007	$	207	$	216		$	(747	)	$	(324	)

(1)	Includes cash flow hedges of $(175) million and $(124) million as of September 30, 2007 and December 31, 2006, respectively.

6. EARNINGS PER SHARE

The Company has outstanding two separate classes of common stock. The Common Stock reflects the performance of the Financial Services Businesses and the Class B Stock reflects the performance of the Closed Block Business. Accordingly, earnings per share is calculated separately for each of these two classes of common stock.

Net income for the Financial Services Businesses and the Closed Block Business is determined in accordance with U.S. GAAP and includes general and administrative expenses charged to each of the respective businesses based on the Company’s methodology for the allocation of such expenses. Cash flows between the Financial Services Businesses and the Closed Block Business related to administrative expenses are determined by a policy servicing fee arrangement that is based upon insurance and policies in force and statutory cash premiums. To the extent reported administrative expenses vary from these cash flow amounts, the differences are recorded, on an after tax basis, as direct equity adjustments to the equity balances of the businesses.

The direct equity adjustments modify the earnings available to each of the classes of common stock for earnings per share purposes.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Common Stock

A reconciliation of the numerators and denominators of the basic and diluted per share computations is as follows:


	Three Months Ended September 30,
	2007					2006
	Income		Weighted Average Shares	Per Share Amount		Income		Weighted Average Shares	Per Share Amount
	(in millions, except per share amounts)
Basic earnings per share
Income from continuing operations attributable to the Financial Services Businesses	$	864				$	1,086
Direct equity adjustment		13					16

Income from continuing operations attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment	$	877	457.0	$	1.92	$	1,102	480.8	$	2.29

Effect of dilutive securities and compensation programs
Stock options			5.0					6.5
Deferred and long-term compensation programs			2.9					3.2
Convertible senior notes			—					—

Diluted earnings per share
Income from continuing operations attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment	$	877	464.9	$	1.89	$	1,102	490.5	$	2.25


	Nine Months Ended September 30,
	2007					2006
	Income		Weighted Average Shares	Per Share Amount		Income		Weighted Average Shares	Per Share Amount
	(in millions, except per share amounts)
Basic earnings per share
Income from continuing operations attributable to the Financial Services Businesses	$	2,716				$	2,197
Direct equity adjustment		42					51

Income from continuing operations attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment	$	2,758	463.0	$	5.96	$	2,248	487.8	$	4.61

Effect of dilutive securities and compensation programs
Stock options			5.5					6.9
Deferred and long-term compensation programs			2.8					3.1
Convertible senior notes			0.3					—

Diluted earnings per share
Income from continuing operations attributable to the Financial Services Businesses available to holders of Common Stock after direct equity adjustment	$	2,758	471.6	$	5.85	$	2,248	497.8	$	4.51

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

For the three months ended September 30, 2007 and 2006, 2.3 million and 2.9 million options, respectively, weighted for the portion of the period they were outstanding, with a weighted average exercise price of $91.70 and $76.13 per share, respectively, were excluded from the computation of diluted earnings per share because the options, based on application of the treasury stock method, were antidilutive. For the nine months ended September 30, 2007 and 2006, 1.7 million and 2.2 million options, respectively, weighted for the portion of the period they were outstanding, with a weighted average exercise price of $91.54 and $76.10 per share, respectively, were excluded from the computation of diluted earnings per share because the options, based on application of the treasury stock method, were antidilutive.

Convertible Senior Notes

The Company’s convertible senior notes provide for the Company to issue shares of its Common Stock as a component of the conversion of the notes. The $2 billion November 2005 issuance was called for redemption in May 2007, as discussed below. These notes were dilutive to earnings per share for the nine months ended September 30, 2007 by 0.3 million shares, weighted for the period prior to the conversion date, as the average market price of the Common Stock was above $90.00, the initial conversion price. The $2 billion December 2006 issuance will be dilutive to earnings per share if the average market price of the Common Stock for a particular period is above $104.21.

On May 21, 2007, the Company called for redemption the $2 billion of outstanding floating rate convertible senior notes issued in 2005. Prior to redemption by the Company, substantially all holders elected to convert their senior notes as provided under their terms. The senior notes required net settlement in shares; therefore, upon conversion, the holders received cash equal to the par amount of the senior notes surrendered for conversion plus accrued interest and shares of Prudential Financial Common Stock for the portion of the settlement amount in excess of the par amount. The settlement amount in excess of the par amount was based upon the excess of the closing market price of Prudential Financial Common Stock for a 10-day period defined under the terms of the senior notes, or $100.80 per share, over the initial conversion price of $90 per share. Accordingly, at conversion the Company issued 2,367,887 shares of Common Stock from treasury. The conversion had no impact on our results of operations and resulted in a net increase to shareholders’ equity of $44 million, reflecting the tax benefit associated with the conversion of the senior notes.

Class B Stock

Income (loss) from continuing operations per share of Class B Stock was $(3.00) and $18.50 for the three months ended September 30, 2007 and 2006, respectively, and $34.50 and $44.50 for the nine months ended September 30, 2007 and 2006, respectively.

The income (loss) from continuing operations attributable to the Closed Block Business available to holders of Class B Stock after direct equity adjustment for the three months ended September 30, 2007 and 2006 amounted to $(6) million and $37 million, respectively. The direct equity adjustment resulted in a decrease in the income from continuing operations attributable to the Closed Block Business applicable to holders of Class B Stock for earnings per share purposes of $13 million and $16 million for the three months ended September 30, 2007 and 2006, respectively. The income from continuing operations attributable to the Closed Block Business available to holders of Class B Stock after direct equity adjustment for the nine months ended September 30, 2007 and 2006 amounted to $69 million and $89 million, respectively. The direct equity adjustment resulted in a decrease in the income from continuing operations attributable to the Closed Block Business applicable to holders of Class B Stock for earnings per share purposes of $42 million and $51 million for the nine months ended September 30, 2007 and 2006, respectively. For the three and nine months ended September 30, 2007 and 2006, the weighted average number of shares of Class B Stock used in the calculation of earnings per share amounted to two million. There are no potentially dilutive shares associated with the Class B Stock.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

7. EMPLOYEE BENEFIT PLANS

The Company has funded and non-funded contributory and non-contributory defined benefit pension plans, which cover substantially all of its employees. For some employees, benefits are based on final average earnings and length of service, while benefits for other employees are based on an account balance that takes into consideration age, service and earnings during their career.

The Company provides certain health care and life insurance benefits for its retired employees, their beneficiaries and covered dependents (“other postretirement benefits”). The health care plan is contributory; the life insurance plan is non-contributory. Substantially all of the Company’s U.S. employees may become eligible to receive other postretirement benefits if they retire after age 55 with at least 10 years of service or under certain circumstances after age 50 with at least 20 years of continuous service.

Net periodic (benefit) cost included in “General and administrative expenses” includes the following components:


	Three Months Ended September 30,
	Pension Benefits						Other Postretirement Benefits
	2007			2006			2007			2006
	(in millions)
Components of net periodic (benefit) cost
Service cost	$	42		$	40		$	3		$	3
Interest cost		108			104			34			32
Expected return on plan assets		(192	)		(185	)		(23	)		(22	)
Amortization of prior service cost		7			6			(1	)		(2	)
Amortization of actuarial (gain) loss, net		7			12			4			4
Special termination benefits		1			1			—			—

Net periodic (benefit) cost	$	(27	)	$	(22	)	$	17		$	15


	Nine Months Ended September 30,
	Pension Benefits						Other Postretirement Benefits
	2007			2006			2007			2006
	(in millions)
Components of net periodic (benefit) cost
Service cost	$	126		$	120		$	9		$	9
Interest cost		324			312			102			96
Expected return on plan assets		(576	)		(555	)		(69	)		(66	)
Amortization of prior service cost		21			18			(3	)		(6	)
Amortization of actuarial (gain) loss, net		21			36			11			13
Special termination benefits		3			4			—			—

Net periodic (benefit) cost	$	(81	)	$	(65	)	$	50		$	46

On April 30, 2007, the Company transferred $1 billion of assets within the qualified pension plan under Section 420 of the Internal Revenue Code from assets supporting pension benefits to assets supporting retiree medical benefits. The transfer resulted in a reduction to the prepaid benefit for the qualified pension plan and an offsetting decrease in the accrued benefit liability for the postretirement plan with no net effect on stockholders’ equity on the Company’s consolidated financial position. The transfer had no impact on the Company’s consolidated results of operations, but will reduce the future cash contributions required to be made to the postretirement plan.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The Company made cash contributions during the nine months ended September 30, 2007 of $55 million to its postretirement plans and anticipates that it will make cash contributions for the remainder of 2007 of approximately $5 million. The Company does not anticipate making any contributions to the qualified pension plan in 2007 and continues to anticipate contributing approximately $80 million in 2007 to the non-qualified pension plans.

In July 2007, the Company established an irrevocable trust, commonly referred to as a “rabbi trust,” for the purpose of holding assets of the Company to be used to satisfy its obligations with respect to certain non-qualified retirement plans. Assets held in a rabbi trust are available to the general creditors of the Company in the event of insolvency or bankruptcy. The Company may from time to time in its discretion make contributions to the trust to fund accrued benefits payable to participants in one or more of the plans, and, in the case of a change in control of the Company, as defined in the trust agreement, the Company will be required to make contributions to the plans to fund the accrued benefits, vested and unvested, payable on a pretax basis to participants in the plans. The Company made a discretionary payment to the trust fund in July 2007 in the amount of $95 million.

8. SEGMENT INFORMATION

Segments

The Company has organized its principal operations into the Financial Services Businesses and the Closed Block Business. Within the Financial Services Businesses, the Company operates through three divisions, which together encompass eight reportable segments. The Company’s real estate and relocation services business as well as businesses that are not sufficiently material to warrant separate disclosure and businesses to be divested are included in Corporate and Other operations within the Financial Services Businesses. Collectively, the businesses that comprise the three operating divisions and Corporate and Other are referred to as the Financial Services Businesses.

Adjusted Operating Income

In managing the Financial Services Businesses, the Company analyzes the operating performance of each segment using “adjusted operating income.” Adjusted operating income does not equate to “income from continuing operations before income taxes and equity in earnings of operating joint ventures” or “net income” as determined in accordance with U.S. GAAP but is the measure of segment profit or loss used by the Company to evaluate segment performance and allocate resources, and, consistent with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” is the measure of segment performance presented below.

Adjusted operating income is calculated by adjusting each segment’s “income from continuing operations before income taxes and equity in earnings of operating joint ventures” for the following items, which are described in greater detail below:

•

realized investment gains (losses), net, and related charges and adjustments;

•

net investment gains and losses on trading account assets supporting insurance liabilities and changes in experience-rated contractholder liabilities due to asset value changes;

•

the contribution to income/loss of divested businesses that have been or will be sold or exited but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP; and

•

equity in earnings of operating joint ventures.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

These items are important to an understanding of overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and the Company’s definition of adjusted operating income may differ from that used by other companies. However, the Company believes that the presentation of adjusted operating income as measured for management purposes enhances the understanding of results of operations by highlighting the results from ongoing operations and the underlying profitability factors of the Financial Services Businesses.

Realized investment gains (losses), net, and related charges and adjustments. Adjusted operating income excludes realized investment gains (losses), net, except as indicated below. A significant element of realized investment gains and losses are impairments and credit-related and interest rate-related gains and losses. Impairments and losses from sales of credit-impaired securities, the timing of which depends largely on market credit cycles, can vary considerably across periods. The timing of other sales that would result in gains or losses, such as interest rate-related gains or losses, is largely subject to the Company’s discretion and influenced by market opportunities, as well as the Company’s tax profile. Trends in the underlying profitability of the Company’s businesses can be more clearly identified without the fluctuating effects of these transactions.

Charges that relate to realized investment gains (losses), net, are also excluded from adjusted operating income. The related charges relate to: policyholder dividends; amortization of deferred policy acquisition costs, valuation of business acquired (“VOBA”), unearned revenue reserves and deferred sales inducements; interest credited to policyholders’ account balances; reserves for future policy benefits; payments associated with the market value adjustment features related to certain of the annuity products we sell; and minority interest in consolidated operating subsidiaries. The related charges associated with policyholder dividends include a percentage of the net increase in the fair value of specified Gibraltar Life assets that is required to be paid as dividends to Gibraltar Life policyholders. Deferred policy acquisition costs, VOBA, unearned revenue reserves and deferred sales inducements for certain products are amortized based on estimated gross profits, which include net realized investment gains and losses on the underlying invested assets. The related charge for these items represent the portion of this amortization associated with net realized investment gains and losses. The related charges for interest credited to policyholders’ account balances relate to certain group life policies that pass back certain realized investment gains and losses to the policyholder. The reserves for certain policies are adjusted when cash flows related to these policies are affected by net realized investment gains and losses, and the related charge for reserves for future policy benefits represents that adjustment. Certain of our annuity products contain a market value adjustment feature that requires us to pay to the contractholder or entitles us to receive from the contractholder, upon surrender, a market value adjustment based on the crediting rates on the contract surrendered compared to crediting rates on newly issued contracts or based on an index rate at the time of purchase compared to an index rate at time of surrender, as applicable. These payments mitigate the net realized investment gains or losses incurred upon the disposition of the underlying invested assets. The related charge represents the payments or receipts associated with these market value adjustment features. Minority interest expense is recorded for the earnings of consolidated subsidiaries owed to minority investors. The related charge for minority interest in consolidated operating subsidiaries represents the portion of these earnings associated with net realized investment gains and losses.

