UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORMN-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
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Investment Company Act file number: | | 811-01612 |
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Exact name of registrant as specified in charter: | | The Prudential Variable ContractAccount-2 |
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Address of principal executive offices: | | 655 Broad Street, 17th Floor |
| | Newark, New Jersey 07102 |
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Name and address of agent for service: | | Andrew R. French |
| | 655 Broad Street, 17th Floor |
| | Newark, New Jersey 07102 |
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Registrant’s telephone number, including area code: | | 800-225-1852 |
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Date of fiscal year end: | | 12/31/2019 |
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Date of reporting period: | | 06/30/2019 |
Item 1 – Reports to Stockholders
The Prudential Variable Contract Account-2
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SEMIANNUAL REPORT | | June 30, 2019 |
This report is for the information of persons participating in The Prudential Variable Contract Account-2 (VCA-2, or the “Account”). VCA-2 is a group annuity insurance product issued by The Prudential Insurance Company of America, 751 Broad Street, Newark, NJ 07102-3777, and is distributed by Prudential Investment Management Services LLC (PIMS), member SIPC, 655 Broad Street, 19th Floor, Newark, NJ 07102. Both are Prudential Financial companies.
All are Prudential Financial companies and each is solely responsible for its financial condition and contractual obligations.
The views expressed in this report and information about the Account’s portfolio holdings are for the period covered by this report and are subject to change thereafter.
The accompanying financial statements as of June 30, 2019, were not audited; and accordingly, no auditor’s opinion is expressed on them.
Please note that this document may include prospectus supplements that are separate from and not a part of this report.
Investors should consider the contract and VCA-2’s investment objectives, risks, charges and expenses carefully before investing. This and other important information is contained in the prospectus that can be obtained from your financial professional. You should read the prospectus carefully before investing.
Annuity contracts contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. Your plan sponsor or licensed financial professional can provide you with costs and complete details. Contract guarantees are based on the claims-paying ability of the issuing company.
Information regarding how the Account voted proxies relating to portfolio securities during the most recent12-month period ended June 30 is available on the website of the Securities and Exchange Commission (Commission), at www.sec.gov.
The Account’s Statement of Additional Information contains additional information about the members of the Account’s Committee and is available without charge upon request by calling (800)458-6333.
The Account will file with the Commission a complete listing of portfolio holdings as of its first and third quarter-end onForm N-PORT.Form N-PORT will be available on the Commission’s website atwww.sec.gov or call(800) SEC-0330. Participants may obtain copies of Form N-PORT filings by calling(800) 458-6333.
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The Prudential Variable Contract Account-2 Table of Contents | | Semiannual Report | | June 30, 2019 |
∎ | | PRESENTATION OF PORTFOLIO HOLDINGS |
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Section A | | Statement of Net Assets and Other Financial Statements | | |
Section B | | Financial Highlights | | |
Section C | | Notes to Financial Statements | | |
∎ | | APPROVAL OF ADVISORY AGREEMENTS |
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The Prudential Variable Contract Account-2 Letter to Participants | | June 30, 2019 |
At Prudential, our primary objective is to help investors achieve and maintain long-term financial success. This Variable ContractAccount-2 semiannual report outlines our efforts to achieve this goal. We hope you find it informative and useful.
Prudential has been building on a heritage of success for more than 135 years. We believe the array of our products provides a highly attractive value proposition to clients like you who are focused on financial security.
Your financial professional is the best resource to help you make the most informed investment decisions. Together, you can build a diversified investment portfolio that aligns with your long-term financial goals. Please keep in mind that diversification and asset allocation strategies do not assure a profit or protect against loss in declining markets.
Thank you for selecting Prudential as one of your financial partners. We value your trust and appreciate the opportunity to help you achieve financial security.
Sincerely,
Stuart Parker
President,
The Prudential Variable Contract Account-2 | July 31, 2019 |
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The Prudential Variable Contract Account-2 (VCA-2) Presentation of Portfolio Holdings — unaudited | | June 30, 2019 |
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VCA-2 | |
Ten Largest Holdings | | Line of Business | | | (% of Net Assets | ) |
JPMorgan Chase & Co. | | Banks | | | 2.8% | |
Microsoft Corp. | | Software | | | 2.8% | |
Walt Disney Co. (The) | | Entertainment | | | 2.5% | |
Alphabet, Inc. (Class A Stock) | | Interactive Media & Services | | | 2.4% | |
AstraZeneca PLC, ADR | | Pharmaceuticals | | | 2.2% | |
Chevron Corp. | | Oil, Gas & Consumable Fuels | | | 2.2% | |
Amazon.com, Inc. | | Internet & Direct Marketing Retail | | | 2.0% | |
Mastercard, Inc. (Class A Stock) | | IT Services | | | 2.0% | |
Pfizer, Inc. | | Pharmaceuticals | | | 2.0% | |
QUALCOMM, Inc. | | Semiconductors & Semiconductor Equipment | | | 1.9% | |
For a complete list of holdings, please refer to the Statement of Net Assets section of this report. Holdings reflect only long-term investments. Holdings/Issues/Industries/Sectors are subject to change.
FINANCIAL STATEMENTS OF VCA-2
| | | | | | |
| | |
| | STATEMENT OF NET ASSETS (Unaudited) | | |
June 30, 2019
| | | | | | | | |
