AS FILED WITH THE SEC ON _______________. REGISTRATION NO. 333-64957
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
----------------------
PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
(Exact Name of Trust)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(800) 437-4016
(Address and telephone number of principal executive offices)
---------------------
THOMAS C. CASTANO
ASSISTANT SECRETARY
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 BROAD STREET
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
---------------------
Variable Universal Life Insurance Contracts--The Registrant hereby elects to
register an indefinite amount of securities pursuant to Rule 24f-2 under the
Investment Company Act of 1940.
Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
This filing is being made pursuant to Rules 6c-3 and 6e-3(T) under the
Investment Company Act of 1940.
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. Introduction and Summary; Short-Term
Cancellation Right, or "Free Look"; Type
of Death Benefit; Changing the Type of
Death Benefit; Premiums; Contract Date;
Allocation of Premiums; Transfers; Dollar
Cost Averaging, Auto-Rebalancing; Charges
and Expenses; How a Contract's Cash
Surrender Value Will Vary; How a Type A
(Fixed) Contract's Death Benefit Will
Vary; How a Type B (Variable) Contract's
Death Benefit Will Vary; Surrender of a
Contract; Withdrawals; Increases in Basic
Insurance Amount; Decreases in Basic
Insurance Amount; Lapse and Reinstatement;
When Proceeds are Paid; Riders; Other
General Contract Provisions; Voting
Rights; Substitution of Fund Shares
11. Introduction and Summary; The Prudential
Variable Appreciable Account
12. Cover Page; Introduction and Summary; The
Funds; Sale of the Contract and Sales
Commissions
13. Introduction and Summary; The Funds;
Charges and Expenses; Sale of the Contract
and Sales Commissions
14. Introduction and Summary; Requirements for
Issuance of a Contract
15. Introduction and Summary; Allocation of
Premiums; Transfers; Dollar Cost
Averaging, Auto-Rebalancing; The Fixed-
Rate Option
16. Introduction and Summary; Detailed
Information for Prospective Contract
Owners
17. When Proceeds are Paid
N-8B-2 ITEM NUMBER LOCATION
------------------ --------
18. The Prudential Variable Appreciable
Account
19. Reports to Contract Owners
20. Not Applicable
21. Contract Loans
22. Not Applicable
23. Not Applicable
24. Other General Contract Provisions
25. The Prudential Variable Appreciable
Account
26. Introduction and Summary; The Funds;
Charges and Expenses
27. The Prudential Insurance Company of
America; The Funds
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
N-8B-2 ITEM NUMBER LOCATION
------------------ --------
44. Introduction and Summary; The Funds; How a
Contract's Cash Surrender Value Will Vary;
How a Type A (Fixed) Contract's Death
Benefit Will Vary; How a Type B (Variable)
Contract's Death Benefit Will Vary
45. Not Applicable
46. Introduction and Summary; The Prudential
Variable Appreciable Account; The Funds
47. The Prudential Variable Appreciable
Account; The Funds
48. Not Applicable
49. Not Applicable
50. Not Applicable
51. Not Applicable
52. Substitution of Fund Shares
53. Tax Treatment of Contract Benefits
54. Not Applicable
55. Not Applicable
56. Not Applicable
57. Not Applicable
58. Not Applicable
59. Financial Statements; Financial Statements
of the Variable Universal Life Subaccounts
of the Prudential Variable Appreciable
Account; Consolidated Financial Statements
of The Prudential Insurance Company of
America and Subsidiaries
PART I
INFORMATION REQUIRED IN PROSPECTUS
Variable Universal Life
Insurance
PROSPECTUS
The Prudential
Variable Appreciable Account
December 31, 1998
[LOGO] Prudential
PROSPECTUS
December 31, 1998
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
VARIABLE UNIVERSAL LIFE
This prospectus describes a flexible premium variable universal life insurance
contract (the "Contract") offered by The Prudential Insurance Company of America
("Prudential"). The Contract provides life insurance coverage with flexible
premium payments and a variety of investment options. You must pay an initial
premium, after which you can pay premium amounts as desired, as long as
sufficient money is in the Contract Fund to cover all charges. Your Contract may
lapse without value if your Contract Fund has insufficient value. You may select
either of two death benefit types, a fixed death benefit or a variable death
benefit. The variable death benefit will vary with the performance of the
investment options you select. For each type, there are generally two death
benefit guarantees, each of which can be secured by a certain level of premium
payments.
You may choose to invest your Contract's premiums and its earnings in the
following ways:
Invest in one or more of 15 available subaccounts of The Prudential Variable
Appreciable Account, each of which invests in a corresponding portfolio of the
Funds indicated below:
THE PRUDENTIAL SERIES FUND, INC. (THE "SERIES FUND")
. Money Market . High Yield Bond . Equity
. Diversified Bond . Stock Index . Prudential Jennison
. Conservative Balanced . Equity Income . Global
. Flexible Managed
AIM VARIABLE INSURANCE FUNDS, INC. AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
AIM V.I. Value Fund American Century VP Value Fund
JANUS ASPEN SERIES MFS(R) VARIABLE INSURANCE TRUST
Growth Portfolio Emerging Growth Series
T. ROWE PRICE INTERNATIONAL SERIES, INC.
International Stock Portfolio
Invest in the fixed-rate option, which pays a guaranteed interest rate.
Prudential will credit interest daily on any portion of the premium payment that
you have allocated to the fixed-rate option at rates periodically declared by
Prudential, in its sole discretion. Any such interest rate will never be less
than an effective annual rate of 4%.
This prospectus describes the Contract generally and the The Prudential Variable
Appreciable Account. The attached prospectuses for the Funds and their related
statements of additional information describe the investment objectives and the
risks of investing in the portfolios. Prudential may add additional investment
options in the future. Please read this prospectus and keep it for future
reference.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 Broad Street
Newark, New Jersey 07102-3777
Telephone: (800) 437-4016
PROSPECTUS CONTENTS
PAGE
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS......................... 1
INTRODUCTION AND SUMMARY..................................................... 2
BRIEF DESCRIPTION OF THE CONTRACT........................................... 2
CHARGES..................................................................... 2
TYPES OF DEATH BENEFIT...................................................... 4
PREMIUM PAYMENTS............................................................ 5
REFUND...................................................................... 5
GENERAL INFORMATION ABOUT THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, THE
PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS
AVAILABLE UNDER THE CONTRACT................................................. 6
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA................................. 6
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT................................. 6
THE FUNDS................................................................... 6
THE FIXED-RATE OPTION....................................................... 9
WHICH INVESTMENT OPTION SHOULD BE SELECTED?................................. 9
DETAILED INFORMATION FOR PROSPECTIVE CONTRACT OWNERS.........................10
REQUIREMENTS FOR ISSUANCE OF A CONTRACT.....................................10
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK.................................10
TYPE OF DEATH BENEFIT.......................................................10
CHANGING THE TYPE OF DEATH BENEFIT..........................................10
PREMIUMS....................................................................11
DEATH BENEFIT GUARANTEE.....................................................12
CONTRACT DATE...............................................................13
ALLOCATION OF PREMIUMS......................................................13
TRANSFERS...................................................................14
DOLLAR COST AVERAGING.......................................................14
AUTO-REBALANCING............................................................14
CHARGES AND EXPENSES........................................................15
HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY.............................18
HOW A TYPE A (FIXED) CONTRACT'S DEATH BENEFIT WILL VARY.....................18
HOW A TYPE B (VARIABLE) CONTRACT'S DEATH BENEFIT WILL VARY..................19
SURRENDER OF A CONTRACT.....................................................20
WITHDRAWALS.................................................................20
INCREASES IN BASIC INSURANCE AMOUNT.........................................21
DECREASES IN BASIC INSURANCE AMOUNT.........................................21
WHEN PROCEEDS ARE PAID......................................................22
LIVING NEEDS BENEFIT........................................................22
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
LAPSE AND REINSTATEMENT.....................................................28
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS.........28
OTHER GENERAL CONTRACT PROVISIONS...........................................28
RIDERS......................................................................29
PARTICIPATION IN DIVISIBLE SURPLUS..........................................29
VOTING RIGHTS...............................................................29
SUBSTITUTION OF FUND SHARES.................................................30
REPORTS TO CONTRACT OWNERS..................................................30
STATE REGULATION............................................................30
EXPERTS.....................................................................30
LITIGATION..................................................................31
YEAR 2000 COMPLIANCE........................................................32
ADDITIONAL INFORMATION......................................................33
FINANCIAL STATEMENTS........................................................33
SUBSEQUENT EVENTS...........................................................34
DIRECTORS AND OFFICERS OF PRUDENTIAL.........................................34
FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE
PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT......................................A1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA AND SUBSIDIARIES..........................................B1
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--The 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.
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 and, during the first 10 Contract years, minus the
applicable surrender charge.
CONTRACT--The variable universal life insurance contract 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
we have charged that is not yet due and that we have not yet added to the loan.
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 OWNER--Unless a different owner is named in the application, the owner
of the Contract is the insured.
CONTRACT YEAR--A year that starts on the Contract date or on a Contract
anniversary. For any portion of a Contract representing an increase (see page
21), "Contract year" is a year that starts on the effective date of the
increase.
DEATH BENEFIT--The amount we will pay upon the death of the insured before
reduction of any Contract debt and amounts needed to pay charges through the
date of death.
FACE AMOUNT--The same as the "basic insurance amount."
FIXED-RATE OPTION--An investment option under which interest is accrued daily
at a rate that Prudential declares periodically, but not less than an effective
annual rate of 4%.
FUNDS--Mutual funds with separate portfolios. One or more of the available Fund
portfolios may be chosen as an underlying investment for the Contract.
LIFETIME DEATH BENEFIT GUARANTEE PERIOD--The lifetime of the Contract, during
which time the Lifetime Death Benefit Guarantee is available if sufficient
premiums are paid. See DEATH BENEFIT GUARANTEE, page 12.
LIMITED DEATH BENEFIT GUARANTEE PERIOD--A period which is determined on a case-
by-case basis, during which time the Limited Death Benefit Guarantee is
available if sufficient premiums are paid. See DEATH BENEFIT GUARANTEE, page
12.
MONTHLY DATE--The Contract date and the same date in each subsequent month.
SUBACCOUNT--An investment division of the Account, the assets of which are
invested in the shares of the corresponding portfolio of the Funds.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--Us, we, Prudential. The company
offering the Contract.
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT (THE "ACCOUNT")--A separate account
of Prudential registered as a unit investment trust under the Investment Company
Act of 1940.
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 Funds are calculated, which is
generally at 4:15 p.m. Eastern time on each day during which the New York Stock
Exchange is open.
VARIABLE INVESTMENT OPTIONS--The subaccounts.
WE--The Prudential Insurance Company of America.
YOU--The owner of the Contract.
1
INTRODUCTION AND SUMMARY
This Summary provides a brief overview of the more significant aspects of the
Contract. We provide further detail in the subsequent sections of this
prospectus and in the Contract. The Contract, including the application
attached to it, constitutes the entire agreement between you and Prudential and
you should retain these documents.
As you read this prospectus you should keep in mind that this is a life
insurance contract. VARIABLE LIFE INSURANCE has significant investment aspects
and requires you to make investment decisions and therefore it is also a
"security." Securities that are offered to the public must be registered with
the Securities and Exchange Commission. The prospectus that is a part of the
registration statement must be given to all prospective purchasers. A
substantial part of the premium pays for life insurance that will pay a benefit
to the beneficiary, in the event of the insured's death. This death benefit
generally far exceeds your total premium payments. Therefore, you should not
buy this Contract unless the major reason for the purchase is to provide life
insurance protection.
BRIEF DESCRIPTION OF THE CONTRACT
The Contract is a form of variable universal life insurance. It is based on a
Contract Fund, the value of which changes every business day. The chart below
describes how the value of your Contract Fund changes.
You may invest premiums in one or more of the 15 available subaccounts or in the
fixed-rate option. Your Contract Fund value changes every day depending upon
the change in the value of the particular investment options that you have
selected.
Although the value of your Contract Fund will increase if there is favorable
investment performance in the subaccounts you select, there is a 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 9.
If you select the fixed-rate option, Prudential credits your account 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%.
CHARGES
The following chart outlines the components of your Contract Fund and the
adjustments which may be made including the maximum charges which may be
deducted from each premium payment and from the amounts held in the designated
investment options. These charges are largely designed to cover insurance costs
and risks as well as sales and administrative expenses. The maximum charges
shown in the chart, as well as the current lower charges, are fully described
under CHARGES AND EXPENSES, page 15.
2
PREMIUM PAYMENT
[LINE DOWN]
. less an administrative charge of up to 7.5% of the
premiums.
. less a charge for sales expenses of up to 4% of the
premiums paid.
[LINE DOWN]
INVESTED PREMIUM AMOUNT
To be invested in one or a combination of:
. 15 investment portfolios of the Funds
. The fixed-rate option
[LINE DOWN]
CONTRACT FUND
On the Contract Date, the Contract Fund is equal to the invested premium amount
minus any of the charges described below which may be due on that date.
Thereafter, the value of the Contract Fund changes daily.
PRUDENTIAL ADJUSTS THE CONTRACT FUND FOR:
. Addition of any new invested premium amounts.
. Addition of any increase due to investment results of the chosen variable
investment options.
. Addition of guaranteed interest at an effective annual rate of 4% (plus any
excess interest if applicable) on the portion of the Contract Fund allocated
to the fixed-rate option.
. Addition of guaranteed interest at an effective annual rate of 4% on the
amount of any Contract loan. (Separately, interest charged on the loan
accrues at an effective annual rate of 4.5% or 5%. See CONTRACT LOANS, page
25.)
. Subtraction of any decrease due to investment results of the chosen variable
investment options.
. Subtraction of any amount withdrawn.
. Subtraction of the charges listed below, as applicable.
[LINE DOWN]
DAILY CHARGES
. Management fees and expenses are deducted from the Fund assets.
. We deduct a daily mortality and expense risk charge, equivalent to an annual
rate of up to 0.9%, from the variable investment options assets.
3
MONTHLY CHARGES
. We reduce the Contract Fund by a monthly administrative charge of up to $10
plus $0.07 per $1,000 of the basic insurance amount; after the first Contract
year, the $0.07 per $1,000 portion of the charge is reduced to $0.01 per
$1,000 of the basic insurance amount.
. We deduct a cost of insurance ("COI") charge.
. We reduce the Contract Fund by a Death Benefit Guarantee risk charge of $0.01
per $1,000 of the basic insurance amount.
. If the Contract includes riders, we deduct rider charges from the Contract
Fund.
. If the rating class of an insured results in an extra charge, we will deduct
that charge from the Contract Fund.
POSSIBLE ADDITIONAL CHARGES
. During the first 10 Contract years, we will assess a contingent deferred sales
charge if the Contract lapses, is surrendered, or the basic insurance amount
is decreased (including as a result of a withdrawal or a death benefit type
change). For insureds age 76 or less at issue, the maximum contingent deferred
sales charge is 26% of the lesser of the target level premium or the actual
premiums paid (see PREMIUMS, page 11) for the Contract. The charge is level
for six years and then declines monthly to zero at the end of the 10th
Contract year. For insureds age 77 or over at issue, the maximum charge will
be a lesser percentage of the target level premium for the Contract or the
actual premiums paid.
. During the first 10 Contract years, we will assess a contingent deferred
administrative charge if the Contract lapses, is surrendered or the basic
insurance amount is decreased (including as a result of a withdrawal or a
death benefit type change). This charge equals the lesser of: (a) $5 per
$1,000 of basic insurance amount; and (b) $500. It is level for six years and
then declines monthly until it reaches zero at the end of the 10th Contract
year.
. We assess an administrative charge of up to $25 for any withdrawals.
. We may assess an administrative charge of up to $25 for any change in basic
insurance amount.
. We assess an administrative charge of up to $25 for each transfer exceeding 12
in any Contract year.
TYPES OF DEATH BENEFIT
There are two types of death benefit available. You may choose a Contract with
a Type A (fixed) death benefit under which the cash surrender value varies daily
with investment experience, and the death benefit generally remains at the basic
insurance amount you initially chose. However, the Contract Fund may grow to a
point where the death benefit may increase and vary with investment experience.
If you choose a Contract with a Type B (variable) death benefit, the cash
surrender value and the death benefit both vary with investment experience. For
either type of death benefit, as long as the Contract is inforce, the death
benefit will never be less than the basic insurance amount shown in your
Contract. See TYPE OF DEATH BENEFIT, page 10.
4
PREMIUM PAYMENTS
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, you choose the timing and amount of premium payments. The
Contract will remain inforce if the Contract Fund less any applicable surrender
charges is greater than zero and more than any Contract debt. However, if the
accumulated premiums you pay are high enough, and Contract debt does not equal
or exceed the Contract Fund less any applicable surrender charges, Prudential
guarantees that your Contract will not lapse even if investment experience is
very unfavorable and the Contract Fund drops below zero. Each Contract
generally provides two guarantees, one that lasts 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 28.
We offer and suggest regular billing of premiums even though you decide when to
make premium payments and, subject to a $25 minimum, in what amounts. You
should discuss your billing options with your Prudential representative when you
apply for the Contract. See PREMIUMS, page 11.
REFUND
For a limited time, you may return your Contract for a refund in accordance with
the terms of its "free look" provision. See SHORT-TERM CANCELLATION RIGHT OR
"FREE LOOK," page 10.
For the DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, see page 1.
THE REPLACEMENT OF LIFE INSURANCE IS GENERALLY NOT IN THE INTEREST OF THE
CUSTOMER. WHEN A CUSTOMER REQUIRES ADDITIONAL COVERAGE, IN MOST CASES, THE
BENEFITS OF THE EXISTING CONTRACT CAN BE PROTECTED BY PURCHASING ADDITIONAL
INSURANCE OR A SUPPLEMENTAL CONTRACT. IF YOU ARE CONSIDERING REPLACING A
CONTRACT, YOU SHOULD COMPARE THE BENEFITS AND COSTS OF SUPPLEMENTING YOUR
EXISTING CONTRACT WITH THE BENEFITS AND COSTS OF PURCHASING THE CONTRACT
DESCRIBED IN THIS PROSPECTUS AND YOU SHOULD CONSULT WITH A QUALIFIED TAX
ADVISER.
THIS PROSPECTUS MAY ONLY BE OFFERED IN JURISDICTIONS IN WHICH THE OFFERING IS
LAWFUL. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
PROSPECTUSES AND THE STATEMENTS OF ADDITIONAL INFORMATION FOR THE FUNDS.
5
GENERAL INFORMATION ABOUT THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,
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 ("Prudential") is a mutual insurance
company, founded in 1875 under the laws of the State of New Jersey. Prudential
is currently considering reorganizing itself into a stock company. This form of
reorganization, known as demutualization, is a complex process that could take
two years to complete. No plan of demutualization has been adopted yet by
Prudential's Board of Directors. Any plan of reorganization adopted by the Board
of Directors would have to be approved by qualified policyholders and
appropriate state insurance regulators. Throughout the process, there will be a
continuing evaluation by the Board of Directors and management of Prudential as
to the desirability of demutualization. The Board of Directors, in its
discretion, may choose not to demutualize or to delay demutualization for a
time.
Prudential is licensed to sell life insurance and annuities in the District of
Columbia, Guam, U. S. Virgin Islands, and in all states. This Contract is only
offered in New York State.
Prudential's consolidated financial statements begin on page B1 and should be
considered only as bearing upon 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 federal securities
laws. The Account holds assets that are segregated from all of Prudential's
other assets.
The obligations to Contract owners and beneficiaries arising under the Contract
are general corporate obligations of Prudential. Prudential is also the legal
owner of the assets in the Account. Prudential will 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 Prudential conducts. In addition to these assets, the Account's assets
may include funds contributed by Prudential to commence operation of the Account
and may include accumulations of the charges Prudential makes against the
Account. From time to time these additional assets may be withdrawn by
Prudential.
The Account is a unit investment trust, which is a type of investment company.
It is registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940 ("1940 Act"). This does not involve any
supervision by the SEC of the management, investment policies, or practices of
the Account. For state law purposes, the Account is treated as a part or
division of Prudential.
Currently, you may invest in one or a combination of 15 available subaccounts
within the Account, each of which invests in a single corresponding portfolio of
the Funds. Prudential may add additional subaccounts in the future. The
Account's financial statements begin on page A1.
THE FUNDS
The following is a list of the Funds, the portfolios' investment objectives and
investment advisers:
THE PRUDENTIAL SERIES FUND, INC. (THE "SERIES FUND"):
. MONEY MARKET PORTFOLIO: The maximum current income that is consistent with
stability of capital and maintenance of liquidity through investment in high-
quality short-term debt obligations. There are no assurances that this
portfolio will maintain a stable net asset value.
. DIVERSIFIED BOND PORTFOLIO: A high level of income over the longer term while
providing reasonable safety of capital through investment primarily in readily
marketable intermediate and long-term fixed income securities that provide
attractive yields but do not involve substantial risk of loss of capital through
default.
6
. CONSERVATIVE BALANCED PORTFOLIO: Achievement of a favorable total investment
return consistent with a portfolio having a conservatively managed 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 prefers a relatively lower risk of loss than
that associated with the Flexible Managed Portfolio while recognizing that this
reduces the chances of greater appreciation.
. FLEXIBLE MANAGED PORTFOLIO: Achievement of a high total return consistent
with a portfolio having an aggressively managed 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.
. HIGH YIELD BOND PORTFOLIO: Achievement of a high total return through
investment in high yield/high risk fixed income securities in the medium to
lower quality ranges.
. STOCK INDEX PORTFOLIO: Achievement of investment results that correspond to
the price and yield performance of publicly traded common stocks in the
aggregate by following a policy of attempting to duplicate the price and yield
performance of the Standard & Poor's 500 Composite Stock Price Index.
. EQUITY INCOME PORTFOLIO: Both current income and capital appreciation through
investment primarily in common stocks and convertible securities that provide
favorable prospects for investment income returns above those of the Standard &
Poor's 500 Composite Stock Price Index or the New York Stock Exchange Composite
Index.
. EQUITY PORTFOLIO: Capital appreciation through investment primarily in common
stocks of companies, including major established corporations as well as smaller
capitalization companies, that appear to offer attractive prospects of price
appreciation that are superior to broadly-based stock indices. Current income,
if any, is incidental.
. PRUDENTIAL JENNISON PORTFOLIO: Long-term growth of capital through investment
primarily in equity securities of established companies with above-average
growth prospects. Current income, if any, is incidental.
. GLOBAL PORTFOLIO: Long-term growth of capital through investment primarily in
common stock and common stock equivalents of foreign and domestic issuers.
Current income, if any, is incidental.
Prudential is the investment adviser for the assets of each of the portfolios of
the Series Fund. Prudential's principal business address is 751 Broad Street,
Newark, New Jersey 07102-3777. Prudential has a Service Agreement with its
wholly-owned subsidiary, The Prudential Investment Corporation ("PIC"). The
Service Agreement provides that, subject to Prudential's supervision, PIC will
furnish investment advisory services in connection with the management of the
Series Fund. In addition, Prudential has entered into a Subadvisory Agreement
with its wholly-owned subsidiary Jennison Associates LLC ("Jennison"), under
which Jennison furnishes investment advisory services in connection with the
management of the Prudential Jennison Portfolio.
AIM VARIABLE INSURANCE FUNDS, INC.:
. AIM V.I. VALUE FUND. To achieve long-term growth of capital by investing
primarily in equity securities judged by A I M Advisors, Inc. to be undervalued
relative to the current or projected earnings of the companies issuing the
securities, or relative market values of assets owned by the companies issuing
the securities or relative to the equity market generally. Income is a
secondary objective and would be satisfied principally from the income (interest
and dividends) generated by the common stocks, convertible bonds and convertible
preferred stocks that make up the Fund's portfolio.
A I M Advisors, Inc. ("AIM") is the investment adviser for this fund. The
principal business address for AIM is 11 Greenway Plaza, Suite 100, Houston,
Texas 77046-1173.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.:
. AMERICAN CENTURY VP VALUE FUND. Seeks long-term capital growth with income as
a secondary objective. The fund seeks to achieve its objective by investing
primarily in equity securities of well-established companies with intermediate-
to-large market capitalizations that are believed by management to be
undervalued at the time of purchase.
7
American Century Investment Management, Inc. ("ACIM") is the investment adviser
for this fund. ACIM's principal business address is American Century Tower,
4500 Main Street, Kansas City, Missouri 64111. The Principal Underwriter of the
fund is American Century Services, Inc., located at 4500 Main Street, Kansas
City, Missouri 64111.
JANUS ASPEN SERIES:
. GROWTH PORTFOLIO. Seeks long-term growth of capital in a manner consistent
with the preservation of capital.
Janus Capital Corporation is the investment adviser and is responsible for the
day-to-day management of the portfolio and other business affairs of the
portfolio. Janus Capital Corporation's principal business address is 100
Fillmore Street, Denver, Colorado 80206-4928.
MFS(R) VARIABLE INSURANCE TRUSTSM:
. EMERGING GROWTH SERIES. Seeks to provide long-term growth of capital.
Dividend and interest income from portfolio securities, if any, is incidental to
the Series' investment objective of long-term growth of capital.
Massachusetts Financial Services Company, a Delaware corporation, is the
investment adviser to this MFS Series. The principal business address for the
Massachusetts Financial Services Company is 500 Boylston Street, Boston,
Massachusetts 02116.
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
. INTERNATIONAL STOCK PORTFOLIO. Long-term growth of capital through
investments primarily in common stocks of established, non-U.S. companies.
Rowe Price-Fleming International, Inc. is the investment manager for this fund.
The principal business address for Rowe Price-Fleming International, Inc. is 100
East Pratt Street, Baltimore, Maryland 21202.
Further information about Fund portfolios can be found in the attached
prospectuses and their statements of additional information for each Fund.
The investment advisers for the Funds charge a daily investment management fee
as compensation for their services. These fees are described in the table in
the DEDUCTIONS FROM PORTFOLIOS section on page 15, and are more fully described
in the prospectus for each Fund.
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 funds. Although neither the companies which invest in the Funds nor the
Funds currently foresee any such disadvantage, the Board of Directors for each
Fund 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. 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
Funds; or (4) differences between voting instructions given by variable life
insurance and variable annuity contract owners.
Prudential may be compensated by an affiliate of each of the Funds (other than
the Prudential Series Fund) based upon an annual percentage of the average
assets held in the Fund by Prudential under the Contracts. These percentages
vary by Fund, and reflect administrative and other services provided by
Prudential.
A FULL DESCRIPTION OF THE FUNDS, THEIR INVESTMENT OBJECTIVES, MANAGEMENT,
POLICIES, RESTRICTIONS, EXPENSES, INVESTMENT RISKS, AND ALL OTHER ASPECTS OF
THEIR OPERATION IS CONTAINED IN THE ATTACHED PROSPECTUSES FOR EACH FUND AND IN
THE RELATED STATEMENTS OF ADDITIONAL INFORMATION, WHICH SHOULD BE READ IN
CONJUNCTION WITH THIS PROSPECTUS. THERE IS NO ASSURANCE THAT THE INVESTMENT
OBJECTIVES OF THE FUNDS WILL BE MET.
8
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 PRUDENTIAL HAS
BEEN ADVISED THAT THE STAFF OF THE SEC HAS NOT REVIEWED THE DISCLOSURE IN THIS
PROSPECTUS RELATING TO THE FIXED-RATE OPTION. ANY INACCURATE OR MISLEADING
DISCLOSURE REGARDING THE FIXED-RATE OPTION MAY, HOWEVER, SUBJECT PRUDENTIAL AND
ITS DIRECTORS TO CIVIL LIABILITY IF THAT RESULTS IN ANY DAMAGE.
You may choose to invest, either initially or by transfer, all or part of your
Contract Fund to a fixed-rate option. This amount becomes part of Prudential's
general account. The general account consists of all assets owned by Prudential
other than those in the Account and in other separate accounts that have been or
may be established by Prudential. Subject to applicable law, Prudential has
sole discretion over the investment of the general account assets. Contract
owners do not share in the investment experience of those assets. Instead,
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
Prudential declares periodically, but not less than an effective annual rate of
4%.
Currently, the following steps are taken for crediting interest rates: (1)
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;
(2) a new crediting rate will apply to that money until the first day of the
same month in the next year; (3) a new declared crediting rate will apply to
that money for the remainder of that calendar year; (4) a new crediting rate
will be declared each year for that money and it will remain in effect for the
entire calendar year. Prudential reserves the right to change this practice.
Prudential is not obligated to credit interest at a higher rate than 4%,
although it 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 are subject to strict limits, see
TRANSFERS, page 14. The payment of any cash surrender value attributable to the
fixed-rate option may be delayed up to six months, see WHEN PROCEEDS ARE PAID,
page 22.
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,
portfolios such as the Stock Index, Equity Income, Equity, Prudential Jennison,
Global, AIM V.I. Value Fund, American Century VP Value Fund, Janus Growth, MFS
Emerging Growth Series or T. Rowe Price International Stock may be desirable
options if you are willing to accept such volatility in your Contract values.
Each of these equity portfolios involves 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 Diversified Bond Portfolio.
Or, you may want even greater safety of principal and may prefer the Money
Market Portfolio or the fixed-rate option, recognizing that the level of short-
term rates may change rather rapidly. If you are willing to take risks and
possibly achieve a higher total return, you may prefer the High Yield Bond
Portfolio, recognizing that the risks are greater for lower quality bonds with
higher yields. You may wish to divide your invested premium among two or more
of the portfolios. You may wish to obtain diversification by relying on
Prudential's judgment for an appropriate asset mix by choosing the Conservative
Balanced or Flexible Managed Portfolio.
Your choice should take into account how willing you are to accept investment
risks, how your other assets are invested, and what investment results you may
experience in the future. You should consult your Prudential representative from
time to time about the choices available to you under the Contract. Prudential
recommends AGAINST frequent transfers among the several options. Experience
generally indicates that "market timing" investing, particularly by non-
professional investors, is likely to prove unsuccessful.
9
DETAILED INFORMATION FOR
PROSPECTIVE CONTRACT OWNERS
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
The Contract may generally be issued on insureds below the age of 81.
Currently, the minimum basic insurance amount that can be applied for is
$100,000. Prudential requires evidence of insurability, which may include a
medical examination, before issuing any Contract. Non-smokers are offered the
most favorable cost of insurance rates. A higher cost of insurance rate and/or
an additional amount 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. You can request a refund by mailing or delivering the Contract to
the representative who sold it or to the 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, with no
adjustment for investment experience.
TYPE OF DEATH BENEFIT
You may select either of two types of death benefit. Generally, a Contract with
a Type A (fixed) death benefit has a death benefit equal to the basic insurance
amount. This type of death benefit does not vary with the investment
performance of the investment options you selected, except in certain
circumstances. See HOW A TYPE A (FIXED) CONTRACT'S DEATH BENEFIT WILL VARY,
page 18. The payment of additional premiums and favorable investment results of
the variable investment options to which the assets are allocated will generally
increase the cash surrender value. See HOW A CONTRACT'S CASH SURRENDER VALUE
WILL VARY, page 18.
A Contract with a Type B (variable) death benefit has a death benefit which will
generally equal the basic insurance amount plus the Contract Fund. Since the
Contract Fund is a part of the death benefit, 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 Type A (fixed)
Contract. This is because, given two Contracts with the same basic insurance
amount and equal Contract Funds, generally the cost of insurance charge for a
Type B (variable) Contract will be greater. See HOW A CONTRACT'S CASH SURRENDER
VALUE WILL VARY, page 18 and HOW A TYPE B (VARIABLE) CONTRACT'S DEATH BENEFIT
WILL VARY, page 19. Unfavorable investment performance will result in decreases
in the death benefit and in the cash surrender value. But, as long as the
Contract is not in default, the death benefit may not fall below the basic
insurance amount stated in the Contract.
In choosing a death benefit type, you should also consider whether you intend to
use the withdrawal feature. Contract owners of Type A (fixed) Contracts should
note that any withdrawal may result in a reduction of the basic insurance amount
and the deduction of any applicable surrender charges. In addition, we will not
allow you to make a withdrawal that will decrease the basic insurance amount
below the minimum basic insurance amount. See WITHDRAWALS, page 20.
CHANGING THE TYPE OF DEATH BENEFIT
You may change the type of death benefit on or after the first Contract
anniversary and subject to Prudential's approval. 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.
If you are changing your Contract's type of death benefit from Type A (fixed) to
Type B (variable), we will reduce the basic insurance amount by the amount in
your Contract Fund on the date the change takes place. The basic insurance
amount after the change may not be lower than the minimum basic insurance amount
applicable to the Contract. If you are changing from a Type B (variable) to a
Type A (fixed) death benefit, 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.
10
CHANGING THE DEATH CHANGING THE DEATH
BENEFIT FROM BENEFIT FROM
TYPE A [RIGHT ARROW] TYPE B TYPE B [RIGHT ARROW] TYPE A
(Fixed) (Variable) (Variable) (Fixed)
- ------------------------------------------------------------------------------------
BASIC INSURANCE
AMOUNT $300,000 [RIGHT ARROW] $250,000 $250,000 [RIGHT ARROW] $300,000
CONTRACT FUND $50,000 = $50,000 $50,000 = $50,000
DEATH BENEFIT $300,000 = $300,000 $300,000 = $300,000
- -------------------------------------------------------------------------------------
Changing your Contract's type of death benefit from Type A (fixed) to Type B
(variable) during the first 10 Contract years may result in the assessment of
surrender charges. In addition, we reserve the right to make an administrative
processing charge of up to $25 for any change in basic insurance amount,
although we do not currently do so. See CHARGES AND EXPENSES, page 15.