Adjustments to “Realized investment gains (losses), net,” for purposes of calculating adjusted operating income, include the following:

Gains and losses pertaining to derivative contracts that do not qualify for hedge accounting treatment, other than derivatives used in the Company’s capacity as a broker or dealer, are included in “Realized investment gains (losses), net.” This includes mark-to-market adjustments of open contracts as well as periodic settlements. As discussed further below, adjusted operating income includes a portion of realized gains and losses pertaining to certain derivative contracts.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Adjusted operating income of the International Insurance segment and International Investments segment, excluding the global commodities group, reflect the impact of an intercompany arrangement with Corporate and Other operations pursuant to which the segments’ non-U.S. dollar denominated earnings in all countries for a particular year, including its interim reporting periods, are translated at fixed currency exchange rates. The fixed rates are determined in connection with a currency hedging program designed to mitigate the risk that unfavorable rate changes will reduce the segments’ U.S. dollar equivalent earnings. Pursuant to this program, the Company’s Corporate and Other operations execute forward currency contracts with third parties to sell the hedged currency in exchange for U.S. dollars at a specified exchange rate. The maturities of these contracts correspond with the future periods in which the identified non-U.S. dollar denominated earnings are expected to be generated. These contracts do not qualify for hedge accounting under U.S. GAAP and, as noted above, all resulting profits or losses from such contracts are included in “Realized investment gains (losses), net.” When the contracts are terminated in the same period that the expected earnings emerge, the resulting positive or negative cash flow effect is included in adjusted operating income (gains of $19 million and $12 million for the three months ended September 30, 2007 and 2006, respectively, and gains of $65 million and $26 million for the nine months ended September 30, 2007 and 2006, respectively). As of September 30, 2007 and December 31, 2006, the fair value of open contracts used for this purpose was a net asset of $34 million and $105 million, respectively.

The Company uses interest and currency swaps and other derivatives to manage interest and currency exchange rate exposures arising from mismatches between assets and liabilities, including duration mismatches. For the derivative contracts that do not qualify for hedge accounting treatment, mark-to-market adjustments of open contracts as well as periodic settlements are included in “Realized investment gains (losses), net.” However, the periodic swap settlements, as well as other derivative related yield adjustments, are included in adjusted operating income to reflect the after-hedge yield of the underlying instruments. Adjusted operating income includes gains of $18 million and $17 million for the three months ended September 30, 2007 and 2006, respectively, and gains of $61 million and $37 million for the nine months ended September 30, 2007 and 2006, respectively, due to periodic settlements and yield adjustments of such contracts.

Certain products the Company sells are accounted for as freestanding derivatives or contain embedded derivatives. Changes in the fair value of these derivatives, along with any fees received or payments made relating to the derivative, are recorded in “Realized investment gains (losses), net.” These “Realized investment gains (losses), net” are included in adjusted operating income in the period in which the gain or loss is recorded. In addition, the changes in fair value of any associated derivative portfolio that is part of an economic hedging program related to the risk of these products (but which do not qualify for hedge accounting treatment under U.S. GAAP) are also included in adjusted operating income in the period in which the gains or losses on the derivative portfolio are recorded. Adjusted operating income includes gains of $16 million and $14 million for the three months ended September 30, 2007 and 2006, respectively, and gains of $44 million and $4 million for the nine months ended September 30, 2007 and 2006, respectively related to these products and any associated derivative portfolio.

The Company invests in fixed maturities that, in addition to a stated coupon, provide a return based upon the results of an underlying portfolio of fixed income investments and related investment activity. The Company accounts for these investments as available for sale fixed maturities containing embedded derivatives that are marked to market through “Realized investment gains (losses), net,” based upon the change in value of the underlying portfolio. Adjusted operating income includes cumulative realized investment losses, and recoveries of such losses, on the embedded derivative in the period they occur. Cumulative realized investment gains above the original fair value of the embedded derivative are deferred and amortized into adjusted operating income over the remaining life of the investment. Adjusted operating income includes losses of $72 million and gains of $1 million for the three months ended September 30, 2007 and 2006, respectively, and losses of $69 million and $8 million for the nine months ended September 30, 2007 and 2006, respectively, related to these embedded derivatives.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Adjustments are also made for the purposes of calculating adjusted operating income for the following items:

Within the Company’s Asset Management segment, its commercial mortgage operations originate loans for sale, including through securitization transactions. The “Realized investment gains (losses), net” associated with these loans, including related derivative results and retained mortgage servicing rights, are a principal source of earnings for this business and are included in adjusted operating income. Also within the Company’s Asset Management segment, its proprietary investing business makes investments for sale or syndication to other investors or for placement or co-investment in the Company’s managed funds and structured products. The “Realized investment gains (losses), net” associated with the sale of these proprietary investments are a principal source of earnings for this business and are included in adjusted operating income. In addition, “Realized investment gains (losses), net” from derivatives used to hedge certain foreign currency-denominated proprietary investments are included in adjusted operating income. Net realized investment losses of $47 million and gains of $3 million related to these businesses were included in adjusted operating income for the three months ended September 30, 2007 and 2006, respectively. Net realized investment gains of $11 million and $75 million related to these businesses were included in adjusted operating income for the nine months ended September 30, 2007 and 2006, respectively.

The Company’s Japanese insurance operations invest in “dual currency” fixed maturities and loans, which pay interest in U.S. dollars, while the principal is payable in Japanese yen. For fixed maturities that are categorized as held to maturity, and loans where the Company’s intent is to hold them to maturity, the change in value related to foreign currency fluctuations associated with the U.S. dollar interest payments is recorded in “Asset management fees and other income.” Since these investments will be held until maturity, the foreign exchange impact will ultimately be realized as net investment income as earned. Therefore, the change in value related to foreign currency fluctuations recorded within “Asset management fees and other income” is excluded from adjusted operating income and is reflected as an adjustment to “Realized investment gains (losses), net.” These adjustments were a net loss of $25 million and a net gain of $18 million for the three months ended September 30, 2007 and 2006, respectively, and a net loss of $5 million and $4 million for the nine months ended September 30, 2007 and 2006, respectively.

In addition, the Company has certain other assets and liabilities for which, under GAAP, the change in value due to changes in foreign currency exchange rates is recorded in “Asset management fees and other income.” To the extent the foreign currency exposure on these assets and liabilities is economically hedged, the change in value included in “Asset management fees and other income” is excluded from adjusted operating income and is reflected as an adjustment to “Realized investment gains (losses), net.” These adjustments were a net gain of $51 million and net gain of $4 million for the three months ended September 30, 2007 and 2006, respectively. These adjustments were a net gain of $56 million and $4 million for the nine months ended September 30, 2007 and 2006, respectively.

Investment gains and losses on trading account assets supporting insurance liabilities and changes in experience-rated contractholder liabilities due to asset value changes. Certain products included in the retirement business acquired from CIGNA, as well as certain products included in the International Insurance segment, are experience-rated in that investment results associated with these products will ultimately accrue to contractholders. The investments supporting these experience-rated products, excluding mortgage loans, are classified as trading. These trading investments are reflected on the statements of financial position as “Trading account assets supporting insurance liabilities, at fair value.” Realized and unrealized gains and losses for these investments are reported in “Asset management fees and other income.” Investment income for these investments is reported in “Net investment income.” Mortgage loans that support these experience-rated products are carried at unpaid principal, net of unamortized discounts and an allowance for losses, and are reflected on the statements of financial position as “Commercial loans.”

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Adjusted operating income excludes net investment gains and losses on trading account assets supporting insurance liabilities. This is consistent with the exclusion of realized investment gains and losses with respect to other investments supporting insurance liabilities managed on a consistent basis, as discussed above. In addition, to be consistent with the historical treatment of charges related to realized investment gains and losses on available for sale securities, adjusted operating income also excludes the change in contractholder liabilities due to asset value changes in the pool of investments (including mortgage loans) supporting these experience-rated contracts, which are reflected in “Interest credited to policyholders’ account balances.” The result of this approach is that adjusted operating income for these products includes only net fee revenue and interest spread the Company earns on these experience-rated contracts, and excludes changes in fair value of the pool of investments, both realized and unrealized, that accrue to the contractholders.

Divested businesses. The contribution to income/loss of divested businesses that have been or will be sold or exited, but that did not qualify for “discontinued operations” accounting treatment under U.S. GAAP, are excluded from adjusted operating income as the results of divested businesses are not relevant to understanding the Company’s ongoing operating results.

Equity in earnings of operating joint ventures. Equity in earnings of operating joint ventures, on a pre-tax basis, are included in adjusted operating income as these results are a principal source of earnings. These earnings are reflected on a GAAP basis on an after-tax basis as a separate line on the Company’s Unaudited Interim Consolidated Statements of Operations.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The summary below reconciles adjusted operating income before income taxes for the Financial Services Businesses to income from continuing operations before income taxes and equity in earnings of operating joint ventures:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Adjusted Operating Income before income taxes for Financial Services Businesses by Segment:
Individual Life	$	247		$	183		$	489		$	412
Individual Annuities		203			192			549			432
Group Insurance		97			90			217			166

Total Insurance Division		547			465			1,255			1,010

Asset Management		119			100			493			406
Financial Advisory		85			51			254			(26	)
Retirement		53			109			339			388

Total Investment Division		257			260			1,086			768

International Insurance		366			397			1,191			1,059
International Investments		114			31			219			109

Total International Insurance and Investments Division		480			428			1,410			1,168

Corporate Operations		(26	)		(32	)		(40	)		(15	)
Real Estate and Relocation Services		21			36			36			75

Total Corporate and Other		(5	)		4			(4	)		60

Adjusted Operating Income before income taxes for Financial Services Businesses		1,279			1,157			3,747			3,006
Reconciling items:
Realized investment gains (losses), net, and related adjustments		(105	)		214			80			(70	)
Charges related to realized investment gains (losses), net		(4	)		7			(17	)		30
Investment gains (losses) on trading account assets supporting insurance liabilities, net		36			257			10			(8	)
Change in experience-rated contractholder liabilities due to asset value changes		(6	)		(168	)		4			28
Divested businesses		15			10			29			58
Equity in earnings of operating joint ventures		(103	)		(78	)		(323	)		(223	)

Income from continuing operations before income taxes and equity in earnings of operating joint ventures for Financial Services Businesses		1,112			1,399			3,530			2,821
Income from continuing operations before income taxes and equity in earnings of operating joint ventures for Closed Block Business		8			74			160			196

Income from continuing operations before income taxes and equity in earnings of operating joint ventures	$	1,120		$	1,473		$	3,690		$	3,017

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The Insurance division results reflect deferred policy acquisition costs as if the individual annuity business and group insurance business were stand-alone operations. The elimination of intersegment costs capitalized in accordance with this policy is included in consolidating adjustments within Corporate and Other operations.

