As filed with the SEC on______________. Registration No. 33-61079
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED
ON FORM N-8B-2
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THE PRUDENTIAL VARIABLE
APPRECIABLE ACCOUNT
(Exact Name of Trust)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
PRUDENTIAL PLAZA
NEWARK, NEW JERSEY 07102-3777
(800) 445-4571
(Address and telephone number of principal executive offices)
----------
THOMAS C. CASTANO
ASSISTANT SECRETARY
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRUDENTIAL PLAZA
NEWARK, NEW JERSEY 07102-3777
(Name and address of agent for service)
Copy to:
JEFFREY C. MARTIN
SHEA & GARDNER
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036
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Prudential Survivorship Preferred Variable Appreciable Life Insurance
Contracts--Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant elects to register an indefinite amount of securities. (Title and
amount of securities being registered; proposed maximum aggregate offering
price; amount of filing fee).
Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
The Registrant hereby amends this Registration Statement on such date as may be
necessary to delay its effective date until the Registrant shall file a further
amendment which specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
date as the Commission, action pursuant to said Section 8(a), may determine.
This filing is being made pursuant to Rules 6c-3 and 6e-3(T) under the
Investment Company Act of 1940.
Registrant elects to be governed by Rules 6c-(T)(b)(13)(i)(A) under the
Investment Company Act of 1940 with respect to the Contract described in this
Registration Statement.
CROSS REFERENCE SHEET
(AS REQUIRED BY FORM N-8B-2)
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
1. Cover Page
2. Cover Page
3. Not Applicable
4. Sale of the Contract and Sales Commissions
5. The Prudential Variable Appreciable Account
6. The Prudential Variable Appreciable Account
7. Not Applicable
8. Not Applicable
9. Litigation
10. Brief Description of the Contract; Short-Term Cancellation
Right, or "Free Look"; Type of Insurance Amount; Changing
the Type of Insurance Amount; Premiums; Contract Date;
Allocation of Premiums; Transfers; Charges and Expenses;
How a Contract's Cash Surrender Value Will Vary; How a
Fixed Insurance Amount Contract's Death Benefit Will Vary;
How a Variable Insurance Amount Contract's Death Benefit
Will Vary; Surrender of a Contract; Withdrawal of Excess
Cash Surrender Value; Decreases in Basic Insurance Amount;
Lapse and Reinstatement; When Proceeds are Paid; Options
on Lapse; Riders; Other General Contract Provisions;
Voting Rights; Substitution of Series Fund Shares
11. Brief Description of the Contract; The Prudential Variable
Appreciable Account
12. Cover Page; Brief Description of the Contract; The
Prudential Series Fund, Inc.; Sale of the Contract and
Sales Commissions
13. Brief Description of the Contract; The Prudential Series
Fund, Inc.; Charges and Expenses; Sale of the Contract and
Sales Commissions; Reduction of Charges for Concurrent
Sales to Several Individuals
14. Brief Description of the Contract; Requirements for
Issuance of a Contract
15. Brief Description of the Contract; Allocation of Premiums;
Transfers; The Fixed-Rate Option
16. Brief Description of the Contract; Detailed Information
for Prospective Contract Owners
17. When Proceeds are Paid
18. The Prudential Variable Appreciable Account
19. Reports to Contract Owners
20. Not Applicable
21. Contract Loans
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
22. Not Applicable
23. Not Applicable
24. Other General Contract Provisions
25. The Prudential Insurance Company of America
26. Brief Description of the Contract; The Prudential Series
Fund, Inc.; Charges and Expenses
27. The Prudential Insurance Company of America; The
Prudential Series Fund, Inc.
28. The Prudential Insurance Company of America; Directors and
Officers
29. The Prudential Insurance Company of America
30. Not Applicable
31. Not Applicable
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. The Prudential Insurance Company of America
36. Not Applicable
37. Not Applicable
38. Sale of the Contract and Sales Commissions
39. Sale of the Contract and Sales Commissions
40. Not Applicable
41. Sale of the Contract and Sales Commissions
42. Not Applicable
43. Not Applicable
44. Brief Description of the Contract; The Prudential Series
Fund, Inc.; How a Contract's Cash Surrender Value Will
Vary; How a Fixed Insurance Amount Contract's Death
Benefit Will Vary; How a Variable Insurance Amount
Contract's Death Benefit Will Vary
45. Not Applicable
46. Brief Description of the Contract; The Prudential Variable
Appreciable Account; The Prudential Series Fund, Inc.
47. The Prudential Variable Appreciable Account; The
Prudential Series Fund, Inc.
48. Not Applicable
49. Not Applicable
50. Not Applicable
51. Not Applicable
52. Substitution of Series Fund Shares
53. Tax Treatment of Contract Benefits
54. Not Applicable
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
55. Not Applicable
56. Not Applicable
57. Not Applicable
58. Not Applicable
59. Financial Statements; Financial Statements of The
Prudential Variable Appreciable Account; Consolidated
Financial Statements of The Prudential Insurance Company
of America and Subsidiaries
PART I
INFORMATION REQUIRED IN PROSPECTUS
PROSPECTUS
DECEMBER 31, 1995
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
SURVIVORSHIP PREFERRED
This prospectus describes a flexible premium survivorship variable universal
life insurance contract offered by The Prudential Insurance Company of America
under the name PRUDENTIAL SURVIVORSHIP PREFERRED(SM) (the "Contract"). The
Contract provides life insurance coverage on two insureds with a death benefit
payable on the second death as long as the Contract is in force.
Purchasers have considerable flexibility as to when and in what amounts they pay
premiums. Subject to an initial premium, you can pay premium amounts as desired,
so long as sufficient money is in the Contract Fund to cover all charges. If
there is insufficient money in the Contract Fund, the Contract may lapse without
value.
There are two insurance amount types available. One type generally remains fixed
in the amount initially selected, the other will vary daily with the investment
performance of the investment options you select. For each type, there are two
premium levels which, if paid, provide death benefit guarantees.
A portion of the Contract's premiums and the earnings on those premiums will be
held in one or more of the following ways. They can be invested in one or more
of fifteen available subaccounts of The Prudential Variable Appreciable Account:
O MONEY MARKET
O BOND
O GOVERNMENT SECURITIES
O ZERO COUPON BOND 2000
O ZERO COUPON BOND 2005
O CONSERVATIVELY MANAGED FLEXIBLE
O AGGRESSIVELY MANAGED FLEXIBLE
O HIGH YIELD BOND
O STOCK INDEX
O HIGH DIVIDEND STOCK
O COMMON STOCK
O GROWTH STOCK
O SMALL CAPITALIZATION STOCK
O GLOBAL EQUITY
O NATURAL RESOURCES
each of which invests in a corresponding portfolio of The Prudential Series
Fund, Inc. Or, they can be allocated to a FIXED-RATE OPTION. Other subaccounts
and portfolios may be added in the future. The attached prospectus for the
Series Fund, and the Series Fund's statement of additional information describe
the investment objectives of and the risks of investing in the portfolios.
Interest is credited daily upon any portion of the premium payment allocated to
the fixed-rate option at rates periodically declared by The Prudential in its
sole discretion but never less than an effective annual rate of 4%. This
prospectus describes the Contract generally and The Prudential Variable
Appreciable Account.
REPLACING EXISTING INSURANCE WITH A CONTRACT DESCRIBED IN THIS PROSPECTUS MAY
NOT BE TO YOUR ADVANTAGE. IF YOU CURRENTLY OWN A LIFE INSURANCE CONTRACT, THE
BENEFITS AND COSTS OF PURCHASING ADDITIONAL INSURANCE UNDER THE EXISTING POLICY
SHOULD BE COMPARED WITH THE BENEFITS AND COSTS OF PURCHASING THE CONTRACT
DESCRIBED IN THIS PROSPECTUS. IN MAKING THIS COMPARISON, YOU SHOULD CONSULT WITH
A QUALIFIED TAX ADVISOR.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS ATTACHED TO
A CURRENT PROSPECTUS FOR THE PRUDENTIAL SERIES FUND, INC.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Prudential Plaza
Newark, New Jersey 07102-3777
Telephone: (800) 445-4571
*PRUDENTIAL SURVIVORSHIP PREFERRED is a service mark of The Prudential.
SVUL-1 Ed 12-95 Catalog # 64M631J
PROSPECTUS CONTENTS
PAGE
DEFINITIONS OF SPECIAL TERMS USED ......................................... 1
BRIEF DESCRIPTION OF THE CONTRACT ......................................... 2
GENERAL INFORMATION ABOUT THE PRUDENTIAL, THE PRUDENTIAL VARIABLE
APPRECIABLE ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS AVAILABLE
UNDER THE CONTRACT ...................................................... 5
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA ............................. 5
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT ............................. 5
THE PRUDENTIAL SERIES FUND, INC. ........................................ 6
WHICH INVESTMENT OPTION SHOULD BE SELECTED? ............................. 7
DETAILED INFORMATION FOR PROSPECTIVE CONTRACT OWNERS ...................... 8
REQUIREMENTS FOR ISSUANCE OF A CONTRACT ................................. 8
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK" ............................ 8
TYPE OF INSURANCE AMOUNT ................................................ 9
CHANGING THE TYPE OF INSURANCE AMOUNT ................................... 10
PREMIUMS ................................................................ 11
DEATH BENEFIT GUARANTEE ................................................. 12
CONTRACT DATE ........................................................... 14
ALLOCATION OF PREMIUMS .................................................. 14
TRANSFERS ............................................................... 15
DOLLAR COST AVERAGING ................................................... 15
CHARGES AND EXPENSES .................................................... 16
HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY ......................... 18
HOW A FIXED INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY ......... 19
HOW A VARIABLE INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY ...... 20
PARTICIPATION IN DIVISIBLE SURPLUS ...................................... 21
SURRENDER OF A CONTRACT ................................................. 21
WITHDRAWALS ............................................................. 22
DECREASES IN BASIC INSURANCE AMOUNT ..................................... 22
WHEN PROCEEDS ARE PAID .................................................. 23
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND
ACCUMULATED PREMIUMS .................................................. 23
CONTRACT LOANS .......................................................... 25
SALE OF THE CONTRACT AND SALES COMMISSIONS .............................. 26
TAX TREATMENT OF CONTRACT BENEFITS ...................................... 26
WITHHOLDING ............................................................. 28
LAPSE AND REINSTATEMENT ................................................. 29
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS ..... 29
OTHER GENERAL CONTRACT PROVISIONS ....................................... 30
RIDERS .................................................................. 31
THE FIXED-RATE OPTION ................................................... 31
VOTING RIGHTS ........................................................... 32
SUBSTITUTION OF SERIES FUND SHARES ...................................... 33
REPORTS TO CONTRACT OWNERS .............................................. 33
STATE REGULATION ........................................................ 33
EXPERTS ................................................................. 33
LITIGATION .............................................................. 33
ADDITIONAL INFORMATION .................................................. 34
FINANCIAL STATEMENTS .................................................... 34
PAGE
DIRECTORS AND OFFICERS OF THE PRUDENTIAL .................................. 35
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
(UNAUDITED) ............................................................. 37
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT ....... A1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA AND SUBSIDIARIES ................................................ B1
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FOR
THE PRUDENTIAL SERIES FUND, INC.
DEFINITIONS OF SPECIAL TERMS
USED IN THIS PROSPECTUS
ACCUMULATED NET PAYMENTS--the actual premium payments you make accumulated at an
effective annual rate of 4% less any withdrawals you make accumulated at an
effective annual rate of 4%.
ATTAINED AGE--An insured's age on the Contract date plus the number of years
since then.
BASIC INSURANCE AMOUNT--The amount of life insurance as shown in the Contract.
Also known as the face amount.
CASH SURRENDER VALUE--The amount payable to the Contract owner upon surrender of
the Contract. It is equal to the Contract Fund minus any Contract debt.
CONTRACT--The PRUDENTIAL SURVIVORSHIP PREFERRED policy described in this
prospectus.
CONTRACT ANNIVERSARY--The same date as the Contract date in each later year.
CONTRACT DATE--The date the Contract is effective, as specified in the Contract.
CONTRACT DEBT--The principal amount of all outstanding loans plus any interest
accrued thereon.
CONTRACT FUND--The total amount credited to a specific Contract. On any date it
is equal to the sum of the amounts in all the subaccounts, the amount invested
under the fixed-rate option, and the principal amount of any Contract debt.
CONTRACT MONTH--A month that starts on the Monthly date.
CONTRACT OWNER--You. Unless a different owner is named in the application, the
owners of the Contract are the insureds jointly or the survivor of them. If the
Contract is owned jointly, the exercise of rights under the Contract must be
made by both jointly.
CONTRACT YEAR--A year that starts on the Contract date or on a Contract
anniversary.
DEATH BENEFIT--The amount payable to the beneficiary upon the second death of
two insureds.
FACE AMOUNT--See basic insurance amount.
FIXED-RATE OPTION--An investment option under which The Prudential guarantees
that interest will be added to the amount invested at a rate declared
periodically in advance.
INSURANCE AMOUNT--the amount we will pay upon the second death of two insureds
before reduction by any Contract debt and amounts needed to pay charges through
the date of death.
ISSUE AGE--An insured's age as of the Contract date.
MONTHLY DATE--The Contract date and the same date in each subsequent month.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--Us, we, The Prudential. The company
offering the Contract.
THE PRUDENTIAL SERIES FUND, INC. (THE "SERIES FUND")--A mutual fund with
separate portfolios, one or more of which may be chosen as an underlying
investment for the Contract.
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT (THE "ACCOUNT")--A separate account
of The Prudential registered as a unit investment trust under the Investment
Company Act of 1940.
SUBACCOUNT--An investment division of the Account, the assets of which are
invested in the shares of the corresponding portfolio of the Series Fund.
VALUATION PERIOD--The period of time from one determination of the value of the
amount invested in a subaccount to the next. Such determinations are made when
the net asset values of the portfolios of the Series Fund are calculated, which
is generally at 4:15 p.m. New York City time on each day during which the New
York Stock Exchange is open.
WE--The Prudential Insurance Company of America.
YOU--the owner[s] of the Contract.
1
BRIEF DESCRIPTION OF THE CONTRACT
This section provides only an overview of the more significant provisions of the
Contract. It omits details which are provided in the rest of this prospectus.
The PRUDENTIAL SURVIVORSHIP PREFERRED Contract (referred to from now on as the
"Contract") is a flexible premium variable universal life insurance policy. It
is issued and sold by The Prudential Insurance Company of America ("The
Prudential"). The Contract provides life insurance coverage, with a death
benefit payable upon the second death of two insureds. A significant element of
the Contract is the Contract Fund, the amount of which changes every business
day. That amount represents the value of your Contract on that day.
A broad objective of the Contract is to provide benefits that will increase in
value if favorable investment results are achieved. The Prudential has
established a separate account, like a separate division within the Company,
called The Prudential Variable Appreciable Account (from now on, the "Account").
You may choose to have premiums, after the deduction of certain charges
(described below), invested into any one or more of the fifteen available
subaccounts of the Account.
The money allocated to each subaccount is immediately invested in a
corresponding portfolio of The Prudential Series Fund, Inc. (the "Series Fund"),
a series mutual fund for which The Prudential is the investment advisor.
o The MONEY MARKET PORTFOLIO is invested in short-term debt obligations similar
to those purchased by money market funds.
o The BOND PORTFOLIO is invested primarily in high quality medium-term
corporate and government debt securities.
o The GOVERNMENT SECURITIES PORTFOLIO is invested primarily in U.S. Government
Securities including intermediate and long-term U.S. Treasury securities and
debt obligations issued by agencies of or instrumentalities established,
sponsored or guaranteed by the U.S. Government.
o The two ZERO COUPON BOND PORTFOLIOS--2000 AND 2005 are invested primarily
in debt obligations of the United States Treasury and investment grade
corporations that have been issued without interest coupons or stripped of
their unmatured interest coupons, interest coupons that have been stripped
from such debt obligations, and receipts and certificates for such stripped
debt obligations and stripped coupons.
o The CONSERVATIVELY MANAGED FLEXIBLE PORTFOLIO is invested in a mix of money
market instruments, fixed income securities, and common stocks, in
proportions believed by the investment manager to be appropriate for an
investor who desires diversification of investment who prefers a relatively
lower risk of loss and a correspondingly reduced chance of high appreciation.
o The AGGRESSIVELY MANAGED FLEXIBLE PORTFOLIO is invested in a mix of money
market instruments, fixed income securities, and common stocks, in
proportions believed by the investment manager to be appropriate for an
investor desiring diversification of investment who is willing to accept a
relatively high level of loss in an effort to achieve greater appreciation.
o The HIGH YIELD BOND PORTFOLIO is invested primarily in high yield fixed
income securities of medium to lower quality, also known as high risk bonds.
o The STOCK INDEX PORTFOLIO is invested in common stocks selected to duplicate
the price and yield performance of the Standard & Poor's 500 Composite Stock
Price Index.
o The HIGH DIVIDEND STOCK PORTFOLIO is invested primarily in common stocks and
convertible securities that provide favorable prospects for investment income
returns above those of the Standard & Poor's 500 Stock Index or the NYSE
Composite Index.
2
o The COMMON STOCK PORTFOLIO is invested primarily in common stocks.
o The GROWTH STOCK PORTFOLIO is invested primarily in equity securities of
established companies with above-average growth prospects.
o The SMALL CAPITALIZATION STOCK PORTFOLIO is invested primarily in equity
securities of publicly-traded companies with small market capitalization.
o The GLOBAL EQUITY PORTFOLIO is invested in common stocks and common stock
equivalents (such as convertible debt securities) of foreign and domestic
insurers.
o The NATURAL RESOURCES PORTFOLIO is invested primarily in common stocks and
convertible securities of natural resource companies, and in securities
(typically debt securities or preferred stock) the terms of which are related
to the market value of a natural resource.
Further information about the Series Fund portfolios can be found under THE
PRUDENTIAL SERIES FUND, INC. on page 6 and in the attached prospectus for the
Series Fund.
You have an additional option which is regulated differently from the other 15
because it is not an investment company registered under the Investment Company
Act of 1940. This is a FIXED-RATE OPTION that increases the portion of your
Contract Fund allocated to this option at a guaranteed rate of interest.
Thus your Contract Fund value changes every day depending upon the change in the
value of the particular portfolios (or fixed-rate option) that you have selected
for the investment of your Contract Fund.
Although the selection of any of the subaccounts offers the possibility that
your Contract Fund value will increase if there is favorable investment
performance, you are subject to the risk that investment performance will be
unfavorable and that the value of your Contract Fund will decrease. The risk
will be different, depending upon which investment options you choose. See WHICH
INVESTMENT OPTION SHOULD BE SELECTED?, page 7. If you select the fixed-rate
option, you are credited with a declared rate or rates of interest but you
assume the risk that the rate may change, although it will never be lower than
an effective annual rate of 4%.
The Prudential deducts certain charges from each premium payment and from the
amounts held in the designated investment options. These charges, which are
largely designed to cover insurance costs and risks as well as sales and
administrative expenses, are fully described under CHARGES AND EXPENSES, on page
16. In brief, and subject to that fuller description, the following diagram
outlines the maximum charges which may be made:
3
- --------------------------------------------------------------------------------
DEDUCTIONS FROM PREMIUM PAYMENTS
o A charge of up to 7.5% is deducted for any taxes
attributable to premiums.
o A charge for sales expenses is deducted (this charge
depends upon the Contract year and the amount paid
during that year and disappears after the twentieth year).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DAILY CHARGES
o Management fees and expenses are deducted from the assets of the Series
Fund.
o A daily charge equivalent to an annual rate of up to 0.9% is
deducted from the assets of the variable investment options for mortality
and expense risks.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MONTHLY CHARGES
o The Contract Fund is reduced by a monthly administrative charge of up to
$7.50 per Contract and $0.07 per $1,000 of basic insurance amount in the
first Contract year; for Contract years after the first, the $0.07 per
$1,000 portion of the charge drops to $0.01 per $1,000 of basic insurance
amount.
o A cost of insurance ("COI") charge is deducted.
o The Contract Fund is reduced by a Death Benefit Guarantee risk charge of up
to $0.01 per $1,000 of the basic insurance amount.
o If the Contract includes riders, a deduction from the Contract Fund will be
made for charges applicable to those riders
o If the rating class of an insured results in an extra charge, that charge
will be deducted from the Contract Fund.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL CHARGES
o An administrative processing charge of up to $25 is made in connection with
any withdrawals.
o Although no such charge is currently being made, we reserve the right to
charge up to $25 for each decrease in basic insurance amount.
o An administrative processing charge of up to $25 will be made for each
transfer exceeding twelve in any Contract year.
- --------------------------------------------------------------------------------
There are two types of death benefit available. You may choose a Contract with a
fixed insurance amount under which the cash surrender value varies daily with
investment experience, and the basic insurance amount chosen by you at the
outset does not change. However, the Contract Fund may grow to a point where the
insurance amount may increase and vary with investment experience. If you choose
a Contract with a variable insurance amount, the cash surrender value and the
insurance amount both vary with investment experience. For either type of
insurance amount, as long as the Contract is in force, the insurance amount will
never be less than the basic insurance amount shown in your Contract. See TYPE
OF INSURANCE AMOUNT, page 9.
The Contract is a flexible premium contract--there are no scheduled premiums.
Except for the minimum initial premium, and subject to a minimum of $25 per
subsequent payment, the timing and amount of premium payments is discretionary
and the Contract will remain in force provided that the Contract Fund is
sufficient to cover the charges. However, if the premiums you pay on an
accumulated basis are high enough, and Contract debt does not exceed the
Contract Fund, The Prudential guarantees that your Contract will not lapse even
if investment experience is very unfavorable and the Contract Fund drops below
zero. There are two
4
guarantees available, one that last for the lifetime of the Contract and another
that lasts for a stated, reasonably lengthy period. The guarantee for the life
of the Contract requires higher premium payments. See PREMIUMS, page 11, DEATH
BENEFIT GUARANTEE, page 12 and LAPSE AND REINSTATEMENT, page 29.
While you decide when to make premium payments and, subject to a $25 minimum, in
what amounts, we do offer and suggest regular billing of premiums. When applying
for the Contract, you should discuss with your Prudential representative if you
would like to be billed, how frequently and for what amount. See PREMIUMS, page
11.
For a limited time, a Contract may be returned for a refund in accordance with
the terms of its "free look" provision. See SHORT-TERM CANCELLATION RIGHT OR
"FREE LOOK," page 8.
This Summary provides only a brief overview of the more significant aspects of
the Contract. Further detail is provided in the subsequent sections of this
prospectus and in the Contract. The Contract, including the application attached
to it, constitutes the entire agreement between the owner and The Prudential and
should be retained.
For the DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, see page 1.
GENERAL INFORMATION ABOUT THE PRUDENTIAL, THE
PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT, AND
THE VARIABLE INVESTMENT OPTIONS AVAILABLE
UNDER THE CONTRACT
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
The Prudential Insurance Company of America ("The Prudential") is a mutual
insurance company, founded in 1875 under the laws of the State of New Jersey. We
are licensed to sell life insurance and annuities in the District of Columbia,
Guam, and in all states. These Contracts are not offered in any state in which
the necessary approvals have not yet been obtained.
The Prudential's consolidated financial statements begin on page B1 and should
be considered only as bearing upon The Prudential's ability to meet its
obligations under the Contracts.
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
The Prudential Variable Appreciable Account (the "Account") was established on
August 11, 1987 under New Jersey law as a separate investment account. The
Account meets the definition of a "separate account" under the federal
securities laws. The Account holds assets that are segregated from all of The
Prudential's other assets.
The obligations to Contract owners and beneficiaries arising under the Contract
are general corporate obligations of The Prudential. The Prudential is also the
legal owner of the assets in the Account. The Prudential will at all times
maintain assets in the Account with a total market value at least equal to the
reserve and other liabilities relating to the variable benefits attributable to
the Account. These assets may not be charged with liabilities which arise from
any other business The Prudential conducts. In addition to these assets, the
Account's assets may include funds contributed by The Prudential to commence
operation of the Account and may include accumulations of the charges The
Prudential makes against the Account. From time to time these additional assets
may be withdrawn by The Prudential.
5
The Account is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 ("1940 Act") as a unit investment
trust, which is a type of investment company. This does not involve any
supervision by the SEC of the management or investment policies or practices of
the Account. For state law purposes, the Account is treated as a part or
division of The Prudential. The Account's financial statements begin on page A1.
Currently, you may invest in one or a combination of fifteen available
subaccounts within the Account, each of which invests in a single corresponding
portfolio of The Prudential Series Fund, Inc. Additional subaccounts may be
added in the future.
THE PRUDENTIAL SERIES FUND, INC.
The Prudential Series Fund, Inc. (the "Series Fund") is registered under the
1940 Act as an open-end diversified management investment company. Its shares
are currently sold only to separate accounts of The Prudential and certain
subsidiary insurers that offer variable life insurance and variable annuity
contracts. The Account will purchase and redeem shares from the Series Fund at
net asset value. Shares will be redeemed to the extent necessary for The
Prudential to provide benefits under the Contract and to transfer assets from
one subaccount to another, as requested by Contract owners. Any dividend or
capital gain distribution received from a portfolio of the Series Fund will be
reinvested immediately at net asset value in shares of that portfolio and
retained as assets of the corresponding subaccount.
The Prudential is the investment advisor for the assets of each of the
portfolios of the Series Fund. The Prudential's principal business address is
Prudential Plaza, Newark, New Jersey 07102-3777. The Prudential has a Service
Agreement with its wholly-owned subsidiary The Prudential Investment Corporation
("PIC"), which provides that, subject to The Prudential's supervision, PIC will
furnish investment advisory services in connection with the management of the
Series Fund. In addition, The Prudential has entered into a Subadvisory
Agreement with its wholly-owned subsidiary Jennison Associates Capital
Corporation ("Jennison"), under which Jennison furnishes investment advisory
services in connection with the management of the Growth Stock Portfolio.
Further detail is provided in the prospectus and statement of additional
information for the Series Fund. The Prudential, PIC, and Jennison are
registered as investment advisors under the Investment Advisers Act of 1940.
As an investment advisor, The Prudential charges the Series Fund a daily
investment management fee as compensation for its services. The following table
shows the investment management fee charged for each portfolio of the Series
Fund available to you.
6
- -------------------------------------------------------------------------------
ANNUAL INVESTMENT
PORTFOLIO MANAGEMENT FEE AS
A PERCENTAGE OF
AVERAGE DAILY NET
ASSETS
- -------------------------------------------------------------------------------
Stock Index Portfolio ........................................ 0.35%
Money Market Portfolio ....................................... 0.40%
Bond Portfolio ............................................... 0.40%
Government Securities Portfolio .............................. 0.40%
Zero Coupon Bond Portfolios .................................. 0.40%
High Dividend Stock Portfolio ................................ 0.40%
Small Capitalization Stock Portfolio ......................... 0.40%
Common Stock Portfolio ....................................... 0.45%
Natural Resources Portfolio .................................. 0.45%
High Yield Bond Portfolio .................................... 0.55%
Conservatively Managed Flexible Portfolio .................... 0.55%
Aggressively Managed Flexible Portfolio ...................... 0.60%
Growth Stock Portfolio ....................................... 0.60%
Global Equity Portfolio ...................................... 0.75%
- -------------------------------------------------------------------------------
In addition to the investment management fee, each portfolio incurs certain
expenses, such as accounting and custodian fees. The Prudential, on a
non-guaranteed basis, makes daily adjustments that will offset the effect on
Contract owners of some of these expenses to ensure that the portfolio expenses
indirectly borne by a Contract owner investing in the Zero Coupon Bond
Portfolios will not exceed the investment management fee.
It is conceivable that in the future it may become disadvantageous for both
variable life insurance and variable annuity contract separate accounts to
invest in the same underlying mutual fund. Although neither the companies which
invest in the Series Fund, nor the Series Fund currently foresees any such
disadvantage, the Series Fund's Board of Directors intends to monitor events in
order to identify any material conflict between variable life insurance and
variable annuity contract owners and to determine what action, if any, should be
taken in response thereto. Material conflicts could result from such things as:
(1) changes in state insurance law; (2) changes in federal income tax law; (3)
changes in the investment management of any portfolio of the Series Fund; or (4)
differences between voting instructions given by variable life insurance and
variable annuity contract owners.
A FULL DESCRIPTION OF THE SERIES FUND, ITS INVESTMENT OBJECTIVES, MANAGEMENT,
POLICIES, AND RESTRICTIONS, ITS EXPENSES, THE RISKS ATTENDANT TO INVESTMENT
THEREIN--INCLUDING ANY RISKS ASSOCIATED WITH INVESTMENT IN THE HIGH YIELD BOND
PORTFOLIO, AND ALL OTHER ASPECTS OF ITS OPERATION IS CONTAINED IN THE ATTACHED
PROSPECTUS FOR THE SERIES FUND AND IN ITS STATEMENT OF ADDITIONAL INFORMATION,
WHICH SHOULD BE READ IN CONJUNCTION WITH THIS PROSPECTUS. THERE IS NO ASSURANCE
THAT THE INVESTMENT OBJECTIVES WILL BE MET.