To request a change, fill out an application for change which can be obtained
from your Prudential representative or a Home Office. If the change is
approved, we will recompute the Contract's charges and appropriate tables and
send you new Contract data pages. We may require you to 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 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 death benefit by more than it
increases the Contract Fund. See HOW A TYPE A (FIXED) CONTRACT'S DEATH BENEFIT
WILL VARY, page 18 and HOW A TYPE B (VARIABLE) CONTRACT'S DEATH BENEFIT WILL
VARY, page 19. 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.
The Contract has several types of "premiums" which are described below.
Understanding them will help you understand how the Contract works.
MINIMUM INITIAL PREMIUM -- the premium needed to start the Contract. There
is no insurance under the Contract unless the minimum initial premium is
paid.
GUIDELINE PREMIUMS -- the premiums that, if paid at the beginning of each
Contract year, will keep the Contract inforce for the lifetime of the insured
regardless of investment performance, assuming no loans or withdrawals.
These guideline premiums will be higher for a Type B (variable) Contract than
for a Type A (fixed) Contract. For a Contract with no 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 -- the premiums that, if paid at the beginning of each
Contract year, will keep the Contract inforce during the Limited Death
Benefit Guarantee period regardless of investment performance, 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 -- the target premium at issue minus any premiums
associated with riders or with aviation, avocation, occupational or temporary
extra insurance charges. We use the target level premium in calculating the
contingent deferred sales charges. See CHARGES AND EXPENSES, page 15.
11
We can bill you for the 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 inforce if: (1) the
Contract Fund, less any applicable surrender charges, is greater than zero and
more than any Contract debt or (2) you have paid sufficient premiums, on an
accumulated basis, to meet the Death Benefit Guarantee conditions and Contract
debt is not equal to or greater than the Contract Fund, less any applicable
surrender charges. You may also pay premiums automatically through pre-
authorized monthly transfers from a bank checking account. If you elect to use
this feature, you choose the day of the month on which premiums will be paid and
the amount of the 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, sufficient premium
payments, on an accumulated basis, will guarantee that your Contract will not
lapse and a death benefit will be paid upon the death of the insured. 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 not being equal to or greater than the Contract Fund less any applicable
surrender charges. See CONTRACT LOANS, page 25. You should consider the
importance of the Death Benefit Guarantee to you when deciding what amounts of
premiums to pay into the Contract.
For purposes of determining this guarantee, we generally 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 payable
death benefits. They are values used solely to determine if a Death Benefit
Guarantee is in effect. The Lifetime Death Benefit Guarantee Values are shown
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 insured's age, sex, smoker/non-smoker
status, death benefit type 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. For certain insureds, generally those who are
older and/or in a substandard risk classification, the Limited Death Benefit
Guarantee period may be of short duration.
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. At each Monthly 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 equal or exceed the Contract Fund less any
applicable surrender charges, then the Contract is kept inforce, 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 along with
corresponding Limited Death Benefit Guarantee periods. The examples assume the
insured is a male, non-smoker, with no extra risk or substandard ratings, and no
extra benefit riders added to the Contract.
12
BASIC INSURANCE AMOUNT -- $250,000
Illustrative Annual Premiums
- ----------------------------------------------------------------------------------------------------------------
AGE OF TYPE OF DEATH GUIDELINE TARGET PREMIUM
INSURED AT BENEFIT CHOSEN PREMIUM CORRESPONDING TO
ISSUE CORRESPONDING TO LIMITED DEATH
THE LIFETIME DEATH BENEFIT GUARANTEE
BENEFIT GUARANTEE VALUES AND
VALUES NUMBER OF YEARS OF
GUARANTEE
- ----------------------------------------------------------------------------------------------------------------
35 Type A (fixed) $ 3,532.50 $ 2,007.50 for 35 years
35 Type B (variable) $ 12,037.50 $ 2,007.50 for 33 years
45 Type A (fixed) $ 5,462.50 $ 2,977.50 for 25 years
45 Type B (variable) $ 17,147.50 $ 2,977.50 for 23 years
55 Type A (fixed) $ 8,897.50 $ 5,770.00 for 20 years
55 Type B (variable) $ 25,607.50 $ 5,770.00 for 18 years
- ----------------------------------------------------------------------------------------------------------------
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. If you
desire the death benefit guarantee for lifetime protection, you may prefer to
pay generally higher premiums in all years, rather than trying to make such
payments on an as needed basis. 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 cause 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 application date or the
medical examination date. If the first premium is not paid with the
application, the Contract date will be the date on which the first premium is
paid and the Contract is delivered. Under certain circumstances, we may allow
the Contract to be backdated for the purpose of lowering the insured's issue
age, but only to a date not earlier than six months prior to the application
date. 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, we will
credit the initial premium as of the date of receipt and will deduct any charges
due on or before that date.
ALLOCATION OF PREMIUMS
On the Contract date, the charge for sales expenses and the premium based
administrative charge 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. If the
first premium is received before the Contract date, there will be a period
during which the Contract owner's initial premium will not be invested. See
CHARGES AND EXPENSES, page 15.
The charge for sales expenses and the premium based administrative charge also
apply to all subsequent premium payments. The remainder will be invested as of
the end of the valuation period in which it is received at a Home Office, 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 Home Office or by telephoning a Home
Office, provided you are enrolled to use the Telephone Transfer System. 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%.
13
TRANSFERS
You may, up to 12 times 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 12 in any
Contract year. All or a portion of the amount credited to a subaccount may be
transferred.
Transfers will take effect as of the end of the valuation period in which a
proper transfer request is received at a Home Office. The request may be in
terms of dollars, such as a request to transfer $5,000 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 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
the Contract is jointly owned or you elect not to have this privilege.
Telephone transfers may not be available on Contracts that are assigned (see
ASSIGNMENT, page 28), depending on the terms of the assignment.
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.
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.
Only one transfer from the fixed-rate option will be permitted during each
Contract year. 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. Prudential may change these limits in the future.
We may waive these restrictions for limited periods of time in a non-
discriminatory way, (e.g., when interest rates are declining).
The Contract was not designed for professional market timing organizations,
other organizations, or individuals using programmed, large, or frequent
transfers. A pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to the subaccounts and will be discouraged. If such
a pattern were to be found, we may be required to modify the transfer
procedures, including but not limited to, not accepting transfer requests of an
agent under a power of attorney on behalf of more than one Contract owner.
DOLLAR COST AVERAGING
Under the Dollar Cost Averaging ("DCA") feature, either fixed dollar amounts or
a percentage of the amount designated for use under the DCA option will be
transferred periodically from the DCA Money Market Subaccount into other
subaccounts 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 designate, 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 allocation or cancellation of the feature. Currently, a
transfer that occurs under the DCA feature is not counted towards the 12 free
transfers permitted each Contract year; however, we reserve the right to change
this practice.
AUTO-REBALANCING
As an administrative practice, we are currently offering a feature called Auto-
Rebalancing. This feature allows you to automatically rebalance subaccount
assets at specified intervals based on percentage allocations that you choose.
For example, suppose your initial investment allocation of variable investment
options X and Y is split 40% and 60%, respectively. Then, due to investment
results, that split changes. You may instruct that those assets be rebalanced
to your original or different allocation percentages.
Auto-Rebalancing can be performed on a monthly, quarterly, semi-annual or annual
basis. Each rebalance will take effect as of the end of the valuation period on
the date coinciding with the periodic timing you designate, 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. The fixed-rate option cannot participate in this
administrative procedure. Currently, a
14
transfer that occurs under the Auto-Rebalancing feature is not counted towards
the 12 free transfers permitted each Contract year. We reserve the right to
change this practice, modify the requirements or discontinue the feature.
CHARGES AND EXPENSES
This section provides a detailed description of each charge that is described
briefly in the chart on page 3, 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
Prudential is entitled to make under the Contract. The "current charge" is the
lower amount that Prudential is now charging. However, if circumstances change,
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) We charge up to 7.5% as an administrative charge. This charge is currently
equal to 3.75% of each premium, of which 1.25% of the premium is used to
cover a 1990 increase in Prudential's federal income taxes measured by
premiums.
(b) We charge up to 4% for sales expenses. This charge, often called a sales
load, is deducted to compensate us for the costs Prudential incurs in
selling the Contracts, including commissions, advertising and the printing
and distribution of prospectuses and sales literature.
Currently, the charge is equal to 4% of premiums paid in each Contract year
up to the amount of the target premium (see PREMIUMS, page 11) and 0% of
premiums paid in excess of this amount. Consequently, paying more than this
amount in any Contract year could reduce your total sales load. For example,
assume that a Contract with no riders or extra insurance charges has a
target premium of $2,007.50 and the Contract owner would like to pay 10
target premiums. If the Contract owner paid $4,015 (two times the amount of
the target premium in every other Contract year up to the ninth year (i.e.
in years 1, 3, 5, 7, 9), the sales load charge would be $401.50. If the
Contract owner paid $2,007.50 in each of the first 10 Contract years, the
total sales load would be $803. For additional information, see INCREASES IN
BASIC INSURANCE AMOUNT, page 21.
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
An investment advisory fee is deducted daily from each portfolio of the Funds at
a rate, on an annualized basis, from 0.35% for the Stock Index Portfolio to
1.05% for the T. Rowe Price International Stock Portfolio. The expenses
incurred in conducting the investment operations of the portfolios (such as
custodian fees and preparation and distribution of annual reports) are paid out
of the portfolio's income. These expenses also vary from portfolio to
portfolio.
The total expenses of each portfolio for the year 1997 expressed as a percentage
of the average assets during the year are shown below:
15
PORTFOLIO Investment Other Total
Advisory Fee Expenses Expenses
- ----------------------------------------------------------------------------------------------
SERIES FUND
Money Market 0.40% 0.03% 0.43%
Diversified Bond 0.40% 0.03% 0.43%
Conservative Balanced 0.55% 0.01% 0.56%
Flexible Managed 0.60% 0.02% 0.62%
High Yield Bond 0.55% 0.02% 0.57%
Stock Index 0.35% 0.02% 0.37%
Equity Income 0.40% 0.01% 0.41%
Equity 0.45% 0.01% 0.46%
Prudential Jennison 0.60% 0.04% 0.64%
Global 0.75% 0.10% 0.85%
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Value Fund (4) 0.62% 0.08% 0.70%
AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC. 1.00% 0.00% 1.00%
VP Value Portfolio (1)
Janus Aspen Series 0.65% 0.05% 0.70%
Growth Portfolio (2)
MFS(R) VARIABLE INSURANCE TRUST(SM) 0.75% 0.12% 0.87%
Emerging Growth Series
T. ROWE PRICE INTERNATIONAL SERIES, INC. 1.05% 0.00% 1.05%
International Stock Portfolio (3)
- ----------------------------------------------------------------------------------------------
(1) Fees are all-inclusive.
(2) The fees and expenses in the table above are based on gross expenses of the
Portfolio before expense offset arrangements for the fiscal year ended
December 31, 1997. The information for the Portfolio is net of fee waivers
or reductions from Janus Capital. Fee reductions for the Portfolio reduce
the management fee to the level of the corresponding Janus retail fund.
Other waivers, if applicable, are first applied against the management fee
and then against other expenses. Without such waivers or reductions, the
Management Fee, Other Expenses and Total Operating Expenses for the
Portfolio would have been 0.74%, 0.04% and 0.78%, respectively. Janus
Capital may modify or terminate the waivers or reductions at any time upon
at least 90 days' notice to the Trustees.
(3) The investment management fee includes the ordinary expenses of operating
the Fund.
(4) AIM may from time to time voluntarily waive or reduce its respective fees.
Effective May 1, 1998, the Fund will reimburse AIM in an amount up to 0.25%
of the average net asset value of the Fund for expenses incurred in
providing, or assuring that participating insurance companies provide,
certain administrative services. Currently, the fee only applies to the
average net asset value of each Fund in excess of the net asset value of
each Fund as calculated on April 30, 1998.
THE EXPENSES RELATING TO THE FUNDS (OTHER THAN THOSE OF THE SERIES FUND) HAVE
BEEN PROVIDED TO PRUDENTIAL BY THE FUNDS. PRUDENTIAL HAS NOT INDEPENDENTLY
VERIFIED THEM.
DAILY DEDUCTION FROM THE CONTRACT FUND
Each day a charge is deducted from the assets of each of the subaccounts in an
amount equivalent to an effective annual rate of up to 0.9%. Currently, we
intend to charge 0.6%. This charge is intended to compensate Prudential for
assuming mortality and expense risks under the Contract. The mortality risk
assumed is that insureds may live for shorter periods of time than 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 Prudential estimated in fixing its administrative charges. This
charge is not assessed against amounts allocated to the fixed-rate option.
16
MONTHLY DEDUCTIONS FROM CONTRACT FUND
Prudential deducts the following monthly charges 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 Prudential for things like processing
claims, keeping records and communicating with Contract owners. Currently,
the charge is equal to $10 per Contract plus $0.07 per $1,000 of basic
insurance amount in the first Contract year and $5 per Contract plus $0.01
per $1,000 of basic insurance amount in all subsequent years. Prudential
reserves the right, however to charge up to $10 per Contract plus $0.07 per
$1,000 of basic insurance amount in the first Contract year and $10 per
Contract plus $0.01 per $1,000 of basic insurance amount in all subsequent
years.
For example, a Contract with a basic insurance amount of $250,000 would
currently have a charge equal to $10 plus $17.50 for a total of $27.50 per
month for the first Contract year and $5 plus $2.50 for a total of $7.50 per
month in all later years. The maximum charge for this same Contract would be
$10 plus $17.50 for a total of $27.50 per month during the first Contract
year. In later years, the maximum charge would be $10 plus $2.50 for a total
of $12.50 per month.
(b) A cost of insurance ("COI") charge is deducted. When an insured dies, the
amount payable to the beneficiary (assuming there is no Contract debt) is
larger than the Contract Fund -- significantly larger if the insured dies in
the early years of a Contract. The cost of insurance charges collected from
all Contract owners enables 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 death benefit exceeds
the Contract Fund) by maximum COI rates. The maximum COI rates are based
upon the 1980 Commissioners Standard Ordinary ("CSO") Tables and an
insured's current attained age, sex, smoker/non-smoker status, and extra
rating class, if any. For an increase in basic insurance amount, maximum COI
rates are based upon 1980 CSO Tables, the age at the increase effective date
and the number of years since then, sex, smoker/nonsmoker status, and extra
rating class, if any. See INCREASES IN BASIC INSURANCE AMOUNT, page 21. At
most ages, Prudential's current COI rates are lower than the maximum rates.
(c) A charge of $0.01 per $1,000 of basic insurance amount is made to compensate
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.
SURRENDER CHARGES
(a) An additional sales load is charged if during the first 10 Contract years
the Contract lapses, is surrendered or if the basic insurance amount is
decreased. It is not deducted from the death benefit if the insured should
die during this period. Upon lapse or surrender, for issue ages 76 or less,
this contingent deferred charge will be 26% of the lesser of: (a) the target
level premium for the Contract; and (b) the actual premiums paid. The rate
used in the calculation of this contingent deferred charge will be 22% for
issue ages 77-79, 16% for issue ages 80-83 and 13% for issue ages 84-85.
The rate used in the calculation of this contingent deferred charge will
remain level for six years. After six years, this charge will reduce
monthly at a constant rate until it reaches zero at the end of the 10th
year. If during the first 10 Contract years the basic insurance amount is
decreased [including as a result of a withdrawal or a change in the type of
death benefit from Type A (fixed) to Type B (variable)], we will deduct a
proportionate amount of the charge from the Contract Fund. The proportion
we use will be the amount by which the new basic insurance amount is less
than the basic insurance amount at issue (but not greater than the amount of
the decrease) divided by the basic insurance amount at issue.
(b) If during the first 10 Contract years the Contract lapses, is surrendered or
if the basic insurance amount is decreased, an administrative charge is
deducted to cover the cost of processing applications, conducting medical
examinations, determining insurability and the insured's rating class, and
establishing records. The charge is equal to the lesser of: (a) $5 per
$1,000 of basic insurance amount; and (b) $500. This charge is level for
six years. After six years, this charge will be reduced monthly at a
constant rate until it reaches zero at the end of the 10th year. If the
basic insurance amount is decreased [including as a result of a withdrawal
or a
17
change in the type of death benefit from Type A (fixed) to Type B
(variable)] during the first 10 Contract years, we will deduct a
proportionate amount of the charge from the Contract Fund. The proportion we
use will be the amount by which the new basic insurance amount is less than
the basic insurance amount at issue (but not greater than the amount of the
decrease) divided by the basic insurance amount at issue.
TRANSACTION CHARGES
(a) An administrative processing charge, which is the lesser of: (a) $25 and;
(b) 2% of the withdrawal amount, is made in connection with each withdrawal.
(b) No administrative processing charge is currently being made in connection
with a change in basic insurance amount. We reserve the right to make such
a charge in an amount of up to $25 for any change in basic insurance amount.
(c) An administrative processing charge of up to $25 is 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 cash surrender value (referred to as net
cash value in the Contract). The Contract's cash surrender value on any date
will be the Contract Fund less any applicable surrender charges and less any
Contract debt. See CONTRACT LOANS, page 25. The Contract Fund value changes
daily, reflecting: (1) increases or decreases in the value of the Fund
portfolios in which the assets of the subaccount[s] have been invested; (2)
interest credited on any amounts allocated to the fixed-rate option; (3)
interest credited on any loan; and (4) 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 deductions described under CHARGES AND EXPENSES, page 15. Upon request,
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 or outstanding Contract debt.
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 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 TYPE A (FIXED) CONTRACT'S DEATH BENEFIT WILL VARY
As described earlier, there are two types of death benefit available under the
Contract: Type A, a generally fixed death benefit and Type B, a variable death
benefit. A Type B (variable) death benefit varies with investment performance
while a Type A (fixed) death benefit does not, unless it must be increased to
comply with the Internal Revenue Code's definition of life insurance.
Under a Type A (fixed) Contract, the death benefit is generally equal to the
basic insurance amount. See CONTRACT LOANS, page 25. If the Contract is kept
inforce 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 Prudential will increase the death benefit in order to ensure
that the Contract will satisfy the Internal Revenue Code's definition of life
insurance. Thus, the death benefit under a Type A (fixed) Contract 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 a death benefit large enough so that the Contract will
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 $250,000 Type A (fixed) Contract was issued when the insured was age
35.
18
TYPE A (FIXED) DEATH BENEFIT
IF THEN
- ----------------------------------------------------------------------------------------------------
THE INSURED IS AND THE CONTRACT THE ATTAINED AGE THE CONTRACT FUND AND THE DEATH
AGE FUND IS FACTOR IS MULTIPLIED BY THE BENEFIT IS
ATTAINED AGE FACTOR IS
- ----------------------------------------------------------------------------------------------
40 $ 25,000 3.64 91,000 $250,000
40 $ 75,000 3.64 273,000 $273,000*
40 $100,000 3.64 364,000 $364,000*
- ----------------------------------------------------------------------------------------------
60 $ 75,000 1.96 147,000 $250,000
60 $125,000 1.96 245,000 $250,000
60 $150,000 1.96 294,000 $294,000*
- ----------------------------------------------------------------------------------------------
80 $150,000 1.28 192,000 $250,000
80 $200,000 1.28 256,000 $256,000*
80 $225,000 1.28 288,000 $288,000*
- ----------------------------------------------------------------------------------------------
* Note that the death benefit has been increased to comply with the Internal Revenue Code's
definition of life insurance.
- ----------------------------------------------------------------------------------------------------
This means, for example, that if the insured has reached the age of 60, and the
Contract Fund is $150,000, the death benefit will be $294,000, even though the
original basic insurance amount was $250,000. In this situation, for every $1
increase in the Contract Fund, the death benefit will be increased by $1.96. We
reserve the right to refuse to accept any premium payment that increases the
death benefit 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 TYPE B (VARIABLE) CONTRACT'S DEATH BENEFIT WILL VARY
Under a Type B (variable) Contract, while the Contract is inforce, the death
benefit will never be less than the basic insurance amount, but will also vary,
immediately after it is issued, with the investment results of the selected
investment options. The death benefit may be further increased to ensure that
the Contract will satisfy the Internal Revenue Code's definition of life
insurance. Thus, the death benefit will always be the greater of: (1) the basic
insurance amount plus the Contract Fund before the deduction of any monthly
charges due on that date; and (2) the Contract Fund before the deduction of any
monthly charges due on that date, multiplied by the attained age factor that
applies. For purposes of computing the death benefit, if the Contract Fund is
less than zero we will consider it to be zero. 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 a death benefit large enough so that
the Contract will 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 $250,000 Type B
(variable) Contract was issued when the insured was age 35.
19
TYPE B (VARIABLE) DEATH BENEFIT
IF THEN
- ----------------------------------------------------------------------------------------------------
THE INSURED IS AND THE CONTRACT THE ATTAINED AGE THE CONTRACT FUND AND THE DEATH
AGE FUND IS FACTOR IS MULTIPLIED BY THE BENEFIT IS
ATTAINED AGE FACTOR IS
- -----------------------------------------------------------------------------------------------
40 $ 25,000 3.64 91,000 $275,000
40 $ 75,000 3.64 273,000 $325,000
40 $100,000 3.64 364,000 $364,000*
- -----------------------------------------------------------------------------------------------
60 $ 75,000 1.96 147,000 $325,000
60 $125,000 1.96 245,000 $375,000
60 $150,000 1.96 294,000 $400,000
- -----------------------------------------------------------------------------------------------
80 $150,000 1.28 192,000 $400,000
80 $200,000 1.28 256,000 $450,000
80 $225,000 1.28 288,000 $475,000
- -----------------------------------------------------------------------------------------------
* Note that the death benefit has been increased to comply with the Internal Revenue Code's
definition of life insurance.
- ----------------------------------------------------------------------------------------------------
This means, for example, that if the insured has reached the age of 40, and the
Contract Fund is $100,000, the death benefit will be $364,000, even though the
original basic insurance amount was $250,000. In this situation, for every $1
increase in the Contract Fund, the death benefit will be increased by $3.64. We
reserve the right to refuse to accept any premium payment that increases the
death benefit 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.
SURRENDER OF A CONTRACT
A Contract may be surrendered for its cash surrender value or for a fixed
reduced paid-up insurance benefit while the insured is living. To surrender a
Contract, we may require you to deliver or mail the Contract with a written
request in a form that meets our needs, to a 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. Fixed
reduced paid-up insurance provides paid-up insurance, the amount of which will
be paid when the insured dies. There will be cash values and loan values. The
loan interest rate for fixed reduced paid-up insurance is 5%. Upon surrender of
the Contract, the amount of fixed reduced paid-up insurance depends upon the
cash surrender value and the insured's issue age, sex, and the length of time
since the Contract date. Surrender of a Contract may have tax consequences. See
TAX TREATMENT OF CONTRACT BENEFITS, page 26.
WITHDRAWALS
Under certain circumstances, you may withdraw a portion of the Contract's cash
surrender value without surrendering the Contract. The withdrawal amount is
limited by the requirement that the cash surrender value after the withdrawal
may not be zero or less than zero after deducting the withdrawal charges. The
amount withdrawn must be at least $500. There is an administrative processing
fee for each withdrawal which is the lesser of: (a) $25 and; (b) 2% of the
withdrawal amount. 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 death benefit will immediately be reduced by
at least the amount of the withdrawal. For a Type B (variable) Contract, this
will not change the basic insurance amount. However, under a Type A (fixed)
Contract, the resulting reduction in death benefit usually requires a reduction
in the basic insurance amount. If the basic insurance amount is decreased to an
amount less than the basic insurance amount at issue, a surrender charge may be
deducted. See CHARGES AND EXPENSES, page 15. No withdrawal will be permitted
under a Type A (fixed) Contract 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 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
20
TREATMENT OF CONTRACT BENEFITS, page 26. Before making any withdrawal which
causes a decrease in basic insurance amount, you should consult with your tax
adviser and your Prudential representative.
When a withdrawal is made, the Contract Fund is reduced by the sum of the cash
withdrawn and the withdrawal fee. 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 Contract benefits. 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 inforce under the Death
Benefit Guarantee, since withdrawals decrease the accumulated net payments. See
DEATH BENEFIT GUARANTEE, page 12.
INCREASES IN BASIC INSURANCE AMOUNT
Subject to the underwriting requirements determined by Prudential, on or after
the first Contract anniversary, you may increase the amount of insurance by
increasing the basic insurance amount of the Contract. The following conditions
must be met: (1) you must ask for the change in a form that meets our needs; (2)
the amount of the increase must be at least equal to the minimum increase in
basic insurance amount shown under CONTRACT LIMITATIONS in the data pages of the
Contract; (3) you must prove to us that the insured is insurable for any
increase; (4) the Contract must not be in default; (5) we must not be paying
premiums into the Contract as a result of the insured's total disability; and
(6) if we ask you to do so, you must send us the Contract to be endorsed.
If we approve the change, we will send you new Contract data pages showing the
amount and effective date of the change and the recomputed charges, values and
limitations. If the insured is not living on the effective date, the change
will not take effect. No administrative processing charge is currently being
made in connection with an increase in basic insurance amount. We reserve the
right to make such a charge in an amount of up to $25.
For sales load purposes, the target premiums are calculated separately for the
initial basic insurance amount and each increase in basic insurance amount.
Each target premium piece also includes the premium for extra insurance charges
associated to that piece of coverage. When premiums are paid, each payment is
allocated among the initial basic insurance amount and each increase in basic
insurance amount according to the target premiums. Currently, the sales load
charge for each piece is equal to 4% of the allocated premium paid in each
Contract year up to the target premium and 0% of allocated premiums paid in
excess of the target premium. See the definition of Contract year for an
increase in DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, page 1.
Each Contract owner who elects to increase the basic insurance amount of his or
her Contract will receive a "free-look" right which will apply only to the
increase in basic insurance amount, not the entire Contract. This right is
comparable to the right afforded to a purchaser of a new Contract except that,
any cost of insurance charge for the increase in the basic insurance amount will
be returned to the Contract Fund instead of a refund of premium. See SHORT-TERM
CANCELLATION RIGHT OR "FREE LOOK", page 10. Generally, the "free-look" right
would have to be exercised no later than 10 days after receipt of the Contract
as increased.
An increase in basic insurance amount may impact the status of the Contract as a
Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
Therefore, before increasing the basic insurance amount, you should consult with
your tax adviser and your Prudential representative.
DECREASES IN BASIC INSURANCE AMOUNT
As explained earlier, you may make a withdrawal (see WITHDRAWALS, page 20). On
or after the first Contract anniversary, you also have the 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 be able to
decrease their amount of insurance protection, and the monthly deductions for
the cost of insurance. The amount of the decrease must be at least equal to the
minimum decrease in basic insurance amount shown under Contract Limitations in
the data pages of your Contract. In addition, the basic insurance amount after
the decrease must be at least equal to the minimum basic insurance amount shown
under CONTRACT LIMITATIONS in the data pages of your Contract. If the basic
insurance amount is decreased to an amount less than the basic insurance amount
at issue, a surrender charge may be deducted. 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.
See CHARGES AND EXPENSES, page 15. 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.
21
We may decline a reduction if we determine it would cause the Contract to fail
to qualify as "life insurance" for purposes of Section 7702 of the Internal
Revenue Code. A decrease will not take effect if the insured is not living on
the effective date.
It is important to note, however, that if the basic insurance amount is
decreased, 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 tax adviser and your Prudential representative.
WHEN PROCEEDS ARE PAID
Prudential will generally pay any death benefit, cash surrender value, loan
proceeds or withdrawal within seven days after all the documents required for
such a payment are received at a Home Office. Other than the death benefit,
which is determined as of the date of death, the amount will be determined as of
the end of the valuation period in which the necessary documents are received at
a Home Office. However, 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, Prudential expects to pay the cash surrender value promptly upon
request. However, Prudential has the right to delay payment of such cash
surrender value for up to six months. Prudential will pay interest of at least
3% a year if it delays such a payment for 10 days or more.
LIVING NEEDS BENEFIT
You may elect to add the LIVING NEEDS BENEFIT(SM) to your Contract at issue.
There is no charge for adding the benefit to the Contract. However, an
administrative charge (not to exceed $150) will be made at the time the LIVING
NEEDS BENEFIT is paid.
The LIVING NEEDS BENEFIT allows you to elect to receive an accelerated payment
of all or part of the Contract's death benefit, adjusted to reflect current
value, at a time when certain special needs exist. The adjusted death benefit
will always be less than the death benefit, but will generally be greater than
the Contract's cash surrender value. The following options are available.
Terminal Illness Option. This option is available if the insured is diagnosed
as terminally ill with a life expectancy of six months or less. When
satisfactory evidence is provided, Prudential will provide an accelerated
payment of the portion of the death benefit selected by you as a LIVING NEEDS
BENEFIT. The benefit will be paid to you in a single sum.
Organ Transplant Option. This option is available if the insured is diagnosed
as having a life expectancy of six months or less unless the insured receives a
vital organ transplant. When satisfactory evidence is provided, Prudential will
provide an accelerated payment of the portion of the death benefit selected by
you as a LIVING NEEDS BENEFIT. The benefit will be paid to you in a single sum.
All or part of the Contract's death benefit may be accelerated under the LIVING
NEEDS BENEFIT. If the benefit is only partially accelerated, a death benefit of
at least $25,000 must remain under the Contract. Prudential reserves the right
to determine the minimum amount that may be accelerated.
No benefit will be payable if you are required to elect it in order to meet the
claims of creditors or to obtain a government benefit. Prudential can furnish
details about the amount of LIVING NEEDS BENEFIT that is available to an
eligible Contract owner, and the effect on the Contract if less than the entire
death benefit is accelerated.
You should consider whether adding this settlement option is appropriate in your
given situation. Adding the LIVING NEEDS BENEFIT to the Contract has no adverse
consequences; however, electing to use it could. With the exception of certain
business-related Contracts, the Health Insurance Portability and Accountability
Act of 1996 excludes from income the LIVING NEEDS BENEFIT if the insured is
terminally ill or chronically ill as defined in the tax law (although the
exclusion in the latter case may be limited). You should consult a qualified
tax adviser before electing to receive this
22
benefit. Receipt of a LIVING NEEDS BENEFIT payment may also affect your
eligibility for certain government benefits or entitlements.
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS
The following four tables 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 that a Contract with a basic insurance
amount of $250,000 has been bought by a 35 year old male, non-smoker, 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 Type A (fixed) Contract has been purchased and
the second table (page T2) assumes that a Type B (variable) 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 15.
Another assumption is that the Contract Fund has been invested in equal amounts
in each of the 15 portfolios of the Funds 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 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
Fund expenses. The net return reflects average total annual expenses of the 15
portfolios of 0.68%, and the daily deduction from the Contract Fund of 0.6% per
year for the tables based on current charges and 0.9% per year for the tables
based on maximum charges. Thus, assuming current charges, gross returns of 0%,
4%, 8% and 12% are the equivalent of net returns of -1.24%, 2.76%, 6.76% and
10.76%, respectively. Assuming maximum charges, gross returns of 0%, 4%, 8% and
12% are the equivalent of net returns of -1.54%, 2.46%, 6.46% and 10.46%,
respectively. The death benefits and cash surrender values shown reflect the
deduction of all expenses and charges both from the Funds and under the
Contract.
Under the Type B (variable) Contract, the death benefit changes to reflect
investment returns. While under the Type A (fixed) Contract, the death benefit
increases only if the Contract Fund becomes large enough that an increase in the
death benefit is necessary. The death benefit is increased so that the Contract
will satisfy the Internal Revenue Code's definition of life insurance. See TYPE
OF DEATH BENEFIT, page 10.
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 insured was to die.
The IRR on the death benefit is equivalent to an interest rate (without
considering 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
(without considering 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.
23
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 35 year
old man, may be useful for a 35 year old man 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 12%.