The summary below presents revenues for the Company’s reportable segments:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Financial Services Businesses:
Individual Life	$	668		$	467		$	1,928		$	1,611
Individual Annuities		629			583			1,865			1,505
Group Insurance		1,200			1,155			3,616			3,381

Total Insurance Division		2,497			2,205			7,409			6,497

Asset Management		518			443			1,692			1,414
Financial Advisory		98			78			303			222
Retirement		1,183			1,112			3,496			3,215

Total Investment Division		1,799			1,633			5,491			4,851

International Insurance		1,983			1,924			6,094			5,807
International Investments		251			132			597			428

Total International Insurance and Investments Division		2,234			2,056			6,691			6,235

Corporate Operations		39			77			197			255
Real Estate and Relocation Services		89			93			229			246

Total Corporate and Other		128			170			426			501

Total		6,658			6,064			20,017			18,084

Reconciling items:
Realized investment gains (losses), net, and related adjustments		(105	)		214			80			(70	)
Charges related to realized investment gains (losses), net		2			—			5			9
Investment gains (losses) on trading account assets supporting insurance liabilities, net		36			257			10			(8	)
Divested businesses		19			15			34			80
Equity in earnings of operating joint ventures		(103	)		(78	)		(323	)		(223	)

Total Financial Services Businesses		6,507			6,472			19,823			17,872

Closed Block Business		1,886			1,889			5,770			5,589

Total per Unaudited Interim Consolidated Financial Statements	$	8,393		$	8,361		$	25,593		$	23,461

The Asset Management segment revenues include intersegment revenues of $75 million and $82 million for the three months ended September 30, 2007 and 2006, respectively, and $234 million and $258 million for the nine months ended September 30, 2007 and 2006, respectively, primarily consisting of asset-based management and administration fees. Management has determined the intersegment revenues with reference to market rates. Intersegment revenues are eliminated in consolidation in Corporate and Other.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

The summary below presents total assets for the Company’s reportable segments as of the periods indicated:


	September 30, 2007		December 31, 2006
	(in millions)
Individual Life	$	36,117	$	33,041
Individual Annuities		76,579		69,153
Group Insurance		32,804		29,342

Total Insurance Division		145,500		131,536

Asset Management		44,077		38,524
Financial Advisory		1,428		1,342
Retirement		130,806		125,604

Total Investment Division		176,311		165,470

International Insurance		62,380		59,211
International Investments		7,700		6,191

Total International Insurance and Investments Division		70,080		65,402

Corporate Operations		12,113		16,479
Real Estate and Relocation Services		1,242		1,380

Total Corporate and Other		13,355		17,859

Total Financial Services Businesses		405,246		380,267

Closed Block Business		75,168		73,999

Total per Unaudited Interim Consolidated Financial Statements	$	480,414	$	454,266

9. CONTINGENT LIABILITIES AND LITIGATION AND REGULATORY MATTERS

Contingent Liabilities

On an ongoing basis, the Company’s internal supervisory and control functions review the quality of sales, marketing and other customer interface procedures and practices and may recommend modifications or enhancements. From time to time, this review process results in the discovery of product administration, servicing or other errors, including errors relating to the timing or amount of payments or contract values due to customers. In certain cases, if appropriate, the Company may offer customers remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.

It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be materially affected as a result of payments in connection with the matters discussed above or other matters depending, in part, upon the results of operations or cash flow for such period. Management believes, however, that ultimate payments in connection with these matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on the Company’s financial position.

Litigation and Regulatory Matters

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 businesses and operations that are specific to the Company and proceedings that are typical of the businesses in which the Company operates, including in

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

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.

Insurance and Annuities

In August 2000, plaintiffs filed a purported national class action in the District Court of Valencia County, New Mexico, Azar, et al. v. Prudential Insurance, based upon the alleged failure to adequately disclose the increased costs associated with payment of life insurance premiums on a “modal” basis, i.e., more frequently than once a year. Similar actions have been filed in New Mexico against over a dozen other insurance companies. The complaint asserts claims for breach of the common law duty to disclose material information, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, unjust enrichment and fraudulent concealment and seeks injunctive relief, compensatory and punitive damages, both in unspecified amounts, restitution, treble damages, interest, costs and attorneys’ fees. In March 2001, the court entered an order granting partial summary judgment to plaintiffs as to liability. In January 2003, the New Mexico Court of Appeals reversed this finding and dismissed the claims for breach of the covenant of good faith and fair dealing and breach of fiduciary duty. The case was remanded to the trial court and in November 2004, it held that, as to the named plaintiffs, the non-disclosure was material. In July 2005, the court certified a class of New Mexico only policyholders denying plaintiffs’ motion to include purchasers from 35 additional states. In September 2005, plaintiffs sought to amend the court’s order on class certification with respect to eight additional states. In March 2006, the court reiterated its denial of a multi-state class and maintained the certification of a class of New Mexico resident purchasers of Prudential life insurance. The court also indicated it would enter judgment on liability against Prudential for the New Mexico class. In May 2007, the matter settled. The settlement provides that Prudential Insurance will pay the difference between the annualized modal premium and the annual premium and attorneys’ fees. In October 2007, the court approved the settlement of approximately $2 million without any objections. The settlement is expected to become final in November 2007.

From November 2002 to March 2005, eleven separate complaints were filed against the Company and the law firm of Leeds Morelli & Brown in New Jersey state court. The cases were consolidated for pre-trial proceedings in New Jersey Superior Court, Essex County and captioned Lederman v. Prudential Financial, Inc., et al. The complaints allege that an alternative dispute resolution agreement entered into among Prudential Insurance, over 350 claimants who are current and former Prudential Insurance employees, and Leeds Morelli & Brown (the law firm representing the claimants) was illegal and that Prudential Insurance conspired with Leeds Morelli & Brown to commit fraud, malpractice, breach of contract, and violate federal racketeering laws by advancing legal fees to the law firm with the purpose of limiting Prudential’s liability to the claimants. In 2004, the Superior Court sealed these lawsuits and compelled them to arbitration. In May 2006, the Appellate Division reversed the trial court’s decisions, held that the cases were improperly sealed, and should be heard in court rather than arbitrated. In November 2006, plaintiffs filed a motion seeking to permit over 200 individuals to join the cases as additional plaintiffs, to authorize a joint trial on liability issues for all plaintiffs, and to add a claim under the New Jersey discrimination law. In March 2007, the court granted plaintiffs’ motion to amend the complaint to add over 200 additional plaintiffs and a claim under the New Jersey discrimination law but denied without prejudice plaintiffs’ motion for a joint trial on liability issues. In April 2007, the amended complaint was filed. In June 2007, the Company moved to dismiss the complaint. The motion is pending.

The Company, along with a number of other insurance companies, received formal requests for information from the State of New York Attorney General’s Office (“NYAG”), the Securities and Exchange Commission (“SEC”), the Connecticut Attorney General’s Office, the Massachusetts Office of the Attorney General, the

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Department of Labor, the United States Attorney for the Southern District of California, the District Attorney of the County of San Diego, and various state insurance departments relating to payments to insurance intermediaries and certain other practices that may be viewed as anti-competitive. The Company may receive additional requests from these and other regulators and governmental authorities concerning these and related subjects. The Company is cooperating with these inquiries and has had discussions with certain authorities in an effort to resolve the inquiries into this matter. In December 2006, Prudential Insurance reached a resolution of the NYAG investigation. Under the terms of the settlement, Prudential Insurance paid a $2.5 million penalty and established a $16.5 million fund for policyholders, adopted business reforms and agreed, among other things, to continue to cooperate with the NYAG in any litigation, ongoing investigations or other proceedings. Prudential Insurance also settled the litigation brought by the California Department of Insurance and agreed to business reforms and disclosures as to group insurance contracts insuring customers or residents in California and to pay certain costs of investigation. These matters are also the subject of litigation brought by private plaintiffs, including purported class actions that have been consolidated in the multidistrict litigation in the United States District Court for the District of New Jersey, In re Employee Benefit Insurance Brokerage Antitrust Litigation. In that action, in August and September 2007, the court dismissed the anti-trust and RICO claims but has not yet ruled on the dismissal motions of the other claims. Two shareholder derivative actions, Gillespie v. Ryan and Kahn v. Agnew were dismissed without prejudice. In Gillespie, the plaintiff entered into a tolling agreement with the Company to permit a Special Evaluation Committee of the Board of Directors to investigate and evaluate his demand that the Company take action regarding these matters. The Committee has completed its investigation and has informed counsel for Mr. Gillespie that it has determined to refuse his demand. The regulatory settlement may adversely affect the existing litigation or cause additional litigation and result in adverse publicity and other potentially adverse impacts to the Company’s business.

In April 2005, the Company voluntarily commenced a review of the accounting for its reinsurance arrangements to confirm that it complied with applicable accounting rules. This review included an inventory and examination of current and past arrangements, including those relating to the Company’s wind down and divested businesses and discontinued operations. Subsequent to commencing this voluntary review, the Company received a formal request from the Connecticut Attorney General for information regarding its participation in reinsurance transactions generally and a formal request from the SEC for information regarding certain reinsurance contracts entered into with a single counterparty since 1997 as well as specific contracts entered into with that counterparty in the years 1997 through 2002 relating to the Company’s property and casualty insurance operations that were sold in 2003. These investigations are ongoing and not yet complete and it is possible that the Company may receive additional requests from regulators relating to reinsurance arrangements. The Company intends to cooperate with all such requests.

The Company’s subsidiary, American Skandia Life Assurance Corporation, has commenced a remediation program to correct errors in the administration of approximately 11,000 annuity contracts issued by that company. The owners of these contracts did not receive notification that the contracts were approaching or past their designated annuitization date or default annuitization date (both dates referred to as the “contractual annuity date”) and the contracts were not annuitized at their contractual annuity dates. Some of these contracts also were affected by data integrity errors resulting in incorrect contractual annuity dates. The lack of notice and data integrity errors, as reflected on the annuities administrative system, all occurred before the acquisition of the American Skandia entities by the Company. The remediation and administrative costs of the remediation program are subject to the indemnification provisions of the acquisition agreement pursuant to which the Company purchased the American Skandia entities in May 2003 from Skandia.

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

Securities

Prudential Securities has been named as a defendant in a number of industry-wide purported class actions in the United States District Court for the Southern District of New York relating to its former securities underwriting business. Plaintiffs in one consolidated proceeding, captioned In re: Initial Public Offering Securities Litigation, allege, among other things, that the underwriters engaged in a scheme involving tying agreements, undisclosed compensation arrangements and research analyst conflicts to manipulate and inflate the prices of shares sold in initial public offerings in violation of the federal securities laws. Certain issuers of these securities and their current and former officers and directors have also been named as defendants. In October 2004, the district court granted plaintiffs’ motion for class certification in six “focus cases.” In December 2006, the United States Court of Appeals for the Second Circuit vacated that decision and remanded the case to the district court for further proceedings. In August 2000, Prudential Securities was named as a defendant, along with other underwriters, in a purported class action, captioned CHS Electronics Inc. v. Credit Suisse First Boston Corp. et al., which alleges on behalf of issuers of securities in initial public offerings that the defendants conspired to fix at 7% the discount that underwriting syndicates receive from issuers in violation of federal antitrust laws. Plaintiffs moved for class certification in September 2004 and for partial summary judgment in November 2005. The summary judgment motion has been deferred pending disposition of the class certification motion. In April 2006, the court denied class certification. In September 2007, the Second Circuit reversed the district court’s decision denying class certification and remanded the case to the district court for further proceedings. In a related action, captioned Gillet v. Goldman Sachs et al., plaintiffs allege substantially the same antitrust claims on behalf of investors, though only injunctive relief is currently being sought.

Other Matters

Mutual Fund Market Timing Practices

In August 2006, Prudential Equity Group, LLC (“PEG”), a wholly owned subsidiary of the Company, reached a resolution of the previously disclosed regulatory and criminal investigations into deceptive market related activities involving PEG’s former Prudential Securities operations. The settlements relate to conduct that generally occurred between 1999 and 2003 involving certain former Prudential Securities brokers in Boston and certain other branch offices in the U.S., their supervisors, and other members of the Prudential Securities control structure with responsibilities that related to the market timing activities, including certain former members of Prudential Securities senior management. The Prudential Securities operations were contributed to a joint venture with Wachovia Corporation in July 2003, but PEG retained liability for the market timing related activities. In connection with the resolution of the investigations, PEG entered into separate settlements with each of the United States Attorney for the District of Massachusetts (“USAO”), the Secretary of the Commonwealth of Massachusetts, Securities Division, the SEC, the National Association of Securities Dealers, the New York Stock Exchange, the New Jersey Bureau of Securities and the NYAG. These settlements resolve the investigations by the above named authorities into these matters as to all Prudential entities without further regulatory proceedings or filing of charges so long as the terms of the settlement are followed and provided, in the case of the settlement agreement reached with the USAO, that the USAO has reserved the right to prosecute PEG if there is a material breach by PEG of that agreement during its five year term and in certain other specified events. Under the terms of the settlements, PEG paid $270 million into a Fair Fund administered by the SEC to compensate those harmed by the market timing activities. In addition, $330 million was paid in fines and penalties. Pursuant to the settlements, PEG retained, at PEG’s ongoing cost and expense, the services of an Independent Distribution Consultant acceptable to certain of the authorities to develop a proposed distribution plan for the distribution of Fair Fund amounts according to a methodology developed in consultation with and acceptable to certain of the authorities. In addition, as part of the settlements, PEG has agreed, among other things, to continue to cooperate

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

with the above named authorities in any litigation, ongoing investigations or other proceedings relating to or arising from their investigations into these matters. In connection with the settlements, the Company has agreed with the USAO, among other things, to cooperate with the USAO and to maintain and periodically report on the effectiveness of its compliance procedures. The settlement documents include findings and admissions that may adversely affect existing litigation or cause additional litigation and result in adverse publicity and other potentially adverse impacts to the Company’s businesses.