LONG-TERM INVESTMENTS — 97.0% | |
COMMON STOCKS | | Shares | | | Value | |
Aerospace & Defense — 3.0% | | | | | | | | |
Airbus SE (France) | | | 10,497 | | | $ | 1,487,773 | |
Boeing Co. (The) | | | 7,501 | | | | 2,730,439 | |
United Technologies Corp. | | | 17,730 | | | | 2,308,446 | |
| | | | | | | | |
| | | | | | | 6,526,658 | |
| | | | | | | | |
Automobiles — 0.5% | | | | | | | | |
Tesla, Inc.* | | | 4,498 | | | | 1,005,123 | |
| | | | | | | | |
Banks — 9.5% | | | | | | | | |
Bank of America Corp. | | | 138,941 | | | | 4,029,289 | |
BB&T Corp. | | | 28,751 | | | | 1,412,537 | |
Citigroup, Inc. | | | 53,308 | | | | 3,733,159 | |
JPMorgan Chase & Co. | | | 54,307 | | | | 6,071,523 | |
PNC Financial Services Group, Inc. (The) | | | 18,380 | | | | 2,523,206 | |
SunTrust Banks, Inc. | | | 22,711 | | | | 1,427,386 | |
Wells Fargo & Co. | | | 31,409 | | | | 1,486,274 | |
| | | | | | | | |
| | | | | | | 20,683,374 | |
| | | | | | | | |
Beverages — 0.7% | | | | | | | | |
PepsiCo, Inc. | | | 11,288 | | | | 1,480,195 | |
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Building Products — 1.1% | | | | | | | | |
Johnson Controls International PLC | | | 57,688 | | | | 2,383,091 | |
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Capital Markets — 0.9% | | | | | | | | |
Goldman Sachs Group, Inc. (The) | | | 9,199 | | | | 1,882,115 | |
| | | | | | | | |
Chemicals — 2.2% | | | | | | | | |
FMC Corp. | | | 18,829 | | | | 1,561,865 | |
Linde PLC (United Kingdom) | | | 16,122 | | | | 3,237,298 | |
| | | | | | | | |
| | | | | | | 4,799,163 | |
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Communications Equipment — 2.2% | | | | | |
Cisco Systems, Inc. | | | 67,360 | | | | 3,686,613 | |
Nokia OYJ (Finland), ADR | | | 221,436 | | | | 1,109,394 | |
| | | | | | | | |
| | | | | | | 4,796,007 | |
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Consumer Finance — 2.0% | | | | | | | | |
Capital One Financial Corp. | | | 29,849 | | | | 2,708,498 | |
SLM Corp. | | | 168,496 | | | | 1,637,781 | |
| | | | | | | | |
| | | | | | | 4,346,279 | |
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Diversified Telecommunication Services — 1.4% | | | | | |
Verizon Communications, Inc. | | | 54,514 | | | | 3,114,385 | |
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Electric Utilities — 3.0% | | | | | | | | |
American Electric Power Co., Inc. | | | 41,306 | | | | 3,635,341 | |
Exelon Corp. | | | 60,327 | | | | 2,892,077 | |
| | | | | | | | |
| | | | | | | 6,527,418 | |
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Electrical Equipment — 0.7% | | | | | | | | |
Emerson Electric Co. | | | 22,759 | | | | 1,518,481 | |
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Energy Equipment & Services — 0.3% | | | | | |
Schlumberger Ltd. | | | 15,579 | | | | 619,110 | |
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Entertainment — 4.0% | | | | | | | | |
Netflix, Inc.* | | | 8,610 | | | | 3,162,625 | |
Walt Disney Co. (The) | | | 39,071 | | | | 5,455,875 | |
| | | | | | | | |
| | | | | | | 8,618,500 | |
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COMMON STOCKS (continued) | | Shares | | | Value | |
Equity Real Estate Investment Trusts (REITs) — 2.5% | |
American Campus Communities, Inc. | | | 32,184 | | | $ | 1,485,614 | |
American Tower Corp. | | | 11,707 | | | | 2,393,496 | |
Boston Properties, Inc. | | | 11,330 | | | | 1,461,570 | |
| | | | | | | | |
| | | | | | | 5,340,680 | |
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Food & Staples Retailing — 1.7% | | | | | | | | |
Walmart, Inc. | | | 32,911 | | | | 3,636,336 | |
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Food Products — 1.9% | | | | | | | | |
Conagra Brands, Inc. | | | 41,310 | | | | 1,095,541 | |
Mondelez International, Inc. (Class A Stock) | | | 57,750 | | | | 3,112,725 | |
| | | | | | | | |
| | | | | | | 4,208,266 | |
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Health Care Equipment & Supplies — 1.6% | |
Intuitive Surgical, Inc.* | | | 2,967 | | | | 1,556,340 | |
Zimmer Biomet Holdings, Inc. | | | 16,879 | | | | 1,987,333 | |
| | | | | | | | |
| | | | | | | 3,543,673 | |
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Health Care Providers & Services — 1.0% | |
Laboratory Corp. of America Holdings* | | | 12,293 | | | | 2,125,460 | |
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Hotels, Restaurants & Leisure — 1.0% | | | | | |
McDonald’s Corp. | | | 10,248 | | | | 2,128,100 | |
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Household Products — 1.6% | | | | | | | | |
Procter & Gamble Co. (The) | | | 31,289 | | | | 3,430,839 | |
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Insurance — 3.0% | | | | | | | | |
Brighthouse Financial, Inc.* | | | 19,281 | | | | 707,420 | |
Chubb Ltd. (Switzerland) | | | 22,440 | | | | 3,305,188 | |
MetLife, Inc. | | | 49,754 | | | | 2,471,281 | |
| | | | | | | | |
| | | | | | | 6,483,889 | |
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Interactive Media & Services — 4.4% | | | | | |
Alphabet, Inc. (Class A Stock)* | | | 4,829 | | | | 5,228,841 | |
Facebook, Inc. (Class A Stock)* | | | 15,762 | | | | 3,042,066 | |
Tencent Holdings Ltd. (China), ADR | | | 29,333 | | | | 1,327,612 | |
| | | | | | | | |
| | | | | | | 9,598,519 | |
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Internet & Direct Marketing Retail — 3.2% | | | | | |
Alibaba Group Holding Ltd. (China), ADR* | | | 15,885 | | | | 2,691,713 | |
Amazon.com, Inc.* | | | 2,276 | | | | 4,309,902 | |
| | | | | | | | |
| | | | | | | 7,001,615 | |
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IT Services — 4.8% | | | | | | | | |
Adyen NV (Netherlands), 144A* | | | 4,012 | | | | 3,099,426 | |
Mastercard, Inc. (Class A Stock) | | | 16,101 | | | | 4,259,197 | |
PayPal Holdings, Inc.* | | | 27,256 | | | | 3,119,722 | |
| | | | | | | | |
| | | | | | | 10,478,345 | |
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Life Sciences Tools & Services — 1.6% | | | | | |
Illumina, Inc.* | | | 9,276 | | | | 3,414,959 | |
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Media — 2.3% | | | | | | | | |
Comcast Corp. (Class A Stock) | | | 79,831 | | | | 3,375,255 | |
Liberty Global PLC (United Kingdom) (Class C Stock)* | | | 60,767 | | | | 1,612,148 | |
| | | | | | | | |
| | | | | | | 4,987,403 | |
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SEE NOTES TO FINANCIAL STATEMENTS.