WHICH INVESTMENT OPTION SHOULD BE SELECTED?
Historically, for investments held over relatively long periods, the investment
performance of common stocks has generally been superior to that of short or
long-term debt securities, even though common stocks have been subject to much
more dramatic changes in value over short periods of time. Accordingly, the
Stock Index, High Dividend Stock, Common Stock, Growth
7
Stock, Small Capitalization Stock, Global Equity or Natural Resources Portfolios
may be desirable options if you are willing to accept such volatility in your
Contract values. Each of these equity portfolios involves somewhat different
policies and investment risks.
You may prefer the somewhat greater protection against loss of principal (and
reduced chance of high total return) provided by the Government Securities or
Bond Portfolios. There may be times when you desire even greater safety of
principal and may then prefer the Money Market Portfolio or the fixed-rate
option, recognizing that the level of short-term rates may change rather
rapidly. Money invested in a Zero Coupon Bond Portfolio and held to its
liquidation date will realize a predictable return, although the portfolio's
value may fluctuate significantly with changes in interest rates prior to its
liquidation date. If you are willing to take risks and possibly achieve a higher
total return, you may prefer the High Yield Bond Portfolio, recognizing that
with higher yielding, lower quality bonds the risks are greater. You may wish to
divide your invested premium among two or more of the portfolios. You may wish
to obtain diversification by relying on The Prudential's judgment for an
appropriate asset mix by choosing the Conservatively Managed Flexible or
Aggressively Managed Flexible Portfolios.
You should make a choice that takes into account how willing you are to accept
investment risks, the manner in which your other assets are invested, and your
own predictions about what investment results are likely to be in the future.
The Prudential does recommend AGAINST frequent transfers among the several
investment options as experience generally indicates that "market timing"
investing, particularly by non-professional investors, is likely to prove
unsuccessful.
DETAILED INFORMATION FOR
PROSPECTIVE CONTRACT OWNERS
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
The minimum basic insurance amount that can be applied for is $250,000. The
Contract may be issued on two insureds each between the ages of 20 and 85.
Before issuing any Contract, The Prudential requires evidence of insurability on
each insured which may include a medical examination. Non-smokers are offered
the most favorable cost of insurance rates. A higher cost of insurance rate
and/or additional charge is charged if an extra mortality risk is involved.
These are the current underwriting requirements. We reserve the right to change
them on a non-discriminatory basis.
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"
Generally, you may return the Contract for a refund within 10 days after you
receive it, within 45 days after Part I of the application for insurance is
signed or within 10 days after The Prudential mails or delivers a Notice of
Withdrawal Right, whichever is latest. Some states allow a longer period of time
during which a Contract may be returned for a refund. A refund can be requested
by mailing or delivering the Contract to the representative who sold it or to
The Prudential Home Office specified in the Contract. A Contract returned
according to this provision shall be deemed void from the beginning. You will
then receive a refund of all premium payments made, plus or minus any change due
to investment experience in the value of the invested portion of the premiums,
calculated as if no charges had been made against the Account or the Series
Fund. However, if applicable law so requires, if you exercise your short-term
cancellation right, you will receive a refund of all premium payments made, with
no adjustment for investment experience.
8
TYPE OF INSURANCE AMOUNT
You may select either of two types of insurance amount. Generally, a Contract
with a fixed insurance amount has an insurance amount equal to the basic
insurance amount. The death benefit of this type does not vary with the
investment performance of the investment options selected by you, except in
certain circumstances. See HOW A FIXED INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT
WILL VARY, page 19. Favorable investment results of the variable investment
options to which the assets related to the Contract are allocated and payment of
additional premiums will generally result in increases in the cash surrender
value. See HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY, page 18.
A Contract with a variable insurance amount has an insurance amount which will
generally equal the basic insurance amount plus the Contract Fund. Since the
Contract Fund is a component of the insurance amount, favorable investment
performance and payment of additional premiums generally result in an increase
in the death benefit as well as in the cash surrender value. Over time, however,
the increase in the cash surrender value will be less than under a Contract with
a fixed insurance amount. This is because, given two Contract with the same
basic insurance amount and equal Contract Funds, generally the cost of insurance
charge for a Contract with a variable insurance amount will be greater. See HOW
A CONTRACT'S CASH SURRENDER VALUE WILL VARY, page 18 and HOW A VARIABLE
INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY, page 20. Unfavorable
investment performance will result in decreases in the insurance amount and in
the cash surrender value. But, as long as the Contract is not in default and
there is no Contract debt, the death benefit may not fall below the basic
insurance amount stated in the Contract.
In choosing an insurance amount type, you should also consider whether you
intend to use the withdrawal feature. Purchasers of Contracts with a fixed
insurance amount should note that any withdrawal may result in a reduction of
the basic insurance amount. In addition, we will not allow you to make a
withdrawal that will decrease the insurance amount below the minimum basic
insurance amount. See WITHDRAWALS, page 22.
Here are two examples of how the death benefit and cash surrender values may
vary for Contracts with fixed and variable insurance amounts. The graphs are
based on the same assumptions as the illustrations shown on pages T-1 through
T-4. Specifically, a Contract with a basic insurance amount of $1,000,000 has
been issued on the lives of a 55 year old male and a 50 year old female, both
non-smokers, with no extra risks or substandard ratings, and no extra benefit
riders added to the Contract. The first chart assumes that the target premium
amount (see PREMIUMS, page 11) is paid on each Contract anniversary, no loans
are taken, current charges will continue for the indefinite future, and there is
a uniform gross annual rate of return of 8%. The second chart makes the same
assumptions, except that it assumes that the maximum charges permitted by the
Contract are made.
9
Current contractual charges, 8% Gross Investment Return
[GRAPHIC OMITTED]
Maximum contractual charges, 8% Gross Investment Return
[GRAPHIC OMITTED]
The way in which the cash surrender values and death benefits will change
depends significantly upon the investment results that are actually achieved.
CHANGING THE TYPE OF INSURANCE AMOUNT
Subject to The Prudential's approval, you may change the type of insurance
amount. We will increase or decrease the basic insurance amount so that the
death benefit immediately after the change matches the death benefit immediately
before the change. There may be times
10
when a change from one type of insurance amount to the other may be desirable.
You should consult your Prudential representative from time to time about the
choices available to you under the Contract.
If you are changing your Contract's type of insurance amount from fixed to
variable, we will reduce the basic insurance amount by the amount in your
Contract Fund on the date the change takes place. The basic amount after the
change may not be lower than the minimum basic insurance amount applicable to
the Contract. If you are changing from a variable to a fixed insurance amount,
we will increase the basic insurance amount by the amount in your Contract Fund
on the date the change takes place. This is illustrated in the following chart.
------------------------------------------------------------------------------
CHANGING THE CHANGING THE
INSURANCE AMOUNT INSURANCE AMOUNT
FROM FROM
FIXED (RIGHT ARROW) VARIABLE VARIABLE (RIGHT ARROW) FIXED
- -------------------------------------------------------------------------------------------------
BASIC INSURANCE
AMOUNT $300,000 (Right Arrow) $250,000 $300,000 (Right Arrow) $350,000
CONTRACT FUND $50,000 (Equal Sign) $50,000 $50,000 (Equal Sign) $50,000
DEATH BENEFIT* $300,000 (Equal Sign) $300,000 $350,000 (Equal Sign) $350,000
<FN>
- -------------------------------------------------------------------------------------------------
* assuming there is no Contract debt
- -------------------------------------------------------------------------------------------------
</FN>
To request a change, fill out an application for change which can be obtained
from your Prudential representative or any of our offices. If the change is
approved, we will recompute the Contract's charges and appropriate tables and
send you new Contract data pages. We may ask that you send us your Contract
before making the change.
PREMIUMS
The Contract is a flexible premium contract. The minimum initial premium is due
on or before the Contract date. Thereafter, you decide when you would like to
make premium payments and, subject to a $25 minimum, in what amounts. We reserve
the right to refuse to accept any payment that increases the insurance amount by
more than it increases the Contract Fund. See HOW A FIXED INSURANCE AMOUNT
CONTRACT'S DEATH BENEFIT WILL VARY, page 19 and HOW A VARIABLE INSURANCE AMOUNT
CONTRACT'S DEATH BENEFIT WILL VARY, page 20. There are circumstances under which
the payment of premiums in amounts that are too large may cause the Contract to
be characterized, under the Internal Revenue Code, as a Modified Endowment
Contract, which could be significantly disadvantageous. See TAX TREATMENT OF
CONTRACT BENEFITS, page 26.
Once the minimum initial premium payment is made, there are no required
premiums. However, there are several types of "premium" which may help you
understand how the Contract works.
MINIMUM INITIAL PREMIUM -- the premium needed to start the Contract. There is no
insurance under this Contract unless the minimum initial premium is paid.
GUIDELINE PREMIUMS -- these are the premiums that, if paid at the beginning of
each Contract year, will keep the Contract in force regardless of investment
performance, assuming no loans or withdrawals. These guideline premiums will be
higher for a Contract with a variable insurance amount than for a Contract with
a fixed insurance amount. For a Contract with no
11
riders or extra risk charges, these premiums will be level. If certain riders
are included, the guideline premium may increase each year. Payment of guideline
premiums at the beginning of each Contract year is one way to achieve the
Lifetime Death Benefit Guarantee Values shown on the Contract data pages. See
DEATH BENEFIT GUARANTEE, below. When you purchase a Contract, your Prudential
representative can tell you the amount[s] of the guideline premium.
TARGET PREMIUMS -- these are the premiums that, if paid at the beginning of each
Contract year, will keep the Contract in force during the Limited Death Benefit
Guarantee period assuming no loans or withdrawals. As is the case with the
guideline premium, for a Contract with no riders or extra risk charges, these
premiums will be level. If certain riders are included, the target premium may
increase each year. Payment of target premiums at the beginning of each Contract
year is one way to achieve the Limited Death Benefit Guarantee Values shown on
the Contract data pages. At the end of the Limited Death Benefit Guarantee
period, continuation of the Contract will depend on the Contract Fund having
sufficient money to cover all charges or meeting the conditions of the Lifetime
DEATH BENEFIT GUARANTEE. See DEATH BENEFIT GUARANTEE, below. When you purchase a
Contract, your Prudential representative can tell you the amount[s] of the
target premium.
TARGET LEVEL PREMIUM -- For any Contract this is generally the target premium
minus any premiums for single life riders or any premiums associated with
aviation, avocation, occupational or temporary extras. We use the target level
premium in calculating the sales load (as shown under ADJUSTMENTS TO PREMIUM
PAYMENTS on your Contract's data pages). See CHARGES AND EXPENSES, page 16 and
SALE OF THE CONTRACT AND SALES COMMISSIONS, page 26.
We can bill you for any amount you select annually, semi-annually, quarterly or
monthly. Because the Contract is a flexible premium contract, there are no
scheduled premium due dates. When you receive a premium notice, you are not
required to pay this amount. The Contract will remain in force if either the
Contract Fund is sufficient to pay all charges or if you have paid sufficient
premiums on an accumulated basis to meet the conditions of the Death Benefit
Guarantee and Contract debt is not equal to or greater than the Contract Fund.
You may also pay premiums automatically through pre-authorized transfers from a
bank checking account. If you elect to use this feature, you choose the
frequency (monthly, quarterly, semi-annually or annually) and the amount of
premiums paid.
When you apply for the Contract, you should discuss with your Prudential
representative how frequently you would like to be billed (if at all) and for
what amount.
DEATH BENEFIT GUARANTEE
Although you decide what premium amounts you wish to pay, payment of sufficient
premium, on an accumulated basis, will guarantee that your policy will not lapse
and a death benefit will be paid upon the second death of two insureds. This
will be true even if, because of unfavorable investment experience, your
Contract Fund value drops to zero. However, the guarantee is contingent upon
Contract debt never being equal to or greater than the Contract Fund. See
CONTRACT LOANS, page 25. You should consider the importance of the Death Benefit
Guarantee to you when deciding on what amounts of premiums to pay into the
Contract.
For purposes of determining this guarantee, we calculate, and show in the
Contract data pages, two sets of amounts--the Lifetime Death Benefit Guarantee
Values and Limited Death Benefit Guarantee Values. These are not cash values
that you can realize by surrendering the Contract, nor are they death benefits
payable. They are values used solely to determine if a Death Benefit Guarantee
is in effect. The Lifetime Death Benefit Guarantee Values are shown
12
for the lifetime of the Contract. The Limited Death Benefit Guarantee Values are
lower, but only apply for the length of the Limited Death Benefit Guarantee
period.
The length of the Limited Death Benefit Guarantee period is determined on a case
by case basis depending on things like the insureds' ages and extra rating
class, if any. The length of the Limited Death Benefit Guarantee period
applicable to your particular Contract is shown on the Contract data pages.
At the Contract date, and on each Monthly date, we calculate your Contract's
"Accumulated Net Payments" as of that date. Accumulated Net Payments equal the
premiums you paid, accumulated at an effective annual rate of 4%, less
withdrawals also accumulated at 4%.
At each Monthly date within the Limited Death Benefit Guarantee period, we will
compare your Accumulated Net Payments to the Limited Death Benefit Guarantee
Value as of that date. After the Limited Death Benefit Guarantee period, we will
compare your Accumulated Net Payments to the Lifetime Death Benefit Guarantee
Value as of that date. If your Accumulated Net Payments equal or exceed the
applicable (Lifetime or Limited) Death Benefit Guarantee Value and Contract debt
does not exceed the Contract Fund, then the Contract is kept in force,
regardless of the amount in the Contract Fund.
The Contract data pages show Lifetime Death Benefit Guarantee Values and Limited
Death Benefit Guarantee Values as of Contract anniversaries. Values for
non-anniversary Monthly dates will reflect the number of months elapsed between
Contract anniversaries.
Guideline and target premiums are premium levels that, if paid at the start of
each Contract year, correspond to the Lifetime and Limited Death Benefit
Guarantee Values, respectively (assuming no withdrawals or loans). See PREMIUMS,
page 11. They are one way of reaching the Death Benefit Guarantee Values; they
are certainly not the only way.
Here is a table of typical guideline and target premiums (to the nearest dollar)
along with corresponding Limited Death Benefit Guarantee periods. The examples
assume the insureds are a male and a female, both of the same age, both
non-smokers, with no extra risk or substandard ratings, and no extra benefit
riders added to the Contract.
- -------------------------------------------------------------------------------
BASIC INSURANCE AMOUNT--$250,000
ILLUSTRATIVE ANNUAL PREMIUMS
- -------------------------------------------------------------------------------
GUIDELINE PREMIUM TARGET PREMIUM
AGE OF TYPE OF CORRESPONDING TO CORRESPONDING TO THE
BOTH THE INSURANCE THE LIMITED DEATH BENEFIT
INSUREDS AMOUNT LIFETIME DEATH GUARANTEE VALUES AND
AT ISSUE CHOSEN BENEFIT GUARANTEE NUMBER OF YEARS OF
VALUES GUARANTEE
- -------------------------------------------------------------------------------
45 Fixed $3,713 $2,218 for 39 years
45 Variable $13,906 $2,218 for 37 years
55 Fixed $5,581 $3,601 for 29 years
55 Variable $20,349 $3,601 for 27 years
65 Fixed $9,618 $7,212 for 22 years
65 Variable $30,787 $7,212 for 20 years
- -------------------------------------------------------------------------------
13
The Death Benefit Guarantee allows considerable flexibility as to the timing of
premium payments. Your Prudential representative can supply sample illustrations
of various premium amount and frequency combinations that correspond to the
Death Benefit Guarantee Values.
You should consider carefully the value of maintaining the guarantee. It may be
preferable for you to pay generally higher premiums in all years, rather than
trying to make such payments on an as needed basis if the death benefit
guarantee is desired for lifetime protection. For example, if you pay only
enough premium to meet the Limited Death Benefit Guarantee Values, a substantial
amount may be required to meet the Lifetime Death Benefit Guarantee Values in
order to continue the guarantee at the end of the Limited Death Benefit
Guarantee period. In addition, it is possible that the payment required to
continue the guarantee after the Limited Death Benefit Guarantee period could
exceed the premium payments allowed to be paid without causing the Contract to
become a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS,
page 26.
CONTRACT DATE
When the first premium payment is paid with the application for a Contract, the
Contract date will ordinarily be the later of the date of the application or the
date of the medical examination. If the first premium is not paid with the
application, the Contract date will ordinarily be 2 or 3 days after the
application is approved by The Prudential so that it will coincide with the date
on which the first premium is paid and the Contract is delivered. Under certain
circumstances, we may allow the Contract to be back dated for the purpose of
lowering one or both insureds' issue age[s], but only to a date not earlier than
six months prior to the date of the application. This may be advantageous for
some Contract owners as a lower issue age may result in lower current charges.
For a Contract that is backdated, the minimum initial premium will be treated as
if it were received on the back-dated Contract date and the current death
benefit and cash surrender value under the Contract will be equal to what they
would have been had the Contract been issued on the Contract date and had all
Contract charges been made.
ALLOCATION OF PREMIUMS
On the Contract date, the charge for sales expenses and the charge for taxes
attributable to premiums are deducted from the initial premium. The remainder of
the initial premium will be allocated on the Contract date among the subaccounts
and/or the fixed-rate option according to your desired allocation as specified
in the application form and the first monthly deductions are made. See CHARGES
AND EXPENSES, page 16.
The invested portion of all subsequent premiums is placed in the selected
investment option[s] when we receive them. Thus, to the extent that the receipt
of the first premium precedes the Contract date, there will be a period during
which the Contract owner's initial premium will not be invested. The charge for
sales expenses and the charge for taxes attributable to premiums also apply to
all subsequent premium payments (there is no charge for sales expenses after the
twentieth Contract year); the remainder will be placed when received by The
Prudential in the subaccount[s], or the fixed-rate option, in accordance with
the allocation you previously designated. Provided the Contract is not in
default, you may change the way in which subsequent premiums are allocated by
giving written notice to a Prudential Home Office or by telephoning that Home
Office, unless you ask that transfers by telephone not be made. There is no
charge for reallocating future premiums. All percentage allocations must be in
whole numbers. For example, 33% can be selected but 33 1/3% cannot. Of course,
the total allocation to all selected investment options must equal 100%.
14
TRANSFERS
You may, up to twelve times in each Contract year, transfer amounts from one
subaccount to another subaccount or to the fixed-rate option without charge.
There is an administrative charge of up to $25 for each transfer made exceeding
twelve in any Contract year. All or a portion of the amount credited to a
subaccount may be transferred.
Transfers among subaccounts will take effect as of the end of the valuation
period in which a proper transfer request is received at a Prudential Home
Office. The request may be in terms of dollars, such as a request to transfer
$10,000 from one subaccount to another, or may be in terms of a percentage
reallocation among subaccounts. In the latter case, as with premium
reallocations, the percentages must be in whole numbers. You may transfer
amounts by proper written notice to a Prudential Home Office, or by telephone,
provided you are enrolled to use the Telephone Transfer System.
You will automatically be enrolled to use the Telephone Transfer System unless
you elect not to have this privilege. We will use reasonable procedures, such as
asking you to provide certain personal information provided on your application
for insurance, to confirm that instructions given by telephone are genuine. We
will not be held liable for following telephone instructions that we reasonably
believe to be genuine. The Prudential cannot guarantee that you will be able to
get through to complete a telephone transfer during peak periods such as periods
of drastic economic or market change.
On the liquidation date of a Zero Coupon Bond Subaccount, all the shares held by
it in the corresponding portfolio of the Series Fund will be redeemed and the
proceeds of the redemption applicable to each Contract will be transferred to
the Money Market Subaccount unless the Contract owner directs that it be
transferred to another investment option[s]. Affected Contract owners will be
notified in writing and given the opportunity to transfer their proceeds to
another subaccount or the fixed-rate option prior to the liquidation date.
Transfers from the fixed rate option are currently not restricted. However, on
May 1, 1996 the following restrictions will take effect. Transfers from the
fixed rate option will be permitted once each Contract year and only during the
30-day period beginning on the Contract anniversary. The maximum amount which
may be transferred out of the fixed-rate option each year is the greater of: (a)
25% of the amount in the fixed-rate option; and (b) $2,000. These limits are
subject to change in the future.
DOLLAR COST AVERAGING
As an administrative practice, we are currently offering a feature called Dollar
Cost Averaging ("DCA"). Under this feature, either fixed dollar amounts or a
percentage of the amount designated for use under the DCA option will be
transferred periodically from the Money Market Subaccount into other investment
options available under the Contract, excluding the fixed-rate option. You may
choose to have periodic transfers made monthly, quarterly, semi-annually or
annually.
Each automatic transfer will take effect as of the end of the valuation period
on the date coinciding with the periodic timing you designated provided the New
York Stock Exchange is open on that date. If the New York Stock Exchange is not
open on that date, or if the date does not occur in that particular month, the
transfer will take effect as of the end of the valuation period which
immediately follows that date. Automatic transfers will continue until: (1) $50
or less remains of the amount designated for Dollar Cost Averaging, at which
time the remaining amount will be transferred; or (2) you give us notification
of a change in DCA
15
allocation or cancellation of the feature. Currently, there is no charge for
using the Dollar Cost Averaging feature. We reserve the right to change the
requirements or discontinue the feature.
CHARGES AND EXPENSES
The total amount invested at any time under the Contract (the "Contract Fund")
consists of the sum of the amount credited to the subaccounts, the amount
allocated to the fixed-rate option, and the principal amount of any Contract
loan plus the amount of interest credited to the Contract upon that loan. See
Contract Loans, page 25. Most charges, although not all, are made by reducing
the Contract Fund.
This section provides a detailed description of each charge that is described
briefly in the chart on page 4, and an explanation of the purpose of the charge.
In several instances we will use the terms "maximum charge" and "current
charge." The "maximum charge," in each instance, is the highest charge that The
Prudential is entitled to make under the Contract. The "current charge" is the
lower amount that The Prudential is now charging. However, if circumstances
change, The Prudential reserves the right to increase each current charge, up to
but to no more than the maximum charge, without giving any advance notice.
DEDUCTIONS FROM PREMIUM PAYMENTS
(a) A charge of up to 7.5% is deducted from each premium for taxes attributable
to premiums. For these purposes, "taxes attributable to premiums" shall
include any federal, state or local income, premium, excise, business or any
other type of tax (or component thereof) measured by or based upon the
amount of premium received by The Prudential. That charge is currently made
up of two parts. The first part is in an amount based on an average of state
and local premium taxes. The current charge for this first part is 2.5% of
the premium. The second part is for federal income taxes measured by
premiums and it is currently equal to 1.25% of the premium. The Prudential
believes that this charge is a reasonable estimate of an increase in its
federal income taxes resulting from a 1990 change in the Internal Revenue
Code. It is intended to recover this increased tax.
(b) A charge for sales expenses will be deducted from premium payments made
during the first twenty Contract years. This charge, often called a sales
load, is deducted to compensate us for things like the costs The Prudential
incurs in selling the Contracts, including commissions, advertising and the
printing and distribution of prospectuses and sales literature. The charge
is expressed as a percentage of premium. The charge is equal to 30% of
premiums paid in the first Contract year up to the amount of the target
level premium (see Premiums, page 11) and 4% of premiums paid in excess of
the target level premium. For Contract years 2 through 20, the charge is
equal to 7.5% of the premiums paid in each Contract year up to the target
level premium and 4% of the premiums paid above the target level premium.
Generally, if the average age of the insureds is 59 years or more, these
charges may be reduced to comply with the requirements of certain provisions
of the Investment Company Act of 1940 and rules adopted by the Securities
and Exchange Commission.
Paying less than the target level premium amount in the first Contract year
or paying more than the target level premium amount in any Contract year
could reduce your total sales load. For example, assume that a Contract has
a target level premium of $12,097.49 and the Contract owner would like to
pay ten target level premiums. If the Contract owner
16
paid $24,194.98 (two times the amount of the target level premium in every
other policy year up to the ninth year (i.e. in years 1, 3, 5, 7, 9), the
sales load charge would be $9,677.99. If however, the Contract owner paid
$12,097.49 in each of the first ten policy years, the total sales load would
be $11,795.04.
Attempting to structure the timing and amount of premium payments to reduce
the potential sales load may increase the risk that your Contract will lapse
without value. Delaying the payment of target premium amounts to later years
will adversely affect the Death Benefit Guarantee if the accumulated premium
payments do not reach the accumulated values shown under your Contract's
Limited Death Benefit Guarantee Values. See DEATH BENEFIT GUARANTEE, page
12. In addition, there are circumstances where payment of premiums that are
too large may cause the Contract to be characterized as a Modified Endowment
Contract, which could be significantly disadvantageous. See TAX TREATMENT OF
CONTRACT BENEFITS, page 26.
DEDUCTIONS FROM PORTFOLIOS
The Account purchases shares of the Series Fund at net asset value. The net
asset value of those shares reflects portfolio management fees and expenses
already deducted from the assets of the Series Fund. The fees and expenses for
the Series Fund are briefly described under THE PRUDENTIAL SERIES FUND, INC. on
page 6 in connection with the general description of the Series Fund. More
detailed information is contained in the attached Series Fund prospectus.
DAILY DEDUCTION FROM THE CONTRACT FUND
Each day a charge is deducted from the assets of each of the subaccounts (the
"variable investment options") in an amount equivalent to an effective annual
rate of 0.9%. This charge is intended to compensate Prudential for assuming
mortality and expense risks under the Contract. The mortality risk assumed is
that the insureds may live for shorter periods of time than The Prudential
estimated when it determined what mortality charge to make. The expense risk
assumed is that expenses incurred in issuing and administering the Contract will
be greater than The Prudential estimated in fixing its administrative charges.
The Prudential will realize a profit from this risk charge to the extent it is
not needed to provide benefits and pay expenses under the Contracts. This charge
is not assessed against amounts allocated to the fixed-rate option.
MONTHLY DEDUCTIONS FROM CONTRACT FUND
The following monthly charges are deducted proportionately from the dollar
amounts held in each of the chosen investment option[s].
a) An administrative charge based on the basic insurance amount is deducted. The
charge is intended to compensate us for things like processing claims,
keeping records and communicating with Contract owners. In the first year,
this charge consists of $5 per Contract plus $0.07 per $1,000 of basic
insurance amount. In all subsequent years, this charge will be $5 per
Contract. The Prudential reserves the right, however, to increase these
charges to $7.50 per Contract plus $0.07 per $1,000 of basic insurance amount
in the first Contract year and $7.50 per Contract plus $0.01 per $1,000 of
basic insurance amount in later years.
17
For example, a Contract with a basic insurance amount of $250,000 would
currently have a charge equal to $5 plus $17.50 for a total of $22.50 per
month for the first Contract year and $5 per month in all later years. The
maximum charge for this same Contract would be $7.50 plus $17.50 for a total
of $25 per month during the first Contract year. In later years, the maximum
charge would be $7.50 plus $2.50 for a total of $10 per month.
b) A cost of insurance ("COI") charge is deducted. Upon the second death of two
insureds, the amount payable to the beneficiary (assuming there is no
Contract debt) is larger than the Contract Fund - significantly larger if
both insureds died in the early years of the Contract. The cost of insurance
charges collected from all Contract owners enables The Prudential to pay this
larger death benefit. The maximum COI charge is determined by multiplying the
"net amount at risk" under a Contract (the amount by which the Contract's
insurance amount exceeds the Contract Fund) by maximum COI rates. The maximum
COI rates are based upon both insureds' current attained age, sex, smoking
status, and extra rating class, if any.
For current COI charges, we use rates that are generally lower than the
maximum if both insureds are 36 years of age or older.
c) A charge of $0.01 per $1,000 of basic insurance amount is made to compensate
The Prudential for the risk we assume by providing the Death Benefit
Guarantee feature. See DEATH BENEFIT GUARANTEE, page 12.
d) You may add one or more of several riders to the Contract. Some riders are
charged for separately. If you add such a rider to the basic Contract,
additional charges will be deducted.
e) If an insured is in a substandard risk classification (for example, a person
in a hazardous occupation), additional charges will be deducted.
TRANSACTION CHARGES
(a) An administrative processing charge of $10 is made in connection with each
withdrawal. We reserve the right to increase this charge up to $25 for each
withdrawal.
b) No administrative processing charge is currently being made in connection
with a decrease in basic insurance amount. We reserve the right to make such
a charge in an amount of up to $25 for each decrease.
(c) An administrative processing charge of up to $25 will be made for each
transfer exceeding 12 in any Contract year.
HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY
You may surrender the Contract for its net cash value. The Contract's cash
surrender value on any date will be the Contract Fund, defined under CHARGES AND
EXPENSES on page 16, reduced by any Contract debt. See CONTRACT LOANS, page 25.
The Contract Fund value changes daily, reflecting increases or decreases in the
value of the Series Fund portfolios in which the assets of the subaccount[s]
have been invested, interest credited on any amounts allocated to the fixed-rate
option, interest credited on any loan, and by the daily asset charge for
mortality and expense risks assessed against the variable investment options.