In addition to the regulatory proceedings described above that were settled in 2006, in October 2004, the Company and Prudential Securities were named as defendants in several class actions brought on behalf of purchasers and holders of shares in a number of mutual fund complexes. The actions are consolidated as part of a multi-district proceeding, In re: Mutual Fund Investment Litigation, pending in the United States District Court for the District of Maryland. The complaints allege that the purchasers and holders were harmed by dilution of the funds’ values and excessive fees, caused by market timing and late trading, and seek unspecified damages. In August 2005, the Company was dismissed from several of the actions, without prejudice to repleading the state claims, but remains a defendant in other actions in the consolidated proceeding. In July 2006, in one of the consolidated mutual fund actions, Saunders v. Putnam American Government Income Fund, et al., the United States District Court for the District of Maryland granted plaintiffs leave to refile their federal securities law claims against Prudential Securities. In August 2006, the second amended complaint was filed alleging federal securities law claims on behalf of a purported nationwide class of mutual fund investors seeking compensatory and punitive damages in unspecified amounts. Motions to dismiss the other actions are pending.

Commencing in 2003, the Company received formal requests for information from the SEC and NYAG relating to market timing in variable annuities by certain American Skandia entities. In connection with these investigations, with the approval of Skandia Insurance Company Ltd. (publ) (“Skandia”), an offer was made by American Skandia to the authorities investigating its companies, the SEC and NYAG, to settle these matters by paying restitution and a civil penalty of $95 million in the aggregate. While not assured, the Company believes these discussions are likely to lead to settlements with these authorities. Any regulatory settlement involving an American Skandia entity would be subject to the indemnification provisions of the acquisition agreement pursuant to which the Company purchased the American Skandia entities in May 2003 from Skandia. If achieved, settlement of the matters relating to American Skandia also could involve continuing monitoring, changes to and/or supervision of business practices, findings that may adversely affect existing or cause additional litigation, adverse publicity and other adverse impacts to the Company’s businesses.

Other

In October 2007, Prudential Retirement Insurance and Annuity Co. (“PRIAC”) filed an action in the United States District Court for the Southern District of New York, Prudential Retirement Insurance & Annuity Co. v. State Street Global Advisors, in PRIAC’s fiduciary capacity and on behalf of certain defined benefit and defined contribution plan clients of PRIAC, against an unaffiliated asset manager, State Street Global Advisors (“SSgA”) and SSgA’s affiliate, State Street Bank and Trust Company (“State Street”). This action seeks, among other relief, restitution of certain losses attributable to certain investment funds sold by SSgA as to which PRIAC believes SSgA employed investment strategies and practices that were misrepresented by SSgA and failed to exercise the standard of care of a prudent investment manager. PRIAC also intends to vigorously pursue any other available remedies against SSgA and State Street in respect of this matter. Given the unusual circumstances surrounding the management of these SSgA funds and in order to protect the interests of the affected plans and their participants while PRIAC pursues these remedies, PRIAC is also implementing a process under which affected plan clients that authorize PRIAC to proceed on their behalf will receive payments from funds provided by PRIAC for the losses referred to above. The Company’s consolidated financial statements, and the results of

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

the Retirement segment included in the Company’s Investment Division, for the quarter ended September 30, 2007 include a pre-tax charge of $81 million, reflecting these payments to plan clients and certain related costs.

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 Prudential Insurance and related entities, which invested in Enron’s commercial paper. The complaint alleges that Enron’s October 2001 prepayment of its commercial paper is a voidable preference under the bankruptcy laws and constitutes a fraudulent conveyance and that the Company and related entities received prepayment of $125 million. A motion by all defendants to dismiss the complaint was denied in June 2005. Defendants’ motions for leave to appeal are pending. In April 2007, the Prudential defendants and Enron agreed to a tentative settlement of the adversary proceeding. In July 2007, the settlement, which involves Prudential and certain other defendants, was approved. The agreement provides that the Prudential defendants will pay $16.3 million. In August 2007, the court dismissed the Prudential defendants pursuant to the settlement agreement.

In August 1999, a Prudential Insurance employee and several Prudential Insurance retirees filed an action in the United States District Court for the Southern District of Florida, Dupree, et al., v. Prudential Insurance, et al., against Prudential Insurance and its Board of Directors in connection with a group annuity contract entered into in 1989 between the Prudential Retirement Plan and Prudential Insurance. The suit alleged that the annuitization of certain retirement benefits violated ERISA and that, in the event of demutualization, Prudential Insurance would retain shares distributed under the annuity contract in violation of ERISA’s fiduciary duty requirements. In July 2001, plaintiffs filed an amended complaint dropping three counts, and the Company filed an answer denying the essential allegations of the complaint. The amended complaint seeks injunctive and monetary relief, including the return of what are claimed to be excess investment and advisory fees paid by the Retirement Plan to Prudential. In March 2002, the court dismissed certain of the claims against the individual defendants. A non-jury trial was concluded in January 2005. In August 2007, the court issued its decision and order dismissing the case. In September 2007, plaintiffs filed a notice of appeal with the Eleventh Circuit Court of Appeals.

In September and October 2005, five purported class action lawsuits were filed against the Company, PSI and PEG claiming that stockbrokers were improperly classified as exempt employees under state and federal wage and hour laws, were improperly denied overtime pay and that improper deductions were made from the stockbrokers’ wages. Two of the stockbrokers’ complaints, Janowsky v. Wachovia Securities, LLC and Prudential Securities Incorporated and Goldstein v. Prudential Financial, Inc., were filed in the United States District Court for the Southern District of New York. The Goldstein complaint purports to have been filed on behalf of a nationwide class. The Janowsky complaint alleges a class of New York brokers. Motions to dismiss and compel arbitration were filed in the Janowsky and Goldstein matters, which have been consolidated for pre-trial purposes. The three stockbrokers complaints filed in California Superior Court, Dewane v. Prudential Equity Group, Prudential Securities Incorporated, and Wachovia Securities LLC; DiLustro v. Prudential Securities Incorporated, Prudential Equity Group Inc. and Wachovia Securities; and Carayanis v. Prudential Equity Group LLC and Prudential Securities Inc., purport to have been brought on behalf of classes of California brokers. The Carayanis complaint was subsequently withdrawn without prejudice in May 2006. In June 2006, a purported New York state class action complaint was filed in the United States District Court for the Eastern District of New York, Panesenko v. Wachovia Securities, et al., alleging that the Company failed to pay overtime to stockbrokers in violation of state and federal law and that improper deductions were made from the stockbrokers’ wages in violation of state law. In September 2006, Prudential Securities was sued in Badain v. Wachovia Securities, et al., a purported nationwide class action filed in the United States District Court for the Western District of New York. The complaint alleges that Prudential Securities failed to pay overtime to

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

stockbrokers in violation of state and federal law and that improper deductions were made from the stockbrokers’ wages in violation of state law. In October 2006, a purported class action lawsuit, Bouder v. Prudential Financial, Inc. and Prudential Insurance Company of America, was filed in the United States District Court for the District of New Jersey, claiming that the Company failed to pay overtime to insurance agents who were registered representatives in violation of federal and state law, and that improper deductions were made from these agents’ wages in violation of state law. In December 2006, the stockbrokers’ cases were transferred to the United States District Court for the Central District of California by the Judicial Panel on Multidistrict Litigation for coordinated or consolidated pre-trial proceedings. The complaints seek back overtime pay and statutory damages, recovery of improper deductions, interest, and attorneys’ fees.

In November 1996, plaintiffs filed a purported class action lawsuit against Prudential Insurance, the Prudential Home Mortgage Company, Inc. and several other subsidiaries in the Superior Court of New Jersey, Essex County, Capitol Life Insurance Company v. Prudential Insurance, et al., in connection with the sale of certain subordinated mortgage securities sold by a subsidiary of Prudential Home Mortgage. In May 2000, plaintiffs filed a second amended complaint that alleges violations of the New Jersey securities and RICO statutes, fraud, conspiracy and negligent misrepresentation, and seeks compensatory as well as treble and punitive damages. In 2002, class certification was denied. In August 2005, the court dismissed the New Jersey Securities Act and RICO claims and the negligent misrepresentation claim. In April 2007, the matter settled for $7.5 million.

Summary

The Company’s litigation and regulatory matters are subject to many uncertainties, and given their complexity and scope, their outcome cannot be predicted. It is possible that results of operations or 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 and rights to indemnification, should not have a material adverse effect on the Company’s financial position.

10. INVESTMENT IN WACHOVIA SECURITIES

On July 1, 2003, the Company combined its retail securities brokerage and clearing operations with those of Wachovia Corporation (“Wachovia”) and formed Wachovia Securities Financial Holdings, LLC (“Wachovia Securities”), a joint venture now headquartered in St. Louis, Missouri. The Company currently has a 38% ownership interest in the joint venture, while Wachovia owns the remaining 62%. The Company accounts for its 38% ownership of the joint venture under the equity method of accounting.

On October 1, 2007, Wachovia completed the acquisition of the retail securities brokerage business of A.G. Edwards, Inc. (“A.G. Edwards”) for $6.8 billion and has indicated they will combine A.G. Edwards with Wachovia Securities in early 2008.

On July 6, 2007, the Board of Directors of the Company approved the election by the Company of the “lookback” option under the terms of the agreements relating to the joint venture. The “lookback” option permits the Company to delay for two years following the combination of the A.G. Edwards business with Wachovia Securities the Company’s decision to make or not to make an additional capital contribution to the joint venture or other payments to avoid or limit dilution of its ownership interest in the joint venture. During this “lookback”

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Consolidated Financial Statements—(Continued)

period, the Company’s share in the earnings of the joint venture and one-time costs associated with the combination of A.G. Edwards with Wachovia Securities will be based on the Company’s diluted ownership level. Any capital contribution or other payment at the end of the “lookback” period to restore all or part of the Company’s ownership interest in the joint venture would be based on the appraised value of the existing joint venture and the A.G. Edwards business as of the date of the combination of the A.G. Edwards business with Wachovia Securities. In such event, the Company would also need to make a true-up payment of one-time costs to reflect the incremental increase in its ownership interest in the joint venture. Alternatively, the Company may at the end of the “lookback” period “put” its joint venture interests to Wachovia based on the appraised value of the joint venture, excluding the A.G. Edwards business, as of the date of the combination of the A.G. Edwards business with Wachovia Securities.

At the time of the combination of the A.G. Edwards business with Wachovia Securities, the Company expects to adjust the carrying value for accounting purposes of its ownership interest in the joint venture to reflect the addition of that business and the initial dilution of its ownership level and to record the initial value of the above described rights under the “lookback” option. The Company expects that the value to be recognized for the foregoing items will be credited net of tax directly to “Additional paid-in capital.”

The Company also retains its separate right to “put” its joint venture interests to Wachovia at any time after July 1, 2008 based on the appraised value of the joint venture, including the A.G. Edwards business, determined pursuant to appraisal procedures carried out following a decision by the Company to exercise this “put”. However, if in connection with the “lookback” option the Company elects at the end of the “lookback” period to make an additional capital contribution or other payment to avoid or limit dilution, the Company may not exercise this “put” option prior to the first anniversary of the end of the “lookback” period.