24
VARIABLE UNIVERSAL LIFE
TYPE A (FIXED) DEATH BENEFIT
MALE NON-SMOKER AGE 35
$ 250,000 BASIC INSURANCE AMOUNT
$ 2,007.50 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 (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net) (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net)
- ------ -------------- ------------- ------------- ------------- ------------- ------------ ------------ ------------ ------------
1 $ 2,088 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 103 $ 161 $ 220 $ 279
2 $ 4,259 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 1,448 $ 1,618 $ 1,792 $ 1,972
3 $ 6,517 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 2,772 $ 3,109 $ 3,465 $ 3,841
4 $ 8,866 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 4,071 $ 4,634 $ 5,244 $ 5,904
5 $ 11,308 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 5,345 $ 6,191 $ 7,133 $ 8,180
6 $ 13,848 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 6,592 $ 7,781 $ 9,140 $ 10,692
7 $ 16,490 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 8,065 $ 9,656 $ 11,525 $ 13,716
8 $ 19,237 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 9,505 $ 11,560 $ 14,038 $ 17,025
9 $ 22,095 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 10,910 $ 13,488 $ 16,684 $ 20,643
10 $ 25,066 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 12,276 $ 15,439 $ 19,470 $ 24,604
15 $ 41,805 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 17,145 $ 24,162 $ 34,467 $ 49,628
20 $ 62,171 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 21,325 $ 33,788 $ 54,997 $ 91,317
25 $ 86,948 $ 250,000 $ 250,000 $ 250,000 $ 322,959 $ 24,307 $ 43,984 $ 82,976 $ 160,676
30 $ 117,094 $ 250,000 $ 250,000 $ 250,000 $ 479,220 $ 24,104 $ 52,883 $ 120,060 $ 272,284
35 $ 153,771 $ 250,000 $ 250,000 $ 267,837 $ 707,721 $ 19,426 $ 59,258 $ 170,597 $ 450,778
40 $ 198,394 $ 250,000 $ 250,000 $ 334,107 $ 1,031,251 $ 5,138 $ 58,475 $ 236,955 $ 731,384
45 $ 252,685 $ 0(2) $ 250,000 $ 417,984 $ 1,516,215 $ 0(2) $ 42,531 $ 321,526 $ 1,166,319
50 $ 318,738 $ 0 $ 0(2) $ 522,262 $ 2,236,837 $ 0 $ 0(2) $ 428,083 $ 1,833,473
55 $ 399,102 $ 0 $ 0 $ 649,272 $ 3,295,188 $ 0 $ 0 $ 559,717 $ 2,840,679
60 $ 496,877 $ 0 $ 0 $ 801,213 $ 4,831,881 $ 0 $ 0 $ 721,814 $ 4,353,046
65 $ 615,835 $ 0 $ 0 $ 995,275 $ 7,148,494 $ 0 $ 0 $ 947,881 $ 6,808,090
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in year
42.
Based on a gross return of 4%, the Contract would go into default in year
50.
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 RATE OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGE 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 PRUDENTIAL OR THE
FUNDS THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
T1
VARIABLE UNIVERSAL LIFE
TYPE B (VARIABLE) DEATH BENEFIT
MALE NON-SMOKER AGE 35
$ 250,000 BASIC INSURANCE AMOUNT
$ 2,007.50 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 (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net) (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net)
- ------ -------------- ------------ ------------ ------------ ------------ ----------- ------------ ------------ -----------
1 $ 2,088 $ 251,122 $ 251,181 $ 251,240 $ 251,299 $ 100 $ 159 $ 218 $ 277
2 $ 4,259 $ 252,464 $ 252,633 $ 252,807 $ 252,986 $ 1,442 $ 1,611 $ 1,785 $ 1,964
3 $ 6,517 $ 253,782 $ 254,118 $ 254,473 $ 254,847 $ 2,760 $ 3,096 $ 3,451 $ 3,825
4 $ 8,866 $ 255,074 $ 255,634 $ 256,241 $ 256,898 $ 4,052 $ 4,612 $ 5,219 $ 5,876
5 $ 11,308 $ 256,337 $ 257,178 $ 258,115 $ 259,156 $ 5,315 $ 6,156 $ 7,093 $ 8,134
6 $ 13,848 $ 257,572 $ 258,753 $ 260,103 $ 261,644 $ 6,550 $ 7,731 $ 9,081 $ 10,622
7 $ 16,490 $ 258,775 $ 260,354 $ 262,208 $ 264,381 $ 8,008 $ 9,587 $ 11,441 $ 13,615
8 $ 19,237 $ 259,943 $ 261,978 $ 264,434 $ 267,392 $ 9,432 $ 11,467 $ 13,923 $ 16,881
9 $ 22,095 $ 261,071 $ 263,622 $ 266,785 $ 270,701 $ 10,816 $ 13,367 $ 16,530 $ 20,445
10 $ 25,066 $ 262,159 $ 265,284 $ 269,266 $ 274,336 $ 12,159 $ 15,284 $ 19,266 $ 24,336
15 $ 41,805 $ 266,849 $ 273,717 $ 283,796 $ 298,614 $ 16,849 $ 23,717 $ 33,796 $ 48,614
20 $ 62,171 $ 270,772 $ 282,832 $ 303,326 $ 338,383 $ 20,772 $ 32,832 $ 53,326 $ 88,383
25 $ 86,948 $ 273,353 $ 292,094 $ 329,150 $ 403,329 $ 23,353 $ 42,094 $ 79,150 $ 153,329
30 $ 117,094 $ 272,404 $ 298,996 $ 360,887 $ 507,117 $ 22,404 $ 48,996 $ 110,887 $ 257,117
35 $ 153,771 $ 266,653 $ 301,583 $ 399,088 $ 673,789 $ 16,653 $ 51,583 $ 149,088 $ 423,789
40 $ 198,394 $ 251,285 $ 293,633 $ 440,136 $ 969,784 $ 1,285 $ 43,633 $ 190,136 $ 687,790
45 $ 252,685 $ 0(2) $ 266,416 $ 477,239 $ 1,426,734 $ 0(2) $ 16,416 $ 227,239 $ 1,097,488
50 $ 318,738 $ 0 $ 0(2) $ 498,085 $ 2,105,652 $ 0 $ 0(2) $ 248,085 $ 1,725,944
55 $ 399,102 $ 0 $ 0 $ 477,128 $ 3,102,704 $ 0 $ 0 $ 227,128 $ 2,674,745
60 $ 496,877 $ 0 $ 0 $ 372,844 $ 4,550,365 $ 0 $ 0 $ 122,844 $ 4,099,428
65 $ 615,835 $ 0 $ 0 $ 0(2) $ 6,732,708 $ 0 $ 0 $ 0(2) $ 6,412,103
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in year
41.
Based on a gross return of 4%, the Contract would go into default in year
47.
Based on a gross return of 8%, the Contract would go into default in year
64.
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 RATE OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGE 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 PRUDENTIAL OR THE
FUNDS THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
T2
VARIABLE UNIVERSAL LIFE
TYPE A (FIXED) DEATH BENEFIT
MALE NON-SMOKER AGE 35
$ 250,000 BASIC INSURANCE AMOUNT
$ 2,007.50 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 (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net) (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net)
- ------ ----------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1 $ 2,088 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 0 $ 53 $ 108
2 $ 4,259 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 1,056 $ 1,207 $ 1,364 $ 1,525
3 $ 6,517 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 2,122 $ 2,418 $ 2,731 $ 3,062
4 $ 8,866 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 3,142 $ 3,628 $ 4,156 $ 4,730
5 $ 11,308 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 4,115 $ 4,836 $ 5,642 $ 6,540
6 $ 13,848 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 5,034 $ 6,035 $ 7,184 $ 8,501
7 $ 16,490 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 6,153 $ 7,478 $ 9,041 $ 10,882
8 $ 19,237 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 7,216 $ 8,907 $ 10,959 $ 13,445
9 $ 22,095 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 8,218 $ 10,317 $ 12,938 $ 16,204
10 $ 25,066 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 9,156 $ 11,704 $ 14,978 $ 19,177
15 $ 41,805 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 11,439 $ 16,788 $ 24,779 $ 36,707
20 $ 62,171 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 11,106 $ 20,001 $ 35,702 $ 63,368
25 $ 86,948 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 6,305 $ 19,042 $ 46,429 $ 104,464
30 $ 117,094 $ 250,000 $ 250,000 $ 250,000 $ 298,484 $ 0 $ 9,780 $ 54,305 $ 169,593
35 $ 153,771 $ 250,000 $ 250,000 $ 250,000 $ 417,880 $ 0 $ 0 $ 53,166 $ 266,166
40 $ 198,394 $ 0(2) $ 0(2) $ 250,000 $ 570,258 $ 0(2) $ 0(2) $ 28,298 $ 404,438
45 $ 252,685 $ 0 $ 0 $ 0(2) $ 775,012 $ 0 $ 0 $ 0(2) $ 596,163
50 $ 318,738 $ 0 $ 0 $ 0 $ 1,047,096 $ 0 $ 0 $ 0 $ 858,275
55 $ 399,102 $ 0 $ 0 $ 0 $ 1,403,925 $ 0 $ 0 $ 0 $ 1,210,280
60 $ 496,877 $ 0 $ 0 $ 0 $ 1,883,587 $ 0 $ 0 $ 0 $ 1,696,925
65 $ 615,835 $ 0 $ 0 $ 0 $ 2,430,417 $ 0 $ 0 $ 0 $ 2,314,683
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0% the cash surrender value would go to zero in
year 1 and in year 29 and later, but because the Target Premium is being
paid, the Contract is kept inforce through the Limited Death Benefit
Guarantee Period of 35 years. The Contract would go into default at the
beginning of year 36. Based on a gross return of 4% the cash surrender
value would go to zero in year 1 and in year 33 and later, but because the
Target Premium is being paid, the Contract is kept inforce through the
Limited Death Benefit Guarantee Period of 35 years. The Contract would go
into default at the beginning of year 36. Based on a gross return of 8%,
the Contract would go into default in year 43.
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 RATE OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGE 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 PRUDENTIAL OR THE
FUNDS THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
T3
VARIABLE UNIVERSAL LIFE
TYPE B (VARIABLE) DEATH BENEFIT
MALE NON-SMOKER AGE 35
$ 250,000 BASIC INSURANCE AMOUNT
$ 2,007.50 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 (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net) (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net)
- ------ -------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1 $ 2,088 $ 250,965 $ 251,019 $ 251,073 $ 251,127 $ 0 $ 0 $ 51 $ 105
2 $ 4,259 $ 252,071 $ 252,222 $ 252,378 $ 252,539 $ 1,049 $ 1,200 $ 1,356 $ 1,517
3 $ 6,517 $ 253,131 $ 253,425 $ 253,737 $ 254,066 $ 2,109 $ 2,403 $ 2,715 $ 3,045
4 $ 8,866 $ 254,142 $ 254,625 $ 255,150 $ 255,720 $ 3,120 $ 3,603 $ 4,128 $ 4,698
5 $ 11,308 $ 255,103 $ 255,818 $ 256,618 $ 257,509 $ 4,081 $ 4,796 $ 5,596 $ 6,487
6 $ 13,848 $ 256,007 $ 256,999 $ 258,137 $ 259,441 $ 4,985 $ 5,977 $ 7,115 $ 8,419
7 $ 16,490 $ 256,853 $ 258,162 $ 259,708 $ 261,527 $ 6,086 $ 7,396 $ 8,941 $ 10,761
8 $ 19,237 $ 257,638 $ 259,307 $ 261,331 $ 263,782 $ 7,127 $ 8,796 $ 10,820 $ 13,271
9 $ 22,095 $ 258,360 $ 260,426 $ 263,005 $ 266,218 $ 8,105 $ 10,171 $ 12,750 $ 15,962
10 $ 25,066 $ 259,014 $ 261,516 $ 264,728 $ 268,848 $ 9,014 $ 11,516 $ 14,728 $ 18,848
15 $ 41,805 $ 261,084 $ 266,246 $ 273,949 $ 285,440 $ 11,084 $ 16,246 $ 23,949 $ 35,440
20 $ 62,171 $ 260,405 $ 268,744 $ 283,444 $ 309,317 $ 10,405 $ 18,744 $ 33,444 $ 59,317
25 $ 86,948 $ 255,176 $ 266,514 $ 290,886 $ 342,505 $ 5,176 $ 16,514 $ 40,886 $ 92,505
30 $ 117,094 $ 250,000 $ 255,524 $ 291,782 $ 386,929 $ 0 $ 5,524 $ 41,782 $ 136,929
35 $ 153,771 $ 0(2) $ 0(2) $ 277,178 $ 442,655 $ 0(2) $ 0(2) $ 27,178 $ 192,655
40 $ 198,394 $ 0 $ 0 $ 0(2) $ 505,686 $ 0 $ 0 $ 0(2) $ 255,686
45 $ 252,685 $ 0 $ 0 $ 0 $ 561,998 $ 0 $ 0 $ 0 $ 311,998
50 $ 318,738 $ 0 $ 0 $ 0 $ 585,569 $ 0 $ 0 $ 0 $ 335,569
55 $ 399,102 $ 0 $ 0 $ 0 $ 521,201 $ 0 $ 0 $ 0 $ 271,201
60 $ 496,877 $ 0 $ 0 $ 0 $ 285,625 $ 0 $ 0 $ 0 $ 35,625
65 $ 0 $ 0 $ 0 $ 0 $ 0(2) $ 0 $ 0 $ 0 $ 0(2)
(1) Assumes no Contract loan has been made.
(2) Based on a gross return of 0% the cash surrender value would go to zero in
year 1 and in year 28 and later, but because the Target Premium is being
paid, the Contract is kept inforce through the Limited Death Benefit
Guarantee Period of 33 years. The Contract would go into default at the
beginning of year 34. Based on a gross return of 4% the cash surrender
value would go to zero in year 1 and in year 32 and later, but because the
Target Premium is being paid, the Contract is kept inforce through the
Limited Death Benefit Guarantee Period of 33 years. The Contract would go
into default at the beginning of year 34. Based on a gross return of 8%,
the Contract would go into default in year 39. Based on a gross return of
12%, the Contract would go into default in year 61.
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 RATE OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGE 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 PRUDENTIAL OR THE
FUNDS THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
T4
VARIABLE UNIVERSAL LIFE
MALE NON-SMOKER AGE 35
$ 250,000 BASIC INSURANCE AMOUNT
$ 2,007.50 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 (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net) (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net)
- ------ ------------- ------------ ------------ ------------- ------------- ------------ ------------ -------------
5 135.66% 135.66% 135.66% 135.66% -20.31% -15.70% -11.18% -6.75%
10 44.34% 44.34% 44.34% 44.34% -9.18% -4.84% -0.56% 3.67%
15 23.96% 23.96% 23.96% 23.96% -7.44% -2.81% 1.67% 6.02%
20 15.44% 15.44% 15.44% 15.44% -6.51% -1.67% 2.91% 7.31%
25 10.88% 10.88% 10.88% 12.46% -6.17% -1.03% 3.67% 8.09%
30 8.09% 8.09% 8.09% 11.38% -6.83% -0.85% 4.14% 8.53%
35 6.24% 6.24% 6.54% 10.70% -9.06% -0.97% 4.49% 8.80%
40 4.93% 4.93% 6.06% 10.19% -28.09% -1.62% 4.72% 8.96%
45 (2) 3.96% 5.73% 9.86% (2) -3.72% 4.84% 9.04%
50 (2) 5.50% 9.62% (2) 4.91% 9.08%
55 5.33% 9.44% 4.93% 9.07%
60 5.17% 9.28% 4.92% 9.05%
65 5.07% 9.17% 4.97% 9.07%
(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 42.
Based on a gross return of 4% the Contract would go into default in policy
year 50.
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 (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net) (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net)
- ------ ------------- ------------ ------------ ------------- ------------- ------------ ------------ -------------
5 137.03% 137.21% 137.41% 137.63% -20.49% -15.87% -11.36% -6.93%
10 45.20% 45.41% 45.68% 46.02% -9.37% -5.03% -0.75% 3.47%
15 24.66% 24.94% 25.33% 25.88% -7.68% -3.05% 1.43% 5.78%
20 16.06% 16.40% 16.95% 17.80% -6.81% -1.96% 2.63% 7.03%
25 11.43% 11.84% 12.57% 13.81% -6.56% -1.38% 3.34% 7.79%
30 8.54% 9.01% 9.97% 11.67% -7.49% -1.37% 3.69% 8.24%
35 6.52% 7.07% 8.28% 10.49% -10.56% -1.79% 3.85% 8.54%
40 4.95% 5.56% 7.10% 9.97% -60.97% -3.28% 3.83% 8.74%
45 (2) 4.19% 6.18% 9.67% (2) -10.84% 3.62% 8.85%
50 (2) 5.36% 9.46% (2) 3.20% 8.91%
55 4.49% 9.29% 2.36% 8.93%
60 3.26% 9.15% 0.06% 8.92%
65 (2) 9.05% (2) 8.95%
(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 41.
Based on a gross return of 4% the Contract would go into default in policy
year 47.
Based on a gross return of 8% the Contract would go into default in policy
year 64.
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 RATE OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGE 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 PRUDENTIAL OR THE
FUNDS THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR
OR SUSTAINED OVER ANY PERIOD OF TIME.
T5
VARIABLE UNIVERSAL LIFE
MALE NON-SMOKER AGE 35
$ 250,000 BASIC INSURANCE AMOUNT
$ 2,007.50 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 (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net) (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net)
- ------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ -------------
5 135.66% 135.66% 135.66% 135.66% -28.35% -23.42% -18.62% -13.95%
10 44.34% 44.34% 44.34% 44.34% -14.96% -10.10% -5.40% -0.83%
15 23.96% 23.96% 23.96% 23.96% -13.45% -7.73% -2.48% 2.44%
20 15.44% 15.44% 15.44% 15.44% -14.78% -7.24% -1.13% 4.17%
25 10.88% 10.88% 10.88% 10.88% -24.13% -8.62% -0.60% 5.26%
30 8.09% 8.09% 9.00% -16.98% -0.68% 6.04%
35 6.24% 8.48% -1.61% 6.52%
40 (2) (2) 4.93% 8.06% (2) (2) -6.13% 6.78%
45 (2) 7.75% (2) 6.91%
50 7.52% 6.95%
55 7.32% 6.94%
60 7.17% 6.93%
65 6.97% 6.87%
(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 36.
Based on a gross return of 4% the Contract would go into default in policy
year 36.
Based on a gross return of 8% the Contract would go into default in policy
year 43.
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 (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net) (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net)
- ------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ -------------
5 136.77% 136.92% 137.09% 137.28% -28.61% -23.67% -18.88% -14.21%
10 44.98% 45.15% 45.37% 45.65% -15.27% -10.42% -5.72% -1.15%
15 24.43% 24.64% 24.95% 25.39% -13.95% -8.20% -2.92% 2.01%
20 15.76% 16.00% 16.42% 17.10% -15.73% -7.99% -1.77% 3.58%
25 11.01% 11.27% 11.82% 12.82% -27.94% -10.17% -1.62% 4.43%
30 8.20% 8.89% 10.32% -26.65% -2.48% 4.88%
35 (2) (2) 6.70% 8.73% (2) (2) -6.19% 5.06%
40 (2) 7.61% (2) 5.02%
45 6.71% 4.74%
50 5.84% 4.16%
55 4.74% 2.89%
60 2.56% -5.12%
65 (2) (2)
(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 34.
Based on a gross return of 4% the Contract would go into default in policy
year 34.
Based on a gross return of 8% the Contract would go into default in policy
year 39.
Based on a gross return of 12% the Contract would go into default in policy
year 61.
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 RATE OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGE 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 PRUDENTIAL OR THE
FUNDS 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 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 the sum of (1) 90% of the
portion of the cash value attributable to the variable investment options, and
(2) the balance of the cash value. The cash value is equal to the Contract Fund
less any surrender charge. A Contract in default has no loan value. The minimum
loan amount you may borrow is $200.
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 10th Contract anniversary may
be considered a preferred loan if the Contract has not been surrendered for
fixed reduced paid-up insurance. 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 it to be
zero. Only new loans borrowed after the 10th 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 Contract debt is 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 less any applicable surrender charges, the Contract will go into
default. See LAPSE AND REINSTATEMENT, page 28. If the Contract debt equals or
exceeds the Contract Fund less any applicable surrender charges and you fail to
keep the Contract inforce, the amount of unpaid Contract debt will be treated as
a distribution which may be taxable. See TAX TREATMENT OF CONTRACT BENEFITS,
page 26.
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%. On each Monthly date, we will increase the portion
of the Contract Fund in the investment options by interest credits accrued on
the loan since the last Monthly date. The net cost of a standard loan is 1% and
the net cost of a preferred loan is 1/2%.
A loan will not affect the Death Benefit Guarantee as long as Contract debt does
not equal or exceed the Contract Fund, less any applicable surrender charges.
Loans from Modified Endowment Contracts may be treated for tax purposes as
distributions of income. See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
Any Contract debt will directly reduce a Contract's cash surrender value and
will be subtracted from the death benefit to determine the amount 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 on the amount of the loan while the loan is
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 for future premium payments as of the loan
payment date, plus interest credits accrued on the loan since the last
transaction date. If loan interest is paid when due, it will not change the
portion of the Contract Fund allocated to the investment options. We reserve
the right to change the manner in which we allocate loan repayments.
25
SALE OF THE CONTRACT AND SALES COMMISSIONS
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
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
751 Broad Street, Newark, New Jersey 07102-3777. 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: (1) 50% of
the premiums received in the first year on premiums up to the target premium
(see PREMIUMS, page 11); (2) 5% of premiums received in years two through 10 on
premiums up to the target premium; and (3) 3% on premiums received in the first
10 years in excess of the target premium or received after 10 years. If the
basic insurance amount is increased, representatives will generally receive a
commission of no more than: (1) 25% of the premiums received up to the target
premium for the increase received in the first year; (2) 5% of the premiums
received up to the target premium for years two through 10; and (3) 3% on other
premiums received for the increase. Moreover, trail commissions of up to 0.025%
of the Contract Fund as of the end of each calendar quarter may be paid.
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.
TAX TREATMENT OF CONTRACT BENEFITS
Prudential urges each prospective purchaser to consult a qualified tax adviser.
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 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 the
corresponding sections on Dividends, Distributions, and Taxes in the attached
prospectuses for the Funds.)
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
until amounts are distributed under the Contract; 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 and proposed regulations relating to the
definition of life insurance were issued in 1992. 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.
Prudential intends to comply with final regulations or rulings 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.
26
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. 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 gross
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.
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, there is some risk the Internal Revenue Service
might assert that the preferred loan should be treated as a distribution
for tax purposes because of the relatively low differential between the
loan interest rate and Contract's crediting rate. Were the Internal Revenue
Service to take this position, Prudential would take reasonable steps to
avoid this result, including modifying the Contract's loan provisions.
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 basic
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, particularly a
withdrawal that would reduce the basic insurance amount, should first
consult a qualified tax adviser 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 prior to surrender charges
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% 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. If the Contract owner fails to elect that no taxes be withheld, or
in certain other circumstances, the taxable portion of any amounts received
under the Contract will be subject to withholding to meet federal income tax
obligations. 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 insufficient. 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.
DISTRIBUTION AT MATURITY. This Contract matures when the insured attains age
100. When the Contract matures it is payable in full and some portion of the
distribution may be taxable.
OTHER TAX CONSIDERATIONS. Transfer of the Contract to a new owner or assignment
of the Contract may have gift, estate and/or income tax consequences depending
on the circumstances. In the case of a transfer of the Contract for a 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
27
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 adviser
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. Interest on Contract debt on a business-owned insurance contract is
generally not tax-deductible. An exemption permits the deduction of interest on
policy loans on contracts for up to 20 key persons. The interest deduction for
Contract debt on such loans is limited to a prescribed interest rate and a
maximum aggregate loan amount of $50,000 per insured key person. Under certain
circumstances, the Code also imposes a corporate alternative minimum tax. This
is an indirect tax upon additions to the Contract Fund or the receipt of death
benefits under business-owned life insurance policies.
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
Prudential will determine the value of the Contract Fund on each Monthly date.
If the Contract Fund less any applicable surrender charges is zero or less, the
Contract is in default unless it remains inforce 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 less any applicable
surrender charges, the Contract will be in default. Should this happen,
Prudential will send you a notice of default setting forth the payment which we
estimate will keep the Contract inforce for three months from the date of
default. This payment must be received at a 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) renewed evidence of
insurability is provided on the insured; (2) submission of certain payments
sufficient to bring the Contract up to date plus a premium that we estimate will
cover all charges and deductions for the next three months; and (3) any Contract
debt with interest to date must be restored (if the debt with interest would
exceed the loan value of the reinstated Contract, the excess must be paid to us
before reinstatement) or paid back. The reinstatement date will be the Monthly
date that coincides with or next follows the date we approve your request. We
will deduct all the required charges from your payment and the balance will be
placed into your Contract Fund. If we approve the reinstatement, we will credit
the Contract Fund with an amount equal to the surrender charge applicable as of
the date of reinstatement.
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 will generally differ. Employers and employee
organizations considering purchase of a Contract should consult their legal
advisers 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.
OTHER GENERAL CONTRACT PROVISIONS
ASSIGNMENT. This Contract may not be assigned if the 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 Prudential's consent. Prudential assumes no
responsibility for the validity or sufficiency of any assignment. We will not
be obligated to comply with any assignment unless we receive a copy at a Home
Office.
BENEFICIARY. The Contract owner designates and names the beneficiary in the
application. Thereafter, you may change the beneficiary, provided it is in
accordance with the terms of the Contract. Should the insured die with no
surviving beneficiary, the insured's estate will become the beneficiary.
28
INCONTESTABILITY. Prudential will not contest its liability under the Contract
in accordance with its terms after the Contract has been inforce during the
lifetime of the insured for two years from the Contract date or, with respect to
any change in the Contract that requires Prudential's approval and could
increase its liability, after the change has been in effect during the insured's
lifetime for two years from the effective date of the change, assuming enough
premium has been paid to cover the required charges.
MISSTATEMENT OF AGE OR SEX. If the insured's stated age or sex or both are
incorrect in the Contract, Prudential will adjust the death benefit payable 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 the 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.
SUICIDE EXCLUSION. Generally, if the insured dies by suicide within two years
from the Contract date, the Contract will end and Prudential will return the
premiums paid, less any Contract debt, and less any withdrawals. Generally, if
the insured dies by suicide after two years from the issue date, but within two
years of the effective date of an increase in the basic insurance amount, we
will pay, as to the increase in amount, no more than the sum of the premiums
paid on and after the effective date of an increase.
RIDERS
Contract owners 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 pays certain premiums into the Contract if the insured is totally
disabled within the meaning of the provision. Others pay an additional amount if
the insured dies within a stated number of years after issue; similar benefits
may be available if the insured's spouse or child should die. The amounts of
these benefits are fully guaranteed at issue; they do not depend on the
performance of the Account, although they will no longer be available if the
Contract lapses. 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 Prudential
upon written request.
PARTICIPATION IN DIVISIBLE SURPLUS
The Contract is eligible to be credited part of Prudential's divisible surplus
attributable to the Contracts, as determined by Prudential's Board of Directors.
That determination is made, with respect to the insurance Contracts issued by
Prudential, every year. However, Prudential does not expect to credit any
dividends upon these Contracts because favorable investment performance will be
reflected in Contract values and because Prudential intends, if experience
indicates that current charges will be 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.
VOTING RIGHTS
As described earlier, all of the assets held in the subaccounts will be invested
in shares of the corresponding portfolios of the Funds. Prudential is the legal
owner of those shares and as such has the right to vote on any matter voted on
at shareholders meetings of the Funds. However, Prudential will, as required by
law, vote the shares of the Funds in accordance with voting instructions
received from Contract owners at any regular and special shareholders meetings.
A Fund may not hold annual shareholders meetings when not required to do so
under the laws of the state of its incorporation or the Investment Company Act
of 1940. Fund shares for which no timely instructions from Contract owners are
received, and any shares attributable to general account investments of
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 Prudential to vote shares of the Funds 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
29
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 Investment Company Act of 1940.
The number of 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 applicable Fund. The number of votes for which
each Contract owner may give Prudential instructions will be determined as of
the record date chosen by the Board of Directors of the applicable Fund.
Prudential will furnish Contract owners with proper forms and proxies to enable
them to give these instructions. 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.
Prudential may, if required by state insurance regulations, disregard voting
instructions if they would require shares to be voted so as to cause a change in
the sub-classification or investment objectives of one or more of a Fund's
portfolios, or to approve or disapprove an investment advisory contract for a
Fund. In addition, Prudential itself may disregard voting instructions that
would require changes in the investment policy or investment adviser of one or
more of a Fund's portfolios, provided that Prudential reasonably disapproves
such changes in accordance with applicable federal regulations. If 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.
SUBSTITUTION OF FUND SHARES
Although Prudential believes it to be unlikely, it is possible that in the
judgment of its management, one or more of the portfolios of the Funds 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, 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, Prudential will send you 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.
You will also be sent annual and semi-annual reports of the Funds showing the
financial condition of the portfolios and the investments held in each
portfolio.
STATE REGULATION
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.
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, 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, 1997 and December 31, 1996 have been audited by
PricewaterhouseCoopers LLP, independent accountants. Prudential is relying on
PricewaterhouseCoopers' reports, which are given on their authority as
accounting and auditing experts.
30
PricewaterhouseCoopers LLP's principal business address is 1177 Avenue of the
Americas, New York, New York 10036.
The financial statements included in this prospectus for the year ended December
31, 1995 have been audited by Deloitte & Touche LLP, independent auditors.
Prudential is relying on Deloitte & Touche LLP's reports, which are given on
their authority as accounting and auditing experts. Deloitte & Touche LLP's
principal business address is Two Hilton Court, Parsippany, New Jersey 07054-
0319.
On March 12, 1996, Deloitte & Touche LLP was replaced as the independent
accountants of Prudential. There have been no disagreements with Deloitte &
Touche LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of the accountant, would have caused them to make reference to
the matter in their reports.
Actuarial matters included in this prospectus have been examined by Ching-Meei
Chang, MAAA, FSA, Actuarial Director of Prudential, whose opinion is filed as an
exhibit to the registration statement.
LITIGATION
On October 28, 1996, Prudential entered into a Stipulation of Settlement in a
multidistrict proceeding involving allegations of various claims relating to
Prudential's life insurance sales practices. (In re Prudential Insurance
--------------------------
Company of America Sales Practices Litigation, D.N.J., MDL No. 1061, Master
- ---------------------------------------------
Docket No. 95-4704 (AMW)). On March 7, 1997, the United States District Court
for the District of New Jersey approved the Stipulation of Settlement as fair,
reasonable and adequate, and later issued a Final Order and Judgement in the
consolidated class actions before the court, 962 F. Supp. 450 (March 17, 1997,
as amended April 14, 1997). The Court's Final Order and Judgement approving the
class Settlement was appealed to the United States Court of Appeals for the
Third Circuit, which upheld the district court's approval of the Stipulation of
Settlement on July 23, 1998. As of now no further appeal has been taken.
Pursuant to the Settlement, Prudential agreed to provide and has begun to
implement an Alternative Dispute Resolution ("ADR") process for class members
who believe they were misled concerning the sale or performance of their life
insurance Contracts. As of December 31, 1997, based on a reasonable estimate of
losses associated with ADR claims, management estimated the cost, before taxes,
of remedying policyholder claims in the ADR process to be approximately $2.05
billion. While management believed these to be reasonable estimates based on
information then available, further estimates are currently being developed in
connection with the availability of more recent data. The ultimate amount of the
total cost of remedied policyholder claims is dependent on complex and varying
factors, including actual claims by eligible policyholders, the relief options
chosen and the dollar value of those options. There are also additional elements
of the ADR process which cannot be fully evaluated at this time (e.g., claims
which may be successfully appealed) which could increase this estimate.
In addition, a number of actions have been filed against Prudential by
policyholders who have excluded themselves from the Settlement; Prudential
anticipates that additional suits may be filed by other policyholders.
Also, on July 9, 1996, a Multi-State Life Insurance Task Force comprised of
insurance regulators from 29 states and the District of Columbia, released a
report on Prudential's activities. As of February 24, 1997, Prudential had
entered into consent orders or agreements with all 50 states and the District of
Columbia to implement a remediation plan, whose terms closely parallel the
Settlement approved in the MDL proceeding, and agreed to a series of payments
allocated to all 50 states and the District of Columbia amounting to a total of
approximately $65 million. These agreements are now being implemented through
Prudential's implementation of the class Settlement.
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 inquiries or their effect on
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 and regulatory inquiries. It is possible that the results of
operations or the cash flow of Prudential, in particular quarterly or annual
periods, could be materially affected by an ultimate unfavorable outcome of
certain pending litigation and regulatory matters. Management believes,
however, that the ultimate outcome of all pending litigation and regulatory
matters referred to above should not have a material adverse effect on
Prudential's financial position, after consideration of applicable reserves.
31
YEAR 2000 COMPLIANCE
Many computer systems are programmed to recognize only the last two digits in a
date. As a result, any computer system that has date-sensitive programming may
recognize a date using "00" as the year 1900 rather than the year 2000. This
problem can affect non-information technology systems that include embedded
technology, such as microprocessors included in "infrastructure" equipment used
for telecommunications and other services as well as computer systems. If this
anomaly is not corrected, the year "00" could cause systems to perform date
comparisons and calculations incorrectly which could in turn affect the accuracy
and compromise the integrity of business records. Business operations could be
interrupted when companies are unable to process transactions, send invoices, or
engage in similar normal business activities.
Prudential established a Company-wide Program Office (CPO) to develop and
coordinate an operating framework for the Year 2000 compliance activities.
Prudential's CPO structured the Year 2000 program into three major components:
Business Applications, Infrastructure and Business Partners. The CPO also
established quality assurance procedures including a certification process to
monitor and evaluate enterprise-wide progress of each component of Prudential's
program for conversion and upgrading of systems for Year 2000 compliance.
BUSINESS APPLICATIONS
The scope of the Business Applications component includes a wide range of
computer systems that directly support Prudential's business operations and
accounting systems. The entire application portfolio was analyzed in 1996 to
determine appropriate Year 2000 readiness strategies (i.e., renovate, replace or
retire). Rigorous testing standards have been employed for all applications
that will not be retired, including those that are newly developed or purchased.
