AS FILED WITH THE SEC ON __________. REGISTRATION NO. 333-01031
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
POST-EFFECTIVE AMENDMENT NO. 4 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED
ON FORM N-8B-2
------------
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
(Exact Name of Trust)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
PRUDENTIAL PLAZA
NEWARK, NEW JERSEY 07102-3777
(201) 802-6000
(Address and telephone number of principal executive offices)
------------
C. CHRISTOPHER SPRAGUE
ASSISTANT GENERAL COUNSEL
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
100 MULBERRY STREET
3 GATEWAY CENTER
NEWARK, NEW JERSEY 07102-4077
(Name and address of agent for service)
------------
It is proposed that this filing will become effective (check appropriate space):
| | immediately upon filing pursuant to paragraph (b) of Rule 485
|X| on April 30, 1999 pursuant to paragraph (b) of Rule 485
(date)
| | 60 days after filing pursuant to paragraph (a)(1) of Rule 485
| | on pursuant to paragraph (a)(1) of Rule 485
------------------------
(date)
<PAGE>
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 Contract Account GI-2
6. The Prudential Variable Contract Account GI-2
7. Not Applicable
8. Not Applicable
9. Litigation
10. Brief Description of the Group Contract and Certificate; How
Prudential Issues Certificates; Applicant Owner Provision; A
"Free Look" Period; Procedures; Premiums; Effective Date of
Insurance; How You Can Change the Way Prudential Allocates Future
Premium Payments; How You Can Transfer Amounts In Your
Certificate Fund From One Investment Option to Another; Dollar
Cost Averaging; Death Benefits; Changes in Face Amount; Charges
and Expenses; Reduction of Charges; Dividends or Experience
Credits; Cash Surrender Value; Full Surrenders; Paid-Up Coverage;
Partial Withdrawals; Loans; Telephone and Electronic
Transactions; Lapse; Termination of a Group Contractholder's
Participation in Group Contract; Participants Who Are No Longer
Eligible Group Members; Options on Termination of Coverage;
Reinstatement; Tax Treatment of Certificate Benefits; ERISA
Considerations; When Proceeds Are Paid; Beneficiary;
Incontestability; Misstatement of Age; Suicide Exclusion;
Assignment; Voting Rights; Substitution of Fund Shares;
Additional Insurance Benefits
11. Brief Description of the Group Contract and Certificate; The
Prudential Variable Contract Account GI-2; The Funds
12. Cover Page; Brief Description of the Group Contract and
Certificate; The Funds; Sale of the Contract and Sales
Commissions
13. Brief Description of the Group Contract and Certificate;
Premiums; Reduction of Charges; Sale of the Contract
<PAGE>
N-8B-2 ITEM
NUMBER LOCATION
- ----------- --------
and Sales Commissions
14. Brief Description of the Group Contract and Certificate; How
Prudential Issues Certificates; Procedures
15. Brief Description of the Group Contract and Certificate;
Procedures; How You Can Change the Way Prudential Allocates
Future Premium Payments; How You Can Transfer Amounts In Your
Certificate Fund From One Investment Option to Another
16. Brief Description of the Group Contract and Certificate; Detailed
Information About the Certificates
17. Death Benefits; Full Surrenders; Partial Withdrawals; Loans; When
Proceeds Are Paid
18. The Prudential Variable Contract Account GI-2; The Funds
19. Reports
20. Not Applicable
21. Loans
22. Not Applicable
23. Not Applicable
24. Incontestability; Misstatement of Age; Suicide Exclusion;
Assignment
25. The Prudential Insurance Company of America
26. The Funds; Charges and Expenses
27. General Information About Prudential; The Prudential Variable
Contract Account GI-2, and The Variable Investment Options under
the Certificates
28. The Prudential Insurance Company of America; Directors and
Officers of Prudential
29. The Prudential Insurance Company of America
30. Not Applicable
31. Not Applicable
32. Not Applicable
<PAGE>
N-8B-2 ITEM
NUMBER LOCATION
- ----------- --------
33. Not Applicable
34. Not Applicable
35. The Prudential Insurance Company of America
36. Not Applicable
37. Not Applicable
38. Sale of the Contract and Sales Commissions
39. Sale of the Contract and Sales Commissions
40. Not Applicable
41. Sale of the Contract and Sales Commissions
42. Not Applicable
43. Not Applicable
44. Brief Description of the Group Contract and Certificate; The
Funds; Premiums; Cash Surrender Value
45. Not Applicable
46. Brief Description of the Group Contract and Certificate; The
Prudential Variable Contract Account GI-2; The Funds; Death
Benefits; Full Surrenders; Partial Withdrawals
47. The Prudential Variable Contract Account GI-2; The Funds
48. Not Applicable
49. Not Applicable
50. Not Applicable
51. Brief Description of the Group Contract and Certificate; Detailed
Information About the Certificates
52. Substitution of Fund Shares
53. Tax Treatment of Certificate Benefits; ERISA Considerations
54. Not Applicable
55. Not Applicable
<PAGE>
N-8B-2 ITEM
NUMBER LOCATION
- ----------- --------
56. Not Applicable
57. Not Applicable
58. Not Applicable
59. Financial Statements of The Prudential Variable Contract Account
GI-2; Consolidated Financial Statements of The Prudential
Insurance Company of America and Subsidiaries
<PAGE>
PART I
INFORMATION IN PROSPECTUS
<PAGE>
PROSPECTUS
May 1, 1999
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI - 2
GROUP VARIABLE UNIVERSAL LIFE INSURANCE
This document is a prospectus. It tells you about GROUP VARIABLE UNIVERSAL LIFE
INSURANCE contracts offered by The Prudential Insurance Company of America
("Prudential," "we," "our," or "us") for insurance programs that are sponsored
by groups.
We will give a Certificate to each Eligible Group Member or Applicant Owner who
buys coverage under a Group Contract. We will refer to each person who buys
coverage as a "Participant." When we use the terms "you" or "your," we mean a
Participant. Certain Group Contracts may also permit a Participant to apply for
separate insurance coverage for his or her dependents.
The Group Contracts and Certificates provide life insurance protection with
flexible premium payments and a choice of underlying investment options. The
Death Benefit and Cash Surrender Value will change daily, depending on the
performance of the investment options you select. The Death Benefit will usually
not be less than the Face Amount of the Certificate. Surrenders, partial
withdrawals and loans are available but certain rules and limits apply to how
they work.
We have tried to make this prospectus easy to understand. Still, the meaning of
some terms are special because they describe concepts used mostly in insurance
contracts. To help you understand what these terms mean, we added a DEFINITIONS
OF SPECIAL TERMS section on page 97. It's easy to recognize a defined term - we
capitalize them.
A WORD ABOUT REPLACING YOUR LIFE INSURANCE. You should know that, most times, it
is not in your best interest to replace one life insurance policy with another
one. When you need additional life insurance, it is usually better for you to
add coverage - either by asking for a new policy or by buying additional
insurance - than it is for you to replace a policy. In that way, you don't lose
benefits under the policy you already have.
If you are thinking about replacing a life insurance policy you already have so
that you can obtain Group Variable Universal Life Insurance, you should consider
your choices carefully. Compare the costs and benefits of adding coverage to
your current policy against the costs and benefits of Group Variable Universal
Life Insurance. You should also get advice from a tax advisor.
YOU SHOULD READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. THIS
DOCUMENT WILL BE FOLLOWED BY PROSPECTUSES FOR EACH OF THE FUNDS UNDER THE GROUP
PROGRAM THAT WILL BE AVAILABLE TO YOU. FOR SOME GROUP CONTRACTS, THIS PROSPECTUS
WILL BE ACCOMPANIED BY A SUPPLEMENT THAT DESCRIBES THE UNIQUE FEATURES OF THE
GROUP CONTRACT AND CERTIFICATES. FOR THOSE GROUP CONTRACTS, THE PROSPECTUS AND
THE SUPPLEMENT TOGETHER PROVIDE ALL THE INFORMATION YOU NEED TO KNOW ABOUT GROUP
VARIABLE UNIVERSAL LIFE INSURANCE, AND YOU SHOULD READ THEM TOGETHER.
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES, OR DETERMINED THAT 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) 562-9874
The SEC maintains a Web site (http://www.sec.gov) that contains material
incorporated by reference and other information regarding issuers that file
electronically with the SEC. You may also obtain and copy information at the
SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for
information. You may obtain copies of available information upon payment of a
duplicating fee by writing the Public Reference Section of the SEC, Washington,
D.C. 20549-6009.
GL.99.562
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
The Prudential Variable Contract Account GI-2 (called the "Separate Account")
has 131 variable investment options. We call each option a "Subaccount." We will
invest the assets of each Subaccount in The Prudential Series Fund, Inc. (called
the "Series Fund") or in certain other mutual fund portfolios. When we refer to
"Funds" in this prospectus, we mean all or any of these funds.
We will permit each Group Contractholder to choose up to 20 of these Funds. The
Series Fund Money Market Portfolio must be one of the selected Funds. Generally,
half of the Funds selected by the Group Contractholder must be from the Series
Fund.
You may then choose as investment options from among the Funds selected by your
Group Contractholder. You may also choose to invest in the Fixed Account. (The
Fixed Account is an investment option for which Prudential guarantees that the
effective annual interest rate will be at least 4%.)
Once you select the investment options you want, Prudential will direct your
premium payments to the Subaccount associated with those Funds or to the Fixed
Account.
We describe the Funds chosen by your Group Contractholder briefly in the section
called "THE FUNDS." It starts on page 23. We will send you a prospectus for each
Fund selected by your Group Contractholder. The Fund prospectuses tell you about
the objectives and policies for each Fund, as well as about the risks of
investing in each Fund.
<PAGE>
TABLE OF CONTENTS
PAGE
BRIEF DESCRIPTION OF THE GROUP CONTRACT AND CERTIFICATE....................... 1
ILLUSTRATIONS OF DEATH BENEFITS AND CASH SURRENDER VALUES.....................17
GENERAL INFORMATION ABOUT PRUDENTIAL, THE PRUDENTIAL VARIABLE
CONTRACT ACCOUNT GI-2, AND THE VARIABLE INVESTMENT OPTIONS
UNDER THE CERTIFICATES.....................................................22
The Prudential Insurance Company of America..........................22
The Prudential Variable Contract Account GI-2........................23
The Funds............................................................23
The Fixed Account....................................................55
DETAILED INFORMATION ABOUT THE CERTIFICATES...................................56
How Prudential Issues Certificates...................................56
A "Free Look" Period.................................................57
Procedures...........................................................57
Premiums.............................................................58
Effective Date of Insurance..........................................59
How Prudential Will Deposit and Invest Premium Payments..............59
How You Can Change the Way Prudential Allocates
Future Premium Payments.........................................60
How You Can Transfer Amounts in Your Certificate Fund
from One Investment Option to Another...........................60
Dollar Cost Averaging................................................61
Death Benefits.......................................................62
Changes in Face Amount...............................................64
Charges and Expenses.................................................65
Reduction of Charges.................................................69
Dividends or Experience Credits......................................70
Cash Surrender Value.................................................70
Full Surrenders......................................................71
Paid-up Coverage.....................................................71
Partial Withdrawals..................................................72
Loans................................................................72
Telephone and Electronic Transactions................................74
Lapse................................................................74
Termination of a Group Contractholder's Participation in the
Group Contract....................................................75
Participants Who Are No Longer Eligible Group Members................75
Options on Termination of Coverage...................................76
Reinstatement........................................................78
Tax Treatment of Certificate Benefits................................78
ERISA Considerations.................................................81
ii
<PAGE>
When Proceeds Are Paid...............................................84
Beneficiary..........................................................84
Incontestability.....................................................84
Misstatement of Age..................................................85
Suicide Exclusion....................................................85
Modes of Settlement..................................................85
Assignment...........................................................87
Applicant Owner Provision............................................87
Voting Rights........................................................87
Substitution of Fund Shares..........................................89
Additional Insurance Benefits........................................89
Reports..............................................................90
Sale of the Contract and Sales Commissions...........................91
Ratings and Advertisements...........................................92
Services Performed by Third Parties..................................92
State Regulation.....................................................92
Experts..............................................................93
Litigation...........................................................93
The Year 2000 Issue..................................................94
Subsequent Events....................................................96
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS..........................97
DIRECTORS AND OFFICERS OF PRUDENTIAL.........................................100
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2.........A1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA AND SUBSIDIARIES......................................B1
YOU SHOULD NOT CONSIDER THIS PROSPECTUS TO BE AN OFFERING IN ANY JURISDICTION
WHERE AN OFFERING MAY NOT BE LAWFULLY MADE. YOU SHOULD RELY ON THE INFORMATION
CONTAINED IN THIS PROSPECTUS AND ANY SUPPLEMENT TO IT. WE HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
iii
<PAGE>
BRIEF DESCRIPTION OF THE GROUP CONTRACT AND CERTIFICATE
In this section of the prospectus, we answer some questions that are frequently
asked about Group Variable Universal Life Insurance. You can find more detailed
information on later pages of the prospectus.
The Group Contract and Certificate provide even more detailed information. You
will get a Certificate if you buy the Group Variable Universal Life Insurance.
WHAT IS A GROUP VARIABLE UNIVERSAL LIFE INSURANCE CONTRACT?
It is an insurance contract issued by Prudential to the group that sponsors the
Group Variable Universal Life Insurance program. Often, the group that sponsors
a program is an employer. Other groups, such as membership associations, may
also sponsor programs.
The Group Contract states all the terms of the agreement between Prudential and
the sponsoring group. It forms the entire agreement between them. Among other
things, the Group Contract defines which members of the group are eligible to
buy the Group Variable Universal Life Insurance. The Group Contract also says
whether or not Eligible Group Members may also buy coverage for their
dependents.
We will give a Certificate to each Eligible Group Member or Applicant Owner who
buys coverage under the Group Contract. The Certificate provides for a Death
Benefit and a Cash Surrender Value. The Death Benefit and the Cash Surrender
Value can change every day. They change based on the performance of the
investment options you selected.
HOW DOES PRUDENTIAL CALCULATE THE CERTIFICATE'S DEATH BENEFIT?
When you buy Group Variable Universal Life Insurance, you will choose a Face
Amount of insurance, based on the amounts available for your group. Prudential
will calculate the Death Benefit like this:
o The DEATH BENEFIT is the Face Amount of insurance PLUS the value of your
Certificate Fund on the date of your death MINUS any Certificate Debt and
outstanding charges.
(In some cases, we will increase the Death Benefit to an amount that is more
than the Face Amount plus the value of the Certificate Fund. We will do that to
make sure that the Certificate meets the definition of "life insurance" under
the Internal Revenue Code. We will still deduct any Certificate Debt and
outstanding charges.)
1
<PAGE>
The CERTIFICATE FUND consists of the Net Premiums that we invest in the
investment options you selected. Prudential will deduct its charges for the
insurance from the Certificate Fund. The value of the Certificate Fund will
change each day based on the performance of those investment options and to
reflect the deduction of daily charges.
See the DEATH BENEFITS section on page 62.
HOW DOES PRUDENTIAL CALCULATE THE CASH SURRENDER VALUE OF THE CERTIFICATE?
Prudential calculates the Cash Surrender Value of a Certificate like this:
o The CASH SURRENDER VALUE is the value of the Certificate Fund on the day of
the surrender MINUS any Certificate Debt and outstanding charges.
(Under the terms of some Group Contracts, Prudential is permitted to also deduct
a charge for the surrender. The charge may be up to $20.)
See the CASH SURRENDER VALUE section on page 70.
WHAT PREMIUMS MUST I PAY?
You can usually choose how often you pay premiums and the amount of premiums.
Prudential will keep your insurance in force as long as the balance in your
Certificate Fund is enough to pay the charges that are due to Prudential each
month. Prudential may also require you to pay a minimum initial premium.
If the balance in your Certificate Fund is not enough to pay any month's
charges, you must make a premium payment that is enough to bring your
Certificate Fund balance above this minimum amount. You must make that payment
during the grace period. If you don't, your insurance coverage will end.
See the PREMIUMS section on page 58.
WHAT INVESTMENT OPTIONS ARE AVAILABLE?
The Separate Account has Subaccounts. We invest the assets of each Subaccount in
its corresponding Fund.
We permit each Group Contractholder to choose up to 20 of these Funds for the
Group Contractholder's Participants to invest in. The Series Fund Money Market
Portfolio must be one of the selected Funds. And generally, half of the Funds
selected by the Group Contractholder must be from the Series Fund.
2
<PAGE>
Instead of choosing Funds for itself, a Group Contractholder may ask Prudential
to present it with one or more predetermined groups of Funds for the Group
Contractholder's Participants to invest in.
We will not permit a Group Contractholder to substitute other Funds for Funds it
has already selected (whether the Group Contractholder chose its own Funds or
selected a predetermined group of Funds). But, if a Group Contractholder chooses
fewer than 20 Funds, we will permit that Group Contractholder to select
additional Funds.
You may invest only in the Funds chosen by your Group Contractholder and in the
Fixed Account. (The Fixed Account is an investment option for which Prudential
guarantees that the effective annual interest rate will be at least 4%. See THE
FIXED ACCOUNT section on page 55.)
We recommend that the Group Contractholder get advice from an investment advisor
when choosing the investment options for its Participants.
See THE FUNDS section on page 23. Each Fund prospectus provides more detailed
information about the specific Fund.
DOES GROUP VARIABLE UNIVERSAL LIFE INSURANCE OFFER CHOICE AND FLEXIBILITY IN THE
AMOUNT OF INSURANCE PROTECTION I CAN GET?
Yes. The Death Benefit under a Certificate includes, among other things, the
value of your Certificate Fund. The value of your Certificate Fund will vary
with the investment performance of the investment options you select. So, your
Death Benefit could grow more than it could under a certificate that does not
include investment options. But, the Death Benefit may also go down if the
investment options in your Certificate Fund have poor investment performance.
You choose how to invest the amount you have in your Certificate Fund. You may
choose more aggressive Funds or less aggressive Funds. What you choose depends
on your personal circumstances and your investment objectives and how they may
change over time.
If you prefer to avoid or reduce the risks that come with investing in the
Funds, you can choose to direct some or all of the amount in your Certificate
Fund to the Fixed Account. Prudential guarantees that the part of your
Certificate Fund that is directed to the Fixed Account will earn interest daily
at a rate that Prudential declares periodically. That rate will change from time
to time, but it will never be lower than 4%. See THE FIXED ACCOUNT section on
page 55.
WHAT CHARGES DOES PRUDENTIAL MAKE?
We deduct certain charges from each premium payment that you make and from the
amounts that are held in each investment option. These charges compensate us for
insurance costs, risks and expenses.
3
<PAGE>
All charges made by Prudential are described in detail in the CHARGES AND
EXPENSES section on page 65. This chart briefly outlines the charges that may be
made:
- --------------------------------------------------------------------------------
YOU MAKE A PREMIUM PAYMENT.
- --------------------------------------------------------------------------------
|
|
- --------------------------------------------------------------------------------
THEN, PRUDENTIAL DEDUCTS THESE CHARGES:
o A CHARGE FOR TAXES ON PREMIUM PAYMENTS. Currently, this charge is
2.6%, but some Group Contracts may permit a charge up to 5.35%. We
reserve the right to increase this charge if the cost of our taxes
related to premium payments increases. (In some states, this charge is
known as a premium-based administrative charge.)
o A PROCESSING CHARGE of up to $2. (Under some Group Contracts, this
charge is waived.)
o A SALES CHARGE of up to 3 1/2%. (Under some Group Contracts, this
charge is waived.)
- --------------------------------------------------------------------------------
|
|
- --------------------------------------------------------------------------------
THE REMAINDER IS YOUR NET PREMIUM
This is the amount that you can invest in one or more of the investment
options selected by your Group Contractholder.
- --------------------------------------------------------------------------------
|
|
- --------------------------------------------------------------------------------
DAILY CHARGES
After your Net Premium is directed to your investment option(s), Prudential
deducts these DAILY CHARGES from the Subaccounts (but not from the Fixed
Account):
o A DAILY CHARGE for mortality and expense risks. This charge is
deducted from the assets of the Subaccount(s) that correspond to the
Fund(s) you selected.
Currently, this charge is equivalent to an effective annual rate of
0.45%. Prudential guarantees that this charge will not be more than an
effective annual rate of 0.90%.
o A DAILY CHARGE for investment management fees and expenses. These
charges are deducted from the assets of the Fund(s) you selected. The
Funds set these charges.
In 1998, the total expenses (after expense reimbursement) of the Funds
ranged from 0.37% to 1.98% of their average net assets.
- --------------------------------------------------------------------------------
4
<PAGE>
|
|
- --------------------------------------------------------------------------------
MONTHLY CHARGES
Prudential deducts these charges from your Certificate Fund each month:
o A CHARGE FOR ADMINISTRATIVE EXPENSES. Currently, this charge may be up
to $3 per month. Prudential guarantees that it will not be more than
$6 per month.
o A CHARGE FOR THE COST OF INSURANCE.
o A CHARGE FOR ANY ADDITIONAL INSURANCE BENEFITS not already included in
the charge for the cost of insurance.
Under some Group Contracts, Prudential may deduct these charges more or
less frequently.
- --------------------------------------------------------------------------------
|
|
- --------------------------------------------------------------------------------
POSSIBLE ADDITIONAL CHARGES
Some Group Contracts may also permit Prudential to make the following
TRANSACTION CHARGES:
o When you use the DOLLAR COST AVERAGING feature.
o When you ask Prudential to REALLOCATE the way your premium payments
will be invested.
o When you SURRENDER your Certificate Fund or when you make a WITHDRAWAL
from it. The charge can be up to $20 or 2% of the amount you surrender
or withdraw, whichever amount is less.
o Each time you take a LOAN from your Certificate Fund. The charge may
be up to $20.
o Each time you request an ADDITIONAL STATEMENT about your Certificate
Fund. The charge may be up to $20.
o When you request MORE THAN 12 TRANSFERS BETWEEN INVESTMENT OPTIONS in
a Certificate Year. The charge may be up to $20 for each transfer
after the 12th one.
Also, Prudential has the right to make a charge for any taxes that may be
imposed on the operations of the Separate Account.
- --------------------------------------------------------------------------------
5
<PAGE>
CAN I MAKE WITHDRAWALS FROM THE CERTIFICATE FUND?
Yes. You may request a partial withdrawal from the Certificate Fund. You may
also surrender your insurance and receive its Cash Surrender Value. See the
PARTIAL WITHDRAWALS section on page 72 and the FULL SURRENDERS section on page
71.
CAN I TAKE LOANS?
Yes. You may borrow money from your Certificate Fund. The Loan Value, which is
the maximum amount you may borrow, is 90% of your Certificate Fund minus any
existing loan (and its accrued interest), outstanding charges, and the amount of
the next month's charges. In states that require it, you may borrow a greater
amount.
When you take a loan from your Certificate Fund, here's what happens:
o The amount of the loan is transferred from your investment options to
a Loan Account. This Loan Account is still part of your Certificate
Fund.
o The Loan Account earns interest at an effective annual rate that is
usually 2% less than the rate Prudential charges as interest on the
loan.
The term "Certificate Debt" is used to mean any outstanding loan plus its
accrued interest. Certificate Debt is deducted from any amount payable at the
Covered Person's death. It is also deducted from the Certificate's Cash
Surrender Value.
HOW IS MY INSURANCE COVERAGE AFFECTED WHEN I AM NO LONGER A MEMBER OF THE GROUP?
Each Group Contract has different rules. Under some Group Contracts, you may
continue your insurance even though you are no longer part of the group. The
charges for continued insurance may be higher.
You may also surrender the insurance for its Cash Surrender Value, elect to use
the Cash Surrender Value to buy Paid-up Coverage, or convert the insurance to an
individual life insurance policy.
See the OPTIONS ON TERMINATION OF COVERAGE section on page 76.
WHAT IS THE FEDERAL INCOME TAX STATUS OF AMOUNTS RECEIVED UNDER THE CERTIFICATE?
Variable life insurance contracts receive the same Federal income tax treatment
as conventional life insurance contracts (those where the amount of the death
benefit is fixed instead of variable). Here's what that means:
6
<PAGE>
o First, the Death Benefit is generally not included in the gross income
of the beneficiary.
o Second, increases in the value of the Certificate Fund are generally
not included in the taxable income of the Participant. This is true
whether the increases are from income or capital gains.
o Third, surrenders and partial withdrawals are generally treated first
as a return of your investment in the Certificate and then as a
distribution of taxable income.
o Fourth, loans are not generally treated as distributions.
See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page 78. You should
consult your tax advisor for guidance on your specific situation.
WHAT ARE THE FUNDS' CHARGES?
The following table summarizes the fee and expense information for the Funds.
For more information about the Funds, see THE FUNDS section on page 23.
<TABLE>
<CAPTION>
===================================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS) (1)
===================================================================================================================
<S> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND, INC.
Conservative Balanced Portfolio (2) 0.55% - 0.02% 0.57%
Diversified Bond Portfolio (2) 0.40% - 0.02% 0.42%
Equity Portfolio (2) 0.45% - 0.02% 0.47%
Equity Income Portfolio (2) 0.40% - 0.02% 0.42%
Flexible Managed Portfolio (2) 0.60% - 0.01% 0.61%
Global Portfolio (2) 0.75% - 0.11% 0.86%
Government Income Portfolio (2) 0.40% - 0.03% 0.43%
High Yield Bond Portfolio (2) 0.55% - 0.03% 0.58%
Money Market Portfolio (2) 0.40% - 0.01% 0.41%
Natural Resources Portfolio (2) 0.45% - 0.04% 0.49%
Prudential Jennison Portfolio (2) 0.60% - 0.03% 0.63%
Small Capitalization Stock Portfolio (2) 0.40% - 0.07% 0.47%
Stock Index Portfolio (2) 0.35% - 0.02% 0.37%
Zero Coupon Bond 2005 Portfolio (2) 0.40% - 0.21% 0.61%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS) (1)
===================================================================================================================
<S> <C> <C> <C> <C>
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Capital Appreciation Fund 0.62% - 0.05% 0.67%
AIM V.I. Diversified Income Fund 0.60% - 0.17% 0.77%
AIM V.I. Global Utilities Fund 0.65% - 0.46% 1.11%
AIM V.I. Government Securities Fund 0.50% - 0.26% 0.76%
AIM V.I. Growth Fund 0.64% - 0.08% 0.72%
AIM V.I. Growth and Income Fund 0.61% - 0.04% 0.65%
AIM V.I. International Equity Fund 0.75% - 0.16% 0.91%
AIM V.I. Value Fund 0.61% - 0.05% 0.66%
- ------------------------------------------------------------------------------------------------------------------
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
Global Bond Portfolio (3) 0.64% - 0.29% 0.93%
Global Dollar Government Portfolio (3) 0.39% - 0.56% 0.95%
Growth Portfolio (3) 0.75% - 0.12% 0.87%
Growth and Income Portfolio (3) 0.63% - 0.10% 0.73%
International Portfolio (3) 0.58% - 0.37% 0.95%
Premier Growth Portfolio (3) 0.97% - 0.09% 1.06%
Quasar Portfolio (3) 0.73% - 0.22% 0.95%
Real Estate Investment Portfolio (3) 0.08% - 0.87% 0.95%
Technology Portfolio (3) 0.81% - 0.14% 0.95%
U.S. Government/High Grade
Securities Portfolio (3) 0.60% - 0.18% 0.78%
Utility Income Portfolio (3) 0.58% - 0.37% 0.95%
Worldwide Privatization Portfolio (3) 0.25% - 0.70% 0.95%
- -------------------------------------------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
VP Balanced Portfolio (4) N/A - N/A 1.00%
VP International Portfolio (4) N/A - N/A 1.50%
VP Value Portfolio (4) N/A - N/A 1.00%
- -------------------------------------------------------------------------------------------------------------------
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger IPT - 100 Fund (5) 0.75% - 0.25% 1.00%
Berger IPT - Growth and Income Fund (6) 0.75% - 0.25% 1.00%
Berger IPT - Small Company Growth Fund (7) 0.90% - 0.25% 1.15%
Berger/BIAM IPT - International Fund (8) 0.90% - 0.30% 1.20%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS) (1)
===================================================================================================================
<S> <C> <C> <C> <C>
DREYFUS FUNDS
Capital Appreciation Portfolio 0.75% - 0.06% 0.81%
Disciplined Stock Portfolio 0.75% - 0.13% 0.88%
Growth and Income Portfolio 0.75% - 0.03% 0.78%
International Equity Portfolio 0.75% - 0.24% 0.99%
International Value Portfolio 1.00% - 0.29% 1.29%
Quality Bond Portfolio 0.65% - 0.08% 0.73%
Small Cap Portfolio 0.75% - 0.02% 0.77%
Small Company Stock Portfolio 0.75% - 0.23% 0.98%
Socially Responsible Growth Fund 0.75% - 0.05% 0.80%
Special Value Portfolio 0.75% - 0.08% 0.83%
- -------------------------------------------------------------------------------------------------------------------
FRANKLIN(R) TEMPLETON(R): TEMPLETON VARIABLE
PRODUCTS SERIES FUND (CLASS 2 SHARES)
Templeton Asset Allocation Fund (9) 0.60% 0.25% 0.18% 1.03%
Templeton Bond Fund (10) 0.50% 0.15% 0.23% 0.88%
Templeton Developing Markets Fund (9) 1.25% 0.25% 0.41% 1.91%
Templeton International Fund (9) 0.69% 0.25% 0.17% 1.11%
Templeton Stock Fund (9) 0.70% 0.25% 0.19% 1.14%
- -------------------------------------------------------------------------------------------------------------------
INVESCO VARIABLE INVESTMENT FUNDS, INC.
VIF-Blue Chip Growth Fund (11) (12) 0.85% - 0.72% 1.57%
VIF-Dynamics Fund (11) (12) 0.60% - 0.85% 1.45%
VIF-Equity Income Fund (11) (12) 0.75% - 0.18% 0.93%
VIF-Health Sciences Fund (11) (12) 0.75% - 0.52% 1.27%
VIF-High Yield Fund (12) 0.60% - 0.47% 1.07%
VIF-Small Company Growth Fund (11) (12) 0.75% - 1.12% 1.87%
VIF-Technology Fund (11) (12) 0.75% - 0.65% 1.40%
VIF-Total Return Fund (11) (12) 0.75% - 0.42% 1.17%
VIF-Utilities Fund (11) (12) 0.60% - 0.48% 1.08%
- -------------------------------------------------------------------------------------------------------------------
JANUS ASPEN SERIES
Aggressive Growth Portfolio (13) 0.72% - 0.03% 0.75%
Balanced Portfolio (13) 0.72% - 0.02% 0.74%
Flexible Income Portfolio 0.65% - 0.08% 0.73%
Growth Portfolio (13) 0.65% - 0.03% 0.68%
High-Yield Portfolio (13) 0.00% - 1.00% 1.00%
International Growth Portfolio (13) 0.66% - 0.20% 0.86%
Worldwide Growth Portfolio (13) 0.65% - 0.07% 0.72%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS) (1)
===================================================================================================================
<S> <C> <C> <C> <C>
J.P. MORGAN SERIES TRUST II
J.P. Morgan Bond Portfolio (14) 0.30% - 0.45% 0.75%
J.P. Morgan Equity Portfolio (14) 0.40% - 0.50% 0.90%
J.P. Morgan International Opportunities
Portfolio (14) 0.60% - 0.60% 1.20%
J.P. Morgan Small Company Portfolio (14) 0.60% - 0.55% 1.15%
- -------------------------------------------------------------------------------------------------------------------
KEMPER VARIABLE SERIES
Blue Chip Portfolio (15) 0.65% - 0.11% 0.76%
Contrarian Value Portfolio (15) 0.75% - 0.03% 0.78%
Government Securities Portfolio 0.55% - 0.11% 0.66%
Growth Portfolio 0.60% - 0.05% 0.65%
High Yield Portfolio 0.60% - 0.05% 0.65%
Horizon 5 Portfolio (15) 0.60% - 0.06% 0.66%
Horizon 10+ Portfolio (15) 0.60% - 0.04% 0.64%
International Portfolio 0.75% - 0.18% 0.93%
Investment Grade Bond Portfolio (15) 0.60% - 0.07% 0.67%
Small Cap Growth Portfolio 0.65% - 0.05% 0.70%
Small Cap Value Portfolio (15) 0.75% - 0.05% 0.80%
Total Return Portfolio 0.55% - 0.05% 0.60%
Value + Growth Portfolio (15) 0.75% - 0.03% 0.78%
- -------------------------------------------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
Emerging Markets Portfolio (16) 1.00% 0.25% 0.35% 1.60%
Equity Portfolio (16) 0.75% 0.25% 0.25% 1.25%
International Equity Portfolio (16) 0.75% 0.25% 0.25% 1.25%
Small Cap Portfolio (16) 0.75% 0.25% 0.25% 1.25%
- -------------------------------------------------------------------------------------------------------------------
MFS(R) VARIABLE INSURANCE TRUST(SM)
MFS Bond Series (17) (18) 0.60% - 0.42% 1.02%
MFS Capital Opportunities Series (17) (18) 0.75% - 0.27% 1.02%
MFS Emerging Growth Series (17) 0.75% - 0.10% 0.85%
MFS Global Government Series (17) (18) 0.75% - 0.26% 1.01%
MFS Growth With Income Series (17) 0.75% - 0.13% 0.88%
MFS High Income Series (17) (18) 0.75% - 0.28% 1.03%
MFS Research Series (17) 0.75% - 0.11% 0.86%
MFS Total Return Series (17) (18) 0.75% - 0.16% 0.91%
MFS Utilities Series (17) (18) 0.75% - 0.26% 1.01%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS) (1)
===================================================================================================================
<S> <C> <C> <C> <C>
NEUBERGER BERMAN ADVISORS MANAGEMENT
TRUST ("AMT") (19)
AMT Balanced Portfolio 0.85% - 0.18% 1.03%
AMT Growth Portfolio 0.83% - 0.09% 0.92%
AMT Limited Maturity Bond Portfolio 0.65% - 0.11% 0.76%
AMT Partners Portfolio 0.78% - 0.06% 0.84%
- ------------------------------------------------------------------------------------------ ------------------------
THE ROYCE PORTFOLIOS
Royce Micro-Cap Portfolio (20) 1.25% - 0.10% 1.35%
Royce Premier Portfolio (20) 1.00% - 0.35% 1.35%
Royce Total Return Portfolio (20) 1.00% - 0.35% 1.35%
- -------------------------------------------------------------------------------------------------------------------
SCUDDER VARIABLE LIFE INVESTMENT FUND
(CLASS B SHARES)
Balanced Portfolio 0.475% 0.00% 0.082% 0.56%
Bond Portfolio 0.475% 0.00% 0.094% 0.57%
Capital Growth Portfolio 0.466% 0.25% 0.037% 0.75%
Global Discovery Portfolio (21) 0.975% 0.25% 0.815% 2.04%
Growth & Income Portfolio 0.475% 0.23% 0.086% 0.79%
International Portfolio 0.867% 0.23% 0.177% 1.28%
- -------------------------------------------------------------------------------------------------------------------
THE STRONG FUNDS
Strong Discovery Fund II (22) 1.00% - 0.18% 1.18%
Strong Mid Cap Growth Fund II (22) (23) 1.00% - 0.20% 1.20%
Strong International Stock Fund II (22) (24) 1.00% - 0.62% 1.62%
Strong Opportunity Fund II (22) 1.00% - 0.16% 1.16%
- -------------------------------------------------------------------------------------------------------------------
T. ROWE PRICE VARIABLE FUNDS
Equity Income Portfolio (25) 0.85% - 0.00% 0.85%
International Stock Portfolio (25) 1.05% - 0.00% 1.05%
Limited-Term Bond Portfolio (25) 0.70% - 0.00% 0.70%
Mid-Cap Growth Portfolio (25) 0.85% - 0.00% 0.85%
New America Growth Portfolio (25) 0.85% - 0.00% 0.85%
Personal Strategy Balanced Portfolio (25) 0.90% - 0.00% 0.90%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS) (1)
===================================================================================================================
<S> <C> <C> <C>
WARBURG PINCUS TRUST I
Emerging Markets Portfolio (26) 0.20% - 1.20% 1.40%
International Equity Portfolio 1.00% - 0.33% 1.33%
Post-Venture Capital Portfolio (26) 1.08% - 0.32% 1.40%
Small Company Growth Portfolio 0.90% - 0.24% 1.14%
WARBURG PINCUS TRUST II
Fixed Income Portfolio (27) 0.20% - 0.79% 0.99%
Global Fixed Income Portfolio (27) 0.48% - 0.51% 0.99%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Some, but not all, of the Funds have expense reimbursement or fee waiver
arrangements. Without these arrangements, Total Fund Annual Expenses would
have been higher. More information appears in the footnotes that accompany
the Funds that have expense reimbursement or fee waiver arrangements.