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Supplemental Combining Statements of Financial Position

September 30, 2007 and December 31, 2006 (in millions)


	September 30, 2007									December 31, 2006
	Financial Services Businesses			Closed Block Business			Consolidated			Financial Services Businesses		Closed Block Business		Consolidated
ASSETS
Fixed maturities:
Available for sale, at fair value	$	112,956		$	50,816		$	163,772		$	112,043	$	50,773	$	162,816
Held to maturity, at amortized cost		3,473			—			3,473			3,469		—		3,469
Trading account assets supporting insurance liabilities, at fair value		14,612			—			14,612			14,262		—		14,262
Other trading account assets, at fair value		3,118			142			3,260			2,209		—		2,209
Equity securities, available for sale, at fair value		4,683			4,080			8,763			4,331		3,772		8,103
Commercial loans		20,756			7,580			28,336			18,421		7,318		25,739
Policy loans		3,815			5,399			9,214			3,472		5,415		8,887
Securities purchased under agreements to resell		111			—			111			153		—		153
Other long-term investments		4,449			1,034			5,483			3,780		965		4,745
Short-term investments		3,183			941			4,124			3,183		1,851		5,034

Total investments		171,156			69,992			241,148			165,323		70,094		235,417
Cash and cash equivalents		7,687			2,218			9,905			7,243		1,346		8,589
Accrued investment income		1,519			732			2,251			1,429		713		2,142
Reinsurance recoverables		2,149			—			2,149			1,958		—		1,958
Deferred policy acquisition costs		11,032			969			12,001			9,854		1,009		10,863
Other assets		16,379			1,257			17,636			16,997		837		17,834
Separate account assets		195,324			—			195,324			177,463		—		177,463

TOTAL ASSETS	$	405,246		$	75,168		$	480,414		$	380,267	$	73,999	$	454,266

LIABILITIES AND ATTRIBUTED EQUITY
LIABILITIES
Future policy benefits	$	58,117		$	50,964		$	109,081		$	56,245	$	50,706	$	106,951
Policyholders’ account balances		77,105			5,553			82,658			75,090		5,562		80,652
Policyholders’ dividends		602			3,088			3,690			526		3,456		3,982
Reinsurance payables		1,593			—			1,593			1,458		—		1,458
Securities sold under agreements to repurchase		5,683			6,819			12,502			5,747		5,734		11,481
Cash collateral for loaned securities		5,017			3,625			8,642			4,082		3,283		7,365
Income taxes		2,826			142			2,968			2,920		188		3,108
Securities sold but not yet purchased		204			—			204			277		—		277
Short-term debt		12,619			865			13,484			10,798		1,738		12,536
Long-term debt		9,771			1,750			11,521			9,673		1,750		11,423
Other liabilities		14,634			1,136			15,770			14,298		380		14,678
Separate account liabilities		195,324			—			195,324			177,463		—		177,463

Total liabilities		383,495			73,942			457,437			358,577		72,797		431,374

COMMITMENTS AND CONTINGENT LIABILITIES
ATTRIBUTED EQUITY
Accumulated other comprehensive income (loss)		(300	)		(24	)		(324	)		496		23		519
Other attributed equity		22,051			1,250			23,301			21,194		1,179		22,373

Total attributed equity		21,751			1,226			22,977			21,690		1,202		22,892

TOTAL LIABILITIES AND ATTRIBUTED EQUITY	$	405,246		$	75,168		$	480,414		$	380,267	$	73,999	$	454,266

See Notes to Unaudited Interim Supplemental Combining Financial Information

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Supplemental Combining Statements of Operations

For the three months ended September 30, 2007 and 2006 (in millions)


	Three Months Ended September 30,
	2007								2006
	Financial Services Businesses			Closed Block Business		Consolidated			Financial Services Businesses		Closed Block Business		Consolidated
REVENUES
Premiums	$	2,675		$	797	$	3,472		$	2,550	$	814	$	3,364
Policy charges and fee income		729			—		729			583		—		583
Net investment income		2,116			960		3,076			1,967		914		2,881
Realized investment gains (losses), net		(197	)		113		(84	)		239		150		389
Asset management fees and other income		1,184			16		1,200			1,133		11		1,144

Total revenues		6,507			1,886		8,393			6,472		1,889		8,361

BENEFITS AND EXPENSES
Policyholders’ benefits		2,633			910		3,543			2,622		894		3,516
Interest credited to policyholders’ account balances		786			34		820			884		34		918
Dividends to policyholders		38			727		765			32		697		729
General and administrative expenses		1,938			207		2,145			1,535		190		1,725

Total benefits and expenses		5,395			1,878		7,273			5,073		1,815		6,888

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		1,112			8		1,120			1,399		74		1,473

Income tax expense		315			1		316			363		21		384

INCOME FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		797			7		804			1,036		53		1,089
Equity in earnings of operating joint ventures, net of taxes		67			—		67			50		—		50

INCOME FROM CONTINUING OPERATIONS		864			7		871			1,086		53		1,139
Income (loss) from discontinued operations, net of taxes		(4	)		—		(4	)		66		—		66

NET INCOME	$	860		$	7	$	867		$	1,152	$	53	$	1,205

See Notes to Unaudited Interim Supplemental Combining Financial Information

PRUDENTIAL FINANCIAL, INC.

Unaudited Interim Supplemental Combining Statements of Operations

For the nine months ended September 30, 2007 and 2006 (in millions)


	Nine months ended September 30,
	2007						2006
	Financial Services Businesses		Closed Block Business		Consolidated		Financial Services Businesses		Closed Block Business		Consolidated
REVENUES
Premiums	$	8,080	$	2,580	$	10,660	$	7,714	$	2,617	$	10,331
Policy charges and fee income		2,299		—		2,299		1,921		—		1,921
Net investment income		6,251		2,839		9,090		5,658		2,752		8,410
Realized investment gains, net		141		312		453		64		182		246
Asset management fees and other income		3,052		39		3,091		2,515		38		2,553

Total revenues		19,823		5,770		25,593		17,872		5,589		23,461

BENEFITS AND EXPENSES
Policyholders’ benefits		8,028		2,933		10,961		7,733		2,898		10,631
Interest credited to policyholders’ account balances		2,283		105		2,388		2,018		105		2,123
Dividends to policyholders		95		1,986		2,081		74		1,803		1,877
General and administrative expenses		5,887		586		6,473		5,226		587		5,813

Total benefits and expenses		16,293		5,610		21,903		15,051		5,393		20,444

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		3,530		160		3,690		2,821		196		3,017

Income tax expense		1,014		49		1,063		770		56		826

INCOME FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES		2,516		111		2,627		2,051		140		2,191
Equity in earnings of operating joint ventures, net of taxes		200		—		200		146		—		146

INCOME FROM CONTINUING OPERATIONS		2,716		111		2,827		2,197		140		2,337
Income from discontinued operations, net of taxes		4		2		6		54		—		54

NET INCOME	$	2,720	$	113	$	2,833	$	2,251	$	140	$	2,391

See Notes to Unaudited Interim Supplemental Combining Financial Information

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Supplemental Combining Financial Information

1. BASIS OF PRESENTATION

The supplemental combining financial information presents the consolidated financial position and results of operations for Prudential Financial, Inc. and its subsidiaries (together, the “Company”), separately reporting the Financial Services Businesses and the Closed Block Business. The Financial Services Businesses and the Closed Block Business are both fully integrated operations of the Company and are not separate legal entities. The supplemental combining financial information presents the results of the Financial Services Businesses and the Closed Block Business as if they were separate reporting entities and should be read in conjunction with the Consolidated Financial Statements.

The Company has outstanding two classes of common stock. The Common Stock reflects the performance of the Financial Services Businesses and the Class B Stock reflects the performance of the Closed Block Business.

The Closed Block Business was established on the date of demutualization and includes the assets and liabilities of the Closed Block (see Note 4 to the Unaudited Interim Consolidated Financial Statements for a description of the Closed Block). It also includes assets held outside the Closed Block necessary to meet insurance regulatory capital requirements related to products included within the Closed Block; deferred policy acquisition costs related to the Closed Block policies; the principal amount of the IHC debt (as discussed in Note 2 below) and related unamortized debt issuance costs, as well as an interest rate swap related to the IHC debt; and certain other related assets and liabilities. The Financial Services Businesses consist of the Insurance, Investment, and International Insurance and Investments divisions and Corporate and Other operations.

2. ALLOCATION OF RESULTS

This supplemental combining financial information reflects the assets, liabilities, revenues and expenses directly attributable to the Financial Services Businesses and the Closed Block Business, as well as allocations deemed reasonable by management in order to fairly present the financial position and results of operations of the Financial Services Businesses and the Closed Block Business on a stand alone basis. While management considers the allocations utilized to be reasonable, management has the discretion to make operational and financial decisions that may affect the allocation methods and resulting assets, liabilities, revenues and expenses of each business. In addition, management has limited discretion over accounting policies and the appropriate allocation of earnings between the two businesses. The Company is subject to agreements which provide that, in most instances, the Company may not change the allocation methodology or accounting policies for the allocation of earnings between the Financial Services Businesses and Closed Block Business without the prior consent of the Class B Stock holders or IHC debt bond insurer.

The Financial Services Businesses and Closed Block Business participate in the Company’s commingled internal short-term cash management facility, pursuant to which they invest cash from securities lending and repurchase activities as well as certain trading and operating activities. The net funds invested in the facility are generally held in investments that are short term, including mortgage- and asset-backed securities. As of September 30, 2007, the balance held in this facility was approximately $18.5 billion. A proportionate interest in each security held in the portfolio is allocated to the Financial Services Businesses and the Closed Block Business based upon their proportional cash contributions to the facility as of the balance sheet date. Participation in the facility by the Financial Services Businesses and the Closed Block Business is dependent on cash flows arising from the activities noted above, which in turn can change the allocation of the facility’s assets between the two Businesses. A proportionate share of any realized investment gain or loss is recorded by each Business based upon their respective ownership percentages in the facility as of the date of the realized gain or loss. Beginning in the quarter ended September 30, 2007, management determined to seek to implement changes

PRUDENTIAL FINANCIAL, INC.

Notes to Unaudited Interim Supplemental Combining Financial Information—(Continued)

in the facility in order to permit each Business to hold discrete ownership of its investments in the facility without affecting or being affected by the level of participation in the facility by the other Business. Pending the implementation of these changes, the facility is being managed so that the proportionate interests of the Financial Services Businesses and Closed Block Business in the entire facility are maintained at approximately the same proportions held as of June 30, 2007 (approximately 49% and 51%, respectively).

General corporate overhead not directly attributable to a specific business that has been incurred in connection with the generation of the businesses’ revenues is generally allocated between the Financial Services Businesses and the Closed Block Business based on the general and administrative expenses of each business as a percentage of the total general and administrative expenses for all businesses.

Prudential Holdings, LLC, a wholly owned subsidiary of Prudential Financial, Inc., has outstanding senior secured notes (the “IHC debt”), of which net proceeds of $1.66 billion were allocated to the Financial Services Businesses concurrent with the demutualization on December 18, 2001. The IHC debt is serviced by the cash flows of the Closed Block Business, and the results of the Closed Block Business reflect interest expense associated with the IHC debt.

Income taxes are allocated between the Financial Services Businesses and the Closed Block Business as if they were separate companies based on the taxable income or losses and other tax characterizations of each business. If a business generates benefits, such as net operating losses, it is entitled to record such tax benefits to the extent they are expected to be utilized on a consolidated basis.

Holders of Common Stock have no interest in a separate legal entity representing the Financial Services Businesses; holders of the Class B Stock have no interest in a separate legal entity representing the Closed Block Business; and holders of each class of common stock are subject to all of the risks associated with an investment in the Company.

In the event of a liquidation, dissolution or winding-up of the Company, holders of Common Stock and holders of Class B Stock would be entitled to receive a proportionate share of the net assets of the Company that remain after paying all liabilities and the liquidation preferences of any preferred stock.

The results of the Financial Services Businesses are subject to certain risks pertaining to the Closed Block. These include any expenses and liabilities from litigation affecting the Closed Block policies as well as the consequences of certain potential adverse tax determinations. In connection with the sale of the Class B Stock and IHC debt, the cost of indemnifying the investors with respect to certain matters will be borne by the Financial Services Businesses.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) addresses the consolidated financial condition of Prudential Financial as of September 30, 2007, compared with December 31, 2006, and its consolidated results of operations for the three and nine months ended September 30, 2007 and September 30, 2006. You should read the following analysis of our consolidated financial condition and results of operations in conjunction with the “Risk Factors” section included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and the MD&A and the audited Consolidated Financial Statements included in the Company’s Current Report on Form 8-K dated October 4, 2007, as well as the “Risk Factors” section, the statements under “Forward-Looking Statements” and the Unaudited Interim Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Overview

Prudential Financial has two classes of common stock outstanding. The Common Stock, which is publicly traded (NYSE:PRU), reflects the performance of the Financial Services Businesses, while the Class B Stock, which was issued through a private placement and does not trade on any exchange, reflects the performance of the Closed Block Business. The Financial Services Businesses and the Closed Block Business are discussed below.

Financial Services Businesses

Our Financial Services Businesses consist of three operating divisions, which together encompass eight segments, and our Corporate and Other operations. The Insurance division consists of our Individual Life, Individual Annuities and Group Insurance segments. The Investment division consists of our Asset Management, Financial Advisory and Retirement segments. The International Insurance and Investments division consists of our International Insurance and International Investments segments. Our Corporate and Other operations include our real estate and relocation services business, as well as corporate items and initiatives that are not allocated to business segments. Corporate and Other operations also include businesses that have been or will be divested and businesses that we have placed in wind-down status.

We attribute financing costs to each segment based on the amount of financing used by each segment, excluding financing costs associated with corporate debt. The net investment income of each segment includes earnings on the amount of equity that management believes is necessary to support the risks of that segment.

We seek growth internally and through acquisitions, joint ventures or other forms of business combinations or investments. Our principal acquisition focus is in our current business lines, both domestic and international.

Closed Block Business

In connection with the demutualization, we ceased offering domestic participating products. The liabilities for our traditional domestic in force participating products were segregated, together with assets, in a regulatory mechanism referred to as the “Closed Block.” The Closed Block is designed generally to provide for the reasonable expectations for future policy dividends after demutualization of holders of participating individual life insurance policies and annuities included in the Closed Block by allocating assets that will be used exclusively for payment of benefits, including policyholder dividends, expenses and taxes with respect to these products. See Note 4 to the Unaudited Interim Consolidated Financial Statements for more information on the Closed Block. At the time of demutualization, we determined the amount of Closed Block assets so that the Closed Block assets initially had a lower book value than the Closed Block liabilities. We expect that the Closed Block assets will generate sufficient cash flow, together with anticipated revenues from the Closed Block policies, over the life of the Closed Block to fund payments of all expenses, taxes, and policyholder benefits to be paid to, and the reasonable dividend expectations of, holders of the Closed Block policies. We also segregated for

accounting purposes the assets that we need to hold outside the Closed Block to meet capital requirements related to the Closed Block policies. No policies sold after demutualization will be added to the Closed Block, and its in force business is expected to ultimately decline as we pay policyholder benefits in full. We also expect the proportion of our business represented by the Closed Block to decline as we grow other businesses.