Application replacement and renovation projects follow a similar path toward
Year 2000 compliance. The key project phases include Year 2000 analysis and
design, programming activities, testing, and implementation. Replacement
projects are also tracked until the existing applications are removed from
production. Business application projects are grouped by applications undergoing
renovations, replacements or retirements. At September 30, 1998, the percentage
of business applications (based on application count) in the implementation
phase for Year 2000 compliance for renovation, replacement and retirement are
91%, 62% and 87%,respectively. The interim target date for completing
renovations and retirements is December 1998, with an overall completion date
for Business Applications of June 1999.
INFRASTRUCTURE
The scope of Prudential's Year 2000 Infrastructure initiatives include mainframe
computer system hardware and operating system software, mid-range systems and
servers, telecommunications equipment, buildings and facilities systems,
personal computers, and vendor hardware and software.
Although there are minor differences among these various components, the
approach to Year 2000 readiness for Infrastructure generally involves phases
identified as inventory, assessment, remediation activities (e.g., upgrading
hardware or software), testing and implementation. The interim target date for
completion of infrastructure initiatives is December 1998 with an overall
completion date for Infrastructure of June 1999.
BUSINESS PARTNERS
Prudential's approach to business partner readiness includes classification of
each partner's status as "critical" or "less critical" and the development of
contingency plans to address the potential that a business partner could
experience a Year 2000 failure. Project phases include inventory, risk
assessment, and contingency planning activities. The interim target date for
highly critical business partner readiness is December 1998 with an overall
completion date for business partner readiness of June 1999.
THE COST OF YEAR 2000 READINESS
Prudential is funding the Year 2000 program from operating cash flows. The
expenses of Prudential's Year 2000 compliance are allocated across its various
businesses, including those businesses not engaged in providing services to
Contract owners. The Year 2000 costs incurred to date are not material to
Prudential's operations and financial condition and are not expected to have a
material impact on its ability to meet its contractual commitments.
32
YEAR 2000 RISKS AND CONTINGENCY PLANNING
The major portion of the Prudential's transactions are of such volume that they
can only be effectively processed through the use of automated systems.
Therefore, substantially all of Prudential's contingency plans include the
ultimate resolution of any causative technology failures that may be
encountered.
Prudential believes that the Business Application, Infrastructure and Business
Partners components of the Year 2000 project are substantially on schedule.
While management expects that a small number of the projects slated for
completion as of the end of 1998 will not meet this target date, it is
anticipated that these projects will be completed mid-1999 so that these
delays, if experienced, would not have a significant impact on the timing of the
project as a whole. During the course of the Year 2000 program, some
discretionary technology projects have been delayed in favor of the completion
of Year 2000 projects. However, this impact has been minimized by Prudential's
strategic decision to outsource most of the Year 2000 renovation work.
While Prudential and its subsidiaries believe that they are well positioned to
mitigate its Year 2000 issue, this issue, by its nature contains inherent
uncertainties, including the uncertainty of Year 2000 readiness of third
parties. Consequently, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material adverse effect on
the Company's results of operations, liquidity or financial condition. In the
worst case, it is possible that any technology failure, including an internal or
external Year 2000 failure, could have a material impact on the Company's
results of operations, liquidity, or financial position.
Prudential is enhancing existing business contingency plans to mitigate Year
2000 risk. Current contingency plans include planned responses to the failure
of specific business applications or infrastructure components. These responses
are being reviewed and expected to be finalized by June 1999 to ensure that they
are workable under the special conditions of a Year 2000 failure. The plans are
also being updated to reduce the level of uncertainty about the Year 2000
problem including readiness of Prudential's Business Partners.
The discussion of the Year 2000 Issue herein, and in particular Prudential's
plans to remediate this issue and the estimated costs thereof, are
forward-looking in nature.
ADDITIONAL INFORMATION
Prudential has filed a registration statement with the SEC under the Securities
Act of 1933, relating to the offering described in this prospectus. This
prospectus does not include all 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 Prudential. Its address and
telephone number are set forth on the inside front cover of this prospectus.
FINANCIAL STATEMENTS
The financial statements of the Account should be distinguished from the
consolidated financial statements of Prudential and subsidiaries, which should
be considered only as bearing upon the ability of Prudential to meet its
obligations under the Contracts.
The financial statements of Prudential that we show in this prospectus are those
as of the end of the most recent fiscal year. Prudential does not currently
prepare financial statements in accordance with generally accepted accounting
principals more often than annually and believes that any incremental benefit to
prospective Contract owners that may result from the inclusion of interim
financial statements, though unaudited, does not justify the additional cost
that would be incurred. In addition, Prudential represents that there have been
no material adverse changes in the financial condition of Prudential between the
end of the most current fiscal year and the date of this prospectus.
33
SUBSEQUENT EVENTS
On December 10, 1998, the Company announced that it had entered into definitive
agreements for Aetna to acquire, subject to regulatory approval and certain
other conditions, Prudential's healthcare business for $1 billion. The
transaction is expected to be completed in the second quarter of 1999. Included
in this transaction are the Prudentail HealthCare Health Maintenance
Organization (HMO), Point of Service (POS), Preferred Provider Organization
(PPO), and idemnity health lines as well as its dental business.
34
DIRECTORS AND OFFICERS OF PRUDENTIAL
DIRECTORS OF PRUDENTIAL
FRANKLIN E. AGNEW -- Director since 1994 (current term expires April, 2000).
Member, Committee on Dividends; Member, Finance Committee; Member Corporate
Governance Committee. Business consultant since 1987. Senior Vice President,
H.J. Heinz from 1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb,
Inc. John Wiley & Sons, Inc. and Erie Plastics Corporation. Age 63. Address: 600
Grant Street, Suite 660, Pittsburgh, PA 15219.
FREDERICK K. BECKER -- Director since 1994 (current term expires April, 1999).
Member, Auditing Committee, Member, Committee on Business Ethics; Member,
Corporate Governance Committee. President, Wilentz Goldman and Spitzer, P.A.
(law firm) since 1989, with firm since 1960. Age 62. Address: 90 Woodbridge
Center Drive, Woodbridge, NJ 07095.
GILBERT F. CASELLAS -- Director since 1998 (current term expires April, 2002).
Partner, McConnell Valdes, LLP since 1998. Chairman, U.S. Equal Employment
Opportunity Commission from 1994 to 1998. General Counsel, Department of Air
Force from 1993 to 1994. Mr. Casellas is also a director of the American
Arbitration Association and the Puerto Rican Legal Defense & Education Fund.
Age 46. Address: 1717 Pennsylvania Avenue, NW, Suite 625, Washington, DC 20006.
JAMES G. CULLEN -- Director since 1994 (current term expires April, 2001).
Member, Compensation Committee; Member, Committee on Business Ethics. President
& Chief Executive Officer, Telecom Group, Bell Atlantic Corporation, since 1997.
Vice Chairman, Bell Atlantic Corporation from 1995 to 1997. President, Bell
Atlantic Corporation from 1993 to 1995. Mr. Cullen is also a director of Bell
Atlantic Corporation and Johnson & Johnson. Age 55. Address: 1310 North Court
House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS -- Director since 1989 (current term expires April, 2001).
Member, Finance Committee; Member Committee on Business Ethics; Member,
Compensation Committee. Independent Health Care Advisor. National and
International Health Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr.
Davis is also a director of Beckman Instruments, Inc., Merck & Co., Inc.,
Science Applications International Corporation, Minimed Incorporated, and
Beverley Enterprises. Age 65. Address: 751 Broad Street, 23rd Floor, Newark, NJ
07102.
ROGER A. ENRICO -- Director since 1994 (current term expires April, 2002).
Member, Committees on Nominations & Corporate Governance; Member, Compensation
Committee. Chairman and Chief Executive Officer, PepsiCo, Inc. since 1996.
Originally with PepsiCo, Inc. since 1971. Mr. Enrico is also a director of A.M.
Belo Corporation and Dayton Hudson Corporation. Age 53. Address: 700 Anderson
Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR -- Director since 1995 (current term expires April, 1999).
Member, Finance Committee; Member, Committee on Dividends. Retired since 1995.
Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr. Gilmour originally
joined Ford in 1960. Mr. Gilmour is also a director of A.P. Automotive Systems,
Inc., Whirlpool Corporation, USWest, Inc., The Dow Chemical Company and DTE
Energy Company. Age 63. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
WILLIAM H. GRAY, III -- Director since 1991 (current term expires April, 2000).
Member, Executive Committee; Member, Finance Committee; Chairman, Committees on
Nominations & Corporate Governance. President and Chief Executive Officer, The
College Fund/UNCF since 1991. Mr. Gray served in Congress from 1979 to 1991. Mr.
Gray is also a director of Chase Manhattan Corporation, Municipal Bond Investors
Assurance Corporation, Rockwell International Corporation, Union Pacific
Corporation, Warner-Lambert Company, Westinghouse Electric Corporation, and
Electronic Data Systems. Age 56. Address: 8260 Willow Oaks Corp. Drive, Fairfax,
VA 22031-4511.
JON F. HANSON -- Director since 1991 (current term expires April, 2003). Member,
Finance Committee; Member, Committee on Dividends. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of United Water
Resources, Orange & Rockland Utilities, Inc., Consolidated Delivery and
Logistics, and Fleet Trust and Investments Services Company, N.A. Age 61.
Address: 235 Moore Street, Suite 200, Hackensack, NJ 07601.
GLEN H. HINER, JR. -- Director since 1997. (current term expires April, 2001).
Member, Compensation Committee. Chairman and Chief Executive Officer, Owens
Corning since 1991. Senior Vice President and Group Executive, Plastics Group,
General Electric Company from 1983 to 1991. Mr. Hiner is also a director of Dana
Corporation. Age 64. Address: One Owens Corning Parkway, Toledo, OH 43659.
35
CONSTANCE J. HORNER -- Director since 1994 (current term expires April, 2002).
Member, Auditing Committee; Member, Committees on Nominations & Corporate
Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is
also a director of Foster Wheeler Corporation, Ingersoll-Rand Company, and
Pfizer, Inc. Age 55. Address: 1775 Massachusetts Ave., N.W. Washington, D.C.
20036-2188.
GAYNOR N. KELLEY -- Director since 1997 (current term expires April, 2001).
Member, Auditing Committee. Retired since 1996. Former Chairman and Chief
Executive Officer, The Perkins Elmer Corporation from 1990 to 1996. Mr. Kelley
is also a director of Hercules Incorporated, and Alliant Techsystems. Age 66.
Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102-3777.
BURTON G. MALKIEL -- Director since 1978 (current term expires April, 2002).
Chairman, Finance Committee; Member, Executive Committee; Member, Committee on
Dividends. Professor of Economics, Princeton University, since 1988. Dr. Malkiel
is also a director of Banco Bilbao Vizcaya, Baker Fentress & Company, The
Jeffrey Company, The Southern New England Telecommunications Company, and
Vanguard Group, Inc. Age 65. Address: Princeton University, 110 Fisher Hall,
Prospect Avenue, Princeton, NJ 08544-1021.
ARTHUR F. RYAN -- Chairman of the Board, President and Chief Executive Officer
of Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
Corp. from 1990 to 1994, with Chase since 1972. Age 55. Address: 751 Broad
Street, Newark, NJ 07102.
IDA F.S. SCHMERTZ -- Director since 1997 (current term expires April, 2004).
Member, Finance Committee. Principal, Investment Strategies International since
1994. Age 63. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
CHARLES R. SITTER -- Director since 1995 (current term expires April, 1999).
Member, Finance Committee; Member, Committee on Dividends. Retired since 1996.
President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his career with
Exxon in 1957. Age 67. Address: 5959 Las Colinas Boulevard, Irving, TX 75039-
2298.
DONALD L. STAHELI -- Director since 1995 (current term expires April, 1999).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1997.
Chairman and Chief Executive Officer, Continental Grain Company from 1994 to
1997. President and Chief Executive Officer, Continental Grain Company from 1988
to 1994. Mr. Staheli is also director of Bankers Trust Company, Bankers Trust
New York Corporation, and Fresenius AG-Conti Financial Corporation. Age 66.
Address: 39 Locust Street, Suite 204, New Canaan, CT 06840.
RICHARD M. THOMSON -- Director since 1976 (current term expires April, 2000).
Chairman, Executive Committee; Chairman, Compensation Committee; Member,
Committee on Nominations & Corporate Governance. Chairman of the Board, The
Toronto-Dominion Bank since 1997. Chairman and Chief Executive Officer from 1978
to 1997. Mr. Thomson is also a director of CGC, Inc., INCO, Limited, S.C.
Johnson & Son, Inc., The Thomson Corporation, and Canadian Occidental Petroleum,
Ltd. Age 64. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto, Ontario, M5K
1A2, Canada.
JAMES A. UNRUH -- Director since 1996 (current term expires April, 2000).
Member, Compensation Committee. Retired since 1997. Chairman and Chief Executive
Officer, Unisys Corporation, from 1990 to 1997. Mr. Unruh is also a director of
Ameritech Corporation. Age 55. Address: Two Bala Plaza, Suite 300, Bala Cynwyd,
PA 19004.
P. ROY VAGELOS, M.D. -- Director since 1989 (current term expires April, 2001).
Chairman, Auditing Committee; Member, Executive Committee; Member, Committees on
Nominations & Corporate Governance. Chairman, Regeneron Pharmaceuticals since
1995. Chairman and Chief Executive Officer, Merck & Co., Inc. from 1986 to 1994.
Dr. Vagelos is also a director of The Estee Lauder Companies, Inc., PepsiCo.,
Inc., and Regeneron Pharmaceuticals, Inc. Age 68. Address: One Crossroads Drive,
Building A, 3rd Floor, Bedminster, NJ 07921.
STANLEY C. VAN NESS -- Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Executive Committee; Member,
Auditing Committee. Counselor at Law, Picco Herbert Kennedy (law firm) from
1990. Mr. Van Ness is also a director of Jersey Central Power & Light Company.
Age 63. Address: 22 Chambers Street, Princeton, NJ 08542.
PAUL A. VOLCKER -- Director since 1988 (current term expires April, 2000).
Chairman, Committee on Dividends; Member, Executive Committee; Member, Committee
on Nominations & Corporate Governance. Consultant since 1996. Chairman, James D.
Wolfensohn, Inc. from 1988 to 1996. Chief Executive Officer, James D.
Wolfensohn, Inc. from 1995 to 1996. Mr. Volcker is also a public member of the
Board of Governors of the American Stock Exchange,
36
a member of the Board of Overseers of TIAA-CREF, and a director of Nestle, S.A.,
UAL Corporation, and Bankers Trust New York Corporation. Age 70, Address: 610
Fifth Avenue, Suite 420, New York, NY 10020.
JOSEPH H. WILLIAMS -- Director since 1994 (current term expires April, 2002).
Member, Committee on Dividends; Member, Auditing Committee. Director, The
Williams Companies since 1971. Chairman & Chief Executive Officer, The Williams
Companies from 1979 to 1993. Mr. Williams is also a director of Flint
Industries, The Orvis Company, and MTC Investors, LLC. Age 64. Address: One
Williams Center, Tulsa, OK 74172.
PRINCIPAL OFFICERS OF PRUDENTIAL
ARTHUR F. RYAN -- Chairman, President and Chief Executive Officer since 1994;
prior to 1994, President and Chief Operating Officer, Chase Manhattan
Corporation, New York, NY. Age 55.
E. MICHAEL CAULFIELD -- Chief Executive Officer, Prudential Investments since
1996; Chief Executive Officer, Money Management Group from 1995 to 1996; prior
to 1995, President, Prudential Preferred Financial Services. Age 51.
MICHELE S. DARLING -- Executive Vice President Human Resources since 1997; prior
to 1997, Executive Vice President, Canadian Imperial Bank of Commerce, Toronto,
Canada. Age 44.
ROBERT C. GOLDEN -- Executive Vice President Corporate Operations and Systems
since 1997; prior to 1997, Executive Vice President, Prudential Securities, New
York, NY. Age 51.
MARK B. GRIER -- Executive Vice President, Financial Management since 1997;
Chief Financial Officer from 1995 to 1997; prior to 1995, Executive Vice
President, Chase Manhattan Corporation, New York, NY. Age 44.
RODGER A. LAWSON -- Executive Vice President, Marketing and Planning since 1996;
President and CEO, Van Eck Global, New York, NY, from 1994 to 1996; prior to
1994, President and CEO, Global Private Banking, Bankers Trust Company, New
York, NY. Age 50.
JOHN V. SCICUTELLA -- Chief Executive Officer, Individual Insurance Group since
1997; Executive Vice President Operations and Systems from 1995 to 1997; prior
to 1995, Executive Vice President, Chase Manhattan Corporation. Age 48.
JOHN R. STRANGFELD -- Chief Executive Officer, Private Asset Management Group
(PAMG) since 1998; President, PAMG, from 1996 to 1998; prior to 1996, Senior
Managing Director. Age 44.
JAMES J. AVERY, JR. -- Senior Vice President & Chief Actuary since 1997;
President Prudential Select from 1995 to 1997; prior to 1995, Chief Financial
Officer, Prudential Select. Age 46.
MARTIN A. BERKOWITZ -- Senior Vice President and Comptroller since 1995; prior
to 1995, Senior Vice President and CFO, Prudential Investment Corporation. Age
48.
WILLIAM M. BETHKE -- Chief Investment Officer since 1997; prior to 1997, Senior
Vice President. Age 50.
RICHARD J. CARBONE -- Senior Vice President and Chief Financial Officer since
1997. Controller, Salomon Brothers, New York, NY, from 1995 to 1997; prior to
1995, Controller, Bankers Trust, New York, NY. Age 50.
LEO J. CORBETT -- Senior Vice President, Individual Insurance Marketing since
1997; prior to 1997, Managing Director, Lehman Brothers, New York, NY. Age 49.
THOMAS W. CRAWFORD -- President and Chief Executive Officer, Prudential Property
and Casualty Company since 1996; prior to 1996, President and Chief Executive
Officer, Southern Heritage Insurance Company, Tucker, GA. Age 55.
MARK R. FETTING -- President, Prudential Retirement Services since 1996; prior
to 1996, President, Prudential Defined Contribution Services. Age 43.
WILLIAM D. FRIEL -- Senior Vice President and Chief Information Officer since
1993. Age 59.
37
JONATHAN M. GREENE -- President, Investment Management, Prudential Investments
since 1996; prior to 1996, Vice President, T. Rowe Price, Baltimore, MD. Age 54.
JEAN D. HAMILTON -- President, Diversified Group since 1995; prior to 1995,
President, Prudential Capital Group. Age 51.
RONALD P. JOELSON -- Senior Vice President, Guaranteed Products since 1997;
President, Prudential Investments Guaranteed Products from 1996 to 1998; prior
to 1996, Managing Director, Enterprise Planning Unit. Age 40.
IRA J. KLEINMAN -- Executive Vice President, International Insurance Group,
since 1997; prior to 1997, Senior Vice President. Age 51.
NEIL A. MCGUINNESS -- Senior Vice President, Marketing, Prudential Investments,
since 1996; prior to 1996, Managing Director, Putnam Investments, Boston, MA.
Age 51.
PRISCILLA A. MYERS -- Senior Vice President, Audit, Compliance and Investigation
since 1995. Vice President and Auditor from 1989 to 1995. Age 48.
RICHARD O. PAINTER -- President, Prudential Insurance & Financial Services since
1995; prior to 1995, Senior Vice President, New York Life, New York, NY. Age 50.
I. EDWARD PRICE -- Senior Vice President and Actuary since 1995; prior to 1995,
Chief Executive Officer, Prudential International Insurance. Age 55.
KIYOFUMI SAKAGUCHI -- President, International Insurance Group since 1995; prior
to 1995, Chairman and CEO, The Prudential Life Insurance Co., Ltd., Japan. Age
55.
BRIAN M. STORMS -- President, Mutual Funds and Annuities, Prudential Investments
since 1996; prior to 1996, Managing Director, Fidelity Investments, Boston. Age
43.
ROBERT J. SULLIVAN -- Senior Vice President, Sales, Prudential Investments since
1997; prior to 1997, Managing Director, Fidelity Investments, Boston. Age 59.
SUSAN J. BLOUNT -- Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 40.
C. EDWARD CHAPLIN -- Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
Prudential officers are elected annually.
38
FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS (unaudited)
September 30, 1998
SUBACCOUNTS
------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
------------ ------------ -------------- -------------- --------------
ASSETS
Investment in shares of The Prudential Series
Fund, Inc.
Portfolios at net asset value [Note 3] .... $112,823,063 $143,315,665 $1,334,111,408 $1,339,309,586 $1,059,852,464
Receivable from The Prudential Insurance
Company of America [Note 2] ............... 0 33,566 0 0 0
------------ ------------ -------------- -------------- --------------
Net Assets .............................. $112,823,063 $143,349,231 $1,334,111,408 $1,339,309,586 $1,059,852,464
============ ============ ============== ============== ==============
NET ASSETS, representing
Equity of Contract Owners ................... $110,427,555 $143,349,231 $1,334,096,825 $1,338,321,016 $1,059,568,014
Equity of The Prudential Insurance
Company of America ........................ 2,395,508 0 14,583 988,570 284,450
------------ ------------ -------------- -------------- --------------
$112,823,063 $143,349,231 $1,334,111,408 $1,339,309,586 $1,059,852,464
============ ============ ============== ============== ==============
STATEMENTS OF OPERATIONS (UNAUDITED)
For the nine months ended September 30, 1998
SUBACCOUNTS
--------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
---------- ---------- ------------ ------------ -----------
INVESTMENT INCOME
Dividend distributions received ............... $3,830,788 $4,247,636 $ 14,556,874 $ 22,380,896 $23,036,009
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk
[Note 5A] .................................... 501,813 712,166 7,949,905 7,516,943 5,880,951
---------- ---------- ------------ ------------ -----------
NET EXPENSES ..................................... 501,813 712,166 7,949,905 7,516,943 5,880,951
---------- ---------- ------------ ------------ -----------
NET INVESTMENT INCOME (LOSS) ..................... 3,328,975 3,535,470 6,606,969 14,863,953 17,155,058
---------- ---------- ------------ ------------ -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received .......... 0 437,366 7,149,937 21,354,423 8,706,762
Realized gain (loss) on shares redeemed
[average cost basis] ........................ 0 90,830 10,092,937 1,628,332 1,060,458
Net change in unrealized gain (loss) on
investments ................................... 0 4,373,074 (91,590,037) (40,921,939) 14,690,923
---------- ---------- ------------ ------------ -----------
NET GAIN (LOSS) ON INVESTMENTS ................... 0 4,901,270 (74,347,163) (17,939,184) 24,458,143
---------- ---------- ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ..................... $3,328,975 $8,436,740 $(67,740,194) $ (3,075,231) $41,613,201
========== ========== ============ ============ ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A8 THROUGH A14
A1
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------
HIGH
YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
------------ ------------ ------------ ------------ ------------
ASSETS
Investment in shares of The Prudential Series
Fund, Inc. ....................................
Portfolios at net asset value [Note 3] ....... $ 91,821,846 $688,673,938 $419,113,428 $115,473,032 $142,264,216
Receivable from The Prudential Insurance
Company of America [Note 2] .................. 0 0 0 0 74,360
------------ ------------ ------------ ------------ ------------
Net Assets ................................. $ 91,821,846 $688,673,938 $419,113,428 $115,473,032 $142,338,576
============ ============ ============ ============ ============
NET ASSETS, representing
Equity of Contract Owners....................... $ 91,733,729 $687,568,657 $419,036,356 $115,324,763 $142,338,576
Equity of The Prudential Insurance 88,117 1,105,281 77,072 148,269 0
Company of America ........................... ------------ ------------ ------------ ------------ ------------
$ 91,821,846 $688,673,938 $419,113,428 $115,473,032 $142,338,576
============ ============ ============ ============ ============
SUBACCOUNTS (CONTINUED)
---------------------------------------------------------------------
HIGH
YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
----------- ----------- ------------ ---------- -----------
INVESTMENT INCOME
Dividend distributions received ............... $ 4,779,143 $ 4,444,449 $ 6,860,608 $ 774,127 170,945
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk
[Note 5A] .................................... 526,815 3,761,689 2,460,778 622,002 638,664
----------- ----------- ------------ ---------- -----------
NET EXPENSES ..................................... 526,815 3,761,689 2,460,778 622,002 638,664
----------- ----------- ------------ ---------- -----------
NET INVESTMENT INCOME (LOSS) ..................... 4,252,328 682,760 4,399,830 152,125 (467,719)
----------- ----------- ------------ ---------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received .......... 0 1,726,723 7,590,287 115,371 602,201
Realized gain (loss) on shares redeemed
[average cost basis] ........................ 315,090 1,216,602 (1,151,999) 1,090,717 365,393
Net change in unrealized gain (loss) on
investments ................................... (9,825,323) 26,473,514 (61,953,549) 50,668 775,675
----------- ----------- ------------ ---------- -----------
NET GAIN (LOSS) ON INVESTMENTS ................... (9,510,233) 29,416,839 (55,515,261) 1,256,756 1,743,269
----------- ----------- ------------ ---------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ..................... $(5,257,905) $30,099,599 $(51,115,431) $1,408,881 $ 1,275,550
=========== =========== ============ ========== ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A8 THROUGH A14
A2
FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996
SUBACCOUNTS
---------------------------------------------------------------------------------------
MONEY DIVERSIFIED
MARKET BOND
----------------------------------------- -------------------------------------------
1/1/98 1/1/98
TO 1/1/97 1/1/96 TO 1/1/97 1/1/96
9/30/98 TO TO 9/30/98 TO TO
(UNAUDITED) 12/31/97 12/31/96 (UNAUDITED) 12/31/97 12/31/96
------------ ------------ ----------- ------------ ------------ ------------
OPERATIONS:
Net investment income (loss) .......... $ 3,328,975 $ 4,433,677 $ 4,058,398 $ 3,535,470 $ 8,177,017 $ 6,388,307
Capital gains distributions received .. 0 0 0 437,366 1,452,476 0
Realized gain on shares redeemed
[average cost basis] ................ 0 0 0 90,830 107,543 19,658
Net change in unrealized gain (loss) on
investments ......................... 0 0 0 4,373,074 (702,474) (2,104,541)
------------ ------------ ----------- ------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ............. 3,328,975 4,433,677 4,058,398 8,436,740 9,034,562 4,303,424
------------ ------------ ----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
PREMIUM PAYMENTS AND OTHER
OPERATING TRANSFERS [Note 7] .......... 13,850,547 (6,936,043) 768,830 5,780,752 3,856,643 10,268,006
------------ ------------ ----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM EQUITY
TRANSFERS [Note 8] .................... 539,265 (147,721) 1,422,930 10,332 (196,475) (142,209)
------------ ------------ ----------- ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS ................................ 17,718,787 (2,650,087) 6,250,158 14,227,824 12,694,730 14,429,221
------------ ------------ ----------- ------------ ------------ ------------
NET ASSETS:
Beginning of year ..................... 95,104,276 97,754,363 91,504,205 129,121,407 116,426,677 101,997,456
------------ ------------ ----------- ------------ ------------ ------------
End of period ......................... $112,823,063 $ 95,104,276 $97,754,363 $143,349,231 $129,121,407 $116,426,677
============ ============ =========== ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A8 THROUGH A14
A3
SUBACCOUNTS (CONTINUED)
------------------------------------------------
EQUITY
------------------------------------------------
1/1/98
TO 1/1/97 1/1/96
9/30/98 TO TO
(UNAUDITED) 12/31/97 12/31/96
-------------- -------------- --------------
OPERATIONS:
Net investment income (loss) ...... $ 6,606,969 $ 19,974,703 $ 16,848,341
Capital gains distributions
received ......................... 7,149,937 73,183,544 92,436,486
Realized gain on shares redeemed
[average cost basis] ............ 10,092,937 7,311,176 755,380
Net change in unrealized gain
(loss) on investments ........... (91,590,037) 158,043,072 41,805,447
-------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ......... (67,740,194) 258,512,495 151,845,654
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
PREMIUM PAYMENTS AND OTHER
OPERATING TRANSFERS [Note 7] ...... 28,213,529 55,194,557 116,044,081
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM EQUITY
TRANSFERS [Note 8] ................ (70,596) (1,730,961) (2,717,850)
-------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS ............................ (39,597,261) 311,976,091 265,171,885
-------------- -------------- --------------
NET ASSETS:
Beginning of year ................. 1,373,708,669 1,061,732,578 796,560,693
-------------- -------------- --------------
End of period ..................... $1,334,111,408 $1,373,708,669 $1,061,732,578
============== ============== ==============
SUBACCOUNTS (CONTINUED)
-------------------------------------------------
FLEXIBLE
MANAGED
-------------------------------------------------
1/1/98
TO 1/1/97 1/1/96
9/30/98 TO TO
(UNAUDITED) 12/31/97 12/31/96
-------------- -------------- --------------
OPERATIONS:
Net investment income (loss) ...... $ 14,863,953 $ 29,285,286 $ 25,347,934
Capital gains distributions
received ......................... 21,354,423 201,042,079 106,224,518
Realized gain on shares redeemed
[average cost basis] ............ 1,628,332 3,097,268 487,657
Net change in unrealized gain
(loss) on investments ........... (40,921,939) (37,001,732) (5,082,172)
-------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ......... (3,075,231) 196,422,901 126,977,937
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
PREMIUM PAYMENTS AND OTHER
OPERATING TRANSFERS [Note 7] ...... (7,639,749) 15,507,613 57,031,152
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM EQUITY
TRANSFERS [Note 8] ................ 839,090 (332,076) (1,594,508)
-------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS ............................ (9,875,890) 211,598,438 182,414,581
-------------- -------------- --------------
NET ASSETS:
Beginning of year ................. 1,349,185,476 1,137,587,038 955,172,457
-------------- -------------- --------------
End of period ..................... $1,339,309,586 $1,349,185,476 $1,137,587,038
============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A8 THROUGH A14
A4
FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996
SUBACCOUNTS (CONTINUED)
---------------------------------------------------------------------------------------------
HIGH
CONSERVATIVE YIELD
BALANCED BOND
------------------------------------------------- -----------------------------------------
1/1/98 1/1/98
TO 1/1/97 1/1/96 TO 1/1/97 1/1/96
9/30/98 TO TO 9/30/98 TO TO
(UNAUDITED) 12/31/97 12/31/96 (UNAUDITED) 12/31/97 12/31/96
--------------- --------------- ------------- ------------ ------------ -----------
OPERATIONS:
Net investment income (loss) ..... $ 17,155,058 $ 38,402,245 $ 29,326,106 $ 4,252,328 $ 7,594,709 $ 6,844,609
Capital gains distributions
received ........................ 8,706,762 110,154,176 55,843,548 0 0 0
Realized gain on shares redeemed
[average cost basis] ........... 1,060,458 2,680,112 627,498 315,090 311,580 20,787
Net change in unrealized gain
(loss) on investments .......... 14,690,923 (36,006,094) 10,273,250 (9,825,323) 2,620,272 581,780
--------------- --------------- ------------- ------------ ------------ -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ........ 41,613,201 115,230,439 96,070,402 (5,257,905) 10,526,561 7,447,176
--------------- --------------- ------------- ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
PREMIUM PAYMENTS AND OTHER
OPERATING TRANSFERS [Note 7] ..... (10,325,714) (5,484,215) 36,970,919 5,367,787 374,682 5,326,899
--------------- --------------- ------------- ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM EQUITY
TRANSFERS [Note 8] ............... 216,514 98,440 (1,143,063) 44,029 (110,168) 52,425
--------------- --------------- ------------- ------------ ------------ -----------
TOTAL INCREASE (DECREASE) IN NET
ASSETS ........................... 31,504,001 109,844,664 131,898,258 153,911 10,791,075 12,826,500
--------------- --------------- ------------- ------------ ------------ -----------
NET ASSETS:
Beginning of year ................ 1,028,348,463 918,503,799 786,605,541 91,667,936 80,876,861 68,050,361
--------------- --------------- ------------- ------------ ------------ -----------
End of period .................... $ 1,059,852,464 $ 1,028,348,463 $ 918,503,799 $ 91,821,846 $ 91,667,936 $80,876,861
=============== =============== ============= ============ ============ ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A8 THROUGH A14
A5
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------------------------
STOCK EQUITY
INDEX INCOME
----------------------------------------- ------------------------------------------
1/1/98 1/1/98
TO 1/1/97 1/1/96 TO 1/1/97 1/1/96
9/30/98 TO TO 9/30/98 TO TO
(UNAUDITED) 12/31/97 12/31/96 (UNAUDITED) 12/31/97 12/31/96
------------ ------------ ------------ ------------ ------------ ------------
OPERATIONS:
Net investment income (loss) ..... $ 682,760 $ 4,312,113 $ 4,179,793 $ 4,399,830 $ 7,076,399 $ 7,350,510
Capital gains distributions
received ......................... 1,726,723 17,197,911 4,749,836 7,590,287 39,390,070 9,133,917
Realized gain on shares redeemed
[average cost basis] ............ 1,216,602 6,786,808 263,052 (1,151,999) 3,982,449 171,030
Net change in unrealized gain
(loss) on investments ........... 26,473,514 113,415,557 61,075,735 (61,953,549) 59,248,683 32,816,172
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ......... 30,099,599 141,712,389 70,268,416 (51,115,431) 109,697,601 49,471,629
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
PREMIUM PAYMENTS AND OTHER
OPERATING TRANSFERS [Note 7] ...... 35,182,165 58,525,779 55,125,681 28,940,298 36,671,034 23,125,635
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM EQUITY
TRANSFERS [Note 8] ................ 1,220,018 (910,143) 82,144 259,312 (393,762) (711,051)
------------ ------------ ------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS ............................ 66,501,782 199,328,025 125,476,241 (21,915,821) 145,974,873 71,886,213
------------ ------------ ------------ ------------ ------------ ------------
NET ASSETS:
Beginning of year ................. 622,172,156 422,844,131 297,367,890 441,029,249 295,054,376 223,168,163
------------ ------------ ------------ ------------ ------------ ------------
End of period ..................... $688,673,938 $622,172,156 $422,844,131 $419,113,428 $441,029,249 $295,054,376
============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A8 THROUGH A14
A6
FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996
SUBACCOUNTS (CONTINUED)
----------------------------------------------------------------------------------
PRUDENTIAL
GLOBAL JENNISON
---------------------------------------- ---------------------------------------
1/1/98 1/1/98
TO 1/1/97 1/1/96 TO 1/1/97 1/1/96
9/30/98 TO TO 9/30/98 TO TO
(UNAUDITED) 12/31/97 12/31/96 (UNAUDITED) 12/31/97 12/31/96
------------ ------------ ----------- ------------ ----------- -----------
OPERATIONS:
Net investment income (loss) .......... $ 152,125 $ 595,128 $ 1,332,143 $ (467,719) $ (281,961) $ (85,477)
Capital gains distributions received .. 115,371 5,120,114 1,298,584 602,201 5,052,341 0
Realized gain on shares redeemed
[average cost basis] ................ 1,090,717 309,311 16,670 365,393 525,215 0
Net change in unrealized gain (loss)
on investments ...................... 50,668 (917,843) 9,125,406 775,675 10,743,964 3,012,624
------------ ------------ ----------- ------------ ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ............. 1,408,881 5,106,710 11,772,803 1,275,550 16,039,559 2,927,147
------------ ------------ ----------- ------------ ----------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
PREMIUM PAYMENTS AND OTHER
OPERATING TRANSFERS [Note 7] .......... 5,529,130 17,556,139 24,827,377 49,640,133 34,918,336 30,275,275
------------ ------------ ----------- ------------ ----------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM EQUITY
TRANSFERS [Note 8] .................... 24,873 (317,463) (137,878) (8,218) (773,643) 385,656
------------ ------------ ----------- ------------ ----------- -----------
TOTAL INCREASE (DECREASE) IN NET
ASSETS ................................ 6,962,884 22,345,386 36,462,302 50,907,465 50,184,252 33,588,078
------------ ------------ ----------- ------------ ----------- -----------
NET ASSETS:
Beginning of year ..................... 108,510,148 86,164,762 49,702,460 91,431,111 41,246,859 7,658,781
------------ ------------ ----------- ------------ ----------- -----------
End of period ......................... $115,473,032 $108,510,148 $86,164,762 $142,338,576 $91,431,111 $41,246,859
============ ============ =========== ============ =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A8 THROUGH A14
A7
NOTES TO FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
September 30, 1998 (Unaudited)
NOTE 1: GENERAL
The Prudential Variable Appreciable Account (the "Account") of The
Prudential Insurance Company of America ("Prudential") was established
on August 11, 1987 by a resolution of Prudential's Board of Directors in
conformity with insurance laws of the State of New Jersey. The assets of
the Account are segregated from Prudential's other assets. Currently
only proceeds from the purchases of Prudential Variable Appreciable Life
(PVAL) and Prudential Survivorship Preferred (SVUL) Contracts invest in
the Account. Beginning December 22, 1998 Prudential Variable Universal
Life (PVUL) Contracts will be able to invest in the Account.