(2) With respect to the Prudential Series Fund, Inc. portfolios, except for the
Global Portfolio, Prudential reimburses a portfolio when its ordinary
operating expenses, excluding taxes, interest, and brokerage commissions
exceed 0.75% of the portfolio's average daily net assets. The amounts
listed for the portfolios under Other Expenses are based on amounts
incurred in the last fiscal year.
(3) Total Fund Annual Expenses for the Alliance Variable Products Series Fund,
Inc. are stated net of expenses waived or reimbursed. The expenses of the
following Portfolios, before expense reimbursements, would be: Global Bond
Portfolio: investment management fee 0.65%, other expenses 0.52% and total
fund annual expenses 1.17%; Global Dollar Government Portfolio: investment
management fee 0.75%, other expenses 1.00% and total fund annual expenses
1.75%; Growth Portfolio: investment management fee 0.75%, other expenses
0.12% and total fund annual expenses 0.87%; Growth and Income Portfolio:
investment management fee 0.625%, other expenses 0.105% and total fund
annual expenses 0.73%; International Portfolio: investment management fee
1.00%, other expenses 0.37% and total fund annual expenses 1.37%; Premier
Growth Portfolio: investment management fee 1.00%, other expenses 0.09% and
total fund annual expenses 1.09%; Quasar Portfolio: investment management
fee 1.00%, other expenses 0.30% and total fund annual expenses 1.30%; Real
Estate Investment Portfolio: investment management fee 0.90%, other
expenses 0.87% and total fund annual expenses 1.77%; Technology Portfolio:
investment management fee 1.00%, other expenses 0.20% and total fund annual
expenses 1.20%; U.S. Government/High Grade Securities Portfolio: investment
management fee 0.60%, other expenses 0.31% and total fund annual expenses
0.91%; Utility Income Portfolio: investment management fee 0.75%, other
expenses 0.60% and total fund annual expenses 1.35%; and Worldwide
Privatization Portfolio: investment management fee 1.00%, other expenses
0.70% and total fund annual expenses 1.70%.
12
<PAGE>
(4) Fees for the American Century Variable Portfolios, Inc. are all-inclusive.
(5) Under a written contract, the Berger IPT - 100 Fund's investment advisor
waives its fee and reimburses the Fund to the extent that, at any time
during the life of the Fund, the Fund's annual operating expenses exceed
1.00%. The contract may not be terminated or amended except by a vote of
the Fund's Board of Trustees. Absent the fee waiver and expense
reimbursement, the Fund's total operating expenses would have been 2.88%.
(6) Under a written contract, the Berger IPT - Growth and Income Fund's
investment advisor waives its fee and reimburses the Fund to the extent
that, at any time during the life of the Fund, the Fund's annual operating
expenses exceed 1.00%. The contract may not be terminated or amended except
by a vote of the Fund's Board of Trustees. Absent the fee waiver and
expense reimbursement, the Fund's total operating expenses would have been
1.99%.
(7) Under a written contract, the Berger IPT - Small Company Growth Fund's
investment advisor waives its fee and reimburses the Fund to the extent
that, at any time during the life of the Fund, the Fund's annual operating
expenses exceed 1.15%. The contract may not be terminated or amended except
by a vote of the Fund's Board of Trustees. Absent the fee waiver and
expense reimbursement, the Fund's total operating expenses would have been
2.19%.
(8) Under a written contract, the Berger/BIAM IPT - International Fund's
investment advisor waives its fee and reimburses the Fund to the extent
that, at any time during the life of the Fund, the Fund's annual operating
expenses exceed 1.20%. The contract may not be terminated or amended except
by a vote of the Fund's Board of Trustees. Absent the fee waiver and
expense reimbursement, the Fund's total operating expenses would have been
2.85%.
(9) Class 2 of the Templeton Variable Products Series Templeton Asset
Allocation Fund, Templeton Developing Markets Fund, Templeton International
Fund, and Templeton Stock Fund has a distribution plan or "Rule 12b-1 Plan"
which is described in the Fund's prospectus. Expenses may vary.
(10) Class 2 of the Templeton Variable Products Series Templeton Bond Fund has a
distribution plan or "Rule 12b-1 Plan" which is described in the Fund's
prospectus. Because no Class 2 shares were issued as of December 31, 1998,
figures (other than "Rule 12b-1 Fees") are based on the Fund's Class 1
expenses for the fiscal year ended December 31, 1998, plus Class 2's
maximum annual Rule 12b-1 fee of 0.15%. Expenses may vary.
(11) Certain expenses of the VIF-Blue Chip Growth Fund, the VIF-Dynamics Fund,
the VIF-Equity Income Fund, the VIF-Health Sciences Fund, the VIF-Small
Company Growth Fund, the VIF-Technology Fund, the VIF-Total Return Fund,
and the VIF-Utilities Fund for the INVESCO Variable Investment, Inc. are
being voluntarily absorbed by INVESCO. If such expenses had not been
voluntarily absorbed, the ratio of expenses to average net assets for
13
<PAGE>
Blue Chip Growth, Dynamics, Equity Income, Health Sciences, Small Company
Growth, Technology, Total Return and Utilities Portfolios would have been
12.29%, 15.01%, 1.17%, 4.32%, 12.67%, 6.60%, 1.24% and 1.84%, respectively.
(12) Each actual Total Fund Operating Expenses for the INVESCO Variable
Investment Funds, Inc. were lower than the figures shown, because their
transfer agent fees and/or custodian fees were reduced under expense offset
arrangements. Because of SEC requirements, the figures shown do not reflect
these reductions.
(13) All expenses are stated with contractual waivers and fee reductions by
Janus Capital. Fee reductions for the Aggressive Growth, Balanced, Growth,
International Growth and Worldwide Growth Portfolios 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. Janus Capital has agreed to continue the other waivers and
fee reductions until at least the next annual renewal of the advisory
agreement. Without such waivers and fee reductions, the Total Fund Annual
Expenses would have been: 0.75% for Aggressive Growth; 0.74% for Balanced;
0.73% for Flexible Income; 0.75% for Growth; 2.11% for High-Yield; 0.95%
for International Growth; and 0.74% for Worldwide Growth Portfolios.
(14) The information in the J.P. Morgan Series Trust II section of the foregoing
table has been restated to reflect an agreement by Morgan Guaranty Trust
Company of New York ("Morgan Guaranty"), an affiliate of Morgan, to
reimburse the Trust to the extent certain expenses exceed in any fiscal
year 0.75%, 0.90%, 1.20% and 1.15% of the average daily net assets of J.P.
Morgan Bond Portfolio, J.P. Morgan Equity Portfolio, J.P. Morgan
International Opportunities Portfolio and J.P. Morgan Small Company
Portfolio, respectively. Without such reimbursements, total fund annual
expenses would have been 1.02% for the J.P. Morgan Bond Portfolio, 1.48%
for the J.P. Morgan Equity Portfolio, 3.26% for the J.P. Morgan
International Opportunities Portfolio and 3.43% for the J.P. Morgan Small
Company Portfolio.
(15) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on the date of this prospectus, to limit their respective
fees and to reimburse other operating expenses, in a manner communicated to
the Board of the Fund, to the extent necessary to limit total operating
expenses of the following described Portfolios to the amounts set forth
after the Portfolio names: Kemper Value + Growth Portfolio (.84%), Kemper
Contrarian Value Portfolio (.80%), Kemper Small Cap Value Portfolio (.84%),
Kemper Horizon 5 Portfolio (.97%), Kemper Horizon 10+ Portfolio (.83%),
Kemper Investment Grade Bond Portfolio (.80%), and Kemper Blue Chip
Portfolio (.95%). The amounts set forth in the table above reflect actual
expenses for the past fiscal year, which were lower than these expense
limits.
14
<PAGE>
(16) Lazard Asset Management, the Fund's Investment Manager, agrees to reimburse
the Emerging Markets Portfolio, Equity Portfolio, International Equity
Portfolio and Small Cap Portfolio through December 31, 1999 to the extent
Total Fund Annual Expenses exceed 1.60%, 1.25%, 1.25% and 1.25%,
respectively, of the Portfolio's average daily net assets. Absent such an
agreement with the Investment Manager, the actual Total Fund Annual
Expenses for the year ended December 31, 1998 would have been: 14.37% for
the Emerging Markets Portfolio, 21.32% for the Equity Portfolio, 48.67% for
the International Equity Portfolio, and 16.20% for the Small Cap Portfolio.
(17) Each series in the MFS(R) Variable Insurance Trust(sm) has an expense
offset arrangement which reduces the series' custodian fee based upon the
amount of cash maintained by the series with its custodian and dividend
disbursing agent. Each series may enter into other such arrangements and
directed brokerage arrangements, which would also have the effect of
reducing the series' expenses. Expenses do not take into account these
expense reductions, and are therefore higher than the actual expenses of
the series.
(18) MFS has agreed to bear expenses for these series, subject to reimbursement
by these series, such that each such series' "Other Expenses" shall not
exceed the following percentages of the average daily net assets of the
series during the current fiscal year: 0.40% for the Bond Series, and 0.25%
for each remaining series, except for the Emerging Growth Series, the
Research Series, and the Growth With Income Series, which have no such
limitation. The payments made by MFS on behalf of each series under this
arrangement are subject to reimbursement by the series to MFS, which will
be accomplished by the payment of an expense reimbursement fee by the
series to MFS computed and paid monthly at a percentage of the series'
average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the series' "Other Expenses"
will not exceed the percentage set forth above for that series. The
obligation of MFS to bear a series' "Other Expenses" pursuant to this
arrangement and the series' obligation to pay the reimbursement fee to MFS,
terminates on the earlier of the date on which payments made by the series
equal the prior payment of such reimbursable expenses by MFS or December
31, 2004. Without such waivers and fee reductions, the Total Fund Annual
Expenses would have been: 1.23% for Bond Series; 1.11% for Capital
Opportunities Series; 1.11% for Global Government Series; 0.96% for High
Income Series; 0.91% for Total Return Series; and 0.98% for Utilities
Series Portfolios.
(19) Neuberger Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in a
corresponding series ("Series") of Advisers Managers Trust. The figures
reported under "Investment Management/ Administration Fees" include the
aggregate of the administration fees paid by the Portfolio and the
management fees paid by the corresponding Series. Similarly, the figures
reported under "Other Expenses" include all other expenses of the Portfolio
and its corresponding Series.
15
<PAGE>
(20) Royce & Associates, Inc., the Royce Portfolios' investment adviser, has
contractually agreed to waive its fees and reimburse expenses to the extent
necessary to maintain the Net Annual Operating Expense ratio at or below
1.35% through December 31, 1999. Absent such waivers and fee reductions,
the Total Fund Annual Expenses would have been: 2.59% for Royce Micro-Cap;
7.05% for Royce Premier; and 18.08% for Royce Total Return Portfolios.
(21) Until April 30, 1998, the Adviser for the Scudder Variable Life Investment
Fund-(Class B Shares) agreed to waive a portion of its management fee to
the extent necessary to limit the expenses of the Global Discovery
Portfolio to 1.50% of average daily net assets. As a result, net 1998
expenses were: management fee 0.92% and total expenses 1.98%. The Scudder
Variable Life Investment Fund (Class B Shares) section of the chart above
shows the expenses without this expense limitation.
(22) Fees and expenses for all Strong Funds are calculated on an annualized
basis as of December 31, 1998 through the fiscal year end.
(23) The Strong Mid Cap Growth Fund II advisor may from time to time voluntarily
limit expenses of the fund. During 1998, the advisor absorbed expenses of
0.24%. If these expenses had not been absorbed, Total Fund Annual Expenses
would have equaled 1.44%.
(24) The Strong International Stock Fund II advisor may from time to time
voluntarily limit expenses of the fund. During 1998, the advisor absorbed
expenses of 0.06%. If these expenses had not been absorbed, Total Fund
Annual Expenses would have equaled 1.68%.
(25) The investment management fee for all Portfolios in the T. Rowe Price
Variable Funds includes the ordinary expenses of operating the Portfolios.
Fees and expenses are for the year ended December 31, 1998.
(26) Absent the waiver of fees and reimbursement of expenses by the Warburg
Pincus Trust I investment adviser and co-administrator, the investment
management fee would have equaled 1.25% and 1.25%; other expenses would
have equaled 6.96% and 0.45%; and total fund annual expenses would have
equaled 8.21% and 1.70% for the Emerging Markets and Post-Venture Capital
Portfolios, respectively, based on actual fees and expenses for the fiscal
year ended December 31, 1998. Fee waivers and expense reimbursements or
credits may be discontinued at any time.
(27) Absent the waiver of fees and reimbursement of expenses by the Warburg
Pincus Trust II investment adviser and co-administrator, investment
management fees would have equaled 0.50% and 1.00%, other expenses would
have equaled 4.82% and 2.99% and total portfolio annual expenses would have
equaled 5.32% and 3.99% for the Fixed Income and Global Fixed Income
Portfolios, respectively, based on actual fees and expenses for the fiscal
year ended December 31, 1998. Fee waivers and expense reimbursements or
credits may be discontinued at any time.
16
<PAGE>
ILLUSTRATIONS OF DEATH BENEFITS AND CASH SURRENDER VALUES
On the next several pages, we show you two examples of how the Death Benefit and
the Cash Surrender Value of your Certificate can change as a result of the
performance of the investment options you select. The examples are not our
prediction of how value will grow. They are hypothetical examples and are just
intended to show you how a Certificate works.
We call these examples "ILLUSTRATIONS." The illustrations are based on several
ASSUMPTIONS about the age of the Participant, the amount of insurance, and the
rules of your Group Contract.
ASSUMPTIONS WE USED FOR BOTH ILLUSTRATIONS
Here's what we assumed about the Certificate in both illustrations:
o The Participant was 40 years old when he or she bought the Group Variable
Universal Life Insurance Certificate.
o The Face Amount of insurance under the Certificate is $100,000.
o The Participant paid a premium of $1,200 when the Certificate was first
issued. He or she pays the same premium amount each year on the Certificate
Anniversary.
ILLUSTRATION #1
In Illustration #1, we assumed that the CURRENT CHARGES Prudential deducts would
stay the same as long as the Certificate remains in effect. Accordingly, we
assumed the following charges:
o The charge deducted from each premium payment for taxes on premium payments
is 2.6%.
o Prudential deducts no sales charge from premium payments.
o Prudential deducts no processing charge from premium payments.
o Each month, Prudential deducts a $3 charge for administrative expenses.
o Prudential deducts a charge equal to an annual rate of 0.45% for mortality
and expense risks.
o Prudential does not deduct a surrender charge.
17
<PAGE>
o The Participant has current standardized cost of insurance charges from the
following table, which is excerpted from Table I under Section 79 of the
Internal Revenue Code:
MONTHLY CURRENT COST
OF INSURANCE RATES
-------------------------------------
AGE RATE PER THOUSAND
DOLLARS OF
INSURANCE
-------------------------------------
40 to 44 $0.17
-------------------------------------
45 to 49 $0.29
-------------------------------------
50 to 54 $0.48
-------------------------------------
55 to 59 $0.75
-------------------------------------
60 to 64 $1.17
-------------------------------------
65 to 69 $2.10
-------------------------------------
70 to 79 $3.76
-------------------------------------
ILLUSTRATION #2
In Illustration #2, we changed our assumptions about the charges Prudential will
deduct from the Certificate. Instead of current charges, we assumed that the
MAXIMUM CHARGES permitted under the Group Contract would be made.
Here's what we assumed:
o The charge deducted from each premium payment for taxes on premium payments
is 2.6%. (Since Prudential would increase this charge only if a state
increases its tax charge to us, we left this charge at the current level.)
o Prudential deducts a sales charge equal to 3.5% from each premium payment.
o Prudential deducts a processing charge of $2 from each premium payment.
o Each month, Prudential deducts a $6 charge for administrative expenses.
o Prudential deducts a charge equal to an annual rate of 0.90% for mortality
and expense risks.
o The Participant has cost of insurance charges equal to the maximum rates.
(The maximum rates that Prudential can charge are 150% of the 1980
Commissioner's Standard Ordinary Mortality Table [Male], Age Last Birthday
(the "1980 CSO").)
18
<PAGE>
o Prudential deducts a charge upon surrender equal to the lesser of $20 or 2%
of the amount surrendered.
ASSUMPTIONS ABOUT HOW THE CERTIFICATE FUND WAS INVESTED
We assumed that the Certificate Fund was invested in equal amounts in each of
the 131 Funds available under Group Variable Universal Life Insurance. (We used
all 131 only for the purpose of this illustration. As we told you earlier in
this prospectus, Prudential will permit each Group Contractholder to make no
more than 20 Funds available to its Participants.)
Each illustration shows three different assumptions about the investment
performance - or "investment return" - of the Funds. The three different
assumptions are:
o gross annual rate of return is 0%
o gross annual rate of return is 4.5%
o gross annual rate of return is 9%
These are only assumptions to show how the Death Benefit and Cash Surrender
Value change depending on the investment return. Actual investment return will
depend on the investment options you select and will vary from year to year.
WALKING THROUGH THE ILLUSTRATIONS
Here's what to look for in the illustrations:
o The first column shows the CERTIFICATE YEAR.
o The second column gives you some CONTEXT FOR COMPARING the investment
return under the Certificate to the return you might expect from a savings
account. It shows the amount you would accumulate if you invested the same
premiums in a savings account paying a 4% effective annual rate. (Of
course, unlike the Certificate, a savings account does not offer life
insurance protection.)
o The next three columns show what the DEATH BENEFIT would be for each of the
three investment return assumptions (0%, 4.5% and 9%).
o The last three columns show what the CASH SURRENDER VALUE would be for each
of the three investment return assumptions (0%, 4.5% and 9%).
19
<PAGE>
You should note that:
o Both "gross" and "net" investment returns are shown.
o "Gross" investment return reflects the combined effect of both income on
the investment and capital gains. It is the amount of return before
Prudential takes out any of its charges and before any Fund investment
management fees and other expenses are taken out.
o "Net" investment return is the amount of the investment return after
Prudential takes out its charges and after Fund investment management fees
and other expenses are taken out. Since Illustration #1 and Illustration #2
use different assumptions about charges, the "net" investment returns for
each illustration are different. For some of the Funds, the Fund's
investment advisor or other entity is absorbing certain of the Fund's
expenses. In deriving net investment return, we used those reduced Fund
expenses.
- Fund investment management fees and other expenses were assumed to
equal 0.94% per year, which was the average Fund expense in 1998.
- For Illustration #1, Prudential's mortality and expense risk charges
are 0.45% per year. (In Illustration #1, we assumed that Prudential's
current charges are in effect.) So, including both Fund expenses and
the mortality and expense risk charges, gross returns of 0%, 4.5% and
9% become net returns of -1.39%, 3.11% and 7.61%.
- For Illustration #2, Prudential's mortality and expense risk charges
are 0.90% per year. (In Illustration #2, we assumed that Prudential's
maximum charges are in effect.) So, including both Fund expenses and
the mortality and expense risk charges, gross returns of 0%, 4.5% and
9% become net returns of -1.84%, 2.66% and 7.16%.
o The Death Benefits and Cash Surrender Values are shown with all of
Prudential's charges and Fund investment management fees and other expenses
taken out.
o We assumed no loans or partial withdrawals were taken.
o Neither illustration reflects Dividends or Experience Credits.
IF YOU ASK, PRUDENTIAL WILL GIVE YOU A SIMILAR ILLUSTRATION FOR A CERTIFICATE
THAT SHOWS YOUR AGE, RISK CLASS, PROPOSED FACE AMOUNT OF INSURANCE, AND PROPOSED
PREMIUM PAYMENTS. WE REFER TO THIS AS A "PERSONALIZED ILLUSTRATION."
20
<PAGE>
WE SHOW THESE RATES OF INVESTMENT RETURN ONLY TO HELP YOU UNDERSTAND HOW THE
CERTIFICATE WORKS. YOU SHOULD NOT ASSUME THAT THE INVESTMENT RATES OF RETURN ARE
ACTUAL RATES OF RETURN. YOU SHOULD ALSO NOT ASSUME THAT THESE RATES ARE EXAMPLES
OF PAST OR FUTURE INVESTMENT PERFORMANCE. NEITHER PRUDENTIAL NOR THE FUNDS CAN
TELL YOU WHETHER THESE RATES OF INVESTMENT RETURN CAN ACTUALLY BE ACHIEVED.
THE ACTUAL RATES OF INVESTMENT RETURN FOR YOUR CERTIFICATE WILL DEPEND ON HOW
THE INVESTMENT OPTIONS THAT YOU CHOOSE PERFORM. YOU MAY EARN MORE OR LESS THAN
WHAT IS SHOWN IN THE ILLUSTRATION.
THE DEATH BENEFITS AND CASH SURRENDER VALUES WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATE OF RETURN FOR A CERTIFICATE YEAR VARIED ABOVE OR BELOW THE
AVERAGE, HYPOTHETICAL RATES OF 0%, 4.5% AND 9%.
21
<PAGE>
<TABLE>
ILLUSTRATION #1
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 40
ASSUME PAYMENT OF $1,200 ANNUAL PREMIUMS FOR ALL YEARS
USING CURRENT EXPENSE CHARGES
<CAPTION>
Death Benefit (1) Cash Surrender Value (1)
-------------------------------------------------- ------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums -------------------------------------------------- ------------------------------------------------
Certificate Accumulated 0% Gross 4.5% Gross 9% Gross 0% Gross 4.5% Gross 9% Gross
Year at 4% per year (-1.39%) Net (3.11% Net) (7.61% Net) (-1.39%) Net (3.11% Net) (7.61% Net)
- ----------- -------------- --------------- --------------- ------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $1,248 $100,914 $100,961 $101,008 $914 $961 $1,008
2 2,546 101,816 101,952 102,093 1,816 1,952 2,093
3 3,896 102,705 102,974 103,260 2,705 2,974 3,260
4 5,300 103,582 104,028 104,516 3,582 4,028 4,516
5 6,760 104,446 105,114 105,868 4,446 5,114 5,868
6 8,278 105,156 106,088 107,172 5,156 6,088 7,172
7 9,857 105,856 107,092 108,576 5,856 7,092 8,576
8 11,499 106,546 108,127 110,087 6,546 8,127 10,087
9 13,207 107,226 109,195 111,712 7,226 9,195 11,712
10 14,984 107,897 110,295 113,462 7,897 10,295 13,462
15 24,989 110,015 115,100 123,039 10,015 15,100 23,039
20 37,163 110,425 118,948 134,896 10,425 18,948 34,896
25 51,974 108,376 120,705 148,952 8,376 20,705 48,952
30 69,994 0 (2) 116,715 162,473 0 (2) 16,715 62,473
35 91,918 0 0 (2) 169,916 0 0 (2) 69,916
40 118,592 0 0 180,656 0 0 80,656
(1) Assumes no loan or partial withdrawal has been made.
(2) Based on the interest rate and charges illustrated, the premiums paid are insufficient to keep the certificate in force. The
certificate would lapse under this scenario.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4.5%, AND 9% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
T1
<PAGE>
<TABLE>
ILLUSTRATION #2
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 40
ASSUME PAYMENT OF $1,200 ANNUAL PREMIUMS FOR ALL YEARS
USING MAXIMUM CONTRACTUAL CHARGES
<CAPTION>
Death Benefit (1) Cash Surrender Value (1)
-------------------------------------------------- ---------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums -------------------------------------------------- ---------------------------------------------
Certificate Accumulated 0% Gross 4.5% Gross 9% Gross 0% Gross 4.5% Gross 9% Gross
Year at 4% per year (-1.84%) Net (2.66% Net) (7.16% Net) (-1.84%) Net (2.66% Net) (7.16% Net)
- ----------- -------------- ----------------- ------------ ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $1,248 $100,564 $100,601 $100,639 $553 $589 $626
2 2,546 101,079 101,179 101,283 1,059 1,159 1,263
3 3,896 101,539 101,726 101,926 1,519 1,706 1,906
4 5,300 101,945 102,240 102,566 1,925 2,220 2,546
5 6,760 102,293 102,717 103,200 2,273 2,697 3,180
6 8,278 102,580 103,149 103,821 2,560 3,129 3,801
7 9,857 102,805 103,535 104,428 2,785 3,515 4,408
8 11,499 102,964 103,869 105,013 2,944 3,849 4,993
9 13,207 103,055 104,145 105,572 3,035 4,125 5,552
10 14,984 103,073 104,354 106,096 3,053 4,334 6,076
15 24,989 101,731 103,944 107,662 1,711 3,924 7,642
20 37,163 0 (2) 0 (2) 105,703 0 (2) 0 (2) 5,683
25 51,974 0 0 0 (2) 0 0 0 (2)
30 69,994 0 0 0 0 0 0
35 91,918 0 0 0 0 0 0
40 118,592 0 0 0 0 0 0
(1) Assumes no loan or partial withdrawal has been made.
(2) Based on the interest rate and charges illustrated, the premiums paid are insufficient to keep the certificate in force. The
certificate would lapse under this scenario.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4.5%, AND 9% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
T2
<PAGE>
GENERAL INFORMATION ABOUT:
o PRUDENTIAL
o THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
o THE VARIABLE INVESTMENT OPTIONS UNDER THE CERTIFICATES
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
The Prudential Insurance Company of America ("Prudential" or the "Company") 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 publicly
traded stock company through a process known as "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. On July 1,
1998, legislation was enacted in New Jersey that would permit this conversion to
occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption of a
plan by the Company's Board of Directors, a public hearing, voting by qualified
policyholders and regulatory approval, all of which could take two or more years
to complete. Prudential's management and Board of Directors have not yet
determined to demutualize and it is possible that, after careful review,
Prudential could decide not to go public.
The plan of reorganization, which has not been developed and approved, would
provide the criteria for determining eligibility and the methodology for
allocating shares or other consideration to those who would be eligible.
Generally, the amount of shares or other consideration eligible customers would
receive would be based on a number of factors, including the types, amounts and
issue years of their policies. As a general rule, owners of Prudential-issued
insurance policies and annuity contracts would be eligible, while mutual fund
customers and customers of the Company's subsidiaries would not be. It has not
yet been determined whether any exceptions to that general rule will be made
with respect to policyholders and contract owners of Prudential's subsidiaries.
Eligible policyholders would generally include employers, associations, other
groups, and trusts established by or for such entities, that own group policies
issued by Prudential, and generally would include Group Contractholders. The
individuals covered under a group plan, such as the Participants under a Group
Contract, generally would not be eligible to receive stock or other
consideration from Prudential.
Prudential is licensed to sell life insurance and annuities in all states, in
the District of Columbia, and in all United States territories and possessions.
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 Group Contracts and the insurance provided thereunder. Prudential and
its affiliates act in a variety of capacities with respect to registered
investment companies including as depositor, adviser, and principal underwriter.
22
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
The Prudential Variable Contract Account GI-2 (the "Separate Account") was
established on June 14, 1988 under New Jersey law as a separate investment
account. The Separate Account meets the definition of a "separate account" under
the federal securities laws. The Separate Account holds assets that are
segregated from all of Prudential's other assets.
The obligations arising under the Group Contracts and the Certificates are
general corporate obligations of Prudential. Prudential is also the legal owner
of the assets in the Separate Account. Prudential will maintain assets in the
Separate Account with a total market value at least equal to the liabilities
relating to the benefits attributable to the Separate Account. These assets may
not be charged with liabilities which arise from any other business Prudential
conducts. In addition to these assets, the Separate Account's assets may include
funds contributed by Prudential to commence operation of the Separate Account
and may include accumulations of the charges Prudential makes against the
Separate Account. From time to time, these additional assets will be transferred
to Prudential's general account. Before making any such transfer, Prudential
will consider any possible adverse impact the transfer might have on the
Separate Account.
The Separate Account is registered with the Securities and Exchange Commission
("SEC") under the federal securities laws as a unit investment trust, which is a
type of investment company. This does not involve any supervision by the SEC of
the management or investment policies or practices of the Separate Account. For
state law purposes, the Separate Account is treated as a part or division of
Prudential. There are currently 131 Subaccounts within the Separate Account,
each of which invests in a corresponding Fund. Prudential reserves the right to
take all actions in connection with the operation of the Separate Account that
are permitted by applicable law (including those permitted upon regulatory
approval).
THE FUNDS
Set out below is a list of each Fund, its investment objective, investment
management fees and other expenses, and its investment advisor/investment
manager. Some Funds also provide information about their principal strategies.
Certain Funds have adopted distribution plans pursuant to the federal securities
laws, and under those plans, the Fund may make payments to Prudential and/or its
affiliates for certain marketing efforts.
THE PRUDENTIAL SERIES FUND, INC.
The portfolios of the Series Fund in which the Separate Account may currently
invest and their investment objectives, principal strategies and fees are as
follows:
CONSERVATIVE BALANCED PORTFOLIO: The investment objective is a total investment
return consistent with a conservatively managed diversified portfolio. The
Portfolio invests in a mix of equity securities, debt obligations and money
market instruments.
23
<PAGE>
DIVERSIFIED BOND PORTFOLIO: The investment objective is a high level of income
over a longer term while providing reasonable safety of capital. The Portfolio
invests primarily in higher grade debt obligations and high quality money market
investments.
EQUITY PORTFOLIO: The investment objective is capital appreciation. The
Portfolio invests primarily in common stocks of major established corporations
as well as smaller companies that offer attractive prospects of appreciation.
EQUITY INCOME PORTFOLIO: The investment objective is both current income and
capital appreciation. The Portfolio invests primarily in common stocks and
convertible securities that provide good prospects for returns above those of
the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500 Index") or
the NYSE Composite Index.
FLEXIBLE MANAGED PORTFOLIO: The investment objective is a total investment
return consistent with an aggressively managed diversified portfolio. The
Portfolio invests in a mix of equity securities, debt obligations and money
market instruments.
GLOBAL PORTFOLIO: The investment objective is long-term growth of capital. The
Portfolio invests primarily in common stocks (and their equivalents) of foreign
and U.S. companies.
GOVERNMENT INCOME PORTFOLIO: The investment objective is a high level of income
over the longer term consistent with the preservation of capital. The Portfolio
invests primarily in U.S. Government securities, including intermediate and
long-term U.S. Treasury securities and debt obligations issued by agencies or
instrumentalities established by the U.S. government.
HIGH YIELD BOND PORTFOLIO: The investment objective is a high total return. The
Portfolio invests primarily in high yield/high risk debt securities.
MONEY MARKET PORTFOLIO: The investment objective is maximum current income
consistent with the stability of capital and the maintenance of liquidity. The
Portfolio invests in high quality short-term debt obligations that mature in 13
months or less.
NATURAL RESOURCES PORTFOLIO: The investment objective is long-term growth of
capital. The Portfolio invests primarily in common stocks and convertible
securities of natural resource companies and securities that are related to the
market value of some natural resource.