The Contract Fund value also changes to reflect the receipt of premium payments
and the monthly
18
deductions described under CHARGES AND EXPENSES. Upon request,
The Prudential will tell you the cash surrender value of your Contract. It is
possible for the cash surrender value of a Contract to decline to zero because
of unfavorable investment performance.
The tables on pages T1 through T4 of this prospectus illustrate approximately
what the cash surrender values would be for representative Contracts paying
target premium amounts (see PREMIUMS, page 11), assuming hypothetical uniform
investment results in the Series Fund portfolios. Two of the tables assume
current charges will be made throughout the lifetime of the Contract and two
tables assume maximum charges will be made. See ILLUSTRATIONS OF CASH SURRENDER
VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS, page 23.
HOW A FIXED INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY
As noted above, there are two types of the Contract, a fixed insurance amount
and a variable insurance amount. The death benefit under a Contract with a
variable insurance amount varies with investment performance while the death
benefit under a Contract with a fixed insurance amount does not, unless it must
be increased to comply with the Internal Revenue Code's definition of life
insurance.
Under a Contract with a fixed insurance amount, the death benefit is equal to
the basic insurance amount, reduced by any Contract debt. See CONTRACT LOANS,
page 25. If the Contract is kept in force for several years, depending on how
much premium you pay, and/or if investment performance is reasonably favorable,
the Contract Fund may grow to the point where The Prudential will increase the
insurance amount in order to ensure that the Contract will satisfy the Internal
Revenue Code's definition of life insurance. Thus, assuming no Contract debt,
the death benefit under a Contract with a fixed insurance amount will always be
the greater of: (1) the basic insurance amount; and (2) the Contract Fund before
the deduction of any monthly charges due on that date, multiplied by the
attained age factor that applies. A listing of attained age factors can be found
on the data pages of your Contract. The latter provision ensures that the
Contract will always have an insurance amount large enough to be treated as life
insurance for tax purposes under current law.
The following table illustrates at different ages how the attained age factor
affects the death benefit for different Contract Fund amounts. The table assumes
a $1,000,000 fixed insurance amount Contract was issued when the younger insured
was age 35 and there is no Contract debt.
19
FIXED INSURANCE AMOUNT
- -------------------------------------------------------------------------------
IF THEN
- -------------------------------------------------------------------------------
THE CONTRACT
THE THE FUND
YOUNGER AND THE ATTAINED MULTIPLIED BY AND THE
INSURED IS CONTRACT AGE FACTOR THE ATTAINED DEATH
AGE FUND IS IS AGE FACTOR IS BENEFIT IS
- -------------------------------------------------------------------------------
40 $100,000 5.7 570,000 $1,000,000
40 $200,000 5.7 1,140,000 $1,140,000
40 $300,000 5.7 1,710,000 $1,710,000*
- -------------------------------------------------------------------------------
60 $300,000 2.8 840,000 $1,000,000
60 $400,000 2.8 1,120,000 $1,120,000*
60 $600,000 2.8 1,680,000 $1,680,000*
- -------------------------------------------------------------------------------
80 $600,000 1.5 900,000 $1,000,000
80 $700,000 1.5 1,050,000 $1,050,000*
80 $800,000 1.5 1,200,000 $1,200,000*
- -------------------------------------------------------------------------------
* Note that the death benefit has been increased to comply with the Internal
Revenue Code's definition of life insurance. At this point, any additional
premium payment will increase the insurance amount by more than it increases
the Contract Fund.
- -------------------------------------------------------------------------------
This means, for example, that if the younger insured has reached the age of 60,
and the Contract Fund is $400,000, the death benefit will be $1,120,000, even
though the original basic insurance amount was $1,000,000. In this situation,
for every $1 increase in the Contract Fund, the insurance amount (and therefore
the death benefit) will be increased by $2.80. We reserve the right to refuse to
accept any premium payment that increases the insurance amount by more than it
increases the Contract Fund. If we exercise this right, it may in certain
situations result in the loss of the death benefit guarantee.
HOW A VARIABLE INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY
Under a Contract with a variable insurance amount, while the Contract is in
force, the death benefit will never be less than the basic insurance amount
reduced by any Contract debt, but will also vary, immediately after it is
issued, with the investment results of the selected investment options. The
insurance amount may be further increased to ensure that the Contract will
satisfy the Internal Revenue Code's definition of life insurance. Thus, assuming
no Contract debt, the death benefit will always be the greater of: (1) the basic
insurance amount plus the Contract Fund; and (2) the Contract Fund before the
deduction of any monthly charges due on that date, multiplied by the attained
age factor that applies. A listing of attained age factors can be found on the
data pages of your Contract. The latter provision ensures that the Contract will
always have an insurance amount large enough to be treated as life insurance for
tax purposes under current law.
The following table illustrates various attained age factors and Contract Funds
and the corresponding death benefits. The table assumes a $1,000,000 variable
insurance amount Contract was issued when the younger insured was age 35 and
there is no Contract debt.
20
VARIABLE INSURANCE AMOUNT
- -------------------------------------------------------------------------------
IF THEN
- -------------------------------------------------------------------------------
THE CONTRACT
THE THE FUND
YOUNGER AND THE ATTAINED MULTIPLIED BY AND THE
INSURED IS CONTRACT AGE FACTOR THE ATTAINED DEATH
AGE FUND IS IS AGE FACTOR IS BENEFIT IS
- -------------------------------------------------------------------------------
40 $100,000 5.7 570,000 $1,100,000
40 $200,000 5.7 1,140,000 $1,200,000
40 $300,000 5.7 1,710,000 $1,710,000*
- -------------------------------------------------------------------------------
60 $300,000 2.8 840,000 $1,300,000
60 $400,000 2.8 1,120,000 $1,400,000
60 $600,000 2.8 1,680,000 $1,680,000*
- -------------------------------------------------------------------------------
80 $600,000 1.5 900,000 $1,600,000
80 $700,000 1.5 1,050,000 $1,700,000
80 $800,000 1.5 1,200,000 $1,800,000
- -------------------------------------------------------------------------------
* Note that the death benefit has been increased to comply with the Internal
Revenue Code's definition of life insurance. At this point, any additional
premium payment will increase the insurance amount by more than it increases
the Contract Fund.
- -------------------------------------------------------------------------------
This means, for example, that if the younger insured has reached the age of 60,
and the Contract Fund is $600,000, the death benefit will be $1,680,000, even
though the original basic insurance amount was $1,000,000. In this situation,
for every $1 increase in the Contract Fund, the insurance amount (and therefore
the death benefit) will be increased by $2.80. We reserve the right to refuse to
accept any premium payment that increases the insurance amount by more than it
increases the Contract Fund. If we exercise this right, it may in certain
situations result in the loss of the death benefit guarantee.
PARTICIPATION IN DIVISIBLE SURPLUS
The Contract is eligible to be credited with part of The Prudential's divisible
surplus attributable to the Contracts ("dividends"), as determined annually by
The Prudential's Board of Directors. However, we do not expect to pay any
dividends to Contract owners of the Contracts while they remain in force because
favorable investment performance will be reflected in Contract values and
because we intend, if experience indicates that current charges are greater than
needed to cover expenses, to reduce those charges further so that there will be
no source of distributable surplus attributable to these Contracts.
SURRENDER OF A CONTRACT
A Contract may be surrendered for its cash surrender value while one or both of
the insureds is living. To surrender a Contract, you must deliver or mail it,
together with a written request, to a Prudential Home Office. The cash surrender
value of a surrendered Contract will be determined as of the end of the
valuation period in which such a request is received in the Home Office.
Surrender of a Contract may have tax consequences. See TAX TREATMENT OF CONTRACT
BENEFITS, page 26.
21
WITHDRAWALS
Under certain circumstances, you may withdraw a portion of the Contract's cash
surrender value without surrendering the Contract. The amount that you may
withdraw is limited by the requirement that the cash surrender value after the
withdrawal may not be zero or less than zero after deducting the next monthly
charges. The amount withdrawn must be at least $500. There is an administrative
processing fee for each withdrawal equal to $10. The Prudential, however,
reserves the right to increase this charge up to $25. An amount withdrawn may
not be repaid except as a premium subject to the applicable charges. Upon
request, we will tell you how much you may withdraw. Withdrawal of the cash
surrender value may have tax consequences. See TAX TREATMENT OF CONTRACT
BENEFITS, page 26.
Whenever a withdrawal is made, the insurance amount and therefore the death
benefit payable will immediately be reduced by at least the amount of the
withdrawal. For a Contract with a variable insurance amount, this will not
change the basic insurance amount. However, under a Contract with a fixed
insurance amount, the resulting reduction in insurance amount usually requires a
reduction in the basic insurance amount. No withdrawal will be permitted under a
Contract with a fixed insurance amount if it would result in a basic insurance
amount of less than the minimum basic insurance amount. It is important to note,
however, that if the insurance amount is decreased at any time during the life
of the Contract, there is a possibility that the Contract might be classified as
a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
Before making any withdrawal which causes a decrease in insurance amount, you
should consult with your Prudential representative.
When a withdrawal is made, the Contract Fund is reduced by the sum of the cash
withdrawn and the fee for the withdrawal. An amount equal to the reduction in
the Contract Fund will be withdrawn proportionally from the investment options
unless you direct otherwise.
Withdrawal of the cash surrender value increases the risk that the Contract Fund
may be insufficient to provide for benefits under the Contract. If such a
withdrawal is followed by unfavorable investment experience, the Contract may go
into default. Withdrawals may also affect whether a Contract is kept in force
under the Death Benefit Guarantee. This is because, for purposes of determining
whether a lapse has occurred, The Prudential treats withdrawals as a return of
premium. Therefore, withdrawals decrease the accumulated net payments. See DEATH
BENEFIT GUARANTEE, page 12.
DECREASES IN BASIC INSURANCE AMOUNT
As explained earlier, you may make a withdrawal (see WITHDRAWALS, above). You
also have the additional option of decreasing the basic insurance amount of your
Contract without withdrawing any cash surrender value. Contract owners who
conclude that, because of changed circumstances, the amount of insurance is
greater than needed will thus be able to decrease their amount of insurance
protection, and the monthly deductions for the cost of insurance, without
decreasing their current cash surrender value. The cash surrender value of the
Contract on the date of the decrease will not change, except that an
administrative processing fee of up to $25 may be deducted. If we ask you to,
you must send us your Contract to be endorsed. The Contract will be amended to
show the new basic insurance amount, charges, values in the appropriate tables
and the effective date of the decrease.
The minimum permissible decrease for your Contract is shown under CONTRACT
LIMITATIONS in the data pages of your Contract. The basic insurance amount after
the decrease may not be lower than the minimum basic insurance amount. No
reduction will be permitted if it would cause the Contract to fail to qualify as
"life insurance" for purposes of Section 7702 of the
22
Internal Revenue Code. A decrease will not take effect if at least one insured
is not living on the effective date.
It is important to note, however, that if the basic insurance amount is
decreased at any time during the life of the Contract, there is a possibility
that the Contract might be classified as a Modified Endowment Contract. See TAX
TREATMENT OF CONTRACT BENEFITS, page 26. Before requesting any decrease in basic
insurance amount, you should consult with your Prudential representative.
WHEN PROCEEDS ARE PAID
The Prudential will generally pay any death benefit, cash surrender value, loan
proceeds or withdrawal within 7 days after receipt at a Prudential Home Office
of all the documents required for such a payment. Other than the death benefit,
which is determined as of the date of the second death, the amount will be
determined as of the end of the valuation period in which the necessary
documents are received. However, The Prudential may delay payment of proceeds
from the subaccount[s] and the variable portion of the death benefit due under
the Contract if the disposal or valuation of the Account's assets is not
reasonably practicable because the New York Stock Exchange is closed for other
than a regular holiday or weekend, trading is restricted by the SEC or the SEC
declares that an emergency exists.
With respect to the amount of any cash surrender value allocated to the
fixed-rate option, The Prudential expects to pay the cash surrender value
promptly upon request. However, The Prudential has the right to delay payment of
such cash surrender value for up to 6 months (or a shorter period if required by
applicable law). The Prudential will pay interest of at least 3% a year if it
delays such a payment for more than 30 days (or a shorter period if required by
applicable law).
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS
The four tables that follow show how the death benefit and cash surrender values
change with the investment experience of the Account. They are "hypothetical"
because they are based, in part, upon several assumptions, each of which is
described below. All four tables assume, first, that a Contract with a basic
insurance amount of $1,000,000 has been bought by a 55 year old male and a 50
year old female, both non-smokers, with no extra risks or substandard ratings,
and no extra benefit riders added to the Contract. It is assumed that the target
premium amount (see PREMIUMS, page 11) is paid on each Contract anniversary and
that no loans are taken. The first table (page T1) assumes that a fixed
insurance amount Contract has been purchased and the second table (page T2)
assumes that a variable insurance amount Contract has been purchased. Both
assume that the current charges will continue for the indefinite future. The
third and fourth tables (pages T3 and T4) are based upon the same assumptions
except that it is assumed that the maximum contractual charges have been made
from the beginning. See CHARGES AND EXPENSES, page 16.
Another assumption is that the Contract Fund has been invested in equal amounts
in each of the 15 available portfolios of the Series Fund and no portion of the
Contract Fund has been allocated to the fixed-rate option. Finally, there are
four assumptions, shown separately, about the average investment performance of
the portfolios. The first is that there will be a uniform 0% gross rate of
return, that is, that the average value of the Contract Fund will uniformly be
adversely affected by very unfavorable investment performance. The other three
assumptions are that investment performance will be at a uniform gross annual
rate of 4%, 8% and 12%. These, of course, are unrealistic assumptions since
actual returns will fluctuate from year to
23
year. Nevertheless, these assumptions help show how the Contract values will
change with investment experience.
The first column in the following tables shows the Contract year. The second
column, to provide context, shows what the aggregate amount would be if the
premiums had been invested in a savings account paying 4% compounded interest.
Of course, if that were done, there would be no life insurance protection. The
next four columns show the death benefit payable in each of the years shown for
the four different assumed investment returns. Note that a gross return (as well
as the net return) is shown at the top of each column. The gross return
represents the combined effect of income and capital appreciation of the
portfolios before any reduction is made for investment advisory fees or other
Series Fund expenses. The net return reflects an average total annual expenses
of the 15 portfolios of 0.59%, and the daily deduction from the Contract Fund of
0.9% per year. Thus, gross returns of 0%, 4%, 8% and 12% are the equivalent of
net returns of -1.49%, 2.51%, 6.51% and 10.51% respectively. The death benefits
and cash surrender values shown reflect the deduction of all expenses and
charges both from the Series Fund and under the Contract.
Note that under the variable insurance amount Contract the death benefit changes
to reflect investment returns, while under the fixed insurance amount Contract
the death benefit increases only if the Contract Fund becomes sufficiently large
that an increase in the death benefit is necessary in order to ensure that the
Contract will satisfy the Internal Revenue Code's definition of life insurance.
See TYPE OF INSURANCE AMOUNT, page 9.
Following these illustrations are two pages (pages T5 and T6) showing internal
rates of return (commonly referred to as IRRs) associated with the cash values
and death benefits shown on the preceding four pages. IRRs are often employed by
insurance companies to provide some indication of the rate of return that may be
thought of as earned upon your "investment" in the Contract (the aggregate
premiums paid) if the Contract were surrendered or if the insureds were to die.
The IRR on the death benefit is equivalent to an interest rate (after taxes) at
which an amount equal to the premiums illustrated on the preceding pages could
have been invested to arrive at the death benefit of the Contract. The IRR on
the cash surrender value is equivalent to an interest rate (after taxes) at
which an amount equal to the illustrated premiums could have been invested to
arrive at the cash surrender value of the Contract. The IRRs on page T5 are
based on the Contract values shown on pages T1 and T2. The IRRs on page T6 are
based on the Contract values shown on pages T3 and T4.
If you are considering the purchase of a variable life insurance contract from
another insurance company, you should not rely upon these tables for comparison
purposes. A comparison between two tables, each showing values for a 55 year old
man and a 50 year old woman, may be useful for a 55 year old man and a 50 year
old woman but would be inaccurate if made for insureds of other ages or sex.
Your Prudential representative can provide you with a hypothetical illustration
for your own age, sex, and rating class. You can obtain an illustration using
premium amounts and payment patterns that you wish to follow. You may use
assumed gross returns different than those shown in the tables, although
currently they may not be higher than 10%.
24
ILLUSTRATIONS
-------------
VARIABLE SURVIVORSHIP CONTRACT
FIXED INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$1,000,000 DEATH BENEFIT
$12,097.49 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
DEATH BENEFIT (1) CASH SURRENDER VALUE (1)
---------------------------------------------------- ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ---------------------------------------------------- ----------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET) (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
1 $ 12,581 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 6,872 $ 7,171 $ 7,469 $ 7,768
2 $ 25,666 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 17,132 $ 18,137 $ 19,167 $ 20,221
3 $ 39,274 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 27,207 $ 29,347 $ 31,593 $ 33,949
4 $ 53,426 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 37,092 $ 40,798 $ 44,788 $ 49,079
5 $ 68,145 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 46,781 $ 52,487 $ 58,792 $ 65,748
6 $ 83,452 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 56,266 $ 64,408 $ 73,646 $ 84,108
7 $ 99,372 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 65,536 $ 76,555 $ 89,393 $ 104,325
8 $ 115,928 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 74,578 $ 88,918 $ 106,078 $ 126,581
9 $ 133,146 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 83,379 $101,486 $ 123,746 $ 151,075
10 $ 151,054 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 91,920 $114,242 $ 142,441 $ 178,028
15 $ 251,925 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $129,900 $180,129 $ 253,068 $ 359,208
20 $ 374,650 $1,000,000 $1,000,000 $1,000,000 $ 1,320,783 $156,491 $246,321 $ 397,402 $ 650,632
25 $ 523,963 $1,000,000 $1,000,000 $1,027,335 $ 1,934,268 $166,631 $309,380 $ 590,422 $1,111,648
30 $ 705,626 $1,000,000 $1,000,000 $1,263,815 $ 2,744,995 $132,085 $345,683 $ 831,457 $1,805,918
35 $ 926,647 $ 0(2)$1,000,000 $1,515,454 $ 3,824,363 $ 0(2) $313,008 $1,114,304 $2,812,032
40 $1,195,553 $ 0 $1,000,000 $1,788,050 $ 5,271,183 $ 0 $116,508 $1,441,975 $4,250,954
45 $1,522,718 $ 0 $ 0(2)$2,119,947 $ 7,333,096 $ 0 $ 0(2) $1,843,432 $6,376,605
50 $1,920,764 $ 0 $ 0 $2,512,908 $10,239,676 $ 0 $ 0 $2,416,258 $9,845,843
<FN>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0% the Contract would go into default in policy
year 35.
Based on a gross return of 4% the Contract would go into default
in policy year 42.
</FN>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T1
VARIABLE SURVIVORSHIP CONTRACT
VARIABLE INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$1,000,000 DEATH BENEFIT
$12,097.50 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
DEATH BENEFIT (1) CASH SURRENDER VALUE (1)
---------------------------------------------------- ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ---------------------------------------------------- ----------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET) (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
1 $ 12,581 $1,006,872 $1,007,171 $1,007,469 $1,007,768 $ 6,872 $ 7,171 $ 7,469 $ 7,768
2 $ 25,666 $1,017,131 $1,018,136 $1,019,166 $1,020,220 $ 17,131 $ 18,136 $ 19,166 $ 20,220
3 $ 39,274 $1,027,204 $1,029,344 $1,031,590 $1,033,945 $ 27,204 $ 29,344 $ 31,590 $ 33,945
4 $ 53,426 $1,037,085 $1,040,790 $1,044,779 $1,049,069 $ 37,085 $ 40,790 $ 44,779 $ 49,069
5 $ 68,145 $1,046,767 $1,052,470 $1,058,773 $1,065,727 $ 46,767 $ 52,470 $ 58,773 $ 65,727
6 $ 83,452 $1,056,239 $1,064,376 $1,073,609 $1,084,065 $ 56,239 $ 64,376 $ 73,609 $ 84,065
7 $ 99,372 $1,065,488 $1,076,498 $1,089,326 $1,104,245 $ 65,488 $ 76,498 $ 89,326 $ 104,245
8 $ 115,928 $1,074,500 $1,088,823 $1,105,963 $1,126,440 $ 74,500 $ 88,823 $105,963 $ 126,440
9 $ 133,146 $1,083,257 $1,101,334 $1,123,556 $1,150,838 $ 83,257 $101,344 $123,556 $ 150,838
10 $ 151,054 $1,091,737 $1,114,008 $1,142,141 $1,177,644 $ 91,737 $114,008 $142,141 $ 177,644
15 $ 251,925 $1,128,931 $1,178,730 $1,251,032 $1,356,234 $128,931 $178,730 $251,032 $ 356,234
20 $ 374,650 $1,152,997 $1,240,584 $1,387,831 $1,636,984 $152,997 $240,584 $387,831 $ 636,984
25 $ 523,963 $1,156,514 $1,290,208 $1,553,254 $2,075,818 $156,514 $290,208 $553,254 $1,075,818
30 $ 705,626 $1,108,104 $1,289,916 $1,718,380 $2,732,001 $108,104 $289,916 $718,380 $1,732,001
35 $ 926,647 $ 0(2)$1,176,628 $1,821,216 $3,679,110 $ 0(2) $176,628 $821,216 $2,679,110
40 $1,195,553 $ 0 $ 0(2)$1,765,392 $5,026,057 $ 0 $ 0(2) $765,392 $4,026,057
45 $1,522,718 $ 0 $ 0 $1,435,413 $6,973,750 $ 0 $ 0 $435,413 $5,973,750
50 $1,920,764 $ 0 $ 0 $ 0(2) $9,752,626 $ 0 $ 0 $ 0(2) $8,752,626
<FN>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0% the Contract would go into default in policy
year 35.
Based on a gross return of 4% the Contract would go into default
in policy year 39.
Based on a gross return of 8% the Contract would go into
default in policy year 48.
</FN>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T2
VARIABLE SURVIVORSHIP CONTRACT
FIXED INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$1,000,000 DEATH BENEFIT
$12,097.49 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
DEATH BENEFIT (1) CASH SURRENDER VALUE (1)
---------------------------------------------------- ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ---------------------------------------------------- ----------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET) (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
1 $ 12,581 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 6,372 $ 6,651 $ 6,930 $ 7,209
2 $ 25,666 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 15,963 $ 16,906 $ 17,871 $ 18,859
3 $ 39,274 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 25,313 $ 27,318 $ 29,422 $ 31,629
4 $ 53,426 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 34,402 $ 37,868 $ 41,600 $ 45,614
5 $ 68,145 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 43,210 $ 48,534 $ 54,421 $ 60,917
6 $ 83,452 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 51,711 $ 59,291 $ 67,897 $ 77,650
7 $ 99,372 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 59,877 $ 70,109 $ 82,043 $ 95,934
8 $ 115,928 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 67,675 $ 80,954 $ 96,866 $ 115,901
9 $ 133,146 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 75,068 $ 91,784 $112,374 $ 137,695
10 $ 151,054 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 82,011 $102,551 $128,566 $ 161,470
15 $ 251,925 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $107,375 $152,674 $219,047 $ 316,349
20 $ 374,650 $1,000,000 $1,000,000 $1,000,000 $1,124,240 $105,479 $184,220 $320,218 $ 553,813
25 $ 523,963 $1,000,000 $1,000,000 $1,000,000 $1,564,690 $ 50,360 $170,599 $424,710 $ 899,247
30 $ 705,626 $1,000,000 $1,000,000 $1,000,000 $2,050,528 $ 0 $ 25,812 $501,710 $1,349,032
35 $ 926,647 $ 0(2)$ 0(2)$1,000,000 $2,586,233 $ 0(2) $ 0(2) $495,688 $1,901,642
40 $1,195,553 $ 0 $ 0 $1,000,000 $3,192,033 $ 0 $ 0 $187,118 $2,574,220
45 $1,522,718 $ 0 $ 0 $ 0(2) $3,952,321 $ 0 $ 0 $ 0(2) $3,436,801
50 $1,920,764 $ 0 $ 0 $ 0 $4,902,428 $ 0 $ 0 $ 0 $4,713,873
<FN>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0% the Contract fund would go to zero in
year 27, but because the Target Premium is being paid, the Contract is kept
in force through the Limited Death Benefit Guarantee Period of 32 years.
The Contract would be in default at the beginning of year 33.
Based on a gross return of 4% the Contract fund would go to zero in year
31, but because the Target Premium is being paid, the Contract is kept in
force through the Limited Death Benefit Guarantee Period of 32 years. The
Contract would be in default at the beginning of year 33.
Based on a gross return of 8% the Contract would go into default in policy
year 42.
</FN>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T3
VARIABLE SURVIVORSHIP CONTRACT
VARIABLE INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$1,000,000 DEATH BENEFIT
$12,097.49 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
DEATH BENEFIT (1) CASH SURRENDER VALUE (1)
---------------------------------------------------- ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ---------------------------------------------------- ----------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET) (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET)
------ ------------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
1 $ 12,581 $1,006,372 $1,006,650 $1,006,930 $1,007,209 $ 6,372 $ 6,650 $ 6,930 $ 7,209
2 $ 25,666 $1,015,961 $1,016,904 $1,017,869 $1,018,857 $ 15,961 $ 16,904 $ 17,869 $ 18,857
3 $ 39,274 $1,025,305 $1,027,309 $1,029,413 $1,031,619 $ 25,305 $ 27,309 $ 29,413 $ 31,619
4 $ 53,426 $1,034,382 $1,037,845 $1,041,575 $1,045,587 $ 34,382 $ 37,845 $ 41,575 $ 45,587
5 $ 68,145 $1,043,168 $1,048,487 $1,054,367 $1,060,856 $ 43,168 $ 48,487 $ 54,367 $ 60,856
6 $ 83,452 $1,051,633 $1,059,201 $1,067,792 $1,077,528 $ 51,633 $ 59,201 $ 67,792 $ 77,528
7 $ 99,372 $1,059,744 $1,069,951 $1,081,854 $1,095,709 $ 59,744 $ 69,951 $ 81,854 $ 95,709
8 $ 115,928 $1,067,461 $1,080,693 $1,096,547 $1,115,512 $ 67,461 $ 80,693 $ 96,547 $ 115,512
9 $ 133,146 $1,074,742 $1,091,375 $1,111,861 $1,137,053 $ 74,742 $ 91,375 $111,861 $ 137,053
10 $ 151,054 $1,081,530 $1,101,933 $1,127,771 $1,160,449 $ 81,530 $101,933 $127,771 $ 160,449
15 $ 251,925 $1,105,045 $1,149,261 $1,214,026 $1,308,942 $105,045 $149,261 $214,026 $ 308,942
20 $ 374,650 $1,097,903 $1,171,195 $1,297,705 $1,515,977 $ 97,903 $171,195 $297,705 $ 515,977
25 $ 523,963 $1,033,811 $1,133,334 $1,344,071 $1,782,813 $ 33,811 $133,334 $344,071 $ 782,813
30 $ 705,626 $1,000,000(2) $1,000,000(2)$1,258,393 $2,059,642 $ 0(2) $ 0(2) $258,393 $1,059,642
35 $ 926,647 $ 0 $ 0 $ 0(2) $2,237,191 $ 0 $ 0 $ 0(2) $1,237,191
40 $1,195,553 $ 0 $ 0 $ 0 $2,106,485 $ 0 $ 0 $ 0 $1,106,485
45 $1,522,718 $ 0 $ 0 $ 0 $1,270,963 $ 0 $ 0 $ 0 $ 270,963
50 $1,920,764 $ 0 $ 0 $ 0 $ 0(2) $ 0 $ 0 $ 0 $ 0(2)
<FN>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0% the Contract fund would go to zero in
year 27, but because the Target Premium is being paid, the Contract is kept
in force through the Limited Death Benefit Guarantee Period of 30 years.
The Contract would be in default at the beginning of year 31.
Based on a gross return of 4% the Contract fund would go to zero in year
30, but because the Target Premium is being paid, the Contract is kept in
force through the Limited Death Benefit Guarantee Period of 30 years. The
Contract would be in default at the beginning of year 31.
Based on a gross return of 8% the Contract would go into default in policy
year 34.
Based on a gross return of 12% the Contract would go into default in policy
year 46.
</FN>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T4
INTERNAL RATES OF RETURN
------------------------
VARIABLE SURVIVORSHIP CONTRACT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$1,000,000 DEATH BENEFIT
$12,097.49 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
FIXED INSURANCE AMOUNT
INTERNAL RATES OF RETURN ON DEATH (1) INTERNAL RATES OF RETURN ON SURRENDER (1)
---------------------------------------------------- ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ---------------------------------------------------- ----------------------------------------------------
POLICY 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET) (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET)
------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
5 114.17% 114.17% 114.17% 114.17% -8.45% -4.70% -0.95% 2.79%
10 37.02% 37.02% 37.02% 37.02% -5.07% -1.05% 2.94% 6.91%
15 19.51% 19.51% 19.51% 19.51% -4.31% -0.10% 4.05% 8.14%
20 12.19% 12.19% 12.19% 14.40% -4.37% 0.17% 4.51% 8.70%
25 8.29% 8.29% 8.46% 12.41% -4.98% 0.17% 4.82% 8.97%
30 5.92% 5.92% 7.17% 11.13% -7.69% -0.32% 4.91% 9.02%
35 (2) 4.36% 6.26% 10.24% (2) -1.76% 4.86% 8.95%
40 3.26% 5.59% 9.60% -9.23% 4.75% 8.83%
45 (2) 5.15% 9.17% (2) 4.67% 8.73%
50 4.82% 8.86% 4.70% 8.75%
<FN>
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 35.