The Account is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust. There are ten subaccounts within
the Account at September 30, 1998, which will be available to Contract
holders of PVUL beginning December 22, 1998, which invest in a
corresponding portfolio of The Prudential Series Fund, Inc. (the "Series
Fund") as shown in Note 3. The Series Fund is a diversified open=end
management investment company, and is managed by Prudential. Also
beginning December 22, 1998, the following five additional
non=Prudential administered subaccounts will be available to PVUL
Contract owners: AIM V.I. Value Fund; American Century VP Value Fund;
Janus Growth Portfolio; MFS Emerging Growth Series; and the T. Rowe
Price International Stock Portfolio.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles ("GAAP"). The preparation of
the financial statements, in conformity with GAAP, requires management
to make estimates and assumptions that affect the reported amounts and
disclosures. Actual results could differ from those estimates.
Investments=The investments in shares of the Series Fund are stated at
the net asset value of the respective portfolio.
Security Transactions=Realized gains and losses on security transactions
are reported on an average cost basis. Purchase and sale transactions
are recorded as of the trade date of the security being purchased or
sold.
Distributions Received=Dividend and capital gain distributions received
are reinvested in additional shares of the Series Fund and are recorded
on the ex=dividend date.
Equity of The Prudential Insurance Company of America=Prudential
maintains a position in the Account for liquidity purposes including
unit purchases and redemptions, fund share transactions, and expense
processing. Prudential monitors the balance daily and transfers funds
based upon anticipated activity. At times, Prudential may owe an amount
to the Account, which is reflected in the Account's Statements of Net
Assets as a receivable from Prudential. The receivable does not have an
effect on the Contract owner's account or the related unit value.
A8
NOTE 3: 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, 1998 were as follows: (unaudited)
PORTFOLIOS
------------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
----------- ------------ -------------- -------------- --------------------
Number of Shares: 11,282,306 12,590,236 45,434,160 79,641,925 69,684,133
Net asset value per share: $ 10.00000 $ 11.38308 $ 29.36362 $ 16.81664 $ 15.20938
Cost: $112,823,063 $137,810,817 $1,075,593,561 $1,331,126,129 $1,030,493,496
PORTFOLIOS (CONTINUED)
-----------------------------------------------------------------------------------
HIGH
YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
----------- ------------ ------------ ------------ -------------------
Number of Shares: 12,415,807 21,727,705 21,406,951 6,334,516 7,604,353
Net asset value per share: $ 7.39556 $ 31.69566 $ 19.57838 $ 18.22918 $ 18.70826
Cost: $99,639,740 $402,737,570 $372,237,876 $104,423,901 $127,450,530
A9
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding Contract owner units, unit values and total value of
Contract owner equity at September 30, 1998 were as follows: (unaudited)
SUBACCOUNTS
----------------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
--------------- --------------- ---------------- ---------------- -----------------
Contract Owner Units Outstanding (PVAL)... 44,389,617.593 38,720,964.137 196,955,094.263 267,752,477.219 216,063,360.880
Unit Value (PVAL)......................... $ 1.64572 $ 2.31561 $ 4.09340 $ 3.07369 $ 2.65563
--------------- --------------- --------------- ---------------- ----------------
Contract Owner Equity (PVAL).............. $ 73,052,882 $ 89,662,652 $ 806,215,983 $ 822,988,112 $ 573,784,343
--------------- --------------- --------------- ---------------- ----------------
Contract Owner Units Outstanding
(PVAL $100,000+ face)................... 18,851,606.039 23,065,575.062 130,826,994.530 171,492,835.375 187,254,284.126
Unit Value (PVAL $100,000+ face).......... $ 1.59974 $ 2.25021 $ 3.97870 $ 2.98730 $ 2.58088
--------------- --------------- --------------- ---------------- ----------------
Contract Owner Equity (PVAL $100,000+
face)..................................... $ 30,157,668 $ 51,902,388 $ 520,521,363 $ 512,300,547 $ 483,280,837
--------------- --------------- --------------- ---------------- ----------------
Contract Owner Units Outstanding (SVUL)... 6,422,937.390 1,500,228.389 5,223,155.734 2,275,024.254 1,900,708.958
Unit Value (SVUL)......................... $ 1.12363 $ 1.18928 $ 1.40901 $ 1.33289 $ 1.31679
--------------- --------------- --------------- ---------------- ----------------
Contract Owner Equity (SVUL).............. $ 7,217,005 $ 1,784,191 $ 7,359,479 $ 3,032,357 $ 2,502,834
--------------- --------------- --------------- ---------------- ----------------
TOTAL CONTRACT OWNER EQUITY............... $ 110,427,555 $ 143,349,231 $ 1,334,096,825 $ 1,338,321,016 $ 1,059,568,014
=============== =============== =============== ================ ================
SUBACCOUNTS (CONTINUED)
-----------------------------------------------------------------------------------------
HIGH
YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
--------------- --------------- --------------- --------------- ---------------
Contract Owner Units Outstanding (PVAL)... 24,415,518.400 92,051,944.858 75,342,858.602 59,189,708.065 51,676,253.574
Unit Value (PVAL)......................... $ 2.25531 $ $4.64736 $ $3.73993 $ 1.43980 $ 1.96736
--------------- --------------- --------------- --------------- ---------------
Contract Owner Equity (PVAL).............. $ 55,064,563 $ 427,798,526 $ 281,777,017 $ 85,221,342 $ 101,665,794
--------------- --------------- --------------- --------------- ---------------
Contract Owner Units Outstanding
(PVAL $100,000+ face)................... 15,844,374.348 55,945,351.132 36,580,944.068 18,140,891.317 18,494,834.837
Unit Value (PVAL $100,000+ face).......... $ 2.19259 $ 4.51610 $ 3.63395 $ 1.42120 $ 1.94755
--------------- --------------- --------------- --------------- ---------------
Contract Owner Equity (PVAL $100,000+
face)..................................... $ 34,740,216 $ 252,654,800 $ 132,933,322 $ 25,781,835 $ 36,019,616
--------------- --------------- --------------- --------------- ---------------
Contract Owner Units Outstanding (SVUL)... 1,656,021.074 4,126,049.113 2,898,212.403 3,387,247.975 2,742,270.307
Unit Value (SVUL)......................... $ 1.16481 $ 1.72449 $ 1.49265 $ 1.27584 $ 1.69683
--------------- --------------- --------------- --------------- ---------------
Contract Owner Equity (SVUL).............. $ 1,928,950 $ 7,115,331 $ 4,326,017 $ 4,321,586 $ 4,653,166
--------------- --------------- --------------- --------------- ---------------
TOTAL CONTRACT OWNER EQUITY............... $ 91,733,729 $ 687,568,657 $ 419,036,356 $ 115,324,763 $ 142,338,576
=============== =============== =============== =============== ===============
A10
NOTE 5: CHARGES AND EXPENSES (UNAUDITED)
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges at an effective annual
rate of 0.90% is applied daily against the net assets representing
equity of PVAL Contract owners held in each subaccount. For Contract
owners investing in PVAL with face amounts of $100,000 or more the
annual rate is 0.60%. For Contract owners investing in SVUL the
annual rate is 0.90%. For Contract owners investing in PVUL the
annual rate is 0.90%.
Mortality risk is that Contract owners may not live as long as
estimated and expense risk is that the cost of issuing and
administering the policies may exceed the estimated expenses. For the
nine months ended September 30, 1998, the amount of these charges
paid to Prudential was $15,479,138 for PVAL Contracts, $16,565,259
for PVAL Contracts with face amounts of $100,000 or more and $246,670
for SVUL Contracts.
B. Deferred Sales Charge
Subsequent to Contract owner redemption, a deferred sales charge is
imposed upon surrenders of certain variable life insurance Contracts
to compensate 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. For the nine months ended September 30,
1998, the amount of these charges paid to Prudential was $5,870,317.
C. Partial Withdrawal Charge
A charge is imposed by Prudential on partial withdrawals of the cash
surrender value. For the nine months ended September 30, 1998, the
amount of these charges paid to Prudential was $3,399,834.
D. Expense Reimbursement
PVAL Contracts are reimbursed by Prudential, on a non=guaranteed
basis, for expenses incurred by the Series Fund in excess of the
effective rate 0.45% for the Stock Index Portfolio, 0.50% for the
Equity Income Portfolio, and 0.65% for the High Yield Bond Portfolio
of the average daily net assets of these portfolios. For the nine
months ended September 30, 1998, the amount of these reimbursements
totaled $0.
E. Cost of Insurance Charges
Contract owner contributions are applied to the Account net of the
following charges: transaction costs, premium taxes, sales loads,
monthly administrative charges, and death benefit risk charges prior
to the investment in the Account. For the nine months ended September
30, 1998, Prudential received a total of $13,821,668, $28,333,098,
$66,262,935, $45,270,318 and $10,270,916, respectively, for these
charges.
NOTE 6: TAXES
Prudential is taxed as a "life insurance company" as defined by the
Internal Revenue Code and the operations of the Account form a part of
Prudential's consolidated federal tax return. Under current federal law,
no federal income taxes are payable by the Account. As such, no
provision for tax liability has been recorded in these financial
statements.
A11
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
Premium Payments and other operating transfers in the Series Fund, Inc.,
for the nine months ended September 30, 1998, were as follows:
(unaudited)
SUBACCOUNTS
-------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE
MARKET BOND EQUITY MANAGED
----------- ----------- ------------ ------------
Contract Owner Net Payments .......................... $26,779,453 $18,524,202 $216,914,142 $158,061,098
Policy Loans ......................................... (1,853,929) (2,385,425) (33,972,866) (26,847,240)
Policy Loan Repayments and Interest .................. 1,460,733 1,074,174 14,763,053 12,075,399
Surrenders, Withdrawals, and Death ................... (6,803,883) (5,335,634) (65,596,394) (55,812,409)
Benefits .............................................
Net Transfers From (To) Other
Subaccounts or Fixed Rate Options ................. 686,259 1,936,617 (3,995,028) (14,663,027)
Administrative and Other Charges ..................... (6,418,086) (8,033,182) (99,899,378) (80,453,570)
----------- ----------- ------------ ------------
TOTAL NET PREMIUM PAYMENTS AND OTHER
OPERATING TRANSFERS ............................... $13,850,547 $ 5,780,752 $ 28,213,529 $ (7,639,749)
=========== =========== ============ ============
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------------
High
Conservative Yield Stock Equity
Balanced Bond Index Income
------------ ----------- ------------ ------------
Contract Owner Net Payments .......................... $132,557,259 $15,546,491 $105,921,054 $ 72,627,131
Policy Loans ......................................... (18,202,610) (1,982,032) (15,993,799) (9,722,059)
Policy Loan Repayments and Interest .................. 9,990,075 1,059,905 6,121,153 4,052,465
Surrenders, Withdrawals, and Death ................... (50,883,225) (4,720,723) (27,679,212) (18,773,237)
Benefits
Net Transfers From (To) Other
Subaccounts or Fixed Rate Options ................. (14,858,009) 1,948,318 13,051,392 11,536,553
Administrative and Other Charges ..................... (68,929,204) (6,484,172) (46,238,423) (30,780,555)
------------ ----------- ------------ ------------
TOTAL NET PREMIUM PAYMENTS AND OTHER
OPERATING TRANSFERS ............................... $(10,325,714) $ 5,367,787 $ 35,182,165 $ 28,940,298
============ =========== ============ ============
SUBACCOUNTS (CONTINUED)
------------------------------
PRUDENTIAL
GLOBAL JENNISON
----------- -----------
Contract Owner Net Payments .......................... $27,306,306 $41,505,613
Policy Loans ......................................... (2,412,303) (2,788,537)
Policy Loan Repayments and Interest .................. 1,270,632 1,034,856
Surrenders, Withdrawals, and Death ................... (5,536,888) (4,546,795)
Benefits
Net Transfers From (To) Other
Subaccounts or Fixed Rate Options ................. (5,476,527) 28,121,590
Administrative and Other Charges ..................... (9,622,090) (13,686,594)
----------- -----------
TOTAL NET PREMIUM PAYMENTS AND OTHER
OPERATING TRANSFERS ............................... $ 5,529,130 $49,640,133
=========== ===========
A12
NOTE 8: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS
The increase (decrease) in net assets resulting from equity transfers
represents the net contributions (withdrawals) of Prudential to (from)
the Account.
NOTE 9: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) for the
nine months ending September 30, 1998 were as follows: (unaudited)
SUBACCOUNTS
-------------------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
--------------- --------------- --------------- --------------- ---------------
Contract Owner Contributions: 49,086,294.383 15,463,129.281 62,026,672.217 58,696,316.703 59,919,536.750
Contract Owner Redemptions: (39,093,644.176) (12,337,102.606) (54,188,227.934) (60,535,056.294) (63,251,100.311)
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------------------------------------
HIGH
YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
--------------- --------------- --------------- --------------- ----------------
Contract Owner Contributions: 13,830,858.771 33,699,811.026 26,576,792.100 24,109,995.810 38,553,143.617
Contract Owner Redemptions: (11,048,026.997) (25,418,323.046) (19,007,708.525) (20,525,719.406) (15,075,629.795)
A13
NOTE 10: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments
in the Series Fund for the nine months ending September 30, 1998 were
as follows: (unaudited)
PORTFOLIOS
-----------------------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
------------ ----------- ------------ ------------ ------------
Purchases .................. $ 41,407,000 $ 9,956,000 $ 59,249,000 $ 10,879,000 $ 6,487,000
Sales ...................... $(27,519,000) $(4,700,000) $(37,072,000) $(23,804,000) $(21,436,000)
PORTFOLIOS (CONTINUED)
------------------------------------------------------------------------------------------------
HIGH
YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
------------ ------------ ------------ ----------- ------------
Purchases ................. $ 15,320,000 $ 50,276,000 $ 37,146,000 $12,137,000 $51,194,000
Sales ..................... $(10,435,000) $(16,806,000) $(10,017,000) $(7,205,000) $(2,260,000)
NOTE 11: RELATED PARTY TRANSACTIONS
The Prudential has purchased multiple VAL Contracts insuring the lives
of certain employees. The Prudential is the owner and beneficiary of
the Contracts. There were no net premium payments for the nine months
ended September 30, 1998. Equity of Contract owners in the Flexible
Managed subaccount at September 30, 1998 includes approximately $182.4
million owned by Prudential.
A14
FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31,1997
SUBACCOUNTS
----------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
------------ -------------- -------------- -------------- --------------
ASSETS
Investment in shares of The Prudential Series
Fund, Inc. Portfolios at net asset value
[Note 3] .......................................... $ 95,104,276 $ 128,910,758 $1,371,724,697 $1,347,792,874 $1,027,307,312
Receivable from The Prudential Insurance Company
of America [Note 2] ............................... 0 210,649 1,983,972 1,392,602 1,041,151
------------ -------------- -------------- -------------- --------------
Net Assets ...................................... $ 95,104,276 $ 129,121,407 $1,373,708,669 $1,349,185,476 $1,028,348,463
============ ============== ============== ============== ==============
NET ASSETS, representing:
Equity of Contract owners .......................... $ 93,269,424 $ 129,121,407 $1,373,708,669 $1,349,185,476 $1,028,348,463
Equity of The Prudential Insurance Company of
America ........................................... 1,834,852 0 0 0 0
------------ -------------- -------------- -------------- --------------
$ 95,104,276 $ 129,121,407 $1,373,708,669 $1,349,185,476 $1,028,348,463
============ ============== ============== ============== ==============
STATEMENTS OF OPERATIONS
For the year ended December 31, 1997
SUBACCOUNTS
---------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
---------- ----------- ------------ ------------- -------------
INVESTMENT INCOME
Dividend distributions received ....................... $5,094,912 $ 9,043,537 $ 28,870,327 $ 38,256,221 $ 45,612,319
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 5A] ............ 661,235 866,520 8,895,624 8,970,935 7,210,074
---------- ----------- ------------ ------------- -------------
NET EXPENSES ............................................ 661,235 866,520 8,895,624 8,970,935 7,210,074
---------- ----------- ------------ ------------- -------------
NET INVESTMENT INCOME (LOSS) ............................ 4,433,677 8,177,017 19,974,703 29,285,286 38,402,245
---------- ----------- ------------ ------------- -------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Capital gains distributions received .................. 0 1,452,476 73,183,544 201,042,079 110,154,176
Realized gain on shares redeemed
[average cost basis] ................................. 0 107,543 7,311,176 3,097,268 2,680,112
Net change in unrealized gain (loss) on investments ... 0 (702,474) 158,043,072 (37,001,732) (36,006,094)
---------- ----------- ------------ ------------- -------------
NET GAIN (LOSS) ON INVESTMENTS .......................... 0 857,545 238,537,792 167,137,615 76,828,194
---------- ----------- ------------ ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ............................. $4,433,677 $ 9,034,562 $258,512,495 $ 196,422,901 $ 115,230,439
========== =========== ============ ============= =============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A21 THROUGH A27
A15
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------
HIGH
YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
------------ ------------ ------------ ------------ -----------
ASSETS
Investment in shares of The Prudential Series
Fund, Inc. Portfolios at net asset value
[Note 3] ................................................... $ 91,667,936 $621,342,649 $440,639,081 $108,510,148 $91,416,002
Receivable from The Prudential Insurance Company
of America [Note 2] ........................................ 0 829,507 390,168 0 15,109
------------ ------------ ------------ ------------ -----------
Net Assets ............................................... $ 91,667,936 $622,172,156 $441,029,249 $108,510,148 $91,431,111
============ ============ ============ ============ ===========
NET ASSETS, representing:
Equity of Contract owners ................................... $ 91,609,007 $622,172,156 $441,029,249 $108,451,737 $91,431,111
Equity of The Prudential Insurance Company of
America .................................................... 58,929 0 0 58,411 0
------------ ------------ ------------ ------------ -----------
$ 91,667,936 $622,172,156 $441,029,249 $108,510,148 $91,431,111
============ ============ ============ ============ ===========
SUBACCOUNTS (CONTINUED)
-----------------------------------------------------------------
HIGH
YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
----------- ------------ ------------ ---------- -----------
INVESTMENT INCOME
Dividend distributions received .............................. $ 8,213,223 $ 8,102,242 $ 9,608,504 $1,281,804 $ 157,623
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 5A] ................... 618,514 3,790,129 2,532,105 686,676 439,584
----------- ------------ ------------ ----------- -----------
NET EXPENSES ................................................... 618,514 3,790,129 2,532,105 686,676 439,584
----------- ------------ ------------ ----------- -----------
NET INVESTMENT INCOME (LOSS) ................................... 7,594,709 4,312,113 7,076,399 595,128 (281,961)
----------- ------------ ------------ ----------- -----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Capital gains distributions received ......................... 0 17,197,911 39,390,070 5,120,114 5,052,341
Realized gain on shares redeemed
[average cost basis] ........................................ 311,580 6,786,808 3,982,449 309,311 525,215
Net change in unrealized gain (loss) on investments .......... 2,620,272 113,415,557 59,248,683 (917,843) 10,743,964
----------- ------------ ------------ ----------- -----------
NET GAIN (LOSS) ON INVESTMENTS ................................. 2,931,852 137,400,276 102,621,202 4,511,582 16,321,520
----------- ------------ ------------ ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS .................................... $10,526,561 $141,712,389 $109,697,601 $5,106,710 $16,039,559
=========== ============ ============ ========== ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A21 THROUGH A27
A16
FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31,1997, 1996 and 1995
SUBACCOUNTS
-----------------------------------------------------------------------------------
MONEY DIVERSIFIED
MARKET BOND
-------------------------------------- ------------------------------------------
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ------------ ------------ ------------
OPERATIONS
Net investment income (loss) ............ $ 4,433,677 $ 4,058,398 $ 4,217,643 $ 8,177,017 $ 6,388,307 $ 5,652,448
Capital gains distributions received .... 0 0 0 1,452,476 0 222,002
Realized gain (loss) on shares redeemed
[average cost basis] ................... 0 0 0 107,543 19,658 30,407
Net change in unrealized gain (loss) on
investments ........................... 0 0 0 (702,474) (2,104,541) 10,042,691
----------- ----------- ----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ............... 4,433,677 4,058,398 4,217,643 9,034,562 4,303,424 15,947,548
----------- ----------- ----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[Note 7] ................................ (6,936,043) 768,830 8,955,240 3,856,643 10,268,006 9,712,345
----------- ----------- ----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM EQUITY TRANSFERS
[Note 8] ................................ (147,721) 1,422,930 161,461 (196,475) (142,209) 143,151
----------- ----------- ----------- ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ... (2,650,087) 6,250,158 13,334,344 12,694,730 14,429,221 25,803,044
----------- ----------- ----------- ------------ ------------ ------------
NET ASSETS:
Beginning of year ....................... 97,754,363 91,504,205 78,169,861 116,426,677 101,997,456 76,194,412
----------- ----------- ----------- ------------ ------------ ------------
End of year ............................. $95,104,276 $97,754,363 $91,504,205 $129,121,407 $116,426,677 $101,997,456
=========== =========== =========== ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A21 THROUGH A27
A17
SUBACCOUNTS (CONTINUED)
----------------------------------------------
EQUITY
----------------------------------------------
1997 1996 1995
-------------- -------------- ------------
OPERATIONS
Net investment income (loss) .......... $ 19,974,703 $ 16,848,341 $ 9,985,776
Capital gains distributions received .. 73,183,544 92,436,486 27,318,049
[average cost basis]
Realized gain (loss) on shares redeemed 7,311,176 755,380 11,957
Net change in unrealized gain (loss)
on investments ....................... 158,043,072 41,805,447 129,700,617
-------------- -------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ............. 258,512,495 151,845,654 167,016,399
-------------- -------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[Note 7] .............................. 55,194,557 116,044,081 130,026,767
-------------- -------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM EQUITY TRANSFERS
[Note 8] .............................. (1,730,961) (2,717,850) (595,673)
-------------- -------------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS . 311,976,091 265,171,885 296,447,493
-------------- -------------- ------------
NET ASSETS:
Beginning of year ..................... 1,061,732,578 796,560,693 500,113,200
-------------- -------------- ------------
End of year ........................... $1,373,708,669 $1,061,732,578 $796,560,693
============== ============== ============
SUBACCOUNTS (CONTINUED)
---------------------------------------------
FLEXIBLE
MANAGED
---------------------------------------------
1997 1996 1995
-------------- -------------- ------------
OPERATIONS
Net investment income (loss) ............ $ 29,285,286 $ 25,347,934 $ 21,550,235
Capital gains distributions received .... 201,042,079 106,224,518 39,426,921
[average cost basis]
Realized gain (loss) on shares redeemed.. 3,097,268 487,657 56,509
Net change in unrealized gain (loss)
on investments ........................ (37,001,732) (5,082,172) 110,261,394
-------------- -------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ............... 196,422,901 126,977,937 171,295,059
-------------- -------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[Note 7] ................................ 15,507,613 57,031,152 86,936,282
-------------- -------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM EQUITY TRANSFERS
[Note 8] ................................ (332,076) (1,594,508) (2,895,506)
-------------- -------------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS . 211,598,438 182,414,581 255,335,835
-------------- -------------- ------------
NET ASSETS:
Beginning of year ..................... 1,137,587,038 955,172,457 699,836,622
-------------- -------------- ------------
End of year ........................... $1,349,185,476 $1,137,587,038 $955,172,457
============== ============== ============
SUBACCOUNTS (CONTINUED)
--------------------------------------------
CONSERVATIVE
BALANCED
--------------------------------------------
1997 1996 1995
-------------- ------------ ------------
OPERATIONS
Net investment income (loss) ............ $ 38,402,245 $ 29,326,106 $ 25,291,477
Capital gains distributions received .... 110,154,176 55,843,548 26,552,510
[average cost basis]
Realized gain (loss) on shares redeemed 2,680,112 627,498 97,662
Net change in unrealized gain (loss)
on investments ........................ (36,006,094) 10,273,250 55,648,508
-------------- ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ............... 115,230,439 96,070,402 107,590,157
-------------- ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[Note 7] ................................ (5,484,215) 36,970,919 44,932,925
-------------- ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM EQUITY TRANSFERS
[Note 8] ................................ 98,440 (1,143,063) (3,421,660)
-------------- ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ... 109,844,664 131,898,258 149,101,422
-------------- ------------ ------------
NET ASSETS:
Beginning of year ....................... 918,503,799 786,605,541 637,504,119
-------------- ------------ ------------
End of year ............................. $1,028,348,463 $918,503,799 $786,605,541
============== ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A21 THROUGH A27
A18
FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31,1997, 1996 and 1995
SUBACCOUNTS
----------------------------------------------------------------------------------
HIGH
YIELD STOCK
BOND INDEX
--------------------------------------- ----------------------------------------
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ------------ ------------ ------------
OPERATIONS
Net investment income (loss).............. $ 7,594,709 $ 6,844,609 $ 6,151,112 $ 4,312,113 $ 4,179,793 $ 3,665,394
Capital gains distributions received...... 0 0 0 17,197,911 4,749,836 2,097,393
Realized gain (loss) on shares redeemed
[average cost basis] .................... 311,580 20,787 (58,578) 6,786,808 263,052 293,916
Net change in unrealized gain (loss) on
investments............................. 2,620,272 581,780 3,163,738 113,415,557 61,075,735 66,716,563
----------- ----------- ----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................. 10,526,561 7,447,176 9,256,272 141,712,389 70,268,416 72,773,266
----------- ----------- ----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[Note 7].................................. 374,682 5,326,899 4,374,480 58,525,779 55,125,681 33,935,158
----------- ----------- ----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM EQUITY TRANSFERS
[Note 8].................................. (110,168) 52,425 (119,164) (910,143) 82,144 (100,558)
----------- ----------- ----------- ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 10,791,075 12,826,500 13,511,588 199,328,025 125,476,241 106,607,866
NET ASSETS:
Beginning of year......................... 80,876,861 68,050,361 54,538,773 422,844,131 297,367,890 190,760,024
----------- ----------- ----------- ------------ ------------ ------------
End of year............................... $91,667,936 $80,876,861 $68,050,361 $622,172,156 $422,844,131 $297,367,890
=========== =========== =========== ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A21 THROUGH A27
A19
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------------------------
EQUITY
INCOME GLOBAL
------------------------------------------ ---------------------------------------
1997 1996 1995 1997 1996 1995
------------ ------------ ------------ ------------ ----------- -----------
OPERATIONS
Net investment income (loss).............. $ 7,076,399 $ 7,350,510 $ 6,301,712 $ 595,128 $ 1,332,143 $ 454,049
Capital gains distributions received ...... 39,390,070 9,133,917 9,279,251 5,120,114 1,298,584 915,804
Realized gain (loss) on shares redeemed
[average cost basis] ..................... 3,982,449 171,030 46,601 309,311 16,670 4,998
Net change in unrealized gain (loss) on
investments ............................. 59,248,683 32,816,172 18,945,636 (917,843) 9,125,406 4,212,026
------------ ------------ ------------ ------------ ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ................. 109,697,601 49,471,629 34,573,200 5,106,710 11,772,803 5,586,877
------------ ------------ ------------ ------------ ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[Note 7] .................................. 36,671,034 23,125,635 38,554,244 17,556,139 24,827,377 16,098,541
------------ ------------ ------------ ------------ ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM EQUITY TRANSFERS
[Note 8] .................................. (393,762) (711,051) (646,585) (317,463) (137,878) (1,921,654)
------------ ------------ ------------ ------------ ----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS ..... 145,974,873 71,886,213 72,480,859 22,345,386 36,462,302 19,763,764
NET ASSETS:
Beginning of year ......................... 295,054,376 223,168,163 150,687,304 86,164,762 49,702,460 29,938,696
------------ ------------ ------------ ------------ ----------- -----------
End of year ............................... $441,029,249 $295,054,376 $223,168,163 $108,510,148 $86,164,762 $49,702,460
============ ============ ============ ============ =========== ===========
SUBACCOUNTS (CONTINUED)
--------------------------------------
PRUDENTIAL*
JENNISON
--------------------------------------
1997 1996 1995
----------- ----------- ----------
OPERATIONS
Net investment income (loss) ............ $ (281,961) $ (85,477) $ (11,994)
Capital gains distributions received .... 5,052,341 0 0
Realized gain (loss) on shares redeemed
[average cost basis] ................... 525,215 0 0
Net change in unrealized gain (loss) on
investments ........................... 10,743,964 3,012,624 281,405
----------- ----------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ............... 16,039,559 2,927,147 269,411
----------- ----------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[Note 7] ................................ 34,918,336 30,275,275 7,175,027
----------- ----------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM EQUITY TRANSFERS
[Note 8] ................................ (773,643) 385,656 214,343
----------- ----------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS ... 50,184,252 33,588,078 7,658,781
NET ASSETS:
Beginning of year ....................... 41,246,859 7,658,781 0
----------- ----------- ----------
End of year ............................. $91,431,111 $41,246,859 $7,658,781
=========== =========== ==========
*Commenced Business on 5/1/95.
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A21 THROUGH A27
A20
NOTES TO FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
For the Year Ended December 31, 1997
NOTE 1: GENERAL
The Prudential Variable Appreciable Account (the "Account") of The
Prudential Insurance Company of America ("Prudential") was established
on August 11, 1987 by a resolution of Prudential's Board of Directors
in conformity with insurance laws of the State of New Jersey. The
assets of the Account are segregated from Prudential's other assets.