PRUDENTIAL JENNISON PORTFOLIO: The investment objective is to achieve long-term
growth of capital. The Portfolio invests primarily in equity securities of major
established corporations that offer above-average growth prospects.
SMALL CAPITALIZATION STOCK PORTFOLIO: The investment objective is long-term
growth of capital. The Portfolio invests primarily in equity securities of
publicly-traded companies with small market capitalization.
STOCK INDEX PORTFOLIO: The investment objective is investment results that
generally correspond to the performance of publicly-traded common stocks. The
Portfolio attempts to duplicate the price and yield performance of the Standard
& Poor's 500 Composite Stock Price Index (the "S&P 500 Index").
24
<PAGE>
ZERO COUPON BOND 2005 PORTFOLIO: The investment objective of this portfolio is
the highest predictable compound investment for a specific period of time,
consistent with the safety of invested capital. The Portfolio invests primarily
in debt obligations of the U.S. Treasury and corporations that have been issued
without interest coupons or have been stripped of their interest coupons, or
have interest coupons that have been stripped from the debt obligations.
Prudential is the investment adviser 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"), which 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 provides
investment advisory services for the Prudential Jennison Portfolio. Further
detail is provided in the prospectus and statement of additional information for
the Series Fund. Prudential, PIC and Jennison are registered as investment
advisers under the Investment Advisers Act of 1940.
<TABLE>
<CAPTION>
================================================ =================== ================== ==============================
Total Fund
Investment Annual Expenses
FUNDS Management Other (After Expense
Fee Expenses Reimbursements)
- ------------------------------------------------ ------------------- ------------------ ------------------------------
THE SERIES FUND
<S> <C> <C> <C>
Conservative Balanced Portfolio (1) 0.55% 0.02% 0.57%
Diversified Bond Portfolio (1) 0.40% 0.02% 0.42%
Equity Portfolio (1) 0.45% 0.02% 0.47%
Equity Income Portfolio (1) 0.40% 0.02% 0.42%
Flexible Managed Portfolio (1) 0.60% 0.01% 0.61%
Global Portfolio (1) 0.75% 0.11% 0.86%
Government Income Portfolio (1) 0.40% 0.03% 0.43%
High Yield Bond Portfolio (1) 0.55% 0.03% 0.58%
Money Market Portfolio (1) 0.40% 0.01% 0.41%
Natural Resources Portfolio (1) 0.45% 0.04% 0.49%
Prudential Jennison Portfolio (1) 0.60% 0.03% 0.63%
Small Capitalization Stock Portfolio (1) 0.40% 0.07% 0.47%
Stock Index Portfolio (1) 0.35% 0.02% 0.37%
Zero Coupon Bond 2005 Portfolio (1) 0.40% 0.21% 0.61%
================================================ =================== ================== ==============================
</TABLE>
(1) SERIES FUND. With respect to the Series Fund portfolios, except for the
Global Portfolio, Prudential reimburses a portfolio when its ordinary
operating expenses, excluding taxes, interest, and brokerage
commissions exceed 0.75% of the portfolio's average daily net assets.
The amounts listed for the portfolios under Other Expenses are based on
amounts incurred in the last fiscal year.
25
<PAGE>
AIM VARIABLE INSURANCE FUNDS, INC.
The portfolios of the AIM Variable Insurance Funds, Inc. in which the Separate
Account may currently invest and their investment objectives and fees are as
follows:
AIM V.I. CAPITAL APPRECIATION FUND: The fund's investment objective is growth of
capital through investment in common stocks, with emphasis on medium- and
small-sized growth companies.
AIM V.I. DIVERSIFIED INCOME FUND: The fund's investment objective is to achieve
a high level of current income.
AIM V.I. GLOBAL UTILITIES FUND: The fund's investment objectives are to achieve
a high level of current income and secondarily, growth of capital, by investing
primarily in the common and preferred stocks of public utility companies (either
domestic or foreign).
AIM V.I. GOVERNMENT SECURITIES FUND: The fund's investment objective is to
achieve a high level of current income consistent with reasonable concern for
safety of principal by investing in debt securities issued, guaranteed or
otherwise backed by the United States Government.
AIM V.I. GROWTH FUND: The fund's investment objective is to seek growth of
capital primarily by investing in seasoned and better capitalized companies
considered to have strong earnings momentum.
AIM V.I. GROWTH AND INCOME FUND: The fund's primary investment objective is
growth of capital with a secondary objective of current income.
AIM V.I. INTERNATIONAL EQUITY FUND: The fund's investment objective is to
provide long-term growth of capital by investing in a diversified portfolio of
international equity securities whose issuers are considered to have strong
earnings momentum.
AIM V.I. VALUE FUND: The fund's investment objective is to achieve long-term
growth of capital by investing primarily in equity securities judged by the
fund's investment advisor to be undervalued relative to the investment advisor's
appraisal of the current or projected earnings of the companies issuing the
securities, or relative to current market values of assets owned by the
companies issuing the securities or relative to the equity market generally.
Income is a secondary objective.
A I M Advisors, Inc. ("AIM") serves as the investment advisor to each Fund.
AIM's principal business address is 11 Greenway Plaza, Suite 100, Houston, Texas
77046-1173.
26
<PAGE>
<TABLE>
<CAPTION>
=========================================================================================
FUNDS MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES ANNUAL EXPENSES
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Capital Appreciation Fund 0.62% 0.05% 0.67%
AIM V.I. Diversified Income Fund 0.60% 0.17% 0.77%
AIM V.I. Global Utilities Fund 0.65% 0.46% 1.11%
AIM V.I. Government Securities Fund 0.50% 0.26% 0.76%
AIM V.I. Growth Fund 0.64% 0.08% 0.72%
AIM V.I. Growth and Income Fund 0.61% 0.04% 0.65%
AIM V.I. International Equity Fund 0.75% 0.16% 0.91%
AIM V.I. Value Fund 0.61% 0.05% 0.66%
=========================================================================================
</TABLE>
ALLIANCE CAPITAL
The portfolios of the Alliance Variable Products Series Fund, Inc. in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
GLOBAL BOND PORTFOLIO: Seeks a high level of return from a combination of
current income and capital appreciation by investing in a globally diversified
portfolio of high quality debt securities denominated in the U.S. Dollar and a
range of foreign currencies.
GLOBAL DOLLAR GOVERNMENT PORTFOLIO: Seeks a high level of current income through
investing substantially all of its assets in U.S. and non-U.S. fixed-income
securities denominated only in U.S. dollars. As a secondary objective, the
Portfolio seeks capital appreciation. Substantially all of the Portfolio's
assets will be invested in high yield, high risk securities that are low-rated
(i.e., below investment grade), or of comparable quality and unrated, and that
are considered to be predominantly speculative as regards the issuer's capacity
to pay interest and repay principal.
GROWTH PORTFOLIO: Seeks long-term growth of capital by investing primarily in
common stocks and other equity securities.
GROWTH AND INCOME PORTFOLIO: Seeks to balance the objectives of reasonable
current income and reasonable opportunities for appreciation through investments
primarily in dividend-paying common stocks of good quality.
INTERNATIONAL PORTFOLIO: Seeks to obtain a total return on its assets from
long-term growth of capital and from income principally through a broad
portfolio of marketable securities of established non-United States companies
(or United States companies having their principal activities and interests
outside the United States), companies participating in foreign economies with
prospects for growth, and foreign government securities.
27
<PAGE>
PREMIER GROWTH PORTFOLIO: Seeks growth of capital rather than current income. In
pursuing its investment objective, the Premier Growth Portfolio will employ
aggressive investment policies. Since investments will be made based upon their
potential for capital appreciation, current income will be incidental to the
objective of capital growth. This portfolio is not intended for investors whose
principal objective is assured income or preservation of capital.
QUASAR PORTFOLIO: Seeks growth of capital by pursuing aggressive investment
policies. This portfolio invests principally in a diversified portfolio of
equity securities of any company and industry and in any type of security which
is believed to offer possibilities for capital appreciation.
REAL ESTATE INVESTMENT PORTFOLIO: Seeks a total return on its assets from
long-term growth of capital and from income principally through investing in a
portfolio of equity securities of issuers that are primarily engaged in or
related to the real estate industry.
TECHNOLOGY PORTFOLIO: Seeks growth of capital through investment in companies
expected to benefit from advances in technology. This portfolio will invest
principally in a diversified portfolio of securities of companies which use
technology extensively in the development of new or improved products or
processes.
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO: Seeks a high level of current
income consistent with preservation of capital by investing principally in a
portfolio of U.S. Government Securities and other high grade debt securities.
UTILITY INCOME PORTFOLIO: Seeks current income and capital appreciation by
investing primarily in the equity and fixed-income securities of companies in
the "utilities industry." The Portfolio's investment objective and policies are
designed to take advantage of the characteristics and historical performance of
securities of utilities companies. The utilities industry consists of companies
engaged in the manufacture, production, generation, provision, transmission,
sale and distribution of gas, electric energy, and communications equipment and
services, and in the provision of other utility or utility-related goods and
services.
WORLDWIDE PRIVATIZATION PORTFOLIO: Seeks long-term capital appreciation by
investing principally in equity securities issued by enterprises that are
undergoing, or have undergone, privatization. The balance of the Portfolio's
investment portfolio will include equity securities of companies that are
believed by the Fund's Adviser to be beneficiaries of the privatization process.
Alliance Capital Management L.P. ("Alliance") is the investment adviser to each
of the above-mentioned funds. Alliance's principal business address is 1345
Avenue of the Americas, New York, New York 10105. The principal underwriter of
the funds is Alliance Fund Distributors, Inc., a subsidiary of Alliance, located
at 1345 Avenue of the Americas, New York, New York 10105.
28
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
Global Bond Portfolio (1) 0.64% 0.29% 0.93%
Global Dollar Government Portfolio (1) 0.39% 0.56% 0.95%
Growth Portfolio (1) 0.75% 0.12% 0.87%
Growth and Income Portfolio (1) 0.63% 0.10% 0.73%
International Portfolio (1) 0.58% 0.37% 0.95%
Premier Growth Portfolio (1) 0.97% 0.09% 1.06%
Quasar Portfolio (1) 0.73% 0.22% 0.95%
Real Estate Investment Portfolio (1) 0.08% 0.87% 0.95%
Technology Portfolio (1) 0.81% 0.14% 0.95%
U.S. Government/High Grade Securities
Portfolio (1) 0.60% 0.18% 0.78%
Utility Income Portfolio (1) 0.58% 0.37% 0.95%
Worldwide Privatization Portfolio (1) 0.25% 0.70% 0.95%
==============================================================================================================
</TABLE>
(1) Net of expenses waived or reimbursed. The expenses of the following
Portfolios, before expense reimbursements, would be: Global Bond Portfolio:
investment management fee 0.65%, other expenses 0.52% and total fund annual
expenses 1.17%; Global Dollar Government Portfolio: investment management
fee 0.75%, other expenses 1.00% and total fund annual expenses 1.75%;
Growth Portfolio: investment management fee 0.75%, other expenses 0.12% and
total fund annual expenses 0.87%; Growth and Income Portfolio: investment
management fee 0.625%, other expenses 0.105% and total fund annual expenses
0.73%; International Portfolio: investment management fee 1.00%, other
expenses 0.37% and total fund annual expenses 1.37%; Premier Growth
Portfolio: investment management fee 1.00%, other expenses 0.09% and total
fund annual expenses 1.09%; Quasar Portfolio: investment management fee
1.00%, other expenses 0.30% and total fund annual expenses 1.30%; Real
Estate Investment Portfolio: investment management fee 0.90%, other
expenses 0.87% and total fund annual expenses 1.77%; Technology Portfolio:
investment management fee 1.00%, other expenses 0.20% and total fund annual
expenses 1.20%; U.S. Government/High Grade Securities Portfolio: investment
management fee 0.60%, other expenses 0.31% and total fund annual expenses
0.91%; Utility Income Portfolio: investment management fee 0.75%, other
expenses 0.60% and total fund annual expenses 1.35%; and Worldwide
Privatization Portfolio: investment management fee 1.00%, other expenses
0.70% and total fund annual expenses 1.70%.
29
<PAGE>
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The portfolios of American Century Variable Portfolios, Inc. in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
VP BALANCED PORTFOLIO: The investment objective of the VP Balanced Portfolio is
capital growth and current income. Management of the Portfolio intends to
maintain approximately 60% of the Portfolio's assets in the equity securities
described in the prospectus, and intends to maintain approximately 40% of the
Portfolio's assets in fixed income securities.
VP INTERNATIONAL PORTFOLIO: Seeks capital growth over time by investing in
common stocks of foreign companies considered to have better-than-average
prospects for appreciation.
VP VALUE PORTFOLIO: Seeks long-term capital growth with income as a secondary
objective. The fund seeks to achieve its objectives by investing primarily in
equity securities of well-established companies that are believed by management
to be undervalued at the time of purchase.
The investment adviser for each fund is American Century Investment Management,
Inc. ("ACIM"). ACIM's principal business address is American Century Tower, 4500
Main Street, Kansas City, Missouri 64111. Funds Distributor, Inc. distributes
shares of American Century funds, and all sales of fund shares are subject to
approval by Funds Distributor, Inc.
================================================================================
FUNDS TOTAL FUND
ANNUAL EXPENSES
- --------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
VP Balanced Portfolio (1) 1.00%
VP International Portfolio (1) 1.50%
VP Value Portfolio (1) 1.00%
================================================================================
(1) Fees are all-inclusive.
THE BERGER FUNDS
The portfolios of the Berger Institutional Products Trust ("Berger IPT") in
which the Separate Account may currently invest and their investment objectives
and fees are as follows:
BERGER IPT - 100 FUND: The investment objective of the Berger IPT - 100 Fund is
long term capital appreciation. The Berger IPT - 100 Fund seeks to achieve this
objective by investing primarily in common stocks of established companies which
are believed to offer favorable growth prospects. Current income is not an
investment objective of the Berger IPT - 100 Fund, and any income produced will
be a by-product of the effort to achieve the Fund's objective.
30
<PAGE>
BERGER IPT - GROWTH AND INCOME FUND: The primary investment objective of the
Berger IPT Growth and Income Fund is capital appreciation. A secondary objective
is to provide a moderate level of current income. The Berger IPT - Growth and
Income Fund seeks to achieve these objectives by investing primarily in common
stocks and other securities, such as convertible securities and preferred
stocks, which the Fund's advisor believes offer favorable growth prospects and
are expected to also provide current income.
BERGER IPT - SMALL COMPANY GROWTH FUND: The investment objective of the Berger
IPT - Small Company Growth Fund is capital appreciation. The Berger IPT - Small
Company Growth Fund seeks to achieve this objective by investing primarily in
equity securities (including common and preferred stocks, convertible debt
securities and other securities having equity features) of small growth
companies whose market capitalization, at the time of the initial purchase, is
less than the 12-month average of the maximum market capitalization for
companies included in the Russell 2000(TM) Index.
BERGER/BIAM IPT - INTERNATIONAL FUND: The investment objective of the
Berger/BIAM IPT International Fund is long- term capital appreciation. The
Berger/BIAM IPT - International Fund seeks to achieve this objective by
investing primarily in common stocks of well established companies located
outside the United States. The Fund intends to diversify its holdings among
several countries and to have, under normal market conditions, at least 65% of
the Fund's total assets invested in the securities of companies located in at
least five countries, not including the United States.
Berger Associates, Inc. ("Berger") is the investment adviser to the Berger IPT -
100 Fund, Berger IPT - Growth and Income Fund and Berger IPT - Small Company
Growth Fund. BBOI Worldwide LLC ("BBOI"), a joint venture of Berger and Bank of
Ireland Asset Management (U.S.) Limited ("BIAM"), is the adviser to the
Berger/BIAM IPT - International Fund, and BIAM serves as the Fund's subadviser.
Berger Distributors, Inc., a wholly-owned subsidiary of Berger, is the principal
underwriter for all of the portfolios of Berger IPT. The principal business
address of Berger, BBOI and Berger Distributors, Inc. is 210 University
Boulevard, Denver, Colorado 80206.
<TABLE>
<CAPTION>
================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger IPT - 100 Fund (1) 0.75% 0.25% 1.00%
Berger IPT - Growth and Income Fund (2) 0.75% 0.25% 1.00%
Berger IPT - Small Company Growth Fund (3) 0.90% 0.25% 1.15%
Berger/BIAM IPT - International Fund (4) 0.90% 0.30% 1.20%
================================================================================================
</TABLE>
31
<PAGE>
(1) Under a written contract, the Fund's investment advisor waives its fee and
reimburses the Fund to the extent that, at any time during the life of the
Fund, the Fund's annual operating expenses exceed 1.00%. The contract may
not be terminated or amended except by a vote of the Fund's Board of
Trustees. Absent the fee waiver and expense reimbursement, the Fund's total
operating expenses would have been 2.88%.
(2) Under a written contract, the Fund's investment advisor waives its fee and
reimburses the Fund to the extent that, at any time during the life of the
Fund, the Fund's annual operating expenses exceed 1.00%. The contract may
not be terminated or amended except by a vote of the Fund's Board of
Trustees. Absent the fee waiver and expense reimbursement, the Fund's total
operating expenses would have been 1.99%.
(3) Under a written contract, the Fund's investment advisor waives its fee and
reimburses the Fund to the extent that, at any time during the life of the
Fund, the Fund's annual operating expenses exceed 1.15%. The contract may
not be terminated or amended except by a vote of the Fund's Board of
Trustees. Absent the fee waiver and expense reimbursement, the Fund's total
operating expenses would have been 2.19%.
(4) Under a written contract, the Fund's investment advisor waives its fee and
reimburses the Fund to the extent that, at any time during the life of the
Fund, the Fund's annual operating expenses exceed 1.20%. The contract may
not be terminated or amended except by a vote of the Fund's Board of
Trustees. Absent the fee waiver and expense reimbursement, the Fund's total
operating expenses would have been 2.85%.
DREYFUS CORPORATION FUNDS
The portfolios of the Dreyfus Variable Investment Fund, The Dreyfus Socially
Responsible Growth Fund, Inc., and the Dreyfus Stock Index Fund in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
CAPITAL APPRECIATION PORTFOLIO: Seeks to provide long-term capital growth
consistent with the preservation of capital; current income is a secondary
investment objective. This portfolio invests primarily in the common stocks of
domestic and foreign issuers.
DISCIPLINED STOCK PORTFOLIO: Seeks to provide investment results that are
greater than the total return performance of publicly-traded common stocks in
the aggregate, as represented by the Standard & Poor's 500 Composite Stock
Index. This portfolio will use quantitative statistical modeling techniques to
construct a portfolio in an attempt to achieve its investment objective, without
assuming undue risk relative to the broad stock market.
GROWTH AND INCOME PORTFOLIO: Seeks to provide long-term capital growth, current
income and growth of income, consistent with reasonable investment risk. This
portfolio invests primarily in equity securities of domestic and foreign
issuers. The portfolio also may invest in debt securities and money market
instruments of domestic and foreign issuers.
32
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO: Seeks to maximize capital growth. This portfolio
invests primarily in equity securities of foreign issuers located throughout the
world.
INTERNATIONAL VALUE PORTFOLIO: Seeks long-term capital growth. This portfolio
invests primarily in a portfolio of publicly-traded equity securities of foreign
issuers which would be characterized as "value" companies according to criteria
established by The Dreyfus Corporation.
QUALITY BOND PORTFOLIO: Seeks to provide the maximum amount of current income to
the extent consistent with the preservation of capital and the maintenance of
liquidity. This portfolio invests principally in the debt obligations of
corporations, the U.S. Government and its agencies and instrumentalities, and
U.S. major banking institutions.
SMALL CAP PORTFOLIO: Seeks to maximize capital appreciation. This portfolio
invests primarily in common stocks of domestic and foreign issuers. This
portfolio will be particularly alert to companies that The Dreyfus Corporation
considers to be emerging smaller-sized companies which are believed to be
characterized by new or innovative products, services, or processes which should
enhance prospects for growth in future earnings.
SMALL COMPANY STOCK PORTFOLIO: Seeks to provide investment results that are
greater than the total return performance in publicly-traded common stocks in
the aggregate, as represented by the Russell 2500(TM) Index. This portfolio
invests primarily in a portfolio of equity securities of small to medium-sized
domestic issuers, while attempting to maintain volatility and diversification
similar to that of the Russell 2500(TM) Index.
SOCIALLY RESPONSIBLE GROWTH FUND: The Fund's primary goal is to provide capital
growth through equity investment in companies that, in the opinion of the Fund's
management, not only meet traditional investment standards but which also show
evidence that they conduct their business in a manner that contributes to the
enhancement of the quality of life in America. Current income is secondary to
the primary goal.
SPECIAL VALUE PORTFOLIO: Seeks to maximize total return, consisting of capital
appreciation and current income. This portfolio follows an asset allocation
strategy by investing in equity securities, debt securities and money market
instruments of domestic and foreign issuers.
The Dreyfus Corporation ("Dreyfus") is the investment adviser to each of the
above mentioned portfolios and funds. Dreyfus' principal business address is 200
Park Avenue, New York, New York 10166. The principal underwriter of the
portfolios and funds is Premier Mutual Fund Services, Inc., located at 60 State
Street, Boston, Massachusetts 02109.
33
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================
INVESTMENT
FUNDS MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES ANNUAL EXPENSES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DREYFUS FUNDS
Capital Appreciation Portfolio 0.75% 0.06% 0.81%
Disciplined Stock Portfolio 0.75% 0.13% 0.88%
Growth and Income Portfolio 0.75% 0.03% 0.78%
International Equity Portfolio 0.75% 0.24% 0.99%
International Value Portfolio 1.00% 0.29% 1.29%
Quality Bond Portfolio 0.65% 0.08% 0.73%
Small Cap Portfolio 0.75% 0.02% 0.77%
Small Company Stock Portfolio 0.75% 0.23% 0.98%
Socially Responsible Growth Fund 0.75% 0.05% 0.80%
Special Value Portfolio 0.75% 0.08% 0.83%
=================================================================================================
</TABLE>
FRANKLIN TEMPLETON
The Class 2 portfolios of the Templeton Variable Products Series Fund in which
the Separate Account may currently invest and their investment objectives and
fees are as follows:
TEMPLETON ASSET ALLOCATION FUND: The fund's investment goal is high total
return. Under normal market conditions, the fund will invest in equity and debt
securities of any nation, including emerging markets, and in money market
instruments.
TEMPLETON BOND FUND: The fund's investment goal is high current income. Capital
appreciation is a secondary consideration. Under normal market conditions, the
fund will invest at least 65% of its total assets in the debt securities of
governments and their political subdivisions and agencies, supranational
organizations, and companies located anywhere in the world, including emerging
markets.
TEMPLETON DEVELOPING MARKETS FUND: The fund's investment goal is long-term
capital appreciation. Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities that trade in emerging
markets and are issued by companies that have their principal activities in
emerging market countries.
TEMPLETON INTERNATIONAL FUND: The fund's investment goal is long-term capital
growth. Under normal market conditions, the fund will invest at least 65% of its
total assets in the equity securities of companies located outside the U.S.,
including emerging markets.
TEMPLETON STOCK FUND: The fund's investment goal is long-term capital growth.
Under normal market conditions, the fund will invest at least 65% of its total
assets in the equity securities of companies located anywhere in the world,
including in the U.S. and emerging markets.
34
<PAGE>
Templeton Investment Counsel, Inc. ("TICI") serves as the investment manager for
the Asset Allocation Fund, Bond Fund, International Fund, and Stock Fund. TICI
is a Florida corporation with offices at Broward Financial Centre, Fort
Lauderdale, Florida 33394-3091. The Investment Manager for the Developing
Markets Fund is Templeton Asset Management Ltd., a Singapore corporation with
offices at 7 Temasek Blvd., #38-03, Suntec Tower One, Singapore 038987. The
principal underwriter of the Funds is Franklin Templeton Distributors, Inc., 100
Fountain Parkway, St. Petersburg, Florida 33716-1205.
<TABLE>
<CAPTION>
====================================================================================================
INVESTMENT
FUNDS MANAGEMENT 12B-1 OTHER TOTAL FUND
FEE FEES EXPENSES ANNUAL EXPENSES
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FRANKLIN(R) TEMPLETON(R):
TEMPLETON VARIABLE PRODUCTS
SERIES FUND (CLASS 2 SHARES)
Templeton Asset Allocation
Fund (1) 0.60% 0.25% 0.18% 1.03%
Templeton Bond Fund (2) 0.50% 0.15% 0.23% 0.88%
Templeton Developing Markets
Fund (1) 1.25% 0.25% 0.41% 1.91%
Templeton International Fund (1) 0.69% 0.25% 0.17% 1.11%
Templeton Stock Fund (1) 0.70% 0.25% 0.19% 1.14%
====================================================================================================
</TABLE>
(1) Class 2 of the Fund has a distribution plan or "Rule 12b-1 Plan" which is
described in the Fund's prospectus. Expenses may vary.
(2) Class 2 of the Fund has a distribution plan or "Rule 12b-1 Plan" which is
described in the Fund's prospectus. Because no Class 2 shares were issued
as of December 31, 1998, figures (other than "Rule 12b-1 Fees") are based
on the Fund's Class 1 expenses for the fiscal year ended December 31, 1998,
plus Class 2's maximum annual Rule 12b-1 fee of 0.15%. Expenses may vary.
INVESCO FUNDS
The portfolios of the INVESCO Variable Investment Funds, Inc. in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
VIF-BLUE CHIP GROWTH FUND: The Fund attempts to make your investment grow over
the long term; current income is an additional goal.
The Fund invests primarily in common stocks of large companies with market
capitalizations of more than $10 billion that have a history of consistent
earnings growth regardless of business cycle. In addition, the Fund tries to
identify companies that have -- or are expected to have -- growing earnings,
revenues and strong cash flows. The Fund also examines a variety of industries
35
<PAGE>
and businesses, and seeks to purchase the securities of companies that we
believe are best situated in their industry categories. We also consider the
dividend payment record of the companies whose securities the Fund buys. The
Fund also may invest in preferred stocks (which generally pay higher dividends
than common stocks) and debt instruments that are convertible into common
stocks, as well as in securities of foreign companies. In recent years, the core
of the Fund's investments has been concentrated in the securities of three or
four dozen large, high quality companies.
VIF-DYNAMICS FUND: The Fund attempts to make your investment grow over the long
term. It is aggressively managed. Because its strategy includes many short-term
factors -- including current information about a company, investor interest,
price movements of a company's securities and general market and monetary
conditions -- securities in its portfolio usually are bought and sold relatively
frequently.
The Fund invests in a variety of securities that we believe present
opportunities for capital growth -- primarily common stocks of companies traded
on U.S. securities exchanges, as well as over-the-counter. The Fund also may
invest in preferred stocks (which generally pay higher dividends than common
stocks) and debt instruments that are convertible into common stocks, as well as
in securities of foreign companies.
Because these companies are comparatively small, the prices of their securities
tends to move up and down more rapidly than the securities prices of larger,
more established companies. Therefore, the price of Fund shares tends to
fluctuate more than it would if the Fund invested in the securities of larger
companies.
VIF-EQUITY INCOME FUND: The Fund normally invests at least 65% of its assets in
dividend-paying common and preferred stocks, although in recent years that
percentage has been somewhat higher. Stocks held by the Fund generally are
expected to produce a relatively high level of income and a consistent, stable
return. Although it focuses on the stocks of larger companies with a strong
record of paying dividends, the Fund also may invest in companies that have not
paid regular dividends. The Fund's equity investments are limited to stocks that
can be traded easily in the United States; it may, however, invest in foreign
securities in the form of American Depository Receipts (ADRs).
The rest of the Fund's assets are invested in debt securities, generally
corporate bonds that are rated investment grade or better. The Fund also may
invest up to 15% of its assets in lower-grade debt securities commonly known as
"junk bonds," which generally offer higher interest rates, but are riskier
investments than investment grade securities.
VIF-HEALTH SCIENCES FUND: The Fund seeks capital appreciation and invests
primarily in the equity securities of companies that develop, produce or
distribute products or services related to health care. These industries
include, but are not limited to, medical equipment or supplies, pharmaceuticals,
health care facilities, and applied research and development of new products or
services.
36
<PAGE>
The Fund normally invests at least 80% of its assets in companies doing business
in the health sciences economic sector. The remainder of the Fund's assets are
not required to be invested in the sector. To determine whether a potential
investment is truly doing business in a particular sector, a company must meet
at least one of the following tests:
- At least 50% of its gross income or its net sales must come from
activities in the sector;
- At least 50% of its assets must be devoted to producing revenues from
the sector; or
- Based on other available information, we determine that its primary
business is within the sector.
VIF-HIGH YIELD FUND: The Fund attempts to provide a high level of current
income, with growth of capital as a secondary objective.
It invests substantially all of its assets in lower-rated debt securities,
commonly called "junk bonds," and preferred stock, including securities issued
by foreign companies. Although these securities carry with them higher risks,
they generally provide higher yields - and therefore higher income - than
higher-rated debt securities.
VIF-SMALL COMPANY GROWTH FUND: The Fund attempts to make your investment grow
over the long term.
The Fund normally invests at least 80% of its assets in equity securities of
companies with market capitalizations of $1 billion or less. INVESCO uses a
bottom-up investment approach to the Fund's investment portfolio, focusing on
companies that are in the developing stages of their life cycles. Using this
approach, we try to identify companies that we believe are undervalued in the
marketplace, have earnings which may be expected to grow faster than the U.S.
economy in general, and/or offer the potential for accelerated earnings growth
due to rapid growth of sales, new products, management changes, or structural
changes in the economy. The prices of securities issued by these small companies
tend to rise and fall more rapidly than those of more established companies.
The remainder of the Fund's assets can be invested in a wide range of securities
that may or may not be issued by small companies. In addition to equity
securities, the Fund can invest in foreign securities and debt securities,
including so-called "junk bonds."
VIF-TECHNOLOGY FUND: The Fund seeks capital appreciation and invests primarily
in the equity securities of companies engaged in technology-related industries.
These include, but are not limited to, communications, computers, video,
electronics, oceanography, office and factory automation, and robotics. Many of
these products and services are subject to rapid obsolescence, which may lower
the market value of the securities of the companies in this sector.
A core portion of the Fund's portfolio is invested in market-leading technology
companies that we believe will maintain or improve their market share regardless
of overall economic conditions. These companies are usually large, established
firms which are leaders in their field and have a strategic advantage over many
of their competitors. The remainder of the Fund's portfolio
37
<PAGE>
consists of faster-growing, more volatile technology companies that INVESCO
believes to be emerging leaders in their fields. The market prices of these
companies tend to rise and fall more rapidly than those of larger, more
established companies.
VIF-TOTAL RETURN FUND: The Fund attempts to provide you with high total return
through both growth and current income from those investments. It normally
invests at least 30% of its assets in common stocks of companies with a strong
history of paying regular dividends and 30% of its assets in debt securities.
Debt securities include obligations of the U.S. Government and government
agencies. The remaining 40% of the Fund is allocated among these and other
investments at INVESCO's discretion, based upon current business, economics and
market conditions.
VIF-UTILITIES FUND: The Fund seeks capital appreciation and income.
The Fund is aggressively managed. Although the Fund can invest in debt
securities, it primarily invests in equity securities that INVESCO believes will
rise in price faster than other investments, as well as options and other
investments whose value is based upon the values of equity securities.
The Fund normally invests at least 80% of its assets in companies doing business
in the utilities economic sector. The remainder of the Fund's assets are not
required to be invested in the sector. To determine whether a potential
investment is truly doing business in a particular sector, a company must meet
at least one of the following tests:
- At least 50% of its gross income or its net sales must come from
activities in the sector;
- At least 50% of its assets must be devoted to producing revenues from
the sector; or
- Based on other available information, we determine that its primary
business is within the sector.
INVESCO Funds Group, Inc. ("INVESCO") serves as the investment adviser and
principal underwriter of each of the above-mentioned funds. INVESCO's principal
business address is 7800 E. Union Avenue, Denver, Colorado 80237.
38
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESCO VARIABLE INVESTMENT FUNDS, INC.
VIF-Blue Chip Growth Fund (1) (2) 0.85% 0.72% 1.57%
VIF-Dynamics Fund (1) (2) 0.60% 0.85% 1.45%
VIF-Equity Income Fund (1) (2) 0.75% 0.18% 0.93%
VIF-Health Sciences Fund (1) (2) 0.75% 0.52% 1.27%
VIF-High Yield Fund (2) 0.60% 0.47% 1.07%
VIF-Small Company Growth Fund (1) (2) 0.75% 1.12% 1.87%
VIF-Technology Fund (1) (2) 0.75% 0.65% 1.40%
VIF-Total Return Fund (1) (2) 0.75% 0.42% 1.17%
VIF-Utilities Fund (1) (2) 0.60% 0.48% 1.08%
=====================================================================================================
</TABLE>
(1) Certain expenses of each Fund are being voluntarily absorbed by INVESCO. If
such expenses had not been voluntarily absorbed, the ratio of expenses to
average net assets for Blue Chip Growth, Dynamics, Equity Income, Health
Sciences, Small Company Growth, Technology, Total Return and Utilities
Portfolios would have been 12.29%, 15.01%, 1.17%, 4.32%, 12.67%, 6.60%,
1.24% and 1.84%, respectively.
(2) Each Fund's actual Total Fund Operating Expenses were lower than the
figures shown, because their transfer agent fees and/or custodian fees
were reduced under expense offset arrangements. Because of SEC
requirements, the figures shown do not reflect these reductions.
JANUS ASPEN SERIES
The portfolios of the Janus Aspen Series in which the Separate Account may
currently invest and their investment objectives and fees are as follows:
AGGRESSIVE GROWTH PORTFOLIO: The investment objective of this Portfolio is
long-term growth of capital. It is a nondiversified portfolio that pursues its
investment objective by normally investing at least 50% of its equity assets in
securities issued by medium-sized companies.