Based on a gross return of 4%, the Contract would go into default in policy
year 42.
</FN>
VARIABLE INSURANCE AMOUNT
INTERNAL RATES OF RETURN ON DEATH (1) INTERNAL RATES OF RETURN ON SURRENDER (1)
---------------------------------------------------- ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ---------------------------------------------------- ----------------------------------------------------
POLICY 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET) (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET)
------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
5 116.49% 116.77% 117.07% 117.41% -8.46% -4.71% -0.96% 2.78%
10 38.58% 38.93% 39.38% 39.92% -5.11% -1.09% 2.91% 6.88%
15 20.83% 21.29% 21.94% 22.82% -4.41% -0.19% 3.95% 8.04%
20 13.32% 13.90% 14.79% 16.08% -4.61% -0.06% 4.30% 8.52%
25 9.22% 9.91% 11.06% 12.85% -5.55% -0.32% 4.37% 8.76%
30 6.47% 7.28% 8.76% 11.10% -9.63% -1.50% 4.10% 8.81%
35 (2) 5.11% 7.07% 10.08% (2) -5.61% 3.42% 8.74%
40 (2) 5.54% 9.43% (2) 2.11% 8.63%
45 3.78% 9.01% -1.01% 8.53%
50 (2) 8.73% (2) 8.43%
<FN>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 35.
Based on a gross return of 4%, the Contract would go into default in policy
year 39.
Based on a gross return of 8%, the Contract would go into default
in policy year 48.
</FN>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T5
INTERNAL RATES OF RETURN
------------------------
VARIABLE SURVIVORSHIP CONTRACT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$1,000,000 DEATH BENEFIT
$12,097.50 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
FIXED INSURANCE AMOUNT
INTERNAL RATES OF RETURN ON DEATH (1) INTERNAL RATES OF RETURN ON SURRENDER (1)
---------------------------------------------------- ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ---------------------------------------------------- ----------------------------------------------------
POLICY 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET) (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET)
------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
5 114.17% 114.17% 114.17% 114.17% -11.01% -7.26% -3.51% 0.23%
10 37.02% 37.02% 37.02% 37.02% -7.22% -3.03% 1.10% 5.18%
15 19.51% 19.51% 19.51% 19.51% -6.91% -2.20% 2.31% 6.67%
20 12.19% 12.19% 12.19% 13.12% -8.81% -2.68% 2.59% 7.35%
25 8.29% 8.29% 8.29% 11.11% -19.30% -4.76% 2.51% 7.61%
30 5.92% 5.92% 5.92% 9.67% 0.00% -31.92% 2.01% 7.51%
35 (2) (2) 4.36% 8.59% (2) (2) 0.85% 7.26%
40 3.26% 7.78% -5.47% 6.98%
45 (2) 7.21% (2) 6.76%
50 6.79% 6.68%
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 33.
Based on a gross return of 4%, the Contract would go into default
in policy year 33.
Based on a gross return of 8%, the Contract would go into default in policy
year 42.
VARIABLE INSURANCE AMOUNT
INTERNAL RATES OF RETURN ON DEATH (1) INTERNAL RATES OF RETURN ON SURRENDER (1)
---------------------------------------------------- ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF --------------------------------------------------- ----------------------------------------------------
POLICY 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET) (-1.49% NET) (2.51% NET) (6.51% NET) (10.51% NET)
------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
5 116.32% 116.57% 116.86% 117.17% -11.05% -7.29% -3.54% 0.20%
10 38.41% 38.74% 39.15% 39.66% -7.33% -3.14% 0.99% 5.07%
15 20.59% 21.02% 21.61% 22.43% -7.21% -2.49% 2.03% 6.40%
20 12.93% 13.45% 14.26% 15.48% -9.72% -3.43% 1.93% 6.76%
25 8.50% 9.09% 10.16% 11.91% -26.35% -7.09% 0.97% 6.70%
30 5.92% 5.92% 7.15% 9.69% 0.00% 0.00% -2.30% 6.23%
35 (2) (2) (2) 7.97% (2) (2) (2) 5.34%
40 6.22% 3.68%
45 3.35% -3.41%
50 (2) (2)
<FN>
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in policy
year 31.
Based on a gross return of 4%, the Contract would go into default in policy
year 31.
Based on a gross return of 8%, the Contract would go into default
in policy year 34.
Based on a gross return of 12%, the Contract would go into default in
policy year 46.
</FN>
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T6
CONTRACT LOANS
You may borrow from The Prudential an amount up to the current "loan value" of
your Contract less any existing Contract debt using the Contract as the only
security for the loan. The loan value at any time is equal to 90% of the
Contract Fund provided the Contract is not in default. A Contract in default has
no loan value.
Interest charged on a loan accrues daily. Interest is due on each Contract
anniversary or when the loan is paid back, whichever comes first. If interest is
not paid when due, it becomes part of the loan and we will charge interest on
it, too. Except in the case of preferred loans, we charge interest at an
effective annual rate of 5%.
A portion of any amount you borrow on or after the tenth Contract anniversary
may be considered a preferred loan. The maximum preferred loan amount is the
total amount you may borrow minus the total net premiums paid (net premiums
equal premiums paid less total withdrawals, if any). If the net premium amount
is less than zero, we will, for purposes of this calculation, consider is to be
zero. Only new loans borrowed after the tenth Contract anniversary may be
considered preferred loans; standard loans will not automatically be converted
into preferred loans. Preferred loans are charged interest at an effective
annual rate of 4.5%.
The term "Contract debt" means the amount of all outstanding loans plus any
interest accrued but not yet due. If at any time the Contract debt equals or
exceeds the Contract Fund, the Contract will go into default. We will notify you
of a 61-day grace period, within which time you may repay all or enough of the
loan to obtain a positive cash surrender value and thus keep the Contract in
force for a limited time. If the Contract debt equals or exceeds the Contract
Fund and you fail to keep the Contract in force, the amount of unpaid Contract
debt will be treated as a distribution which may be taxable. See TAX TREATMENT
OF CONTRACT BENEFITS, page 26 and LAPSE AND REINSTATEMENT, page 29.
When a loan is made, an amount equal to the loan proceeds will be transferred
out of the Account and/or the fixed-rate option, as applicable. Unless you ask
us to take the loan amount from specific investment options and we agree, the
reduction will be made in the same proportions as the value in each subaccount
and the fixed-rate option bears to the total value of the Contract. While a loan
is outstanding, the amount that was so transferred will continue to be treated
as part of the Contract Fund. It will be credited with an effective annual rate
of return of 4%. Therefore, the net cost of a standard loan is 1% and the net
cost of a preferred loan is 1/2%.
As long as Contract debt does not equal or exceed the Contract Fund, a loan will
not affect the Death Benefit Guarantee. Should the death benefit become payable
while a loan is outstanding, or should the Contract be surrendered, any Contract
debt will be deducted from the insurance amount or Contract Fund to calculate
the death benefit or the cash surrender value, as applicable. Loans from
Modified Endowment Contracts may be treated for tax purposes as distributions of
income. See Tax Treatment of Contract Benefits, page 26.
As stated above, any Contract debt will directly reduce a Contract's cash
surrender value and will be subtracted from the insurance amount to determine
the death benefit payable. In addition, even if the loan is fully repaid, it may
have an effect on future death benefits, because the investment results of the
selected investment options will apply only to the amount remaining invested
under those options. The longer the loan is outstanding, the greater the effect
is likely to be. The effect could be favorable or unfavorable. If investment
results are greater than the rate being credited upon the amount of the loan
while the loan is
25
outstanding, values under the Contract will not increase as rapidly as they
would have if no loan had been made. If investment results are below that rate,
Contract values will be higher than they would have been had no loan been made.
When you repay all or part of a loan, we will increase the portion of the
Contract Fund in the investment options by the amount of the loan you repay
using the investment allocation of your most recent premium payment, plus
interest credits accrued on the loan since the last transaction date. We will
not increase the portion of the Contract Fund allocated to the investment
options by loan interest that is paid before we make it part of the loan. We
reserve the right to change the manner in which we allocate loan repayments.
SALE OF THE CONTRACT AND SALES COMMISSIONS
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
The Prudential, acts as the principal underwriter of the Contract. Prusec,
organized in 1971 under New Jersey law, is registered as a broker and dealer
under the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. Prusec's principal business address is
1111 Durham Avenue, South Plainfield, New Jersey 07080. The Contract is sold by
registered representatives of Prusec who are also authorized by state insurance
departments to do so. The Contract may also be sold through other broker-dealers
authorized by Prusec and applicable law to do so. Registered representatives of
such other broker-dealers may be paid on a different basis than described below.
Generally, representatives will receive a commission of no more than 50% of the
premiums received in the first year on premiums up to the target level premium
(see PREMIUMS, page ), no more than 4% commission on premiums received in the
first year in excess of the target level premium, no more than 4% of premiums
received in years two through ten, and no more than 2% of premiums received
thereafter. Representatives with less than 4 years of service may receive
compensation on a different basis. Representatives who meet certain productivity
or persistency standards may be eligible for additional compensation.
Sales expenses in any year are not equal to the deduction for sales load in that
year. The Prudential expects to recover its total sales expenses over the
periods the Contracts are in effect. To the extent that the sales charges are
insufficient to cover total sales expenses, the sales expenses will be recovered
from The Prudential's surplus which consists of, among other things, amounts
derived from mortality and expense risk charges.
TAX TREATMENT OF CONTRACT BENEFITS
Each prospective purchaser is urged to consult a qualified tax advisor. The
following discussion is not intended as tax advice, and it is not a complete
statement of what the effect of federal income taxes will be under all
circumstances. Rather, it provides information about how The Prudential believes
the tax laws apply in the most commonly occurring circumstances. There is no
guarantee, however, that the current federal income tax laws and regulations or
interpretations will not change.
TREATMENT AS LIFE INSURANCE. The Contract will be treated as "life insurance,"
as long as it satisfies certain definitional tests set forth in Sections 7702 of
the Internal Revenue Code (the "Code") and as long as the underlying investments
for the Contract satisfy diversification requirements under Section 817(h) of
the Code. (For further detail on diversification requirements, see DIVIDENDS,
DISTRIBUTIONS, AND TAXES in the attached prospectus for the Series Fund.)
26
The Prudential believes that it has taken adequate steps to cause the Contract
to be treated as life insurance for tax purposes. This means that (1) except as
noted below, the Contract owner should not be taxed on any part of the Contract
Fund, including additions attributable to interest, dividends or appreciation;
and (2) the death benefit should be excludible from the gross income of the
beneficiary under Section 101(a) of the Code.
However, Section 7702 of the Code which defines life insurance for tax purposes
gives the Secretary of the Treasury authority to prescribe regulations to carry
out the purposes of the Section. In this regard, proposed regulations governing
mortality charges were issued in 1991. The mortality charges assumed for risks
under the Contract do not comply with the proposed regulations. In this regard,
the proposed regulations preclude the assumption of the industry's standard
mortality table for survivorship life insurance policies and do not provide for
the use of the substandard mortality risk assumptions used for the Contract.
Consequently, if such regulations were finalized in their current form, the
Contract may not qualify as life insurance for federal tax purposes or may be
classified as a Modified Endowment Contract. None of these proposed regulations
has yet been finalized. Additional regulations under Section 7702 may also be
promulgated in the future. Moreover, in connection with the issuance of
temporary regulations under Section 817(h), the Treasury Department announced
that such regulations do not provide guidance concerning the extent to which
Contract owners may direct their investments to particular divisions of a
separate account. Such guidance will be included in regulations or rulings under
Section 817(d) relating to the definition of a variable contract.
The Prudential intends to comply with final regulations issued under sections
7702 and 817. Therefore, it reserves the right to make such changes as it deems
necessary to assure that the Contract continues to qualify as life insurance for
tax purposes. Any such changes will apply uniformly to affected Contract owners
and will be made only after advance written notice to affected Contract owners.
PRE-DEATH DISTRIBUTIONS. The taxation of pre-death distributions depends on
whether the Contract is classified as a Modified Endowment Contract. The
following discussion first deals with distributions under Contracts not so
classified, and then with Modified Endowment Contracts.
1. A surrender or lapse of the Contract may have tax consequences. Upon
surrender, the owner will not be taxed on the cash surrender value
except for the amount, if any, that exceeds the gross premiums paid less
the untaxed portion of any prior withdrawals. The amount of any unpaid
Contract debt will, upon surrender or lapse, be added to the cash
surrender value and treated, for this purpose, as if it had been
received. Any loss incurred upon surrender is generally not deductible.
The tax consequences of a surrender may differ if the proceeds are
received under any income payment settlement option.
A withdrawal generally is not taxable unless it exceeds total
premiums paid to the date of withdrawal less the untaxed portion of
any prior withdrawals. However, under certain limited circumstances,
in the first 15 Contract years all or a portion of a withdrawal may
be taxable if the Contract Fund exceeds the total premiums paid less
the untaxed portions of any prior withdrawals, even if total
withdrawals do not exceed total premiums paid to date.
27
Extra premiums for optional benefits and riders generally do not
count in computing gross premiums paid, which in turn determines the
extent to which a withdrawal might be taxed.
Loans received under the Contract will ordinarily be treated as
indebtedness of the owner and will not be considered to be
distributions subject to tax. However, if a loan is still outstanding
when the Contract is surrendered or allowed to lapse, the outstanding
Contract debt will be taxable at that time to the extent the cash
surrender value exceeds gross premiums paid less the untaxed portion
of any prior withdrawals.
2. Some of the above rules are changed if the Contract is classified as a
Modified Endowment Contract under Section 7702A of the Code. It is
possible for this Contract to be classified as a Modified Endowment
Contract under at least two circumstances: premiums in excess of the
7-pay premiums allowed under Section 7702A are paid or a decrease in the
insurance amount is made (or a rider removed). Moreover, the addition of
a rider or the increase in the basic insurance amount after the Contract
date may have an impact on the Contract's status as a Modified Endowment
Contract. Contract owners contemplating any of these steps should first
consult a qualified tax advisor and their Prudential representative.
If the Contract is classified as a Modified Endowment Contract, then
pre-death distributions, including loans, assignment and pledges are
includible in income to the extent that the Contract Fund exceeds the
gross premiums paid for the Contract increased by the amount of any
loans previously includible in income and reduced by any untaxed
amounts previously received other than the amount of any loans
excludible from income. These rules may also apply to pre-death
distributions, including loans, made during the two year period prior
to the Contract becoming a Modified Endowment Contract.
In addition, pre-death distributions from such Contracts (including
full surrenders) will be subject to a penalty of 10 per cent of the
amount includible in income unless the amount is distributed on or
after age 59 1/2, on account of the taxpayer's disability or as a
life annuity. It is presently unclear how the penalty tax provisions
apply to Contracts owned by nonnatural persons such as corporations.
Under certain circumstances, multiple Modified Endowment Contracts
issued during any calendar year will be treated as a single contract
for purposes of applying the above rules.
WITHHOLDING
The taxable portion of any amounts received under the Contract will be subject
to withholding to meet federal income tax obligations, if the Contract owner
fails to elect that no taxes be withheld. The Prudential will provide the
Contract owner with forms and instructions concerning the right to elect that no
taxes be withheld from the taxable portion of any payment. All recipients may be
subject to penalties under the estimated tax payment rules if withholding and
estimated tax payments are not sufficient. Contract owners who do not provide a
social security number or other taxpayer identification number will not be
permitted to elect out of withholding. Special withholding rules apply to
payments to non-resident aliens.
OTHER TAX CONSIDERATIONS. Transfer of the Contract to a new owner or assignment
of the Contract may have tax consequences depending on the circumstances. In the
case of a
28
transfer of the Contract for valuable consideration, the death benefit may be
subject to federal income taxes under section 101(a)(2) of the Code. In
addition, a transfer of the Contract to or the designation of a beneficiary who
is either 37 1/2 years younger than the Contract owner or a grandchild of the
Contract owner may have Generation Skipping Transfer tax consequences under
Section 2601 of the Code.
In certain circumstances, deductions for interest paid or accrued on Contract
debt or on other loans that are incurred or continued to purchase or carry the
Contract may be denied under sections 163 of the Code as personal interest or
under section 264 of the Code. Contract owners should consult a tax advisor
regarding the application of these provisions to their circumstances.
Business-owned life insurance is subject to additional rules. Section 264(a)(1)
of the Code generally precludes business Contract owners from deducting premium
payments. Under section 264(a)(4) of the Code, a deduction is not allowed for
any interest paid or accrued on any Contract debt on an insurance policy to the
extent the indebtedness exceeds $50,000 per officer, employee or financially
interested person. The Code also imposes an indirect tax upon additions to the
Contract Fund or the receipt of death benefits under business-owned life
insurance policies under certain circumstances by way of the corporate
alternative minimum tax.
The individual situation of each Contract owner or beneficiary will determine
the federal estate taxes and the state and local estate, inheritance and other
taxes due if the owner or insured dies.
LAPSE AND REINSTATEMENT
On each Monthly date, we will determine the value of the Contract Fund. If the
Contract Fund is zero or less, the Contract is in default unless it remains in
force under the Death Benefit Guarantee. See DEATH BENEFIT GUARANTEE, page 12.
If the Contract debt ever grows to be equal to or more than the Contract Fund,
the Contract will be in default. Should this happen, The Prudential will send
you a notice of default setting forth the payment necessary to keep the Contract
in force for three months from the date of default. This payment must be
received at The Prudential Home Office within the 61-day grace period after the
notice of default is mailed or the Contract will end and have no value. A
Contract that lapses and ends without value with an outstanding Contract loan
may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
A Contract that ended in default may be reinstated within 5 years after the date
of default if the following conditions are met: (1) both insureds are alive or
if one insured is alive and the Contract ended without value after the death of
the other insured; (2) you must provide renewed evidence of insurability on any
insured who was living when the Contract went into default; and (3) submission
of certain payments sufficient to bring the Contract up to date and cover all
charges and deductions for the next three months. The date of reinstatement will
be the beginning of the Contract month that coincides with the or next follows
the date we approve your request. All required charges will be deducted from
your payment and the balance will be placed into your Contract Fund.
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS
The Contract generally employs mortality tables that distinguish between males
and females. Thus, premiums and benefits under Contracts issued on males and
females of the same age
29
will generally differ. However, in those states that have adopted regulations
prohibiting sex-distinct insurance rates, premiums and cost of insurance charges
will be based on male rates whether the insureds are male or female. In
addition, employers and employee organizations considering purchase of a
Contract should consult their legal advisors to determine whether purchase of a
Contract based on sex-distinct actuarial tables is consistent with Title VII of
the Civil Rights Act of 1964 or other applicable law. The Prudential may offer
the Contract with male mortality rates to such prospective purchasers.
OTHER GENERAL CONTRACT PROVISIONS
ASSIGNMENT. This Contract may not be assigned if such assignment would violate
any federal, state or local law or regulation prohibiting sex distinct rates for
insurance. Generally, the Contract may not be assigned to an employee benefit
plan or program without The Prudential's consent. The Prudential assumes no
responsibility for the validity or sufficiency of any assignment, and we will
not be obligated to comply with any assignment unless we received a copy at one
of our Home Offices.
BENEFICIARY. The beneficiary is designated and named in the application by the
Contract owner. Thereafter, you may change the beneficiary, provided it is in
accordance with the terms of the Contract. Should the second insured to die do
so with no surviving beneficiary, that insured's estate will become the
beneficiary, unless someone other than the insureds owned the Contract. In that
case, we will make the Contract owner or the Contract owner's estate the
beneficiary.
INCONTESTABILITY. After the Contract has been in force during the lifetime of
both insureds for 2 years from the Contract date or, with respect to any change
in the Contract that requires The Prudential's approval and could increase its
liability, after the change has been in effect during at least one insured's
lifetime for 2 years from the effective date of the change, assuming enough
premium has been paid to cover the required charges, The Prudential will not
contest its liability under the Contract in accordance with its terms.
MISSTATEMENT OF AGE OR SEX. If an insured's stated age or sex or both are
incorrect in the Contract, The Prudential will adjust each benefit and any
amount to be paid, as required by law, to reflect the correct age and sex. Any
such benefit will be based on what the most recent deductions from the Contract
Fund would have provided at that insured's correct age and sex.
SETTLEMENT OPTIONS. The Contract grants to most owners, or to the beneficiary, a
variety of optional ways of receiving Contract proceeds, other than in a lump
sum. Any Prudential representative authorized to sell this Contract can explain
these options upon request.
SIMULTANEOUS DEATH. If both insureds die while the Contract is in force and we
find there is lack of sufficient evidence that they died other than
simultaneously, we will assume that the older insured died first.
SUICIDE EXCLUSION. Generally, if either insured, whether sane or insane, dies by
suicide within 2 years from the Contract date, the Contract will end and The
Prudential will return the premiums paid, less any Contract debt, and less any
withdrawals. If there is a surviving insured, The Prudential will make a new
contract available to that insured. The amount of coverage, issue age, contract
date, and underwriting classification will be the same as when this Contract was
issued.
30
RIDERS
When the Contract is first issued, you may be able to obtain extra fixed
benefits which may require an additional premium. These optional insurance
benefits will be described in what is known as a "rider" to the Contract.
Charges applicable to the riders will be deducted from the Contract Fund on each
Monthly date.
One rider gives insureds the option to exchange the Contract for two new life
insurance contracts, one on the life of each insured, in the event of a divorce
or if certain changes in tax law occur. Exercise of this option may give rise to
taxable income. Another pays an additional amount if both insureds die within a
specified number of years. Another pays an additional amount if a specified
insured dies within a stated number of years. If the two insureds are not family
members (i.e. husband/wife or parent/child), charges for these single life
riders will be treated as pre-death distributions from the Contract. See TAX
TREATMENT OF CONTRACT BENEFITS, page 26. Certain restrictions may apply; they
are clearly described in the applicable rider. Any Prudential representative
authorized to sell the Contract can explain these extra benefits further.
Samples of the provisions are available from The Prudential upon written
request.
THE FIXED-RATE OPTION
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED-RATE
OPTION UNDER THE CONTRACT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND THE GENERAL ACCOUNT HAS NOT BEEN REGISTERED AS AN INVESTMENT COMPANY
UNDER THE INVESTMENT COMPANY ACT OF 1940. ACCORDINGLY, INTERESTS IN THE
FIXED-RATE OPTION ARE NOT SUBJECT TO THE PROVISIONS OF THESE ACTS, AND THE
PRUDENTIAL HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE
COMMISSION HAS NOT REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE
FIXED-RATE OPTION. DISCLOSURE REGARDING THE FIXED-RATE OPTION MAY, HOWEVER, BE
SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF FEDERAL SECURITIES LAWS
RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
As explained earlier, you may elect to allocate, either initially or by
transfer, all or part of the amount credited under the Contract to a fixed-rate
option, and the amount so allocated or transferred becomes part of The
Prudential's general assets. Sometimes this is referred to as The Prudential's
general account, which consists of all assets owned by The Prudential other than
those in the Account and in other separate accounts that have been or may be
established by The Prudential. Subject to applicable law, The Prudential has
sole discretion over the investment of the assets of the general account, and
Contract owners do not share in the investment experience of those assets.
Instead, The Prudential guarantees that the part of the Contract Fund allocated
to the fixed-rate option will accrue interest daily at an effective annual rate
that The Prudential declares periodically, but not less than an effective annual
rate of 4%. Currently, declared interest rates remain in effect from the date
money is allocated to the fixed-rate option until the first day of the same
month in the following year. Thereafter, a new crediting rate will be declared
each year and will remain in effect for the calendar year. The Prudential
reserves the right to change this practice. The Prudential is not obligated to
credit interest at a higher rate than an effective annual rate of 4%, although
in our sole discretion we may do so. Different crediting rates may be declared
for different portions of the Contract Fund allocated to the fixed-rate option.
On request, you will be advised of the interest rates that currently apply to
your Contract.
Transfers from the fixed-rate option may be subject to strict limits. (See
TRANSFERS, page 15). The payment of any cash surrender value attributable to the
fixed-rate option may be delayed up to 6 months (see WHEN PROCEEDS ARE PAID,
page 23.
31
VOTING RIGHTS
As stated above, all of the assets held in the subaccounts of the Account will
be invested in shares of the corresponding portfolios of the Series Fund. The
Prudential is the legal owner of those shares and as such has the right to vote
on any matter voted on at Series Fund shareholders meetings. However, The
Prudential will, as required by law, vote the shares of the Series Fund at any
regular and special shareholders meetings it is required to hold in accordance
with voting instructions received from Contract owners. The Series Fund will not
hold annual shareholders meetings when not required to do so under Maryland law
or the Investment Company Act of 1940. Series Fund shares for which no timely
instructions from Contract owners are received, and any shares attributable to
general account investments of The Prudential will be voted in the same
proportion as shares in the respective portfolios for which instructions are
received. Should the applicable federal securities laws or regulations, or their
current interpretation, change so as to permit The Prudential to vote shares of
the Series Fund in its own right, it may elect to do so.
Matters on which Contract owners may give voting instructions include the
following: (1) election of the Board of Directors of the Series Fund; (2)
ratification of the independent accountant of the Series Fund; (3) approval of
the investment advisory agreement for a portfolio of the Series Fund
corresponding to the Contract owner's selected subaccount[s]; (4) any change in
the fundamental investment policy of a portfolio corresponding to the Contract
owner's selected subaccount[s]; and (5) any other matter requiring a vote of the
shareholders of the Series Fund. With respect to approval of the investment
advisory agreement or any change in a portfolio's fundamental investment policy,
Contract owners participating in such portfolios will vote separately on the
matter, pursuant to the requirements of Rule 18f-2 under the 1940 Act.
The number of Series Fund shares for which instructions may be given by a
Contract owner is determined by dividing the portion of the value of the
Contract derived from participation in a subaccount, by the value of one share
in the corresponding portfolio of the Series Fund. The number of votes for which
each Contract owner may give The Prudential instructions will be determined as
of the record date chosen by the Board of Directors of the Series Fund. The
Prudential will furnish Contract owners with proper forms and proxies to enable
them to give these instructions. The Prudential reserves the right to modify the
manner in which the weight to be given voting instructions is calculated where
such a change is necessary to comply with current federal regulations or
interpretations of those regulations.
The Prudential may, if required by state insurance regulations, disregard voting
instructions if such instructions would require shares to be voted so as to
cause a change in the sub-classification or investment objectives of one or more
of the Series Fund's portfolios, or to approve or disapprove an investment
advisory contract for the Series Fund. In addition, The Prudential itself may
disregard voting instructions that would require changes in the investment
policy or investment advisor of one or more of the Series Fund's portfolios,
provided that The Prudential reasonably disapproves such changes in accordance
with applicable federal regulations. If The Prudential does disregard voting
instructions, it will advise Contract owners of that action and its reasons for
such action in the next annual or semi-annual report to Contract owners.
Contract owners also share with the owners of all Prudential Contracts and
policies the right to vote in elections for members of the Board of Directors of
The Prudential.
32
SUBSTITUTION OF SERIES FUND SHARES
Although The Prudential believes it to be unlikely, it is possible that in the
judgment of its management, one or more of the portfolios of the Series Fund may
become unsuitable for investment by Contract owners because of investment policy
changes, tax law changes, or the unavailability of shares for investment. In
that event, The Prudential may seek to substitute the shares of another
portfolio or of an entirely different mutual fund. Before this can be done, the
approval of the SEC, and possibly one or more state insurance departments, may
be required. Contract owners will be notified of such substitution.
REPORTS TO CONTRACT OWNERS
Once each year you will be sent a statement that provides certain information
pertinent to your own Contract. This statement will detail values and
transactions made and specific Contract data that apply only to your particular
Contract. Currently we intend to provide three quarterly reports (in addition to
the year-end statement) which provide abbreviated information pertinent to your
own Contract.
You will also be sent an annual report for the Account and annual and
semi-annual reports of the Series Fund showing the financial condition of the
portfolios and the investments held in each.
STATE REGULATION
The Prudential is subject to regulation and supervision by the Department of
Insurance of the State of New Jersey, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
The Prudential is required to submit annual statements of its operations,
including financial statements, to the insurance departments of the various
jurisdictions in which it does business to determine solvency and compliance
with local insurance laws and regulations.
In addition to the annual statements referred to above, The Prudential is
required to file with New Jersey and other jurisdictions a separate statement
with respect to the operations of all its variable contract accounts, in a form
promulgated by the National Association of Insurance Commissioners.