A1
FINANCIAL STATEMENTS OF VCA-2
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| | STATEMENT OF NET ASSETS (Unaudited) | | |
June 30, 2019
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COMMON STOCKS (continued) | | Shares | | | Value | |
Multi-Utilities — 1.1% | | | | | | | | |
Ameren Corp. | | | 31,685 | | | $ | 2,379,860 | |
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Oil, Gas & Consumable Fuels — 6.3% | |
Anadarko Petroleum Corp. | | | 10,544 | | | | 743,985 | |
Chevron Corp. | | | 38,603 | | | | 4,803,757 | |
Noble Energy, Inc. | | | 65,045 | | | | 1,457,008 | |
Royal Dutch Shell PLC (Netherlands) (Class A Stock), ADR | | | 48,662 | | | | 3,166,436 | |
Suncor Energy, Inc. (Canada) | | | 67,788 | | | | 2,112,274 | |
Williams Cos., Inc. (The) | | | 49,366 | | | | 1,384,223 | |
| | | | | | | | |
| | | | | | | 13,667,683 | |
| | | | | | | | |
Pharmaceuticals — 8.1% | | | | | | | | |
Allergan PLC | | | 2,793 | | | | 467,632 | |
AstraZeneca PLC (United Kingdom), ADR | | | 117,067 | | | | 4,832,526 | |
Bristol-Myers Squibb Co. | | | 29,953 | | | | 1,358,369 | |
Elanco Animal Health, Inc.* | | | 27,522 | | | | 930,244 | |
Eli Lilly & Co. | | | 23,782 | | | | 2,634,808 | |
Merck & Co., Inc. | | | 36,324 | | | | 3,045,767 | |
Pfizer, Inc. | | | 97,392 | | | | 4,219,021 | |
| | | | | | | | |
| | | | | | | 17,488,367 | |
| | | | | | | | |
Road & Rail — 1.3% | | | | | | | | |
Union Pacific Corp. | | | 16,342 | | | | 2,763,596 | |
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Semiconductors & Semiconductor Equipment — 5.0% | |
Broadcom, Inc. | | | 8,709 | | | | 2,506,973 | |
NVIDIA Corp. | | | 14,937 | | | | 2,453,103 | |
QUALCOMM, Inc. | | | 55,056 | | | | 4,188,110 | |
Texas Instruments, Inc. | | | 14,052 | | | | 1,612,608 | |
| | | | | | | | |
| | | | | | | 10,760,794 | |
| | | | | | | | |
Software — 7.7% | | | | | | | | |
Adobe, Inc.* | | | 11,361 | | | | 3,347,519 | |
Microsoft Corp. | | | 44,815 | | | | 6,003,417 | |
PTC, Inc.* | | | 17,844 | | | | 1,601,678 | |
salesforce.com, Inc.* | | | 24,780 | | | | 3,759,869 | |
SAP SE (Germany), ADR | | | 14,849 | | | | 2,031,343 | |
| | | | | | | | |
| | | | | | | 16,743,826 | |
| | | | | | | | |
Specialty Retail — 1.7% | | | | | | | | |
Lowe’s Cos., Inc. | | | 15,890 | | | | 1,603,460 | |
Ross Stores, Inc. | | | 21,752 | | | | 2,156,058 | |
| | | | | | | | |
| | | | | | | 3,759,518 | |
| | | | | | | | |
Technology Hardware, Storage & Peripherals — 0.6% | |
Apple, Inc. | | | 6,083 | | | | 1,203,947 | |
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Textiles, Apparel & Luxury Goods — 3.1% | |
Lululemon Athletica, Inc. (Canada)* | | | 18,490 | | | | 3,332,083 | |
NIKE, Inc. (Class B Stock) | | | 26,032 | | | | 2,185,386 | |
Tapestry, Inc. | | | 35,267 | | | | 1,119,022 | |
| | | | | | | | |
| | | | | | | 6,636,491 | |
| | | | | | | | |
TOTAL COMMON STOCKS (cost $142,272,624) | | | | 210,082,065 | |
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| | Shares | | | Value | |
|
SHORT-TERM INVESTMENT — 2.0% | |
AFFILIATED MUTUAL FUND | |
PGIM Core Ultra Short Bond Fund (cost $4,279,552)(a) | | | 4,279,552 | | | $ | 4,279,552 | |
| | | | | | | | |
TOTAL INVESTMENTS — 99.0% (cost $146,552,176) | | | | 214,361,617 | |
| | | | | | | | |
OTHER ASSETS IN EXCESS OF LIABILITIES — 1.0% | |
Cash | | | | 171,695 | |
Receivable for Securities Sold | | | | 2,308,038 | |
Dividends and Interests Receivable | | | | 159,661 | |
Tax Reclaim Receivable | | | | 6,665 | |
Payable for Pending Capital Transactions | | | | (6,259 | ) |
Payable for Securities Purchased | | | | (405,924 | ) |
| | | | | | | | |
OTHER ASSETS IN EXCESS OF LIABILITIES | | | | 2,233,876 | |
| | | | | | | | |
NET ASSETS — 100.0% | | | $ | 216,595,493 | |
| | | | | | | | |
NET ASSETS, representing: | | | | | |
Equity of Participants — 2,489,477 Accumulation Units at an Accumulation Unit Value of $84.7706 | | | $ | 211,034,583 | |
Equity of Annuitants | | | | 4,755,077 | |
Equity of The Prudential Insurance Company of America | | | | 805,833 | |
| | | | | | | | |
| | | | | | $ | 216,595,493 | |
| | | | | | | | |
* | Non-income producing security. |
(a) | PGIM Investments LLC, the manager of the Account, also serves as manager of the PGIM Core Ultra Short Bond Fund. |
The following abbreviations are used in the semiannual report:
| | |
144A | | Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in tranactions exempt from registration, typically only to qualified institutional buyers. |
ADR | | American Depositary Receipt |
Fair Value Measurements:
Various inputs are used in determining the value of the Account’s investments. These inputs are summarized in the three broad levels listed below.
Level 1— | unadjusted quoted prices generally in active markets for identical securities. |
Level 2— | quoted prices for similar securities, interest rates and yield curves, prepayment speeds, foreign currency exchange rates, and other observable inputs. |
Level 3— | unobservable inputs for securities valued in accordance with the Account’s Committee approved fair valuation procedures. |
SEE NOTES TO FINANCIAL STATEMENTS.
A2
FINANCIAL STATEMENTS OF VCA-2
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| | |
| | STATEMENT OF NET ASSETS (Unaudited) | | |
June 30, 2019
The following is a summary of the inputs used as of June 30, 2019 in valuing such portfolio securities:
| | | | | | | | | | | | |
| | Level 1 | | | Level 2 | | | Level 3 | |
Investments in Securities | | | | | | | | | | | | |
Common Stocks | | | | | | | | | | | | |
Aerospace & Defense | | $ | 5,038,885 | | | $ | 1,487,773 | | | $ | — | |
Automobiles | | | 1,005,123 | | | | — | | | | — | |
Banks | | | 20,683,374 | | | | — | | | | — | |
Beverages | | | 1,480,195 | | | | — | | | | — | |
Building Products | | | 2,383,091 | | | | — | | | | — | |
Capital Markets | | | 1,882,115 | | | | — | | | | — | |
Chemicals | | | 4,799,163 | | | | — | | | | — | |
Communications Equipment | | | 4,796,007 | | | | — | | | | — | |
Consumer Finance | | | 4,346,279 | | | | — | | | | — | |
Diversified Telecommunication Services | | | 3,114,385 | | | | — | | | | — | |
Electric Utilities | | | 6,527,418 | | | | — | | | | — | |
Electrical Equipment | | | 1,518,481 | | | | — | | | | — | |
Energy Equipment & Services | | | 619,110 | | | | — | | | | — | |
Entertainment | | | 8,618,500 | | | | — | | | | — | |
Equity Real Estate Investment Trusts (REITs) | | | 5,340,680 | | | | — | | | | — | |
Food & Staples Retailing | | | 3,636,336 | | | | — | | | | — | |
Food Products | | | 4,208,266 | | | | — | | | | — | |
Health Care Equipment & Supplies | | | 3,543,673 | | | | — | | | | — | |
Health Care Providers & Services | | | 2,125,460 | | | | — | | | | — | |
Hotels, Restaurants & Leisure | | | 2,128,100 | | | | — | | | | — | |
Household Products | | | 3,430,839 | | | | — | | | | — | |
Insurance | | | 6,483,889 | | | | — | | | | — | |
Interactive Media & Services | | | 9,598,519 | | | | — | | | | — | |
Internet & Direct Marketing Retail | | | 7,001,615 | | | | — | | | | — | |
IT Services | | | 7,378,919 | | | | 3,099,426 | | | | — | |
Life Sciences Tools & Services | | | 3,414,959 | | | | — | | | | — | |
Media | | | 4,987,403 | | | | — | | | | — | |
Multi-Utilities | | | 2,379,860 | | | | — | | | | — | |
Oil, Gas & Consumable Fuels | | | 13,667,683 | | | | — | | | | — | |
Pharmaceuticals | | | 17,488,367 | | | | — | | | | — | |
Road & Rail | | | 2,763,596 | | | | — | | | | — | |
Semiconductors & Semiconductor Equipment | | | 10,760,794 | | | | — | | | | — | |
Software | | | 16,743,826 | | | | — | | | | — | |
Specialty Retail | | | 3,759,518 | | | | — | | | | — | |
Technology Hardware, Storage & Peripherals | | | 1,203,947 | | | | — | | | | — | |
Textiles, Apparel & Luxury Goods | | | 6,636,491 | | | | — | | | | — | |
Affiliated Mutual Fund | | | 4,279,552 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total | | $ | 209,774,418 | | | $ | 4,587,199 | | | $ | — | |
| | | | | | | | | | | | |
Industry Classification:
The industry classification of investments and other assets in excess of other liabilities shown as a percentage of net assets as of June 30, 2019 were as follows (unaudited):
| | | | |
Banks | | | 9.5 | % |
Pharmaceuticals | | | 8.1 | |
Software | | | 7.7 | |
Oil, Gas & Consumable Fuels | | | 6.3 | |
Semiconductors & Semiconductor Equipment | | | 5.0 | |
IT Services | | | 4.8 | |
Interactive Media & Services | | | 4.4 | |
Entertainment | | | 4.0 | |
| | | | |
Internet & Direct Marketing Retail | | | 3.2 | % |
Textiles, Apparel & Luxury Goods | | | 3.1 | |
Electric Utilities | | | 3.0 | |
Aerospace & Defense | | | 3.0 | |
Insurance | | | 3.0 | |
Equity Real Estate Investment Trusts (REITs) | | | 2.5 | |
Media | | | 2.3 | |
Chemicals | | | 2.2 | |
SEE NOTES TO FINANCIAL STATEMENTS.