BALANCED PORTFOLIO: The investment objective of this Portfolio is long-term
capital growth, consistent with preservation of capital and balanced by current
income. It is a diversified portfolio that, under normal circumstances, pursues
its objective by investing 40-60% of its assets in securities selected primarily
for their growth potential and 40-60% of its assets in securities selected
primarily for their income potential.
FLEXIBLE INCOME PORTFOLIO: The investment objective of this Portfolio is to
obtain maximum total return, consistent with preservation of capital. The
Portfolio pursues its objective primarily through investments in
income-producing securities. Total return is expected to result from a
39
<PAGE>
combination of current income and capital appreciation, although income will
normally be the dominant component of total return. The Portfolio invests in
many types of income-producing securities and may have substantial holdings in
debt securities rated below investment grade.
GROWTH PORTFOLIO: The investment objective of this Portfolio is long-term growth
of capital in a manner consistent with the preservation of capital. It is a
diversified portfolio that pursues its objective by investing in common stocks
of issuers of any size. This Portfolio generally invests in larger, more
established issuers.
HIGH-YIELD PORTFOLIO: The primary investment objective of this Portfolio is to
obtain high current income. Capital appreciation is a secondary objective when
consistent with its primary objective.
INTERNATIONAL GROWTH PORTFOLIO: The investment objective of this Portfolio is
long-term growth of capital. It is a diversified portfolio that pursues its
objective primarily through investments in common stocks of issuers located
outside the United States.
WORLDWIDE GROWTH PORTFOLIO: The investment objective of this Portfolio is
long-term growth of capital in a manner consistent with the preservation of
capital. It is a diversified portfolio that pursues its objective primarily
through investments in common stocks of foreign and domestic issuers.
Janus Capital Corporation ("Janus Capital") serves as the investment adviser and
principal underwriter to each of the above-mentioned portfolios. Janus Capital's
principal business address is 100 Fillmore Street, Denver, Colorado 80206-4928.
<TABLE>
<CAPTION>
=================================================================================================
TOTAL OPERATING
EXPENSES
FUNDS MANAGEMENT OTHER (AFTER FEE WAIVERS
FEE EXPENSES AND REDUCTIONS)*
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JANUS ASPEN SERIES
Aggressive Growth Portfolio 0.72% 0.03% 0.75%
Balanced Portfolio 0.72% 0.02% 0.74%
Flexible Income Portfolio 0.65% 0.08% 0.73%
Growth Portfolio 0.65% 0.03% 0.68%
High-Yield Portfolio 0.00% 1.00% 1.00%
International Growth Portfolio 0.66% 0.20% 0.86%
Worldwide Growth Portfolio 0.65% 0.07% 0.72%
==================================================================================================
</TABLE>
* All expenses are stated with contractual waivers and fee reductions by
Janus Capital. Fee reductions for the Aggressive Growth, Balanced, Growth,
International Growth and Worldwide Growth Portfolios 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. Janus Capital has agreed to continue the other waivers and
fee reductions until at least the next annual renewal of the advisory
agreement. Without such
40
<PAGE>
waivers and fee reductions, the Total Fund Annual Expenses would have
been: 0.75% for Aggressive Growth; 0.74% for Balanced; 0.73% for Flexible
Income; 0.75% for Growth; 2.11% for High-Yield; 0.95% for International
Growth; and 0.74% for Worldwide Growth Portfolios.
J.P. MORGAN SERIES TRUST II
The portfolios of the J.P. Morgan Series Trust II in which the Separate Account
may currently invest and their investment objectives and fees are as follows:
J.P. MORGAN BOND PORTFOLIO: Seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. Total return will consist
of realized and unrealized capital gains and losses plus income less expenses.
J.P. MORGAN EQUITY PORTFOLIO: Seeks to provide a high total return from a
portfolio of selected equity securities. Total return will consist of realized
and unrealized capital gains and losses plus income less expenses. The Portfolio
invests primarily in large- and medium-capitalization U.S. companies, typically
represented by the Standard & Poor's 500 Stock Index.
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO: Seeks to provide a high total
return from a portfolio of equity securities of foreign corporations. Total
return will consist of realized and unrealized capital gains and losses plus
income less expenses.
J.P. MORGAN SMALL COMPANY PORTFOLIO: Seeks to provide a high total return from a
portfolio of small company stocks. Total return will consist of realized and
unrealized capital gains and losses plus income less expenses. The Portfolio
invests at least 65% of the value of its total assets in the common stock of
small and medium sized U.S. companies whose market capitalizations are greater
than $110 million and less than $1.5 billion.
J.P. Morgan Investment Management Inc. ("Morgan" or the "Adviser") serves as the
investment adviser to each of the above-mentioned portfolios. Morgan's principal
business address is 522 Fifth Avenue, New York, New York 10036. The Trust's
distributor is Funds Distributor, Inc. located at 60 State Street, Suite 1300,
Boston, Massachusetts 02109.
41
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
TOTAL FUND ANNUAL
INVESTMENT EXPENSES
FUNDS MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
J.P. MORGAN SERIES TRUST II
J.P. Morgan Bond Portfolio (1) 0.30% 0.45% 0.75%
J.P. Morgan Equity Portfolio (1) 0.40% 0.50% 0.90%
J.P. Morgan International Opportunities
Portfolio (1) 0.60% 0.60% 1.20%
J.P. Morgan Small Company Portfolio (1) 0.60% 0.55% 1.15%
========================================================================================================
</TABLE>
(1) The information in the foregoing table has been restated to reflect an
agreement by Morgan Guaranty Trust Company of New York ("Morgan Guaranty"),
an affiliate of Morgan, to reimburse the Trust to the extent certain
expenses exceed in any fiscal year 0.75%, 0.90%, 1.20% and 1.15% of the
average daily net assets of J.P. Morgan Bond Portfolio, J.P. Morgan Equity
Portfolio, J.P. Morgan International Opportunities Portfolio and J.P.
Morgan Small Company Portfolio, respectively. Without such reimbursements,
total fund annual expenses would have been 1.02% for the J.P. Morgan Bond
Portfolio, 1.48% for the J.P. Morgan Equity Portfolio, 3.26% for the J.P.
Morgan International Opportunities Portfolio and 3.43% for the J.P. Morgan
Small Company Portfolio.
KEMPER VARIABLE SERIES
The portfolios of Kemper Variable Series in which the Separate Account may
currently invest (the "Kemper Series") and their investment objectives and fees
are as follows:
BLUE CHIP PORTFOLIO: Seeks growth of capital and income by investing primarily
in common stocks of well capitalized, established companies having potential for
growth of capital, earnings and dividends.
CONTRARIAN VALUE PORTFOLIO: Seeks to achieve a high rate of total return from a
diversified portfolio consisting primarily of common stocks of large U.S.
companies believed to be undervalued.
GOVERNMENT SECURITIES PORTFOLIO: Seeks high current return consistent with
preservation of capital from a portfolio composed primarily of high quality U.S.
Government securities.
GROWTH PORTFOLIO: Seeks maximum appreciation of capital through diversification
of investment securities having the potential for capital appreciation.
HIGH YIELD PORTFOLIO: Seeks to provide a high level of current income by
investing in lower rated fixed-income securities.
42
<PAGE>
HORIZON 5 PORTFOLIO: Designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.
HORIZON 10+ PORTFOLIO: Designed for investors with approximately a 10+ year
investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
INTERNATIONAL PORTFOLIO: Seeks total return by investing primarily in common
stocks of established non-U.S. companies that have potential for capital growth,
income or both.
INVESTMENT GRADE BOND PORTFOLIO: Seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities.
SMALL CAP GROWTH PORTFOLIO: Seeks maximum appreciation of capital primarily from
a portfolio of growth stocks of smaller companies.
SMALL CAP VALUE PORTFOLIO: Seeks long-term capital appreciation, principally
from a portfolio of equity securities of small U.S. companies believed to be
undervalued.
TOTAL RETURN PORTFOLIO: Seeks a high total return, a combination of income and
capital appreciation consistent with reasonable risk, by investing in a
combination of debt securities and common stocks.
VALUE+GROWTH PORTFOLIO: Seeks growth of capital through a portfolio of growth
and value stocks by investing primarily in a diversified portfolio of U.S.
common stocks.
The asset manager of the portfolios is Scudder Kemper Investments, Inc.
("Scudder Kemper"). Scudder Kemper's principal business address is Two
International Place, Boston, Massachusetts 02110-4103.
43
<PAGE>
<TABLE>
<CAPTION>
================================================================================================
FUNDS OTHER TOTAL ANNUAL
MANAGEMENT FEE EXPENSES PORTFOLIO CHARGES
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
KEMPER VARIABLE SERIES
Blue Chip Portfolio (1) 0.65% 0.11% 0.76%
Contrarian Value Portfolio (1) 0.75% 0.03% 0.78%
Government Securities Portfolio 0.55% 0.11% 0.66%
Growth Portfolio 0.60% 0.05% 0.65%
High Yield Portfolio 0.60% 0.05% 0.65%
Horizon 5 Portfolio (1) 0.60% 0.06% 0.66%
Horizon 10+ Portfolio (1) 0.60% 0.04% 0.64%
International Portfolio 0.75% 0.18% 0.93%
Investment Grade Bond Portfolio (1) 0.60% 0.07% 0.67%
Small Cap Growth Portfolio 0.65% 0.05% 0.70%
Small Cap Value Portfolio (1) 0.75% 0.05% 0.80%
Total Return Portfolio 0.55% 0.05% 0.60%
Value + Growth Portfolio (1) 0.75% 0.03% 0.78%
================================================================================================
</TABLE>
(1) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on the date of this prospectus, to limit their respective
fees and to reimburse other operating expenses of the following described
portfolios to the amounts set forth after the portfolio names: Kemper Value
+ Growth Portfolio (.84%), Kemper Contrarian Value Portfolio (.80%), Kemper
Small Cap Value Portfolio (.84%), Kemper Horizon 5 Portfolio (.97%), Kemper
Horizon 10+ Portfolio (.83%), Kemper Investment Grade Band Portfolio
(.80%), and Kemper Blue Chip Portfolio (.95%). The amounts set forth in the
table above reflect actual expenses for the past fiscal year, which were
lower than these expense limits.
LAZARD RETIREMENT SERIES, INC.
The portfolios of the Lazard Retirement Series, Inc. in which the Separate
Account may currently invest and their investment objectives and fees are as
follows:
LAZARD RETIREMENT EMERGING MARKETS PORTFOLIO: Seeks long-term capital
appreciation by investing primarily in equity securities, principally common
stocks, of non-U.S. companies whose principal activities are in emerging market
countries that the Investment Manager believes are undervalued based on their
earnings, cash flow or asset values.
LAZARD RETIREMENT EQUITY PORTFOLIO: Seeks long-term capital appreciation by
investing primarily in equity securities, principally common stocks, of
relatively large U.S. companies (those whose total market value is more than $1
billion) that the Investment Manager believes are undervalued based on their
earnings, cash flow or asset values.
44
<PAGE>
LAZARD RETIREMENT INTERNATIONAL EQUITY PORTFOLIO: Seeks long-term capital
appreciation by investing primarily in equity securities, principally common
stocks, of relatively large non-U.S. companies (those whose total market value
is more than $1 billion) that the Investment Manager believes are undervalued
based on their earnings, cash flow or asset values.
LAZARD RETIREMENT SMALL CAP PORTFOLIO: Seeks long-term capital appreciation by
investing primarily in equity securities, principally common stocks, of
relatively small U.S. companies in the range of the Russell 2000 Index that the
Investment Manager believes are undervalued based on their earnings, cash flow
or asset values.
Lazard Asset Management is a division of Lazard Freres & Co. LLC ("Lazard
Freres"), a New York limited liability company, serves as the investment manager
and principal underwriter to each of the above-mentioned portfolios. Lazard
Freres' principal business address is 30 Rockefeller Plaza, New York, New York
10112.
<TABLE>
<CAPTION>
===================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LAZARD RETIREMENT SERIES, INC.
Emerging Markets Portfolio (1) 1.00% 0.25% 0.35% 1.60%
Equity Portfolio (1) 0.75% 0.25% 0.25% 1.25%
International Equity Portfolio (1) 0.75% 0.25% 0.25% 1.25%
Small Cap Portfolio (1) 0.75% 0.25% 0.25% 1.25%
===================================================================================================
</TABLE>
(1) Lazard Asset Management, the Fund's Investment Manager, agrees to reimburse
the Emerging Markets Portfolio, Equity Portfolio, International Equity
Portfolio and Small Cap Portfolio through December 31, 1999 to the extent
Total Fund Annual Expenses exceed 1.60%, 1.25%, 1.25% and 1.25%,
respectively, of the Portfolio's average daily net assets. Absent such an
agreement with the Investment Manager, the actual Total Fund Annual
Expenses for the year ended December 31, 1998 would have been: 14.37% for
the Emerging Markets Portfolio, 21.32% for the Equity Portfolio, 48.67% for
the International Equity Portfolio, and 16.20% for the Small Cap Portfolio.
MFS(R) VARIABLE INSURANCE TRUST(sm)
The portfolios of the MFS Variable Insurance Trust in which the Separate Account
may currently invest and their investment objectives and fees are as follows:
MFS BOND SERIES: Seeks primarily to provide as high a level of current income as
is believed consistent with prudent investment risk and secondarily to protect
shareholders' capital.
MFS CAPITAL OPPORTUNITIES SERIES: Seeks capital appreciation.
45
<PAGE>
MFS EMERGING GROWTH SERIES: Seeks to provide long-term growth of capital.
MFS GLOBAL GOVERNMENT SERIES: Seeks income and capital appreciation.
MFS GROWTH WITH INCOME SERIES: Seeks to provide reasonable current income and
long-term growth of capital and income.
MFS HIGH INCOME SERIES: Seeks high current income by investing primarily in a
professionally managed diversified portfolio of fixed income securities, some of
which may involve equity features.
MFS RESEARCH SERIES: Seeks to provide long-term growth of capital and future
income.
MFS TOTAL RETURN SERIES: Seeks primarily to provide above-average income
(compared to a portfolio invested entirely in equity securities) consistent with
the prudent employment of capital, and secondarily to provide a reasonable
opportunity for growth of capital and income.
MFS UTILITIES SERIES: Seeks capital growth and current income (income above that
available from a portfolio invested entirely in equity securities).
The investment adviser for each series is Massachusetts Financial Services
Company ("MFS"). MFS' principal business address is 500 Boylston Street, Boston,
Massachusetts 02116. The principal underwriter of the series is MFS Fund
Distributors, Inc. located at 500 Boylston Street, Boston, Massachusetts 02116.
<TABLE>
<CAPTION>
==================================================================================================
INVESTMENT
MANAGEMENT TOTAL FUND ANNUAL
FUNDS AND FUND OTHER EXPENSES
ADMINISTRATION EXPENSES (1) (AFTER EXPENSE
FEE REIMBURSEMENTS)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MFS(R) VARIABLE INSURANCE TRUST(sm)
MFS Bond Series (2) 0.60% 0.42% 1.02%
MFS Capital Opportunities Series (2) 0.75% 0.27% 1.02%
MFS Emerging Growth Series 0.75% 0.10% 0.85%
MFS Global Government Series (2) 0.75% 0.26% 1.01%
MFS Growth With Income Series 0.75% 0.13% 0.88%
MFS High Income Series (2) 0.75% 0.28% 1.03%
MFS Research Series 0.75% 0.11% 0.86%
MFS Total Return Series (2) 0.75% 0.16% 0.91%
MFS Utilities Series (2) 0.75% 0.26% 1.01%
==================================================================================================
</TABLE>
(1) Each series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series with
its custodian and dividend disbursing agent. Each series may enter into
other such arrangements and directed brokerage
46
<PAGE>
arrangements, which would also have the effect of reducing the series'
expenses. Expenses do not take into account these expense reductions, and
are therefore higher than the actual expenses of the series.
(2) MFS has agreed to bear expenses for these series, subject to reimbursement
by these series, such that each such series' "Other Expenses" shall not
exceed the following percentages of the average daily net assets of the
series during the current fiscal year: 0.40% for the Bond Series, and 0.25%
for each remaining series, except for the Emerging Growth Series, the
Research Series, and the Growth With Income Series, which have no such
limitation. The payments made by MFS on behalf of each series under this
arrangement are subject to reimbursement by the series to MFS, which will
be accomplished by the payment of an expense reimbursement fee by the
series to MFS computed and paid monthly at a percentage of the series'
average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the series' "Other Expenses"
will not exceed the percentage set forth above for that series. The
obligation of MFS to bear a series' "Other Expenses" pursuant to this
arrangement and the series' obligation to pay the reimbursement fee to MFS,
terminates on the earlier of the date on which payments made by the series
equal the prior payment of such reimbursable expenses by MFS or December
31, 2004. Without such waivers and fee reductions, the Total Fund Annual
Expenses would have been: 1.23% for Bond Series; 1.11% for Capital
Opportunities Series; 1.11% for Global Government Series; 0.96% for High
Income Series; 0.91% for Total Return Series; and 0.98% for Utilities
Series Portfolios.
NEUBERGER BERMAN MANAGEMENT INC. ("NBMI")
The portfolios of the Neuberger Berman Advisers Management Trust ("AMT") in
which the Separate Account may currently invest and their investment objectives
and fees are as follows:
AMT BALANCED PORTFOLIO: Seeks long-term capital growth and reasonable current
income without undue risk to principal.
AMT GROWTH PORTFOLIO: Seeks growth of capital. To pursue this goal, the
portfolio invests mainly in stocks of mid-capitalization companies. The
portfolio seeks to reduce risk by diversifying among many companies and
industries. The managers look for fast-growing companies that are in emerging or
rapidly evolving industries.
AMT LIMITED MATURITY BOND PORTFOLIO: Seeks the highest available current income
consistent with liquidity and low risk to principal; total return is a secondary
goal. To pursue these goals, the portfolio invests mainly in investment-grade
bonds and other debt securities from U.S. government and corporate issuers.
AMT PARTNERS PORTFOLIO: Seeks growth of capital. To pursue this goal, the
portfolio invests mainly in common stocks of mid- to large-capitalization
companies. The portfolio seeks to reduce risk by diversifying among many
companies and industries. The managers look for well-managed companies whose
stock prices are believed to be undervalued.
47
<PAGE>
Neuberger Berman Management Inc. ("NBMI") serves as the investment manager of
the portfolios and is also the principal underwriter of the portfolios. NBMI's
principal business
address is 605 Third Avenue, New York, New York 10158-0180.
<TABLE>
<CAPTION>
================================================================================================
INVESTMENT
MANAGEMENT/
FUNDS ADMINISTRATIVE OTHER TOTAL FUND ANNUAL
FEES EXPENSES EXPENSES
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NEUBERGER BERMAN ADVISORS
MANAGEMENT TRUST ("AMT") (1)
AMT Balanced Portfolio 0.85% 0.18% 1.03%
AMT Growth Portfolio 0.83% 0.09% 0.92%
AMT Limited Maturity Bond Portfolio 0.65% 0.11% 0.76%
AMT Partners Portfolio 0.78% 0.06% 0.84%
================================================================================================
</TABLE>
(1) Neuberger Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in a
corresponding series ("Series") of Advisers Managers Trust. The figures
reported under "Investment Management/Administration Fees" include the
aggregate of the administration fees paid by the Portfolio and the
management fees paid by the corresponding Series. Similarly, the figures
reported under "Other Expenses" include all other expenses of the Portfolio
and its corresponding Series.
THE ROYCE PORTFOLIOS
The portfolios of Royce Capital Fund (Series Trust) in which the Separate
Account may currently invest and their investment objectives and fees are as
follows:
ROYCE MICRO-CAP PORTFOLIO: Seeks long-term growth of capital primarily through
investments in a broadly diversified portfolio of equity securities of micro-cap
companies (companies with stock market capitalization below $300 million).
ROYCE PREMIER PORTFOLIO: Investment objectives are primarily long-term growth
and secondarily current income. It seeks to achieve these objectives through
investments in a limited number of equity securities of small-cap companies
viewed by Royce as having superior financial characteristics and/or unusually
attractive business prospects.
ROYCE TOTAL RETURN PORTFOLIO: Investment goals are both long term growth of
capital and current income by investing in a diversified portfolio of dividend
paying securities of small and micro-cap companies selected on a value basis.
Royce & Associates, Inc. ("Royce") serves as the investment manager of the
portfolios. Royce's principal business address is 1414 Avenue of the Americas,
New York, New York 10019.
48
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
TOTAL FUND ANNUAL
INVESTMENT EXPENSES
FUNDS MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
THE ROYCE PORTFOLIOS
Royce Micro-Cap Portfolio (1) 1.25% 0.10% 1.35%
Royce Premier Portfolio (1) 1.00% 0.35% 1.35%
Royce Total Return Portfolio (1) 1.00% 0.35% 1.35%
==============================================================================================
</TABLE>
(1) Royce & Associates, Inc., the Funds' investment adviser, has contractually
agreed to waive its fees and reimburse expenses to the extent necessary to
maintain the Funds' Net Annual Operating Expense ratio at or below 1.35%
through December 31, 1999. Absent such waivers and fee reductions, the
Total Fund Annual Expenses would have been: 2.59% for Royce Micro-Cap;
7.05% for Royce Premier; and 18.08% for Royce Total Return Portfolios.
SCUDDER VARIABLE LIFE INVESTMENT FUND
The portfolios of the Scudder Variable Life Investment Fund in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
BALANCED PORTFOLIO: Seeks a balance of growth and income, as well as long-term
preservation of capital, from a diversified portfolio of equity and fixed income
securities.
BOND PORTFOLIO: Seeks high income from a high quality portfolio of debt
securities.
CAPITAL GROWTH PORTFOLIO: Seeks to maximize long-term capital growth from a
portfolio consisting primarily of equity securities.
GLOBAL DISCOVERY PORTFOLIO: Seeks above-average capital appreciation over the
long term by investing primarily in the equity securities of small companies
throughout the world.
GROWTH & INCOME PORTFOLIO: Seeks long-term growth of capital, current income and
growth of income from a portfolio consisting of primarily common stocks and
securities convertible into common stocks.
INTERNATIONAL PORTFOLIO: Seeks long-term growth of capital principally from
diversified holdings of marketable foreign equity investments.
The investment adviser for each portfolio is Scudder Kemper Investments, Inc.
("Scudder Kemper"). Scudder Kemper's principal business address is Two
International Place, Boston, Massachusetts 02110-4103. The principal underwriter
of the portfolios is Scudder Investor Services, Inc., a Scudder Kemper
subsidiary, located at Two International Place, Boston, Massachusetts
02110-4103.
49
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================
FUNDS MANAGEMENT 12B-1 OTHER TOTAL FUND
FEE FEE EXPENSES ANNUAL EXPENSES
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SCUDDER VARIABLE LIFE INVESTMENT
FUND-(CLASS B SHARES)
Balanced Portfolio 0.475% 0.00% 0.082% 0.56%
Bond Portfolio 0.475% 0.00% 0.094% 0.57%
Capital Growth Portfolio 0.466% 0.25% 0.037% 0.75%
Global Discovery Portfolio (1) 0.975% 0.25% 0.815% 2.04%
Growth & Income Portfolio 0.475% 0.23% 0.086% 0.79%
International Portfolio 0.867% 0.23% 0.177% 1.28%
=====================================================================================================
</TABLE>
(1) Until April 30, 1998, the Adviser has agreed to waive a portion of its
management fee to the extent necessary to limit the expenses of the Global
Discovery Portfolio to 1.50% of average daily net assets. As a result, net
1998 expenses were: management fee 0.92% and total expenses 1.98%. The
above chart shows the expenses without this expense limitation.
THE STRONG FUNDS
The Strong Funds in which the Separate Account may currently invest and their
investment objectives and fees are as follows:
STRONG DISCOVERY FUND II: Seeks capital growth by investing primarily in equity
securities that are believed to represent attractive growth opportunities. The
Fund also has the flexibility to invest in debt obligations and short-term fixed
income securities for capital appreciation potential. The fund's investment
advisor may invest in companies, regardless of size or maturity, that are poised
for accelerated earnings growth due to innovative products or services, new
management, or favorable economic or market cycles.
STRONG MID CAP GROWTH FUND II: Seeks capital growth by investing primarily in
equity securities that are believed to have above-average growth prospects. The
fund will generally invest in companies whose earnings are believed to be in a
relatively strong growth trend, and to a lesser extent, in companies in which
significant further growth is not anticipated but whose market value is thought
to be undervalued.
STRONG INTERNATIONAL STOCK FUND II: Seeks capital growth by investing primarily
in equity securities of issuers located outside the United States. The fund will
normally invest in securities of issuers in at least three different countries.
The fund attempts to deliver a competitive Risk adjusted Return by reducing the
fund's overall volatility by analyzing currencies, country allocations, and
individual stocks.
50
<PAGE>
STRONG OPPORTUNITY FUND II: Seeks capital growth by investing in equity
securities emphasizing investments in medium-sized companies that the investment
advisor believes are under-researched and attractively valued. The fund's
investment advisor looks for companies with fundamental value or growth
potential that is not yet reflected in their current market prices.
The Strong Funds are not available to California residents.
The investment adviser for each fund is Strong Capital Management, Inc.
("Strong"). Strong's principal business address is P.O. Box 2936, Milwaukee,
Wisconsin 53201. The principal underwriter of the funds is Strong Funds
Distributors, Inc., located at P.O. Box 2936, Milwaukee, Wisconsin 53201.
<TABLE>
<CAPTION>
=========================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
THE STRONG FUNDS
Strong Discovery Fund II (1) 1.00% 0.18% 1.18%
Strong Mid Cap Growth Fund II (1) (2) 1.00% 0.20% 1.20%
Strong International Stock Fund II (1) (3) 1.00% 0.62% 1.62%
Strong Opportunity Fund II (1) 1.00% 0.16% 1.16%
=========================================================================================================
</TABLE>
(1) Calculated on an annualized basis as of December 31, 1998 through the
fiscal year end.
(2) The Fund's advisor may from time to time voluntarily limit expenses of the
fund. During 1998, the advisor absorbed expenses of 0.24%. If these
expenses had not been absorbed, Total Fund Annual Expenses would have
equaled 1.44%.
(3) The Fund's advisor may from time to time voluntarily limit expenses of the
fund. During 1998, the advisor absorbed expenses of 0.06%. If these
expenses had not been absorbed, Total Fund Annual Expenses would have
equaled 1.68%.
T. ROWE PRICE VARIABLE FUNDS
The portfolios of the T. Rowe Price Equity Series, Inc., T. Rowe Price
International Series, Inc., and the T. Rowe Price Fixed Income Series, Inc. in
which the Separate Account may currently invest and their investment objectives
and fees are as follows:
EQUITY INCOME PORTFOLIO: Seeks to provide substantial dividend income as well as
long-term growth of capital by investing primarily in the common stocks of
established companies paying above-average dividends, with favorable prospects
for both increasing dividends and capital appreciation.
51
<PAGE>
INTERNATIONAL STOCK PORTFOLIO: Seeks to provide long-term growth of capital
through investments primarily in the common stocks of established companies
based outside the United States.
LIMITED-TERM BOND PORTFOLIO: Seeks a high level of income consistent with
moderate fluctuations in principal value by investing primarily in short- and
intermediate-term investment-grade, corporate bonds.
MID-CAP GROWTH PORTFOLIO: Seeks to provide long-term capital appreciation by
investing primarily in a diversified portfolio of common stocks of medium-sized
(mid-cap) companies whose earnings T. Rowe Price expects to grow at a faster
rate than the average company. Mid-cap companies are defined as those with a
market capitalization within the range of companies in the S&P 400 Mid-Cap
Index.
NEW AMERICA GROWTH PORTFOLIO: Seeks to provide long-term growth of capital by
investing primarily in common stocks of U.S. growth companies operating in
service industries. The portfolio invests in stocks that range from large to
small service companies expected by the fund's investment adviser to show
superior earnings growth and that are above-average performers in their fields.
PERSONAL STRATEGY BALANCED PORTFOLIO: Seeks the highest total return over time,
with an emphasis on both capital growth and income by investing in a diversified
portfolio typically consisting of 60% stocks, 30% bonds, and 10% money market
securities.
The investment manager for each portfolio, except the International Stock
Portfolio, is T. Rowe Price Associates, Inc. ("T. Rowe Price"). T. Rowe Price's
principal business address is 100 East Pratt Street, Baltimore, Maryland 21202.
Rowe Price-Fleming International Inc. ("Price- Fleming"), an affiliate of T.
Rowe Price, serves as investment adviser to the International Stock Portfolio
and its U.S. office is located at 100 East Pratt Street, Baltimore, Maryland
21202. T. Rowe Price Investment Services, Inc. serves as the principal
underwriter of the portfolios.
<TABLE>
<CAPTION>
==========================================================================================================
INVESTMENT TOTAL FUND
FUNDS MANAGEMENT FEE OTHER ANNUAL EXPENSES
YEAR ENDED 12/31/98 EXPENSES YEAR ENDED 12/31/98
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
T. ROWE PRICE VARIABLE FUNDS
Equity Income Portfolio (1) 0.85% 0.00% 0.85%
International Stock Portfolio (1) 1.05% 0.00% 1.05%
Limited-Term Bond Portfolio (1) 0.70% 0.00% 0.70%
Mid-Cap Growth Portfolio (1) 0.85% 0.00% 0.85%
New America Growth Portfolio (1) 0.85% 0.00% 0.85%
Personal Strategy Balanced Portfolio (1) 0.90% 0.00% 0.90%
==========================================================================================================
</TABLE>
(1) The investment management fee includes the ordinary expenses of operating
the Portfolios.
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WARBURG PINCUS PORTFOLIOS
The portfolios of Warburg Pincus Trust I and Warburg Pincus Trust II in which
the Separate Account may currently invest and their investment objectives and
fees are as follows:
WARBURG PINCUS TRUST I
EMERGING MARKETS PORTFOLIO: The goal of the Portfolio is long-term growth of
capital. To achieve this goal, the Portfolio: invests in foreign equity
securities; focuses on the world's less developed countries; and analyzes a
company's growth potential, using a bottom-up investment approach.
INTERNATIONAL EQUITY PORTFOLIO: The goal of the Portfolio is long-term capital
appreciation. To achieve this goal, the Portfolio: invests in foreign equity
securities; diversifies its investments across countries, including emerging
markets; and favors stocks with discounted valuations, using a value-based,
bottom-up investment approach.
POST-VENTURE CAPITAL PORTFOLIO: The goal of the Portfolio is long-term growth of
capital. To achieve this goal, the Portfolio: invests primarily in equity
securities of U.S. companies considered to be in their post-venture-capital
stage of development; may invest in companies of any size; and takes a growth
investment approach to identifying attractive post-venture-capital investments.
SMALL COMPANY GROWTH PORTFOLIO: The goal of the Portfolio is capital growth. To
achieve this goal, the Portfolio: invests in equity securities of small U.S.
companies; may look for either developing or older companies in a growth stage
or companies providing products or services with a high unit-volume growth rate
by using a growth investment style.
WARBURG PINCUS TRUST II
FIXED INCOME PORTFOLIO: The goal of the Portfolio is total return consistent
with prudent investment management. To achieve this goal, the Portfolio: invests
in fixed-income securities denominated primarily in U.S. dollars; normally
maintains a weighted-average portfolio maturity of 10 years or less; and favors
investment-grade securities, but may diversify credit quality in pursuit of its
goal.
GLOBAL FIXED INCOME PORTFOLIO: The goal of the Portfolio is total return
consistent with prudent management, consisting of a combination of interest
income, currency gains and capital appreciation. To achieve this goal, the
Portfolio: invests in U.S. and foreign fixed-income securities denominated in
various currencies; favors investment-grade securities, but may diversify credit
quality in pursuit of its goal; and makes investment decisions based on
fundamental market factors, currency trends and credit quality.
The investment adviser for each portfolio is Warburg Pincus Asset Management,
Inc. ("Warburg"). Warburg's principal business address is 466 Lexington Avenue,
New York, New York 10017-3147. The principal underwriter of the portfolios is
Counsellors Securities, Inc., a Warburg subsidiary, located at 466 Lexington
Avenue, New York, New York 10017-3147.
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<TABLE>
<CAPTION>
=====================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
PORTFOLIOS MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
WARBURG PINCUS TRUST I
Emerging Markets Portfolio (1) 0.20% 1.20% 1.40%
International Equity Portfolio 1.00% 0.33% 1.33%
Post-Venture Capital Portfolio (1) 1.08% 0.32% 1.40%
Small Company Growth Portfolio 0.90% 0.24% 1.14%
WARBURG PINCUS TRUST II
Fixed Income Portfolio (2) 0.20% 0.79% 0.99%
Global Fixed Income Portfolio (2) 0.48% 0.51% 0.99%
======================================================================================================
</TABLE>
(1) Absent the waiver of fees and reimbursement of expenses by the Portfolio's
investment adviser and co-administrator, the investment management fee
would have equaled 1.25% and 1.25%; other expenses would have equaled 6.96%
and 0.45%; and total fund annual expenses would have equaled 8.21% and
1.70% for the Emerging Markets and Post-Venture Capital Portfolios,
respectively, based on actual fees and expenses for the fiscal year ended
December 31, 1998. Fee waivers and expense reimbursements or credits may be
discontinued at any time.
(2) Absent the waiver of fees and reimbursement of expenses by the Portfolio's
investment adviser and co-administrator, investment management fees would
have equaled 0.50% and 1.00%, other expenses would have equaled 4.82% and
2.99% and total portfolio annual expenses would have equaled 5.32% and
3.99% for the Fixed Income and Global Fixed Income Portfolios,
respectively, based on actual fees and expenses for the fiscal year ended
December 31, 1998. Fee waivers and expense reimbursements or credits may be
discontinued at any time.