EXPERTS
The financial statements included in this prospectus for the years ended
December 31, 1994, 1993, and 1992 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein, and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing. Deloitte & Touche LLP's principal business
address is Two Hilton Court, Parsippany, New Jersey 07054-0319. Actuarial
matters included in this prospectus have been examined by Andy Mirchuk, FSA,
MAAA, whose opinion is filed as an exhibit to the registration statement.
LITIGATION
No litigation is pending that would have a material effect upon the Account or
the Series Fund.
33
ADDITIONAL INFORMATION
A registration statement has been filed with the SEC under the Securities Act of
1933, relating to the offering described in this prospectus. This prospectus
does not include all of the information set forth in the registration statement.
Certain portions have been omitted pursuant to the rules and regulations of the
SEC. The omitted information may, however, be obtained from the SEC's principal
office in Washington, D.C., upon payment of a prescribed fee.
Further information may also be obtained from The Prudential's office. The
address and telephone number are set forth on the cover of this prospectus.
FINANCIAL STATEMENTS
The consolidated financial statements of The Prudential and subsidiaries
included herein should be distinguished from the financial statements of the
Account, and should be considered only as bearing upon the ability of The
Prudential to meet its obligations under the Contracts.
The Account's assets are segregated from The Prudential's other assets. Prior to
the date of this prospectus, the Account was only used by two other of
Prudential's variable life products. The information under charges and expenses
outlined in Note 3 of the audited and unaudited financial statements of the
Account do not apply to PRUDENTIAL SURVIVORSHIP PREFERRED. The charges and
expenses of PRUDENTIAL SURVIVORSHIP PREFERRED are different.
The most current financial statements of the company are those as of the end of
the most recent fiscal year. The company does not prepare financial statements
more often than annually and believes that any incremental benefit to
prospective policy owners that may result from preparing and delivering more
current financial statement, though unaudited, does not justify the additional
cost that would be incurred. In addition, the company represents that there have
been no adverse changes in the financial condition or operations of the company
between the end of the most current fiscal year and the date of this prospectus.
34
DIRECTORS AND OFFICERS OF THE PRUDENTIAL
The directors and certain officers of The Prudential, listed with their
principal occupations during the past 5 years, are shown below.
DIRECTORS OF THE PRUDENTIAL
FRANKLIN E. AGNEW. Director.--Business Consultant and former Senior Vice
President of H.J. Heinz. Address: One Mellon Bank Center, Suite 2120,
Pittsburgh, PA 15219.
FREDERIC K. BECKER, Director.--President of Wilentz, Goldman, and Spitzer (law
firm). Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
WILLIAM W. BOESCHENSTEIN, Director.--Director, Owens-Corning Fiberglas
Corporation. Address: Fiberglas Tower, Toledo, OH 43659.
LISLE C. CARTER, JR., Director.--Former Senior Vice President and General
Counsel, United Way of America. Address: 1307 Fourth Street, S.W., Washington,
DC 20024.
JAMES G. CULLEN, Director.--President, Bell Atlantic Corporation since 1993;
Prior to 1993: President, New Jersey Bell. Address: 1301 North Court House Road,
11th floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS, Director.--Health Care Advisor, Ernst & Young. Address: 1200
Nineteenth Street, N.W., 4th floor, Washington, DC 20024.
ROGER A. ENRICO, Director.--Vice Chairman, Pepsi Co. Inc. since 1993; 1991 to
1993: Chairman and Chief Executive Officer, Pepsi Co. Worldwide Foods; Prior to
1991: President and Chief Executive Officer, Pepsi Co. Worldwide Beverages.
Address: 7701 Legacy Drive, Plano, TX 75024.
ALLAN D. GILMOUR, Director.--Former Vice Chairman, Ford Motor Company. Address:
Prudential Plaza, Newark, NJ 07102-3777.
WILLIAM H. GRAY, III, Director.--President and Chief Executive Officer, United
Negro College Fund, Inc. since 1991; Prior to 1991: United States Representative
for Pennsylvania's 2nd District. Address: 500 East 62nd Street, New York, NY
10021.
JON F. HANSON, Director.--Chairman, Hampshire Management Co. Address: 235 Moore
Street, Suite 200, Hackensack, NJ 07601.
CONSTANCE J. HORNER, Director.--Guest Scholar, The Brookings Institution since
1993; 1991 to 1992 Assistant to the President and Director of Presidential
Personnel, U.S. Government; Prior to 1991: Deputy Secretary, Department of
Health and Human Services. Address: 1775 Massachusetts Avenue, N.W., Washington,
DC 20036-2188.
ALLEN F. JACOBSON, Director.--Former Chairman and Chief Executive Officer,
Minnesota Mining & Manufacturing Co. Address: 30 Seventh Street East, St. Paul,
MN 55101-4901.
GARNETT L. KEITH, JR., Director and Vice Chairman.--Vice Chairman of The
Prudential. Address: Prudential Plaza, Newark, NJ 07102-3777.
35
BURTON G. MALKIEL, Director.--Chemical Bank Chairman's Professor of Economics,
Princeton University. Address: Princeton University, Department of Economics,
110 Fisher Hall, Prospect Avenue, Princeton, NJ 08544-1021.
JOHN R. OPEL, Director.--Prior to 1994, Chairman of the Executive Committee,
International Business Machines Corporation. Address: 590 Madison Avenue, New
York, NY 10022.
ARTHUR F. RYAN, Chairman of the Board, President, and Chief Executive Officer.
- -- Chairman of the Board, President, and Chief Executive Officer, The Prudential
since 1994; Prior to 1994, President and Chief Operating Officer, Chase
Manhattan Corporation. Address: 751 Broad Street, Newark, NJ 07102-3777.
CHARLES R. SITTER, Director.--President and Director, Exxon Corporation since
1993; Prior to 1993; Director, Exxon Corporation. Address: 225 John W. Carpenter
Freeway, Irving, TX 75062.
DONALD L. STAHELI, Director.--Chairman and Chief Executive Officer, Continental
Grain Company since 1994; Prior to 1994; Chairman, Continental Grain Company.
Address: 277 Park Avenue, New York, NY 10172.
RICHARD M. THOMSON, Director.--Chairman of the Board and Chief Executive
Officer, The Toronto-Dominion Bank. Address: P.O. Box 1, Toronto-Dominion
Centre, Toronto, Ontario, M5K 1A2, Canada.
P. ROY VAGELOS, M.D., Director.--Chairman, Regeneron Pharmaceuticals since 1995;
Prior to 1995, Chairman, President and Chief Executive Officer, Merck & Co.,
Inc. Address: 126 East Lincoln Avenue, Rahway, NJ 07065.
STANLEY C. VAN NESS, Director.--Attorney, Picco Mack Herbert Kennedy Jaffe
Perrella and Yoskin (law firm). Address: One State Street Square, Suite 1000,
Trenton, NJ 08607-1388.
PAUL A. VOLCKER, Director.--Chairman, James D. Wolfensohn, Inc. Address: 599
Lexington Avenue, New York, NY 10022.
JOSEPH H. WILLIAMS, Director.--Chairman of the Board, The Williams Companies
since 1994; Prior to 1994: Chairman and Chief Executive Officer, The Williams
Companies. Address: P.O. Box 2400, Tulsa, OK 74102.
OTHER EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
MARK B. GRIER, Chief Financial Officer.--Chief Financial Officer of The
Prudential since 1995. Prior to 1995: Executive Vice President and Head of
Global Markets, Chase Manhattan Corporation.
SUSAN L. BLOUNT, Vice President and Secretary.--Vice President and Secretary of
The Prudential since 1995; Prior to 1995: Assistant General Counsel for
Prudential Residential Services Company.
MARTIN PFINSGRAFF, Vice President and Treasurer.--Vice President and Treasurer
of The Prudential since 1991; Prior to 1991: Senior Vice President, Mellon Bank.
36
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS (UNAUDITED)
September 30, 1995
SUBACCOUNTS
--------------------------------------------------------------
AGGRESSIVELY
MONEY COMMON MANAGED
TOTAL MARKET BOND STOCK FLEXIBLE
-------------- -------------- -------------- -------------- --------------
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $3,383,368,374 $ 90,028,473 $ 95,792,214 $ 736,920,171 $ 904,149,946
Receivable from Related Separate Account........ 43,791 0 0 0 0
-------------- -------------- -------------- -------------- --------------
Total Assets.................................. $3,383,412,165 $ 90,028,473 $ 95,792,214 $ 736,920,171 $ 904,149,946
============== ============== ============== ============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $3,372,658,507 $ 88,475,439 $ 95,320,236 $ 733,523,899 $ 902,666,904
Equity of The Prudential Insurance Company of
America....................................... 10,753,658 1,553,034 471,978 3,396,272 1,483,042
-------------- -------------- -------------- -------------- --------------
$3,383,412,165 $ 90,028,473 $ 95,792,214 $ 736,920,171 $ 904,149,946
============== ============== ============== ============== ==============
STATEMENTS OF OPERATIONS (UNAUDITED)
For the period ended September 30, 1995
SUBACCOUNTS
--------------------------------------------------------------
AGGRESSIVELY
MONEY COMMON MANAGED
TOTAL MARKET BOND STOCK FLEXIBLE
-------------- -------------- -------------- -------------- --------------
INVESTMENT INCOME
Dividend distributions received................. $ 35,975,608 $ 3,577,611 $ 2,029,410 $ 3,829,863 $ 8,332,719
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 15,869,519 433,798 458,971 3,294,574 4,168,782
Reimbursement for excess expenses [Note 3D]..... (48,059) 0 0 0 0
-------------- -------------- -------------- -------------- --------------
NET EXPENSES...................................... 15,821,460 433,798 458,971 3,294,574 4,168,782
-------------- -------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 20,154,148 3,143,813 1,570,439 535,289 4,163,937
-------------- -------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 2,086,089 0 0 1,739,255 0
Realized gain (loss) on shares redeemed
[average cost basis].......................... 240,542 0 1,234 0 (2,076)
Net unrealized gain on investments.............. 488,893,043 0 9,588,158 139,935,854 131,533,680
-------------- -------------- -------------- -------------- --------------
NET GAIN ON INVESTMENTS........................... 491,219,674 0 9,589,392 141,675,109 131,531,604
-------------- -------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 511,373,822 $ 3,143,813 $ 11,159,831 $ 142,210,398 $ 135,695,541
============== ============== ============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES 46 AND 47.
37
STATEMENTS OF NET ASSETS (UNAUDITED) (CONTINUED)
September 30, 1995
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------
ZERO ZERO
CONSERVATIVELY COUPON COUPON HIGH
MANAGED BOND BOND YIELD STOCK
FLEXIBLE 1995 2000 BOND INDEX
-------------- -------------- -------------- -------------- --------------
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $ 753,265,311 $ 5,084,866 $ 19,286,631 $ 61,792,758 $ 270,365,364
Receivable from Related Separate Account........ 0 0 0 43,791 0
-------------- -------------- -------------- -------------- --------------
Total Assets.................................. $ 753,265,311 $ 5,084,866 $ 19,286,631 $ 61,836,549 $ 270,365,364
============== ============== ============== ============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $ 752,531,866 $ 4,939,940 $ 19,247,845 $ 61,836,549 $ 269,384,165
Equity of The Prudential Insurance Company of
America....................................... 733,445 144,926 38,786 0 981,199
-------------- -------------- -------------- -------------- --------------
$ 753,265,311 $ 5,084,866 $ 19,286,631 $ 61,836,549 $ 270,365,364
============== ============== ============== ============== ==============
HIGH
DIVIDEND NATURAL GLOBAL
STOCK RESOURCES EQUITY
-------------- -------------- --------------
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $ 211,175,699 $ 95,353,602 $ 45,579,969
Receivable from Related Separate Account........ 0 0 0
-------------- -------------- --------------
Total Assets.................................. $ 211,175,699 $ 95,353,602 $ 45,579,969
============== ============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $ 210,218,890 $ 94,986,353 $ 45,246,160
Equity of The Prudential Insurance Company of
America....................................... 956,809 367,249 333,809
-------------- -------------- --------------
$ 211,175,699 $ 95,353,602 $ 45,579,969
============== ============== ==============
STATEMENTS OF OPERATIONS (UNAUDITED) (CONTINUED)
For the period ended September 30, 1995
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------
ZERO ZERO
CONSERVATIVELY COUPON COUPON HIGH
MANAGED BOND BOND YIELD STOCK
FLEXIBLE 1995 2000 BOND INDEX
-------------- -------------- -------------- -------------- --------------
INVESTMENT INCOME
Dividend distributions received................. $ 10,004,669 $ 151,230 $ 282,953 $ 2,001,044 $ 1,468,557
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 3,819,827 26,066 96,283 314,844 1,231,486
Reimbursement for excess expenses [Note 3D]..... 0 (9,609) (18,084) 0 0
-------------- -------------- -------------- -------------- --------------
NET EXPENSES...................................... 3,819,827 16,457 78,199 314,844 1,231,486
-------------- -------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 6,184,842 134,773 204,754 1,686,200 237,071
-------------- -------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 0 0 0 0 0
Realized gain (loss) on shares redeemed
[average cost basis].......................... 79,426 (388) 16,969 (61,428) 180,422
Net unrealized gain on investments.............. 80,048,098 110,427 2,346,083 4,993,370 56,633,361
-------------- -------------- -------------- -------------- --------------
NET GAIN ON INVESTMENTS........................... 80,127,524 110,039 2,363,052 4,931,942 56,813,783
-------------- -------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 86,312,366 $ 244,812 $ 2,567,806 $ 6,618,142 $ 57,050,854
============== ============== ============== ============== ==============
HIGH
DIVIDEND NATURAL GLOBAL
STOCK RESOURCES EQUITY
-------------- -------------- --------------
INVESTMENT INCOME
Dividend distributions received................. $ 2,052,589 $ 388,008 $ 60,036
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 945,117 457,994 181,626
Reimbursement for excess expenses [Note 3D]..... 0 (14) 0
-------------- -------------- --------------
NET EXPENSES...................................... 945,117 457,980 181,626
-------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 1,107,472 (69,972) (121,590)
-------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 0 346,834 0
Realized gain (loss) on shares redeemed
[average cost basis].......................... 34,828 20,178 0
Net unrealized gain on investments.............. 31,304,979 15,394,413 6,639,237
-------------- -------------- --------------
NET GAIN ON INVESTMENTS........................... 31,339,807 15,761,425 6,639,237
-------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 32,447,279 $ 15,691,453 $ 6,517,647
============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES 46 AND 47.
38
STATEMENTS OF NET ASSETS (UNAUDITED) (CONTINUED)
September 30, 1995
SUBACCOUNTS
--------------------------------------------------------------
ZERO
COUPON SMALL
GOVERNMENT BOND GROWTH CAPITALIZATION
SECURITIES 2005 STOCK STOCK
-------------- -------------- -------------- --------------
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $ 69,332,130 $ 18,541,442 $ 3,577,719 $ 3,122,079
Receivable from Related Separate Account........ 0 0 0 0
-------------- -------------- -------------- --------------
Total Assets.................................. $ 69,332,130 $ 18,541,442 $ 3,577,719 $ 3,122,079
============== ============== ============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $ 69,298,096 $ 18,487,416 $ 3,538,472 $ 2,956,277
Equity of The Prudential Insurance Company of
America....................................... 34,034 54,026 39,247 165,802
-------------- -------------- -------------- --------------
$ 69,332,130 $ 18,541,442 $ 3,577,719 $ 3,122,079
============== ============== ============== ==============
STATEMENTS OF OPERATIONS (UNAUDITED) (CONTINUED)
For the period ended September 30, 1995
SUBACCOUNTS
--------------------------------------------------------------
ZERO
COUPON SMALL
GOVERNMENT BOND GROWTH CAPITALIZATION
SECURITIES 2005 STOCK* STOCK*
-------------- -------------- -------------- --------------
INVESTMENT INCOME
Dividend distributions received................. $ 1,466,973 $ 329,296 $ 376 $ 274
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 349,686 83,785 3,648 3,032
Reimbursement for excess expenses [Note 3D]..... 0 (20,352) 0 0
-------------- -------------- -------------- --------------
NET EXPENSES...................................... 349,686 63,433 3,648 3,032
-------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 1,117,287 265,863 (3,272) (2,758)
-------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 0 0 0 0
Realized gain (loss) on shares redeemed
[average cost basis].......................... (28,623) 0 0 0
Net unrealized gain on investments.............. 7,103,438 2,907,796 182,344 171,805
-------------- -------------- -------------- --------------
NET GAIN ON INVESTMENTS........................... 7,074,815 2,907,796 182,344 171,805
-------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 8,192,102 $ 3,173,659 $ 179,072 $ 169,047
============== ============== ============== ==============
*Commenced *Commenced
Business Business
on 5/1/95 on 5/1/95
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES 46 AND 47.
39
(This page intentionally left blank.)
40
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the periods ended September 30, 1995 and December 31, 1994
SUBACCOUNTS
--------------------------------------------------------------
MONEY
TOTAL MARKET BOND
------------------------------ ------------------------------ ------------------------------
01/01/95 01/01/94 01/01/95 01/01/94 01/01/95 01/01/94
TO TO TO TO TO TO
09/30/95 12/31/94 09/30/95 12/31/94 09/30/95 12/31/94
(UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------- -------------- -------------- -------------- -------------- --------------
OPERATIONS:
Net investment income (loss)..... $ 20,154,148 $ 63,087,032 $ 3,143,813 $ 2,402,301 $ 1,570,439 $ 4,226,871
Capital gains distributions
received....................... 2,086,089 54,709,623 0 0 0 158,594
Realized gain (loss) on shares
redeemed
[average cost basis]........... 240,542 167,179 0 0 1,234 4,403
Net unrealized gain (loss) on
investments.................... 488,893,043 (155,373,175) 0 0 9,588,158 (7,162,380)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 511,373,822 (37,409,341) 3,143,813 2,402,301 11,159,831 (2,772,512)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 294,991,548 560,003,324 7,414,066 6,444,757 8,138,003 11,829,119
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (10,091,300) (942,487) 1,300,733 (213,654) 299,968 (532,267)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 796,274,070 521,651,496 11,858,612 8,633,404 19,597,802 8,524,340
NET ASSETS:
Beginning of period.............. 2,587,138,095 2,065,486,599 78,169,861 69,536,457 76,194,412 67,670,072
-------------- -------------- -------------- -------------- -------------- --------------
End of period.................... $3,383,412,165 $2,587,138,095 $ 90,028,473 $ 78,169,861 $ 95,792,214 $ 76,194,412
============== ============== ============== ============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES 46 AND 47.
41
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
For the periods ended September 30, 1995 and December 31, 1994
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------
AGGRESSIVELY
COMMON MANAGED
STOCK FLEXIBLE
------------------------------ ------------------------------
01/01/95 01/01/94 01/01/95 01/01/94
TO TO TO TO
09/30/95 12/31/94 09/30/95 12/31/94
(UNAUDITED) (UNAUDITED)
-------------- -------------- -------------- --------------
OPERATIONS:
Net investment income (loss)..... $ 535,289 $ 7,323,925 $ 4,163,937 $ 14,060,998
Capital gains distributions
received....................... 1,739,255 19,666,506 0 18,931,168
Realized gain (loss) on shares
redeemed
[average cost basis]........... 0 86,672 (2,076) 0
Net unrealized gain (loss) on
investments.................... 139,935,854 (18,362,891) 131,533,680 (56,779,739)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 142,210,398 8,714,212 135,695,541 (23,787,573)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 95,802,346 123,951,671 71,743,550 142,298,237
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (1,205,773) 452,486 (3,125,767) (55,717)
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 236,806,971 133,118,369 204,313,324 118,454,947
NET ASSETS:
Beginning of period.............. 500,113,200 366,994,831 699,836,622 581,381,675
-------------- -------------- -------------- --------------
End of period.................... $ 736,920,171 $ 500,113,200 $ 904,149,946 $ 699,836,622
============== ============== ============== ==============
ZERO
CONSERVATIVELY COUPON
MANAGED BOND
FLEXIBLE 1995
------------------------------ ------------------------------
01/01/95 01/01/94 01/01/95 01/01/94
TO TO TO TO
09/30/95 12/31/94 09/30/95 12/31/94
(UNAUDITED) (UNAUDITED)
-------------- -------------- -------------- --------------
OPERATIONS:
Net investment income (loss)..... $ 6,184,842 $ 16,966,301 $ 134,773 $ 263,254
Capital gains distributions
received....................... 0 6,635,310 0 1,011
Realized gain (loss) on shares
redeemed
[average cost basis]........... 79,426 31,649 (388) 586
Net unrealized gain (loss) on
investments.................... 80,048,098 (33,092,575) 110,427 (288,227)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 86,312,366 (9,459,315) 244,812 (23,376)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 32,967,819 127,164,401 (90,546) 338,277
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (3,518,993) (1,173,893) 126,003 (106,380)
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 115,761,192 116,531,193 280,269 208,521
NET ASSETS:
Beginning of period.............. 637,504,119 520,972,926 4,804,597 4,596,076
-------------- -------------- -------------- --------------
End of period.................... $ 753,265,311 $ 637,504,119 $ 5,084,866 $ 4,804,597
============== ============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES 46 AND 47.
42
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
For the periods ended September 30, 1995 and December 31, 1994
SUBACCOUNTS
----------------------------------------------------------------------------------------------
ZERO
COUPON HIGH
BOND YIELD STOCK
2000 BOND INDEX
------------------------------ ------------------------------ ------------------------------
01/01/95 01/01/94 01/01/95 01/01/94 01/01/95 01/01/94
TO TO TO TO TO TO
09/30/95 12/31/94 09/30/95 12/31/94 09/30/95 12/31/94
(UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------- -------------- -------------- -------------- -------------- --------------
OPERATIONS:
Net investment income (loss)..... $ 204,754 $ 1,032,410 $ 1,686,200 $ 4,958,854 $ 237,071 $ 3,181,988
Capital gains distributions
received....................... 0 31,655 0 38 0 267,733
Realized gain (loss) on shares
redeemed
[average cost basis]........... 16,969 1,031 (61,428) 5,625 180,422 58,302
Net unrealized gain (loss) on
investments.................... 2,346,083 (2,416,751) 4,993,370 (6,827,471) 56,633,361 (2,856,319)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 2,567,806 (1,351,655) 6,618,142 (1,862,954) 57,050,854 651,704
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 551,712 900,334 883,274 9,774,435 22,419,099 26,983,569
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (619,514) 409,426 (203,640) (576,511) 135,387 (298,727)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 2,500,004 (41,895) 7,297,776 7,334,970 79,605,340 27,336,546
NET ASSETS:
Beginning of period.............. 16,786,627 16,828,522 54,538,773 47,203,803 190,760,024 163,423,478
-------------- -------------- -------------- -------------- -------------- --------------
End of period.................... $ 19,286,631 $ 16,786,627 $ 61,836,549 $ 54,538,773 $ 270,365,364 $ 190,760,024
============== ============== ============== ============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES 46 AND 47.
43
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
For the periods ended September 30, 1995 and December 31, 1994
SUBACCOUNTS (CONTINUED)
----------------------------------------------------------------------------------------------
HIGH
DIVIDEND NATURAL GLOBAL
STOCK RESOURCES EQUITY
------------------------------ ------------------------------ ------------------------------
01/01/95 01/01/94 01/01/95 01/01/94 01/01/95 01/01/94
TO TO TO TO TO TO
09/30/95 12/31/94 09/30/95 12/31/94 09/30/95 12/31/94
(UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------- -------------- -------------- -------------- -------------- --------------
OPERATIONS:
Net investment income (loss)..... $ 1,107,472 $ 4,108,092 $ (69,972) $ 203,463 $ (121,590) $ (11,478)
Capital gains distributions
received....................... 0 7,633,088 346,834 1,375,424 0 5,622
Realized gain (loss) on shares
redeemed
[average cost basis]........... 34,828 34,607 20,178 22,045 0 0
Net unrealized gain (loss) on
investments.................... 31,304,979 (11,478,198) 15,394,413 (5,314,192) 6,639,237 (1,421,127)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 32,447,279 297,589 15,691,453 (3,713,260) 6,517,647 (1,426,983)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 28,706,249 51,018,498 7,856,576 22,317,372 11,164,974 29,174,840
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (665,133) (376,490) (341,595) (47,480) (2,041,348) 2,190,839
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 60,488,395 50,939,597 23,206,434 18,556,632 15,641,273 29,938,696
NET ASSETS:
Beginning of period.............. 150,687,304 99,747,707 72,147,168 53,590,536 29,938,696 0
-------------- -------------- -------------- -------------- -------------- --------------
End of period.................... $ 211,175,699 $ 150,687,304 $ 95,353,602 $ 72,147,168 $ 45,579,969 $ 29,938,696
============== ============== ============== ============== ============== ==============
GOVERNMENT
SECURITIES
------------------------------
01/01/95 01/01/94
TO TO
09/30/95 12/31/94
(UNAUDITED)
-------------- --------------
OPERATIONS:
Net investment income (loss)..... $ 1,117,287 $ 3,587,433
Capital gains distributions
received....................... 0 0
Realized gain (loss) on shares
redeemed
[average cost basis]........... (28,623) (74,828)
Net unrealized gain (loss) on
investments.................... 7,103,438 (7,299,824)
-------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 8,192,102 (3,787,219)
-------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... (101,583) 4,183,444
-------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (321,731) (467,937)
-------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 7,768,788 (71,712)
NET ASSETS:
Beginning of period.............. 61,563,342 61,635,054
-------------- --------------
End of period.................... $ 69,332,130 $ 61,563,342
============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES 46 AND 47.
44
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
For the periods ended September 30, 1995 and December 31, 1994
SUBACCOUNTS
--------------------------------------------------------------
ZERO
COUPON SMALL
BOND GROWTH CAPITALIZATION
2005 STOCK STOCK
------------------------------ -------------- --------------
01/01/95 01/01/94 05/01/95* 05/01/95*
TO TO TO TO
09/30/95 12/31/94 09/30/95 09/30/95
(UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------- -------------- -------------- --------------
OPERATIONS:
Net investment income (loss)..... $ 265,863 $ 782,620 $ (3,272) $ (2,758)
Capital gains distributions
received....................... 0 3,474 0 0
Realized gain (loss) on shares
redeemed
[average cost basis]........... 0 (2,913) 0 0
Net unrealized gain (loss) on
investments.................... 2,907,796 (2,073,481) 182,344 171,805
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 3,173,659 (1,290,300) 179,072 169,047
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 1,374,082 3,624,370 3,369,067 2,792,860
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM SURPLUS
TRANSFERS........................ (99,649) (146,182) 29,580 160,172
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 4,448,092 2,187,888 3,577,719 3,122,079
NET ASSETS:
Beginning of period.............. 14,093,350 11,905,462 0 0
-------------- -------------- -------------- --------------
End of period.................... $ 18,541,442 $ 14,093,350 $ 3,577,719 $ 3,122,079
============== ============== ============== ==============
*Commencement
of Business
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES 46 AND 47.
45
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
NOTE 1: GENERAL
The Prudential Variable Appreciable Account (the "Account") of The
Prudential Insurance Company of America ("The Prudential") was established on
August 11, 1987 by a resolution of The Prudential's Board of Directors in
conformity with insurance laws of the State of New Jersey. The assets of the
Account are segregated from The Prudential's other assets. Currently only The
Prudential Variable Appreciable Life (PVAL) and the Custom Variable Appreciable
Life contracts invests in the Account. The Prudential Survivorship Preferred
(SVUL) will also invest in the Account once the product becomes available to the
contract owner.
The Account is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust. There are sixteen subaccounts within the
Account, each of which invests only in a corresponding portfolio of The
Prudential Series Fund, Inc. (the "Series Fund"). The Series Fund is a
diversified open-end management investment company, and is managed by The
Prudential. The SVUL product was not in existence at September 30, 1995,
therefore, the Account was only used for the PVAL and the Custom Variable
Appreciable Life contracts. Due to its liquidation on November 15, 1995, the
Zero Coupon Bond 1995 portfolio will not be offered as an investment option of
the SVUL product. The information under charges and expenses outlined in Note 3
apply only to PVAL. The charges and expenses for the SVUL product will be
different.