A3
FINANCIAL STATEMENTS OF VCA-2
| | | | | | |
| | |
| | STATEMENT OF NET ASSETS (Unaudited) | | |
June 30, 2019
| | | | |
Industry Classification (cont.): | | | |
Communications Equipment | | | 2.2 | % |
Consumer Finance | | | 2.0 | |
Affiliated Mutual Fund | | | 2.0 | |
Food Products | | | 1.9 | |
Specialty Retail | | | 1.7 | |
Food & Staples Retailing | | | 1.7 | |
Health Care Equipment & Supplies | | | 1.6 | |
Household Products | | | 1.6 | |
Life Sciences Tools & Services | | | 1.6 | |
Diversified Telecommunication Services | | | 1.4 | |
Road & Rail | | | 1.3 | |
Building Products | | | 1.1 | |
| | | | |
Multi-Utilities | | | 1.1 | % |
Hotels, Restaurants & Leisure | | | 1.0 | |
Health Care Providers & Services | | | 1.0 | |
Capital Markets | | | 0.9 | |
Electrical Equipment | | | 0.7 | |
Beverages | | | 0.7 | |
Technology Hardware, Storage & Peripherals | | | 0.6 | |
Automobiles | | | 0.5 | |
Energy Equipment & Services | | | 0.3 | |
| | | | |
| | | 99.0 | |
Other assets in excess of liabilities | | | 1.0 | |
| | | | |
| | | 100.0 | % |
| | | | |
SEE NOTES TO FINANCIAL STATEMENTS.
A4
FINANCIAL STATEMENTS OF VCA-2
| | | | | | |
| | |
| | STATEMENT OF OPERATIONS (Unaudited) | | |
Six Months Ended June 30, 2019
| | | | |
| | | |
INVESTMENT INCOME | | | | |
Unaffiliated Dividend Income (net of $25,260 foreign withholding tax) | | $ | 2,066,486 | |
Affiliated Dividend Income | | | 55,852 | |
Total Income | | | 2,122,338 | |
EXPENSES | | | | |
Fees Charged to Participants and Annuitants for Investment Management Services | | | (130,395 | ) |
Fees Charged to Participants (other than Annuitants) for Assuming Mortality and Expense Risks | | | (382,803 | ) |
Total Expenses | | | (513,198 | ) |
NET INVESTMENT INCOME | | | 1,609,140 | |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT AND FOREIGN CURRENCY TRANSACTIONS | | | | |
Net Realized Gain (Loss) on: | | | | |
Investment Transactions | | | 10,449,698 | |
Foreign Currency Transactions | | | (2,178 | ) |
| | | 10,447,520 | |
Net Change in Unrealized Appreciation (Depreciation) on: | | | | |
Investments | | | 20,165,237 | |
Foreign Currencies | | | 498 | |
| | | 20,165,735 | |
NET GAIN ON INVESTMENT AND FOREIGN CURRENCY TRANSACTIONS | | | 30,613,255 | |
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | | $ | 32,222,395 | |
| | | | | | |
| | |
| | STATEMENT OF CHANGES IN NET ASSETS (unaudited) | | |
| | | | | | | | |
| | Six Months Ended June 30, 2019 | | | Year Ended December 31, 2018 | |
OPERATIONS | | | | | | | | |
Net Investment Income | | $ | 1,609,140 | | | $ | 3,176,606 | |
Net Realized Gain on Investment and Foreign Currency Transactions | | | 10,447,520 | | | | 11,782,660 | |
Net Change in Unrealized Appreciation (Depreciation) on Investments and Foreign Currencies | | | 20,165,735 | | | | (30,132,488 | ) |
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | | | 32,222,395 | | | | (15,173,222 | ) |
CAPITAL TRANSACTIONS | | | | | | | | |
Purchase Payments and Transfers In (18,700 and 57,645 units, respectively) | | | 1,587,186 | | | | 4,624,266 | |
Withdrawals and Transfers Out (136,107 and 450,943 units, respectively) | | | (11,094,455 | ) | | | (35,629,772 | ) |
Mortality and Expense Risk Charges Deducted from Annuitants’ Accounts | | | (8,382 | ) | | | (18,303 | ) |
Variable Annuity Payments | | | (315,587 | ) | | | (714,983 | ) |
NET DECREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS | | | (9,831,238 | ) | | | (31,738,792 | ) |
NET INCREASE IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS | | | 5,952 | | | | 6,346 | |
TOTAL INCREASE (DECREASE) IN NET ASSETS | | | 22,397,109 | | | | (46,905,668 | ) |
NET ASSETS | | | | | | | | |
Beginning of period | | | 194,198,384 | | | | 241,104,052 | |
End of period | | $ | 216,595,493 | | | $ | 194,198,384 | |
SEE NOTES TO FINANCIAL STATEMENTS.