Proceeds from the purchases of Prudential Variable Appreciable Life
(PVAL) and Prudential Survivorship Preferred (SVUL) Contracts are
invested in the Account.
The Account is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust. There are ten subaccounts within
the Account available to Contract holders of PVUL, which invest 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 Prudential.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The financial statements are prepared in conformity with generally
accepted accounting principles (GAAP). The preparation of the financial
statements, in conformity with GAAP, requires management to make
estimates and assumptions that affect the reported amounts and
disclosures. Actual results could differ from those estimates.
Investments - The investments in shares of the Series Fund are stated
at the net asset value of the respective portfolio.
Security Transactions - Realized gains and losses on security
transactions are reported on an average cost basis. Purchase and sale
transactions are recorded as of the trade date of the security being
purchased or sold.
Distributions Received - Dividend and capital gain distributions
received are reinvested in additional shares of the Series Fund and are
recorded on the ex-dividend date.
Equity of The Prudential Insurance Company of America - Prudential
maintains a position in the Account for liquidity purposes including
unit purchases and redemptions, fund share transactions, and expense
processing. Prudential monitors the balance daily and transfers funds
based upon anticipated activity. At times, Prudential may owe an amount
to the Account, which is reflected in the Account's Statements of Net
Assets as a receivable from Prudential. The receivable does not have an
effect on the Contract owner's account or the related unit value.
Note 3: 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, 1997 were as follows:
PORTFOLIOS
--------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
----------- ------------ -------------- -------------- --------------
Number of Shares: 9,510,428 11,695,927 44,150,785 77,995,962 68,623,393
Net asset value per share: $ 10.00000 $ 11.02185 $ 31.06909 $ 17.28029 $ 14.97022
Cost: $95,104,276 $127,778,984 $1,021,616,812 $1,298,687,478 $1,012,639,267
PORTFOLIOS (CONTINUED)
--------------------------------------------------------------------------
HIGH
YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
------------ ------------ ------------ ----------- -----------
Number of Shares: 11,255,154 20,560,943 19,682,485 6,054,080 5,155,568
Net asset value per share: $ 8.14453 $ 30.21956 $ 22.38737 $ 17.92348 $ 17.73151
Cost: $ 89,660,507 $361,879,797 $331,809,980 $97,511,686 $77,378,009
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding Contract owner units, unit values and total value of
Contract owner equity at December 31, 1997 were as follows:
SUBACCOUNTS
-------------------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
--------------- --------------- ---------------- ---------------- -----------------
Contract Owner Units Outstanding (PVAL). 38,909,139.353 37,082,552.171 192,670,577.036 270,135,601.789 218,020,371.531
Unit Value (PVAL) ...................... $ 1.58873 $ 2.17433 $ 4.29156 $ 3.07895 $ 2.55041
--------------- --------------- ---------------- ---------------- -----------------
Contract Owner Equity (PVAL) ........... $ 61,816,117 $ 80,629,705 $ 826,857,342 $ 831,734,011 $ 556,041,336
--------------- --------------- ---------------- ---------------- -----------------
Contract Owner Units Outstanding
(PVAL $100,000+ face) ................ 18,458,545.137 22,697,498.739 129,893,269.042 171,984,362.751 189,705,796.235
Unit Value (PVAL $100,000+ face) ....... $ 1.54794 $ 2.11769 $ 4.18060 $ 2.99911 $ 2.48409
Contract Owner Equity (PVAL --------------- --------------- ---------------- ---------------- -----------------
$100,000+ face) ...................... $ 28,572,720 $ 48,066,266 $ 543,031,800 $ 515,800,022 $ 471,246,271
--------------- --------------- ---------------- ---------------- -----------------
Contract Owner Units Outstanding (SVUL) 2,648,352.917 380,114.649 2,579,924.823 1,234,178.929 836,953.765
Unit Value (SVUL) ...................... $ 1.08769 $ 1.11923 $ 1.48048 $ 1.33809 $ 1.26752
--------------- --------------- ---------------- ---------------- -----------------
Contract Owner Equity (SVUL) ........... $ 2,880,587 $ 425,436 $ 3,819,527 $ 1,651,443 $ 1,060,856
--------------- --------------- ---------------- ---------------- -----------------
TOTAL CONTRACT OWNER EQUITY ............ $ 93,269,424 $ 129,121,407 $ 1,373,708,669 $ 1,349,185,476 $ 1,028,348,463
=============== =============== ================ ================ =================
A22
SUBACCOUNTS (CONTINUED)
---------------------------------------------------------------------------------------
HIGH YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
--------------- --------------- --------------- --------------- ---------------
Contract Owner Units Outstanding (PVAL). 23,131,451.862 87,096,741.492 71,391,113.621 58,222,623.069 36,483,251.911
Unit Value (PVAL) ...................... $ 2.37943 $ 4.41436 $ 4.17583 $ 1.41253 $ 1.86119
--------------- --------------- --------------- --------------- ---------------
Contract Owner Equity (PVAL) ........... $ 55,039,671 $ 384,476,371 $ 298,117,154 $ 82,241,202 $ 67,902,264
--------------- --------------- --------------- --------------- ---------------
Contract Owner Units Outstanding
(PVAL $100,000+ face) ................ 15,535,412.038 54,360,075.140 34,647,590.548 17,548,821.325 12,109,526.233
Unit Value (PVAL $100,000+ face) ....... $ 2.31834 $ 4.29923 $ 4.06648 $ 1.39734 $ 1.84650
--------------- --------------- --------------- --------------- ---------------
Contract Owner Equity (PVAL
$100,000+ face) ...................... $ 36,016,367 $ 233,706,466 $ 140,893,734 $ 24,521,670 $ 22,360,240
--------------- --------------- --------------- --------------- ---------------
Contract Owner Units Outstanding (SVUL) 448,976.859 2,430,022.226 1,208,375.161 1,346,309.879 726,406.872
Unit Value (SVUL) ...................... $ 1.23162 $ 1.64168 $ 1.67031 $ 1.25444 $ 1.60875
--------------- --------------- --------------- --------------- ---------------
Contract Owner Equity (SVUL) ........... $ 552,969 $ 3,989,319 $ 2,018,361 $ 1,688,865 $ 1,168,607
--------------- --------------- --------------- --------------- ---------------
TOTAL CONTRACT OWNER EQUITY............. $ 91,609,007 $ 622,172,156 $ 441,029,249 $ 108,451,737 $ 91,431,111
=============== =============== =============== =============== ===============
NOTE 5: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges at an effective annual
rate of 0.90% is applied daily against the net assets representing
equity of PVAL Contract owners held in each subaccount. For Contract
owners investing in PVAL with face amounts of $100,000 or more the
annual rate is 0.60%. For Contract owners investing in SVUL the
annual rate is 0.90%.
Mortality risk is that Contract owners may not live as long as
estimated and expense risk is that the cost of issuing and
administering the policies may exceed the estimated expenses. For
1997, the amount of these charges paid to Prudential was $18,767,367
for PVAL Contracts, $18,002,915 for PVAL Contracts with face amounts
of $100,000 or more and $109,088 for SVUL Contracts.
B. Deferred Sales Charge
Subsequent to Contract owner redemption, a deferred sales charge is
imposed upon surrenders of certain variable life insurance Contracts
to compensate 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. For 1997, the amount of these charges
paid to Prudential was $8,918,133.
C. Partial Withdrawal Charge
A charge is imposed by Prudential on partial withdrawals of the cash
surrender value. For 1997, the amount of these charges paid to
Prudential was $3,718,341.
D. Expense Reimbursement
PVAL Contracts are reimbursed by Prudential, on a non-guaranteed
basis, for expenses incurred by the Series Fund in excess of the
effective rate of 0.45% for the Stock Index Portfolio, 0.50% for the
Equity Income Portfolio, and 0.65% for the High Yield Bond Portfolio
of the average daily net assets of these portfolios. For 1997, the
amount of these reimbursements totaled $0.
A23
E. Cost of Insurance Charges
Contract owners contributions to the Account are subject to the
following charges: transaction costs, premium taxes, sales charges,
monthly administration charges, and death benefit risk charges prior
to the investment in the Account. During 1997, Prudential received a
total of $18,592,697, $37,395,717, $97,887,744, $63,196,365 and
$13,745,360, respectively, for these charges.
NOTE 6: TAXES
Prudential is taxed as a "life insurance company" as defined by the
Internal Revenue Code and the results of operations of the Account form
a part of Prudential's consolidated federal tax return. Under current
federal law, no federal income taxes are payable by the Account. As
such, no provision for tax liability has been recorded in these
financial statements.
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM
PAYMENTS AND OTHER OPERATING TRANSFERS
The following amounts represent Contract owner activity components for
the year ended December 31, 1997:
SUBACCOUNTS
---------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
------------ ------------ ------------- ------------- -------------
Contract Owner Net Payments ................ $ 43,029,352 $ 27,918,752 $ 293,586,658 $ 230,098,301 $ 193,920,159
Policy Loans ............................... $ (2,616,136) $ (2,676,866) $ (36,815,052) $ (29,768,329) $ (21,017,180)
Policy Loan Repayments and Interest ........ $ 1,685,370 $ 1,259,455 $ 15,156,086 $ 13,061,811 $ 10,130,000
Surrenders, Withdrawals, and Death Benefits. $(11,469,314) $ (7,179,534) $ (79,836,234) $ (69,955,243) $ (68,407,322)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Options .................... $(27,263,357) $ (3,556,460) $ 281,061 $ (12,348,231) $ (19,240,097)
Administrative and Other Charges ........... $(10,301,958) $(11,908,704) $(137,177,962) $(115,580,696) $(100,869,775)
SUBACCOUNTS (CONTINUED)
---------------------------------------------------------------------------
HIGH
YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
----------- ------------ ------------ ------------ -------------
Contract Owner Net Payments ................ $19,451,504 $126,688,004 $ 79,016,436 $ 34,211,689 $ 34,294,641
Policy Loans ............................... $(2,378,667) $(15,814,797) $ (9,558,454) $ (2,628,076) $ (1,732,453)
Policy Loan Repayments and Interest ........ $ 1,433,405 $ 5,919,148 $ 3,893,428 $ 1,262,980 $ 744,576
Surrenders, Withdrawals, and Death
Benefits ................................... $(6,747,487) $(32,499,126) $(21,564,128) $ (7,075,480) $ (3,227,110)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Options .................... $(2,355,030) $ 30,361,425 $ 21,482,832 $ 4,870,997 $ 16,630,147
Administrative and Other Charges ........... $(9,029,043) $(56,128,875) $(36,599,080) $(13,085,971) $(11,791,465)
NOTE 8: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS
The increase (decrease) in net assets resulting from equity transfers
represents the net contributions (withdrawals) of Prudential to (from)
the Account.
A24
NOTE 9: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) for the
year ended December 31, 1997 were as follows:
SUBACCOUNTS
---------------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
--------------- --------------- --------------- --------------- ----------------
Contract Owner Contributions: 65,667,687.360 16,213,787.198 92,473,729.304 93,973,163.620 93,048,912.698
Contract Owner Redemptions: (69,425,851.286) (14,250,810.327) (76,628,697.286) (87,813,518.888) (94,880,956.345)
SUBACCOUNTS (CONTINUED)
---------------------------------------------------------------------------------------
HIGH YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
--------------- --------------- --------------- --------------- ----------------
Contract Owner Contributions: 17,186,033.239 50,408,149.325 34,569,865.840 37,198,996.863 36,782,725.213
Contract Owner Redemptions: (16,878,089.505) (34,222,528.100) (24,004,754.496) (24,567,570.689) (16,099,947.069)
NOTE 10: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments
in the Series Fund were as follows:
PORTFOLIOS
---------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
------------ ----------- ------------ ------------ ------------
For the year ended December 31, 1997
Purchases............................. $ 26,486,000 $ 6,759,000 $ 69,128,000 $ 24,560,000 $ 10,479,000
Sales................................. $(34,231,000) $(4,176,000) $(26,544,000) $(19,748,000) $(24,116,000)
PORTFOLIOS (CONTINUED)
--------------------------------------------------------------------------
HIGH YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
------------ ----------- ----------- ----------- -----------
For the year ended December 31, 1997
Purchases............................. $ 11,827,000 $ 60,645,000 $ 37,969,000 $ 18,498,000 $ 36,454,000
Sales................................. $(12,181,000) $ (7,649,000) $ (4,614,000) $ (1,946,000) $ (2,764,000)
NOTE 11: RELATED PARTY TRANSACTIONS
The Prudential has purchased multiple VAL Contracts insuring the lives
of certain employees. The Prudential is the owner and beneficiary of
the Contracts. There were no net premium payments for the year ended
December 31, 1997. Equity of Contract owners in the Flexible Managed
subaccount at December 31, 1997 includes approximately $242.1 million
owned by the Prudential.
A25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of the
Variable Universal Life Subaccounts of the
Prudential Variable Appreciable Account
and the Board of Directors of
The Prudential Insurance Company of America
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of the subaccounts (Money Market,
Diversified Bond, Equity, Flexible Managed, Conservative Balanced, High Yield
Bond, Stock Index, Equity Income, Global, and Prudential Jennison) of the
Prudential Variable Appreciable Account at December 31, 1997, the results of
each of their operations for the year then ended and the changes in each of
their net assets for each of the two years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of The Prudential Insurance Company of
America's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of shares owned in The Prudential Series Fund, Inc. at December 31,
1997, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
March 20, 1998
A26
INDEPENDENT AUDITORS' REPORT
To the Contract Owners of the
Variable Universal Life Subaccounts 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 changes in net assets of The
Prudential Variable Appreciable Account of The Prudential Insurance Company of
America (comprising, respectively, the Money Market, Diversified Bond, Equity,
Flexible Managed, Conservative Balanced, High Yield Bond, Stock Index, Equity
Income, Global, and Prudential Jennison subaccounts) for the periods presented
in the year ended December 31, 1995. 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 financial statements present fairly, in all material
respects, the changes in net assets of each of the respective subaccounts
constituting The Prudential Variable Appreciable Account for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
February 15, 1996
A27
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
March 5, 1998
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in equity and
of cash flows present fairly, in all material respects, the financial position
of The Prudential Insurance Company of America and its subsidiaries at December
31, 1997 and 1996, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles. 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 audit. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
1
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 operations, changes
in equity, and cash flows of The Prudential Insurance Company of America and
subsidiaries for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated statements of operations, changes in equity,
and cash flows present fairly, in all material respects, the results of
operations and cash flows of The Prudential Insurance Company of America and
subsidiaries for the year ended December 31, 1995 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
June 4, 1997
2
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1997 AND 1996 (IN MILLIONS)
1997 1996
----------- -----------
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1997: $71,496; 1996: $64,545) .......... $ 75,270 $ 66,553
Held to maturity, at amortized cost (fair value, 1997: $19,894; 1996: $21,362) ............ 18,700 20,403
Trading account assets, at fair value........................................................ 6,044 4,219
Equity securities, available for sale, at fair value (cost, 1997: $2,376; 1996: $2,103) ..... 2,810 2,622
Mortgage loans on real estate ............................................................... 16,004 17,097
Investment real estate ...................................................................... 1,519 2,586
Policy loans ................................................................................ 6,827 6,692
Securities purchased under agreements to resell ............................................. 8,661 5,347
Cash collateral for borrowed securities ..................................................... 5,047 2,416
Short-term investments ...................................................................... 12,106 9,294
Other long-term investments ................................................................. 3,360 2,995
----------- -----------
Total investments ......................................................................... 156,348 140,224
Cash ........................................................................................ 3,636 2,091
Deferred policy acquisition costs ........................................................... 5,994 6,291
Accrued investment income ................................................................... 1,909 1,828
Receivables from broker-dealer clients ...................................................... 6,273 5,281
Other assets ................................................................................ 11,276 9,990
Separate Account assets ..................................................................... 74,046 63,358
----------- -----------
TOTAL ASSETS .................................................................................. $ 259,482 $ 229,063
=========== ===========
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits ...................................................................... $ 65,581 $ 63,955
Policyholders' account balances ............................................................. 32,941 36,009
Other policyholders' liabilities ............................................................ 6,659 6,043
Policyholders' dividends .................................................................... 1,269 714
Securities sold under agreements to repurchase .............................................. 12,347 7,503
Cash collateral for loaned securities ....................................................... 14,117 8,449
Short-term debt ............................................................................. 6,774 6,562
Long-term debt .............................................................................. 4,273 3,760
Income taxes payable ........................................................................ 500 1,544
Payables to broker-dealer clients ........................................................... 3,338 3,018
Securities sold but not yet purchased ....................................................... 3,533 1,900
Other liabilities ........................................................................... 14,774 8,238
Separate Account liabilities ................................................................ 73,658 62,845
----------- -----------
TOTAL LIABILITIES ......................................................................... 239,764 210,540
=========== ===========
COMMITMENTS AND CONTINGENCIES (SEE NOTES 12, 13 AND 14)
EQUITY
Retained earnings ........................................................................... 18,051 17,443
Net unrealized investment gains ............................................................. 1,752 1,136
Foreign currency translation adjustments .................................................... (85) (56)
----------- -----------
TOTAL EQUITY .............................................................................. 19,718 18,523
----------- -----------
TOTAL LIABILITIES AND EQUITY .................................................................. $ 259,482 $ 229,063
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
1997 1996 1995
------------ ----------- -----------
REVENUES
Premiums .................................................................... $ 18,534 $ 18,962 $ 19,783
Policy charges and fee income ............................................... 1,828 1,912 1,824
Net investment income ....................................................... 9,863 9,742 10,178
Realized investment gains, net .............................................. 2,187 1,138 1,503
Commissions and other income ................................................ 4,661 4,521 3,952
------------ ----------- -----------
Total revenues ............................................................ 37,073 36,275 37,240
------------ ----------- -----------
BENEFITS AND EXPENSES
Policyholders' benefits ..................................................... 18,208 19,306 19,470
Interest credited to policyholders' account balances ........................ 2,043 2,251 2,739
Dividends to policyholders .................................................. 2,429 2,339 2,317
General and administrative expenses ......................................... 11,926 10,875 10,345
Sales practice remediation costs ............................................ 1,640 410 --
------------ ----------- -----------
Total benefits and expenses ............................................... 36,246 35,181 34,871
------------ ----------- -----------
INCOME FROM OPERATIONS BEFORE INCOME TAXES .................................... 827 1,094 2,369
------------ ----------- -----------
Income taxes
Current ................................................................... (46) 406 1,293
Deferred .................................................................. 263 (390) (167)
------------ ----------- -----------
217 16 1,126
------------ ----------- -----------
NET INCOME .................................................................... $ 610 $ 1,078 $ 1,243
============ =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
FOREIGN NET
CURRENCY UNREALIZED
RETAINED TRANSLATION INVESTMENT TOTAL
EARNINGS ADJUSTMENTS GAINS EQUITY
--------- ----------- ---------- ---------
BALANCE, JANUARY 1, 1995 ........................ $ 15,126 $ (42) $ 16 $ 15,100
Net income .................................... 1,243 -- -- 1,243
Change in foreign currency translation
adjustments ................................. -- 18 -- 18
Change in net unrealized investment gains ..... -- -- 2,381 2,381
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 ...................... 16,369 (24) 2,397 18,742
Net income .................................... 1,078 -- -- 1,078
Change in foreign currency translation
adjustments ................................. -- (32) -- (32)
Change in net unrealized investment gains ..... -- -- (1,261) (1,261)
Additional pension liability adjustment ....... (4) -- -- (4)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 ...................... 17,443 (56) 1,136 18,523
Net income .................................... 610 -- -- 610
Change in foreign currency translation
adjustments ................................. -- (29) -- (29)
Change in net unrealized investment gains ..... -- -- 616 616
Additional pension liability adjustment ....... (2) -- -- (2)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ...................... $ 18,051 $ (85) $ 1,752 $ 19,718
========= ========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
1997 1996 1995
---------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 610 $ 1,078 $ 1,243
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net ............................... (2,187) (1,138) (1,503)
Policy charges and fee income ................................ (258) (208) (201)
Interest credited to policyholders' account balances ......... 2,043 2,128 2,616
Depreciation and amortization ................................ 258 266 398
Other, net ................................................... 4,681 (1,180) (2,628)
Loss (gain) on divestitures .................................. -- (116) 297
Change in:
Deferred policy acquisition costs .......................... 143 (122) (214)
Policy liabilities and insurance reserves .................. 2,477 2,471 2,382
Securities purchased under agreements to resell ............ (3,314) (217) 461
Trading account assets ..................................... (1,825) (433) 2,579
Income taxes receivable/payable ............................ (1,391) (937) 194
Cash collateral for borrowed securities .................... (2,631) (332) 25
Broker-dealer client receivables/payables .................. (672) (607) (420)
Securities sold but not yet purchased ...................... 1,633 251 (225)
Securities sold under agreements to repurchase ............. 4,844 (490) (712)
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES ...................... $ 4,411 $ 414 $ 4,292
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale .......................... $ 123,550 $ 123,368 $ 97,084
Fixed maturities, held to maturity ............................ 4,042 4,268 3,767
Equity securities, available for sale ......................... 2,572 2,162 2,370
Mortgage loans on real estate ................................. 4,299 5,731 5,553
Investment real estate ........................................ 1,842 615 435
Other long-term investments ................................... 5,081 3,203 3,385
Divestitures .................................................. -- 52 790
Payments for the purchase of:
Fixed maturities, available for sale .......................... (129,854) (125,093) (101,197)
Fixed maturities, held to maturity ............................ (2,317) (2,844) (6,803)
Equity securities, available for sale ......................... (2,461) (2,384) (1,391)
Mortgage loans on real estate ................................. (3,363) (1,906) (3,015)
Investment real estate ........................................ (241) (142) (387)
Other long-term investments ................................... (4,148) (2,060) (1,849)
Cash collateral for securities loaned (net) .................... 5,668 2,891 3,471
Short-term investments (net) ................................... (2,848) (1,915) 2,793
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES ...................... $ 1,822 $ 5,946 $ 5,006
--------- --------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits ................................ $ 5,020 $ 2,799 $ 2,724
Policyholders' account withdrawals ............................. (9,873) (8,099) (9,164)
Net increase(decrease) in short-term debt ...................... 305 583 (3,077)
Proceeds from the issuance of long-term debt ................... 324 93 763
Repayments of long-term debt ................................... (464) (1,306) (30)
--------- --------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES ................... (4,688) (5,930) (8,784)
--------- --------- ---------
NET INCREASE IN CASH ............................................. 1,545 430 514
CASH, BEGINNING OF YEAR .......................................... 2,091 1,661 1,147
--------- --------- ---------
CASH, END OF YEAR ................................................ $ 3,636 $ 2,091 $ 1,661
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid ................................................ $ 968 $ 793 $ 430
--------- --------- ---------
Interest paid .................................................... $ 1,243 $ 1,404 $ 1,413
--------- --------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
The Prudential Insurance Company of America and its subsidiaries
(collectively, "the Company") provide insurance and financial services
throughout the United States and many locations worldwide. Principal
products and services provided include life and health insurance, annuities,
pension and retirement related investments and administration, managed
healthcare, property and casualty insurance, securities brokerage, asset
management, investment advisory services and real estate brokerage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Prudential
Insurance Company of America, a mutual life insurance company, and its
subsidiaries, and those partnerships and joint ventures in which the Company
has a controlling interest. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
("GAAP"). All significant intercompany balances and transactions have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the period. Actual results could differ from
those estimates.
INVESTMENTS
FIXED MATURITIES classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the positive intent
and ability to hold to maturity are stated at amortized cost and classified
as "held to maturity." The amortized cost of fixed maturities are written
down to estimated fair value when considered impaired and the decline in
value is considered to be other than temporary. Unrealized gains and losses
on fixed maturities "available for sale," net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Net unrealized investment
gains."
TRADING ACCOUNT ASSETS are carried at estimated fair value.
EQUITY SECURITIES, available for sale, comprised of common and
non-redeemable preferred stock, are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Net unrealized investment
gains."
MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal
balances, net of unamortized discounts and allowance for losses on impaired
loans. Impaired loans are identified by management as loans in which a
probability exists that all amounts due according to the contractual terms
of the loan agreement will not be collected. Impaired loans are measured
based on the present value of expected future cash flows, discounted at the
loan's effective interest rate or the fair value of the collateral, if the
loan is collateral dependent. The Company's periodic evaluation of the
adequacy of the allowance for losses is based on a number of factors,
including past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of the underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant factors.
This evaluation is inherently subjective as it requires estimating the
amounts and timing of future cash flows expected to be received on impaired
loans.
Interest received on impaired loans, including loans that were previously
modified in a troubled debt restructuring, is either applied against the
principal or reported as revenue, according to management's judgment as to
the collectibility of principal. Management discontinues the accrual of
interest on impaired loans after the loans are 90 days delinquent as to
principal or interest or earlier when management has serious doubts about
collectibility. When a loan is recognized as
8
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
impaired, any accrued but unpaid interest previously recorded on such loan
is reversed against interest income of the current period. Generally, a loan
is restored to accrual status only after all delinquent interest and
principal are brought current and, in the case of loans where interest has
been interrupted for a substantial period, a regular payment performance has
been established.
INVESTMENT REAL ESTATE, which the Company has the intent to hold for the
production of income, is carried at depreciated cost less any write-downs to
fair value for impairment losses. Depreciation on real estate is computed
using the straight-line method over the estimated lives of the properties.
Real estate to be disposed of is carried at the lower of depreciated cost or
fair value less selling costs and is not depreciated once classified as
such.
POLICY LOANS are carried at unpaid principal balances.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE are carried at the amounts at which the securities
will be subsequently resold or reacquired, including accrued interest, as
specified in the respective agreements. The Company's policy is to take
possession of securities purchased under agreements to resell. The market
value of securities to be repurchased is monitored, and additional
collateral is requested, where appropriate, to protect against credit
exposure.
SECURITIES BORROWED AND SECURITIES LOANED are recorded at the amount of cash
advanced or received. With respect to securities loaned, the Company obtains
collateral in an amount equal to 102% and 105% of the fair value of the
domestic and foreign securities, respectively. The Company monitors the
market value of securities borrowed and loaned on a daily basis with
additional collateral obtained as necessary. Non-cash collateral received is
not reflected in the Consolidated Statements of Financial Position.
Substantially, all the Company's securities borrowed contracts are with
other brokers and dealers, commercial banks and institutional clients.
Substantially, all of the Company's securities loaned are with large
brokerage firms.
These transactions are used to generate net investment income and facilitate
trading activity. These instruments are short-term in nature (usually 30
days or less) and are collateralized principally by U.S. Government and
mortgage-backed securities. The carrying amounts of these instruments
approximate fair value because of the relatively short period of time
between the origination of the instruments and their expected realization.
SHORT-TERM INVESTMENTS, including highly liquid debt instruments purchased
with an original maturity of twelve months or less, are carried at amortized
cost, which approximates fair value.
OTHER LONG-TERM INVESTMENTS primarily represent the Company's investments
in joint ventures and partnerships in which the Company does not have
control and derivatives held for purposes other than trading. Joint venture
and partnership investments are recorded using the equity method of
accounting, reduced for other than temporary declines in value.
REALIZED INVESTMENT GAINS, NET are computed using the specific
identification method. Costs of fixed maturities and equity securities are
adjusted for impairments considered to be other than temporary. Allowances
for losses on mortgage loans on real estate are netted against asset
categories to which they apply and provisions for losses on investments are
included in "Realized investment gains, net." Unrealized gains and losses on
trading account assets are included in "Commissions and other income."
CASH
Cash includes cash on hand, amounts due from banks, and money market
instruments.
DEFERRED POLICY ACQUISITION COSTS
The costs which vary with and that are related primarily to the production
of new insurance business are deferred to the extent such costs are deemed
recoverable from future profits. Such costs include certain commissions,
costs of policy issuance and underwriting, and certain variable field office
expenses. Deferred policy acquisition costs are subject to recoverability
testing at the time of policy issue and loss recognition testing at the end
of each accounting period. Deferred policy acquisition costs are adjusted
for the impact of unrealized gains or losses on investments as if these
gains or losses had been realized, with corresponding credits or charges
included in equity.
9
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For life insurance, deferred policy acquisition costs are amortized over the
expected life of the contracts (up to 45 years) in proportion to estimated
gross margins based on historical and anticipated future experience, which
is updated periodically. The effect of changes in estimated gross margins is
reflected in earnings in the period they are revised. Policy acquisition
costs related to interest-sensitive products and certain investment-type
products are deferred and amortized over the expected life of the contracts
(periods ranging from 15 to 30 years) in proportion to estimated gross
profits arising principally from investment results, mortality and expense
margins and surrender charges based on historical and anticipated future
experience, updated periodically. The effect of revisions to estimated gross
profits on unamortized deferred acquisition costs is reflected in earnings
in the period such estimated gross profits are revised.
For property and casualty contracts, deferred policy acquisition costs are
amortized over the period in which related premiums are earned. Future
investment income is considered in determining the recoverability of
deferred policy acquisition costs.
For disability insurance, health insurance, group life insurance and most
group annuities, acquisition costs are expensed as incurred.
POLICYHOLDERS' DIVIDENDS
The amount of the dividends to be paid to policyholders is determined
annually by the Company's Board of Directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity, persistency and expense experience for the year and judgment as
to the appropriate level of statutory surplus to be retained by the Company.
SEPARATE ACCOUNT ASSETS AND LIABILITIES
Separate Account assets and liabilities are reported at estimated fair value
and represent segregated funds which are invested for certain policyholders,
pension fund and other customers. The assets consist of common stocks, fixed
maturities, real estate related securities, real estate mortgage loans and
short-term investments. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company. Investment risks associated with market value
changes are generally borne by the customers, except to the extent of
minimum guarantees made by the Company with respect to certain accounts. The
investment income and gains or losses for Separate Accounts generally accrue
to the policyholders and are not included in the Consolidated Statement of
Operations. Mortality, policy administration and surrender charges on the
accounts are included in "Policy charges and fee income."
INSURANCE REVENUE AND EXPENSE RECOGNITION
Premiums from participating insurance policies are generally recognized when
due. Benefits are recorded as an expense when they are incurred. A liability
for future policy benefits is recorded using the net level premium method.
Premiums from non-participating group annuities with life contingencies are
generally recognized when due. For single premium immediate annuities and
structured settlements, premiums are recognized when due with any excess
profit deferred and recognized in a constant relationship to insurance
in-force or, for annuities, the amount of expected future benefit payments.
Amounts received as payment for interest sensitive investment contracts,
deferred annuities and participating group annuities are reported as
deposits to "Policyholders' account balances." Revenues from these contracts
are reflected in "Policy charges and fee income" and consist primarily of
fees assessed during the period against the policyholders' account balances
for mortality charges, policy administration charges, surrender charges and
interest earned from the investment of these account balances. Benefits and
expenses for these products include claims in excess of related account
balances, expenses of contract administration, interest credited and
amortization of deferred policy acquisition costs.
For disability insurance, group life insurance, health insurance and
property and casualty insurance, premiums are recognized over the period to
which the premiums relate in proportion to the amount of insurance
protection provided. Claim and claim adjustment expenses are recognized when
incurred.
10
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Assets and liabilities of foreign operations and subsidiaries reported in
other than U.S. dollars are translated at the exchange rate in effect at the
end of the period. Revenues, benefits and other expenses are translated at
the average rate prevailing during the period. Translation adjustments
arising from the use of differing exchange rates from period to period are
charged or credited directly to equity. The cumulative effect of changes in
foreign exchange rates are included in "Foreign currency translation
adjustments."
COMMISSIONS AND OTHER INCOME
Commissions and other income principally includes securities and
commodities, commission revenues, asset management fees, investment banking
revenue and realized and unrealized gains on trading account assets of the
Company's broker-dealer subsidiary.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives include swaps, forwards, futures, options and loan commitments
subject to market risk, all of which are used by the Company in both trading
and other than trading activities. Income and expenses related to
derivatives used to hedge are recorded on the accrual basis as an adjustment
to the carrying amount or to the yield of the related assets or liabilities
over the periods covered by the derivative contracts. Gains and losses
relating to early terminations of interest rate swaps used to hedge are
deferred and amortized over the remaining period originally covered by the
swap. Gains and losses relating to derivatives used to hedge the risks
associated with anticipated transactions are deferred and utilized to adjust
the basis of the transaction once it has closed. If it is determined that
the transaction will not close, such gains and losses are included in
"Realized investment gains, net."
DERIVATIVES HELD FOR TRADING PURPOSES are used in the Company's securities
broker-dealer business and in a limited-purpose swap subsidiary to meet the
risk management needs of its customers by structuring transactions that
allow customers to manage their exposure to interest rates, foreign exchange
rates, indices or prices of securities and commodities and when possible,
matched trading positions are established to minimize risk to the Company.
Derivatives used for trading purposes are recorded at fair value as of the
reporting date. Realized and unrealized changes in fair values are included
in "Commissions and other income" in the period in which the changes occur.
DERIVATIVES HELD FOR PURPOSES OTHER THAN TRADING are primarily used to hedge
or reduce exposure to interest rate and foreign currency risks associated
with assets held or expected to be purchased or sold, and liabilities
incurred or expected to be incurred. Additionally, other than trading
derivatives are used to change the characteristics of the Company's
asset/liability mix consistent with the Company's risk management
activities.
INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") limits the amount of
non-life insurance losses that may offset life insurance company taxable
income. The Code also imposes an "equity tax" on mutual life insurance
companies which, in effect, imputes an additional tax to the Company based
on a formula that calculates the difference between stock and mutual
insurance companies' earnings. Income taxes include an estimate for changes
in the total equity tax to be paid for current and prior years. Subsidiaries
operating outside the United States are taxed under applicable foreign
statutes.
Deferred income taxes are generally recognized, based on enacted rates, when
assets and liabilities have different values for financial statement and tax
reporting purposes. A valuation allowance is recorded to reduce a deferred
tax asset to that portion which management believes is more likely than not
to be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS
11
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
125"). The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities and provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. SFAS 125 became effective January 1, 1997 and is to be applied
prospectively. Subsequent to June 1996, FASB issued SFAS No. 127 "Deferral
of the Effective Date of Certain Provisions of SFAS 125" ("SFAS 127"). SFAS
127 delays the implementation of SFAS 125 for one year for certain
provisions, including repurchase agreements, dollar rolls, securities
lending and similar transactions. The Company will delay implementation
with respect to those affected provisions. Adoption of SFAS 125 has not and
will not have a material impact on the Company's results of operations,
financial condition and liquidity.
In June of 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for years beginning after December 15, 1997. This
statement defines comprehensive income as "the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources, excluding investments by owners and
distributions to owners" and establishes standards for reporting and
displaying comprehensive income and its components in financial statements.
The statement requires that the Company classify items of other
comprehensive income by their nature and display the accumulated balance of
other comprehensive income separately from retained earnings in the equity
section of the Statement of Financial Position. In addition,
reclassification of financial statements for earlier periods must be
provided for comparative purposes.
RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform to
current year presentation.
12
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS
FIXED MATURITIES AND EQUITY SECURITIES
The following tables provide additional information relating to fixed
maturities and equity securities (excluding trading account assets) as of
December 31:
1997
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- ------------
FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 9,755 $ 783 $ -- $ 10,538
Obligations of U.S. states and
their political subdivisions..................... 1,375 93 -- 1,468
Foreign government bonds............................ 3,177 218 17 3,378
Corporate securities................................ 49,997 2,601 144 52,454
Mortgage-backed securities.......................... 6,828 210 5 7,033
Other fixed maturities.............................. 364 35 -- 399
-------------- -------------- -------------- ------------
Total fixed maturities available for sale........... $ 71,496 $ 3,940 $ 166 $ 75,270
============== ============== ============== ============
EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,376 $ 680 $ 246 $ 2,810
============== ============== ============== ============
1997
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- ------------
FIXED MATURITIES HELD TO MATURITY (IN MILLIONS)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 88 $ - $ - $ 88
Obligations of U.S. states and
their political subdivisions...................... 152 4 1 155
Foreign government bonds............................ 33 5 - 38
Corporate securities................................ 18,282 1,212 34 19,460
Mortgage-backed securities.......................... 1 - - 1
Other fixed maturities.............................. 144 8 - 152
-------------- -------------- -------------- ------------
Total fixed maturities held to maturity............. $ 18,700 $ 1,229 $ 35 $ 19,894
============== ============== ============== ============
13
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- -------------- ------------
FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 10,618 $ 361 $ 77 $ 10,902
Obligations of U.S. states and
their political subdivisions...................... 1,104 29 2 1,131
Foreign government bonds............................ 2,814 137 12 2,939
Corporate securities................................ 43,593 1,737 284 45,046
Mortgage-backed securities.......................... 6,377 140 21 6,496
Other fixed maturities.............................. 39 1 1 39
--------------- -------------- -------------- ------------
Total fixed maturities available for sale........... $ 64,545 $ 2,405 $ 397 $ 66,553
=============== ============== ============== ============
EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,103 $ 659 $ 140 $ 2,622
=============== ============== ============== ============
1996
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- -------------- ------------
FIXED MATURITIES HELD TO MATURITY (IN MILLIONS)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies......... $ 309 $ 3 $ 6 $ 306
Obligations of U.S. states and
their political subdivisions...................... 7 -- -- 7
Foreign government bonds............................ 162 11 -- 173
Corporate securities................................ 19,886 1,033 82 20,837
Mortgage-backed securities.......................... 26 -- -- 26
Other fixed maturities.............................. 13 -- -- 13
--------------- -------------- -------------- ------------
Total fixed maturities held to maturity............. $ 20,403 $ 1,047 $ 88 $ 21,362
=============== ============== ============== ============
14
INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1997, is shown below:
AVAILABLE FOR SALE HELD TO MATURITY
-------------------------------- ------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------------- -------------- -------------- ------------
(IN MILLIONS) (IN MILLIONS)
Due in one year or less....................... $ 1,991 $ 2,011 $ 686 $ 695
Due after one year through five years......... 18,916 19,226 4,496 4,659
Due after five years through ten years........ 16,776 17,494 7,161 7,551
Due after ten years........................... 26,985 29,506 6,356 6,988
Mortgage-backed securities.................... 6,828 7,033 1 1
-------------- -------------- -------------- ------------
Total......................................... $ 71,496 $ 75,270 $ 18,700 $ 19,894
============== ============== ============== ============
Actual maturities may differ from contractual maturities because issuers have
the right to call or prepay obligations
Proceeds from the repayment of held to maturity fixed maturities during 1997,
1996 and 1995 were $4,042 million, $4,268 million, and $3,767 million,
respectively. Gross gains of $62 million, $78 million, and $27 million, and
gross losses of $1 million, $7 million, and $0.2 million were realized on
prepayment of held to maturity fixed maturities during 1997, 1996 and 1995,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1997,
1996 and 1995 were $120,604 million, $121,910 million and $96,134 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1997, 1996 and 1995 were $2,946 million, $1,458 million,
and $950 million, respectively. Gross gains of $1,310 million, $1,562
million, and $2,052 million and gross losses of $639 million, $1,026 million,
and $941 million were realized on sales and prepayments of available for sale
fixed maturities during 1997, 1996 and 1995, respectively.
Write downs for impairments of fixed maturities which were deemed to be other
than temporary were $13 million, $54 million and $100 million for the years
1997, 1996 and 1995, respectively.
During the year ended December 31, 1997, there were no securities classified
as held to maturity that were sold and two securities so classified were
transferred to the available for sale portfolio. These actions were taken as
a result of a significant deterioration in credit worthiness. The aggregate
amortized cost of the securities transferred was $26 million with gross
unrealized investment gains of $0.5 million charged to "Net unrealized
investment gains."
During the year ended December 31, 1996, one security classified as held to
maturity was sold and two securities so classified were transferred to the
available for sale portfolio. These actions were taken as a result of a
significant deterioration in credit worthiness. The amortized cost of the
security sold was $35 million with a related realized investment loss of $0.7
million; the aggregate amortized cost of the securities transferred was $26
million with gross unrealized investment losses of $6 million charged to "Net
unrealized investment gains."
15
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans were collateralized by the following property
types at December 31:
1997 1996
--------------------------------- --------------------------------
(IN MILLIONS)
Office buildings............................... $ 4,692 28.5% $ 6,056 34.4%
Retail stores.................................. 3,078 18.7% 3,676 20.9%
Residential properties......................... 891 5.4% 961 5.4%
Apartment complexes............................ 3,551 21.6% 2,954 16.8%
Industrial buildings........................... 1,958 11.9% 1,807 10.3%
Agricultural properties........................ 1,666 10.1% 1,550 8.8%
Other.......................................... 618 3.8% 608 3.4%
--------------- --------- -------------- ------
Subtotal 16,454 100.0% 17,612 100.0%
========= ======
Allowance for losses........................... (450) (515)
--------------- --------------
Net carrying value............................. $ 16,004 $ 17,097
=============== ==============
The mortgage loans are geographically dispersed throughout the United
States and Canada with the largest concentrations in California (25.3%) and
New York (8.3%) at December 31, 1997. Included in the above balances are
mortgage loans receivable from affiliated joint ventures of $225 million
and $461 million at December 31, 1997 and 1996, respectively.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
1997 1996 1995
---------------- ---------------- ---------------
(IN MILLIONS)
Allowance for losses, beginning of year.............. $ 515 $ 862 $ 1,004
Additions charged to operations...................... 19 9 6
Release of allowance for losses...................... (60) (256) (32)
Charge-offs, net of recoveries....................... (24) (100) (116)
--------------- ---------------- ---------------
Allowance for losses, end of year.................... $ 450 $ 515 $ 862
================ ================ ===============
The $60 million, $256 million and $32 million reduction of the mortgage
loan allowance for losses in 1997, 1996 and 1995, respectively, is
primarily attributable to the improved economic climate, changes in the
nature and mix of borrowers and underlying collateral and a significant
decrease in impaired loans consistent with a general decrease in the
mortgage loan portfolio due to prepayments, sales and foreclosures.
16
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Impaired mortgage loans and related allowance for losses at December 31,
are as follows:
1997 1996
----------------- ------------------
(IN MILLIONS)
Impaired mortgage loans with allowance for losses ............. $ 330 $ 941
Impaired mortgage loans with no allowance for losses .......... 1,303 1,491
Allowance for losses .......................................... (97) (189)
----------------- ------------------
Net carrying value of impaired mortgage loans ................. $ 1,536 $ 2,243
================= ==================
Impaired mortgage loans with no provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. The average recorded investment in impaired loans before
allowance for losses was $2,102 million, $2,842 million and $4,146 million
during 1997, 1996 and 1995, respectively. Net investment income recognized
on these loans totaled $140 million, $265 million and $415 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
INVESTMENT REAL ESTATE
The Company's "investment real estate" of $1,519 million and $2,586 million
at December 31, 1997 and 1996, respectively, is held through direct
ownership. Of the Company's real estate, $1,490 million and $406 million
consists of commercial and agricultural assets held for disposal at
December 31, 1997 and 1996, respectively. Impairment losses and the
valuation allowances aggregated $40 million, $38 million and $124 million
for the years ended December 31, 1997, 1996 and 1995, respectively, and are
included in "Realized investment gains, net."
RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets of $2,783 million and $2,453 million at December 31, 1997 and 1996,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $2,352
million at December 31, 1997, were held in voluntary trusts. Of this
amount, $1,801 million related to the multi-state policyholder settlement
as described in Note 14. The remainder relates to trusts established to
fund guaranteed dividends to certain policyholders. The terms of these
trusts provide that the assets are to be used for payment of the designated
settlement and dividend benefits, as the case may be. Assets valued at $741
million and $3,414 million at December 31, 1997 and 1996, respectively,
were maintained as compensating balances or pledged as collateral for bank
loans and other financing agreements. Restricted cash and securities of
$1,835 million and $1,614 million at December 31, 1997, and 1996,
respectively, were included in the consolidated financial statements. The
restricted cash represents funds deposited by clients and funds accruing to
clients as a result of trades or contracts.
OTHER LONG-TERM INVESTMENTS
The Company's "Other long-term investments" of $3,360 million and $2,995
million as of December 31, 1997 and 1996, respectively, are composed of
$1,349 million and $832 million in real estate related interests and $2,011
million and $2,163 million of non-real estate related interests, including
a $149 million net investment in a leveraged lease entered into in 1997.
The Company's share of net income from such entities was $411 million, $245
million, and $326 million for 1997, 1996, and 1995, respectively, and is
reported in "Net investment income."
17
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES
NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
Fixed maturities-available for sale........................ $ 5,074 $ 4,871 $ 4,774
Fixed maturities-held to maturity.......................... 1,622 1,793 1,717
Trading account assets..................................... 504 444 588
Equity securities-available for sale ...................... 52 81 57
Mortgage loans on real estate.............................. 1,555 1,690 2,075
Real estate ............................................... 565 685 742
Policy loans............................................... 396 384 392
Securities purchased under agreements to resell............ 15 11 19
Receivables from broker-dealer clients..................... 706 579 678
Short-term investments..................................... 697 536 590
Other investment income.................................... 573 725 983
-------------- -------------- -------------
Gross investment income.................................... 11,759 11,799 12,615
Less investment expenses................................... (1,896) (2,057) (2,437)
-------------- -------------- -------------
Net investment income...................................... $ 9,863 $ 9,742 $ 10,178
============== ============== =============
REALIZED INVESTMENT GAINS, NET, including changes in allowances for losses
and charges for other than temporary reductions in value, for the years
ended December 31, were from the following sources:
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
Fixed maturities....................................... $ 684 $ 513 $ 1,180
Mortgage loans on real estate ......................... 68 248 67
Investment real estate ................................ 700 76 (19)
Equity securities-available for sale .................. 363 267 400
Other gains (losses)................................... 372 34 (125)
-------------- -------------- -----------
Realized investment gains, net......................... $ 2,187 $ 1,138 $ 1,503
============== ============== ===========
NET UNREALIZED INVESTMENT GAINS on securities available for sale are
included in the consolidated statement of financial position as a component
of equity, net of tax. Changes in these amounts for the years ended
December 31, are as follows:
1997 1996
----------------- -----------------
(IN MILLIONS)
Balance, beginning of year................................. $ 1,136 $ 2,397
Changes in unrealized investment
gains(losses) attributable to:
Fixed maturities ....................................... 1,766 (2,892)
Equity securities....................................... (85) 254
Participating group annuity contracts................... (564) 479
Deferred policy acquisition costs....................... (154) 261
Deferred federal income taxes........................... (347) 637
----------------- -----------------
Sub-total............................................... 616 (1,261)
----------------- -----------------
Balance, end of year....................................... $ 1,752 $ 1,136
================= =================
18
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS (CONTINUED)
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1997 included in fixed maturities available
for sale, mortgage loans on real estate and other long term investments
totaled $26 million, $93 million and $7 million, respectively.
4. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, are as follows:
1997 1996 1995
-------------- -------------- -----------
(IN MILLIONS)
Balance, beginning of year ............................ $ 6,291 $ 6,088 $ 6,403
Capitalization of commissions, sales and issue expenses 1,049 931 919
Amortization and other adjustments..................... (1,192) (989) (783)
Change in unrealized investment gains ................. (154) 261 (451)
-------------- -------------- -----------
Balance, end of year .................................. $ 5,994 $ 6,291 $ 6,088
============== ============== ===========
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES
FUTURE POLICY BENEFITS at December 31 are as follows:
1997 1996
----------------- -----------------
(IN MILLIONS)
Life insurance ............................................ $ 46,712 $ 44,118
Annuities ................................................. 15,469 14,828
Other contract liabilities ................................ 3,400 5,009
----------------- -----------------
Future policy benefits .................................... $ 65,581 $ 63,955
================= =================
Life insurance liabilities include reserves for death and endowment policy
benefits, terminal dividends, premium deficiency reserves and certain health
benefits. Annuity liabilities include reserves for immediate annuities and
non-participating group annuities. Other contract liabilities primarily consist
of unearned premium and benefit reserves for group health products.
The following table highlights the key assumptions generally utilized in
calculating these reserves:
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- ------------------------- ------------------------ --------------- ------------------------
Life insurance Generally rates 2.5% to 7.5% Net level premium
guaranteed in calculating based on non-forfeiture
cash surrender values interest rate
Individual immediate 1983 Individual 3.25% to 11.25% Present value of
annuities Annuity Mortality expected future payments
Table with certain based on historical
modifications experience
Group annuities in 1950 Group 3.75% to 17.35% Present value of
payout status Annuity Mortality expected future payments
Table with certain based on historical
modifications experience
Other contract liabilities -- 6.0% to 7.0% Present value of
expected future payments
based on historical
experience
19
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED)
For the above categories, premium deficiency reserves are established, if
necessary, when the liability for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for
expected future policy benefits and expenses. A premium deficiency reserve
has been recorded for the group single premium annuity business, which
consists of limited-payment, long duration, traditional non-participating
annuities. A liability of $1,645 million and $1,320 million is included in
"Future policy benefits" with respect to this deficiency for the years
ended December 31, 1997 and 1996, respectively.
POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:
1997 1996
--------- ---------
(IN MILLIONS)
Individual annuities........................................ $ 5,695 $ 6,408
Group annuities & guaranteed investment contracts........... 19,053 21,706
Interest-sensitive life contracts........................... 3,160 2,888
Dividend accumulations...................................... 5,033 5,007
--------- ---------
Policyholders' account balances............................. $ 32,941 $ 36,009
========= =========
Policyholders' account balances for interest-sensitive life and
investment-type contracts are equal to policy account values. The policy
account values represent an accumulation of gross premium payments plus
credited interest less withdrawals, expenses and mortality charges.
Certain contract provisions that determine the policyholder account
balances are as follows:
WITHDRAWAL/
PRODUCT INTEREST RATE SURRENDER CHARGES
----------------------------------- ------------------------ -------------------------------------
Individual annuities 3.1% to 6.6% 0% to 8% for up to 8 years
Group annuities 5.0% to 12.7% Contractually limited or subject to
market value adjustments
Guaranteed investment contracts 3.9% to 14.34% Subject to market value withdrawal
provisions for any funds withdrawn
other than for benefit responsive and
contractual payments
Interest sensitive life contracts 4.0% to 6.5% Various up to 10 years
Dividend accumulations 3.0% to 4.0%
20
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED)
OTHER POLICYHOLDERS' LIABILITIES. The following table provides a
reconciliation of the activity in the liability for unpaid claims and claim
adjustment expense for property and casualty and accident and health
insurance, which is included in "Other policyholder's liabilities" at
December 31:
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
Balance at January 1......................................... $ 6,043 $ 5,933 $ 7,983
Less reinsurance recoverables.............................. 563 572 865
---------- ---------- ----------
Net balance at January 1..................................... 5,480 5,361 7,118
---------- ---------- ----------
Incurred related to:
Current year............................................... 10,691 10,281 10,534
Prior years................................................ 11 (91) 141
---------- ---------- ----------
Total incurred............................................... 10,702 10,190 10,675
---------- ---------- ----------
Paid related to:
Current year............................................... 7,415 7,497 7,116
Prior years................................................ 2,651 2,574 2,800
---------- ---------- ----------
Total paid................................................... 10,066 10,071 9,916
---------- ---------- ----------
Less Reinsurance
Segment.................................................... -- -- 2,516
---------- ---------- ----------
Net balance at December 31................................... 6,116 5,480 5,361
Plus reinsurance recoverables.............................. 543 563 572
---------- ---------- ----------
Balance at December 31....................................... $ 6,659 $ 6,043 $ 5,933
========== ========== ==========
The changes in provision for claims and claim adjustment expenses related
to prior years of $11 million, $(91) million and $141 million in 1997, 1996
and 1995, respectively, are due to such factors as changes in claim cost
trends in healthcare, an accelerated decline in indemnity health business,
and lower than anticipated property and casualty unpaid claims and claim
adjustment expenses.
The other policyholders' liabilities presented above consist primarily of
unpaid claim liabilities which include estimates for liabilities associated
with reported claims and for incurred but not reported claims based, in
part, on the Company's experience. Changes in the estimated cost to settle
unpaid claims are charged or credited to the statement of operations
periodically as the estimates are revised. Accident and health unpaid
claims liabilities for 1997 and 1996 included above are discounted using
interest rates ranging from 6.0% to 7.5%.
21
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SHORT-TERM AND LONG-TERM DEBT
Debt consists of the following at December 31:
SHORT-TERM DEBT
1997 1996
-------------- --------------
(IN MILLIONS)
Commercial paper.......................................... $ 4,268 $ 4,511
Notes payable............................................. 2,151 1,614
Current portion of long-term debt......................... 355 437
-------------- --------------
Total short-term debt................................ $ 6,774 $ 6,562
============== ==============
The weighted average interest rate on outstanding short-term debt was
approximately 6.0% and 5.6% at December 31, 1997 and 1996, respectively.
The Company issues commercial paper primarily to manage operating cash
flows and existing commitments, meet working capital needs and take
advantage of current investment opportunities. Commercial paper borrowings
are supported by various lines of credit.
LONG-TERM DEBT
DESCRIPTION MATURITY DATES RATE 1997 1996
------------------------------------ ----------------- -------------- --------- ----------
(IN MILLIONS)
Floating rate notes ("FRN") 1998 6.5% $ 40 $ 128
Long term notes 1998 - 2023 4% - 12% 1,194 1,023
Zero coupon notes 1998 - 1999 8.6% (a) 334 365
Australian dollar notes 1997 9% -- 55
Canadian dollar notes 1997 - 1998 7.0% - 9.125% 117 320
Japanese yen notes 1998 - 2000 0.5% - 4.6% 178 90
Swiss francs notes 1998 3.875% 120 103
Canadian dollar FRN 2003 5.89% 96 96
Surplus notes 2003 - 2025 6.875% - 8.3% 986 985
Commercial paper backed by long-term
credit agreements 1,500 1,000
Other notes payable 1998 - 2017 4% - 7.5% 63 32
---------- ----------
Sub-total............................................................................. 4,628 4,197
Less: current portion of long-term debt............................................ (355) (437)
---------- ----------
Total long-term debt.................................................................. $ 4,273 $ 3,760
========== ==========
(a) The rate shown for zero coupon notes, which do not bear interest,
represents a level yield to maturity.
Payment of interest and principal on the surplus notes of $686 million
issued after 1993 may be made only with the prior approval of the
Commissioner of Insurance of the State of New Jersey.
In order to modify exposure to interest rate and currency exchange rate
movements, the Company utilizes derivative instruments, primarily interest
rate swaps, in conjunction with some of its debt issues. The effect of
these derivative instruments is included in the calculation of the interest
expense on the associated debt, and as a result, the effective interest
rates on the debt may differ from the rates reflected in the tables above.
Floating rates are determined by formulas and may be subject to certain
minimum or maximum rates.
Scheduled principal repayments of long-term debt as of December 31, 1997,
are as follows: $357 million in 1998, $808 million in 1999, $260 million in
2000, $32 million in 2001, $1,814 million in 2002 and $1,379 million
thereafter.
At December 31, 1997, the Company had $8,257 million in lines of credit
from numerous financial institutions of which $5,160 million were unused.
These lines of credit generally have terms ranging from 1 to 5 years.
22
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has one funded non-contributory defined benefit pension plan,
which covers substantially all of its employees. The Company also has
several non-contributory non-funded defined benefit plans covering certain
executives. Benefits are generally based on career average earnings and
credited length of service. The Company's funding policy is to contribute
annually an amount necessary to satisfy the Internal Revenue Service
contribution guidelines.
Prepaid and accrued pension costs are included in "Other assets" and "Other
liabilities," respectively, in the Company's consolidated statements of
financial position. The status of these plans as of September 30, adjusted
for fourth quarter activity related to funding activity and contractual
termination benefits is summarized below:
1997 1996
--------------------------------- --------------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
--------------- -------------- -------------- -------------
(IN MILLIONS)
Actuarial present value of
benefit obligation:
Vested benefit obligation.............. $ (4,129) $ (205) $ (3,826) $ (180)
============ ============ =========== =============
Accumulated benefit obligation......... $ (4,434) $ (226) $ (4,121) $ (198)
============ ============ =========== =============
Projected benefit obligation............. $ (5,238) $ (319) $ (4,873) $ (274)
Plan assets at fair value................ 8,489 -- 7,306 --
------------ ------------ ----------- -------------
Plan assets in excess of (less than)
projected benefit obligation........... 3,251 (319) 2,433 (274)
Unrecognized transition amount........... (662) 1 (769) 1
Unrecognized prior service cost.......... 317 10 356 11
Unrecognized net (gain) loss............. (1,689) 45 (916) 16
Additional minimum liability............. -- (11) -- (10)
Effect of fourth quarter activity........ (67) 4 (98) 4
------------ ------------ ----------- -------------
Prepaid (accrued) pension cost
at December 31......................... $ 1,150 $ (270) $ 1,006 $ (252)
============ ============ =========== =============
Plan assets consist primarily of equity securities, bonds, real estate and
short-term investments, of which $6,022 million and $5,668 million are
included in Separate Account assets and liabilities at December 31, 1997
and 1996, respectively.
Effective December 31, 1996, The Prudential Securities Incorporated Cash
Balance Plan (the "PSI Plan") was merged into The Retirement System for
United States Employees and Special Agents of The Prudential Insurance
Company of America (the "Prudential Plan"). The name of the merged plan is
The Prudential Merged Retirement Plan ("Merged Retirement Plan"). All of
the assets of the Merged Retirement Plan are available to pay benefits to
participants and their beneficiaries who are covered by the Merged
Retirement Plan. The merger of the plans had no effect on the December 31,
1996 consolidated financial position or results of operations.
During 1996, the Prudential Plan was amended to provide cost of living
adjustments for retirees. The effect of this plan amendment increased
benefit obligations and unrecognized prior service cost by $170 million at
September 30, 1996. In addition, the Prudential Plan was amended to provide
contractual termination benefits to certain plan participants who were
notified between September 15, 1996 and December 31, 1997 that their
employment had been terminated. During 1997, the Prudential Retirement Plan
Document, a component of the Merged Retirement Plan was amended to extend
the contractual termination benefits to December 31, 1998. Costs related to
these amendments are reflected below in contractual termination benefits.
23
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic pension income included in "General and administrative
expenses" in the Company's consolidated statement of operations for the
years ended December 31, 1997, 1996 and 1995 include the following
components:
1997 1996 1995
-------------- ------------- --------------
(IN MILLIONS)
Service cost-benefits earned during the year......... $ 127 $ 140 $ 133
Interest cost on projected benefit obligation........ 376 354 392
Actual return on plan assets......................... (1,693) (748) (1,288)
Net amortization and deferral........................ 1,012 73 629
Contractual termination benefits..................... 30 63 --
-------------- ------------- --------------
Net periodic pension income.......................... $ (148) $ (118) $ (134)
============== ============= ==============
The assumptions at September 30 used by the Company are to calculate the
projected benefit obligations as of that date and determine the pension
expense for the following fiscal year:
1997 1996 1995
-------------- ------------- --------------
Discount rate.......................................... 7.25% 7.75% 7.50%
Rate of increase in compensation levels................ 4.50% 4.50% 4.50%
Expected long-term rate of return on plan assets....... 9.50% 9.50% 9.00%
OTHER POSTRETIREMENT BENEFITS
The Company provides certain life insurance and health care benefits for
its retired employees, their beneficiaries and covered dependents.
Substantially all of the Company's employees may become eligible to receive
benefits if they retire after age 55 with at least 10 years of service, or
under circumstances after age 50 with at least 20 years of continuous
service.
The Company has elected to amortize its transition obligation over 20
years. Post-retirement benefits are funded as considered necessary by
Company management. The Company's funding of its postretirement benefit
obligations totaled $43 million, $38 million and $94 million in 1997, 1996
and 1995, respectively.
In 1995 the Company modified the restrictions on certain post-retirement
plan assets to allow these assets to be used for benefits related to both
active and retired employees. Formerly, these benefits were available only
for retired employees. In connection with this modification, the Company
transferred $120 million from one of these plans in 1995. Of the $120
million transferred, $45 million went to Union Post-Retirement Benefits and
$75 million went to Union Medical Benefits.
24
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The status of the plan at September 30, adjusted for assets transferred to
the plan in the fourth quarter, is provided below. Accrued post-retirement
benefit costs are included in "Other liabilities" in the Company's
consolidated statement of financial position.
1997 1996
---------- ----------
(IN MILLIONS)
Accumulated postretirement benefit obligation (APBO):
Retirees.......................................................... $ (1,516) $ (1,423)
Fully eligible active plan participants........................... (36) (35)
Other active plan participants.................................... (576) (544)
--------- ---------
Total APBO..................................................... (2,128) (2,002)
Plan assets at fair value............................................ 1,354 1,313
--------- ---------
Funded status........................................................ (774) (689)
Unrecognized transition amount....................................... 707 787
Unrecognized net gain ............................................... (364) (428)
Effects of fourth quarter activity................................... 33 28
--------- ---------
Accrued postretirement benefit cost at December 31................... $ (398) $ (302)
========= =========
Plan assets with respect to this coverage consist of group and individual
variable life insurance policies, group life and health contracts, common
stocks, U.S. government securities and short-term investments. Plan assets
include $1,044 million and $1,003 million of Company insurance policies and
contracts at December 31, 1997 and 1996, respectively.
Net periodic postretirement benefit cost included in "General and
administrative expenses" for the years ended December 31, 1997, 1996 and
1995 includes the following components:
1997 1996 1995
---------- ----------- -----------
(IN MILLIONS)
Service cost.............................................. $ 38 $ 45 $ 44
Interest cost............................................. 149 157 169
Actual return on plan assets.............................. (120) (105) (144)
Net amortization and deferral............................. 70 53 111
----------- ----------- -----------
Net periodic postretirement benefit cost.................. $ 137 $ 150 $ 180
=========== =========== ===========
The following assumptions at September 30 are used to calculate the APBO as
of that date and determine postretirement benefit expense for the following
fiscal year:
1997 1996 1995
--------- --------- ---------
Discount rate............................................. 7.25% 7.75% 7.50%
Rate of increase in compensation levels................... 4.5% 4.5% 4.5%
Expected long-term rate of return on plan assets.......... 9.0% 9.0% 8.0%
Health care cost trend rates.............................. 8.2-11.8% 8.5-12.5% 8.9-13.3%
Ultimate health care cost trend rate after gradual
decrease until 2006....................................... 5.0% 5.0% 5.0%
25
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The effect of a 1% increase in health care cost trend rates for each future
year on the following costs at December 31, are as follows:
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
Accumulated postretirement benefit obligation............ $ (218) $ (207) $ (217)
Service and interest costs............................... 24 25 27
POSTEMPLOYMENT BENEFITS
The Company accrues postemployment benefits primarily for life and health
benefits provided to former or inactive employees who are not retirees. The
net accumulated liability for these benefits at December 31, 1997 and 1996
was $144 million and $156 million, respectively, and is included in "Other
liabilities."
OTHER EMPLOYEE BENEFITS
The Company sponsors voluntary savings plans for employees (401(k) plans).
The plans provide for salary reduction contributions by employees and
matching contributions by the Company of up to three percent of annual
salary, resulting in $63 million, $57 million, and $61 million of expenses
included in "General and administrative expenses" for 1997, 1996 and 1995,
respectively.
8. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
Current tax expense (benefit):
U.S...................................................... $ (158) $ 255 $ 1,189
State and Iocal.......................................... 48 103 38
Foreign.................................................. 64 48 66
--------- --------- ---------
Total.................................................... $ (46) $ 406 $ 1,293
========= ========= =========
Deferred tax expense (benefit):
U.S...................................................... $ 227 $ (442) $ (166)
State and Iocal.......................................... 3 (2) (10)
Foreign.................................................. 33 54 9
--------- --------- ---------
Total.................................................... $ 263 $ (390) $ (167)
========= ========= =========
Total income tax expense................................. $ 217 $ 16 $ 1,126
========= ========= =========
26
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
The Company's income tax expense for the years ended December 31, differs
from the amount computed by applying the expected federal income tax rate
of 35% to income from operations before income taxes for the following
reasons:
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
Expected federal income tax expense.......................... $ 290 $ 382 $ 829
Equity tax................................................... (91) (365) 163
State and local income taxes................................. 51 100 28
Tax-exempt interest and dividend received deduction.......... (67) (50) (77)
Other........................................................ 34 (51) 183
-------- -------- --------
Total income tax expense..................................... $ 217 $ 16 $ 1,126
======== ======== ========
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
1997 1996
------- --------
(IN MILLIONS)
Deferred tax assets
Insurance reserves.......................................... $ 1,482 $ 1,316
Policyholder dividends...................................... 250 257
Net operating loss carryforwards............................ 80 268
Depreciation................................................ -- 44
Litigation related reserves................................. 178 297
Employee benefits........................................... 42 10
Other....................................................... 360 329
-------- --------
Deferred tax assets before valuation allowance.............. 2,392 2,521
Valuation allowance......................................... (18) (36)
-------- --------
Deferred tax assets after valuation allowance............... 2,374 2,485
-------- --------
Deferred tax liabilities
Investments................................................. 1,867 1,183
Deferred acquisition costs.................................. 1,525 1,707
Depreciation................................................ 36 --
Other....................................................... 73 110
-------- --------
Deferred tax liabilities.................................... 3,501 3,000
-------- --------
Net deferred tax liability.................................... $ 1,127 $ 515
======== ========
The Company's income taxes payable of $500 million and $1,544 million
includes a $627 million current income tax receivable at December 31, 1997
and a $1,029 million current income taxes payable at December 31, 1996.
27
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
Management believes that based on its historical pattern of taxable income,
the Company will produce sufficient income in the future to realize its net
deferred tax asset after valuation allowance. Adjustments to the valuation
allowance will be made if there is a change in management's assessment of
the amount of the deferred tax asset that is realizable. At December 31,
1997, the Company had state non-life operating loss carryforwards for tax
purposes approximating $800 million.
The Internal Revenue Service (the "Service") has completed an examination
of the consolidated federal income tax return through 1989. The Service has
examined the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments, however, management believes
there are adequate defenses against, or sufficient reserves to provide for,
such adjustments. The Service has begun their examination of the years 1993
through 1995.