Concurrently with our demutualization, Prudential Holdings, LLC, a wholly owned subsidiary of Prudential Financial that owns the capital stock of Prudential Insurance, issued $1.75 billion in senior secured notes, which we refer to as the IHC debt. The net proceeds from the issuances of the Class B Stock and IHC debt, except for $72 million used to purchase a guaranteed investment contract to fund a portion of the bond insurance cost associated with that debt, were allocated to the Financial Services Businesses. However, we expect that the IHC debt will be serviced by the net cash flows of the Closed Block Business over time, and we include interest expenses associated with the IHC debt when we report results of the Closed Block Business.

The Closed Block Business consists principally of the Closed Block, assets that we must hold outside the Closed Block to meet capital requirements related to the Closed Block policies, invested assets held outside the Closed Block that represent the difference between the Closed Block assets and Closed Block liabilities and the interest maintenance reserve, deferred policy acquisition costs related to Closed Block policies, the principal amount of the IHC debt and related hedging activities, and certain other related assets and liabilities.

Executive Summary

Prudential Financial, one of the largest financial services companies in the U.S., offers individual and institutional clients a wide array of financial products and services, including life insurance, annuities, mutual funds, pension and retirement-related services and administration, investment management, banking and trust services, real estate brokerage and relocation services, and, through a joint venture, retail securities brokerage services. We offer these products and services through one of the largest distribution networks in the financial services industry.

The first nine months of 2007 reflect our continued efforts to redeploy capital effectively to seek enhanced returns, including the continuation of our share repurchase program. In the first nine months of 2007, we repurchased 24.3 million shares of Common Stock at a total cost of $2.3 billion and are authorized, under a stock repurchase program authorized by Prudential Financial’s Board of Directors in November 2006, to repurchase up to an additional $0.7 billion of Common Stock during 2007.

We analyze performance of the segments and Corporate and Other operations of the Financial Services Businesses using a measure called adjusted operating income. See “—Consolidated Results of Operations” for a definition of adjusted operating income and a discussion of its use as a measure of segment operating performance.

Shown below are the contributions of each segment and Corporate and Other operations to our adjusted operating income for the three and nine months ended September 30, 2007 and 2006 and a reconciliation of adjusted operating income of our segments and Corporate and Other operations to income from continuing operations before income taxes and equity in earnings of operating joint ventures.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Adjusted operating income before income taxes for segments of the Financial Services Businesses:
Individual Life	$	247		$	183		$	489		$	412
Individual Annuities		203			192			549			432
Group Insurance		97			90			217			166
Asset Management		119			100			493			406
Financial Advisory		85			51			254			(26	)
Retirement		53			109			339			388
International Insurance		366			397			1,191			1,059
International Investments		114			31			219			109
Corporate and Other		(5	)		4			(4	)		60
Reconciling Items:
Realized investment gains (losses), net, and related adjustments		(105	)		214			80			(70	)
Charges related to realized investment gains (losses), net		(4	)		7			(17	)		30
Investment gains (losses) on trading account assets supporting insurance liabilities, net		36			257			10			(8	)
Change in experience-rated contractholder liabilities due to asset value changes		(6	)		(168	)		4			28
Divested businesses		15			10			29			58
Equity in earnings of operating joint ventures		(103	)		(78	)		(323	)		(223	)

Income from continuing operations before income taxes and equity in earnings of operating joint ventures for Financial Services Businesses		1,112			1,399			3,530			2,821
Income from continuing operations before income taxes and equity in earnings of operating joint ventures for Closed Block Business		8			74			160			196

Consolidated income from continuing operations before income taxes and equity in earnings of operating joint ventures	$	1,120		$	1,473		$	3,690		$	3,017

Results for the three and nine months ended September 30, 2007 presented above reflect the following:

•

Individual Life segment results for both the third quarter and first nine months of 2007 improved in comparison to the corresponding prior year periods as results for the current year periods reflect a greater benefit from reductions in amortization of deferred policy acquisition costs and other costs, reflecting updates of our actuarial assumptions based on annual reviews concluded in the third quarter of both 2007 and 2006, and a greater benefit from compensation received in the third quarter of 2007 based on multi-year profitability of third-party products we distribute than that of the third quarter of 2006.

•

Individual Annuities segment results improved in both the third quarter and the first nine months of 2007 due to higher fee income reflecting higher average variable annuity asset balances. The first nine months of 2007 also reflects a greater contribution from the operations of the variable annuity business acquired from The Allstate Corporation, for which prior year period results reflect operations from the June 1, 2006 date of acquisition.

•

Group Insurance segment results improved in both the third quarter and first nine months of 2007 reflecting more favorable claims experience in our group life business and more favorable claims experience, as well as growth, in our group disability business. Partially offsetting these items are higher administrative operating expenses primarily reflecting the growth in the business, as well as the lower benefit in the current year of refinements in group disability reserves related to our annual reviews.

•

Asset Management segment results increased in both the third quarter and the first nine months of 2007 in comparison to the corresponding prior year periods primarily reflecting higher asset management fees as a result of increased asset values due to market appreciation and net asset flows, and increased performance based fees primarily related to real estate investment management. These increases were partially offset by less favorable results from the segment’s commercial mortgage operations driven by a third quarter 2007 loss associated with unfavorable credit market conditions.

•

Financial Advisory segment results for the third quarter of 2007 increased from the third quarter of 2006 primarily due to higher income from our 38% share of the retail brokerage joint venture with Wachovia reflecting the venture’s greater income from fees and commissions. Results for the first nine months of 2007 increased from the first nine months of 2006 due to lower expenses related to obligations and costs we retained in connection with businesses contributed to the joint venture, as well as higher income from our share of the joint venture.

•

Retirement segment results for the third quarter and first nine months of 2007 decreased from the third quarter and first nine months of 2006 reflecting an $81 million charge for payments to be made to plan clients related to a legal action filed against an unaffiliated asset manager. This charge, and decreases in the market value of certain externally managed investments in the European market included in adjusted operating income in the third quarter of 2007, more than offset improved investment results from a larger base of invested assets in our institutional investment products business and growth in fee income due to higher full service retirement account balances.

•

The International Insurance segment is comprised of its Life Planner and Gibraltar Life operations. Results from the segment’s Life Planner operations benefited from continued business growth which was more than offset in the third quarter of 2007 in comparison to the third quarter of 2006 and partially offset in the first nine months of 2007 in comparison to the first nine months of 2006 by the impact of decreases in the market value of certain externally managed investments in the European market included in third quarter 2007 adjusted operating income. In addition, the first nine months of 2007 also benefited from more favorable foreign currency exchange rates. Results from the segment’s Gibraltar Life operation improved, for the third quarter and first nine months of 2007 in comparison to the corresponding prior year periods, due to improved investment income margins primarily reflecting investment portfolio strategies.

•

International Investments segment results improved in both the third quarter and first nine months of 2007 primarily reflecting the gain from the sale of an interest in operating joint ventures during the current quarter, income from market value changes on securities relating to exchange memberships, and a benefit to current quarter results from recoveries related to a former investment, as well as more favorable results in our asset management businesses, principally in our Korean operations.

•

Results of several segments reflect decreases in the market value of certain externally managed investments in the European market during the third quarter of 2007. These decreases in market value had an aggregate negative impact of $78 million on the segments of the Financial Services Businesses for both the third quarter and the first nine months of 2007.

•

Realized investment gains (losses), net, and related adjustments for the Financial Services Businesses in the third quarter and first nine months of 2007 amounted to $(105) million and $80 million, respectively. Results for the third quarter of 2007 relate primarily to derivative losses, while results for the first nine months of 2007 reflect gains on sales of equity securities primarily by our Japanese and Korean insurance operations, partially offset by derivative losses.

•

Income from continuing operations before income taxes and equity in earnings of operating joint ventures in the Closed Block Business decreased $66 million in the third quarter of 2007 compared to the third quarter of 2006, reflecting a decrease in net realized investment gains, an increase in the cumulative earnings policyholder dividend obligation expense and a decrease in income due to a reserve release in the third quarter of 2006. These items were partially offset by an increase in net investment income. Income from continuing operations before income taxes and equity in earnings of operating joint ventures in the Closed Block Business decreased $36 million for the first nine months of 2007 compared to the first nine months of 2006, reflecting an increase in the cumulative earnings policyholder dividend obligation expense and less favorable claims experience, in addition to a reserve release in the prior year period. These items are partially offset by an increase in net realized investment gains.

Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP, requires the application of accounting policies that often involve a significant degree of judgment. Management, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, results of operations and financial position as reported in the Consolidated Financial Statements could change significantly.

Management believes the accounting policies relating to the following areas are most dependent on the application of estimates and assumptions:

•

Valuation of investments;

•

Policyholder liabilities;

•

Deferred policy acquisition costs;

•

Goodwill;

•

Pension and other postretirement benefits;

•

Taxes on income; and

•

Reserves for contingencies, including reserves for losses in connection with unresolved legal matters.

A discussion of each of these critical accounting estimates may be found in our Current Report on Form 8-K dated October 4, 2007, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Accounting Policies and Pronouncements—Application of Critical Accounting Estimates.”

Accounting Pronouncements Adopted

See Note 2 to the Unaudited Interim Consolidated Financial Statements for a discussion of recently adopted accounting pronouncements, including the effect of adopting FASB Staff Position No. 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction”, AICPA Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts,” and FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”

Recent Accounting Pronouncements

See Note 2 to the Unaudited Interim Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.

Consolidated Results of Operations

The following table summarizes income from continuing operations for the Financial Services Businesses and the Closed Block Business as well as other components comprising net income.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Financial Services Businesses by segment:
Individual Life	$	217		$	179		$	451		$	360
Individual Annuities		179			182			517			386
Group Insurance		67			83			199			148

Total Insurance Division		463			444			1,167			894

Asset Management		128			95			500			401
Financial Advisory		(12	)		(22	)		(47	)		(228	)
Retirement		18			146			224			272

Total Investment Division		134			219			677			445

International Insurance		562			577			1,539			1,219
International Investments		106			26			193			89

Total International Insurance and Investments Division		668			603			1,732			1,308

Corporate and Other		(153	)		133			(46	)		174

Income from continuing operations before income taxes and equity in earnings of operating joint ventures for Financial Services Businesses		1,112			1,399			3,530			2,821
Income tax expense		315			363			1,014			770

Income from continuing operations before equity in earnings of operating joint ventures for Financial Services Businesses		797			1,036			2,516			2,051
Equity in earnings of operating joint ventures, net of taxes		67			50			200			146

Income from continuing operations for Financial Services Businesses		864			1,086			2,716			2,197
Income (loss) from discontinued operations, net of taxes		(4	)		66			4			54

Net income – Financial Services Businesses	$	860		$	1,152		$	2,720		$	2,251

Basic income from continuing operations per share – Common Stock	$	1.92		$	2.29		$	5.96		$	4.61
Diluted income from continuing operations per share – Common Stock	$	1.89		$	2.25		$	5.85		$	4.51
Basic net income per share – Common Stock	$	1.91		$	2.43		$	5.97		$	4.72
Diluted net income per share – Common Stock	$	1.88		$	2.38		$	5.86		$	4.62

Closed Block Business:
Income from continuing operations before income taxes for Closed Block Business	$	8		$	74		$	160		$	196
Income tax expense		1			21			49			56

Income from continuing operations for Closed Block Business		7			53			111			140
Income from discontinued operations, net of taxes		—			—			2			—

Net income – Closed Block Business	$	7		$	53		$	113		$	140

Basic and diluted income (loss) from continuing operations per share – Class B Stock	$	(3.00	)	$	18.50		$	34.50		$	44.50
Basic and diluted net income (loss) per share – Class B Stock	$	(3.00	)	$	18.50		$	35.50		$	44.50

Consolidated:

Net income	$	867		$	1,205		$	2,833		$	2,391

Results of Operations – Financial Services Businesses

2007 to 2006 Three Month Comparison. Income from continuing operations attributable to the Financial Services Businesses decreased $222 million, from $1.086 billion in the third quarter of 2006 to $864 million in the third quarter of 2007. This decrease resulted primarily from net realized losses on derivatives, which was partially offset by continued growth of our international insurance operations and improved results from our domestic businesses, including the benefit of higher asset based fees and improved investment income. On a diluted per share basis, income from continuing operations attributable to the Financial Services Businesses for the three months ended September 30, 2007 of $1.89 per share of Common Stock decreased from $2.25 per share of Common Stock for the three months ended September 30, 2006. This decrease reflects the decline in earnings discussed above, partially offset by the benefit of a lower number of shares of Common Stock outstanding due to our share repurchase program. We analyze the operating performance of the segments included in the Financial Services Businesses using “adjusted operating income” as described in “—Segment Measures,” below. For a discussion of our segment results on this basis see “—Results of Operations for Financial Services Businesses by Segment,” below. In addition, for a discussion of the realized investment gains (losses), net attributable to the Financial Services Businesses, see “—Realized Investment Gains and General Account Investments—Realized Investment Gains,” below.