A5
FINANCIAL HIGHLIGHTS FOR VCA-2
| | | | | | |
| | |
| | INCOME AND CAPITAL CHANGES PER ACCUMULATION UNIT* (Unaudited) | | |
(For an Accumulation Unit outstanding throughout the period)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | | | Year Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
Investment Income | | $ | 0.8149 | | | $ | 1.4886 | | | $ | 1.1756 | | | $ | 1.1021 | | | $ | 0.9469 | | | $ | 0.7348 | |
Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Investment management fee | | | (0.0503 | ) | | | (0.1008 | ) | | | (0.0883 | ) | | | (0.0735 | ) | | | (0.0763 | ) | | | (0.0718 | ) |
Assuming mortality and expense risks | | | (0.1508 | ) | | | (0.3021 | ) | | | (0.2647 | ) | | | (0.2203 | ) | | | (0.2284 | ) | | | (0.2151 | ) |
Net Investment Income | | | 0.6138 | | | | 1.0857 | | | | 0.8266 | | | | 0.8083 | | | | 0.6422 | | | | 0.4479 | |
Capital Changes | | | | | | | | | | | | | | | | | | | | | | | | |
Net realized and unrealized gain (loss) on investment and foreign currency transactions | | | 11.5960 | | | | (6.8449 | ) | | | 13.7979 | | | | 3.1300 | | | | (1.3303 | ) | | | 5.6719 | |
Net Increase (Decrease) in Accumulation Unit Value | | | 12.2098 | | | | (5.7592 | ) | | | 14.6205 | | | | 3.9383 | | | | (0.6881 | ) | | | 6.1198 | |
Accumulation Unit Value | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning of period | | | 72.5608 | | | | 78.3200 | | | | 63.6995 | | | | 59.7612 | | | | 60.4493 | | | | 54.3295 | |
End of period | | | 84.7706 | | | | 72.5608 | | | | 78.3200 | | | | 63.6995 | | | | 59.7612 | | | | 60.4493 | |
Total Return** | | | 16.83 | % | | | (7.35 | )% | | | 22.95 | % | | | 6.59 | % | | | (1.14 | )% | | | 11.26 | % |
Ratio of Expenses to Average Net Assets*** | | | 0.50 | %† | | | 0.50 | % | | | 0.50 | % | | | 0.50 | % | | | 0.50 | % | | | 0.50 | % |
Ratio of Net Investment Income to Average Net Assets*** | | | 1.53 | %† | | | 1.35 | % | | | 1.16 | % | | | 1.37 | % | | | 1.06 | % | | | 0.78 | % |
Portfolio Turnover Rate | | | 26 | %†† | | | 36 | % | | | 48 | % | | | 40 | % | | | 47 | % | | | 70 | % |
Number of Accumulation Units Outstanding For Participants at end of period (000’s omitted) | | | 2,489 | | | | 2,607 | | | | 3,000 | | | | 3,384 | | | | 3,952 | | | | 4,579 | |
* | Calculated by accumulating the actual per unit amounts daily. |
** | Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of a share on the first day and a sale on the last day of each period reported. Total returns may reflect adjustments to conform to generally accepted accounting principles. Total returns for periods less than one full year are not annualized. |
*** | These calculations exclude PICA’s equity inVCA-2. |
The above table does not reflect the annual administration charge, which does not affect the Accumulation Unit Value. This charge is made by reducing Participants’ Accumulation Accounts by a number of Accumulation Units equal in value to the charge.
SEE NOTES TO FINANCIAL STATEMENTS.
B1
NOTES TO FINANCIAL STATEMENTS OF
VCA-2 (Unaudited)
The Prudential Variable ContractAccount-2(“VCA-2” or the “Account”) was established on January 9, 1968 by The Prudential Insurance Company of America (“PICA”) under the laws of the State of New Jersey and is registered as anopen-end, diversified management investment company under the Investment Company Act of 1940 (“1940 Act”), as amended.VCA-2 has been designed for use with retirement arrangements qualified under Section 403(b) of the Internal Revenue Code. The investment objective of the Account is long-term growth of capital.
Note 2: | | Accounting Policies |
The Account follows investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 946 Financial Services — Investment Companies. The following accounting policies conform to U.S. generally accepted accounting principles. The Account consistently follows such policies in the preparation of its financial statements.
Securities Valuation: The Account holds securities and other assets and liabilities that are fair valued at the close of each day (generally, 4:00 PM Eastern time) the New York Stock Exchange (“NYSE”) is open for trading. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Account’s Committee Members (the “Committee”) have adopted valuation procedures for security valuation under which fair valuation responsibilities have been delegated to PGIM Investments LLC (“PGIM Investments” or the “Manager”). Pursuant to the Committee’s delegation, the Manager has established a Valuation Committee responsible for supervising the fair valuation of portfolio securities and other assets and liabilities. The valuation procedures permit the Account to utilize independent pricing vendor services, quotations from market makers, and alternative valuation methods when market quotations are either not readily available or not deemed representative of fair value. A record of the Valuation Committee’s actions is subject to the Committee’s review, approval, and ratification at its next regularly-scheduled quarterly meeting.
For the fiscal reportingperiod-end, securities and other assets and liabilities were fair valued at the close of the last U.S. business day. Trading in certain foreign securities may occur when the NYSE is closed (including weekends and holidays). Because such foreign securities trade in markets that are open on weekends and U.S. holidays, the values of some of the Account’s foreign investments may change on days when investors cannot purchase or redeem Account shares.
Various inputs determine how the Account’s investments are valued, all of which are categorized according to the three broad levels (Level 1, 2, or 3) detailed in the table following the Account’s Statement of Net Assets and referred to herein as the “fair value hierarchy” in accordance with FASB ASC Topic 820 — Fair Value Measurements and Disclosures.
Common and preferred stocks, exchange-traded funds, and derivative instruments, such as futures or options, that are traded on a national securities exchange are valued at the last sale price as of the close of trading on the applicable exchange where the security principally trades. Securities traded via NASDAQ are valued at the NASDAQ official closing price. To the extent these securities are valued at the last sale price or NASDAQ official closing price, they are classified as Level 1 in the fair value hierarchy. In the event that no sale or official closing price on valuation date exists, these securities are generally valued at the mean between the last reported bid and asked prices, or at the last bid price in the absence of an ask price. These securities are classified as Level 2 in the fair value hierarchy.
Foreign equities traded on foreign securities exchanges are valued using pricing vendor services that provide model prices derived using adjustment factors based on information such as local closing price, relevant general and sector indices, currency fluctuations, depositary receipts, and futures, as applicable. Securities valued using such model prices are classified as Level 2 in the fair value hierarchy. The models generate an evaluated adjustment factor for each security, which is applied to the local closing price to adjust it for post-closing market movements up to the time the Account is valued. Utilizing that evaluated adjustment factor, the vendor provides an evaluated price for each security. If the vendor does not provide an evaluated price, securities are valued in accordance with exchange-traded common and preferred stock valuation policies discussed above.
C1
Investments inopen-end,non-exchange-traded mutual funds are valued at their net asset values as of the close of the NYSE on the date of valuation. These securities are classified as Level 1 in the fair value hierarchy since they may be purchased or sold at their net asset values on the date of valuation.
Securities and other assets that cannot be priced according to the methods described above are valued based on pricing methodologies approved by the Committee. In the event that unobservable inputs are used when determining such valuations, the securities will be classified as Level 3 in the fair value hierarchy.
When determining the fair value of securities, some of the factors influencing the valuation include: the nature of any restrictions on disposition of the securities; assessment of the general liquidity of the securities; the issuer’s financial condition and the markets in which it does business; the cost of the investment; the size of the holding and the capitalization of the issuer; the prices of any recent transactions or bids/offers for such securities or any comparable securities; any available analyst media or other reports or information deemed reliable by the investment adviser regarding the issuer or the markets or industry in which it operates. Using fair value to price securities may result in a value that is different from a security’s most recent closing price and from the price used by other mutual funds to calculate their net asset values.
Illiquid Securities: Pursuant to Rule22e-4 under the 1940 Act, the Account has adopted a Committee approved Liquidity Risk Management Program (“LRMP”) that requires, among other things, that the Account limit its illiquid investments that are assets to no more than 15% of net assets. Illiquid securities are those that, because of the absence of a readily available market or due to legal or contractual restrictions on resale, may not reasonably be expected to be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. The Account may find it difficult to sell illiquid securities at the time considered most advantageous by its subadviser and may incur transaction costs that would not be incurred in the sale of securities that were freely marketable.