NOTE 2: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS
The net asset value per share for each portfolio of the Series Fund, the number
of shares of each portfolio held by the subaccounts of the Account and the
aggregate cost of investments in such shares at September 30, 1995 were as
follows:
PORTFOLIOS
-------------------------------------------------------------------------------
AGGRESSIVELY CONSERVATIVELY
PORTFOLIO MONEY COMMON MANAGED MANAGED
INFORMATION MARKET BOND STOCK FLEXIBLE FLEXIBLE
- ---------------------------- -------------- -------------- -------------- -------------- ---------------
Number of shares: 9,002,847 8,505,745 28,343,858 49,432,168 47,591,644
Net asset value per share: $ 10.0000 $ 11.2621 $ 25.9993 $ 18.2907 $ 15.8277
Cost: $ 90,028,473 $ 92,307,958 $ 576,425,569 $ 791,688,359 $ 688,464,833
PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------------
ZERO ZERO
COUPON COUPON HIGH HIGH
PORTFOLIO BOND BOND YIELD STOCK DIVIDEND
INFORMATION 1995 2000 BOND INDEX STOCK
- ---------------------------- -------------- -------------- -------------- -------------- ---------------
Number of shares: 469,494 1,424,637 7,698,315 14,054,058 12,240,501
Net asset value per share: $ 10.8305 $ 13.5379 $ 8.0268 $ 19.2375 $ 17.2522
Cost: $ 5,205,862 $ 17,861,897 $ 61,157,749 $ 195,477,006 $ 182,052,111
PORTFOLIOS (CONTINUED)
-----------------------------------------------------------------------------------------------
ZERO
COUPON SMALL
PORTFOLIO NATURAL GLOBAL GOVERNMENT BOND GROWTH CAPITALIZATION
INFORMATION RESOURCES EQUITY SECURITIES 2005 STOCK STOCK
- ---------------------------- -------------- -------------- -------------- -------------- --------------- --------------
Number of shares: 5,494,444 2,784,662 5,940,731 1,436,339 289,894 261,218
Net asset value per share: $ 17.3546 $ 16.3682 $ 11.6706 $ 12.9088 $ 12.3415 $ 11.9520
Cost: $ 77,304,509 $ 40,361,859 $ 66,886,689 $ 16,676,687 $ 3,395,376 $ 2,950,274
NOTE 3: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges at an effective annual
rate of up to 0.90% may be applied daily against the net assets
representing equity of the Contract owners held in each subaccount.
For contracts with face amounts of $100,000 or more, the annual rate
is 0.60%.
46
B. Deferred Sales Charge
A deferred sales charge is imposed upon the surrender of certain
variable life insurance contracts to compensate The Prudential for
sales and other marketing expenses. The amount of any sales charge
will depend on the number of years that have elapsed since the
Contract was issued. No sales charge will be imposed after the tenth
year of the Contract. No sales charge will be imposed on death
benefits.
C. Partial Withdrawal Charge
The partial withdrawal of the cash surrender value from certain
variable life insurance contracts invokes a charge equal to the
lesser of $15 or 2% of the amount withdrawn.
D. Expense Reimbursement
The Account is reimbursed by The Prudential, on a non-guaranteed
basis, for expenses incurred by the Series Fund in excess of the
effective rate of 0.40% for all Zero Coupon Bond Portfolios, 0.45%
for the Stock Index Portfolio, 0.50% for the High Dividend Stock
Portfolio, 0.55% for the Natural Resources Portfolio, and 0.65% for
the High Yield Bond Portfolio of the average daily net assets of
these portfolios.
NOTE 4: TAXES
The operations of the subaccounts form a part of, and are taxed with,
the operations of The Prudential. Under the Internal Revenue Code, all
ordinary income and capital gains allocated to the Contract owners are
not taxed to The Prudential. As a result, the net asset values of the
subaccounts are not affected by federal income taxes on distributions
received by the subaccounts.
NOTE 5: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS
The increase (decrease) in net assets resulting from surplus transfers
represents the net contributions of The Prudential to the Account.
NOTE 6: RELATED PARTY TRANSACTIONS
The Prudential has purchased multiple individual contracts of the
Account insuring the lives of certain employees. The Prudential is the
owner and beneficiary of the contracts. Net premium payments of
approximately $22.9 million were received for the period ended September
30, 1995. Net premium payments of approximately $23.0 million for the
year ended December 31, 1994 were directed to the Aggressively Managed
Flexible subaccount. Equity of Contract owners in that subaccount at
September 30, 1995 and December 31, 1994 includes approximately $182.7
million and $136.7 million, respectively, owned by the Prudential.
47
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1994
SUBACCOUNTS
--------------------------------------------------------------
AGGRESSIVELY
MONEY COMMON MANAGED
TOTAL MARKET BOND STOCK FLEXIBLE
-------------- -------------- -------------- -------------- --------------
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $2,587,138,095 $ 78,169,861 $ 76,194,412 $ 500,113,200 $ 699,836,622
============== ============== ============== ============== ==============
Equity of Contract owners....................... $2,568,337,051 $ 77,928,559 $ 76,018,846 $ 495,997,636 $ 695,664,623
Equity of The Prudential Insurance Company of
America....................................... 18,801,044 241,302 175,566 4,115,564 4,171,999
-------------- -------------- -------------- -------------- --------------
$2,587,138,095 $ 78,169,861 $ 76,194,412 $ 500,113,200 $ 699,836,622
============== ============== ============== ============== ==============
STATEMENTS OF OPERATIONS
For the year ended December 31, 1994
SUBACCOUNTS
--------------------------------------------------------------
AGGRESSIVELY
MONEY COMMON MANAGED
TOTAL MARKET BOND STOCK FLEXIBLE
-------------- -------------- -------------- -------------- --------------
INVESTMENT INCOME
Dividend distributions received................. $ 79,801,099 $ 2,906,404 $ 4,745,723 $ 10,458,080 $ 18,588,518
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 16,768,066 504,103 518,852 3,134,155 4,527,520
Reimbursement for excess expenses [Note 3D]..... (53,999) 0 0 0 0
-------------- -------------- -------------- -------------- --------------
NET EXPENSES...................................... 16,714,067 504,103 518,852 3,134,155 4,527,520
-------------- -------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 63,087,032 2,402,301 4,226,871 7,323,925 14,060,998
-------------- -------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 54,709,623 0 158,594 19,666,506 18,931,168
Realized gain (loss) on shares redeemed
[average cost basis].......................... 167,179 0 4,403 86,672 0
Net unrealized loss on investments.............. (155,373,175) 0 (7,162,380) (18,362,891) (56,779,739)
-------------- -------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... (100,496,373) 0 (6,999,383) 1,390,287 (37,848,571)
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ (37,409,341) $ 2,402,301 $ (2,772,512) $ 8,714,212 $ (23,787,573)
============== ============== ============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A1
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------
ZERO ZERO
CONSERVATIVELY COUPON COUPON HIGH
MANAGED BOND BOND YIELD STOCK
FLEXIBLE 1995 2000 BOND INDEX
-------------- -------------- -------------- -------------- --------------
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $ 637,504,119 $ 4,804,597 $ 16,786,627 $ 54,538,773 $ 190,760,024
============== ============== ============== ============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $ 633,504,352 $ 4,788,369 $ 16,177,407 $ 54,364,432 $ 190,028,325
Equity of The Prudential Insurance Company of
America....................................... 3,999,767 16,228 609,220 174,341 731,699
-------------- -------------- -------------- -------------- --------------
$ 637,504,119 $ 4,804,597 $ 16,786,627 $ 54,538,773 $ 190,760,024
============== ============== ============== ============== ==============
HIGH
DIVIDEND NATURAL GLOBAL
STOCK RESOURCES EQUITY
-------------- -------------- --------------
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $ 150,687,304 $ 72,147,168 $ 29,938,696
============== ============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $ 149,277,865 $ 71,565,256 $ 27,782,691
Equity of The Prudential Insurance Company of
America....................................... 1,409,439 581,912 2,156,005
-------------- -------------- --------------
$ 150,687,304 $ 72,147,168 $ 29,938,696
============== ============== ==============
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------
ZERO ZERO
CONSERVATIVELY COUPON COUPON HIGH
MANAGED BOND BOND YIELD STOCK
FLEXIBLE 1995 2000 BOND INDEX
-------------- -------------- -------------- -------------- --------------
INVESTMENT INCOME
Dividend distributions received................. $ 21,289,808 $ 286,151 $ 1,133,170 $ 5,329,778 $ 4,465,133
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 4,323,507 32,534 118,731 370,924 1,283,145
Reimbursement for excess expenses [Note 3D]..... 0 (9,637) (17,971) 0 0
-------------- -------------- -------------- -------------- --------------
NET EXPENSES...................................... 4,323,507 22,897 100,760 370,924 1,283,145
-------------- -------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 16,966,301 263,254 1,032,410 4,958,854 3,181,988
-------------- -------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 6,635,310 1,011 31,655 38 267,733
Realized gain (loss) on shares redeemed
[average cost basis].......................... 31,649 586 1,031 5,625 58,302
Net unrealized loss on investments.............. (33,092,575) (288,227) (2,416,751) (6,827,471) (2,856,319)
-------------- -------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... (26,425,616) (286,630) (2,384,065) (6,821,808) (2,530,284)
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ (9,459,315) $ (23,376) $ (1,351,655) $ (1,862,954) $ 651,704
============== ============== ============== ============== ==============
HIGH
DIVIDEND NATURAL GLOBAL
STOCK RESOURCES EQUITY*
-------------- -------------- --------------
INVESTMENT INCOME
Dividend distributions received................. $ 5,001,100 $ 674,356 $ 44,201
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 893,008 470,895 55,679
Reimbursement for excess expenses [Note 3D]..... 0 (2) 0
-------------- -------------- --------------
NET EXPENSES...................................... 893,008 470,893 55,679
-------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 4,108,092 203,463 (11,478)
-------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 7,633,088 1,375,424 5,622
Realized gain (loss) on shares redeemed
[average cost basis].......................... 34,607 22,045 0
Net unrealized loss on investments.............. (11,478,198) (5,314,192) (1,421,127)
-------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... (3,810,503) (3,916,723) (1,415,505)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 297,589 $ (3,713,260) $ (1,426,983)
============== ============== ==============
*Commenced
Business
on 5/1/94
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A2
STATEMENTS OF NET ASSETS (CONTINUED)
December 31, 1994
SUBACCOUNTS
------------------------------
ZERO
COUPON
GOVERNMENT BOND
SECURITIES 2005
-------------- --------------
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 2].......... $ 61,563,342 $ 14,093,350
============== ==============
NET ASSETS, representing:
Equity of Contract owners....................... $ 61,256,996 $ 13,981,694
Equity of The Prudential Insurance Company of
America....................................... 306,346 111,656
-------------- --------------
$ 61,563,342 $ 14,093,350
============== ==============
STATEMENTS OF OPERATIONS (CONTINUED)
For the year ended December 31, 1994
SUBACCOUNTS
------------------------------
ZERO
COUPON
GOVERNMENT BOND
SECURITIES 2005
-------------- --------------
INVESTMENT INCOME
Dividend distributions received................. $ 4,032,941 $ 845,736
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 3A]..... 445,508 89,505
Reimbursement for excess expenses [Note 3D]..... 0 (26,389)
-------------- --------------
NET EXPENSES...................................... 445,508 63,116
-------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 3,587,433 782,620
-------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 0 3,474
Realized gain (loss) on shares redeemed
[average cost basis].......................... (74,828) (2,913)
Net unrealized loss on investments.............. (7,299,824) (2,073,481)
-------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... (7,374,652) (2,072,920)
-------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ (3,787,219) $ (1,290,300)
============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A3
(This page intentionally left blank.)
A4
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1994 and 1993
SUBACCOUNTS
--------------------------------------------------------------
MONEY
TOTAL MARKET BOND
------------------------------ ------------------------------ ------------------------------
1993
1994 (AS RESTATED) 1994 1993 1994 1993
-------------- -------------- -------------- -------------- -------------- --------------
OPERATIONS:
Net investment income (loss)..... $ 63,087,032 $ 44,057,142 $ 2,402,301 $ 1,562,897 $ 4,226,871 $ 3,075,764
Capital gains distributions
received....................... 54,709,623 70,916,387 0 0 158,594 892,376
Realized gain (loss) on shares
redeemed [average cost basis].. 167,179 626,607 0 0 4,403 15,239
Net unrealized gain (loss) on
investments.................... (155,373,175) 89,884,218 0 0 (7,162,380) 662,894
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS....................... (37,409,341) 205,484,354 2,402,301 1,562,897 (2,772,512) 4,646,273
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 560,003,324 595,883,814 6,444,757 5,467,177 11,829,119 18,271,190
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM SURPLUS
TRANSFERS........................ (942,487) 1,089,951 (213,654) (175,801) (532,267) (36,073)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 521,651,496 802,458,119 8,633,404 6,854,273 8,524,340 22,881,390
NET ASSETS:
Beginning of year................ 2,065,486,599 1,263,028,480 69,536,457 62,682,184 67,670,072 44,788,682
-------------- -------------- -------------- -------------- -------------- --------------
End of year...................... $2,587,138,095 $2,065,486,599 $ 78,169,861 $ 69,536,457 $ 76,194,412 $ 67,670,072
============== ============== ============== ============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A5
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
For the years ended December 31, 1994 and 1993
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------
AGGRESSIVELY
COMMON MANAGED
STOCK FLEXIBLE
------------------------------ ------------------------------
1994 1993 1994 1993
-------------- -------------- -------------- --------------
OPERATIONS:
Net investment income (loss)..... $ 7,323,925 $ 3,787,584 $ 14,060,998 $ 12,932,914
Capital gains distributions
received....................... 19,666,506 16,988,695 18,931,168 29,168,105
Realized gain (loss) on shares
redeemed [average cost basis].. 86,672 167,532 0 122,764
Net unrealized gain (loss) on
investments.................... (18,362,891) 30,362,343 (56,779,739) 18,927,854
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS....................... 8,714,212 51,306,154 (23,787,573) 61,151,637
-------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 123,951,671 108,534,011 142,298,237 150,101,012
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM SURPLUS
TRANSFERS........................ 452,486 1,171,594 (55,717) (111,711)
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 133,118,369 161,011,759 118,454,947 211,140,938
NET ASSETS:
Beginning of year................ 366,994,831 205,983,072 581,381,675 370,240,737
-------------- -------------- -------------- --------------
End of year...................... $ 500,113,200 $ 366,994,831 $ 699,836,622 $ 581,381,675
============== ============== ============== ==============
ZERO
CONSERVATIVELY COUPON
MANAGED BOND
FLEXIBLE 1995
------------------------------ ------------------------------
1994 1993 1994 1993
-------------- -------------- -------------- --------------
OPERATIONS:
Net investment income (loss)..... $ 16,966,301 $ 10,601,459 $ 263,254 $ 257,300
Capital gains distributions
received....................... 6,635,310 18,959,118 1,011 0
Realized gain (loss) on shares
redeemed [average cost basis].. 31,649 120,806 586 0
Net unrealized gain (loss) on
investments.................... (33,092,575) 12,220,568 (288,227) (1,749)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS....................... (9,459,315) 41,901,951 (23,376) 255,551
-------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 127,164,401 163,207,517 338,277 1,203,358
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM SURPLUS
TRANSFERS........................ (1,173,893) 816,842 (106,380) 8,524
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 116,531,193 205,926,310 208,521 1,467,433
NET ASSETS:
Beginning of year................ 520,972,926 315,046,616 4,596,076 3,128,643
-------------- -------------- -------------- --------------
End of year...................... $ 637,504,119 $ 520,972,926 $ 4,804,597 $ 4,596,076
============== ============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A6
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
For the years ended December 31, 1994 and 1993
SUBACCOUNTS
----------------------------------------------------------------------------------------------
ZERO
COUPON HIGH
BOND YIELD STOCK
2000 BOND INDEX
------------------------------ ------------------------------ ------------------------------
1993
1994 1993 1994 (AS RESTATED) 1994 1993
-------------- -------------- -------------- -------------- -------------- --------------
OPERATIONS:
Net investment income (loss)..... $ 1,032,410 $ 834,516 $ 4,958,854 $ 3,323,954 $ 3,181,988 $ 2,402,805
Capital gains distributions
received....................... 31,655 5,978 38 23 267,733 339,359
Realized gain (loss) on shares
redeemed [average cost basis].. 1,031 1,154 5,625 48,986 58,302 63,772
Net unrealized gain (loss) on
investments.................... (2,416,751) 919,475 (6,827,471) 2,255,362 (2,856,319) 8,649,699
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS....................... (1,351,655) 1,761,123 (1,862,954) 5,628,325 651,704 11,455,635
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 900,334 5,163,860 9,774,435 17,361,907 26,983,569 43,311,756
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM SURPLUS
TRANSFERS........................ 409,426 10,638 (576,511) (16,603) (298,727) (951,071)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... (41,895) 6,935,621 7,334,970 22,973,629 27,336,546 53,816,320
NET ASSETS:
Beginning of year................ 16,828,522 9,892,901 47,203,803 24,230,174 163,423,478 109,607,158
-------------- -------------- -------------- -------------- -------------- --------------
End of year...................... $ 16,786,627 $ 16,828,522 $ 54,538,773 $ 47,203,803 $ 190,760,024 $ 163,423,478
============== ============== ============== ============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A7
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
SUBACCOUNTS (CONTINUED)
----------------------------------------------------------------------------------------------
HIGH
DIVIDEND NATURAL GLOBAL GOVERNMENT
STOCK RESOURCES EQUITY* SECURITIES
------------------------------ ------------------------------ -------------- --------------
1994 1993 1994 1993 1994 1994
-------------- -------------- -------------- -------------- -------------- --------------
OPERATIONS:
Net investment income (loss)..... $ 4,108,092 $ 1,948,922 $ 203,463 $ 300,114 $ (11,478) $ 3,587,433
Capital gains distributions
received....................... 7,633,088 3,057,447 1,375,424 1,290,124 5,622 0
Realized gain (loss) on shares
redeemed [average cost basis].. 34,607 68,504 22,045 8,953 0 (74,828)
Net unrealized gain (loss) on
investments.................... (11,478,198) 6,361,835 (5,314,192) 6,638,189 (1,421,127) (7,299,824)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS....................... 297,589 11,436,708 (3,713,260) 8,237,380 (1,426,983) (3,787,219)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 51,018,498 44,298,031 22,317,372 13,476,759 29,174,840 4,183,444
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM SURPLUS
TRANSFERS........................ (376,490) 886,003 (47,480) 173,903 2,190,839 (467,937)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 50,939,597 56,620,742 18,556,632 21,888,042 29,938,696 (71,712)
NET ASSETS:
Beginning of year................ 99,747,707 43,126,965 53,590,536 31,702,494 0 61,635,054
-------------- -------------- -------------- -------------- -------------- --------------
End of year...................... $ 150,687,304 $ 99,747,707 $ 72,147,168 $ 53,590,536 $ 29,938,696 $ 61,563,342
============== ============== ============== ============== ============== ==============
*Commenced
Business
on 5/1/94
1993
--------------
OPERATIONS:
Net investment income (loss)..... $ 2,505,506
Capital gains distributions
received....................... 213,250
Realized gain (loss) on shares
redeemed [average cost basis].. 6,004
Net unrealized gain (loss) on
investments.................... 2,070,124
--------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS....................... 4,794,884
--------------
NET INCREASE IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 20,135,848
--------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM SURPLUS
TRANSFERS........................ (628,148)
--------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 24,302,584
NET ASSETS:
Beginning of year................ 37,332,470
--------------
End of year...................... $ 61,635,054
==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A8
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
For the years ended December 31, 1994 and 1993
SUBACCOUNTS (CONTINUED)
------------------------------
ZERO
COUPON
BOND
2005
------------------------------
1994 1993
-------------- --------------
OPERATIONS:
Net investment income (loss)..... $ 782,620 $ 523,407
Capital gains distributions
received....................... 3,474 1,912
Realized gain (loss) on shares
redeemed [average cost basis].. (2,913) 2,893
Net unrealized gain (loss) on
investments.................... (2,073,481) 817,624
-------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS....................... (1,290,300) 1,345,836
-------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 3,624,370 5,351,388
-------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM SURPLUS
TRANSFERS........................ (146,182) (58,146)
-------------- --------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS.................... 2,187,888 6,639,078
NET ASSETS:
Beginning of year................ 11,905,462 5,266,384
-------------- --------------
End of year...................... $ 14,093,350 $ 11,905,462
============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A10 AND A11.
A9
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
FOR THE YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1993
NOTE 1: GENERAL
The Prudential Variable Appreciable Account (the "Account") of The
Prudential Insurance Company of America ("The Prudential") was
established on August 11, 1987 by a resolution of The Prudential's
Board of Directors in conformity with insurance laws of the State of
New Jersey. The assets of the Account are segregated from The
Prudential's other assets.
The Account is registered under the Investment Company Act of 1940, as amended,
as a unit investment trust. There are fourteen subaccounts within the Account,
each of which invests only in a corresponding portfolio of The Prudential Series
Fund, Inc. (the "Series Fund"). The Series Fund is a diversified open-end
management investment company, and is managed by The Prudential.
NOTE 2: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS
The net asset value per share for each portfolio of the Series Fund,
the number of shares of each portfolio held by the subaccounts of the
Account and the aggregate cost of investments in such shares at
December 31, 1994 were as follows:
PORTFOLIOS
-------------------------------------------------------------------------------
AGGRESSIVELY CONSERVATIVELY
PORTFOLIO MONEY COMMON MANAGED MANAGED
INFORMATION MARKET BOND STOCK FLEXIBLE FLEXIBLE
- ---------------------------- -------------- -------------- -------------- -------------- ---------------
Number of shares: 7,816,986 7,590,332 24,204,046 45,162,376 45,229,225
Net asset value per share: $ 10.0000 $ 10.0384 $ 20.6624 $ 15.4960 $ 14.0950
Cost: $ 78,169,861 $ 82,298,314 $ 479,554,451 $ 718,908,716 $ 652,751,738
PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------------
ZERO ZERO
COUPON COUPON HIGH HIGH
PORTFOLIO BOND BOND YIELD STOCK DIVIDEND
INFORMATION 1995 2000 BOND INDEX STOCK
- ---------------------------- -------------- -------------- -------------- -------------- ---------------
Number of shares: 453,570 1,415,159 7,400,245 12,753,836 10,403,600
Net asset value per share: $ 10.5929 $ 11.8620 $ 7.3655 $ 14.9571 $ 14.4842
Cost: $ 5,036,020 $ 17,707,975 $ 58,897,134 $ 172,505,026 $ 152,868,694
PORTFOLIOS (CONTINUED)
--------------------------------------------------------------
ZERO
COUPON
PORTFOLIO NATURAL GLOBAL GOVERNMENT BOND
INFORMATION RESOURCES EQUITY SECURITIES 2005
- ---------------------------- -------------- -------------- -------------- --------------
Number of shares: 4,995,241 2,157,138 5,884,837 1,311,729
Net asset value per share: $ 14.4432 $ 13.8789 $ 10.4614 $ 10.7441
Cost: $ 69,492,489 $ 31,359,823 $ 66,221,339 $ 15,136,391
NOTE 3: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges at an effective annual
rate of up to 0.90% may be applied daily against the net assets
representing equity of the Contract owners held in each subaccount.
For contracts with face amounts of $100,000 or more, the annual rate
is 0.60%.
B. Deferred Sales Charge
A deferred sales charge is imposed upon the surrender of certain
variable life insurance contracts to compensate The Prudential for
sales and other marketing expenses. The amount of any sales charge
will depend on the number of years that have elapsed since the
Contract was issued. No sales charge will be imposed after the tenth
year of the Contract. No sales charge will be imposed on death
benefits.
A10
C. Partial Withdrawal Charge
The partial withdrawal of the cash surrender value from certain
variable life insurance contracts invokes a charge equal to the
lesser of $15 or 2% of the amount withdrawn.
D. Expense Reimbursement
The Account is reimbursed by The Prudential, on a non-guaranteed
basis, for expenses incurred by the Series Fund in excess of the
effective rate of 0.40% for all Zero Coupon Bond Portfolios, 0.45%
for the Stock Index Portfolio, 0.50% for the High Dividend Stock
Portfolio, 0.55% for the Natural Resources Portfolio, and 0.65% for
the High Yield Bond Portfolio of the average daily net assets of
these portfolios.
NOTE 4: TAXES
The operations of the subaccounts form a part of, and are taxed with,
the operations of The Prudential. Under the Internal Revenue Code, all
ordinary income and capital gains allocated to the Contract owners are
not taxed to The Prudential. As a result, the net asset values of the
subaccounts are not affected by federal income taxes on distributions
received by the subaccounts.
NOTE 5: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS
The increase (decrease) in net assets resulting from surplus transfers
represents the net contributions of The Prudential to the Account.
NOTE 6: RELATED PARTY TRANSACTIONS
The Prudential has purchased multiple individual contracts of the
Account insuring the lives of certain employees. The Prudential is the
owner and beneficiary of the contracts. Net premium payments of
approximately $23.0 million for each of the years ended December 31,
1994 and December 31, 1993, respectively, were directed to the
Aggressively Managed Flexible subaccount. Equity of Contract owners in
that subaccount at December 31, 1994 and December 31, 1993 includes
approximately $136.7 million and $122.8 million, respectively, owned by
The Prudential.
NOTE 7: RESTATEMENT
Subsequent to the issuance of the Account's previously issued December
31, 1993 financial statements, The Prudential determined that in the
High Yield Bond subaccount, net assets and net increase in net assets
resulting from operations were overstated by approximately $284,192 due
to the overvaluation of a security held in the High Yield Bond
Portfolio of the Series Fund at December 31, 1993. Accordingly, the
comparative 1993 financial information included in the statements of
changes in net assets of the Account has been restated.
A11
INDEPENDENT AUDITORS' REPORT
To the Contract Owners of
The Prudential Variable Appreciable
Account and the Board of Directors
of The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying statements of net assets of The Prudential
Variable Appreciable Account of The Prudential Insurance Company of America
(comprising, respectively, the Money Market, Bond, Common Stock, Aggressively
Managed Flexible, Conservatively Managed Flexible, Zero Coupon Bond 1995, Zero
Coupon Bond 2000, High Yield Bond, Stock Index, High Dividend Stock, Natural
Resources, Global Equity, Government Securities and Zero Coupon Bond 2005
subaccounts) as of December 31, 1994, the related statements of operations for
the periods presented in the year then ended, and the statements of changes in
net assets for each of the periods presented in the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1994. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of each of the respective subaccounts
constituting The Prudential Variable Appreciable Account as of December 31,
1994, the results of their operations, and the changes in their net assets for
the respective stated periods in conformity with generally accepted accounting
principles.
As discussed in Note 7, the 1993 financial statements of The Prudential Variable
Appreciable Account have been restated.