The direct equity adjustment increased income from continuing operations available to holders of the Common Stock for earnings per share purposes by $13 million for the three months ended September 30, 2007, compared to $16 million for the three months ended September 30, 2006. The direct equity adjustment modifies earnings available to holders of the Common Stock and the Class B Stock for earnings per share purposes. The holders of the Common Stock will benefit from the direct equity adjustment as long as reported administrative expenses of the Closed Block Business are less than the cash flows for administrative expenses determined by the policy servicing fee arrangement that is based upon insurance and policies in force and statutory cash premiums. As statutory cash premiums and policies in force in the Closed Block Business decline, we expect the benefit to the Common Stock holders from the direct equity adjustment to decline accordingly. If the reported administrative expenses of the Closed Block Business exceed the cash flows for administrative expenses determined by the policy servicing fee arrangement, the direct equity adjustment will reduce income available to holders of the Common Stock for earnings per share purposes.

2007 to 2006 Nine Month Comparison. Income from continuing operations attributable to the Financial Services Businesses increased $519 million, from $2.197 billion in the first nine months of 2006 to $2.716 billion in the first nine months of 2007. This increase resulted primarily from continued growth of our international insurance operations and improved results from our domestic businesses, including the benefit of higher asset based fees, improved investment results, and a greater contribution from the variable annuity business acquired from The Allstate Corporation, for which the prior year period includes results from only the June 1, 2006 date of acquisition. In addition, the first nine months of 2007 include lower retained costs in connection with our joint venture with Wachovia.

The direct equity adjustment increased income from continuing operations available to holders of the Common Stock for earnings per share purposes by $42 million for the nine months ended September 30, 2007, compared to $51 million for the nine months ended September 30, 2006.

Results of Operations – Closed Block Business

2007 to 2006 Three Month Comparison. Income from continuing operations attributable to the Closed Block Business for the three months ended September 30, 2007, was $7 million, or $(3.00) per share of Class B Stock, compared to $53 million, or $18.50 per share of Class B Stock, for the three months ended September 30, 2006. The direct equity adjustment decreased income from continuing operations available to the Class B Stock holders for earnings per share purposes by $13 million for the three months ended September 30, 2007, compared to $16 million for the three months ended September 30, 2006. For a discussion of the results of operations for the Closed Block Business, see “—Results of Operations of Closed Block Business,” below.

2007 to 2006 Nine Month Comparison. Income from continuing operations attributable to the Closed Block Business for the nine months ended September 30, 2007, was $111 million, or $34.50 per share of Class B stock, compared to $140 million, or $44.50 per share of Class B Stock, for the nine months ended September 30, 2006. The direct equity adjustment decreased income from continuing operations available to the Class B Stock holders for earnings per share purposes by $42 million for the nine months ended September 30, 2007, compared to $51 million for the nine months ended September 30, 2006.

Segment Measures

In managing our business, we analyze operating performance separately for our Financial Services Businesses and our Closed Block Business. For the Financial Services Businesses, we analyze our segments’ operating performance using “adjusted operating income.” Results of the Closed Block Business for all periods are evaluated and presented only in accordance with U.S. GAAP. Adjusted operating income does not equate to “income from continuing operations before income taxes and equity in earnings of operating joint ventures” or “net income” as determined in accordance with U.S. GAAP but is the measure of segment profit or loss we use to evaluate segment performance and allocate resources, and consistent with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” is our measure of segment performance. Adjusted operating income is calculated for the segments of the Financial Services Businesses by adjusting each segment’s “income from continuing operations before income taxes and equity in earnings of operating joint ventures” for the following items:

•

realized investment gains (losses), net, except as indicated below, and related charges and adjustments;

•

net investment gains and losses on trading account assets supporting insurance liabilities and changes in experience-rated contractholder liabilities due to asset value changes;

•

the contribution to income/loss of divested businesses that have been or will be sold or exited that do not qualify for “discontinued operations” accounting treatment under U.S. GAAP; and

•

equity in earnings of operating joint ventures.

The items above are important to an understanding of our overall results of operations. Adjusted operating income is not a substitute for income determined in accordance with U.S. GAAP, and our definition of adjusted operating income may differ from that used by other companies. However, we believe that the presentation of adjusted operating income as we measure it for management purposes enhances understanding of our results of operations by highlighting the results from ongoing operations and the underlying profitability of the Financial Services Businesses. Adjusted operating income excludes “Realized investment gains (losses), net,” except as indicated below, and related charges and adjustments. A significant element of realized investment gains and losses are impairments and credit-related and interest rate-related gains and losses. Impairments and losses from sales of credit-impaired securities, the timing of which depends largely on market credit cycles, can vary considerably across periods. The timing of other sales that would result in gains or losses, such as interest rate-related gains or losses, is largely subject to our discretion and influenced by market opportunities, as well as our tax profile. Trends in the underlying profitability of our businesses can be more clearly identified without the fluctuating effects of these transactions. Similarly, adjusted operating income excludes investment gains and losses on trading account assets supporting insurance liabilities and changes in experience-rated contractholder liabilities due to asset value changes, because these recorded changes in asset and liability values will ultimately accrue to the contractholders. Adjusted operating income excludes the results of divested businesses because they are not relevant to understanding our ongoing operating results. The contributions to income/loss of wind-down businesses that we have not divested remain in adjusted operating income. See Note 8 to the Unaudited Interim Consolidated Financial Statements for further information on the presentation of segment results.

As noted above, certain “Realized investment gains (losses), net,” are included in adjusted operating income. We include in adjusted operating income the portion of our realized investment gains and losses on derivatives that arise from the termination of contracts used to hedge our foreign currency earnings in the same

period that the expected earnings emerge. Similarly, we include in adjusted operating income the portion of our realized investment gains and losses on derivatives that represent current period yield adjustments. The realized investment gains or losses from products that are free standing derivatives, or contain embedded derivatives, along with the realized investment gains or losses from associated derivative portfolios that are part of an economic hedging program related to the risk of these products, are included in adjusted operating income. Adjusted operating income also includes for certain embedded derivatives, as current period yield adjustments, a portion of the cumulative realized investment gains above the original fair value, on an amortized basis over the remaining life of the related security, or cumulative realized investment losses, and recoveries of such losses, in the period incurred. Adjusted operating income also includes those realized investment gains and losses that represent profit or loss of certain of our businesses which primarily originate investments for sale or syndication to unrelated investors.

Results of Operations for Financial Services Businesses by Segment

Insurance Division

Individual Life

Operating Results

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Operating results:
Revenues	$	668		$	467		$	1,928		$	1,611
Benefits and expenses		421			284			1,439			1,199

Adjusted operating income		247			183			489			412
Realized investment gains (losses), net, and related adjustments(1)		(30	)		(4	)		(38	)		(52	)

Income from continuing operations before income taxes and equity in earnings of operating joint ventures	$	217		$	179		$	451		$	360

(1)	Revenues exclude Realized investment gains (losses), net, and related adjustments. See “—Realized Investment Gains and General Account Investments—Realized Investment Gains.”

Adjusted Operating Income

2007 to 2006 Three Month Comparison. Adjusted operating income increased $64 million, from $183 million in the third quarter of 2006 to $247 million in the third quarter of 2007. Adjusted operating income for the third quarter of 2007 includes a $78 million benefit from a net reduction in amortization of deferred policy acquisition costs and other costs due to an increased estimate of total gross profits used as a basis for amortizing deferred policy acquisition costs and unearned revenue reserves, based on an annual review, primarily reflecting improved future mortality expectations, compared to a $46 million benefit from the annual review in the third quarter of 2006. Third quarter 2007 results also include a $57 million benefit from compensation received based on multi-year profitability of third-party products we distribute, while results for the year-ago quarter include a similar benefit amounting to $25 million. Absent the effect of these items, adjusted operating income was unchanged from the year-ago quarter, as less favorable mortality experience, net of reinsurance, compared to the prior year quarter was offset by higher fees resulting primarily from higher asset balances reflecting market value changes and the impact of refinements to certain reserves in the prior year quarter.

2007 to 2006 Nine Month Comparison. Adjusted operating income increased $77 million, from $412 million in the first nine months of 2006 to $489 million in the first nine months of 2007. Adjusted operating income for the first nine months of 2007 includes a $78 million benefit from a net reduction in amortization of deferred policy acquisition costs and other costs while adjusted operating income for the first nine months of 2006 included a $46 million benefit from a net reduction in amortization of deferred policy acquisition and other costs, based on an annual review, as discussed above. Results for the first nine months of 2007 also include a $57 million benefit from compensation received related to third-party products we distribute while the first nine months of 2006 included a $25 million benefit for this item, as discussed above. Absent the effect of these items, adjusted operating income for the first nine months of 2007 increased $13 million from the prior year period. This increase primarily reflects lower amortization of deferred policy acquisition costs net of related amortization of unearned revenue reserves reflecting more favorable separate account fund performance and policy persistency in the first nine months of 2007 as compared to the first nine months of 2006. In addition, the first nine months of 2007 benefited from higher fees resulting primarily from higher asset balances reflecting market value changes and higher margins from growth in term and universal life insurance in force. These items were partially offset by less favorable mortality experience, net of reinsurance, in the first nine months of 2007 compared to the first nine months of 2006.

Revenues

2007 to 2006 Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” increased by $201 million, from $467 million in the third quarter of 2006 to $668 million in the third quarter of 2007. Policy charges and fee income increased $109 million, including $102 million due to the effects of updates in both periods of our assumptions related to the amortization of unearned revenue reserves based on the annual reviews, as discussed above. Absent this item, policy charges and fee income increased $7 million reflecting growth in our universal life insurance in force. Asset management fees and other income increased $36 million, including a $32 million increase in compensation received based on multi-year profitability of third-party products we distribute, as discussed above. Premiums increased $28 million, primarily due to increased premiums on term life insurance reflecting continued growth of our in force block of term insurance. Net investment income increased $28 million, reflecting higher asset balances primarily from the financing of statutory capital needs for certain term and universal life insurance policies.

2007 to 2006 Nine Month Comparison. Revenues increased by $317 million, from $1.611 billion in the first nine months of 2006 to $1.928 billion in the first nine months of 2007. Policy charges and fee income increased $109 million, including $102 million due to the effects of updates in both periods of our assumptions related to the amortization of unearned revenue reserves based on the annual reviews, as discussed above. Absent this item, policy charges and fee income increased $7 million reflecting growth in our universal life insurance in force. Asset management fees and other income increased $49 million, including a $32 million increase in compensation received based on multi-year profitability of third-party products we distribute, as discussed above, as well as higher asset based fees due to higher asset balances reflecting market value changes. Premiums increased $77 million, primarily due to increased premiums on term life insurance reflecting continued growth of our in force block of term insurance. Net investment income increased $82 million, reflecting higher asset balances primarily from the financing of statutory capital needs for certain term and universal life insurance policies and higher yields in the first nine months of 2007.

Benefits and Expenses

2007 to 2006 Three Month Comparison. Benefits and expenses, as shown in the table above under “—Operating Results,” increased by $137 million, from $284 million in the third quarter of 2006 to $421 million in the third quarter of 2007. Absent the impacts of the annual reviews conducted in the third quarter of both periods, as discussed above, benefits and expenses increased $67 million, from $477 million in the third quarter of 2006 to $544 million in the third quarter of 2007. On this basis, policyholders’ benefits, including interest credited to policyholders’ account balances, increased $40 million, reflecting less favorable mortality experience,

net of reinsurance, compared to the third quarter of 2006 and increases in reserves on term life insurance associated with growth in our in force block of term insurance. Interest expense increased $21 million, primarily reflecting interest on borrowings related to the financing of statutory capital needs for certain term and universal life insurance policies.