Restricted Securities: Securities acquired in unregistered, private sales from the issuing company or from an affiliate of the issuer are considered restricted as to disposition under federal securities law (“restricted securities”). Such restricted securities are valued pursuant to the valuation procedures noted above. Restricted securities that would otherwise be considered illiquid investments pursuant to the Account’s LRMP because of legal restrictions on resale to the general public may be traded among qualified institutional buyers under Rule 144A of the Securities Act of 1933. Therefore, these Rule 144A securities, as well as commercial paper that is sold in private placements under Section 4(2) of the Securities Act of 1933, may be classified higher than “illiquid” under the LRMP (i.e. “moderately liquid” or “less liquid” investments). However, the liquidity of the Account’s investments in restricted securities could be impaired if trading does not develop or declines.
Foreign Currency Translation: The books and records of the Account are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis:
(i) market value of investment securities, other assets and liabilities — at the current rates of exchange;
(ii) purchases and sales of investment securities, income and expenses — at the rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Account are presented at the foreign exchange rates and market values at the close of the period, the Account does not generally isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of long-term portfolio securities held at the end of the period. Similarly, the Account does not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of long-term portfolio securities sold during the period. Accordingly, holding period realized foreign currency gains (losses) are included in the reported net realized gains (losses) on investment transactions.
Net realized gains (losses) on foreign currency transactions represent net foreign exchange gains (losses) from holdings of foreign currencies, currency gains (losses) realized between the trade and settlement dates on securities transactions, and the difference between the amounts of interest, dividends and foreign withholding taxes recorded on the Account’s books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains (losses) from valuing foreign currency denominated assets and liabilities (other than investments) at period end exchange rates are reflected as a component of net unrealized appreciation (depreciation) on foreign currencies.
C2
Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains (losses) from investment and currency transactions are calculated on the identified cost basis. Dividend income is recorded on theex-date or for certain foreign securities, when the Account becomes aware of such dividends. Interest income, including amortization of premium and accretion of discount on debt securities, as required, is recorded on the accrual basis. Expenses are recorded on the accrual basis, which may require the use of certain estimates by management that may differ from actual. Net investment income and realized and unrealized gain (losses) (other than administrative fees) are allocated to the Participants and PICA on a daily basis in proportion to their respective ownership inVCA-2.
Estimates: The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Federal Income Taxes: The operations ofVCA-2 are part of, and are taxed with, the operations of PICA. Under the current provisions of the Internal Revenue Code, PICA does not expect to incur federal income taxes on earnings ofVCA-2 to the extent the earnings are credited under the Contracts. As a result, the Unit Value ofVCA-2 has not been reduced by federal income taxes.
Annuity Reserves: Reserves are computed for purchased annuities using the Prudential 1950 Group Annuity Valuation (GAV) Table, adjusted, and a valuation interest rate related to the Assumed Investment Result (AIR). The valuation interest rate is equal to the AIR less 0.50% in contract charges defined in Note 3. The AIRs are selected by each Contract-holder and are described in the prospectus. Such amounts are included in Equity of Annuitants in the Statement of Net Assets.
Note 3: | | Investment Management Agreement and Charges |
The Account has a management agreement with PGIM Investments. Pursuant to this agreement, PGIM Investments has responsibility for all investment advisory services and supervises the subadviser’s performance of such services. PGIM Investments has entered into a subadvisory agreement with Jennison Associates LLC (“Jennison”). The subadvisory agreement provides that Jennison will furnish investment advisory services in connection with management of the Account. PGIM Investments pays for the services of Jennison.
A daily charge, at an effective annual rate of 0.125% of the current value of the Participant’s (other than Annuitants’ and PICA’s) account inVCA-2, is charged to the Account and paid to PGIM Investments for investment management services.
A daily charge, paid to PICA Investments for assuming mortality and expense risks, is calculated at an effective annual rate of 0.375% of the current value of the Participant’s (other than Annuitants’ and PICA’s) account inVCA-2.
An annual administration charge of not more than $30 annually is deducted from the accumulation account of certain Participants either at the time of withdrawal of the value of the entire Participant’s account or on the last business day of each calendar year such amounts are reflected as a withdrawal on the Statements of Changes in Net Assets. This deduction may be made from a fixed-dollar annuity contract if the Participant is enrolled under such a contract.
No sales charge is deducted from Participants’ purchase payments and/or contributions. However, PICA has reserved the right in the future to impose or deduct a maximum sales charge of 2.50% from purchase payments and/or contributions.
PICA, PGIM Investments and Jennison are indirect, wholly-owned subsidiaries of Prudential Financial, Inc. (“Prudential”).
Note 4: | | Other Transactions with Affiliates |
The Account may enter into certain securities purchase or sale transactions under Committee approvedRule 17a-7 procedures. Rule17a-7 is an exemptive rule under the 1940 Act, that permits purchase and sale transactions among affiliated investment companies, or between an investment company and a person that is affiliated solely by reason of having a common (or affiliated) investment adviser, common directors, and/or common officers. Such transactions are subject to ratification by the Committee. For the six months ended June 30, 2019, no such transactions were entered into by the Account.
C3
During the six months ended June 30, 2019, the Account invested in the PGIM Core Ultra Short Bond Fund (the “Core Fund”), a portfolio of Prudential Investment Portfolios 2, registered under the 1940 Act, and managed by PGIM Investments. Through the Account’s investment in the mentioned underlying fund, PGIM Investments and/or its affiliates are paid fees or compensated for providing their services. Earnings from the Core Fund are disclosed on the Statement of Operations as “Affiliated Dividend Income”.
Note 5: | | Portfolio Securities |
For the six months ended June 30, 2019, the aggregate cost of purchases and the proceeds from sales of securities, excluding short-term investments, were $52,987,015 and $60,856,406, respectively.
A summary of the cost of purchases and proceeds from sales of shares of an affiliated mutual fund for the six months ended June 30, 2019, is presented as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Value, Beginning of Period | | | Cost of Purchases | | | Proceeds from Sales | | | Change in Unrealized Gain (Loss) | | | Realized Gain (Loss) | | | Value, End of Period | | | Shares, End of Period | | | Income | |
| PGIM Core Ultra Short Bond Fund* | |
| $6,188,145 | | | $ | 26,551,040 | | | $ | 28,459,633 | | | $ | — | | | $ | — | | | $ | 4,279,552 | | | | 4,279,552 | | | $ | 55,852 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
* The Account did not have any capital gain distributions during reporting period.
Note 6: | | Net Increase (Decrease) In Net Assets Resulting From Surplus Transfers |
The increase (decrease) in net assets resulting from surplus transfers represents the net increase to/(reductions from) PICA’s investment in the Account.
Note 7: | | Participant Loans |
Participant loan initiations are not permitted inVCA-2. However, participants who initiated loans in other accounts are permitted to direct loan repayments intoVCA-2.
For the six months ended June 30, 2019 and year ended December 31, 2018, $0 and $0 of participant loan principal and interest have been paid toVCA-2, respectively.
Note 8: | | Risks of Investing in the Account |
The Account’s risks include, but are not limited to, some or all of the risks discussed below:
Equity and Equity-Related Securities Risks: The value of a particular security could go down and you could lose money. In addition to an individual security losing value, the value of the equity markets or a sector in which the Account invests could go down. The Account’s holdings can vary significantly from broad market indexes and the performance of the Account can deviate from the performance of these indexes. Different parts of a market can react differently to adverse issuer, market, regulatory, political and economic developments.