CERTAIN FUNDS HAVE INVESTMENT OBJECTIVES AND POLICIES CLOSELY RESEMBLING THOSE
OF MUTUAL FUNDS WITHIN THE SAME COMPLEX THAT ARE SOLD DIRECTLY TO INDIVIDUAL
INVESTORS. DESPITE SUCH SIMILARITIES, THERE CAN BE NO ASSURANCE THAT THE
INVESTMENT PERFORMANCE OF ANY SUCH FUND WILL RESEMBLE THAT OF ITS RETAIL FUND
COUNTERPART.
YOU WILL RECEIVE A PROSPECTUS FOR EACH AVAILABLE FUND. THAT PROSPECTUS WILL
DESCRIBE THE FUND, ITS INVESTMENT OBJECTIVE AND STRATEGIES, ITS RISKS, AND ITS
MANAGEMENT FEES AND OTHER EXPENSES. YOU SHOULD READ THE FUND PROSPECTUSES
TOGETHER WITH THIS PROSPECTUS. AS WITH ALL MUTUAL FUNDS, A FUND MAY NOT MEET ITS
INVESTMENT OBJECTIVE. SUBJECT TO APPLICABLE LAW, PRUDENTIAL MAY STOP OFFERING
ONE OR MORE FUNDS OR MAY SUBSTITUTE A DIFFERENT MUTUAL FUND FOR ANY FUND.
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EACH FUND HAS PROVIDED PRUDENTIAL WITH INFORMATION ABOUT ITS MANAGEMENT FEES AND
OTHER EXPENSES. EXCEPT FOR THE SERIES FUND, PRUDENTIAL HAS NOT VERIFIED THAT
INFORMATION INDEPENDENTLY.
THE FIXED ACCOUNT
You may invest all or part of your Certificate Fund in the Fixed Account. The
amount invested in the Fixed Account becomes part of Prudential's general
assets, commonly referred to as the general account. The part of the Certificate
Fund that you invest in the Fixed Account will accrue interest daily at a rate
that Prudential declares periodically. This rate will not be less than an
effective annual rate of 4%. Prudential may in its sole discretion sometimes
declare a higher rate. At least annually and anytime you ask, we will tell you
what interest rate currently applies. Under some Group Contracts, Prudential may
determine interest rates based on the contract year we receive the premium
payments.
We strictly limit your right to make transfers out of the Fixed Account. See the
HOW YOU CAN TRANSFER AMOUNTS IN YOUR CERTIFICATE FUND FROM ONE INVESTMENT OPTION
TO ANOTHER section on page 60. Prudential has the right to delay payment of any
Cash Surrender Value attributable to the Fixed Account for up to 6 months. See
the WHEN PROCEEDS ARE PAID section on page 84.
Because of exemptive and exclusionary provisions, Prudential has not registered
the Fixed Account or the general account under the federal securities laws.
Prudential has been advised that the staff of the Securities and Exchange
Commission has not reviewed the disclosure in this Prospectus relating to the
Fixed Account. Disclosures concerning the Fixed Account may, however, be subject
to certain provisions of the federal securities laws relating to the accuracy of
statements made in a prospectus.
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<PAGE>
DETAILED INFORMATION ABOUT THE CERTIFICATES
HOW PRUDENTIAL ISSUES CERTIFICATES
To apply for coverage under a Group Variable Universal Life Insurance Contract,
an Eligible Group Member must fill out an enrollment form. Prudential may ask
questions about the health of the person whose life is to be covered, and may
ask that person to have a medical exam. If Prudential approves the person for
coverage, that person will become a Covered Person under the Group Variable
Universal Life Insurance.
COVERAGE ON THE LIFE OF A SPOUSE. Usually, the Eligible Group Member buys
coverage on his or her own life. But, some Group Contracts allow an Eligible
Group Member to also apply for coverage on his or her spouse's life. No matter
whose life is covered, the Participant is the person who "owns" the right to
make decisions about the coverage (for example, deciding who the beneficiary
will be). When we use the term "Participant" or "you," we mean the person who
owns those rights. When we use the term "Covered Person," we mean the person
whose life is covered.
The Eligible Group Member is usually the Participant. But, under some Group
Contracts, an Eligible Group Member may allow another person the right to make
decisions about the coverage. When that happens, Prudential considers the other
person to be a Participant. See the ASSIGNMENT and APPLICANT OWNER sections on
pages 87 and 87.
Prudential will issue a Certificate to each Participant. Prudential will issue a
separate Certificate for spouse coverage. The Certificate tells you about the
rights, benefits, coverage, and obligations of the Group Variable Universal Life
Insurance. The minimum Face Amount of insurance for a Certificate is $10,000.
MAXIMUM AGES. Generally, Prudential will not issue Certificates for a person who
is older than age 74. And, Prudential will generally end a Participant's
coverage at the maximum age shown in the Certificate (usually, that is age 100).
When a Participant reaches the maximum age, we make available these three
options:
o You may ask to receive the Cash Surrender Value of the Certificate.
(Prudential believes that a cash surrender upon termination of
coverage will be subject to the same tax treatment as other
surrenders. See the TAX TREATMENT OF CERTIFICATE BENEFITS section on
page 78.)
o You may use some or all of the Certificate Fund to buy Paid-up
Coverage. See the PAID-UP COVERAGE section on page 71.
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<PAGE>
o You can remain invested in your investment options. Under this option,
we will no longer deduct monthly charges for the cost of insurance and
for additional insurance benefits. The Death Benefit will change.
Specifically, the Death Benefit will be equal to the amount of the
Certificate Fund, minus any Certificate Debt and outstanding charges.
The Death Benefit will no longer include the Face Amount of insurance.
Also, we will no longer allow you to make premium contributions. You
can still make loan repayments.
Under some Group Contracts, coverage may end at an age less than 100. You should
refer to your particular Certificate and Group Contract to learn when coverage
under your Certificate will end.
A "FREE LOOK" PERIOD
Generally, you may return a Certificate for a refund within 10 days after you
receive it. This 10- day period is known as the "free look" period. Some states
allow a longer period. You can ask for a refund by mailing the Certificate back
to Prudential.
If you cancel your coverage during the free look period, we will generally
refund the premium payments you made, minus any loans or withdrawals that you
took. We will not add or subtract any gain or loss that would have come from the
investment options you chose (unless a state law requires that we take those
gains or losses into account when we make a refund). When we make a refund, we
will not deduct any charges.
During the first 20 days after the Certificate Date, your premium payments will
be invested in the Fixed Account (or, under some Group Contracts, in the Series
Fund Money Market Portfolio). Prudential reserves the right to limit
contributions and transactions during the free look period.
PROCEDURES
Each Group Contract has different procedures for how you will conduct
transactions under your Group Variable Universal Life Insurance - for example,
how you will submit an enrollment form, make premium payments, take loans and
withdrawals, and transfer or reallocate money in your Certificate Fund. Your
Group Contractholder can tell you what those procedures are.
Under some Group Contracts, Participants will be required to make transactions
through the Group Contractholder. Under other Group Contracts, Participants will
be required to deal directly with Prudential. Either way, Prudential will
consider enrollment forms, payments, orders and other documents to be "received"
when Prudential receives them in good order.
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<PAGE>
WHEN PRUDENTIAL RECONCILES FINANCIAL TRANSACTIONS. Prudential usually reconciles
financial transactions at the end of the day, when most banks and financial
institutions have closed for the evening. As a result, some transactions (for
example, premium payments, loan repayments, or withdrawals) cannot be completed
until the next business day. Usually, this will result in a one-day delay in the
movement of money from one investment option to another. During any delay,
Prudential may place this money in an unallocated account owned by Prudential
that pays a market rate of interest. The short term interest ("float") earned on
this money will be retained by Prudential as compensation for services rendered.
This interest will not be paid from a Participant's Certificate Fund, and will
not reduce the value of the Certificate Fund. Transfers among the Funds and
dollar cost averaging are not subject to this possible delay.
PREMIUMS
ROUTINE PREMIUM PAYMENTS. You will usually be able to decide when to make
premium payments and how much each premium payment will be. You just have to
make sure that there is enough money in your Certificate Fund - minus
Certificate Debt and outstanding charges - to cover each month's charges. If
there is not, your insurance will end (in insurance terms, it will "lapse"). See
the LAPSE section on page 74 to learn how your insurance will end and what you
can do to stop it from ending.
Under some Group Contracts, you may also be required to pay a minimum initial
premium to become a Participant. The minimum initial premium will vary for each
Group Contract, but it will not be more than 50% of the Guideline Annual
Premium. We define Guideline Annual Premium in the DEFINITIONS OF SPECIAL TERMS
section on page 97.
ADDITIONAL PREMIUM PAYMENTS. In addition to routine premium payments, you may
make additional premium payments at any time. Each additional premium payment
must be at least $100. Prudential reserves the right to limit the amount of
additional premiums.
HOW YOU WILL PAY PREMIUMS. Your Group Contractholder sets up the premium payment
method. Some Participants will make payments through the Group Contractholder
(who will pass them on to us). Other Participants will pay us directly. Monthly
charges may be higher when premium payments are made directly to Prudential. See
the CHARGES AND EXPENSES section on page 65.
DEDUCTING PREMIUMS FROM YOUR PAYCHECK. Some Group Contractholders might set up a
way for you to make routine premium payments by deducting them from your
paycheck. Each Group Contractholder's rules for paycheck deduction will be
different and some may require your premium payment to meet a minimum before the
automatic deduction will be allowed. If that's the case, you may still make
premium payments below the minimum directly to Prudential.
EFFECT OF PREMIUM PAYMENTS ON TAX STATUS. If you pay additional premiums, we may
need to increase your Death Benefit (and corresponding cost of insurance
charges) to continue to qualify it as life insurance for federal tax purposes.
Also, if you make premium payments above certain
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<PAGE>
limits, the tax status of the insurance may change to that of a Modified
Endowment Contract under the Internal Revenue Code. That status could have
significant disadvantages from a tax standpoint. We have procedures designed to
identify most situations in which a premium payment would cause your Certificate
to be treated as a Modified Endowment Contract. When we identify such a
situation, we generally will notify you and ask whether you want us to refund
the premium payment. If you fail to respond within a reasonable time, we will
continue to process the premium payment as usual.
We reserve the right to return any premium payment that would cause your
insurance to fail to qualify as life insurance under applicable tax laws, or
that would increase the Death Benefit by more than it increases the Certificate
Fund.
See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page 78.
EFFECTIVE DATE OF INSURANCE
When your insurance begins depends on what day of the month Prudential approves
your completed enrollment form. If we approve your completed enrollment form
prior to the 20th day of a month, your insurance will begin on the first day of
the next month. If we receive your completed enrollment form on or after the
20th day of a month, your insurance will begin on the first day of the month
after the next month.
HOW PRUDENTIAL WILL DEPOSIT AND INVEST PREMIUM PAYMENTS
Prudential will deposit premium payments in your Certificate Fund after we
deduct any charges that apply. The amount of your premium after we deduct those
charges is called "Net Premiums." See the CHARGES AND EXPENSES section on page
65.
Here's how Prudential will deposit and invest your Net Premiums: we generally
will make deposits to your investment options at the end of the Business Day on
which Prudential receives the payment. Any payments received before the
Certificate Date will be deposited as of the Certificate Date.
o BEFORE THE CERTIFICATE DATE. Prudential will hold any premium payment
that it receives before the Certificate Date in our general account
(on your behalf). We will not pay interest on those amounts. If we
receive a premium payment before we have approved your enrollment
under the Group Contract, however, we generally will return the
premium payment to you.
o DURING THE FIRST 20 DAYS THAT YOUR CERTIFICATE IS IN EFFECT. We will
invest any Net Premiums that we receive during the first 20 days in
the Fixed Account. We will leave the Net Premiums in the Fixed Account
for those first 20 days. After that, we will allocate the
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<PAGE>
Net Premiums plus any interest earned to the investment options you
selected. (Under some Group Contracts, we would use the Series Fund
Money Market Portfolio instead of the Fixed Account.)
o AFTER YOUR CERTIFICATE HAS BEEN IN EFFECT FOR 20 DAYS. After your
Certificate has been in effect for 20 days, Prudential will invest Net
Premiums in your Certificate Fund and allocate them to the investment
options you selected.
If you have not given us complete instructions on how you want Net Premiums to
be invested, we will leave your Net Premiums invested in the Fixed Account until
you furnish complete information. (Again, under some Group Contracts, we would
use the Series Fund Money Market Portfolio, rather than the Fixed Account.)
HOW YOU CAN CHANGE THE WAY PRUDENTIAL ALLOCATES FUTURE PREMIUM PAYMENTS
You may ask Prudential to change the way your future premium payments will be
allocated among the available investment options. Prudential will give you a
form to use for this purpose. We will start to allocate premium payments in the
new way as of the end of the Business Day on which we receive your request form
in good order.
The minimum percent that you may allocate to an available investment option is
5%. All allocations must be in whole percents.
You may not change the way Prudential allocates future premiums if, at the time
we receive your request, there is not enough money in your Certificate Fund -
minus Certificate Debt and outstanding charges - to cover each month's charges.
See the LAPSE section on page 74.
We do not currently charge for changing the allocation of your future premiums.
But, we may charge for it in the future.
HOW YOU CAN TRANSFER AMOUNTS IN YOUR CERTIFICATE FUND FROM ONE INVESTMENT OPTION
TO ANOTHER
You may transfer amounts from one investment option to another. You may request
a transfer in terms of dollars (such as transfer of $10,000 from one available
option to another) or in terms of a percent reallocation (such as a transfer of
25% of your Certificate Fund from one option to another).
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There are some rules about how transfers can be made:
o The minimum amount you may transfer from one option to another is $100
(or the entire balance in the investment option, if it is less than
$100).
o The minimum percent that you may allocate to an available investment
option is 5%. All allocations must be in whole percents.
o We limit the number of times you may transfer amounts out of the Fixed
Account. You may make only one transfer from the Fixed Account to one
of the available Funds each Certificate Year. The transfer cannot be
for more than $5,000 or 25% of the amount you have invested in the
Fixed Account, whichever is greater. We may change these limits in the
future.
Transfers will take effect as of the end of the Business Day in which a proper
transfer request is received by Prudential (or Prudential's designee) on the
form we require you to use for this purpose.
Under some Group Contracts, if you make more than twelve transfers in a
Certificate Year, Prudential may charge up to $20 for each transfer after the
twelfth.
Group Variable Universal Life Insurance was not designed for professional market
timing organizations or for other organizations or persons that use programmed,
large or frequent transfers. We will discourage a pattern of exchanges that
coincides with a "market timing" strategy, since they may be disruptive to the
Separate Account and the Funds. If we were to find such a pattern, we might
modify the transfer procedures, including not accepting transfer requests of an
agent acting under a power of attorney on behalf of more than one Certificate
owner.
DOLLAR COST AVERAGING
Dollar Cost Averaging (which we refer to as "DCA") lets you systematically
transfer specified dollar amounts from the Series Fund Money Market Portfolio to
the other available Funds at monthly intervals. You can request that a
designated number of transfers be made under the DCA feature. When we make
transfers under the DCA feature, the transfers are effective as of the end of
the first Business Day following the first of the month.
You may use DCA at any time after your Certificate becomes effective. But, to
start the DCA feature, you usually have to make a premium payment of at least
$1,000 to the Series Fund Money Market Portfolio. And, the minimum transfer
amount is $100.
Prudential will give you a form to request DCA. If we receive your request form
in good order by the tenth of a month, we will start DCA processing during the
next month. If we receive it after the tenth day of a month, we will start DCA
processing during the month after the next month.
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We will terminate the DCA arrangement when any of the following events occurs:
o We have completed the designated number of transfers.
o The amount you have invested in the Series Fund Money Market Portfolio
is not enough to complete the next transfer.
o Prudential receives your written request to end the DCA arrangement.
(If we receive your request by the tenth of a month, we will cancel
the transfer scheduled for the next following month. If we receive it
after the tenth day of a month, we will cancel the transfer scheduled
for the month after the next month.)
o You no longer have coverage under the Group Variable Universal Life
Insurance.
Currently, we do not charge for the DCA arrangement but we may in the future.
Transfers made under the DCA arrangement do not count against the number of
transfers that may be subject to the transfer charge described in the HOW YOU
CAN TRANSFER AMOUNTS IN YOUR CERTIFICATE FUND FROM ONE INVESTMENT OPTION TO
ANOTHER section on page 60.
The main objective of DCA is to shield investments from short-term price
fluctuations. Since the same dollar amount is transferred to an available Fund
with each transfer, you buy more of the Fund when its price is low and less of
the Fund when its price is high. Therefore, you may achieve a lower than average
cost over the long term. This plan of investing does not assure a profit or
protect against a loss in declining markets.
DEATH BENEFITS
Prudential will pay a Death Benefit to the beneficiary when the Covered Person
dies.
AMOUNT OF THE DEATH BENEFIT. The Death Benefit is the Face Amount of insurance
PLUS the value of the Certificate Fund as of the date of death MINUS any
Certificate Debt and any past due monthly charges.
ADJUSTMENT IN THE DEATH BENEFIT. The Certificate Fund may have grown to the
point where we would need to increase the Death Benefit to be certain that the
insurance will meet the Internal Revenue Code's definition of life insurance. If
that were the case for your Certificate, we would use one of two methods to
increase the Death Benefit. Each Group Contract will use one method or the
other.
Under the first method, we would increase the Death Benefit (before we deduct
any Certificate Debt and outstanding charges) to make it equal to the following
"corridor percentage" of the Certificate Fund based on your Attained Age:
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COVERED PERSON'S CORRIDOR COVERED PERSON'S CORRIDOR
ATTAINED AGE PERCENTAGE ATTAINED AGE PERCENTAGE
- ---------------- ---------- ---------------- ----------
0-40 250% 70 115%
41 243 71 113
42 236 72 111
43 229 73 109
44 222 74 107
---- ---- --- ----
45 215 75 105
46 209 76 105
47 203 77 105
48 197 78 105
49 191 79 105
---- ---- ---- ----
50 185 80 105
51 178 81 105
52 171 82 105
53 164 83 105
54 157 84 105
---- ---- ---- ----
55 150 85 105
56 146 86 105
57 142 87 105
58 138 88 105
59 134 89 105
---- ---- ---- ----
60 130 90 105
61 128 91 104
62 126 92 103
63 124 93 102
64 122 94 101
---- ---- ---- ----
65 120 95 100
66 119 96 100
67 118 97 100
68 117 98 100
69 116 99 100
Under the second method, we would increase the Death Benefit (before we deduct
any Certificate Debt and outstanding charges) to make it equal the Certificate
Fund divided by the "Net Single Premium" per dollar of insurance for the Covered
Person's Attained Age. For this purpose, we base the "Net Single Premium" on the
1980 CSO Table.
HOW YOUR BENEFICIARY MAY RECEIVE THE DEATH BENEFIT: Your beneficiary may receive
the Death Benefit in the following ways:
o PRUDENTIAL'S ALLIANCE ACCOUNT. The Alliance Account is an
interest-bearing account that holds the Death Benefit while your
beneficiary takes time to consider other options. Your beneficiary has
complete ownership of funds held in the Alliance Account, and may draw
on
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all or part of the funds by writing a draft. Interest earnings in the
Alliance Account are compounded daily and credited monthly. Your
beneficiary can transfer proceeds from the Alliance Account to other
modes of settlement at any time. Proceeds in the Alliance Account are
part of Prudential's general account. If your beneficiary does not
want the money to go to the Alliance Account, he or she can ask
Prudential to issue a check instead.
o OTHER OPTIONS. Your beneficiary can arrange with Prudential for the
Death Benefit to be paid in a different way (known as "modes of
settlement"), if the Death Benefit is $1,000 or more. (You can also
elect a different mode of settlement for your beneficiary while you
are living). See the MODES OF SETTLEMENT section on page 85.
CHANGES IN FACE AMOUNT
The rules for changing the Face Amount of insurance will be different for each
Group Contract, depending on the options selected by the Group Contractholder
and on Prudential's rules.
The Face Amount of insurance may increase or decrease. The increase or decrease
may happen automatically, or when you ask. Here are some general statements
about changes in your Face Amount of insurance. But you should read your
Certificate to learn how changes work in your case.
INCREASES IN THE FACE AMOUNT OF INSURANCE
o Some Group Contracts allow Participants to ask for an increase in the
Face Amount of insurance at certain times.
o Some Group Contracts provide for automatic increases in the Face
Amount of insurance when a Participant's salary increases.
o Some Group Contracts may not allow increases at all.
o Whenever the Face Amount of insurance increases, Prudential may ask
questions about the Covered Person's health, or require the Covered
Person to have a medical exam, before the increase can become
effective. Based on the answers to the questions or on the exam,
Prudential may not allow the increase.
o An increase in the Face Amount will result in higher monthly insurance
charges because our net amount at risk will increase.
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DECREASES IN THE FACE AMOUNT OF INSURANCE
o Some Group Contracts allow Participants to decrease the Face Amount of
insurance at certain times.
o A Participant may not decrease the Face Amount to less than $10,000 or
below the minimum amount required to maintain status as life insurance
under federal tax laws.
o Some Group Contracts allow Prudential to automatically decrease the
Face Amount when certain "triggering events" occur. "Triggering
events" are events like reaching a certain age, retiring, or having a
Certificate in effect for a certain number of years.
Generally, Prudential will make the automatic decrease at latest of: the Covered
Person's 70th birthday, retirement, and the tenth Certificate Anniversary. We
will calculate the amount of the deduction at the end of the first Business Day
on or after the triggering event or receipt of your instructions to decrease the
Face Amount. The actual decrease will generally take effect on the first Monthly
Deduction Date after that. Sometimes it may take an additional month before the
charges change. If that happens, we will adjust the amount we deduct the first
month after the decrease takes effect to credit you for any extra monthly
charges we deducted the previous month.
When your Face Amount of insurance changes - whether it increases or decreases -
the change may cause your insurance to be treated as a Modified Endowment
Contract under the Internal Revenue Code. Also, a decrease in coverage may limit
the amount of premiums that you may contribute in the future. See the TAX
TREATMENT OF CERTIFICATE BENEFITS section on page 78. You should consult your
tax advisor before you change the Face Amount of your insurance.
CHARGES AND EXPENSES
For a Certificate that is in effect, Prudential reserves the right to increase
the charges that we currently make, but we currently have no intention to do so.
We will not in any case increase charges above the maximum charges described
below. You should refer to your particular Certificate to learn what charges
apply to you.
CHARGES DEDUCTED FROM EACH PREMIUM PAYMENT. We will deduct the charges listed
below from each premium payment you make before we invest the payment in the
investment options you selected.
1. CHARGE FOR TAXES ON PREMIUM PAYMENTS. We will deduct a charge for taxes we
must pay on premiums. These taxes include federal, state or local income,
premium, excise, business or any other type of tax (or part of one) that is
based on the amount of premium we receive.
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This charge is currently made up of two parts:
o The first part is for state and local premium taxes. Currently, it is
2.25% of the premium Prudential receives. For some Group Contracts,
the charge may be up to 5%. (In some states, this charge is called a
premium-based administrative charge.)
o The second part is for federal income taxes that are based on
premiums. Currently, it is 0.35% of premiums received by Prudential.
We believe that this second charge is a reasonable estimate of the
increased cost for premium-based federal income taxes resulting from a
1990 change in the Internal Revenue Code.
We may increase this charge if the cost of our taxes related to
premiums is increased. During 1998, we received approximately $61,000
in charges for taxes on premium payments.
2. CHARGE FOR PROCESSING PREMIUMS. We may deduct up to $2 to cover the costs
of collecting and processing premiums. We may reduce or eliminate this
charge under certain Group Contracts. See the REDUCTION OF CHARGES section
on page 69. During 1998, we received no charges for processing premiums.
3. CHARGE FOR SALES EXPENSES. We may deduct a charge to pay part of the costs
we incur in selling the Group Contract and Certificates. These costs
include commissions, advertising, and publishing prospectuses and sales
literature. The maximum sales charge is 3.5% of each premium payment. We
may reduce or eliminate this charge under certain Group Contracts. See the
REDUCTION OF CHARGES section on page 69. During 1998, we received no
charges for sales expenses.
MONTHLY CERTIFICATE FUND CHARGES. Prudential will deduct the following charges
from your Certificate Fund each month. We will take the charges from each
investment option you selected, in the same proportion that the value of your
Certificate Fund is invested.
Generally, we will deduct these charges on the Monthly Deduction Date. Under
some Group Contracts, we may deduct them when we receive the premium payments
from the Group Contractholder. But, we will never deduct them later than 45 days
past the Monthly Deduction Date.
1. CHARGE FOR THE COST OF INSURANCE. We will deduct a charge for the cost of
your insurance.
To calculate the cost of insurance charge, we multiply:
your Certificate's "net amount at risk" by
the "cost of insurance rate" for the Covered Person.
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"Net amount at risk" means the amount by which your Certificate's Death
Benefit (computed as if there were no Certificate Debt) exceeds your
Certificate Fund.
The "cost of insurance rate" is based on many factors, including:
o the Covered Person's age;
o the Covered Person's rate class (such as classes for smokers and
non-smokers, or for active employees and retired employees);
o the life expectancy of the people covered under your Group Contract;
o whether the Group Contractholder elected to buy any of the additional
insurance benefits shown in the ADDITIONAL INSURANCE BENEFITS section
on page 89;
o whether or not the Certificate is provided on a Portable basis; and
o the expected expenses.
The cost of insurance rate will generally increase as the Covered Person
ages. The cost of insurance charges are generally lower than the 1980 CSO
Table.
We may adjust the actual cost of insurance rates from time to time. The
changes in cost of insurance rates for each Group Contractholder are based
on many factors, including:
o the number of Certificates in effect;
o the number of new Certificates issued;
o the number of Certificates surrendered or becoming Portable;
o the expected claims (death benefits, living benefits and surrenders);
o the expected cost of any additional insurance benefits that the Group
Contractholder elected to buy;
o the expected expenses; and
o administrative services provided by the Group Contractholder, if any.
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In addition to the list above, the past claims, expenses and the costs of
additional insurance benefits, if any, of the group are reviewed since they
are an important factor in calculating the expected claims, expenses and
costs. However, we are prohibited from recovering past losses by state
insurance law.
If we change the cost of insurance rates, we will change them the same way
for all persons of the same age, rate class and group. We will not change
them to be higher than the guaranteed cost of insurance rates shown in your
Certificate. The guaranteed rates may be up to 150% of the 1980 CSO Table.
The guaranteed rates are based on many factors, including:
o guaranteed issue procedures, if any;
o simplified underwriting that may not require a medical exam, blood
tests or urine tests;
o groups with substandard risks characteristics; and
o the expected maximum cost of any additional insurance benefits that
the Group Contractholder elected to buy.
During 1998, we received approximately $554,000 in charges for cost of
insurance.
2. CHARGE FOR ADDITIONAL INSURANCE BENEFITS. The ADDITIONAL INSURANCE BENEFITS
section on page 89 tells you about benefits that you may be able to buy in
addition to the Group Variable Universal Life Insurance and the additional
insurance benefits that the Group Contractholder elected to buy. We will
deduct a separate charge for any additional insurance benefits that you
elect to buy from your Certificate Fund.
3. CHARGE FOR ADMINISTRATIVE EXPENSES. We may deduct a charge for
administrative expenses. This charge pays for maintaining records and for
communicating with Participants and Group Contractholders. Currently, it is
not more than $3 per month and it is guaranteed not to be more than $6 per
month. We may reduce or eliminate this charge under certain Group
Contracts. See the REDUCTION OF CHARGES section on page 69. During 1998, we
received no charges for administrative expenses.
4. CHARGE FOR OTHER TAXES. We reserve the right to deduct a charge to cover
federal, state or local taxes that are imposed on the operations of the
Separate Account. These are taxes other than those described under the
"CHARGE FOR TAXES ON PREMIUM PAYMENTS" section above. Currently, we do not
charge for these other taxes.
DAILY DEDUCTION FROM THE SEPARATE ACCOUNT. Each day, Prudential deducts a charge
from the assets of the Separate Account in an amount currently equal to an
effective annual rate of 0.45%. We guarantee that the charge will not be more
than an effective annual rate of 0.90%.
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This charge compensates us for assuming the mortality and expense risks of the
insurance provided under the Group Contract. The "mortality risk" is the risk
that Covered Persons may live for shorter periods of time than Prudential
estimated when we determined the mortality charge. The "expense risk" is the
risk that expenses for issuing and administering the insurance will be more than
Prudential estimated when we determined the charge for administrative expenses.
We will earn a profit from this risk charge to the extent we do not need it to
provide benefits and pay expenses under the Certificate. We do not assess this
charge on amounts allocated to the Fixed Account. During 1998, we received
approximately $7,000 in charges for mortality and expense risks.
TRANSACTION CHARGES. Under some Group Contracts, we may deduct a charge for
surrenders, partial withdrawals, loans, transfers, reinstatements and additional
statement requests. See the sections of this prospectus that describe each of
those transactions. Those sections also describe the charges that Prudential may
deduct.
EXPENSES INCURRED BY THE FUNDS. Participants indirectly bear the charges and
expenses of the Funds. To find out details about the management fees and other
underlying Fund expenses, you should see THE FUNDS section on page 23. You
should also read the prospectuses for the available Funds.
REDUCTION OF CHARGES
Prudential may reduce or waive the charge for sales expenses, the charge for
processing premiums, or other charges under certain Group Contracts where we
expect that the Group Contract will involve reduced sales or administrative
expenses. In deciding whether to reduce such charges, and by how much, we
consider the following factors:
o The size of the group.
o The total amount of premium payments we expect to receive.
o How long Participants will hold their Certificates.
o The purpose for which the Group Contractholder bought the Group
Contract and whether that purpose makes it likely that expenses will
go down.
o Any other circumstances Prudential believes to be relevant in
determining whether sales or administrative expenses will go down.
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In some cases, we may guarantee the reduction or waivers of charges in the Group
Contract. In other cases, we may decide to discontinue the reductions or
waivers. Prudential's reductions and waivers of charges will not be unfairly
discriminatory to the interests of any individual Participants.
DIVIDENDS OR EXPERIENCE CREDITS
The Group Contract is eligible to receive Dividends or Experience Credits. But,
we have set the premium rates in such a way that we will not generally pay a
dividend or experience credit.
If there is a Dividend or Experience Credit, Prudential will pay it to the Group
Contractholder.
You should refer to your particular Group Contract for details on Dividends or
Experience Credits.
CASH SURRENDER VALUE
The Cash Surrender Value of your Certificate is equal to your Certificate Fund
MINUS any Certificate Debt, outstanding charges, and any transaction charge that
may apply. On any day, your Certificate Fund equals the sum of the amounts in
the Funds, the amount invested in the Fixed Account, and the Loan Account (see
the LOANS section on page 72).
The Cash Surrender Value will change daily to reflect:
o Net Premiums;
o withdrawals;
o increases or decreases in the value of the Funds you selected;
o interest credited on any amounts allocated to the Fixed Account and on
the Loan Account;
o interest accrued on any loan;
o the daily asset charge for mortality and expense risks assessed
against the variable investment options; and
o monthly charges that Prudential deducts from your Certificate Fund.
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If you ask Prudential, we (or our designee) will tell you what the Cash
Surrender Value of your Certificate is. Prudential does not guarantee a minimum
Cash Surrender Value. It is possible for the Cash Surrender Value of your
Certificate to go down to zero.
The tables on pages T1 and T2 (following page 21) of this prospectus give
examples of what Cash Surrender Values would be for two sample Certificates. The
examples assume there would be uniform investment results in the selected
Subaccount portfolios. The examples are only hypothetical and are only meant to
help you understand how the Certificate works.
FULL SURRENDERS
You may surrender your Certificate for its Cash Surrender Value at any time. If
you do, all insurance coverage will end. Prudential will calculate the Cash
Surrender Value as of the end of the Business Day on which we receive your
request form in good order.
We will pay the proceeds as described in the WHEN PROCEEDS ARE PAID section on
page 84. Under certain Group Contracts, Prudential may charge a transaction
charge for the surrender of up to the lesser of $20 or 2% of the amount that you
receive.
A surrender may have tax consequences. See the TAX TREATMENT OF CERTIFICATE
BENEFITS section on page 78.
During 1998, we received approximately $30 in surrender charges.
PAID-UP COVERAGE
At any time, you may elect to use the Cash Surrender Value of your Certificate
to buy Paid-up Coverage. The minimum amount of Cash Surrender Value that you can
exchange is $1,000. Under certain Group Contracts, Prudential may impose a
transaction charge of up to $20 for the exchange.
The amount of Paid-up Coverage that you can have will be limited to the amount
that you can buy with your Certificate's Cash Surrender Value. Also, it cannot
be more than the Death Benefit under your Certificate at the time you make the
exchange.
Paid-up Coverage will start as of the end of the Business Day on which
we receive your request form in good order. Once the Paid-up Coverage starts,
all other coverage under your Certificate, including any additional insurance
benefits, will end.
If you did not use your entire Cash Surrender Value to buy the Paid-up Coverage,
Prudential will pay you the remaining amount as of the end of the first Business
Day after we receive your request form. We will pay it as described in the WHEN
PROCEEDS ARE PAID section on page 84.
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This withdrawal may affect the way you are taxed. See the TAX TREATMENT OF
CERTIFICATE BENEFITS section on page 78.
The purchase of Paid-up Coverage could make your Certificate a Modified
Endowment Contract. See the TAX TREATMENT OF CERTIFICATE BENEFITS section on
page 78.
PARTIAL WITHDRAWALS
While your Certificate is in effect, you may withdraw part of your Certificate's
Cash Surrender Value. We will take it from each investment option you selected
in the same proportions as the value of your Certificate Fund is invested,
unless your request tells us to take the withdrawal from only selected
investment options.