Deloitte & Touche LLP
Parsippany, New Jersey
February 10, 1995
A12
1
CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF FINANCIAL POSITION
DECEMBER 31,
1994 1993
------ ------
(IN MILLIONS)
ASSETS
Fixed maturities....................... $ 78,743 $ 79,061
Equity securities...................... 2,327 2,216
Mortgage loans......................... 26,199 27,509
Investment real estate................. 1,600 1,903
Policy loans........................... 6,631 6,456
Other long-term investments............ 5,147 4,739
Short-term investments................. 10,630 6,304
Securities purchased under
agreements to resell................. 5,591 9,656
Trading account securities............. 6,218 8,586
Cash................................... 1,109 1,666
Accrued investment income.............. 1,932 1,826
Premiums due and deferred.............. 2,712 2,549
Broker-dealer receivables.............. 7,311 9,133
Other assets........................... 7,119 9,997
Assets held in Separate Accounts....... 48,633 48,110
-------- --------
TOTAL ASSETS............................... $211,902 $219,711
======== ========
LIABILITIES, AVR AND SURPLUS
Liabilities:
Policy liabilities and insurance
reserves:
Future policy benefits and claims...... $101,589 $100,030
Unearned premiums...................... 1,144 1,146
Other policy claims and benefits
payable.............................. 1,848 1,935
Policy dividends....................... 1,686 2,018
Other policyholders' funds............. 9,097 9,874
Securities sold under agreements
to repurchase........................ 8,919 14,703
Notes payable and other borrowings..... 12,009 13,354
Broker-dealer payables................. 5,144 5,410
Other liabilities...................... 13,036 13,075
Liabilities related to
Separate Accounts...................... 47,946 47,475
-------- --------
TOTAL LIABILITIES.......................... 202,418 209,020
-------- --------
Asset valuation reserve (AVR).............. 2,035 2,687
-------- --------
Surplus:
Capital notes.......................... 298 298
Special surplus fund................... 1,097 1,091
Unassigned surplus..................... 6,054 6,615
-------- --------
TOTAL SURPLUS.............................. 7,449 8,004
-------- --------
TOTAL LIABILITIES, AVR
AND SURPLUS............................ $211,902 $219,711
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF
OPERATIONS AND CHANGES IN SURPLUS AND ASSET
VALUATION RESERVE (AVR)
YEARS ENDED DECEMBER 31,
1994 1993 1992
----- ----- -----
(IN MILLIONS)
REVENUE
Premiums and annuity
considerations............. $29,698 $29,982 $29,858
Net investment income........ 9,595 10,090 10,318
Broker-dealer revenue........ 3,677 4,025 3,592
Realized investment
(losses)/gains............. (450) 953 720
Other income................. 1,037 924 833
------- ------- -------
TOTAL REVENUE.................... 43,557 45,974 45,321
------- ------- -------
BENEFITS AND EXPENSES
Current and future benefits
and claims................. 30,788 30,573 32,031
Insurance and underwriting
expenses................... 4,830 4,982 4,563
Limited partnership
matters.................... 1,422 390 129
General, administrative
and other expenses......... 5,794 5,575 5,394
------- ------- -------
TOTAL BENEFITS AND
EXPENSES..................... 42,834 41,520 42,117
------- ------- -------
Income from operations
before dividends
and income taxes............. 723 4,454 3,204
Dividends to
policyholders................ 2,290 2,339 2,389
------- ------- -------
Income/(loss) before
income taxes................. (1,567) 2,115 815
Income tax
(benefit)/provision.......... (392) 1,236 468
------- ------- -------
NET INCOME/(LOSS)................ (1,175) 879 347
SURPLUS, BEGINNING
OF YEAR...................... 8,004 7,365 6,527
Issuance of capital notes
(after net charge-off
of non-admitted prepaid
postretirement benefit
cost of $113 in 1993)........ 0 185 0
Net unrealized
investment (losses)
and change in AVR............ 620 (425) 491
------- ------- -------
SURPLUS, END OF
YEAR......................... 7,449 8,004 7,365
------- ------- -------
AVR, BEGINNING OF YEAR........... 2,687 2,457 3,216
(Decrease)/increase in AVR (652) 230 (759)
------- ------- -------
AVR, END OF YEAR................. 2,035 2,687 2,457
------- ------- -------
TOTAL SURPLUS AND
AVR.......................... $ 9,484 $10,691 $ 9,822
======= ======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
2
CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1994 1993 1992
----- ----- -----
(IN MILLIONS)
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income/(loss)................ $(1,175) $ 879 $ 347
Adjustments to reconcile
net income/(loss) to cash flows
from operating activities:
Increase in policy liabilities
and insurance reserves..... 1,289 2,747 3,428
Net increase in
Separate Accounts.......... (52) (59) (69)
Realized investment
losses/(gains)............. 450 (953) (720)
Depreciation, amortization
and other non-cash
items...................... 379 261 380
Decrease/(increase)
in operating assets:
Mortgage loans........... (226) (226) (1,952)
Policy loans............. (175) (174) (216)
Securities purchased
under agreements
to resell.............. 2,979 (2,049) (1,420)
Trading account
securities............. 2,447 (2,087) 351
Broker-dealer
receivables............ 1,822 (1,803) (161)
Other assets............. 1,873 (2,277) (1,041)
(Decrease)/increase in
operating liabilities:
Securities sold under
agreements to
repurchase........... (3,247) 1,134 1,967
Broker-dealer
payables............. (266) 1,067 (653)
Other liabilities...... (2,116) 2,007 841
------ ------ ------
CASH FLOWS FROM
OPERATING ACTIVITIES............ 3,982 (1,533) 1,082
------ ------ ------
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from the
sale/maturity of:
Fixed maturities.............. 82,834 87,840 73,326
Equity securities............. 1,426 1,725 957
Mortgage loans................ 4,154 4,789 3,230
Investment real estate........ 935 441 243
Other long-term
investments................. 1,022 1,352 2,046
Property and equipment........ 637 6 5
Payments for the purchase of:
Fixed maturities.............. (83,075) (89,034) (72,397)
Equity securities............. (1,535) (1,085) (977)
Mortgage loans................ (3,446) (3,530) (3,087)
Investment real estate........ (161) (196) (240)
Other long-term
investments................. (1,687) (531) (2,039)
Property and equipment........ (392) (640) (733)
Short-term investments (net)...... (4,281) (2,150) (1,160)
Net change in cash placed as
collateral for securities
loaned........................ 2,011 (589) (1,032)
------ ------ ------
CASH FLOWS FROM
INVESTING ACTIVITIES.......... (1,558) (1,602) (1,858)
------ ------ ------
CASH FLOWS FROM
FINANCING ACTIVITIES
Net (payments)/proceeds
of short-term borrowings.... $ (1,115) $ 1,106 $ 70
Proceeds from the issuance of
long-term debt.............. 345 1,228 217
Payments for the settlement
of long-term debt........... (760) (721) (204)
Proceeds/(payments) of
unmatched securities
purchased under
agreements to resell........ 1,086 (47) (170)
(Payments)/proceeds of
unmatched securities sold
under agreements to
repurchase.................. (2,537) 1,707 1,201
Proceeds from the issuance of
capital notes............... 0 298 0
------- ------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES.......... (2,981) 3,571 1,114
------- ------- -------
Net (decrease)/increase
in cash..................... (557) 436 338
Cash, beginning of year........ 1,666 1,230 892
------- ------- -------
CASH, END OF YEAR.............. $ 1,109 $ 1,666 $ 1,230
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income tax payments made, net of refunds, during 1994, 1993 and 1992 were $64
million, $933 million and $555 million, respectively. Interest payments made
during 1994, 1993 and 1992 were $1,429 million, $1,171 million and $1,272
million, respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-2
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1. ACCOUNTING POLICIES AND PRINCIPLES
A. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
The Prudential Insurance Company of America ("The Prudential"), a mutual
life insurance company, and its subsidiaries (collectively, "the
Company"). The activities of the Company cover a broad range of financial
services, including life and health insurance, property and casualty
insurance, reinsurance, group health care, securities brokerage, asset
management, investment advisory services, mortgage banking and servicing,
and real estate development and brokerage. All significant intercompany
balances and transactions have been eliminated in consolidation.
B. BASIS OF PRESENTATION
The consolidated financial statements are presented in conformity with
generally accepted accounting principles ("GAAP"), which for mutual life
insurance companies and their insurance subsidiaries are statutory
accounting practices prescribed or permitted by regulatory authorities in
the domiciliary states. Certain reclassifications have been made to the
1993 and 1992 financial statements to conform to the 1994 presentation.
In 1994, The American Institute of Certified Public Accountants issued
Statement of Position 94-5, "Disclosures of Certain Matters in the
Financial Statements of Insurance Enterprises" ("SOP 94-5"), which
requires insurance enterprises to disclose in their financial statements
the accounting methods used in their statutory financial statements that
are permitted by the state insurance departments rather than prescribed
statutory accounting practices.
The Prudential, domiciled in the State of New Jersey, prepares its
statutory financial statements in accordance with accounting practices
prescribed or permitted by the New Jersey Department of Insurance ("the
Department"). Its insurance subsidiaries prepare statutory financial
statements in accordance with accounting practices prescribed or permitted
by their respective domiciliary home state insurance departments.
Prescribed statutory accounting practices include publications of the
National Association of Insurance Commissioners ("NAIC"), state laws,
regulations, and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed.
In 1993, The Prudential issued Fixed Rate Capital Notes ("the notes").
Interest payments on the notes are pre-approved by the Department, and
principal repayment is subject to a Risk-Based Capital test. This
permitted accounting practice differs from that prescribed by the NAIC.
The NAIC practices provide for Insurance Commissioner approval of every
interest and principal payment before the payment is made. The Prudential
has included the notes as part of surplus (see Note 7).
The Prudential has established guaranty fund liabilities for the
insolvencies of certain life insurance companies. The liabilities were
established net of estimated premium tax credits and federal income tax.
Prescribed statutory accounting practices do not address the establishment
of liabilities for guaranty fund assessments.
The Company, with permission from the Department, prepares an Annual
Report that differs from the Annual Statement filed with the Department in
that subsidiaries are consolidated and certain financial statement
captions are presented differently.
C. FUTURE APPLICATION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board (the "FASB") issued Financial
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises," which, as
amended, is effective for fiscal years beginning after December 15, 1995.
Interpretation No. 40 changes the current practice of mutual life
insurance companies with respect to utilizing statutory basis financial
statements for general purposes in that it would not allow such financial
statements to be referred to as having been prepared in accordance with
GAAP. Interpretation No. 40 requires GAAP financial statements of mutual
life insurance companies to apply all GAAP pronouncements, unless
specifically exempted. Implementation of Interpretation No. 40 will
require significant effort and judgment as to determining GAAP for mutual
insurance companies' insurance operations. The Company is currently
assessing the impact of Interpretation No. 40 on its consolidated
financial statements.
D. INVESTED ASSETS
Fixed maturities, which include long-term bonds and redeemable preferred
stock, are stated primarily at amortized cost. Equity securities, which
consist primarily of common stocks, are carried at market value, which is
based on quoted market prices, where available, or prices provided by
state regulatory authorities.
F-3
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
As of January 1, 1994, the non-insurance subsidiaries of The Prudential
adopted Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS No. 115").
Under SFAS No. 115, debt and marketable equity securities are classified
in three categories: held-to-maturity, available-for-sale and trading. The
effect of adopting SFAS No. 115 for the non-insurance subsidiaries was not
material.
Mortgage loans are stated primarily at unpaid principal balances. In
establishing reserves for losses on mortgage loans, management considers
expected losses on loans which they believe may not be collectible in full
and expected losses on foreclosures and the sale of mortgage loans.
Reserves established for potential or estimated mortgage loan losses are
included in the "Asset valuation reserve."
Policy loans are stated primarily at unpaid principal balances.
Investment real estate, except for real estate acquired in satisfaction of
debt, is carried at cost less accumulated straight-line depreciation ($748
million in 1994 and $859 million in 1993), encumbrances and permanent
impairments in value. Real estate acquired in satisfaction of debt,
included in "Other assets," is carried at the lower of cost or fair value
less disposition costs. Fair value is considered to be the amount that
could reasonably be expected in a current transaction between willing
parties, other than in forced or liquidation sale.
Included in "Other long-term investments" is the Company's net equity in
joint ventures and other forms of partnerships, which amounted to $3,357
million and $3,745 million as of December 31, 1994 and 1993, respectively.
The Company's share of net income from such entities was $354 million,
$375 million and $185 million for 1994, 1993 and 1992, respectively.
Short-term investments are stated at amortized cost, which approximates
fair value.
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are collateralized financing transactions and are
carried at their contract amounts plus accrued interest. These agreements
are generally collateralized by cash or securities with market values in
excess of the obligations under the contract. It is the Company's policy
to take possession of securities purchased under resale agreements and to
value the securities daily. The Company monitors the value of the
underlying collateral and collateral is adjusted when necessary.
Trading account securities from broker-dealer operations are reported
based upon quoted market prices with unrealized gains and losses reported
in "Broker-dealer revenue."
The Company has a securities lending program whereby large blocks of
securities are loaned to third parties, primarily major brokerage firms.
As of December 31, 1994 and 1993, the estimated fair values of loaned
securities were $6,765 million and $6,520 million, respectively. Company
and NAIC policies require a minimum of 102% and 105% of the fair value of
the domestic and foreign loaned securities, respectively, to be separately
maintained as collateral for the loans. Cash collateral received is
invested in "Short-term investments," which are reflected as assets in the
Consolidated Statements of Financial Position. The offsetting collateral
liability is included in the Consolidated Statements of Financial Position
in "Other liabilities" in the amounts of $2,385 million and $374 million
at December 31, 1994 and 1993, respectively. Non-cash collateral is
recorded in memorandum records and not reflected in the consolidated
financial statements.
Net unrealized investment gains and losses result principally from changes
in the carrying values of invested assets. Net unrealized investment
losses were $(32) million, $(195) million and $(268) million for the years
ended December 31, 1994, 1993 and 1992, respectively.
The asset valuation reserve (AVR) and the interest maintenance reserve
(IMR) are required reserves for life insurance companies. The AVR is
calculated based on a statutory formula and is designed to mitigate the
effect of valuation and credit-related losses on unassigned surplus.
F-4
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
The components of AVR at December 31, 1994 and 1993 are as follows:
1994 1993
----- -----
(IN MILLIONS)
Fixed maturities, equity securities
and short-term investments............. $ 930 $1,591
Mortgage loans.......................... 674 722
Real estate and other invested assets... 431 374
------ ------
Total AVR............................... $2,035 $2,687
====== ======
In 1993, the Company made a voluntary contribution to the mortgage loan
component of the AVR in the amount of $305 million.
The IMR is designed to reduce the fluctuations of surplus resulting from
market interest rate movements. Interest rate-related realized capital
gains and losses are generally deferred and amortized into investment
income over the remaining life of the investment sold. The IMR balance,
included in "Other policyholders' funds," was $502 million and $1,539
million at December 31, 1994 and 1993, respectively. Net realized
investment (losses)/gains of $(929) million, $1,082 million and $626
million were deferred during the years ended December 31, 1994, 1993 and
1992, respectively. IMR amounts amortized into investment income were $107
million, $118 million and $51 million for the years ended December 31,
1994, 1993 and 1992, respectively.
E. FUTURE POLICY BENEFITS, LOSSES AND CLAIMS
Reserves for individual life insurance are calculated using various
methods, interest rates and mortality tables, which produce reserves that
meet the aggregate requirements of state laws and regulations.
Approximately 39% of individual life insurance reserves are determined
using the net level premium method, or by using the greater of a net level
premium reserve or the policy cash value. About 56% of individual life
insurance reserves are calculated according to the Commissioner's Reserve
Valuation Method ("CRVM") or methods which compare CRVM reserves to policy
cash values.
For group life insurance, 24% of reserves are determined using net level
premium methods and various mortality tables and interest rates. About 53%
of group life reserves are associated with extended death benefits. For
the most part, these are calculated using modified group tables at various
interest rates. The remainder of group life reserves are unearned premium
reserves (calculated using the 1960 Commissioner's Standard Group Table),
reserves for group life fund accumulations and other miscellaneous
reserves. Reserves for group and individual annuity contracts are
determined using the Commissioner's Annuity Reserve Valuation Method.
For life insurance and annuities, unpaid claims include estimates of both
the death benefits on reported claims and those which are incurred but not
reported. Unpaid claims and claim adjustment expenses for other than life
insurance and annuities include estimates of benefits and associated
settlement expenses for reported losses and a provision for losses
incurred but not reported.
F-5
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Activity in the liability for unpaid claims and claim adjustment
expenses is:
1994 1993
----------------------- ------------------------
ACCIDENT PROPERTY ACCIDENT PROPERTY
AND AND AND AND
HEALTH CASUALTY HEALTH CASUALTY
--------- ---------- ---------- ----------
(IN MILLIONS)
Balance at January 1 ......... $ 2,654 $ 4,869 $ 2,623 $ 4,712
Less reinsurance recoverables 15 1,070 22 1,107
-------- -------- -------- --------
Net balance at January 1 ..... 2,639 3,799 2,601 3,605
-------- -------- -------- --------
Incurred related to:
Current year ................ 7,398 2,541 7,146 2,364
Prior years ................. (105) 158 (167) 109
-------- -------- -------- --------
Total incurred ............... 7,293 2,699 6,979 2,473
-------- -------- -------- --------
Paid related to:
Current year ................ 5,568 1,237 5,336 1,119
Prior years ................. 1,649 1,163 1,605 1,160
-------- -------- -------- --------
Total paid ................... 7,217 2,400 6,941 2,279
-------- -------- -------- --------
Net balance at December 31 ... 2,715 4,098 2,639 3,799
Plus reinsurance recoverables 23 1,018 15 1,070
-------- -------- -------- --------
Balance at December 31 ....... $ 2,738 $ 5,116 $ 2,654 $ 4,869
======== ======== ======== ========
As a result of changes in estimates of insured events in prior years, the
declines of $105 million and $167 million in the provision for claims and
claim adjustment expenses for accident and health business in 1994 and
1993, respectively, were due to lower-than-expected trends in claim costs
and an accelerated decline in indemnity health business.
As a result of changes in estimates of insured events in prior years, the
provision for claims and claim adjustment expenses for property and
casualty business (net of reinsurance recoveries of $47 million and $120
million in 1994 and 1993, respectively) increased by $158 million and $109
million in 1994 and 1993, respectively, due to increased loss development
and reserve strengthening for asbestos and environmental claims.
F. REVENUE RECOGNITION AND RELATED EXPENSES
Life premiums are recognized as income over the premium paying period of
the related policies. Annuity considerations are recognized as revenue
when received.
Health and property and casualty premiums are earned ratably over the
terms of the related insurance and reinsurance contracts or policies.
Unearned premium reserves are established to cover the unexpired portion
of premiums written. Such reserves are computed by pro rata methods for
direct business and are computed either by pro rata methods or using
reports received from ceding companies for reinsurance. Premiums which
have not yet been reported are estimated and accrued.
Expenses incurred in connection with acquiring new insurance business,
including such acquisition costs as sales commissions, are charged to
operations as incurred in "Insurance and underwriting expenses."
Commission revenues in "Broker-dealer revenue" and related broker-dealer
expenses in "General, administrative and other expenses" are accrued when
transactions are executed.
F-6
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
G. INCOME TAXES
Under the Internal Revenue Code ("the Code"), The Prudential and its life
insurance subsidiaries are taxed on their gain from operations after
dividends to policyholders. In calculating this tax, the Code requires the
capitalization and amortization of policy acquisition expenses.
The Code also imposes an "equity tax" on mutual life insurance companies
based on an imputed surplus which, in effect, reduces the deduction for
policyholder dividends. The amount of the equity tax is estimated in the
current year based on the anticipated equity tax rate, and is adjusted in
subsequent years as the rate is finalized.
The Prudential files a consolidated federal income tax return with all of
its domestic subsidiaries. The provision for taxes reported in these
financial statements also includes tax liabilities for the foreign
subsidiaries. Net operating losses of the non-life subsidiaries may be
used in this consolidated return, but are limited each year to the lesser
of 35% of cumulative eligible non-life subsidiary losses or 35% of life
company taxable income.
As of January 1, 1993, the non-insurance subsidiaries of The Prudential
adopted Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, such subsidiaries
recognize deferred tax liabilities or assets for the expected future tax
consequences of events that have been recognized in their financial
statements. Included in "Income tax (benefit)/provision" are deferred
taxes of $(477) million, $21 million and $(8) million for the years ended
December 31, 1994, 1993 and 1992, respectively. The cumulative effect of
adopting SFAS No. 109 was not material.
At December 31, 1994, the Company had consolidated non-life tax loss
carryforwards of $598 million which will expire between 1998 and 2009, if
not utilized.
H. SEPARATE ACCOUNTS
Separate Account assets and liabilities, reported in the Consolidated
Statements of Financial Position at estimated market value, represent
segregated funds which are administered for pension and other clients. The
assets consist of common stocks, long-term bonds, real estate, mortgages
and short-term investments. The liabilities consist of reserves
established to meet withdrawal and future benefit payment contractual
provisions. Investment risks associated with market value changes are
generally borne by the clients, except to the extent of minimum guarantees
made by the Company with respect to certain accounts. Separate Account net
investment income, realized and unrealized capital gains and losses,
benefit payments and change in reserves are included in "Current and
future benefits and claims."
I. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives used for trading purposes are recorded in the Consolidated
Statements of Financial Position at fair value at the reporting date.
Realized and unrealized changes in fair values are recognized in
"Broker-dealer revenue" and "Other income" in the Consolidated Statements
of Operations in the period in which the changes occur. Gains and losses
on hedges of existing assets or liabilities are included in the carrying
amount of those assets or liabilities and are deferred and recognized in
earnings in the same period as the underlying hedged item. For interest
rate swaps that qualify for settlement accounting, the interest
differential to be paid or received under the swap agreements is accrued
over the life of the agreements as a yield adjustment. Gains and losses on
early termination of derivatives that modify the characteristics of
designated assets and liabilities are deferred and are amortized as an
adjustment to the yield of the related assets or liabilities over their
remaining lives.
Derivatives used in activities that support life and health insurance and
annuity contracts are recorded at fair value with unrealized gains and
losses recorded in "Net unrealized investment (losses) and change in AVR."
Upon termination of derivatives supporting life and health insurance and
annuity contracts, the interest-related gains and losses are amortized
through the IMR.
2. RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets in the amounts of $5,901 million and $5,164 million at December 31,
1994 and 1993, respectively, were on deposit with governmental authorities or
trustees as required by law.
Assets valued at $5,855 million and $4,430 million at December 31, 1994 and
1993, respectively, were maintained as compensating balances or pledged as
collateral for bank loans and other financing agreements.
F-7
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Restricted cash of $455 million and $444 million at December 31, 1994 and
1993, respectively, was included in "Cash" in the Consolidated Statements of
Financial Position and Cash Flows.
3. FIXED MATURITIES
The carrying value and estimated fair value of fixed maturities at December
31, 1994 and 1993 are as follows:
1994 1993
------------------------------------------- -----------------------------------------------
GROSS GROSS ESTIMATED GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE VALUE GAINS LOSSES VALUE
-------- -------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies .......... $13,624 $ 123 $ 647 $13,100 $14,979 $ 754 $ 94 $15,639
Obligations of U.S. .....
states and their
political subdivisions 2,776 32 165 2,643 3,212 187 3 3,396
Fixed maturities issued
by foreign governments
and their agencies and
political subdivisions 3,101 37 153 2,985 2,716 188 3 2,901
Corporate securities .... 54,144 1,191 1,772 53,563 51,548 4,390 300 55,638
Mortgage-backed
securities ............ 4,889 82 148 4,823 6,478 257 220 6,515
Other fixed maturities .. 209 0 0 209 128 0 0 128
------- ------- ------- ------- ------- ------- ------- -------
Total ................... $78,743 $ 1,465 $ 2,885 $77,323 $79,061 $ 5,776 $ 620 $84,217
======= ======= ======= ======= ======= ======= ======= =======
The carrying value and estimated fair value of fixed maturities at December
31, 1994 categorized by contractual maturity, are shown below. Actual
maturities will differ from contractual maturities because borrowers may
prepay obligations with or without call or prepayment penalties.
ESTIMATED
CARRYING FAIR
VALUE VALUE
----------- -----------
(IN MILLIONS)
Due in one year or less .............. $ 2,746 $ 2,760
Due after one year through five years 24,405 24,000
Due after five years through ten years 18,972 18,536
Due after ten years .................. 27,731 27,204
------- -------
73,854 72,500
Mortgage-backed securities ........... 4,889 4,823
------- -------
Totals ............................... $78,743 $77,323
======= =======
Proceeds from the sale and maturity of fixed maturities during 1994, 1993 and
1992 were $82,834 million, $87,840 million and $73,326 million, respectively.
Gross gains of $693 million, $2,473 million and $2,034 million, and gross
losses of $2,009 million, $698 million and $530 million were realized on such
sales during 1994, 1993 and 1992, respectively (see Note 1D).
The Company invests in both investment grade and non-investment grade
securities. The Securities Valuation Office of the NAIC rates the fixed
maturities held by insurers (which account for approximately 98% of the
Company's total fixed maturities balance at December 31, 1994 and 1993) for
regulatory purposes and groups investments into six categories ranging from
highest quality bonds to those in or near default. The lowest three NAIC
categories represent, for the most part, high-yield securities and are
defined by the NAIC as including any security with a public agency rating of
B+ or B1 or less.
F-8
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Included in "Fixed maturities" are securities that are classified by the NAIC
as being in the lowest three rating categories. These approximate 1.6% and
2.0% of the Company's assets at December 31, 1994 and 1993, respectively. At
December 31, 1994 and 1993, their estimated fair value varied from the
carrying value by $(78) million and $42 million, respectively.
4. MORTGAGE LOANS
Mortgage loans at December 31, 1994 and 1993 are as follows:
1994 1993
----------------------- -------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
(IN MILLIONS)
Commercial and agricultural loans:
In good standing ......... $ 19,752 75.4% $ 20,916 76.0%
In good standing
with restructured terms 1,412 5.4% 1,177 4.3%
Past due 90 days or more . 339 1.3% 590 2.2%
In process of foreclosure 387 1.5% 415 1.5%
Residential loans .......... 4,309 16.4% 4,411 16.0%
-------- ------ -------- ------
Total mortgage loans ....... $ 26,199 100.0% $ 27,509 100.0%
======== ====== ======== ======
At December 31, 1994, the Company's mortgage loans were collateralized by the
following property types: office buildings (30%), retail stores (20%),
residential properties (17%), apartment complexes (12%), industrial buildings
(11%), agricultural properties (7%) and other commercial properties (3%). The
mortgage loans are geographically dispersed throughout the United States and
Canada with the largest concentrations in California (25%) and New York (8%).
Included in these balances are mortgage loans with affiliated joint ventures
of $684 million and $689 million at December 31, 1994 and 1993, respectively.
5. EMPLOYEE BENEFIT PLANS
A. PENSION PLANS
The Company has several defined benefit pension plans which cover
substantially all of its employees. The benefits are generally based on
career average earnings and credited length of service.
The Company's funding policy is to contribute annually the amount necessary
to satisfy the Internal Revenue Service contribution guidelines. The
pension plans are accounted for in accordance with Statement of Financial
Accounting Standards No. 87, "Employers' Accounting for Pensions" ("SFAS
No. 87").
Employee pension benefit plan status at September 30, 1994 and 1993 is as
follows:
1994 1993
-------- --------
(IN MILLIONS)
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested benefits of
$2,956 in 1994 and $3,053 in 1993 ........................ $(3,255) $(3,401)
======= =======
Projected benefit obligation ............................... (4,247) (4,409)
Plan assets at fair value .................................... 5,704 5,950
------- -------
Plan assets in excess of projected benefit obligation ........ 1,457 1,541
Unrecognized net asset existing at the date of the initial
application of SFAS No. 87 ................................. (980) (1,086)
Unrecognized prior service cost since initial application of
SFAS No. 87 ................................................ 228 253
Unrecognized net loss from actuarial experience since initial
application of SFAS No. 87 ................................. 9 25
Additional minimum liability ................................. (8) 0
------- -------
Prepaid pension cost ......................................... $ 706 $ 733
======= =======
F-9
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Plan assets consist primarily of equity securities, bonds, real estate and
short-term investments, of which $4,155 million are included in the
Consolidated Statement of Financial Position at December 31, 1994.
In compliance with statutory accounting principles, The Prudential's
prepaid pension costs of $765 million and $784 million at December 31,
1994 and 1993, respectively, were considered non-admitted assets. These
assets are excluded from the consolidated assets and the changes in these
non-admitted assets of ($19) million and $142 million in 1994 and 1993,
respectively, are reported in "General, administrative and other expenses"
in the Consolidated Statements of Operations.
The components of the net periodic pension expense/(benefit) for 1994 and
1993 are as follows:
1994 1993 1992
------ ------ ------
(IN MILLIONS)
Service cost - benefits earned during the year $ 163 $ 133 $ 133
Interest cost on projected benefit obligation 311 301 296
Actual return on assets ...................... 56 (854) (367)
Net amortization and deferral ................ (639) 301 (150)
Net charge for special termination benefits .. 156 0 0
----- ----- -----
Net periodic pension expense/(benefit) ...... $ 47 $(119) $ (88)
===== ===== =====
The net expense relating to the Company's pension plans is $28 million, $23
million and $29 million in 1994, 1993 and 1992, respectively, which considers
the changes in The Prudential's non-admitted prepaid pension asset of $(19)
million, $142 million and $117 million, respectively.
As a result of a special early retirement program, net curtailment gains and
special termination benefits of approximately $156 million are included in
the net periodic pension expense for the year ended December 31, 1994.
The assumptions used in 1994 and 1993 to develop the accumulated pension
benefit obligation were:
1994 1993
-------- --------
Discount rate ................................ 8.25-8.5% 7.0%
Expected long-term rate of return on assets... 8.5-9.0% 8.5-9.0%
Rate of increase in compensation levels ...... 5.0-5.5% 4.5-5.0%
B. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company provides certain life insurance and health care benefits for
its retired employees. Substantially all of the Company's employees may
become eligible to receive a benefit if they retire after age 55 with at
least 10 years of service.
Effective in 1993, the costs of postretirement benefits, with respect to
The Prudential, are recognized in accordance with the accounting policy
issued by the NAIC. The NAIC's policy is similar to Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," except that the NAIC policy excludes
non-vested employees. The Prudential has elected to amortize its
transition obligation over 20 years.
Prior to 1993, the Company's policy was to fund the cost of providing
these benefits in the years that the employees were providing services to
the Company. The Company defined this service period as originating at an
assumed entry age and terminating at an average retirement age. Annual
deposits to the fund were determined using the entry age normal actuarial
cost method, including amortization of prior service costs for employees'
services rendered prior to the initial funding of the plan. The provision
for the year ended December 31, 1992 was $143 million.
The Prudential's net periodic postretirement benefit cost required to be
recognized for 1994 and 1993, under the NAIC policy is $110 million and
$125 million, respectively. In 1994 and 1993, The Prudential voluntarily
accrued an additional $10 million and $62 million, respectively, which
represents a portion of the obligation for active non-vested employees
(the total of this obligation is $520 million and $594 million as of
December 31, 1994 and 1993, respectively).
Company funding of its postretirement benefit obligations totaled $31
million and $404 million in 1994 and 1993, respectively. The Company
contributes amounts to the plan in excess of covered expenses being paid.
F-10
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
The postretirement benefit plan status as of September 30, 1994 and 1993 is
as follows:
1994 1993
-------- --------
(IN MILLIONS)
Accumulated postretirement benefit obligation (APBO):
Retirees ........................................... $(1,337) $(1,211)
Fully eligible active plan participants ............ (188) (445)
------- -------
Total APBO ...................................... (1,525) (1,656)
Plan assets at fair value ............................ 1,304 1,335
------- -------
Accumulated postretirement benefit obligation in
excess of plan assets .............................. (221) (321)
Unrecognized transition obligation ................... 448 525
Unrecognized net (gain)/loss from actuarial experience (41) 69
------- -------
Prepaid postretirement benefit cost in accordance
with the NAIC accounting policy .................... 186 273
Additional amount accrued ............................ (72) (62)
------- -------
Prepaid postretirement benefit cost .................. $ 114 $ 211
======= =======
Plan assets consist of group and individual variable life insurance policies,
group life and health contracts and short-term investments, of which $996
million are included in the Consolidated Statement of Financial Position at
December 31, 1994.