Foreign Securities Risk: The Account’s investments in securities of foreign issuers or issuers with significant exposure to foreign markets involve additional risk. Foreign countries in which the Account may invest may have markets that are less liquid, less regulated and more volatile than US markets. The value of the Account’s investments may decline because of factors affecting the particular issuer as well as foreign markets and issuers generally, such as unfavorable government actions, and political or financial instability.
Market and Credit Risks: Securities markets may be volatile and the market prices of the Account’s securities may decline. Securities fluctuate in price based on changes in an issuer’s financial condition and overall market and economic conditions. If the market prices of the securities owned by the Account fall, the value of an investment in the Account will decline. Additionally, the Account may also be exposed to credit risk in the event that an issuer or guarantor fails to perform or that an institution or entity with which the Account has unsettled or open transactions defaults.
C4
Note 9: | | Recent Accounting Pronouncements and Reporting Updates |
In August 2018, the FASB issued Accounting Standards Update (“ASU”)No. 2018-13, which changes certain fair value measurement disclosure requirements. The new ASU, in addition to other modifications and additions, removes the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and the Account’s policy for the timing of transfers between levels. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Manager has evaluated the implications of certain provisions of the ASU and has determined to early adopt aspects related to the removal and modification of certain fair value measurement disclosures under the ASU effective immediately. At this time, the Manager is evaluating the implications of certain other provisions of the ASU related to new disclosure requirements and any impact on the financial statement disclosures has not yet been determined.
C5
Approval of Advisory Agreements
TheVCA-2 Committee
The Committee of the Prudential Variable ContractAccount-2(“VCA-2”) (the “Committee”) consists of eleven individuals, eight of whom are not “interested persons” ofVCA-2, as defined in the Investment Company Act of 1940, as amended (the “1940 Act”) (the “Independent Committee Members”). The Committee is responsible for the oversight ofVCA-2 and its operations, and performs the various duties imposed on the directors of investment companies by the 1940 Act. The Independent Committee Members have retained independent legal counsel to assist them in connection with their duties. The Chair of the Committee is an Independent Committee Member. The Committee has established four standing committees: the Audit Committee, the Nominating and Governance Committee, and two Investment Committees. Each committee is chaired by, and composed of, Independent Committee Members.
Annual Approval ofVCA-2’s Advisory Agreements
As required under the 1940 Act, the Committee determines annually whether to renewVCA-2’s management agreement with PGIM Investments LLC (“PGIM Investments”) andVCA-2’s subadvisory agreement with Jennison Associates LLC (“Jennison”). In considering the renewal of the agreements, the Committee, including all of the Independent Committee Members, met on May 30, 2019 and onJune 11-13, 2019 and approved the renewal of the agreements through July 31, 2020, after concluding that the renewal of the agreements was in the best interests ofVCA-2 and its investors.
In advance of the meetings, the Committee requested and received materials relating to the agreements, and had the opportunity to ask questions and request further information in connection with its consideration. Among other things, the Committee considered comparative fee information from PGIM Investments and Jennison. Also, the Committee considered comparisons with other mutual funds in relevant Peer Universes and Peer Groups, as is further discussed below.
In approving the agreements, the Committee, including the Independent Committee Members advised by independent legal counsel, considered the factors it deemed relevant, including the nature, quality and extent of services provided by PGIM Investments, the subadviser and, as relevant, its affiliates, the performance ofVCA-2, the profitability of PGIM Investments and its affiliates, expenses and fees, and the potential for economies of scale that may be shared withVCA-2 and its investors asVCA-2’s assets grow. In its deliberations, the Committee did not did not identify any single factor which alone was responsible for the Committee’s decision to approve the agreements with respect toVCA-2. In connection with its deliberations, the Committee considered information provided by PGIM Investments throughout the year at regular Committee meetings, presentations from portfolio managers and other information, as well as information furnished at or in advance of the meetings on May 30, 2019 and on June11-13, 2019.
The Committee determined that the overall arrangements betweenVCA-2 and PGIM Investments, which serves asVCA-2’s investment manager pursuant to a management agreement, and between PGIM Investments and Jennison, which serves asVCA-2’s subadviser pursuant to the terms of a subadvisory agreement with PGIM Investments, are in the best interests ofVCA-2 and its investors in light of the services performed, fees charged and such other matters as the Committee Members considered relevant in the exercise of their business judgment.
The material factors and conclusions that formed the basis for the Committee’s reaching its determinations to approve the continuance of the agreements are separately discussed below.
Nature, Quality and Extent of Services
The Committee received and considered information regarding the nature, quality and extent of services provided toVCA-2 by PGIM Investments and Jennison. The Committee noted that Jennison is affiliated with PGIM Investments. The Committee considered the services provided by PGIM Investments, including but not limited to the oversight of the subadviser forVCA-2, as well as the provision of recordkeeping, compliance, and other services toVCA-2, and PGIM Investments’ role as administrator ofVCA-2’s liquidity risk management program. With respect to PGIM Investments’ oversight of the subadviser, the Committee noted that PGIM Investments’ Strategic Investment Research Group (“SIRG”), which is a business unit of PGIM Investments, is responsible for monitoring and reporting to PGIM Investments’ senior management on the performance and operations of the subadviser. The Committee also considered that PGIM Investments pays the salaries of all of the officers and Committee Members. The Committee also considered the investment subadvisory services provided by Jennison, as well as adherence toVCA-2’s investment restrictions and compliance with applicableVCA-2 policies and procedures. The Committee considered PGIM Investments’ evaluation of the subadviser, as well as PGIM Investments’ recommendation, based on its review of the subadviser, to renew the subadvisory agreement.
The Committee considered the qualifications, backgrounds and responsibilities of PGIM Investments’ senior management responsible for the oversight ofVCA-2 and Jennison, and also considered the qualifications, backgrounds and responsibilities of Jennison’s portfolio managers who are responsible for theday-to-day management ofVCA-2’s portfolio. The Committee was provided with information pertaining to PGIM Investments’ and Jennison’s organizational structure, senior management, investment operations, and other relevant information pertaining to both PGIM Investments and Jennison. The Committee also noted that it received favorable compliance reports fromVCA-2’s Chief Compliance Officer (“CCO”) as to both PGIM Investments and Jennison.
The Committee concluded that it was satisfied with the nature, extent and quality of the investment management services provided by PGIM Investments and the subadvisory services provided toVCA-2 by Jennison, and that there was a reasonable basis on which to conclude thatVCA-2 benefits from the services provided by PGIM Investments and Jennison under the management and subadvisory agreements.
Costs of Services and Profits Realized by PGIM Investments
The Committee was provided with information on the profitability of PGIM Investments and its affiliates in serving asVCA-2’s investment manager. The Committee discussed with PGIM Investments the methodology utilized in assembling the information regarding profitability and considered its reasonableness. The Committee recognized that it is difficult to make comparisons of profitability from fund management contracts because comparative information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocations and the adviser’s capital structure and cost of capital. Taking these factors into account, the Committee concluded that the profitability of PGIM Investments and its affiliates in relation to the services rendered was not unreasonable.