Partial withdrawals will be effective as of the end of the Business Day on which
we receive your request form. We will pay you the withdrawn money as described
in the WHEN PROCEEDS ARE PAID section on page 84.
You must withdraw at least $200 in any partial withdrawal. You may withdraw any
amount that is more than $200, but you must leave enough in your Certificate
Fund (less any Certificate Debt and outstanding charges) to pay the next month's
charges.
Some Group Contracts may have a limit on the number of partial withdrawals you
can make in a year. Some Group Contracts may impose a transaction charge for
each partial withdrawal. The charge can be up to the lesser of $20 or 2% of the
amount you withdraw. We will deduct the transaction charge from the amount you
withdraw.
You may not repay any amount that you withdraw.
Withdrawals may have tax consequences. See the TAX TREATMENT OF CERTIFICATE
BENEFITS section on page 78.
LOANS
You may borrow up to the Loan Value of your Certificate Fund. The Loan Value is
90% of your Certificate Fund minus any existing loan (and its accrued interest),
outstanding charges, and the amount of the next month's charges. In states that
require it, you may borrow a greater amount.
Under certain Group Contracts, Prudential may make a charge of up to $20 for
each loan. The charge will be added to the principal amount of your loan.
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The minimum amount that you can borrow at any one time is $200. You cannot take
a loan if the Certificate Debt exceeds the Loan Value. Prudential will pay loan
proceeds as described in the WHEN PROCEEDS ARE PAID section on page 84.
Interest on the loan will accrue daily at a rate that Prudential sets each year.
Interest payments are due the day before the Contract Anniversary. If you do not
pay the interest when it is due, we will add it to the principal amount of the
loan. When this happens, we will take an amount out of your investment options
to make the loan and the Loan Account equal in value.
When you take a loan from your Certificate Fund, here's what happens:
o We will take an amount equal to the loan out of each of your
investment options on a pro-rata basis unless you tell us to take it
only from selected investment options.
o We will start a Loan Account for you and will credit the Loan Account
with an amount equal to the loan.
o We will generally credit interest to the amount in the Loan Account at
an effective annual rate that is usually 2% less than the rate
Prudential charges as interest on the loan. The crediting rate will
generally be equal to the Fixed Account crediting rate.
You may repay all or part of a loan at any time. We will apply a loan repayment
first against any unpaid loan interest and then to reduce the principal amount
of the loan. You may repay a loan either by repayment or by withdrawing amounts
from the Certificate Fund. When you send us a payment, you should tell us
whether the payment is intended as a premium payment or as a loan repayment. If
you do not indicate whether it is a premium or loan repayment, we will assume it
is a loan repayment.
If you repay a loan by using the Certificate Fund, we will treat the repayment
as a partial withdrawal from the Certificate Fund. A partial withdrawal may have
tax consequences. See the PARTIAL WITHDRAWALS section on page 72 and the TAX
TREATMENT OF CERTIFICATE BENEFITS section on page 78.
Your Loan Account plus accrued interest (together, these are called "Certificate
Debt") may not exceed the value of your Certificate Fund. If Certificate Debt
exceeds the value of your Certificate Fund, you will not have enough money in
your Certificate Fund to cover the month's charges. See the LAPSE section on
page 74.
If you still have Certificate Debt outstanding when you surrender your
Certificate or when you allow your Certificate to lapse, the amount you borrowed
may become taxable. Also, loans from Modified Endowment Contracts may be treated
for tax purposes as distributions of income. See the TAX TREATMENT OF
CERTIFICATE BENEFITS section on page 78.
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If we pay the Death Benefit or the Cash Surrender Value while a loan is
outstanding, we will reduce the Death Benefit or the Cash Surrender Value by the
amount of the loan plus any accrued interest.
A loan will have a permanent effect on your Certificate's Cash Surrender Value.
It may also have a permanent effect on the Death Benefit. This happens because
the investment results of the investment options you selected will apply only to
the amount remaining in those investment options after the loan amount is
transferred to the Loan Account. The longer a loan is outstanding, the greater
the effect is likely to be.
TELEPHONE AND ELECTRONIC TRANSACTIONS
Under some Group Contracts, you may be able to perform some transactions by
telephone or electronically. These transactions include: transferring amounts
among available investment options, making surrenders and partial withdrawals,
and requesting loans.
Prudential will not be liable when we follow instructions that we receive by
telephone or electronically, if we reasonably believe the instructions were
genuine. We have adopted security procedures that are reasonably designed to
verify that such communications are genuine. We cannot guarantee that you will
be able to get through to complete a telephone or electronic transaction during
peak periods such as periods of drastic economic or market change or during
system failures or power outages.
LAPSE
In general, your Certificate will remain in force as long as the balance in your
Certificate Fund (less any Certificate Debt and outstanding charges) is enough
to pay the monthly charges when due. If it is not enough, Prudential will send
you a notice to tell you that your insurance is going to end, how much you must
pay to stop it from ending, and when you must pay it.
In insurance terms, we call it a LAPSE when insurance ends because the charges
for it are not paid. HOW YOU CAN STOP YOUR INSURANCE FROM LAPSING. You must make
a payment that is enough to pay outstanding charges. Prudential must receive the
payment by the later of:
o 61 days after the Monthly Deduction Date; or
o 30 days after the date we mailed you the notice.
If you do not, your insurance will lapse and your Certificate will no longer
have any value. A Certificate that lapses with Certificate Debt may affect the
way you are taxed. See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page
78.
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We will send the notice to the last known address we have on file for you. If
the Covered Person dies during the grace period, we will reduce the Death
Benefit by any past due monthly charges and by any Certificate Debt.
TERMINATION OF A GROUP CONTRACTHOLDER'S PARTICIPATION IN THE GROUP CONTRACT
The Group Contractholder may decide to terminate the Group Contract with
Prudential, by giving Prudential 90 days' written notice.
In addition, Prudential may terminate a Group Contract:
o If the aggregate Face Amount of all Certificates, or the number of
Certificates issued, falls below the permitted minimum, by giving the
Group Contractholder 90 days' written notice.
o If the Group Contractholder fails to remit premium payments to
Prudential in a timely way, at the end of the grace period.
o For any other reason, effective on a Contract Anniversary, by giving
the Group Contractholder 31 days' written notice.
Termination of the Group Contract means that the Group Contractholder will not
remit premiums to Prudential. In that event, no new Certificates will be issued
under the Group Contract. How the termination affects you is described in the
OPTIONS ON TERMINATION OF COVERAGE section on page 76. The options that are
available to you from Prudential may depend on what other insurance options are
available to you. You should refer to your particular Certificate to find out
more about your options at termination of coverage.
PARTICIPANTS WHO ARE NO LONGER ELIGIBLE GROUP MEMBERS
Each Group Contract has different rules for what happens when a Participant is
no longer an Eligible Group Member.
Under some Group Contracts, Participants may be able to continue insurance
coverage even though they are no longer an Eligible Group Member. This is called
Portable Coverage. With Portable Coverage, you will start to make premium
payments directly to Prudential (or to Prudential Mutual Fund Services, Inc.).
We will start to send premium reminders directly to you. We will let you know
about this change in the way premiums are paid within 61 days after you are no
longer eligible under the Group Contract. We might impose certain rules and
limits on the continued insurance. The rules and limits are shown in your
Certificate. The notice that we send you will also tell you what the charges and
expenses are for Portable Certificates. See also the CHARGES AND EXPENSES
section on page 65. Charges and expenses for Portable Certificates may
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be higher than those you paid while you were still an Eligible Group Member. But
the charges and expenses will not be higher than the maximums described in this
prospectus. Prudential may require that you keep a specified minimum amount in
your Certificate Fund to continue as a Portable Certificate holder.
Under other Group Contracts, Participants will not be able to continue insurance
coverage when no longer an Eligible Group Member. Those Participants have the
options of Conversion, Paid-up Coverage, and payment of Cash Surrender Value,
which are described in the OPTIONS ON TERMINATION OF COVERAGE section on page
76.
OPTIONS ON TERMINATION OF COVERAGE
Your insurance coverage under the Group Contract will end when the Group
Contract itself ends. Under some Group Contracts, insurance coverage will also
end when a Participant is no longer an Eligible Group Member.
When the Group Contractholder ends a Group Contract, the effect on Participants
depends on whether or not the Group Contractholder replaces the Group Contract
with another life insurance contract that allows for the accumulation of cash
value. Generally, here is what will happen:
o If the Group Contractholder DOES replace the Group Contract with
another life insurance contract that allows for the accumulation of
cash value, Prudential will terminate your Certificate. We will also
transfer the Cash Surrender Value of your Certificate directly to that
new contract, unless you elect to receive the Cash Surrender Value.
Under some Group Contracts, you may continue your insurance coverage on a
Portable basis. Prudential might impose certain rules and limits on the
continued insurance. The rules and limits are shown in your Certificate. You
should read your Certificate to find out what rules and limits apply when you
want to continue your insurance on a Portable basis.
o If the Group Contractholder DOES NOT replace the Group Contract with
another life insurance contract that allows for the accumulation of
cash value, you will have the options listed below. Under some Group
Contracts, you may also have the option of continuing your insurance
coverage on a Portable basis, as stated above.
CONVERSION. You may elect to convert your Certificate to an individual life
insurance policy without giving Prudential evidence that the Covered Person is
in good health, if your Certificate has been in force for at least 5 years
(under some Group Contracts, the requirement may be less than 5 years). To elect
this option, you must apply for it within 31 days (or longer, depending on the
state law that applies) after your Certificate ends. You may select any form of
individual life insurance policy (other than term insurance) that Prudential
normally makes available to persons
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who are the same age as you and who are asking for the same amount of life
insurance. Your premiums for the individual life insurance policy will be based
on the type and amount of life insurance you select, your age and your risk
class.
If your Certificate ended because you are no longer an Eligible Group Member,
you may not convert more than the Face Amount of your Certificate. If your
Certificate ended because the Group Contract ended, the amount you are able to
convert may, depending on the state law that applies, be limited to the lesser
of:
o $10,000 or
o the Face Amount of your Certificate MINUS the amount of any group
insurance that you become eligible for within 45 days after your
Certificate ends.
If a Covered Person dies within 31 days (or longer, depending on the state law
that applies) after the Certificate ends and you had the right to convert to an
individual policy, we will pay a Death Benefit under the Certificate. But, the
Death Benefit will be equal to the amount of individual insurance you could have
had if you had actually made the conversion to the individual policy.
PAID-UP COVERAGE. You may elect to use your Certificate's Cash Surrender Value
to buy fixed Paid-up Coverage on the Covered Person. To use this option, you
must have at least $1,000 of Cash Surrender Value on the day your Certificate
ends. The insurance amount will depend on how much the Cash Surrender Value is
and on the age of the Covered Person. But, the amount of Paid-up Coverage cannot
be more than your Certificate's Death Benefit right before you buy the Paid-up
Coverage.
You may elect this option within 61 days of the date your Certificate ended.
Prudential will make the Paid-up Coverage effective as of the end of the
Business Day on which we (or our designee) receive your request on the form we
require you to use for this purpose. If you elect this option, your insurance
may become a Modified Endowment Contract under the Internal Revenue Code.
See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page 78.
PAYMENT OF CASH SURRENDER VALUE. You may receive the Cash Surrender Value by
surrendering your Certificate. To do this, you must make a request to Prudential
on the form that we require you to use for this purpose.
If you do not choose one of the options described above within 61 days of the
date the Certificate ends, we will exchange your Certificate Fund for Paid-up
Coverage if your Certificate Fund value is at least $1,000. If it does not have
that much value, we will pay the Cash Surrender Value.
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REINSTATEMENT
You may request reinstatement of a lapsed Certificate any time within 3 years
after the end of the grace period. But, you must be less than the maximum age at
which a Certificate may be held. We will not reinstate a lapsed Certificate if
the Group Contract under which the Certificate was issued ended and you did not
have the right to continue your insurance on a Portable basis.
To reinstate your Certificate, you must send the following items to Prudential
(or our designee):
o A written request for reinstatement.
o Evidence of the good health of the Covered Person. The evidence must
be satisfactory to Prudential.
o A premium payment (less any charges that apply) that is at least
enough to pay the monthly charges for the grace period and for two
more months. See the CHARGES AND EXPENSES section on page 65.
o We will make your Certificate effective again on the Monthly Deduction
Date that occurs after we approve your request. The terms of your
original Certificate will still apply. We will apply a new 2-year
period of incontestability, and the period during which the suicide
exclusion applies will start over again. See the INCONTESTABILITY
section on page 84 and the SUICIDE EXCLUSION section on page 85. When
the original Certificate lapsed, we would have required you to pay off
any outstanding Certificate Debt. We will not allow you to continue
the loan under the reinstated Certificate.
o Currently, we do not charge for a reinstatement. But, we reserve the
right to charge for reinstatements in the future.
TAX TREATMENT OF CERTIFICATE BENEFITS
INTRODUCTION
This summary provides general information on the federal income tax treatment of
a Certificate under the Group Contract. It is not a complete statement of what
the federal income taxes will be in all circumstances. It is based on current
law and interpretations, which may change. It does not cover state taxes or
other taxes. It is not intended as tax advice. You should consult your own tax
advisor for complete information and advice.
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TREATMENT AS LIFE INSURANCE AND INVESTOR CONTROL
The Certificate must meet certain requirements to qualify as life insurance for
tax purposes. These requirements include certain definitional tests and rules
for diversification of investments. For further information on the
diversification requirements, see the Dividends, Distributions and Taxes section
in the applicable Fund prospectuses.
We believe we have taken adequate steps to insure that the Certificate qualifies
as life insurance for tax purposes. Generally speaking, this means that:
o you will not be taxed on the growth of the funds in the Certificate
Fund, unless you receive a distribution, and
o the Certificate's Death Benefit will be tax free to your beneficiary.
Although we believe that the Certificate should qualify as life insurance for
tax purposes, there are some uncertainties, particularly because the Secretary
of Treasury has not yet issued permanent regulations that bear on this question.
Moreover, regulations issued to date do not provide guidance concerning the
extent to which Participants may direct their investments to the particular
available subaccounts of a separate account without causing the Participants
(instead of Prudential) to be considered the owners of the underlying assets.
The ownership rights under the Certificate are similar to, but different in
certain respects from, those addressed by the Internal Revenue Service in
rulings holding that the insurance company was the owner of the assets. For
example, Participants have the choice of more funds and the ability to
reallocate amounts among available Subaccounts more frequently than in the
rulings. While we believe that Prudential will be treated as the owner of the
Separate Account assets, it is possible that the Participants may be considered
to own the assets.
Because of these uncertainties, we reserve the right to make changes - which
will be applied uniformly to all Participants after advance written notice -
that we deem necessary to insure that the Certificates under the Group Contract
will qualify as life insurance and that Prudential will be treated as the owner
of the underlying assets.
DISTRIBUTIONS
The tax treatment of any distribution you receive before the Covered Person's
death depends on whether your Certificate is classified as a Modified Endowment
Contract.
CERTIFICATES NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS
o If you surrender your Certificate or allow it to lapse, you will be
taxed on the amount you receive in excess of the premiums you paid
less the untaxed portion of any prior withdrawals. For this purpose,
you will be treated as receiving any portion of the Cash Surrender
Value
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used to repay Certificate Debt. The tax consequences of a surrender
may differ if you take the proceeds under an income payment settlement
option.
o Generally, you will be taxed on a withdrawal to the extent the amount
you receive exceeds the premiums you paid for the Certificate less the
untaxed portion of any prior withdrawals. However, under some limited
circumstances, in the first 15 Certificate Years, all or a portion of
a withdrawal may be taxed if the Certificate Fund exceeds the total
premiums paid less the untaxed portions of any prior withdrawals, even
if total withdrawals do not exceed total premiums paid.
o Extra premiums for optional benefits and riders generally do not count
in computing the premiums paid for the Certificate for the purposes of
determining whether a withdrawal is taxable.
o Loans you take against the Certificate are ordinarily treated as debt
and are not considered distributions subject to tax.
MODIFIED ENDOWMENT CONTRACTS
o The rules change if the Certificate is classified as a Modified
Endowment Contract. The Certificate could be classified as a Modified
Endowment Contract if premiums in excess of certain IRS limits are
paid, or a change in the Face Amount of insurance is made (or a rider
is added or removed). The addition of a rider or an increase in the
Face Amount of insurance may also cause the Certificate to be
classified as a Modified Endowment Contract. You should first consult
a tax advisor if you are contemplating any of these steps.
o If the Certificate is classified as a Modified Endowment Contract,
then amounts you receive under the Certificate before the Covered
Person's death, including loans and withdrawals, are included in
income to the extent that the Certificate Fund before surrender
charges exceeds the premiums paid for the Certificate increased by the
amount of any loans previously included in income and reduced by any
untaxed amounts previously received other than the amount of any loans
excludible from income. An assignment of a Modified Endowment Contract
is taxable in the same way. These rules also apply to loans,
withdrawals, and full surrenders made during the two-year period
before the time that the Certificate became a Modified Endowment
Contract.
o Any taxable income on pre-death distributions (including full
surrenders) is subject to a penalty tax of 10 percent unless the
amount is received on or after age 59-1/2 , on account of your
becoming disabled or as a life annuity.
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o All Modified Endowment Contracts issued by us to you during the same
calendar year are treated as a single Certificate for purposes of
applying these rules.
Any dividends or Experience Credits applied to reduce premiums due will
effectively reduce the premiums paid for purposes of these rules.
TREATMENT AS GROUP TERM LIFE INSURANCE
In most cases, employee-pay-all coverage under the Group Contract will not
qualify as group term life insurance under the Internal Revenue Code, or be
deemed to be part of a group term life insurance plan. The Certificate will
therefore be treated the same as any individually purchased life insurance
policy for tax purposes. However, under certain circumstances, a portion of the
coverage under the Group Contract may qualify as group term life insurance and,
in addition, Participants may be taxed on certain increases in cash values under
an IRS-prescribed formula.
WITHHOLDING
You must affirmatively elect that no taxes be withheld from a pre-death
distribution. Otherwise, the taxable portion of any amounts you receive will be
subject to withholding. You are not permitted to elect out of withholding if you
do not provide a social security number or other taxpayer identification number.
You may be subject to penalties under the estimated tax payment rules if your
withholding and estimated tax payments are insufficient to cover the tax due.
OTHER TAX CONSIDERATIONS
If you transfer or assign the Certificate to someone else, there may be gift,
estate and/or income tax consequences. If you transfer the Certificate to a
person two or more generations younger than you (or designate such a younger
person as a beneficiary), there may be Generation Skipping Transfer tax
consequences. Deductions for interest paid or accrued on Certificate Debt or on
other loans that are incurred or continued to purchase or carry the Certificate
may be denied. Your individual situation or that of your beneficiary will
determine the federal estate taxes and the state and local estate, inheritance
and other taxes due if you or the Covered Person dies.
The earnings of the Separate Account are taxed as part of Prudential's
operations. The Separate Account does not intend to qualify as a regulated
investment company under the Internal Revenue Code.
ERISA CONSIDERATIONS
If the Group Contract is treated as or acquired by an "employee benefit plan,"
as defined under the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), certain legal requirements may apply.
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DEFINITION OF AN EMPLOYEE BENEFIT PLAN
An "employee benefit plan" includes two broad categories of arrangements that
are established by certain entities (employers or unions) to cover employees -
"pension" plans or "welfare" plans.
A "pension plan" includes any program that provides retirement income to
employees, or results in a deferral of income by employees for periods extending
to the termination of covered employment or beyond. For these purposes, the term
"pension plan" includes, but is not limited to, retirement plans that meet tax
qualification requirements (for example, a "401(k) plan"), as well as other
arrangements which, by their operation, are intended to provide retirement
income or deferrals beyond termination of employment.
A "welfare plan" includes a program established or maintained for the purposes
of providing to employees, among other things, medical, accident, disability,
death, vacation, and unemployment benefits.
GROUP CONTRACTS AS EMPLOYEE BENEFIT PLANS
Regulations issued by the United States Department of Labor ("Labor") clarify
when specific plans, programs or other arrangements will not be either pension
or welfare plans (and thus not considered "employee benefit plans" for purposes
of ERISA). Among other exceptions, "group" or "group-type insurance programs"
offered by an insurer to employees of an employer will not be a "plan" where:
o no contributions are made by the employer for the coverage;
o participation in the program is completely voluntary for employees;
o the "sole" function of the employer with respect to the program is,
without endorsing the arrangement, to permit the insurer to publicize
the program, to collect premiums through payroll deductions and to
remit them to the insurer; and
o the employer does not receive any consideration in connection with the
program, other than reasonable compensation (excluding any profit) for
administrative services actually provided in connection with payroll
deductions.
Whether or not a particular group insurance arrangement satisfies these
conditions is a question of fact depending on the particular circumstances. You
should consult counsel and other advisors to determine whether, under the facts
of the particular case, a particular Group Contract might be treated as an
"employee benefit plan" (either a pension or a welfare plan) subject to the
requirements of ERISA.
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INVESTMENT OF PLAN ASSETS IN A GROUP CONTRACT
The decision to invest employee benefit plan assets in a Group Contract is
subject to rules under ERISA and/or tax law. Any plan fiduciary, which proposes
to cause a plan to acquire a Group Contract, should consult with its counsel
with respect to the potential legal consequences of the plan's acquisition and
ownership of such Contract.
FIDUCIARY/PROHIBITED TRANSACTION REQUIREMENTS UNDER ERISA
If applicable, ERISA and tax law impose certain restrictions on employee benefit
plans and on persons who are (1) "parties in interest" (as defined under ERISA)
or "disqualified persons" (as defined under tax law) and (2) "fiduciaries" with
respect to such plans. These restrictions may, in particular, prohibit certain
transactions in connection with a Group Contract, absent a statutory or
administrative exemption. You should consult counsel and other advisors to
determine the application of ERISA under these circumstances.
For example, administrative exemptions issued by Labor under ERISA permit
transactions (including the sale of insurance contracts like the Group Contract)
between insurance agents and employee benefit plans. To be able to rely upon
such exemptions, certain information must be disclosed to the plan fiduciary
approving such purchase on behalf of the plan. The information that must be
disclosed includes:
o the relationship between the agent and the insurer;
o a description of any charges, fees, discounts, penalties or
adjustments that may be imposed in connection with the purchase,
holding, exchange or termination of the Group Contract; and
o the commissions received by the agent.
Information about any applicable charges, fees, discounts, penalties or
adjustments may be found in the CHARGES AND EXPENSES section on page 65.
Information about sales representatives and commissions may be found in the SALE
OF THE CONTRACT AND SALES COMMISSIONS section on page 91.
Execution of a Group Contract by a Group Contractholder and an enrollment form
by a Participant will be deemed an acknowledgment of receipt of this information
and approval of transactions under the Group Contract.
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WHEN PROCEEDS ARE PAID
Prudential will generally pay any Death Benefit, Cash Surrender Value, partial
withdrawal or loan proceeds within 7 days after we receive the request for
payment at the office specified in our request form. We will determine the
amount of the Death Benefit as of the date of the Covered Person's death. For
other types of redemptions, we will determine the amount of the proceeds as of
the end of the Business Day on which we received the request in good order.
There are certain circumstances when we delay payment of proceeds:
o We may delay payment of proceeds that come from the Funds and the
variable part of the Death Benefit if any of the following events
occurs: the New York Stock Exchange is closed (other than for a
regular holiday or a weekend), trading is restricted by the SEC, or
the SEC declares that an emergency exists.
o We expect to pay proceeds that come from the Fixed Account or from
Paid-up Coverage promptly upon request. But, we do have the right to
delay these payments (other than the Death Benefit) for up to six
months (or a shorter period, if required by state law). We will pay
interest at the Fixed Account rate if we delay payment for more than
30 days (or a shorter period, if required by state law).
BENEFICIARY
You have the right to name the beneficiary who will receive the Death Benefit
from your Certificate. You must use the form that Prudential requires you to
use. You may change the beneficiary at any time. You do not need the consent of
the present beneficiary. If you have more than one beneficiary at the time the
Covered Person dies, we will pay the Death Benefit in equal parts to each
beneficiary, unless you have given us other instructions.
INCONTESTABILITY
After your Certificate has been in force for two years or more during the
Covered Person's lifetime, Prudential will not contest liability under the
Certificate. We will also not contest liability for any change in your
Certificate that required our approval after the change has been in force for
two years or more during the Covered Person's lifetime.
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MISSTATEMENT OF AGE
If the Covered Person's age is stated incorrectly in the Certificate, we will
adjust the amount of the Death Benefit to reflect the correct age, as permitted
by law.
SUICIDE EXCLUSION
Generally, if the Covered Person dies by suicide within two years from the
Certificate Date, Prudential will not pay the Death Benefit described in other
sections of this prospectus. Instead, we will pay your beneficiary an amount
equal to your premium payments minus any Certificate Debt, outstanding charges,
and any partial withdrawals. This limit will apply whether the suicide occurred
while the Covered Person was sane or insane.
If the Covered Person dies by suicide within two years after the effective date
of an increase in the Face Amount of your Certificate that required our
approval, we will not pay the increased amount of insurance. Instead of the
amount of the increase, we will pay your beneficiary the monthly charges that
were attributable to the increased amount. Again, this limit will apply whether
the suicide occurred while the Covered Person was sane or insane.
MODES OF SETTLEMENT
The DEATH BENEFITS section describes how your beneficiary may receive the Death
Benefit. In addition to the methods described in the DEATH BENEFITS section,
Prudential also makes these methods available. They are known as "modes of
settlement":
OPTION 1: PAYMENTS FOR A FIXED PERIOD
The Death Benefit plus interest is paid over a fixed number of years (1 -
25). The payment may be received monthly, quarterly, semi-annually or
annually. The payment amount will be higher or lower depending on the
period selected.
The interest rate can change, but will not be less than the guaranteed rate
shown in the claim settlement certificate that your beneficiary will
receive. Your beneficiary may withdraw the total present value of payments
not yet made at any time.
OPTION 2: PAYMENT IN INSTALLMENTS FOR LIFE
The Death Benefit provides monthly payments in installments for as long as
your beneficiary lives. Your beneficiary may choose a guaranteed minimum
payment period (5, 10 or 20 years) or an installment refund, which will
guarantee that the sum of the payments equals the amount of the
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Death Benefit payable under this option. If your beneficiary dies before
Prudential has made all guaranteed payments, Prudential will pay the
present value of the remaining guaranteed payments to a payee your
beneficiary designated.
OPTION 3: INTEREST INCOME
The Death Benefit remains with Prudential and earns interest. This option
allows you or your beneficiary to leave the Death Benefit with Prudential
and choose another settlement option at a later time. Withdrawals of $100
or more (including the entire unpaid Death Benefit) can be made at any
time. The interest income may be received monthly, quarterly, semi-annually
or annually.
The interest rate can change, but will not be less than the guaranteed rate
shown in the claim settlement certificate that you or your beneficiary will
receive.
OPTION 4: PAYMENTS OF A FIXED AMOUNT
You or your beneficiary receives a guaranteed specified sum for a limited
number of years. This guaranteed specified sum represents a return of the
principal (Death Benefit) and interest paid over the selected number of
years. The payment may be received monthly, quarterly, semi-annually, or
annually.
The interest rate can change, but will not be less than the guaranteed rate
shown in the claim settlement certificate that you or your beneficiary will
receive. Any interest credited will be used to extend the payment period.
OPTION 5: CERTIFICATE OF DEPOSIT
The Death Benefit is used to purchase a certificate of deposit that is
issued by The Prudential Bank. Certificates of Deposit (CDs) are
investments that allow your beneficiary to choose a variety of short- and
long-term deposit options. They are designed to pay interest monthly,
quarterly, semi-annually, annually or at maturity. Interest rates are
guaranteed for the term of the CD. There is generally a $10,000 minimum
amount for this option.
Under each of the above options, each payment must generally be at least $20.
If your beneficiary elects one of these settlement options, the tax treatment of
the Death Benefit may be different than it would have been had the option not
been elected. Your beneficiary should get advice from a tax advisor.
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ASSIGNMENT
You may assign your Certificate, including all rights, benefits and privileges
that you have. Prudential will honor the assignment only if: (1) you make the
assignment in writing; (2) you sign it; and (3) Prudential receives a copy of
the assignment at the Prudential office shown in your Certificate. We are not
responsible for determining whether the assignment is legal or valid.
Throughout this prospectus, we describe various rights that you have. You may
assign those rights to someone else. If you do, you should consider the
references to "you" in this prospectus as applying to the person to whom you
validly assigned your Certificate.
If you assign a Certificate that is a Modified Endowment Contract, it might
affect the way you are taxed. It might also affect the way the person to whom
you assign the Certificate is taxed. See the TAX TREATMENT OF CERTIFICATE
BENEFITS section on page 78.
APPLICANT OWNER PROVISION
Some Group Contracts have an "applicant owner" provision. An "applicant owner"
is a person who may apply for coverage on the life of an Eligible Group Member.
And, as with an assignment, if a Participant agrees to let another person be the
applicant owner of the Certificate, that person would have all of the rights to
make decisions about the coverage. References to "Participant" and "you" in this
prospectus also apply to an applicant owner.
When naming an applicant owner, the Eligible Group Member must agree to have his
or her life covered. Examples of people who may be applicant owners are the
Eligible Group Member's spouse, child, parent, grandparent, grandchild, sister,
brother, or the trustee of any trust set up by the Eligible Group Member. At any
one time, only one person may be an applicant owner under a Certificate.
An "applicant owner" must fill out an enrollment form. The Eligible Group Member
must sign the enrollment form to show his or her agreement. Prudential may
require the Eligible Group Member to answer questions about his or her health,
or to have a medical examination. If we approve the enrollment form, we will
issue the Certificate to the applicant owner.
VOTING RIGHTS
The assets that are held in the Separate Account are invested in the Funds.
Prudential is the legal owner of those shares. Because we are the owner, we have
the right to vote on any matter that shareholders of the Funds vote on. The
voting happens at regular and special shareholder meetings.
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We will (as required by law) vote in accordance with voting instructions we
receive from Participants. A Fund may not hold annual shareholder meetings when
not required to do so under the laws of the state of its incorporation or under
the federal securities laws.
If we do not receive timely voting instructions for Fund shares from
Participants, we will vote those shares in the same proportion as shares in the
Funds for which we do receive instructions. We will do the same thing for shares
held as general account investments of Prudential. If the federal securities
laws change so that Prudential is allowed to vote on Fund shares in our own
right, we may decide to do so.
Generally, you may give us voting instructions on matters that would be changes
in fundamental policies of the Funds. You may also give us voting instructions
on any matter that requires a vote of the Fund's shareholders. But, if a Fund
that you participate in has a vote on approval of the investment advisory
agreement or any change in a Fund's fundamental investment policy, you will vote
separately by Fund. This practice is dictated by the federal securities laws.
Here's how we will determine the number of Fund shares and votes for which you
may give instructions:
o To determine the number of Fund shares, we will divide the part of
your Certificate Fund that is derived from participation in a
Subaccount by the value of one share in the corresponding portfolio of
the applicable Fund.
o The number of votes will be determined as of the record date chosen by
the Board of Directors of the applicable Fund.
We will give you the proper forms and proxies to give these instructions. We
reserve the right to change the way in which we calculate the weight we give to
voting instructions. We would make such a change to comply with federal
regulations.
If we are required by state insurance regulations, we may disregard voting
instructions in certain instances. We may disregard instructions if: (1) the
instructions would require shares to be voted in a way that would cause a change
in the sub-classification or investment objectives of one or more of the Funds'
portfolios, or (2) the instruction would approve or disapprove an investment
advisory contract for a Fund. Also, Prudential itself may disregard voting
instructions that would require changes in the investment policy or investment
advisor of one or more of the Funds' portfolios, provided that Prudential
reasonably disapproves such changes in accordance with applicable federal
regulations. If Prudential does disregard voting instructions, we will tell you
that we did and our reasons for it in the next annual or semi-annual report to
Participants.
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SUBSTITUTION OF FUND SHARES
If Prudential's management thinks that an available portfolio of the Funds
becomes unsuitable for investment by Participants, we may substitute the shares
of another portfolio or of an entirely different mutual fund. Our management
might find a portfolio to be unsuitable because of investment policy changes,
tax law changes or considerations, the unavailability of shares for investment,
or other reasons, including our discretion. Before Prudential can substitute
shares, the SEC, and possibly one or more state insurance departments, must
approve the substitution. We would notify Group Contractholders and Participants
if we were to make such a substitution.
ADDITIONAL INSURANCE BENEFITS
One or more of the following additional insurance benefits may be available to
you. These benefits may be provided to all Participants under a Group Contract.
Or, the Group Contract may require you to pay an additional charge to receive
the benefits. Each Group Contract will have different rules about how the
additional benefits are made available. You should refer to the Group Contract
and your Certificate to find out what additional insurance benefits are
available to you.
ACCELERATED DEATH BENEFIT. Under an accelerated death benefit, you can elect to
receive an early payment of part of the Certificate's Death Benefit when the
Covered Person is diagnosed as being terminally ill. "Terminally ill" means the
Covered Person has a life expectancy of 12 months or less (under some Group
Contracts, the number of months might be higher or lower). You must give
Prudential satisfactory evidence that the Covered Person is terminally ill. You
may receive the accelerated payment in a lump sum.
When we pay the Death Benefit under this option, it will be adjusted to reflect
its present value. The adjusted Death Benefit will always be less than the Death
Benefit, but will generally be greater than the Certificate's Cash Surrender
Value. Under some Group Contracts, the accelerated death benefit may be
discounted for interest. Prudential may charge a fee of up to $350 when we pay
an accelerated death benefit.
We will not pay an accelerated death benefit if you are required to elect it to
meet the claims of creditors or to obtain a government benefit. We can furnish
details about the amount of accelerated death benefit that is available to you.