9. EQUITY
RECONCILIATION OF STATUTORY SURPLUS AND NET INCOME
Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following
table reconciles the Company's statutory net income and surplus as of and
for the years ended December 31, determined in accordance with accounting
practices prescribed or permitted by the New Jersey Department of Banking
and Insurance with net income and equity determined using GAAP:
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
STATUTORY NET INCOME........................................... $ 1,471 $ 1,402 $ 478
Adjustments to reconcile to net income on a GAAP basis:
Insurance revenues and expenses.............................. 12 (478) (496)
Income taxes................................................. 601 439 (596)
Valuation of investments..................................... (62) 121 --
Realized investment gains.................................... 702 327 1,562
Litigation and other reserves................................ (1,975) (906) --
Other, net................................................... (139) 173 295
-------- -------- --------
GAAP NET INCOME................................................ $ 610 $ 1,078 $ 1,243
======== ======== ========
1997 1996
-------- --------
(IN MILLIONS)
STATUTORY SURPLUS.............................................. $ 9,242 $ 9,375
Adjustments to reconcile to equity on a GAAP basis:
Deferred policy acquisition costs............................ 5,994 6,291
Valuation of investments..................................... 8,067 5,624
Future policy benefits and policyholder account balances..... (2,906) (1,976)
Non-admitted assets.......................................... 1,643 1,285
Income taxes................................................. (1,070) (654)
Surplus notes................................................ (986) (985)
Other, net................................................... (266) (437)
-------- --------
GAAP EQUITY.................................................... $ 19,718 $ 18,523
======== ========
28
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. EQUITY (CONTINUED)
The New York State Insurance Department ("Department") recognizes only
statutory accounting for determining and reporting the financial condition
of an insurance company, for determining its solvency under the New York
Insurance Law and for determining whether its financial condition warrants
the payment of a dividend to its policyholders. No consideration is given
by the Department to financial statements prepared in accordance with GAAP
in making such determinations.
10. OPERATING LEASES
The Company and its subsidiaries occupy leased office space in many
locations under various long-term leases and have entered into numerous
leases covering the long-term use of computers and other equipment. At
December 31, 1997, future minimum lease payments under non-cancelable
operating leases are estimated as follows:
(IN MILLIONS)
1998........................................ $ 313
1999........................................ 277
2000........................................ 230
2001........................................ 201
2002........................................ 171
Remaining years after 2002.................. 833
-----------
Total....................................... $ 2,025
===========
Rental expense incurred for the years ended December 31, 1997 and 1996 was
approximately $352 million and $343 million, respectively.
11. DIVESTITURES
In October 1995, the Company completed the sale of its reinsurance segment,
Prudential Reinsurance Holdings, Inc., through an initial public offering
of common stock. As a result of the sale, an after-tax loss of $297 million
was recorded in 1995.
On January 26, 1996, the Company entered into a definitive agreement to
sell substantially all the assets of Prudential Home Mortgage Company, Inc.
It has also liquidated certain mortgage-backed securities and extended
warehouse losses, asset write downs, and other costs directly related to
the planned sale. The Company recorded an after-tax loss in 1995 of $98
million which includes operating gains and losses, asset write downs and
other costs directly related with the planned sale. The net assets of the
mortgage banking segment at December 31, 1995 was $78 million, comprised of
$4,293 million in assets and $4,215 million in liabilities.
On July 31, 1996, the Company sold a substantial portion of its Canadian
Branch business to the London Life Insurance Company ("London Life"). This
transaction was structured as a reinsurance transaction whereby London Life
assumed total liabilities of the Canadian Branch equal to $3,291 million as
well as a related amount of assets equal to $3,205 million. This transfer
resulted in a reduction of policy liabilities of $3,257 million and a
corresponding reduction in invested assets. The Company recognized an
after-tax gain in 1996 of $116 million as a result of this transaction,
recorded in "Realized investment gains, net."
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented below have been determined using available
information and valuation methodologies. Considerable judgment is applied
in interpreting data to develop the estimates of fair value. Accordingly,
such estimates presented may not be realized in a current market exchange.
The use of different market assumptions and/or estimation methodologies
could have a material effect on the estimated fair values. The following
methods and assumptions were used in calculating the fair values (for all
other financial instruments presented in the table, the carrying value
approximates fair value).
29
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FIXED MATURITIES AND EQUITY SECURITIES
Fair values for fixed maturities and equity securities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. 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 credit
quality and its remaining average life. The estimated fair value of certain
non-performing private placement securities is based on amounts estimated
by management.
MORTGAGE LOANS ON REAL ESTATE
The fair value of the mortgage loan portfolio is primarily based upon the
present value of the scheduled future 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, the
fair value is based upon the present value of expected future cash flows
discounted at the appropriate U.S. Treasury rate adjusted for current
market spread for a similar quality mortgage.
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,
futures and options is estimated based on market quotes for a transaction
with similar terms. The fair value of loan commitments is derived by
comparing the contractual stream of fees with such fee streams adjusted to
reflect current market rates that would be applicable to instruments of
similar type, maturity, and credit standing.
POLICYHOLDERS' ACCOUNT BALANCES
Fair values of policyholders' account balances are estimated using
discounted projected cash flows, based on interest rates being offered for
similar contracts, with maturities consistent with those remaining for the
contracts being valued.
DEBT
The estimated fair value of short-term and long-term debt is derived by
using discount rates based on the borrowing rates currently available to
the Company for debt with similar terms and remaining maturities.
30
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:
1997 1996
-------------------------- ------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ----------- ------------ --------------
FINANCIAL ASSETS: (IN MILLIONS)
Other than trading:
- -------------------
Fixed maturities:
Available for sale....................... $ 75,270 $ 75,270 $ 66,553 $ 66,553
Held to maturity......................... 18,700 19,894 20,403 21,362
Equity securities........................... 2,810 2,810 2,622 2,622
Mortgage loans on real estate............... 16,004 17,153 17,097 17,963
Policy loans................................ 6,827 6,994 6,692 6,613
Securities purchased under
agreements to resell .................... 8,661 8,661 5,347 5,347
Cash collateral for borrowed securities..... 5,047 5,047 2,416 2,416
Short-term investments...................... 12,106 12,106 9,294 9,294
Cash ....................................... 3,636 3,636 2,091 2,091
Separate Accounts assets.................... 74,046 74,046 63,358 63,358
Derivative financial instruments............ 24 35 16 32
Trading:
- --------
Trading account assets...................... 6,044 6,044 4,219 4,219
Receivables from broker-dealer clients...... 6,273 6,273 5,281 5,281
Derivative financial instruments............ 979 979 904 904
FINANCIAL LIABILITIES:
Other than trading:
- -------------------
Policyholders' account balances............. 32,941 33,896 36,009 37,080
Securities sold under
agreements to repurchase................. 12,347 12,347 7,503 7,503
Cash collateral for loaned securities....... 14,117 14,117 8,449 8,449
Short-term and long-term debt............... 11,047 11,020 10,322 10,350
Securities sold but not yet purchased....... 3,533 3,533 1,900 1,900
Separate Accounts liabilities............... 73,658 73,658 62,845 62,845
Derivative financial instruments............ 32 47 32 45
Trading:
- --------
Payables to broker-dealer clients........... 3,338 3,338 3,018 3,018
Derivative financial instruments ........... 1,088 1,088 1,120 1,120
31
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The tables below summarize the Company's outstanding positions by
derivative instrument types as of December 31, 1997 and 1996. The amounts
presented are classified as either trading or other than trading, based on
management's intent at the time of contract inception and throughout the
life of the contract. The table includes the estimated fair values of
outstanding derivative positions only and does not include the changes in
fair values of associated financial and non-financial assets and
liabilities, which generally offset derivative notional amounts. The fair
value amounts presented also do not reflect the netting of amounts pursuant
to right of setoff, qualifying master netting agreements with
counterparties or collateral arrangements.
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(IN MILLIONS)
TRADING OTHER THAN TRADING TOTAL
------------------------ ----------------------- ------------------------------------
ESTIMATED ESTIMATED CARRYING ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
----------- ----------- ---------- ----------- ----------- ---------- -----------
Swaps:
Assets.............. $ 7,759 $ 394 $ 61 $ -- $ 7,820 $ 395 $ 394
Liabilities......... 6,754 489 13 3 6,767 493 491
Forwards:
Assets.............. 29,511 429 1,031 23 30,542 452 452
Liabilities......... 29,894 459 647 7 30,541 466 466
Futures:
Assets.............. 4,103 51 46 -- 4,149 51 51
Liabilities......... 3,064 50 3,320 21 6,384 71 71
Options:
Assets.............. 6,893 105 239 -- 7,132 105 105
Liabilities......... 4,165 90 5 -- 4,170 90 90
Loan Commitments:
Assets.............. -- -- 317 12 317 -- 12
Liabilities......... -- -- 524 16 524 -- 16
----------- ----------- ---------- ----------- ----------- ---------- -----------
Total:
Assets.............. $ 48,266 $ 979 $ 1,694 $ 35 $ 49,960 $ 1,003 $ 1,014
=========== =========== ========== =========== =========== ========== ===========
Liabilities......... $ 43,877 $ 1,088 $ 4,509 $ 47 $ 48,386 $ 1,120 $ 1,134
=========== =========== ========== =========== =========== ========== ===========
32
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(IN MILLIONS)
TRADING OTHER THAN TRADING TOTAL
------------------------ ----------------------- ------------------------------------
ESTIMATED ESTIMATED CARRYING ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
----------- ----------- ---------- ----------- ----------- ---------- -----------
Swaps:
Assets.............. $ 8,080 $ 481 $ 398 $ 10 $ 8,478 $ 481 $ 491
Liabilities......... 8,316 756 139 17 8,455 771 773
Forwards:
Assets.............. 24,275 367 489 13 24,764 376 380
Liabilities......... 20,103 308 920 10 21,023 318 318
Futures:
Assets.............. 2,299 24 3 -- 2,302 24 24
Liabilities......... 2,573 30 1,087 6 3,660 36 36
Options:
Assets.............. 2,981 32 2,083 7 5,064 39 39
Liabilities......... 2,653 26 437 12 3,090 27 38
Loan Commitments:
Assets.............. -- -- 163 2 163 -- 2
Liabilities......... -- -- 445 -- 445 -- --
----------- ----------- ---------- ----------- ----------- ---------- -----------
Total:
Assets.............. $ 37,635 $ 904 $ 3,136 $ 32 $ 40,771 $ 920 $ 936
=========== =========== ========== =========== =========== ========== ===========
Liabilities......... $ 33,645 $ 1,120 $ 3,028 $ 45 $ 36,673 $ 1,152 $ 1,165
=========== =========== ========== =========== =========== ========== ===========
CREDIT RISK
The current credit exposure of the Company's derivative contracts is
limited to the fair value at the reporting date. Credit risk is managed by
entering into transactions with creditworthy counterparties and obtaining
collateral where appropriate and customary. The Company also attempts to
minimize its exposure to credit risk through the use of various credit
monitoring techniques. Approximately 95% of the net credit exposure for the
Company from derivative contracts is with investment-grade counterparties.
Net trading revenues for the years ended December 31, 1997, 1996 and 1995
relating to forwards, futures and swaps were $54 million, $37 million, $(8)
million; $42 million, $32 million, $(11) million; and $110 million, $42
million, $3 million respectively. Net trading revenues for options were not
material. Average fair values for trading derivatives in an asset position
during the years ended December 31, 1997 and 1996 were $1,015 million and
$881 million, respectively, and for derivatives in a liability position
were $1,166 million and $1,038 million, respectively. Of those derivatives
held for trading purposes at December 31, 1997, 52% of the notional amount
consisted of interest rate derivatives, 40% consisted of foreign currency
derivatives, and 8% consisted of equity and commodity derivatives. Of those
derivatives held for purposes other than trading at December 31, 1997, 72%
of notional consisted of interest rate derivatives and 28% consisted of
foreign currency derivatives.
33
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
During the normal course of its business, the Company utilizes financial
instruments with off-balance sheet credit risk such as commitments,
financial guarantees, loans sold with recourse and letters of credit.
Commitments include commitments to purchase and sell mortgage loans, the
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 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 fair value of asset positions in these instruments, which represents
the Company's current exposure to credit loss from other parties'
non-performance, was $1,014 million and $936 million at December 31, 1997
and 1996, respectively.
14. CONTINGENCIES AND LITIGATION
FINANCIAL GUARANTEE AGREEMENT
In connection with the sale in 1995 of its wholly-owned subsidiary
Prudential Reinsurance Company ("Pru Re"), the Company's subsidiary,
Gibraltar Casualty Insurance Company ("Gibraltar") entered into a stop-loss
reinsurance agreement with Pru Re whereby Gibraltar has reinsured up to
$375 million of the first $400 million of aggregate adverse loss
development on reserves recorded by Pru Re at June 30, 1995. Gibraltar also
has entered into several quota share reinsurance arrangements with Pru Re
whereby certain medical malpractice, direct insurance and casualty
reinsurance pool risks previously underwritten by Pru Re prior to June 30,
1995 were ceded to Gibraltar. The Company has guaranteed Gibraltar's
obligations arising under each of these contracts subject to a limit of
$375 million for the stop-loss agreement and $400 million for the other
agreements. Through December 31, 1997, Gibraltar has incurred $285 million
in losses under the stop-loss agreement, including $45 million in 1997.
Gibraltar has paid $165 million to Pru Re under the stop-loss agreement.
The Company has not been required to fund losses arising under the other
arrangements.
ENVIRONMENTAL AND ASBESTOS-RELATED CLAIMS
Certain of the Company's subsidiaries received 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. In establishing
the liability for unpaid claims 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.
MANAGED CARE REIMBURSEMENT
In 1997, the Company continued to review its obligations under certain
managed care arrangements for possible failure to comply with contractual
and regulatory requirements. The estimated cost to the Company for these
reimbursements increased by $115 million in 1997, bringing the total
provision to $265 million. As of December 31, 1997, $163 million has been
paid or credited to customers. It is the opinion of management that the
remaining reserves of $102 million at December 31, 1997 represent a
reasonable estimate of remaining reimbursements to customers and other
related costs.
LITIGATION
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.
Three putative class actions and approximately 677 individual actions were
pending against the Company in the United States as of January 31, 1998
brought 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
Company anticipates additional suits may be filed by individuals who opted
out of the class action settlement described below. The sales practices
alleged to have occurred are contrary to Company policy. Some of
34
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. CONTINGENCIES AND LITIGATION (CONTINUED)
these cases seek substantial damages while others seek unspecified
compensatory, punitive and treble damages. The Company intends to defend
these cases vigorously.
A Multi-State Life Insurance Task Force (the "Task Force"), comprised of
insurance regulators from 29 states and the District of Columbia, was
formed in April 1995 to conduct a review of sales and marketing practices
throughout the life insurance industry. As the largest life insurance
company in the United States, the Company was the initial focus of the Task
Force examination. On July 9, 1996, the Task Force released its report on
the Company's activities. The Task Force found that some sales of life
insurance policies by the Company had been improper. Based on the findings,
the Task Force recommended, and the Company agreed to, a series of fines
allocated to all 50 states and the District of Columbia. In addition, the
Task Force recommended a remediation program pursuant to which the Company
would offer relief to the policyowners who were misled when they purchased
permanent life insurance policies in the United States from 1982 to 1995.
On October 28, 1996, the Company entered into a Stipulation of Settlement
with attorneys for the plaintiffs in the consolidated class action lawsuit
pending in a Multi-District Litigation proceeding in the federal court in
New Jersey. The class action suit involved alleged improprieties in
connection with the Company's sale, servicing and operation of permanent
life insurance policies from 1982 through 1995. Pursuant to the settlement,
the Company agreed to provide certain enhancements and changes to the
remediation program previously accepted by the Task Force, including some
additional remedies. In addition, the Company agreed that it would incur a
minimum cost of $410 million in providing remedies to policyowners under
the program and, in specified circumstances, agreed to make certain other
payments and guarantees. Under the terms of the settlement, the Company
agreed to a minimum average cost per remedy of $2,364 for up to 330,000
claims remedied and also agreed to provide additional compensation to be
determined by formula that will range in aggregate amount from $50 million
to $300 million depending on the total number of claims remedied. At the
end of the remediation program's claim evaluation process, the Court will
determine how the additional compensation will be distributed.
The terms of the remediation program described above were enhanced again in
February 1997 pursuant to agreements reached with several states that had
not previously accepted the terms of the program. These changes were
incorporated as amendments to the above-described Stipulation of Settlement
and related settlement documents, and the amended Stipulation of Settlement
was approved as fair to class members by the United States District Court
for the District of New Jersey in March 1997. By that point in time, the
Company had entered into agreements with all 50 states and the District of
Columbia pursuant to which each jurisdiction had accepted the remediation
plan and the Company had agreed to pay approximately $65 million in fines,
penalties and related payments.
The decision of the U.S. District Court to certify a class in the
above-described litigation for settlement purposes only and to approve the
class action settlement as described in the amended Stipulation of
Settlement is presently on appeal to the U.S. Court of Appeals for the
Third Circuit. The appellants claim that the District Court erred in
certifying a class and in finding that the terms of the settlement are fair
to the class.
Pursuant to the state agreements and the amended Stipulation of Settlement,
as approved by the U.S. District Court, the Company initiated its
remediation program in 1997. The Company mailed packages and provided broad
class notice to the owners of approximately 10.7 million policies eligible
to participate in the remediation program, informing them of their rights.
Owners of approximately 21,800 policies elected to be excluded from the
class action settlement. Of those eligible to participate in the
settlement, policyowners who believed they were misled were invited to file
a claim through an Alternative Dispute Resolution ("ADR") process. The ADR
process was established to enable the company to discharge its liability to
the affected policyowners. Policyowners who did not wish to file a claim in
the ADR process were permitted to choose from options available under Basic
Claim Relief, such as preferred rate premium loans, or annuities, mutual
fund shares or life insurance policies that the Company will enhance.
The owners of approximately 1.16 million policies responded to these
notices by indicating an intent to file an ADR claim. All policyholders who
responded were provided an ADR claim form for completion and submission.
Approximately 635,000 claim forms were completed and returned as of January
31, 1998. Management does not believe the number of ADR claims that will be
completed and returned will increase significantly. In addition, the owners
of approximately 510,000 policies indicated an interest in a Basic Claim
Relief remedy. The ADR process requires that individual claim files be
reviewed by one or more independent claim evaluators. Management does not
believe costs associated with providing Basic Claim Relief will be material
to the Company's financial position or results of operations.
35
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. CONTINGENCIES AND LITIGATION (CONTINUED)
In 1996, the Company recorded in its Statement of Operations, the minimum
cost of $410 million as agreed to in the settlement. Management had no
better information available at that time upon which to make a reasonable
estimate of losses. Management now has additional information which allows
for computation of a reasonable estimate of losses associated with ADR
claims. Based on this additional information, in 1997, management had
increased the estimated liability for the cost of remedying policyholder
claims in the ADR process by $1.64 billion before taxes to approximately
$2.05 billion before taxes of which $1.80 billion has been funded in a
settlement trust as described in Note 3. While management believes these
are reasonable estimates based on information currently available, the
ultimate amount of the total cost of remedied policyholder claims is
dependent on complex and varying factors, including actual claims by
eligible policyholders, the relief options chosen and the dollar value of
those options. There are also additional elements of the ADR process which
cannot be fully evaluated at this time (e.g., claims which may be
successfully appealed) which could increase this estimate.
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 inquiries or their
effect on 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 and the regulatory
inquiries. It is possible that the results of operations or the cash flow
of the Company, in particular quarterly or annual periods, could be
materially affected by an ultimate unfavorable outcome of certain pending
litigation and regulatory matters. Management believes, however, that the
ultimate outcome of all pending litigation and regulatory matters referred
to above should not have a material adverse effect on the Company's
financial position, after consideration of applicable reserves.
The Company and a number of other insurers ("the Consortium") entered into
a Reinsurance and Participation Agreement (the "Agreement") with MBL Life
Assurance Corporation ("MBLLAC") and others, under which the Company and
the other insurers agreed to reinsure certain payments to be made to
contract holders by MBLLAC in connection with the plan of rehabilitation of
Mutual Benefit Life Insurance Company. Under the agreement, the Consortium,
subject to certain terms and conditions, will indemnify MBLLAC for the
ultimate net loss sustained by MBLLAC on each contract subject to the
Agreement. The ultimate net loss represents the amount by which the
aggregate required payments exceed the fair market value of the assets
supporting the covered contracts at the time such payments are due. The
Company's share of any net loss is 30.55%. The Company has determined that
it does not expect to make any payments to MBLLAC under the agreement. The
Company concluded this after testing a wide range of potentially adverse
scenarios during the rehabilitation period for MBLLAC.
15. SUBSEQUENT EVENTS
DEMUTUALIZATION
On February 10, 1998, the Company's Board of Directors authorized
management to take the preliminary steps necessary to allow the Company to
demutualize and become a publicly-traded company. The Company has begun
discussions with the New Jersey Department of Banking and Insurance,
leaders in the New Jersey State Legislature, as well as other key
regulatory agencies around the country. The New Jersey State Legislature
must first pass a law permitting demutualization. The New Jersey Department
of Banking and Insurance, the Company's Board and a majority of
participating policyholders must ultimately approve the Company's plan for
demutualization.
HEALTHCARE (UNAUDITED)
On December 10, 1998, the Company announced that it had entered into
definitive agreements for Aetna to acquire, subject to regulatory approval
and certain other conditions, the Company's healthcare business for $1
billion. The transaction is expected to be completed in the second quarter
of 1999. Included in this transaction are the Prudential HealthCare Health
Maintenance Organization, Point of Service, Preferred Provider
Organization, and indemnity health lines as well as its dental business.
* * * * *
36
VARIABLE UNIVERSAL LIFE
INSURANCE
LOGO PRUDENTIAL
The Prudential Insurance Company of America
751 Broad Street, Newark, NJ 07102-3777
Telephone 800 437-4016
PVUL-1 Ed. 12/98 CAT#64N370M
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.
REPRESENTATION WITH RESPECT TO CHARGES
The Prudential Insurance Company of America represents that the fees and charges
deducted under the Variable Universal Life Insurance Contracts registered by
this registration statement, in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred, and the risks assumed
by Prudential.
UNDERTAKING WITH RESPECT TO INDEMNIFICATION
The Registrant, in conjunction with certain affiliates, maintains insurance on
behalf of any person who is or was a trustee, director, officer, employee, or
agent of the Registrant, or who is or was serving at the request of the
Registrant as a trustee, director, officer, employee or agent of such other
affiliated trust or corporation, against any liability asserted against and
incurred by him or her arising out of his or her position with such trust or
corporation.
New Jersey, being the state of organization of Prudential Insurance Company of
America ("Prudential"), permits entities organized under its jurisdiction to
indemnify directors and officers with certain limitations. The relevant
provisions of New Jersey law permitting indemnification can be found in Section
14A:3-5 of the New Jersey Statutes Annotated. The text of Prudential's By-law
27, which relates to indemnification of officers and directors, is incorporated
by reference to Exhibit (6)(b) of this registration statement.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") 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 112 pages.
The undertaking to file reports.
The representation with respect to charges.
The undertaking with respect to indemnification.
The signatures.
Written consents of the following persons:
1. PricewaterhouseCoopers, LLP
2. Deloitte & Touche, LLP
3. Clifford E. Kirsch, Esq.
4. Ching-Meei Chang, MAAA, FSA
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) (a) Resolution of Board of Directors of The Prudential
Insurance Company of America establishing The Prudential
Variable Appreciable Account. (Note 2)
(b) Authorization for Separate Account to Invest in
Unaffiliated Mutual Funds (Note 5)
(2) Not Applicable.
(3) Distributing Contracts:
(a) Distribution Agreement between Pruco Securities Corporation
and The Prudential Insurance Company of America. (Note 5)
(b) Proposed form of Agreement between Pruco Securities
Corporation and independent brokers with respect to the
Sale of the Contracts. (Note 5)
(c) Schedules of Sales Commissions. (Note 1)
(d) Participation Agreements:
(i) (a) AIM Variable Insurance Funds, Inc., AIM V.I.
Value Fund. (Note 1)
(ii) (a) American Century Variable Portfolios, Inc., VP
Value Portfolio. (Note 7)
(b) Amendment to the American Century Variable
Portfolios, Inc. Participation Agreement.
(Note 1)
(iii) (a) Janus Aspen Series, Growth Portfolio. (Note 7)
(b) Amendment to the Janus Aspen Series Participation
Agreement. (Note 1)
(iv) (a) MFS Variable Insurance Trust, Emerging Growth
Series. (Note 7)
(b) Amendment to the MFS Variable Insurance Trust
Participation Agreement. (Note 1)
(v) (a) T. Rowe Price International Series, Inc.,
International Stock Portfolio. (Note 8)
(b) Amendment to the T. Rowe Price International
Series, Inc. Participation Agreement. (Note 1)
(4) Not Applicable.
(5) Variable Universal Life Insurance Contract: (Note 1)
(6) (a) Charter of The Prudential Insurance Company of America, as
amended November 14, 1995. (Note 3)
(b) By-laws of The Prudential Insurance Company of America, as
amended May 12, 1998. (Note 5)
(7) Not Applicable.
(8) Not Applicable.
II-2
(9) Not Applicable.
(10) (a) Application Form. (Note 5)
(b) Supplement to the Application. (Note 5)
(11) Not Applicable.
(12) Memorandum describing 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 5)
(13) Available Contract Riders and Endorsements:
(a) Rider for Payment of Premium Benefit Upon Insured's Total
Disability. (Note 5)
(b) 10 Year Level PremiumTerm Rider on Insured. (Note 1)
(c) 10 Year Level PremiumTerm Rider on Spouse. (Note 1)
(d) Children's Rider
(i) The dependent child is named in the application for
the contract and on the date of the application has
not reached his or her 18th birthday. (Note 1)
(ii) The dependent child just before the contract date of
this contract was insured under the earlier contract
that was converted or changed to this contract.
(Note 1)
(iii) The dependent child is named in the application for
change. (Note 1)
(iv) After-issue. (Note 1)
(e) Endorsement to the Rider for Level Term Insurance Benefit on
Dependent Children. (Note 1)
(f) Living Needs Benefit Rider
(i) for use in all approved jurisdictions except Florida.
(Note 2)
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.
6. Opinion and Consent of Ching-Meei Chang, MAAA, FSA, as to actuarial matters
pertaining to the securities being registered. (Note 1)
7. Powers of Attorney.
(a) F. Agnew, F. Becker, M. Berkowitz,
J.Cullen, C. Davis, R. Enrico, A. Gilmour,
W. Gray, III, J. Hanson, G. Hiner, C. Horner,
G. Kelley, B. Malkiel, A. Ryan, I. Schmertz,
C. Sitter, D. Staheli, R. Thomson, J. Unruh,
P. Vagelos, S. Van Ness, P. Volcker, J. Williams (Note 4)
(b) G. Casellas (Note 5)
(c) R. Carbone (Note 6)
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 on behalf of The
Prudential Variable Appreciable Account.
(Note 3) Incorporated by reference to Post-Effective Amendment No. 9 to
Form S-1, Registration No. 33-20083, filed April 9, 1997 on behalf
of The Prudential Variable Contract Real Property Account.
II-3
(Note 4) Incorporated by reference to Post-Effective Amendment No. 10 to
Form S-1, Registration No. 33-20083, filed April 9, 1998 on behalf
of The Prudential Variable Contract Real Property Account.
(Note 5) Incorporated by reference to Registrant's Form S-6, filed September
30, 1998.
(Note 6) Incorporated by reference to Post-Effective Amendment No. 3 to
Form N-4, Registration No. 333-23271, filed October 16, 1998 on
behalf of The Prudential Discovery Select Group Variable Contract
Account.
(Note 7) Incorporated by reference to Post-Effective Amendment No. 1 to
Form S-6, Registration No. 333-01031, filed May 14, 1997 on behalf
of The Prudential Variable Contract Account GI-2.
(Note 8) Incorporated by reference to Pre-Effective Amendment No. 1 to
Form N-4, Registration No. 333-23271, filed June 17, 1997 on behalf
of The Prudential Discovery Select Group Variable Contract Account.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant, the
Prudential Variable Appreciable Account, has duly caused this 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 22nd day of December, 1998.
(Seal) THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
(Registrant)
By: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Depositor)
Attest: /s/ Thomas C. Castano By: /s/ Esther H. Milnes
------------------------ --------------------------
Thomas C. Castano Esther H. Milnes
Assistant Secretary Vice President and Actuary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on this 22nd day of December, 1998.
SIGNATURE AND TITLE
/s/ *
- ------------------------------------------------------------
Arthur F. Ryan
Chairman of the Board, President, and Chief Executive
Officer
/s/ *
- ------------------------------------------------------------
Martin A. Berkowitz *By: /s/ Thomas C. Castano
Senior Vice President and Comptroller ---------------------
Thomas C. Castano
/s/ * (Attorney-in-Fact)
- ------------------------------------------------------------
Richard J. Carbone
Chief Financial Officer
/s/ *
- ------------------------------------------------------------
Franklin E. Agnew
Director
/s/ *
- ------------------------------------------------------------
Frederic K. Becker
Director
/s/ *
- ------------------------------------------------------------
Gilbert F. Casellas
Director
/s/ *
- ------------------------------------------------------------
James G. Cullen
Director
/s/ *
- ------------------------------------------------------------
Carolyne K. Davis
Director
/s/ *
- ------------------------------------------------------------
Roger A. Enrico
Director
/s/*
- ------------------------------------------------------------
Allan D. Gilmour
Director
II-5
/s/ *
- ----------------------------------------------
William H. Gray, III
Director
/s/ *
- ----------------------------------------------
Jon F. Hanson
Director
/s/ *
- ----------------------------------------------
Glen H. Hiner, Jr.
Director
/s/ *
- ----------------------------------------------
Constance J. Horner
Director
/s/ *
- ----------------------------------------------
Gaynor N. Kelley
Director
/s/ *
- ----------------------------------------------
Burton G. Malkiel *By: /s/ Thomas C. Castano
Director ---------------------
Thomas C. Castano
/s/* (Attorney-in-Fact)
- ----------------------------------------------
Ida F. S. Schmertz
Director
/s/*
- ----------------------------------------------
Charles R. Sitter
Director
/s/*
- ----------------------------------------------
Donald L. Staheli
Director
/s/ *
- ----------------------------------------------
Richard M. Thomson
Director
/s/ *
- ----------------------------------------------
James A. Unruh
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-6
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this Pre-
Effective Amendment No. 1 to the registration statement on Form S-6 (the
"Registration Statement") of our report dated March 20, 1998, relating to the
financial statements of the Variable Universal Life Subaccounts of the
Prudential Variable Appreciable Account, which appears in such Prospectus.
We also consent to the use in the Prospectus constituting part of this
Registration Statement of our report dated March 5, 1998, relating to the
consolidated financial statements of The Prudential Insurance Company of
America, which appears in such Prospectus.
We also consent to the reference to us under the heading "Experts" in the
Prospectus.
/s/ PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
December 22, 1998
II-7
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-Effective Amendment No. 1 to Registration
Statement No. 333-64957 on Form S-6 of The Prudential Variable Appreciable
Account of The Prudential Insurance Company of America (a) of our report dated
February 15, 1996, relating to the financial statements of The Prudential
Variable Appreciable Account, and (b) of our report dated June 4, 1997, relating
to the consolidated financial statements of The Prudential Insurance Company of
America and subsidiaries appearing in the Prospectus, which is a part of such
Registration Statement; and (c) to the reference to us under the heading of
"Experts" in such Registration Statement.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
December 22, 1998
II-8
EXHIBIT INDEX
Consent of PricewaterhouseCoopers LLP, independent accountants. Page II-7
Consent of Deloitte & Touche LLP, independent auditors. Page II-8
1.A.(3)(c) Schedules of Sales Commissions. Page II-10
1.A.(3)(d) Participation Agreements:
(i)(a) AIM Variable Insurance Funds, Inc., AIM V.I. Value Fund. Page II-11
(ii)(b) American Century Variable Portfolios, Inc., VP Value Portfolio. Page II-41
(iii)(b) Janus Aspen Series, Growth Portfolio. Page II-45
(iv)(b) MFS Variable Insurance Trust, Emerging Growth Series. Page II-47
(v)(b) T. Rowe Price International Series, Inc., International Stock Portfolio. Page II-49
1.A.(5) Variable Universal Life Insurance Contract Page II-52
1.A.(13)(b) 10 Year Level Premium Term Rider on Insured. Page II-98
1.A.(13)(c) 10 Year Level Premium Term Rider on Spouse. Page II-101
1.A.(13)(d)(i) Rider for Level Term Insurance Benefit on Dependent
Children under 18 years of age. Page II-105
1.A.(13)(d)(ii) Rider for Level Term Insurance Benefit on Dependent Children insured
under a previous Contract. Page II-116
1.A.(13)(d)(iii) Rider for Level Term Insurance Benefit on Dependent Children named in
the application for change. Page II-127
1.A.(13)(d)(iv) Rider for Level Term Insurance Benefit on Dependent Children after-issue. Page II-138
1.A.(13)(e) Endorsement to the Rider for Level Term Insurance Benefit on Dependent
Children. Page II-142
3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality of
the securities being registered Page II-143
6. Opinion and Consent of Ching-Meei Chang, MAAA, FSA, as to actuarial
matters pertaining to the securities being registered Page II-144
27. Financial Data Schedule
II-9