2007 to 2006 Nine Month Comparison. Benefits and expenses increased $240 million, from $1.199 billion in the first nine months of 2006 to $1.439 billion in the first nine months of 2007. Absent the impacts of the annual reviews conducted in the third quarter of both periods, as discussed above, benefits and expenses increased $170 million, from $1.392 billion in the first nine months of 2006 to $1.562 billion in the first nine months of 2007. On this basis, policyholders’ benefits, including interest credited to policyholders’ account balances, increased $128 million, reflecting less favorable mortality experience, net of reinsurance, compared to the first nine months of 2006 and increases in reserves on term life insurance associated with growth in our in force block of term insurance. Also on this basis, amortization of deferred policy acquisition costs decreased $25 million, reflecting more favorable separate account fund performance and policy persistency compared to the first nine months of 2006. Interest expense increased $61 million, primarily reflecting interest on borrowings related to the financing of statutory capital needs for certain term and universal life insurance policies.

Sales Results

The following table sets forth individual life insurance business sales, as measured by scheduled premiums from new sales on an annualized basis and first year excess premiums and deposits on a cash-received basis, for the periods indicated. Sales of the individual life insurance business do not correspond to revenues under U.S. GAAP. They are, however, a relevant measure of business activity. In managing our individual life insurance business, we analyze new sales on this basis because it measures the current sales performance of the business, while revenues primarily reflect the renewal persistency and aging of in force policies written in prior years and net investment income as well as current sales.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
	(in millions)
Life insurance sales(1):
Excluding corporate-owned life insurance:
Variable life	$	19	$	25	$	86	$	70
Universal life		40		34		129		117
Term life		54		35		157		100

Total excluding corporate-owned life insurance		113		94		372		287
Corporate-owned life insurance		1		5		9		10

Total	$	114	$	99	$	381	$	297


	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
	(in millions)
Life insurance sales by distribution channel, excluding corporate-owned life insurance(1):
Prudential Agents	$	44	$	37	$	128	$	127
Third party		69		57		244		160

Total	$	113	$	94	$	372	$	287

(1)	Scheduled premiums from new sales on an annualized basis and first year excess premiums and deposits on a cash-received basis.

2007 to 2006 Three Month Comparison. Sales of new life insurance, excluding corporate-owned life insurance, measured as described above, increased $19 million, from $94 million in the third quarter of 2006 to $113 million in the third quarter of 2007, primarily due to increased sales of term life and universal life products of $25 million.

The increase in sales of life insurance, excluding corporate-owned life insurance, was primarily driven by a $12 million increase in sales from the third party distribution channel and a $7 million increase in sales by Prudential Agents, which reflects an increase in agent productivity. The number of agents declined from 2,814 at September 30, 2006 to 2,552 at September 30, 2007.

2007 to 2006 Nine Month Comparison. Sales of new life insurance, excluding corporate-owned life insurance, measured as described above, increased $85 million, from $287 million in the first nine months of 2006 to $372 million in the first nine months of 2007. Sales of term life and universal life products increased $69 million. Sales of variable life products increased $16 million, which included the benefit of several large case sales in 2007.

The increase in sales of life insurance, excluding corporate-owned life insurance, was driven by an $84 million increase in sales from the third party distribution channel across all product lines. Sales by Prudential Agents of $128 million in the first nine months of 2007 were essentially flat from the prior year.

Policy Surrender Experience

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Cash value of surrenders	$	223		$	181		$	565		$	584

Cash value of surrenders as a percentage of mean future benefit reserves, policyholders’ account balances, and separate account balances		3.8	%		3.4	%		3.3	%		3.7	%

2007 to 2006 Three Month Comparison. The total cash value of surrenders increased $42 million, from $181 million in the third quarter of 2006 to $223 million in the third quarter of 2007, due to the surrender of a single large corporate-owned life insurance case in the third quarter of 2007. Cash value of surrenders as a percentage of mean future policy benefit reserves, policyholders’ account balances and separate account balances increased from 3.4% in the third quarter of 2006 to 3.8% in the third quarter of 2007, reflecting the surrender of the large corporate-owned life insurance case in the third quarter of 2007.

2007 to 2006 Nine Month Comparison. The total cash value of surrenders decreased $19 million, from $584 million in the first nine months of 2006 to $565 million in the first nine months of 2007, as the first nine months of 2006 included a greater volume of surrenders of variable corporate-owned life insurance. Cash value of surrenders as a percentage of mean future policy benefit reserves, policyholders’ account balances and separate account balances decreased from 3.7% in the first nine months of 2006 to 3.3% in the first nine months of 2007, reflecting the decrease in surrenders of variable corporate-owned life insurance from the first nine months of 2006.

Individual Annuities

Operating Results

The following table sets forth the Individual Annuities segment’s operating results for the periods indicated.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Operating results:
Revenues	$	629		$	583		$	1,865		$	1,505
Benefits and expenses		426			391			1,316			1,073

Adjusted operating income		203			192			549			432
Realized investment gains (losses), net, and related adjustments(1)		(29	)		(25	)		(36	)		(76	)
Related charges(1)(2)		5			15			4			30

Income from continuing operations before income taxes and equity in earnings of operating joint ventures	$	179		$	182		$	517		$	386

(1)

Revenues exclude Realized investment gains (losses), net, and related charges and adjustments. The related charges represent payments related to the market value adjustment features of certain of our annuity products. See “—Realized Investment Gains and General Account Investments—Realized Investment Gains.”

(2)	Benefits and expenses exclude related charges which represent the unfavorable (favorable) impact of Realized investment gains (losses), net, on change in reserves and the amortization of deferred policy acquisition costs, deferred sales inducements and value of business acquired.

On June 1, 2006, we acquired the variable annuity business of The Allstate Corporation, or Allstate, through a reinsurance transaction for $635 million of total consideration, consisting primarily of a $628 million ceding commission. Our initial investment in the business was approximately $600 million, consisting of the total consideration, offset by the related tax benefits, plus an additional contribution of $94 million to meet regulatory capital requirements. See Note 3 to the Unaudited Interim Consolidated Financial Statements for further discussion of this acquisition.

Adjusted Operating Income

2007 to 2006 Three Month Comparison. Adjusted operating income increased $11 million, from $192 million in the third quarter of 2006 to $203 million in the third quarter of 2007. Results for both periods include the impact of an annual review of our estimate of total gross profits used as a basis for amortizing deferred policy acquisition and other costs and the reserve for the guaranteed minimum death and income benefit features of our variable annuity products. Adjusted operating income for the third quarter of 2007 included a $30 million benefit from this annual review, reflecting market value increases in the underlying assets associated with our variable annuity products, and decreased cost of actual and expected death claims, partially offset by the impact of model refinements and higher expected lapse rates for the variable annuity business acquired from Allstate. Adjusted operating income for the third quarter of 2006 included a $37 million benefit from the annual review, primarily reflecting improved net interest spread from increased investment yields.

Absent the effect of the annual reviews discussed above, adjusted operating income for the third quarter of 2007 increased $18 million from the third quarter of 2006, primarily reflecting higher fee income driven by higher average asset balances from market appreciation and positive net asset flows in our variable annuity account values. The increase in fee income was partially offset by an increase in amortization of deferred policy acquisition and other costs reflecting increased gross profits in the current period. Also offsetting the increase in

fee income was an increase in general and administrative expenses, net of capitalization, reflecting higher distribution and asset management costs associated with growth in variable annuity account values and increased variable annuity sales, as well as growth of the business.

2007 to 2006 Nine Month Comparison. Adjusted operating income increased $117 million, from $432 million in the first nine months of 2006 to $549 million in the first nine months of 2007. Adjusted operating income for the first nine months of 2007 included a $30 million benefit and the first nine months of 2006 included a $37 million benefit from the annual reviews discussed above. Absent the effect of these items, adjusted operating income for the first nine months of 2007 increased $124 million from the first nine months of 2006. Adjusted operating income from the variable annuity business acquired from Allstate, excluding the impact of the annual review discussed above, increased $36 million, reflecting a $68 million contribution for the first nine months of 2007, compared to $32 million for the first nine months of 2006, which reflects results only for the initial four months of operations from the date of acquisition. The remainder of the increase came primarily from higher fee income driven by higher average asset balances from market appreciation and positive net asset flows in our variable annuity account values. Also contributing to the increase was a $20 million favorable variance in the mark-to-market of embedded derivatives and related hedge positions associated with our living benefit features, net of amortization of deferred policy acquisition and other costs. Partially offsetting these items was an increase in amortization of deferred policy acquisition and other costs reflecting increased gross profits in the current period, and an increase in general and administrative expenses, net of capitalization, reflecting higher distribution and asset management costs associated with growth in variable annuity account values and increased variable annuity sales, as well as growth of the business. In addition, interest expense increased driven by higher borrowings related to growth of the business, and net investment income decreased primarily from a shift in the marketplace from fixed income investments to variable investments.

The contribution of the acquired Allstate business to adjusted operating income for the first nine months of 2007, excluding the impact of the annual review discussed above, consists of revenues of $289 million and benefits and expenses of $221 million. Revenues from the acquired business consisted primarily of policy charges and fees of $190 million, net investment income of $52 million and asset management fees and other income of $43 million. Benefits and expenses from this business, excluding the impact of the annual review discussed above, consisted primarily of general and administrative expenses, net of capitalization, of $150 million and policyholders’ benefits, including interest credited to policyholders’ account balances, of $67 million.

Revenues

2007 to 2006 Three Month Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $46 million, from $583 million in the third quarter of 2006 to $629 million in the third quarter of 2007, primarily relating to an $84 million increase in policy charges and fees and asset management fees and other income reflecting an increase in variable annuity account values driven by changes in average market value and positive net flows. Partially offsetting these items was a $25 million decrease in net investment income, primarily from a shift in the marketplace from fixed income investments to variable investments.

2007 to 2006 Nine Month Comparison. Revenues, as shown in the table above under “—Operating Results,” increased $360 million, from $1.505 billion in the first nine months of 2006 to $1.865 billion in the first nine months of 2007, including increased revenues of $162 million related to the variable annuity business acquired from Allstate. The remainder of the increase in revenues came primarily from a $247 million increase in policy charges and fees and asset management fees and other income reflecting an increase in variable annuity account values driven by changes in average market value and positive net flows. Included in the increase in asset management fees and other income is a $38 million favorable variance in the mark-to-market of embedded derivatives and related hedge positions associated with our living benefit features. Partially offsetting these items was a $44 million decrease in net investment income, excluding the impact from the business acquired from Allstate, primarily from a shift in the marketplace from fixed income investments to variable investments.

Benefits and Expenses

2007 to 2006 Three Month Comparison. Benefits and expenses, as shown in the table above under “—Operating Results,” increased $35 million, from $391 million in the third quarter of 2006 to $426 million in the third quarter of 2007. Absent the impact of the annual reviews discussed above, benefits and expenses increased $28 million. On this basis, general and administrative expenses, net of capitalization, increased $30 million, reflecting higher distribution and asset management costs associated with growth in variable annuity account values and increased variable annuity sales, as well as growth of the business. Also on this basis, amortization of deferred policy acquisition costs increased $16 million, reflecting increased gross profits in the current period. Partially offsetting these items is a $19 million decrease in policyholders’ benefits, including interest credited to policyholders’ account balances, primarily reflecting a decrease in interest credited to policyholders due to a shift in the marketplace from fixed income investments to variable investments.

2007 to 2006 Nine Month Comparison. Benefits and expenses, as shown in the table above under “—Operating Results,” increased $243 million, from $1.073 billion in the first nine months of 2006 to $1.316 billion in the first nine months of 2007. Excluding the impact of the annual reviews discussed above and increased benefits and expenses of $126 million related to the variable annuity business acquired from Allstate, benefits and expenses increased $110 million from the first nine months of 2006 to the first nine months of 2007. Contributing to this increase is a $67 million increase in general and administrative expenses, net of capitalization, due to higher distribution and asset management costs associated with growth in variable annuity account values and increased variable annuity sales, and growth of the business. Also contributing to this increase was a $53 million increase in amortization of deferred policy acquisition costs reflecting increased gross profits in the current period. In addition, interest expense increased $8 million, driven by higher borrowings related to growth of the business. Partially offsetting these items was an $18 million reduction in policyholders’ benefits, including interest credited to policyholders’ account balances, primarily reflecting a decrease in interest credited to policyholders due to a shift in the marketplace from fixed income investments to variable investments.

Account Values

The following table sets forth changes in account values for the individual annuity business, for the periods indicated. For our individual annuity business, assets are reported at account value, and net sales (redemptions) are gross sales minus redemptions or surrenders and withdrawals, as applicable.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Variable Annuities(1):
Beginning total account value	$	78,968		$	68,807		$	74,555		$	50,778
Sales		2,825			2,323			8,637			6,952
Surrenders and withdrawals		(2,328	)		(2,084	)		(7,153	)		(5,426	)

Net sales		497			239			1,484			1,526
Benefit payments		(265	)		(244	)		(870	)		(654	)

Net flows		232			(5	)		614			872
Change in market value, interest credited and other activity		2,295			2,012			6,941			3,240
Policy charges		(322	)		(259	)		(937	)		(647	)
Acquisition		—			—			—			16,312