Unless required by law, you can no longer request an increase in the Face Amount
of your Certificate once you have elected to receive an accelerated death
benefit.
The amount of future premium payments you can make will also be
limited.
Adding the Accelerated Death Benefit to your Certificate will not affect the way
you are taxed. This income tax exclusion may not apply if the benefit is paid to
someone other than the Participant. But, if you actually receive proceeds from
the Accelerated Death Benefit, it could have tax consequences and may affect
your eligibility for certain government benefits or entitlements. In general,
the accelerated
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death benefit is excluded from income if the Covered Person 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 tax advisor before you elect to
receive this benefit.
ACCIDENTAL DEATH AND DISMEMBERMENT BENEFIT. An Accidental Death and
Dismemberment Benefit provides you insurance for accidental loss of life, sight,
hand, or foot. This benefit excludes certain types of losses. For example,
losses due to suicide or attempted suicide, diseases and infirmities, medical or
surgical treatments, and acts of war are not covered. The benefit may be subject
to other exclusions from coverage, age limitations, and benefit limitations. You
should refer to your Certificate and the Group Contract to learn the details of
any benefit that may be available to you.
EXTENDED DEATH PROTECTION DURING TOTAL DISABILITY. An extended death benefit
provides protection during your total disability. Under this provision, even if
your insurance would have ended because of your total disability, Prudential
will extend your insurance coverage if you became totally disabled prior to age
60. The amount of insurance that will be extended is your Face Amount of
insurance. We will extend your insurance coverage for successive one-year
periods, generally until age 65. You must provide satisfactory proof of
continued total disability.
DEPENDENT LIFE BENEFITS. Dependent life benefits provide insurance on the life
of a qualified dependent. A qualified dependent may be the Participant's spouse
and/or unmarried child.
SEAT BELT COVERAGE. Seat belt coverage provides a death benefit for the loss of
life while driving or riding in a motor vehicle while wearing a seat belt.
"Motor vehicle" means a private automobile, van, four-wheel drive vehicle,
self-propelled motor home and truck. It does not mean a motor vehicle used for
farming, military, business, racing, or any other type of competitive speed
event. Certain exclusions will apply.
REPORTS
At least once each Certificate Year, Prudential will send you a statement that
gives you certain information about your insurance. These statements will give
you details about the value of your Certificate Fund, about transactions that
you made, and specific insurance data about your coverage.
If you make a request, we will also send you a current statement about your
insurance. It will give you the same kind of information as the annual statement
does. We may limit the number of current statements you may request or may
charge you for additional statements. Any such charge will not exceed $20 for an
additional report.
We will also send to you and to the Group Contractholder, annual and semi-annual
reports that list the securities held in each available portfolio of the Funds.
The federal securities laws require these reports. Prudential keeps records
about the Separate Account according to the federal securities laws.
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If you invest in the Series Fund through more than one variable insurance
contract, you will receive only one copy of each annual and semi-annual report
issued by the Series Fund. But, if you want another copy of a report, you may
ask us for one by calling the telephone number listed on the inside cover page
of this prospectus.
SALE OF THE CONTRACT AND SALES COMMISSIONS
Prudential Investment Management Services LLC (referred to as "PIMS") acts as
the principal underwriter of the Group Contracts and Certificates. PIMS is a
direct, wholly-owned subsidiary of Prudential.
PIMS, organized in 1996 under Delaware law, is registered as a broker-dealer
under the federal securities laws. PIMS is also a member of the National
Association of Securities Dealers, Inc. PIMS's principal business address is 751
Broad Street, Newark, New Jersey 07102. PIMS also acts as principal underwriter
with respect to the securities of other Prudential investment companies.
The Group Contracts and Certificates are sold by persons who are registered
representatives of PIMS and who are also authorized by state insurance
departments. The Group Contracts and Certificates may also be sold through other
broker-dealers authorized by PIMS and applicable law to do so. Registered
representatives of such other broker-dealers may be paid on a different basis
than the basis described below.
The maximum commission that Prudential will pay to the representative upon the
purchase of the Contract is 15% of the premium payment received. The amount
Prudential will pay to the broker-dealer to cover both the individual
representative's commission and other distribution expenses will not exceed 15%
of the premium payment. Prudential may require the representative to return all
of the first year commission if the Group Contract is not continued through the
first year. Sales representatives who meet certain productivity, profitability,
and persistency standards with regard to the sale of the Group Contract will be
eligible for additional bonus compensation from Prudential. Generally,
Prudential will pay PIMS a commission of no more than 15% of the premium
payment. The commission and distribution percentages will depend on factors such
as the size of the group involved and the amount of sales and administrative
effort required in connection with the particular Group Contract. In total, they
will not exceed 15% of the premium payment.
The distribution agreement between PIMS and Prudential will terminate
automatically upon its assignment (as that term is defined in the federal
securities laws). But, PIMS may transfer the agreement, without the prior
written consent of Prudential, under the circumstances set forth in the federal
securities laws. Either party may terminate the agreement at any time if the
party gives 60 days' written notice to the other party.
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Sales expenses in any year are not equal to the sales charge in that year.
Prudential may not recover its total sales expenses for some or all Group
Contracts over the periods the Certificates for such Group Contracts are in
effect. To the extent that the sales charges are insufficient to cover total
sales expenses, the sales expenses will be recovered from Prudential's surplus,
which may include amounts derived from the mortality and expense risk charge and
the monthly cost of insurance charge. See the CHARGES AND EXPENSES section on
page 65.
RATINGS AND ADVERTISEMENTS
Independent financial rating services - including Moody's, Standard & Poors,
Duff & Phelps and A.M. Best Company - rate Prudential. These ratings reflect our
financial strength and claims-paying ability. They are not intended to rate the
investment experience or financial strength of the Separate Account. We may
advertise these ratings from time to time. Furthermore, we may include in
advertisements comparisons of currently taxable and tax-deferred investment
programs, based on selected tax brackets, or discussions of alternative
investment vehicles and general economic conditions.
SERVICES PERFORMED BY THIRD PARTIES
Throughout this prospectus, we describe how Prudential and the Group
Contractholder will perform transactions with you and how you will perform
transactions with them. Prudential has the right to ask another party (referred
to as a "third party") to perform or receive transactions in its place. The
Group Contractholder has the same right. That means that, for a particular Group
Contract, you may conduct transactions via a third party rather than directly
with Prudential or the Group Contractholder.
In some cases, the third party might be another part of Prudential. (For
example, when you make premium payments to Prudential, they could be received by
Prudential Mutual Fund Services, Inc., a wholly-owned subsidiary of Prudential).
In other cases, the third party might be a third party administrator or even the
group that sponsors the Group Contract.
Prudential may make payments to third party administrators or groups sponsoring
the Group Contracts for their services related to administration and sponsorship
of the Group Contracts.
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. We
reserve the right to change the Group Contract and Certificate to comply with
applicable state insurance laws and interpretations thereof.
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We are required to submit annual statements of our operations, including
financial statements, to the insurance departments of the various jurisdictions
in which we do business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, we are required to file
with New Jersey and other jurisdictions a separate statement with respect to the
operations of all our variable contract accounts, in a form promulgated by the
National Association of Insurance Commissioners.
EXPERTS
The consolidated financial statements of Prudential and Subsidiaries as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 and the financial statements of the Separate Account as of
December 31, 1998 and for the period July l, 1998 through December 31, 1998
included in this registration statement have been so included in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants given on the
authority of said firm as experts in auditing and accounting.
PricewaterhouseCoopers LLP's principal business address is 1177 Avenue of the
Americas, New York, New York 10036.
Actuarial matters included in this prospectus have been examined by Stuart L.
Liebeskind, FSA, MAAA, Vice President and Actuary 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. The Supreme Court denied certiorari in January
1999, thereby making final the approval of the class action settlement.
Pursuant to the Settlement, Prudential agreed to provide and has been
implementing 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, 1998, based on an analysis of claims
actually remedied, a sample of claims still to be remedied, and estimates of
additional liabilities associated with the ADR program, management estimated the
cost, before taxes, of remedying policyholder claims in the ADR process to be
approximately $2.56 billion. While management believes
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these to be reasonable estimates based on available information, the ultimate
amount of the total cost of remedied policyholder claims and other related costs
is dependent on complex and varying factors, including the relief options still
to be chosen by claimants, the dollar value of those options, and the number and
type of claims that may successfully be appealed.
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.
Prudential's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted with precision. 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 the matters specifically discussed above.
Management believes, however, that the ultimate resolution of all such matters,
after consideration of applicable reserves, should not have a material adverse
effect on Prudential's financial position.
THE YEAR 2000 ISSUE
The services provided to a Group Contractholder or Participant of Group Variable
Universal Life depend on the smooth functioning of numerous computer systems.
Many computer systems in use today are programmed to recognize only the last two
digits of a date as the year. As a result, any systems using this kind of
programming can not distinguish a date using "00" and may treat it as "1900"
instead of "2000." This problem may impact computer systems that store business
information, but it could also affect other equipment used in our business like
telephones, fax machines and elevators. If this problem is not corrected, the
"Year 2000" issue could affect the accuracy and integrity of business records.
Prudential's regular business operations could be interrupted as well as those
of other companies that deal with us.
In addition, the operations of the mutual funds associated with Group Variable
Universal Life could experience problems resulting from the Year 2000 issue.
Please refer to the respective mutual fund's prospectus for information
regarding their approach to Year 2000 concerns. The following describes
Prudential's effort to address Year 2000 concerns.
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To address this potential problem Prudential organized its Year 2000 efforts
around the following three areas:
o BUSINESS SYSTEMS - Computer programs directly used to support our
business;
o INFRASTRUCTURE - Computers and other business equipment like
telephones and fax machines; and
o BUSINESS PARTNERS - Year 2000 readiness of essential business
partners.
BUSINESS SYSTEMS. The business systems component includes a wide range of
computer programs that directly support Prudential's business operations
including systems for: insurance product processing, securities trading,
personnel record keeping and general accounting systems. All business systems
were analyzed to determine whether each computer program with a Year 2000
problem should be retired, replaced or renovated. The majority of this work has
been completed. A few remaining programs are currently being tested and
completion of this process is expected by June 1999.
INFRASTRUCTURE. As with business applications, we established a specific
methodology and process for addressing infrastructure issues. The infrastructure
effort includes mainframe computer system hardware and operating system
software, mid-range systems and servers, telecommunications equipment and
systems, buildings and facilities systems, personal computers, and vendor
hardware and software. Other than desktop systems, substantially all other
infrastructure systems have been tested. Presently a small number of midrange
computers, and building and facility systems are still in the testing phase. We
expect to have the infrastructure implementation process completed by June 1999.
BUSINESS PARTNERS. Prudential recognizes the importance of determining the Year
2000 readiness of external business relationships especially those that involve
electronic data transfer products and services, and products that impact our
essential business processes. Prudential first classified each business partner
as "highly critical" or "less critical" to our business and then began to
develop risk assessment and contingency plans to address the potential that a
business partner could experience a Year 2000 failure. All highly critical
business partner relationships have been assessed and contingency planning is
completed. Risk assessment and contingency planning continues for less critical
business partners, and the target completion date for these relationships is
June 1999.
Prudential believes that the Business Application, Infrastructure and Business
Partners components of the Year 2000 project are substantially on schedule. A
small number of the projects may not meet their targeted completion date.
However, Prudential expects that these projects will be completed by September
1999. If there are any delays, they should not have a significant impact on the
timing of the project as a whole.
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THE COST OF YEAR 2000 READINESS
Prudential is funding the Year 2000 program from internal operating budgets, and
estimates that its costs to address the Year 2000 issue will total approximately
$220 million. Because these expenses were part of the operating budget, they did
not impact the management of Group Variable Universal Life. During the course of
the Year 2000 program, some optional computer projects have been delayed, but
these delays have not had any material effect on Group Variable Universal Life.
YEAR 2000 RISKS AND CONTINGENCY PLANNING
Prudential believes that it is well positioned to lessen the impact of the Year
2000 problem. However, given the nature of this issue, we can not be 100%
certain that we are completely prepared, particularly because we can not be
certain of Year 2000 readiness of third parties. As a result, we are unable to
determine at this time whether the consequences of Year 2000 failures may have a
material adverse effect on the results of Prudential's operations, liquidity or
financial condition. In the worst case, it is possible that a Year 2000
technology failure, whether internal or external, could have a material impact
on Prudential's results of operations, liquidity, or financial position. If
Prudential is unable to address the Year 2000 problem, we may have difficulty in
responding to your incoming phone calls, calculating your unit values or
processing withdrawals and purchase payments. It is also possible that the
mutual funds associated with Group Variable Universal Life will be unable to
value their securities, in turn creating difficulties in purchasing or selling
shares of the respective mutual fund and calculating corresponding unit asset
values. The objective of Prudential's Year 2000 program has been to reduce these
risks as much as possible.
Most of the operations of Group Variable Universal Life involve such a large
number of individual transactions that they can only be handled with the help of
computers. As a result, our current contingency plans include responses to the
failure of specific business programs or infrastructure components. However, our
contingency responses are now being reviewed and we expect to finalize them by
June, 1999 to ensure that they are workable under the special conditions of a
Year 2000 failure. Prudential believes that with the completion of its Year 2000
program as scheduled, the possibility of significant interruptions of normal
operations will be reduced.
SUBSEQUENT EVENTS
On December 10, 1998, Prudential 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 Prudential HealthCare Health Maintenance
Organization (HMO), Point of Service (POS), Preferred Provider Organization
(PPO), and indemnity health lines, as well as its dental business.
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DEFINITIONS OF SPECIAL TERMS
USED IN THIS PROSPECTUS
ATTAINED AGE -- Your age as defined by the Group Contract.
BUSINESS DAY -- A day on which the New York Stock Exchange is open for trading.
CASH SURRENDER VALUE -- The amount you receive upon surrender of the
Certificate. The Cash Surrender Value is equal to your Certificate Fund on the
date of surrender, less any Certificate Debt, outstanding charges, and any
applicable transaction charge.
CERTIFICATE -- A document issued to you, as a Participant under a Group
Contract, setting forth or summarizing your rights and benefits.
CERTIFICATE ANNIVERSARY -- The same date each year as the Certificate Date.
CERTIFICATE DATE -- The effective date of coverage under a Certificate.
CERTIFICATE DEBT -- The principal amount of any outstanding loans you borrowed
under your Certificate plus any accrued interest.
CERTIFICATE FUND -- The total amount credited to you under your Certificate. On
any date it is equal to the sum of the amounts under that Certificate allocated
to: (1) the Subaccounts, (2) the Fixed Account, and (3) the Loan Account.
CERTIFICATE YEAR -- The year from the Certificate Date to the first Certificate
Anniversary or from one Certificate Anniversary to the next.
CONTRACT ANNIVERSARY -- The same date each year as the Contract Date.
CONTRACT DATE -- The date as of which the Group Contract is issued.
COVERED PERSON -- The person whose life is insured under the Group Contract. The
Covered Person is generally the Participant. Some Group Contracts may permit a
Participant to apply for insurance under a second Certificate naming the
Participant's spouse as the Covered Person.
DEATH BENEFIT -- The amount payable upon the death of the Covered Person (before
the deduction of any Certificate Debt or any outstanding charges).
DIVIDEND -- A portion of Prudential's divisible surplus attributable to the
Group Contract that may be credited to the Group Contract as determined annually
by Prudential's Board of Directors.
ELIGIBLE GROUP MEMBERS -- The persons specified in the Group Contract as
eligible to apply for insurance protection under the Group Contract.
EXPERIENCE CREDIT -- A refund that Prudential may provide under certain Group
Contracts based on favorable experience.
FACE AMOUNT -- The amount of life insurance in your Certificate. The Face
Amount, along with your Certificate Fund are each parts of your Death Benefit.
FIXED ACCOUNT -- An investment option under which Prudential guarantees that
interest will be added to the amount deposited at a rate we declare
periodically.
FUNDS -- The Series Fund portfolios and other mutual fund portfolios in which
the Separate Account invests. Your investment options include the Funds and the
Fixed Account.
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GROUP CONTRACT -- A Group Variable Universal Life insurance contract that
Prudential issues to the Group Contractholder. The term Group Contract also
includes a participating employer's participation in a multi-employer trust.
GROUP CONTRACTHOLDER -- The employer, association, sponsoring organization or
trust that is issued a Group Contract. In the case of an employer that joins a
multiple employer trust, the employer exercises the rights accorded to a Group
Contractholder as described throughout this prospectus.
GUIDELINE ANNUAL PREMIUM -- A level annual premium that would be payable
throughout the duration of a Certificate to fund the future benefits if the
Certificate were a fixed premium contract, based on certain assumptions set
forth in a rule of the SEC. Upon request, Prudential will advise you of the
guideline annual premium under the Certificate.
ISSUE AGE -- The Covered Person's Attained Age on the date that the insurance on
that Covered Person goes into effect as defined by the Group Contract.
LOAN ACCOUNT -- An account within Prudential's general account to which we
transfer from the Separate Account and/or the Fixed Account an amount equal to
the amount of any loan.
LOAN VALUE -- The amount (before any applicable transaction charge) that you may
borrow at any given time under your Certificate. We calculate the Loan Value by
multiplying the Certificate Fund by 90% (or higher where required by state law)
and then subtracting any existing loan with accrued interest, outstanding
charges, and the amount of the next month's charges.
MODIFIED ENDOWMENT CONTRACT -- A type of life insurance contract or Certificate
under the Internal Revenue Code which has been funded in excess of certain IRS
limits. Less favorable tax rules, and in some cases a penalty tax, apply if you
take distributions (such as withdrawals, loans or assignments) from a MEC.
Regardless of classification as a MEC, cash value accrues on a tax deferred
basis and the Death Benefit is generally received free of income tax. See the
TAX TREATMENT OF CERTIFICATE BENEFITS section for a more complete description of
the MEC rules.
MONTHLY DEDUCTION DATE -- Generally, the Contract Date and the first day of each
succeeding month, except that whenever the Monthly Deduction Date falls on a
date other than a Business Day, the Monthly Deduction Date will be the next
Business Day. Some Group Contracts may define Monthly Deduction Date slightly
differently, in which case a supplement to this prospectus will define Monthly
Deduction Date.
NET PREMIUM -- Your premium payment minus any charges for taxes attributable to
premiums, any processing fee, and any sales charge. Net Premiums are the amounts
that we allocate to the Separate Account and/or the Fixed Account.
PAID-UP COVERAGE -- This type of life insurance coverage pays a Death Benefit of
a specific amount that does not change. You make one initial premium payment to
begin the coverage and never make any additional payments.
PARTICIPANT -- An Eligible Group Member or "applicant owner" under a Group
Contract who obtains insurance under the Group Contract and is eligible to
exercise the rights described in the
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Certificate. The Participant will be the person entitled to exercise all rights
under a Certificate, regardless of whether the Covered Person under the
Certificate is the Participant or his or her spouse. We refer to Participants as
"you" in this prospectus. If you validly assign your rights as a Participant to
someone else, then that person may exercise those rights.
PORTABLE -- Under some Group Contracts, you may continue your insurance coverage
even if you are no longer an Eligible Group Member. This type of insurance
coverage is called Portable. Cost of insurance rates and charges may increase
under a Portable Certificate since the Covered Person under a Portable
Certificate may no longer be considered to be a member of the Group
Contractholder's group for purposes of determining those rates and charges.
SEPARATE ACCOUNT -- Prudential Variable Contract Account GI-2, a separate
investment account registered as a unit investment trust under the federal
securities laws and established by Prudential to receive some or all of the Net
Premiums and to invest them in the Funds.
SERIES FUND -- The Prudential Series Fund, Inc., a mutual fund with separate
portfolios, some of which are available as investment options for the Group
Contract.
SUBACCOUNT -- A division of the Separate Account. Each Subaccount invests its
assets in the shares of a corresponding Fund.
WE -- The Prudential Insurance Company of America.
YOU -- A Participant.
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DIRECTORS AND OFFICERS OF PRUDENTIAL
DIRECTORS OF PRUDENTIAL
FRANKLIN E. AGNEW--Director since 1994 (current term expires April, 2000).
Member, Committee on Finance & Dividends; Member, Corporate Governance
Committee. Business consultant since 1986 Senior Vice President, H.J. Heinz from
1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb, Inc. and Erie
Plastics Corporation. Age 64. Address: 600 Grant Street, Suite 660, Pittsburgh,
PA 15219.
FREDERICK K. BECKER--Director since 1994 (current term expires April, 2005).
Member, Auditing Committee; Member, Corporate Governance Committee. President,
Wilentz Goldman and Spitzer, P.A. (law firm) since 1989, with firm since 1960.
Age 63. Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
GILBERT F. CASELLAS--Director since 1998 (current term expires April, 2003).
Member, Compensation Committee. President, The Swarthmore Group, Inc. since
1999. Partner, McConnell Valdes, LLP in 1998. Chairman, U.S. Equal Employment
Opportunity Commission from 1994 to 1998. Age 46. Address: 1646 West Chester
Pike, Suite 3, West Chester, PA 19382.
JAMES G. CULLEN--Director since 1994 (current term expires April, 2001). Member,
Compensation Committee; Member, Committee on Business Ethics. President & Chief
Operating Officer, Bell Atlantic Corporation, since 1998. President & Chief
Executive Officer, Telecom Group, Bell Atlantic Corporation, from 1997 to 1998.
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 56. Address: 1310 North Court
House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS--Director since 1989 (current term expires April, 2001).
Member, Committee on Business Ethics; Member, Compensation Committee.
Independent Health Care Advisor since 1997. National and International Health
Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr. Davis is also a director
of Beckman Coulter Instruments, Inc., Merck & Co., Inc., Minimed Incorporated,
and Beverley Enterprises. Age 67. 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. Mr.
Enrico originally joined PepsiCo, Inc. in 1971. Mr. Enrico is also a director of
A.H. Belo Corporation and Dayton Hudson Corporation. Age 54. Address: 700
Anderson Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR--Director since 1995 (current term expires April, 2003).
Member, Investment Committee; Member, Committee on Finance & Dividends. Retired
since 1995. Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr. Gilmour
originally joined Ford in 1960. Mr.
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Gilmour is also a director of Whirlpool Corporation, MeidiaOne Group, Inc., AP
Automotive Systems, Inc., The Dow Chemical Company, and DTE Energy Company. Age
64. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
WILLIAM H. GRAY, III--Director since 1991 (current term expires April, 2000).
Chairman, Committees on Nominations & Corporate Governance. Member, Executive
Committee; Member, Committee on Business Ethics. 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, CBS Corporation, and
Electronic Data Systems. Age 57. Address: 8260 Willow Oaks Corp. Drive, Fairfax,
VA 22031-4511.
JON F. HANSON--Director since 1991 (current term expires April, 2003). Member,
Investment Committee; Member, Committee on Business Ethics. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of James E. Hanson
Management Company, Neumann Distributors, Inc., Fleet Trust and Investment
Services Company, N.A., United Water Resources, Orange & Rockland Utilities,
Inc., and Consolidated Delivery and Logistics. Age 62. 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 and Owens Corning. Age 64. Address: One Owens Corning Parkway,
Toledo, OH 43659.
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 56. 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. Chairman and Chief Executive
Officer, The Perkin Elmer Corporation from 1990 to 1996. Mr. Kelley is also a
director of Hercules Incorporated and Alliant Techsystems. Age 67. Address: 751
Broad Street, 23rd Floor, Newark, NJ 07102-3777.
BURTON G. MALKIEL--Director since 1978 (current term expires April, 2002).
Chairman, Investment Committee; Member, Executive Committee; Member, Committee
on Finance & 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 66. Address: Princeton University, 110
Fisher Hall, Prospect Avenue, Princeton, NJ 08544-1021.
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ARTHUR F. RYAN--Chairman of the Board, President and Chief Executive Officer of
Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
Bank from 1990 to 1994, with Chase since 1972. Age 56. Address: 751 Broad
Street, Newark, NJ 07102.
IDA F.S. SCHMERTZ--Director since 1997 (current term expires April, 2004).
Member, Audit Committee. Principal, Investment Strategies International since
1994. Age 64. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
CHARLES R. SITTER--Director since 1995 (current term expires April, 2003).
Member, Committee on Finance & Dividend; Member, Investment Committee. Retired
since 1996. President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his
career with Exxon in 1957. Age 68. Address: 5959 Las Colinas Boulevard, Irving,
TX 75039-2298.
DONALD L. STAHELI--Director since 1995 (current term expires April, 2003).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1996.
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, Conti-Financial
Corporation and Continental Grain Company. Age 67. 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. Retired since
1998. Chairman of the Board, The Toronto-Dominion Bank from 1997 to 1998.
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, Canadian Occidental Petroleum, Ltd., The Toronto-Dominion Bank, and
Ontario Hydro. 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,
Committees on Nominations & Corporate Governance; Member, Investment Committee.
Retired since 1997. Chairman and Chief Executive Officer, Unisys Corporation,
from 1990 to 1997. Mr. Unruh is also a director of Ameritech Corporation and
Moss Micro. Age 57. Address: 751 Broad Street, Newark, NJ 07102-3777.
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, Advanced Medicines, Inc. since 1997. Chairman, Chief Executive
Officer and President, Merck & Co., Inc. from 1986 to 1995. Dr. Vagelos
originally joined Merck in 1975. Dr. Vagelos is also a director of The Estee
Lauder Companies, Inc. and PepsiCo., Inc. Age 69. Address: One Crossroads Drive,
Building A, 3rd Floor, Bedminster, NJ 07921.
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STANLEY C. VAN NESS--Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Executive Committee; Member,
Auditing Committee. Partner, Herbert, Van Ness, Cayci & Goodell (law firm) since
1998. Counselor at Law, Picco Herbert Kennedy (law firm) from 1990 to 1998. Mr.
Van Ness is also a director of Jersey Central Power & Light Company. Age 64.
Address: 22 Chambers Street, Princeton, NJ 08542.
PAUL A. VOLCKER--Director since 1988 (current term expires April, 2000).
Chairman, Committee on Finance & Dividends; Member, Executive Committee; Member,
Committee on Nominations & Corporate Governance. Consultant since 1997.
Chairman, Wolfensohn & Co., Inc. 1988 to 1996. Chairman, James D. Wolfensohn,
Inc. 1988 to 1996. Chief Executive Officer, James D. Wolfensohn, Inc. from 1995
to 1996. Mr. Volcker is also a director of Nestle, S.A. and Bankers Trust New
York Corporation, as well as a Director of the Board of Overseers of TIAA-CREF.
Age 71, Address: 610 Fifth Avenue, Suite 420, New York, NY 10020.
JOSEPH H. WILLIAMS--Director since 1994 (current term expires April, 2002).
Member, Committee on Finance & Dividends; Member, Investment Committee.
Director, The Williams Companies since 1979. Chairman & Chief Executive Officer,
The Williams Companies from 1979 to 1993. Mr. Williams is also a director of The
Orvis Company, MTC Investors, LLC., and AEA Investors, Inc. Age 64. Address: One
Williams Center, Tulsa, OK 74102.
PRINCIPAL OFFICERS OF PRUDENTIAL
ARTHUR F. RYAN--Chairman of the Board, President and Chief Executive Officer
since 1994; prior to 1994, President and Chief Operating Officer, Chase
Manhattan Corporation. Age 56.
E. MICHAEL CAULFIELD--Executive Vice President, Financial Management since 1998;
Chief Executive Officer, Prudential Investments from 1995 to 1998; Chief
Executive Officer, Money Management Group in 1995; prior to 1995, President,
Prudential Preferred Financial Services. Age 52.
MICHELE S. DARLING--Executive Vice President, Human Resources since 1997; prior
to 1997, Executive Vice President, Canadian Imperial Bank of Commerce. Age 45.
ROBERT C. GOLDEN--Executive Vice President, Operations and Systems since 1997;
prior to 1997, Executive Vice President, Prudential Securities. Age 53.
MARK B. GRIER--Executive Vice President, Corporate Governance since 1998;
Executive Vice President, Financial Management from 1997 to 1998; Chief
Financial Officer from 1995 to 1997; prior to 1995, Executive Vice President,
Chase Manhattan Corporation. Age 46.
JEAN D. HAMILTON--Executive Vice President, Institutional since 1998; President,
Diversified Group since 1995 to 1998; prior to 1995, President, Prudential
Capital Group. Age 52.
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RODGER A. LAWSON--Executive Vice President, International Investments & Global
Marketing since 1998; Executive Vice President, Marketing and Planning from 1996
to 1998; President and CEO, Van Eck Global, from 1994 to 1996; prior to 1994,
President and CEO, Global Private Banking, Bankers Trust Company. Age 52.
KIYOFUMI SAKAGUCHI--Executive Vice President, International Insurance since
1998; President, International Insurance Group from 1995 to 1998; prior to 1995,
Chairman and CEO, The Prudential Life Insurance Co., Ltd. Age 56.
JOHN V. SCICUTELLA--Executive Vice President, Individual Financial Services
since 1998; Chief Executive Officer, Individual Insurance Group from 1997 to
1998; Executive Vice President Operations and Systems from 1995 to 1997; prior
to 1995, Executive Vice President, Chase Manhattan Corporation. Age 49.
JOHN R. STRANGFELD--Executive Vice President, Global Asset Management since
1998; Chief Executive Officer, Private Asset Management Group (PAMG) from 1996
to 1998; President, PAMG, from 1994 to 1996; prior to 1994, Senior Managing
Director. Age 45.
JAMES J. AVERY, JR.--Senior Vice President & Chief Actuary, Individual Insurance
Group since 1997; President Prudential Select from 1996 to 1997; prior to 1995,
Executive Vice President and Chief Operating Officer, Prudential Select. Age 47.
MARTIN A. BERKOWITZ--Senior Vice President, Financial Management since 1998;
Senior Vice President and Comptroller from 1995 to 1998; prior to 1995, Senior
Vice President and CFO, Prudential Investment Corporation. Age 50.
WILLIAM M. BETHKE--Senior Vice President and Chief Investment Officer since
1997; prior to 1997, President, Capital Management Group. Age 51.
ANNE E. BOSSI--Senior Vice President, Institutional since 1998; President, Group
Life & Disability 1997 to 1998; President, Group Life Insurance 1995 to 1997;
prior to 1995, President, Northeastern Group Operations. Age 47.
RICHARD J. CARBONE--Senior Vice President and Chief Financial Officer since
1997; Controller, Salomon Brothers from 1995 to 1997; prior to 1995, Controller,
Bankers Trust. Age 51.
THOMAS J. CARROLL-- Senior Vice President and Chief Auditor since 1999; Managing
Director, Bankers Trust Company from 1996 to 1998; prior to 1996, Global Chief
Auditor and Managing Director, Credit Suisse First Boston. Age 57.
THOMAS W. CRAWFORD--Senior Vice President, Individual Financial Services since
1998; President and Chief Executive Officer, Prudential Property & Casualty
Company from 1996 to 1998;
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Vice President, Prudential Property & Casualty Company in 1996; prior to 1996,
President & CEO, Southern Heritage Insurance Company. Age 55.
WILLIAM D. FRIEL--Senior Vice President and Chief Information Officer since
1996; prior to 1996, Chief Executive Officer, Prudential Service Company. Age
60.
MICHAEL J. HINES--Senior Vice President, Marketing and Communications since
1999; 1996 to 1998 Vice President, Marketing and Communications. Age 47.
RONALD P. JOELSON--Senior Vice President, Financial Management since 1999;
Senior Vice President, Guaranteed Products from 1996 to 1999; Vice President,
Guaranteed Investments during 1996; prior to 1996, Managing Director, Retirement
Services. Age 40.
IRA J. KLEINMAN--Senior Vice President, International Insurance since 1997;
prior to 1997, Chief Marketing & Product Development Officer. Age 51.
KATHLEEN KRALL--Senior Vice President, Individual Financial Services since 1999;
Vice President, Individual Financial Services from 1996 to 1999; Vice President,
Operations and Systems from 1995 to 1996; prior to 1995, Vice President, Chase
Manhattan Bank. Age 41.
JOYCE R. LEIBOWITZ--Senior Vice President, Management Internal Controls since
1999; Vice President, Management Internal Controls from 1995 to 1999; prior to
1995, Integrated Control Officer. Age 51.
JOHN M. LIFTIN--Senior Vice President and General Counsel since 1998;
Self-employed from 1997 to 1998; prior to 1997, Senior Vice President and
General Counsel, Kidder & Peabody Group, Inc. Age 55.
NEIL A. MCGUINNESS--Senior Vice President, Individual Financial Services since
1996; Director, Putnam Investments, in 1996; prior to 1996, President, Fidelity
Investment Employer Services Company. Age 52.
PRISCILLA A. MYERS--Senior Vice President, Demutualization since 1998; Senior
Vice President and Auditor from 1995 to 1998; prior to 1995, Vice President and
Auditor. Age 48.
I. EDWARD PRICE--Senior Vice President, Individual Financial Services since
1996; Senior Vice President and Actuary from 1995 to 1996; prior to 1995, Chief
Executive Officer, Prudential International Insurance. Age 56.
ROBERT J. SULLIVAN--Senior Vice President, Individual Financial Services since
1997; prior to 1997, Managing Director, Fidelity Investments. Age 60.
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SUSAN J. BLOUNT--Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 41.
C. EDWARD CHAPLIN--Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
ANTHONY S. PISZEL--Vice President and Controller since 1998; Vice President,
Enterprise Financial Management from 1997 to 1998; prior to 1997, Chief
Financial Officer, Individual Insurance Group. Age 44.
Prudential officers are elected annually.
106
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
STATEMENTS OF NET ASSETS
December 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY MARKET FLEXIBLE MANAGED STOCK INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------ ------------ ----------
ASSETS
<S> <C> <C> <C> <C>
Investment in The Prudential Series Fund, Inc.