In compliance with statutory accounting principles, The Prudential's prepaid
postretirement benefit costs of $127 million and $217 million at December 31,
1994 and 1993, respectively, are considered non-admitted assets. These assets
are excluded from the consolidated assets and the changes in these
non-admitted assets of $(90) million and $217 million in 1994 and 1993,
respectively, are reported in "General, administrative and other expenses" in
1994 and in "Issuance of capital notes" in 1993.
Net periodic postretirement benefit cost for 1994 and 1993 includes the
following components:
1994 1993
-------- --------
(IN MILLIONS)
Cost of newly eligible or vested employees... $ 38 $ 41
Interest cost ................................ 112 124
Actual return on plan assets ................. (98) (86)
Net amortization and deferral ................ (13) 15
Amortization of transition obligation ........ 23 39
Net charge for special termination benefits... 58 0
Additional contribution expense .............. 10 62
----- -----
Net periodic postretirement benefit cost ..... $ 130 $ 195
===== =====
The net reduction to surplus relating to the Company's postretirement benefit
plans is $40 million and $412 million in 1994 and 1993, respectively, which
considers the changes in the non-admitted prepaid postretirement benefit cost
of $(90) million and $217 million in 1994 and 1993, respectively.
As a result of a special early retirement program, curtailment expenses and
special termination benefits of approximately $58 million are included in the
net periodic postretirement benefit cost for the year ended December 31,
1994.
The assumptions used in 1994 and 1993 to measure the accumulated
postretirement benefits obligation were:
1994 1993
-------- --------
Discount rate ...................................... 8.25-8.5% 7.0-7.5%
Expected long-term rate of return on plan assets.... 9.0% 9.0%
Salary scale ....................................... 5.5% 5.0%
F-11
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
The health care cost trend rates used varied from 9.1% to 13.9%, depending
on the plan, with one plan being graded to 6.5% by the year 2012 and all
others being graded to 6.0% by 2006. Increasing the health care cost trend
rate by one percentage point in each year would increase the
postretirement benefit obligation as of September 30, 1994, by $243
million and the total of the cost of newly eligible or vested employees
and interest cost for 1994 by $21 million.
In 1994, the Company changed its method of accounting for the recognition
of costs and obligations relating to severance, disability and related
benefits to former or inactive employees after employment, but before
retirement, to an accrual method. Previously, these benefits were expensed
when paid. The effect of this change was to decrease surplus by
approximately $160 million in 1994.
6. NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings consisted of the following at December 31,
1994 and 1993:
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------------ ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
BALANCE COST OF FUNDS BALANCE COST OF FUNDS
-------- ---------------- -------- --------------
(IN MILLIONS)
Short-term debt..... $ 9,188 5.7% $ 9,435 3.7%
Long-term debt...... 2,821 6.5% 3,919 5.3%
------- -------
$12,009 $13,354
======= =======
Scheduled repayments of long-term debt as of December 31, 1994, are as
follows: $594 million in 1995, $269 million in 1996, $362 million in 1997,
$268 million in 1998, $666 million in 1999, and $662 million thereafter. As
of December 31, 1994, the Company had $8,120 million in lines of credit from
numerous financial institutions of which $3,925 million were unused.
7. CAPITAL NOTES
In 1993, The Prudential issued 6.875% Fixed Rate Capital Notes ("the notes")
in the aggregate principal amount of $300 million. The notes mature on April
15, 2003, and may not be redeemed prior to maturity and will not be entitled
to any sinking fund. The notes are subordinated in right of payment to all
claims of policyholders and to senior indebtedness. Payment of the principal
amount of the notes at maturity is subject to the following conditions: (i)
The Prudential shall not be in payment default with respect to any senior
indebtedness or class of policyholders, (ii) no state or federal agency shall
have instituted proceedings seeking reorganization, rehabilitation or
liquidation of The Prudential, and (iii) immediately after making such
payment, Total Adjusted Capital would exceed 200% of its Authorized Control
Level Risk-Based Capital. The terms "Total Adjusted Capital" and "Authorized
Control Level" are defined by the Risk-Based Capital for Life and/or Health
Insurers Model Act. The payment of interest on the notes is subject to
satisfaction of conditions (i) and (ii) above. Unpaid accrued interest
amounted to $25 million at December 31, 1994 and 1993. The net proceeds from
the notes, approximately $298 million, were contributed to a voluntary
employee benefit association trust to prefund certain obligations of The
Prudential to provide postretirement medical and other benefits. This
resulted in a prepaid asset, which is non-admitted for statutory purposes.
The net increase to surplus from the issuance of the notes, including a tax
benefit of $104 million less the charge-off of the non-admitted asset of $217
million, was $185 million (see Note 5B).
8. SPECIAL SURPLUS FUND
The special surplus fund includes required contingency reserves of $1,097
million and $1,091 million as of December 31, 1994 and 1993, respectively.
9. FAIR VALUE INFORMATION
The fair value amounts have been determined by the Company using available
information and reasonable valuation methodologies for those accounts for
which fair value disclosures are required. Considerable judgment is
necessarily applied in interpreting data to develop the estimates of fair
value. Accordingly, the estimates presented may not be realized in a current
market exchange. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair values. The
following methods and assumptions were used in calculating the fair values.
(For all other financial instruments presented in the table, the carrying
value is a reasonable estimate of fair value.)
F-12
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
FIXED MATURITIES. Fair values for fixed maturities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. Fair values for private placement securities
are estimated using a discounted cash flow model which considers the current
market spreads between the U.S. Treasury yield curve and corporate bond yield
curve, adjusted for the type of issue, its current quality and its remaining
average life. The fair value of certain non-performing private placement
securities is based on amounts provided by state regulatory authorities.
MORTGAGE LOANS. The fair value of residential mortgages is based on recent
market trades or quotes, adjusted where necessary for differences in risk
characteristics. The fair value of the commercial mortgage and agricultural
loan portfolio is primarily based upon the present value of the scheduled
cash flows discounted at the appropriate U.S. Treasury rate, adjusted for the
current market spread for a similar quality mortgage. For certain
non-performing and other loans, fair value is based upon the value of the
underlying collateral.
POLICY LOANS. The estimated fair value of policy loans is calculated using a
discounted cash flow model based upon current U.S. Treasury rates and
historical loan repayments.
DERIVATIVE FINANCIAL INSTRUMENTS. The fair value of swap agreements is
estimated based on the present value of future cash flows under the
agreements discounted at the applicable zero coupon U.S. Treasury rate and
swap spread. The fair value of forwards and futures is estimated based on
market quotes for a transaction with similar terms, while the fair value of
options is based principally on market quotes. The fair value of loan
commitments is estimated based on fees actually charged or those currently
charged for similar arrangements, adjusted for changes in interest rates and
credit quality subsequent to origination.
INVESTMENT-TYPE INSURANCE CONTRACT LIABILITIES. Fair values for the Company's
investment-type insurance contract liabilities are estimated using a
discounted cash flow model, based on interest rates currently being offered
for similar contracts.
NOTES PAYABLE AND OTHER BORROWINGS. The estimated fair value of notes payable
and other borrowings is based on the borrowing rates currently available to
the Company for debt with similar terms and maturities.
The following table discloses the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1994 and 1993:
1994 1993
------------------------------- ----------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- -------- ---------
(IN MILLIONS)
Financial assets:
Fixed maturities ..................... $78,743 $77,323 $79,061 $84,217
Equity securities .................... 2,327 2,327 2,216 2,216
Mortgage loans ....................... 26,199 24,955 27,509 28,004
Policy loans ......................... 6,631 6,018 6,456 6,568
Short-term investments ............... 10,630 10,630 6,304 6,304
Securities purchased under
agreements to resell ............... 5,591 5,591 9,656 9,656
Trading account securities ........... 6,218 6,218 8,586 8,586
Cash ................................. 1,109 1,109 1,666 1,666
Broker-dealer receivables ............ 7,311 7,311 9,133 9,133
Assets held in Separate Accounts ..... 48,633 48,633 48,110 48,110
Financial liabilities:
Investment-type insurance contracts .. 39,747 38,934 41,149 42,668
Securities sold under agreements
to repurchase ...................... 8,919 8,919 14,703 14,703
Notes payable and other borrowings ... 12,009 11,828 13,354 13,625
Broker-dealer payables ............... 5,144 5,144 5,410 5,410
Liabilities related to Separate
Accounts ............................. 47,946 47,946 47,475 47,475
Derivative financial instruments - net
(see Note 10) ...................... 392 397 253 303
F-13
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
10. DERIVATIVE AND OFF-BALANCE-SHEET CREDIT-RELATED INSTRUMENTS
A. DERIVATIVE FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 119, "Disclosures about
Derivative Financial Instruments and Fair Value of Financial
Instruments," effective for 1994, requires certain disclosures about
derivative financial instruments and other financial instruments with
similar characteristics ("derivatives"). Derivatives include swaps,
forwards, futures, options and loan commitments subject to market risk,
all of which are used by the Company in the normal course of business in
both trading and other than trading activities.
The Company uses derivatives in trading activities primarily to meet the
financing and hedging needs of its customers and to trade for its own
account. The Company also uses derivatives for purposes other than
trading to reduce exposure to interest rate, currency and other forms of
market risk.
The table below summarizes the Company's outstanding positions by
derivative instrument as of December 31,1994. The amounts presented are
classified as either trading or other than trading, based on
management's intent at the time of contract inception and throughout the
life of the contract. The table includes the estimated fair values of
outstanding derivative positions only and does not include the fair
values of associated financial and non-financial assets and liabilities,
which generally offset derivative fair values. The fair value amounts
presented do not reflect the netting of amounts pursuant to rights of
setoff, qualifying master netting agreements with counterparties or
collateral arrangements. The table shows that less than 5% of derivative
fair values were not reflected in the Company's Consolidated Statement
of Financial Position.
DERIVATIVE FINANCIAL INSTRUMENTS
AS OF DECEMBER 31, 1994
(IN MILLIONS)
TRADING OTHER THAN TRADING
-------------------- ----------------------
ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ---------- -------- ----------
Swaps Assets $13,852 $ 837 $ 184 $ 9
Liabilities 14,825 1,216 4,993 48
Forwards Assets 21,988 300 2,720 24
Liabilities 19,898 289 3,112 19
Futures Assets 1,520 40 4,296 17
Liabilities 1,878 35 505 3
Options Assets 2,924 31 2,407 8
Liabilities 3,028 38 2,217 2
Loan commitments Assets 0 0 212 2
Liabilities 0 0 1,543 15
------- ------- ------- -------
Total Assets $40,284 $ 1,208 $ 9,819 $ 60
======= ======= ======= =======
Liabilities $39,629 $ 1,578 $12,370 $ 87
======= ======= ======= =======
TOTAL
----------------------------------------------
CARRYING ESTIMATED
NOTIONAL AMOUNT FAIR VALUE
-------- -------- ----------
Swaps Assets $14,036 $ 845 $ 846
Liabilities 19,818 1,236 1,264
Forwards Assets 24,708 312 324
Liabilities 23,010 299 308
Futures Assets 5,816 30 57
Liabilities 2,383 35 38
Options Assets 5,331 34 39
Liabilities 5,245 40 40
Loan commitments Assets 212 (2) 2
Liabilities 1,543 1 15
------- ------- -------
Total Assets $50,103 $ 1,219 $ 1,268*
======= ======= =======
Liabilities $51,999 $ 1,611 $ 1,665*
======= ======= =======
* $1,233 of Assets and $1,596 of Liabilities are reflected in the Consolidated
Statement of Financial Position
F-14
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
DERIVATIVES HELD FOR TRADING PURPOSES. The Company uses derivatives for
trading purposes in securities broker-dealer activities and in a
limited-purpose swap subsidiary. Net trading revenues for the year ended
December 31, 1994, relating to forwards, futures and swaps were $107 million,
$33 million and $8 million, respectively. Net trading revenues for options
were not material. Average fair value for trading derivatives in an asset
position during the year ended December 31, 1994, was $1,526 million and for
derivatives in a liability position was $1,671 million. Of those derivatives
held for trading purposes at December 31, 1994, 60.0% of notional consisted
of interest rate derivatives, 33.7% consisted of foreign exchange
derivatives, and 6.3% consisted of equity and commodity derivatives.
DERIVATIVES HELD FOR PURPOSES OTHER THAN TRADING. Of the total notional of
derivatives held for purposes other than trading at December 31, 1994, 23.0%
were used by the Company to hedge its investment portfolio to reduce interest
rate, currency and other market risks, 75.8% were used to hedge interest rate
risk related to the Company's mortgage banking subsidiary activities, and
1.2% were used to hedge interest and currency risks associated with the
Company's debt issuances. Of those derivatives held for purposes other than
trading at December 31, 1994, 85.0% of notional consisted of interest rate
derivatives, 13.9% consisted of foreign exchange derivatives, and 1.1%
consisted of equity and commodity derivatives.
Derivatives used to hedge the Company's investment portfolio, including
futures, options and forwards, are typically short-term in nature and are
intended to minimize exposure to market fluctuations or to change the
characteristics of the Company's asset/liability mix, consistent with the
Company's risk management activities. At December 31, 1994, net gains of $0.7
million relating to futures used as hedges of anticipated bond investments
were deferred and included in "Other liabilities." The investments being
hedged are expected to be made in the first quarter of 1995. The Company's
mortgage banking subsidiary hedges the interest rate risk associated with
mortgage loans and mortgage-backed securities held for sale and with unfunded
loans for which a rate of interest has been guaranteed. At December 31, 1994,
net gains of $0.8 million relating to forwards, futures and options used as
hedges of unfunded loan commitments were deferred as "Other liabilities." The
deferred gains were included in the carrying amounts of the loans when
funded, which is generally within sixty days from the commitment date. The
Company's mortgage banking subsidiary also hedges its exposure to future
changes in interest rates on interest-sensitive liabilities and hedges the
prepayment risk associated with its mortgage servicing portfolio. At December
31, 1994, net gains of $6.5 million relating to futures used as hedges of
anticipated borrowings were deferred and included in "Other liabilities." The
borrowings being hedged are expected to be issued by early 1996. The Company
also uses derivatives, particularly swaps and forwards, to manage the
interest rate and foreign exchange risks associated with its notes payable
and other borrowings.
B. OFF-BALANCE-SHEET CREDIT-RELATED INSTRUMENTS
During the normal course of its business, the Company is party to financial
instruments with off-balance-sheet credit risk such as commitments, financial
guarantees, loans sold with recourse and letters of credit. Commitments
include commitments to purchase and sell mortgage loans, the unfunded portion
of commitments to fund investments in private placement securities, and
unused credit card and home equity lines. The Company also provides financial
guarantees incidental to other transactions and letters of credit that
guarantee the performance of customers to third parties. These credit-related
financial instruments have off-balance-sheet credit risk because only their
origination fees, if any, and accruals for probable losses, if any, are
recognized in the Consolidated Statements of Financial Position until the
obligation under the instrument is fulfilled or expires. These instruments
can extend for several years and expirations are not concentrated in any
period. The Company seeks to control credit risk associated with these
instruments by limiting credit, maintaining collateral where customary and
appropriate, and performing other monitoring procedures.
The notional amount of these instruments, which represents the Company's
maximum exposure to credit loss from other parties' non-performance, was
$17,389 million and $18,666 million at December 31, 1994 and 1993,
respectively. Because many of these amounts expire without being advanced in
whole or in part, the amounts do not represent future cash flows. The above
notional amounts include $4,150 million and $3,066 million of unused
available lines of credit under credit card and home equity commitments as of
December 31, 1994 and 1993, respectively. The Company has not experienced,
and does not anticipate experiencing, all of its customers exercising their
entire available lines of credit at any given point in time.
The estimated fair value of off-balance-sheet credit related instruments was
$(91.3) million and $13.0 million at December 31, 1994 and 1993,
respectively. The total fair value at December 31, 1994, includes $(13.3)
million for fixed-rate loan commitments, which are subject to market risk.
The estimated fair value was determined based on fees currently charged for
similar arrangements, adjusted for changes in interest rate and credit
quality that occurred subsequent to origination.
F-15
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
11. CONTINGENCIES
A. ENVIRONMENTAL-RELATED CLAIMS
The Company receives claims under expired contracts which assert alleged
injuries and/or damages relating to or resulting from toxic torts, toxic
waste and other hazardous substances. The liabilities for such claims
cannot be estimated by traditional reserving techniques. As a result of
judicial decisions and legislative actions, the coverage afforded under
these contracts may be expanded beyond their original terms. Extensive
litigation between insurers and insureds over these issues continues and
the outcome is not predictable, nor is there any clear emerging trend.
In establishing the unpaid claim reserves for these losses, management
considered the available information. However, given the expansion of
coverage and liability by the courts and legislatures in the past, and
potential for other unfavorable trends in the future, the ultimate cost
of these claims could increase from the levels currently established.
B. LAWSUITS
Various lawsuits against the Company have arisen in the course of the
Company's business. In certain of these matters, large and/or
indeterminate amounts are sought.
In 1993, Prudential Securities Incorporated (PSI), a subsidiary of The
Prudential, entered into an agreement with the Securities and Exchange
Commission, the National Association of Securities Dealers, Inc., and
state securities commissions whereby PSI agreed to pay $330 million into
a settlement fund to pay eligible claims on certain limited partnership
matters. Under this agreement, if partnership matter claims exceed the
established settlement fund, PSI is obligated to pay such additional
claims.
In October 1994, the United States Attorney for the Southern District of
New York (the "U.S. Attorney") filed a complaint against PSI in
connection with its sale of certain limited partnerships.
Simultaneously, PSI entered into an agreement to comply with certain
conditions for a period of three years, and to pay an additional $330
million into the settlement fund. At the end of the three-year period,
assuming PSI has fully complied with the terms of the agreement, the
U.S. Attorney will institute no further action.
In the opinion of management, PSI is in compliance with all provisions
of the aforementioned agreements and, after consideration of applicable
accruals, the ultimate liability of such litigation, including
partnership settlement matters, will not have a material adverse effect
on the Company's financial position.
12. SUBSEQUENT EVENTS
Several purported class actions and individual actions have been
brought against the Company on behalf of those persons who purchased life
insurance policies allegedly because of deceptive sales practices engaged
in by the Company and its insurance agents in violation of state and
federal laws. The sales practices alleged to have occurred are contrary to
Company policy. Some of these cases seek very substantial damages while
others seek unspecified compensatory, punitive and treble damages. The
majority of these cases were filed after March 1, 1995. The Company intends
to defend these cases vigorously.
In response to this litigaton, several state insurance departments have
initiated investigations or market conduct examinations relating to
Prudential's sales practices. The Attorney General of two states have also
made inquires.
Litigation is subject to many uncertainties, and given the complexity
and scope of these suits, their outcome cannot be predicted. It is also not
possible to predict the likely results of any regulatory inquires or their
effect on this litigation or other litigation which might be initiated in
response to widespread media coverage of these matters.
Accordingly, management is unable to make a meaningful estimate of the
amount or range of loss that could result from an unfavorable outcome of
all pending litigation. It is possible that the results of operations or
cash flows of the Company in particular quarterly or annual periods could
be materially affected by an ultimate unfavorable outcome of certain
pending litigation matters.
Management believes, however, that the ultimate outcome of all pending
litigation should not have a material adverse effect on the Company's
financial position.
F-16
17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying consolidated statements of financial
position of The Prudential Insurance Company of America and subsidiaries as
of December 31, 1994 and 1993, and the related consolidated statements of
operations and changes in surplus and asset valuation reserve and of cash
flows for each of the three years in the period ended December 31, 1994.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Prudential Insurance Company
of America and subsidiaries as of December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
March 1, 1995, except for Note 12,
as to which the date is April 25, 1995
F-17
PRUDENTIAL SURVIVORSHIP PREFERRED(SM)
INSURANCE CONTRACTS
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Prudential Plaza
Newark, New Jersey 07102-3777
Telephone: (800) 445-4571
PART II
OTHER INFORMATION
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
UNDERTAKING WITH RESPECT TO INDEMNIFICATION
The Prudential Directors' and Officers' Liability and Corporation Reimbursement
Program, purchased by The Prudential from Aetna Casualty & Surety Company, CNA
Insurance Company, Lloyds of London, Great American Insurance Company, Reliance
Insurance Company, Corporate Officers & Directors Assurance Ltd., A.C.E.
Insurance Company, Ltd., XL Insurance Company, Ltd., and Zurich-American
Insurance Company, provides coverage for "Loss" (as defined in the policies)
arising from any claim or claims by reason of any actual or alleged act, error,
misstatement, misleading statement, omission, or breach of duty by persons in
the discharge of their duties solely in their capacities as directors or
officers of The Prudential, any of its subsidiaries, or certain investment
companies affiliated with The Prudential. Coverage is also provided to the
individual directors or officers for such Loss, for which they shall not be
indemnified. Loss essentially is the legal liability on claims against a
director or officer, including adjudicated damages, settlements and reasonable
and necessary legal fees and expenses incurred in defense of adjudicatory
proceedings and appeals therefrom. Loss does not include punitive or exemplary
damages or the multiplied portion of any multiplied damage award, criminal or
civil fines or penalties imposed by law, taxes or wages, or matters which are
insurable under the law pursuant to which the policies are construed.
There are a number of exclusions from coverage. Among the matters excluded are
Losses arising as the result of (1) claims brought about or contributed to by
the criminal or deliberate fraudulent acts of a director or officer, and (2)
claims arising from actual or alleged performance of, or failure to perform,
services as, or in any capacity similar to, an investment adviser, investment
banker, underwriter, broker or dealer, as those terms are defined in the
Securities Act of 1933, the Securities Exchange Act of 1934, the Investment
Advisers Act of 1940, the Investment Company Act of 1940, any rules or
regulations thereunder, or any similar federal, state or local statute, rule or
regulation.
The limit of coverage under the Program for both individual and corporate
reimbursement coverage is $150,000,000. The retention for corporate
reimbursement coverage is $10,000,000 per loss.
The relevant provisions of New Jersey law permitting or requiring
indemnification, New Jersey being the state of organization of The Prudential,
can be found in Section 14A:3-5 of the New Jersey Statutes Annotated. The text
of The Prudential's by-law 27, which relates to indemnification of officers and
directors, is incorporated by reference to Exhibit 1.A.(6)(b) to this
Registration Statement.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-1
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of 86 pages.
The undertaking to file reports.
The undertaking with respect to indemnification.
The signatures.
Written consents of the following persons:
1. Deloitte & Touche LLP
2. Clifford E. Kirsch, Esq.
3. Andy Mirchuk, FSA, MAAA
The following exhibits:
1. The following exhibits correspond to those required by paragraph A
of the instructions as to exhibits in Form N-8B-2:
A. (1) Resolution of Board of Directors of The Prudential
Insurance Company of America establishing The Prudential
Variable Appreciable Account. (Note 2)
(2) Not Applicable.
(3) Distributing Contracts:
(a) Distribution Agreement between Pruco Securities
Corporation and The Prudential Insurance Company of
America.(Note 4)
(b) Proposed form of Agreement between Pruco Securities
Corporation and independent brokers with respect to
the Sale of the Contracts.(Note 4)
(c) Schedules of Sales Commissions.(Note 1)
(4) Not Applicable.
(5) Survivorship Preferred Variable Appreciable Life Insurance
Contract: (Note 4)
(6) (a) Charter of The Prudential Insurance Company of
America, as amended February 26, 1989. (Note 4)
(b) By-laws of The Prudential Insurance Company of
America, as amended January 10, 1995. (Note 3)
(7) Not Applicable.
(8) Not Applicable.
(9) Not Applicable.
(10) (a) Application Form. (Note 4)
(b) Supplement to the Application. (Note 4)
(11) Form of Notice of Withdrawal Right. (Note 1)
(12) Memorandum describing The Prudential's issuance,
transfer, and redemption procedures for the Contracts
pursuant to Rule 6e-3(T)(b)(12)(iii) and method of
computing adjustments in payments and cash surrender
values upon conversion to fixed-benefit policies
pursuant to Rule 6e-3(T)(b)(13)(v)(B). (Note 4)
(13) Available Contract Riders and Endorsements:
(a) Option to Exchange for Separate Contracts. (Note 4)
(b) Rider for Term Insurance Benefit on Life of Second
Insured to Die. (Note 4)
(c) Rider for Term Insurance Benefit. (Note 4)
2. See Exhibit 1.A.(5).
3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality
of the securities being registered.(Note 1)
4. None.
5. Not Applicable.
II-2
6. Opinion and Consent of Andy Mirchuk, FSA, MAAA, as to actuarial
matters pertaining to the securities being registered. (Note 1)
7. The Prudential's representations regarding mortality and expense
risks and sales loads. (Note 4)
8. Powers of Attorney:
(a) F. Agnew, F. Becker, W. Boeschenstein
L. Carter, Jr., J. Cullen, C. Davis, R. Enrico
A. Gilmour, W. Gray, III, J. Hanson, C. Horner
A. Jacobson, G. Keith, B. Malkiel, J. Opel
A. Ryan, C. Sitter, D. Staheli, R. Thomson
P. Vagelos, S. Van Ness, P. Volcker, J. Williams (Note 2)
(b) M. Grier (Note 4)
27. Financial Data Schedule. (Note 1)
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Post-Effective Amendment No. 15
to Form S-6, Registration No. 33-20000, filed May 1, 1995.
(Note 3) Incorporated by reference to Post-Effective Amendment No. 26 to
Form N-3, Registration No. 2-76580, filed May 1, 1995.
(Note 4) Incorporated by reference to Registrant's From S-6, filed July 17,
1995.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant, The
Prudential Variable Appreciable Account, has duly caused this Pre-Effective
Amendment No. 1 to the Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, and its seal hereunto affixed and
attested, all in the city of Newark and the State of New Jersey, on this 15th
day of December, 1995.
(Seal) THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
(Registrant)
By: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Depositor)
Attest: /s/ THOMAS C. CASTANO By: /s/ ANDY MIRCHUK
------------------------- ----------------------------
Thomas C. Castano Andy Mirchuk
Assistant Secretary Vice President and Assistant
Actuary
Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities indicated on this 15th day of December,
1995.
SIGNATURE AND TITLE
-------------------
/s/ *
- ------------------------------------
Arthur C. Ryan
Chairman of the Board, President and
Chief Executive Officer
/s/ *
- ------------------------------------
Garnett L. Keith, Jr.
Vice Chairman and Director
/s/ * *By: /s/ THOMAS C. CASTANO
- ------------------------------------ ---------------------------
Mark B. Grier Thomas Castano
Principal Financial Officer (Attorney-in-Fact)
/s/ *
- ------------------------------------
Franklin E. Agnew
Director
/s/ *
- ------------------------------------
Frederic K. Becker
Director
/s/ *
- ------------------------------------
William W. Boeschenstein
Director
/s/*
- ------------------------------------
Lisle C. Carter, Jr.
Director
/s/ *
- ------------------------------------
James G. Cullen
Director
/s/ *
- ------------------------------------
Carolyne K. Davis
Director
II-4
/s/ *
- ------------------------------------
Roger A. Enrico
Director
/s/ * *By: /s/ THOMAS C. CASTANO
- ------------------------------------ ---------------------------
Allan D. Gilmour Thomas Castano
Director (Attorney-in-Fact)
/s/ *
- ------------------------------------
William H. Gray, III
Director
/s/ *
- ------------------------------------
Jon F. Hanson
Director
/s/ *
- ------------------------------------
Constance J. Horner
Director
/s/ *
- ------------------------------------
Allen F. Jacobson
Director
/s/ *
- ------------------------------------
Burton G. Malkiel
Director
/s/ *
- ------------------------------------
John R. Opel
Director
/s/ *
- ------------------------------------
Charles R. Sitter
Director
/s/ *
- ------------------------------------
Donald L. Staheli
Director
/s/ *
- ------------------------------------
Richard M. Thomson
Director
/s/ *
- ------------------------------------
P. Roy Vagelos, M.D.
Director
/s/ *
- ------------------------------------
Stanley C. Van Ness
Director
/s/ *
- ------------------------------------
Paul A. Volcker
Director
/s/ *
- ------------------------------------
Joseph H. Williams
Director
II-5
EXHIBIT INDEX
Consent of Deloitte & Touche LLP, independent
auditors. Page II-6
1.A.(3)(c) Schedule of Sales Commissions. Page II-8
1.A.(11) Form of Notice of Withdrawal Right. Page II-10
3. Opinion and Consent of Clifford E. Kirsch, Esq. as to
the legality of the securities being registered. Page II-12
6. Opinion and Consent of Andy Mirchuk, FSA, MAAA, as to
actuarial matters pertaining to the securities being
registered. Page II-14
27. Financial Data Schedule. Page II-16
II-6