Economies of Scale
The Committee received and discussed information concerning economies of scale that PGIM Investments may realize asVCA-2’s assets grow beyond current levels. During the course of time, the Committee has considered information regarding the launch date ofVCA-2, the management fees ofVCA-2 compared to those of similarly managed funds and PGIM Investments’ investment inVCA-2 over time. The Committee noted that, whileVCA-2 does not have breakpoints in its management fees, economies of scale can be shared withVCA-2 in other ways, including low management fees from inception, additional technological and personnel investments to enhance shareholder services, and maintaining existing expense structures in the face of a rising cost environment. The Committee considered PGIM Investments’ assertion that it continually evaluates the management fee schedule ofVCA-2 and the potential to share economies of scale through breakpoints or fee waivers as asset levels increase.
The Committee recognized the inherent limitations of any analysis of economies of scale, stemming largely from the Committee’s understanding that most of PGIM Investments’ costs are not specific to individual funds, but rather are incurred across a variety of products and services.
Other Benefits to PGIM Investments and Jennison
The Committee considered potential ancillary benefits that might be received by PGIM Investments, Jennison and their affiliates as a result of their relationship withVCA-2. The Committee concluded that potential benefits to be derived by PGIM Investments included benefits to its reputation or other intangible benefits resulting from PGIM Investments’ association withVCA-2. The Committee concluded that the potential benefits to be derived by Jennison included the ability to use soft dollar credits, as well as the potential benefits consistent with those generally resulting from an increase in assets under management, specifically, potential access to additional research resources and benefits to its reputation. The Committee concluded that the benefits derived by PGIM Investments and Jennison were consistent with the types of benefits generally derived by investment managers and subadvisers to mutual funds.
Performance ofVCA-2 / Fees and Expenses
The Committee considered certain additional factors and made related conclusions relating to the historical performance ofVCA-2 for theone-, three-, five- andten-year periods ended December 31, 2018. The Committee also consideredVCA-2’s actual management fee, as well asVCA-2’s net total expense ratio, for the fiscal year ended December 31, 2018. The Committee considered the management fee forVCA-2 as compared to the management fee charged by PGIM Investments to other funds and the fee charged by other advisers to comparable mutual funds in a Peer Group. The actual management fee represents the fee rate actually paid byVCA-2 investors and includes any fee waivers or reimbursements. The net total expense ratio forVCA-2 represents the actual expense ratio incurred byVCA-2 investors.
The mutual funds included in the Peer Universe, which was used to consider performance, and the Peer Group, which was used to consider fees and expenses, were objectively determined by Broadridge, an independent provider of mutual fund data. In certain circumstances, PGIM Investments provided supplemental Peer Universe or Peer Group information for reasons addressed with the Committee. The comparisons placedVCA-2 in various quartiles over various periods, with the first quartile being the best 25% of the mutual funds (for performance, the best performing mutual funds and, for expenses, the lowest cost mutual funds).
The section below summarizes key factors considered by the Committee and the Committee’s conclusions regardingVCA-2’s performance, fees and overall expenses. The table sets forth net performance comparisons (which reflect the impact on performance of any fund expenses, or subsidies, expense caps or waivers that may be applicable) with the Peer Universe, actual management fees with the Peer Group (which reflect the impact of any subsidies or fee waivers), and net total expenses with the Peer Group, each of which were key factors considered by the Committee.
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Net Performance | | 1 Year | | 3 Years | | 5 Years | | 10 Years |
| 4th Quartile | | 4th Quartile | | 4th Quartile | | 3rd Quartile |
Actual Management Fees: 1st Quartile |
Net Total Expenses: 1st Quartile |
• | | The Committee noted thatVCA-2 underperformed its benchmark index over all periods. |
• | | The Board considered PGIM Investments’ assertion thatVCA-2’s underperformance was primarily attributable to underperformance during the second half of 2018, when investors moved into defensive stocks not held byVCA-2. The Board also considered that, as of March 31, 2019,VCA-2 ranked in the second quartile (40th percentile) of its Peer Universe over the trailing three-year period. |
• | | The Board also considered that, when it evaluated performance in the prior year, as of December 31, 2017, whenVCA-2’s investment style was more favored in the market,VCA-2 outperformed its benchmark index and ranked in the first quartile of its Peer Universe for theone-year period. |
• | | The Committee concluded that, in light of the above, it would be in the best interests ofVCA-2 and its investors to renew the agreements. |
• | | The Committee concluded that the management fees (including subadvisory fees) and total expenses were reasonable in light of the services provided. |
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After full consideration of these factors, the Committee concluded that the approval of the agreements was in the best interests ofVCA-2 and its investors.
The toll-free number shown below can be used to make transfers and reallocations, review how your premiums are being allocated, and receive current investment option values in your contract. Unit values for each investment option are available to all participants from the toll-free number. Please be sure to have your contract number available when you call.
(800) 458-6333
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LT.RS.001
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Item 2 – | | Code of Ethics – Not required, as this is not an annual filing. |
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Item 3 – | | Audit Committee Financial Expert – Not required, as this is not an annual filing. |
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Item 4 – | | Principal Accountant Fees and Services – Not required, as this is not an annual filing. |
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Item 5 – | | Audit Committee of Listed Registrants – Not applicable. |
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Item 6 – | | Schedule of Investments – The schedule is included as part of the report to shareholders filed under Item 1 of this Form. |
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Item 7 – | | Disclosure of Proxy Voting Policies and Procedures forClosed-End Management Investment Companies – Not applicable. |
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Item 8 – | | Portfolio Managers ofClosed-End Management Investment Companies – Not applicable. |
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Item 9 – | | Purchases of Equity Securities byClosed-End Management Investment Company and Affiliated Purchasers – Not applicable. |
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Item 10 – | | Submission of Matters to a Vote of Security Holders – Not applicable. |
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Item 11 – | | Controls and Procedures |
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(a) It is the conclusion of the registrant’s principal executive officer and principal financial officer that the effectiveness of the registrant’s current disclosure controls and procedures (such disclosure controls and procedures having been evaluated within 90 days of the date of this filing) provide reasonable assurance that the information required to be disclosed by the registrant has been recorded, processed, summarized and reported within the time period specified in the Commission’s rules and forms and that the information required to be disclosed by the registrant has been accumulated and communicated to the registrant’s principal executive officer and principal financial officer in order to allow timely decisions regarding required disclosure. |
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(b) There has been no significant change in the registrant’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is likely to materially affect, the registrant’s internal control over financial reporting. |
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Item 12 – | | Controls and Procedures - Disclosure of Securities Lending Activities for Closed-End Management Investment Companies – Not applicable. |
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Item 13 – | | Exhibits |
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(a) (1) Code of Ethics – Not required, as this is not an annual filing. |
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(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act – Attached hereto asExhibit EX-99.CERT. |
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(3) Any written solicitation to purchase securities under Rule23c-1. – Not applicable. |
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(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act – Attached hereto asExhibit EX-99.906CERT. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Registrant: | | The Prudential Variable Contract Account-2 |
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By: | | /s/ Andrew R. French |
| | Andrew R. French |
| | Secretary |
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Date: | | August 28, 2019 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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By: | | /s/ Stuart S. Parker |
| | Stuart S. Parker |
| | President and Principal Executive Officer |
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Date: | | August 28, 2019 |
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By: | | /s/ Christian J. Kelly |
| | Christian J. Kelly |
| | Treasurer and Principal Financial and Accounting Officer |
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Date: | | August 28, 2019 |