Portfolios and non-Prudential administered
funds, at net asset value [Note 3] ..................... $ 231,517 $ 417,696 $ 1,404,003 $ 811,509
Accrued expenses payable to The Prudential
Insurance Company of America [Note 2] .................. (277) (509) (1,607) (970)
----------- ----------- ----------- -----------
Net Assets ............................................... $ 231,240 $ 417,187 $ 1,402,396 $ 810,539
=========== =========== =========== ===========
NET ASSETS, representing:
Equity of Participants ................................... $ 231,240 $ 417,187 $ 1,402,396 $ 810,539
----------- ----------- ----------- -----------
$ 231,240 $ 417,187 $ 1,402,396 $ 810,539
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A1
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ----------------------------------------------------------------------------------------
NEUBERGER & FRANKLIN
BERMAN KEMPER TEMPLETON
AMT LIMITED SERIES MFS DREYFUS FRANKLIN TEMPLETON DEVELOPING
MATURITY BOND HIGH YIELD RESEARCH SMALL CAP INTERNATIONAL MARKETS
PORTFOLIO PORTFOLIO SERIES PORTFOLIO FUND FUND
- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 159,827 $ 356,155 $ 891,261 $ 1,305,969 $ 387,597 $ 166,733
(193) (461) (1,026) (1,561) (499) (197)
- ----------- ----------- ----------- ----------- ----------- -----------
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
=========== =========== =========== =========== =========== ===========
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
- ----------- ----------- ----------- ----------- ----------- -----------
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A2
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
STATEMENTS OF OPERATIONS
For the period July 1, 1998* to December 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY MARKET FLEXIBLE MANAGED STOCK INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ---------------- ----------- ------
INVESTMENT INCOME:
<S> <C> <C> <C> <C>
Dividend income ........................................... $ 3,241 $ 5,648 $ 6,340 $ 5,495
--------- --------- --------- ---------
EXPENSES
Charges to Participants for assuming
mortality risk and expense risk [Note 5A] ............... 277 509 1,607 970
--------- --------- --------- ---------
NET INVESTMENT INCOME (LOSS) ................................ 2,964 5,139 4,733 4,525
--------- --------- --------- ---------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received ...................... 0 33,105 17,051 78,110
Realized gain (loss) on shares redeemed ................... 0 (1,147) (1,408) (2,032)
Net change in unrealized gain (loss)
on investments .......................................... 0 (12,978) 151,883 (41,420)
--------- --------- --------- ---------
NET GAIN ON INVESTMENTS ..................................... 0 18,980 167,526 34,658
--------- --------- --------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................. $ 2,964 $ 24,119 $ 172,259 $ 39,183
========= ========= ========= =========
*Commenced Operations
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A3
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -------------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER FRANKLIN TEMPLETON
AMT LIMITED SERIES MFS DREYFUS FRANKLIN TEMPLETON DEVELOPING
MATURITY BOND HIGH YIELD RESEARCH SMALL CAP INTERNATIONAL MARKETS
PORTFOLIO PORTFOLIO SERIES PORTFOLIO FUND FUND
- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0 $ 0 $ 0 $ 3 $ 0 $ 0
- --------- --------- --------- --------- --------- ---------
193 461 1,026 1,561 499 197
- --------- --------- --------- --------- --------- ---------
(193) (461) (1,026) (1,558) (499) (197)
- --------- --------- --------- --------- --------- ---------
0 0 0 15,555 0 0
7 (1,269) (1,568) (4,972) (1,543) (596)
1,200 2,494 115,832 123,615 14,401 22,483
- --------- --------- --------- --------- --------- ---------
1,207 1,225 114,264 134,198 12,858 21,887
- --------- --------- --------- --------- --------- ---------
$ 1,014 $ 764 $ 113,238 $ 132,640 $ 12,359 $ 21,690
========= ========= ========= ========= ========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A4
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
STATEMENTS OF CHANGES IN NET ASSETS
For the period July 1, 1998* to December 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY MARKET FLEXIBLE MANAGED STOCK INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ----------- -----------
1998 1998 1998 1998
----------- ----------- ----------- -----------
OPERATIONS
<S> <C> <C> <C> <C>
Net investment income (loss) ................................. $ 2,964 $ 5,139 $ 4,733 $ 4,525
Capital gains distributions received ......................... 0 33,105 17,051 78,110
Realized gain (loss) on shares redeemed ...................... 0 (1,147) (1,408) (2,032)
Net change in unrealized gain (loss) on investments .......... 0 (12,978) 151,883 (41,420)
----------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .................................... 2,964 24,119 172,259 39,183
----------- ----------- ----------- -----------
PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
Participant Net Payments .................................... 22,979 63,947 191,087 125,032
Policy Loans ................................................ (71) (3,208) (2,866) (149)
Policy Loan Repayments and Interest ......................... 0 2,147 2,205 2,005
Surrenders, Withdrawals and Death Benefits .................. 0 (1,089) (1,648) (1,301)
Net Transfers From (To) Other Subaccounts or
Fixed Rate Options ...................................... 205,368 331,276 1,041,359 645,774
Administrative and Other Charges ............................ 0 (5) 0 (5)
----------- ----------- ----------- -----------
TOTAL PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS ................................ 228,276 393,068 1,230,137 771,356
----------- ----------- ----------- -----------
TOTAL INCREASE IN NET ASSETS ................................... 231,240 417,187 1,402,396 810,539
NET ASSETS
Beginning of period .......................................... 0 0 0 0
----------- ----------- ----------- -----------
End of period ................................................ $ 231,240 $ 417,187 $ 1,402,396 $ 810,539
=========== =========== =========== ===========
</TABLE>
*Commenced Operations
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A5
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- --------------------------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER FRANKLIN TEMPLETON
AMT LIMITED SERIES MFS DREYFUS FRANKLIN TEMPLETON DEVELOPING
MATURITY BOND HIGH YIELD RESEARCH SMALL CAP INTERNATIONAL MARKETS
PORTFOLIO PORTFOLIO SERIES PORTFOLIO FUND FUND
- ----------- ----------- ----------- ----------- ----------- -----------
1998 1998 1998 1998 1998 1998
- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ (193) $ (461) $ (1,026) $ (1,558) $ (499) $ (197)
0 0 0 15,555 0 0
7 (1,269) (1,568) (4,972) (1,543) (596)
1,200 2,494 115,832 123,615 14,401 22,483
- ----------- ----------- ----------- ----------- ----------- -----------
1,014 764 113,238 132,640 12,359 21,690
- ----------- ----------- ----------- ----------- ----------- -----------
32,082 53,378 133,668 214,097 75,071 26,331
(4,183) (147) (161) (243) (328) (37)
210 0 2,032 0 0 0
0 (283) (1,701) (807) (237) 0
130,511 301,982 643,159 958,721 300,233 118,552
0 0 0 0 0 0
- ----------- ----------- ----------- ----------- ----------- -----------
158,620 354,930 776,997 1,171,768 374,739 144,846
- ----------- ----------- ----------- ----------- ----------- -----------
159,634 355,694 890,235 1,304,408 387,098 166,536
0 0 0 0 0 0
- ----------- ----------- ----------- ----------- ----------- -----------
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A6
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
December 31, 1998
NOTE 1: GENERAL
The Prudential Variable Contract Account GI-2 (the "Account") of
The Prudential Insurance Company of America ("Prudential") was
established on June 14, 1988 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 purchases of Group Variable Universal
Life 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 one hundred
thirty-six subaccounts within the Account. Group Variable Universal
Life contracts offer the option to invest in up to twenty of the
subaccounts, each of which invests in either a corresponding
portfolio of The Prudential Series Fund, Inc. (the "Series Fund")
or any of the non-Prudential administered funds shown in Note 3.
The Series Fund is a diversified open-end management investment
company, and is managed by Prudential.
The contracts are group insurance contracts and generally are
issued to either employers, associations, sponsoring organizations
or trusts. A person entitled to make contributions under the
contract is a "Participant."
Group Variable Universal Life insurance contracts became available
to Participants on July 1, 1998.
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 or the
non-Prudential administered funds 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 or
the non-Prudential administered funds and are recorded on the
ex-dividend date.
Accrued Expenses Payable to The Prudential Insurance Company of
America--The payable represents amounts due to Prudential for
mortality risk and expense risk charges.
NOTE 3: INVESTMENT INFORMATION FOR THE SUBACCOUNTS OF THE PRUDENTIAL
VARIABLE CONTRACT ACCOUNT GI-2
The net asset value per share for each (rounded) for each portfolio
of the Series Fund or the non-Prudential administered funds, 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, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------
<S> <C> <C> <C> <C>
Number of shares: .................. 23,152 25,222 37,202 27,382
Net asset value per share (rounded): $ 10.00 $ 16.56 $ 37.74 $ 29.64
Cost: .............................. $ 231,517 $ 430,674 $1,252,120 $ 852,929
</TABLE>
A7
<PAGE>
NOTE 3: INVESTMENT INFORMATION FOR THE SUBACCOUNTS OF THE PRUDENTIAL
VARIABLE CONTRACT ACCOUNT GI-2 (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
---------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Number of shares: 11,565 290,175 46,785 24,225
Net asset value per share (rounded): $ 13.82 $ 1.23 $ 19.05 $ 53.91
Cost: $ 158,627 $ 353,661 $ 775,429 $1,182,354
</TABLE>
SUBACCOUNTS (CONTINUED)
--------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------- ---------
Number of shares: 18,806 32,565
Net asset value per share (rounded): $ 20.61 $ 5.12
Cost: $373,196 $144,250
NOTE 4: PARTICIPANT UNIT INFORMATION
Outstanding Participant units, unit values and total value of
Participant equity at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Participant Units Outstanding: 22,672 40,582 127,123 80,739
Unit Value: $ 10.19956 $ 10.28010 $ 11.03184 $ 10.03902
---------- ---------- ---------- ----------
TOTAL PARTICIPANT EQUITY: $ 231,240 $ 417,187 $1,402,396 $ 810,539
========== ========== ========== ==========
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Participant Units Outstanding: 15,785 37,005 83,841 129,380
Unit Value: $ 10.11316 $ 9.61199 $ 10.61812 $ 10.08199
---------- ---------- ---------- ----------
TOTAL PARTICIPANT EQUITY: $ 159,634 $ 355,694 $ 890,235 $1,304,408
========== ========== ========== ==========
</TABLE>
A8
<PAGE>
NOTE 4: PARTICIPANT UNIT INFORMATION (CONTINUED)
SUBACCOUNTS (CONTINUED)
---------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------- --------
Participant Units Outstanding: 40,981 16,259
Unit Value: .................. $9.44570 $10.24261
-------- ---------
TOTAL PARTICIPANT EQUITY: .... $387,098 $ 166,536
======== =========
NOTE 5: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges, currently equal to
an effective annual rate of 0.45%, are applied daily against
the net assets representing equity of Participants in each
subaccount. This charge is guaranteed not to exceed an
effective annual rate of 0.90%. Mortality risk is that
Participants may not live as long as estimated and expense risk
is that the cost of issuing and administering the insurance may
exceed related charges by Prudential.
B. Transaction Related Charges
There may be charges, if applicable, associated with
surrenders, partial withdrawals, loans, transfers and requests
for additional statements as follows:
o Surrenders and partial withdrawals-- Not to exceed the
lesser of $20 or 2% of the amount received.
o Loans-- Not to exceed $20 for each loan made.
o Transfers-- Not to exceed $20 for each transfer, after
the twelfth transfer, in a period of generally 12 months
depending on the provisions of the contract.
o Additional statement requests related to a Participant's
insurance-- Not to exceed $20 per statement.
C. Cost of Insurance Charges
Participant's contributions may be subject to certain
deductions prior to being invested in the Account. The
deductions are for (1) state premium taxes, (2) transaction
costs which are deducted from each premium payment to cover
premium collection and processing costs and (3) sales charges
which are deducted in order to compensate Prudential for the
cost of selling the contract. Contracts are also subject to
monthly charges to compensate Prudential for the portion of the
face amount of insurance applicable to the Participant. In
addition, monthly charges may also be deducted to compensate
Prudential for costs related to administering the contract and
for additional insurance benefits, if applicable.
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.
A9
<PAGE>
NOTE 7: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) for
the period July 1, 1998* through December 31, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------- --------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Participant Contributions: 23,681 45,583 137,804 87,843
Participant Redemptions: (1,009) (5,001) (10,681) (7,104)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
------------------- --------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Participant Contributions: 17,321 40,569 90,308 143,602
Participant Redemptions: (1,536) (3,564) (6,467) (14,222)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------------------- -------------------
<S> <C> <C>
Participant Contributions: 45,363 17,730
Participant Redemptions: (4,382) (1,471)
</TABLE>
* Commenced Operations
A10
<PAGE>
NOTE 8: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of
investments in the Series Fund or the non-Prudential administered
funds for the period July 1, 1998* through December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
--------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Purchases: $ 238,485 $ 441,301 $1,333,505 $ 837,735
Sales: $ (10,210) $ (48,234) $ (103,368) $ (66,378)
<CAPTION>
PORTFOLIOS (CONTINUED)
---------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Purchases: $ 174,083 $ 387,952 $ 836,499 $1,296,655
Sales: $ (15,463) $ (33,022) $ (59,503) $ (124,887)
<CAPTION>
PORTFOLIOS (CONTINUED)
-----------------------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------------- ---------------
<S> <C> <C>
Purchases: $ 413,671 $ 157,961
Sales: $ (38,932) $ (13,115)
</TABLE>
* Commenced operations
A11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Participants of the
Prudential Variable Contract Account GI-2
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 (Prudential Money
Market Portfolio, Prudential Flexible Managed Portfolio, Prudential Stock Index
Portfolio, Prudential Equity Portfolio, Neuberger & Berman AMT Limited Maturity
Bond Portfolio, Kemper Series High Yield Portfolio, MFS Research Series, Dreyfus
Small Cap Portfolio, Franklin Templeton International Fund and Franklin
Templeton Developing Markets Fund) of the Prudential Variable Contact Account
GI-2 at December 31, 1998, and the results of each of their operations and the
changes in each of their net assets for the period July 1, 1998 through December
31, 1998, 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 audit. We conducted our audit 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 audit, which included
confirmation of fund shares owned at December 31, 1998, provides a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 26, 1999
A12
<PAGE>
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT ACCOUNTANTS
DECEMBER 31, 1998 AND 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 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 audits. 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.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
2
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1998 AND 1997 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1998: $76,997; 1997: $71,496) $ 80,158 $ 75,270
Held to maturity, at amortized cost (fair value, 1998: $17,906; 1997: $19,894) 16,848 18,700
Trading account assets, at fair value 8,888 6,347
Equity securities, available for sale, at fair value (cost, 1998: $2,583; 1997: $2,376) 2,759 2,810
Mortgage loans on real estate 16,495 16,004
Investment real estate 801 1,519
Policy loans 7,476 7,034
Securities purchased under agreements to resell 10,252 8,661
Cash collateral for borrowed securities 5,622 5,047
Other long-term investments 2,658 2,489
Short-term investments 9,781 12,106
--------- ---------
Total investments 161,738 155,987
Cash 1,943 1,859
Accrued investment income 1,795 1,909
Broker-dealer related receivables 10,142 8,442
Deferred policy acquisition costs 6,462 6,083
Other assets 15,721 11,452
Separate Account assets 81,621 73,839
--------- ---------
TOTAL ASSETS $ 279,422 $ 259,571
========= =========
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits $ 69,129 $ 67,367
Policyholders' account balances 30,974 33,246
Unpaid claims and claim adjustment expenses 3,860 4,864
Policyholders' dividends 1,444 1,269
Securities sold under agreements to repurchase 21,486 12,347
Cash collateral for loaned securities 7,132 14,117
Income taxes payable 785 500
Broker-dealer related payables 6,530 3,338
Securities sold but not yet purchased 5,771 3,648
Other liabilities 16,169 14,659
Short-term debt 10,082 6,774
Long-term debt 4,734 4,273
Separate Account liabilities 80,931 73,451
--------- ---------
Total liabilities 259,027 239,853
--------- ---------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 16)
EQUITY
Accumulated other comprehensive income 1,232 1,661
Retained earnings 19,163 18,057
--------- ---------
Total equity 20,395 19,718
--------- ---------
TOTAL LIABILITIES AND EQUITY $ 279,422 $ 259,571
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums $ 9,024 $ 9,005 $ 9,999
Policy charges and fee income 1,462 1,434 1,490
Net investment income 9,520 9,456 9,461
Realized investment gains, net 2,630 2,168 1,128
Commissions and other income 4,451 4,481 4,512
-------- -------- --------
Total revenues 27,087 26,544 26,590
-------- -------- --------
BENEFITS AND EXPENSES
Policyholders' benefits 9,976 10,076 11,094
Interest credited to policyholders' account balances 1,806 2,044 2,251
Dividends to policyholders 2,478 2,422 2,339
General and administrative expenses 9,720 8,992 8,956
Sales practices remedies 510 1,640 410
-------- -------- --------
Total benefits and expenses 24,490 25,174 25,050
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,597 1,370 1,540
-------- -------- --------
Income taxes
Current 1,185 101 556
Deferred (215) 306 (376)
-------- -------- --------
970 407 180
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 1,627 963 1,360
-------- -------- --------
DISCONTINUED OPERATIONS
Loss from Healthcare operations, net of taxes (298) (353) (282)
Loss on disposal of Healthcare operations, net of taxes (223) -- --
-------- -------- --------
Net loss from discontinued operations (521) (353) (282)
-------- -------- --------
NET INCOME $ 1,106 $ 610 $ 1,078
======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED OTHER COMPREHENSIVE INCOME
------------------------------------------------------
FOREIGN NET TOTAL
CURRENCY UNREALIZED PENSION ACCUMULATED OTHER
TRANSLATION INVESTMENT LIABILITY COMPREHENSIVE RETAINED TOTAL
ADJUSTMENTS GAINS ADJUSTMENT INCOME EARNINGS EQUITY
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ (24) $ 2,397 $ -- $ 2,373 $ 16,369 $ 18,742
Comprehensive income (loss):
Net income 1,078 1,078
Other comprehensive income (loss), net of tax:
Change in foreign currency translation
adjustments (32) (32) (32)
Change in net unrealized investment gains (1,261) (1,261) (1,261)
Additional pension liability adjustment (4) (4) (4)
--------
Other comprehensive income (loss) (1,297)
--------
Total comprehensive income (loss) (219)
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 (56) 1,136 (4) 1,076 17,447 18,523
Comprehensive income:
Net income 610 610
Other comprehensive income (loss), net of tax:
Change in foreign currency translation
adjustments (29) (29) (29)
Change in net unrealized investment gains 616 616 616
Additional pension liability adjustment (2) (2) (2)
--------
Other comprehensive income 585
--------
Total comprehensive income 1,195
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 (85) 1,752 (6) 1,661 18,057 19,718
Comprehensive income:
Net income 1,106 1,106
Other comprehensive income, net of tax:
Change in foreign currency translation
adjustments 54 54 54
Change in net unrealized investment gains (480) (480) (480)
Additional pension liability adjustment (3) (3) (3)
--------
Other comprehensive income (429)
--------
Total comprehensive income 677
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ (31) $ 1,272 $ (9) $ 1,232 $ 19,163 $ 20,395
=============================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,106 $ 610 $ 1,078
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net (2,660) (2,209) (1,138)
Policy charges and fee income (135) (258) (208)
Interest credited to policyholders' account balances 1,806 2,044 2,251
Depreciation and amortization 305 258 266
Loss (gain) on disposal of businesses 223 -- (116)
Change in:
Deferred policy acquisition costs (165) (142) (122)
Future policy benefits and other insurance liabilities 584 2,762 2,471
Securities purchased under agreements to resell (1,591) (3,314) (217)
Trading account assets (2,540) (1,825) (433)
Income taxes receivable/payable 594 (1,391) (937)
Cash collateral for borrowed securities (575) (2,631) (332)
Cash collateral for securities loaned (net) (6,985) 5,668 2,891
Broker-dealer related receivables/payables 1,495 (672) (607)
Securities sold but not yet purchased 2,122 1,633 251
Securities sold under agreements to repurchase 9,139 4,844 (490)
Other, net (5,168) 4,142 (1,334)
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES (2,445) 9,519 3,274
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale 123,151 123,550 123,368
Fixed maturities, held to maturity 4,466 4,042 4,268
Equity securities, available for sale 2,792 2,572 2,162
Mortgage loans on real estate 4,839 4,299 5,731
Investment real estate 1,364 1,842 615
Other long-term investments 1,848 5,081 3,203
Disposal of businesses -- -- 52
Payments for the purchase of:
Fixed maturities, available for sale (126,742) (129,854) (125,093)
Fixed maturities, held to maturity (2,244) (2,317) (2,844)
Equity securities, available for sale (2,547) (2,461) (2,384)
Mortgage loans on real estate (4,885) (3,363) (1,906)
Investment real estate (31) (241) (142)
Other long-term investments (1,415) (4,148) (2,060)
Short-term investments (net) 2,145 (2,848) (1,915)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES 2,741 (3,846) 3,055
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits 6,955 5,020 2,676
Policyholders' account withdrawals (11,111) (9,873) (8,099)
Net increase in short-term debt 2,422 305 583
Proceeds from the issuance of long-term debt 1,940 324 93
Repayments of long-term debt (418) (464) (1,306)
-------- -------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES (212) (4,688) (6,053)
-------- -------- --------
NET INCREASE IN CASH 84 985 276
CASH, BEGINNING OF YEAR 1,859 874 598
-------- -------- --------
CASH, END OF YEAR $ 1,943 $ 1,859 $ 874
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 163 $ 968 $ 793
-------- -------- --------
Interest paid $ 864 $ 708 $ 595
-------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
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 financial services throughout the
United States and several locations worldwide. The Company's businesses
provide a full range of insurance, investment, securities brokerage and
other financial products and services to both retail consumers and
institutions. Principal products and services provided include life
insurance, property and casualty insurance, annuities, mutual funds,
pension and retirement related investments and administration, asset
management, and securities brokerage.
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 stock company. On July 1, 1998,
legislation was enacted in New Jersey that would permit this conversion to
occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption
of a plan by the Company's Board of Directors, a public hearing, voting by
qualified voters and regulatory approval. There can be no assurance that
the Company will demutualize or, if it does so, when demutualization will
occur.
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 consolidated 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 a 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, "Accumulated other
comprehensive income."
TRADING ACCOUNT ASSETS AND SECURITIES SOLD BUT NOT YET PURCHASED are
carried at estimated fair value. Realized and unrealized gains and losses
on trading account assets and securities sold but not yet purchased are
included in "Commissions and other income."
EQUITY SECURITIES, available for sale, are comprised of common and
non-redeemable preferred stock and are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax, and the effects
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, "Accumulated other
comprehensive income."
8
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal
balances, net of unamortized discounts and allowance for losses. The
allowance for losses is based upon a loan specific review and, for
performing loans collectively evaluated, a portfolio review. The loan
specific review includes consideration of expected future cash flows
relative to outstanding balances. The portfolio review includes
consideration of the composition of the loan portfolio, current economic
conditions, past results, current trends, the estimated aggregate value of
the underlying collateral, and other relevant environmental factors.
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, identified in management's
specific review of probable loan losses, 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.
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 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 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. 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 and is reviewed for
impairment whenever events or circumstances indicate the carrying value may
not be recoverable. In reviewing recoverability, an impairment loss is
recognized for an other than temporary decline in value to the extent the
reduction in carrying values of investment real estate exceeds estimated
undiscounted future cash flows. Charges relating to real estate to be
disposed of and impairments of real estate held for investment are included
in "Realized investment gains, net." Depreciation on real estate is
computed using the straight-line method over the estimated lives of the
properties.
POLICY LOANS are carried at unpaid principal balances.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE are treated as financing arrangements and 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 or resold is monitored, and additional collateral is requested,
where appropriate, to protect against credit exposure.
SECURITIES BORROWED AND SECURITIES LOANED are treated as financing
arrangements and 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 because the debtor typically
has the right to redeem the collateral on short notice. Substantially all
of 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.
9
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities repurchase and resale agreements and securities borrowed and
loaned 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.
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.
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.
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." Decreases in the lower of
depreciated cost or fair value less selling costs of investment real estate
held for sale are recorded in "Realized investment gains, net."
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, for certain products, 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 "Accumulated
other comprehensive income."
For participating 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. The average rate of assumed investment yield in
estimating expected gross margins was 9.97%, 9.39%, and 8.39% for 1998,
1997 and 1996, respectively. Deferred policy acquisition costs related to
non-participatory term insurance are amortized over the expected life of
the contracts in proportion to the premium income.
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.
10
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For disability 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 Statements of Operations. Mortality, policy administration and
surrender charges on the accounts are included in "Policy charges and fee
income."
OTHER ASSETS AND OTHER LIABILITIES
Other assets consist primarily of prepaid benefit costs, reinsurance
recoverables, certain restricted assets, trade receivables and property and
equipment. Property and equipment are stated at cost less accumulated
depreciation. Depreciation is determined using the straight-line method
over the estimated useful lives of the related assets which generally range
from 3 to 40 years. Other liabilities consist primarily of trade payables
and reserves for sales practice remediation costs.
INSURANCE REVENUE AND EXPENSE RECOGNITION
Premiums from participating insurance policies are 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
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, 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.
11
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premiums, benefits and expenses are stated net of reinsurance ceded to
other companies. Estimated reinsurance receivables and the cost of
reinsurance are recognized over the life of the reinsured policies using
assumptions consistent with those used to account for the underlying
policies.
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. The effects of
translating the Statements of Financial Position of non-U.S. entities with
functional currencies other than the U.S. dollar are recorded, net of
related hedge gains and losses and income taxes, as "Other comprehensive
income," a separate component of equity.
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 from trading activities of the
Company's broker-dealer subsidiary.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose values are derived from
interest rates, foreign exchange rates, various financial indices, or the
value of securities or commodities. Derivative financial instruments can be
exchange-traded or contracted in the over-the-counter market and those used
by the Company include swaps, futures, forwards and options contracts. The
Company uses derivative financial instruments to hedge market risk from
changes in interest rates or foreign currency exchange rates, and to alter
interest rate or currency exposures arising from mismatches between assets
and liabilities. Additionally, derivatives are used in the broker-dealer
business and in a limited-purpose subsidiary for trading purposes.
To qualify as a hedge, derivatives must be designated as hedges for
existing assets, liabilities, firm commitments, or anticipated transactions
which are identified and probable to occur, and effective in reducing the
market risk to which the Company is exposed. The effectiveness of the
derivatives are evaluated at the inception of the hedge and throughout the
hedge period.
DERIVATIVES HELD FOR TRADING PURPOSES are used in the Company's securities
broker-dealer business and in a limited-purpose subsidiary to meet the
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. Trading derivative positions are
valued daily, generally by obtaining quoted market prices or through the
use of pricing models. Values are affected by changes in interest rates,
currency exchange rates, credit spreads, market volatility and liquidity.
The Company monitors these exposures through the use of various analytical
techniques.
Derivatives held for trading are recorded at fair value in "Trading account
assets," "Other liabilities" or "Receivables from/Payables to broker-dealer
clients" in the Consolidated Statements of Financial Position, and realized
and unrealized changes in fair value are included in "Commissions and other
income" of the Consolidated Statements of Operations in the periods in
which the changes occur. Cash flows from trading derivatives are reported
in the operating activities section of the Consolidated Statements of Cash
Flows.
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.
12
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
See Note 14 for a discussion of the accounting treatment of derivatives
that qualify as hedges. If the Company's use of other than trading
derivatives does not meet the criteria to apply hedge accounting, the
derivatives are recorded at fair value in "Other long-term investments" or
"Other liabilities" in the Consolidated Statements of Financial Position,
and changes in their fair value are recognized in earnings in "Realized
investment gains, net" without considering changes in the hedged assets or
liabilities. Cash flows from other than trading derivative assets and
liabilities are reported in the investing activities section in the
Consolidated Statements of Cash Flows.
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 life
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 that is expected 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 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
was 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 delayed the implementation of SFAS 125 for one year
for certain provisions, including repurchase agreements, dollar rolls,
securities lending and similar transactions. The Company adopted the
delayed provisions of SFAS 125 in 1998. The adoption of SFAS 125 did not
have a material impact on the Company's results of operations or financial
position.
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which was issued by the FASB in June 1997. This statement defines
comprehensive income 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 Statements of Financial Position. Application of this
statement did not change recognition or measurement of net income and,
therefore, did not affect the Company's financial position or results of
operations.
During 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which was issued by the
FASB in February 1998. This statement standardizes the disclosure
requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligations and fair
values of plan assets and eliminates certain disclosures. This statement is
limited to changes in reporting and presentation and does not change
recognition or measurement of pension or other postretirement benefit
plans. Therefore, its adoption did not affect the Company's financial
position or results of operations.
13
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On January 1, 1998, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP
97-3"). This statement provides guidance for determining when an insurance
company or other enterprise should recognize a liability for guaranty-fund
assessments as well as guidance for measuring the liability. The adoption
of SOP 97-3 did not have a material effect on the Company's financial
condition or results of operations. In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133 provides, if certain conditions are met, that a
derivative may be specifically designated as (1) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment (fair value hedge), (2) a hedge of the
exposure to variable cash flows of a forecasted transaction (cash flow
hedge), or (3) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign-currency-denominated forecasted
transaction (foreign currency hedge).
SFAS No. 133 does not apply to most traditional insurance contracts.
However, certain hybrid contracts that contain features which can affect
settlement amounts similarly to derivatives may require separate accounting
for the "host contract" and the underlying "embedded derivative"
provisions. The latter provisions would be accounted for as derivatives as
specified by the statement.
Under SFAS No. 133, the accounting for changes in fair value of a
derivative depends on its intended use and designation. For a fair value
hedge, the gain or loss is recognized in earnings in the period of change
together with the offsetting loss or gain on the hedged item. For a cash
flow hedge, the effective portion of the derivative's gain or loss is
initially reported as a component of other comprehensive income and
subsequently reclassified into earnings when the forecasted transaction
affects earnings. For a foreign currency hedge, the gain or loss is
reported in other comprehensive income as part of the foreign currency
translation adjustment. For all other derivatives not designated as hedging
instruments, the gain or loss is recognized in earnings in the period of
change. The Company is required to adopt this Statement no later than
January 1, 2000 and is currently assessing the effect of the new standard.
In October 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk," ("SOP 98-7"). This statement provides guidance on
how to account for insurance and reinsurance contracts that do not transfer
insurance risk. SOP 98-7 is effective for fiscal years beginning after June
15, 1999. The adoption of this statement is not expected to have a material
effect on the Company's financial position or results of operations.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to current
year presentation.
14
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS
In December 1998, the Company entered into a definitive agreement to sell
its HealthCare business to Aetna Inc. ("Aetna"). Included in this
transaction are the Company's managed medical care, point of service,
preferred provider organization and indemnity health lines, dental
business, as well as the Company's Administrative Services Only ("ASO")
businesses. The transaction was approved by the boards of directors of both
companies and is expected to be completed in the second quarter of 1999,
subject to review by federal antitrust authorities and approval by state
regulators, and other customary closing conditions. Proceeds from the sale
will consist of $500 million of cash and $500 million of Aetna three year
senior notes.
Loss from operations of discontinued businesses for 1998 includes results
through December 31, 1998 (the measurement date). The Statements of
Operations for 1997 and 1996 have been restated to conform with the 1998
presentation. Amounts within the footnotes have been adjusted, where noted,
to eliminate the impact of discontinued operations and to be consistent
with the presentation in the Consolidated Statements of Operations. The
following table presents the results of operations and the loss on the
disposal of the Company's HealthCare business, determined as of the
measurement date, which are included in "Discontinued Operations" in the
Consolidated Statements of Operations. Amounts for 1997 and 1996 include
revenues and expenses relating to a contract with the American Association
of Retired Persons for healthcare and similar coverages which was
terminated effective December 31, 1997.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(In Millions)
<S> <C> <C> <C>
Revenues $ 7,461 $ 10,305 $ 9,187
Policyholder benefits (6,064) (8,484) (7,711)
General and administrative expenses (1,822) (2,364) (1,921)
--------- --------- ---------
Loss before income taxes (425) (543) (445)
Income tax benefit 127 190 163
--------- --------- ---------
Loss from operations (298) (353) (282)
Loss on disposal, net of tax benefit of $131 (223) - -
--------- --------- ---------
Loss from discontinued operations, net of taxes $ (521) $ (353) $ (282)
========= ========= =========
</TABLE>
The loss on disposal includes anticipated operating losses to be incurred
by the HealthCare business subsequent to the measurement date through the
expected date of the sale, as well as estimates of other costs the Company
will incur in connection with the disposition of the HealthCare business.
Actual amounts may differ from these estimates. These include costs
attributable to facilities closure and systems terminations, severance,
payments to Aetna related to the ASO business, and estimated payments in
connection with an agreement covering the fully insured medical and dental
business. The latter agreement provides for payments either to or from
Aetna in the event that medical loss ratios (i.e., incurred medical expense
divided by earned premiums) for covered businesses are either less
favorable or more favorable than levels specified in the agreement for the
years 1999 and 2000. The loss on disposition was reduced by the estimated
impact of expected modifications of certain pension and other
postretirement benefit plans in which employees of the HealthCare business
participate. This amount includes curtailment gains and the cost of
termination benefits. (See Note 9.)
15
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS (CONTINUED)
The following table presents the assets and liabilities pertaining to the
Company's HealthCare business at December 31, 1998 which are included in
the Company's Consolidated Statements of Financial Position.
(In Millions)
Cash and investments $ 1,652
Other assets 1,030
-------
Total assets 2,682
Future policy benefits 1,241
Other liabilities 1,105
-------
Total liabilities 2,346
-------
Net assets $ 336
=======
4. 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:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5,761 $ 580 $ 9 $ 6,332
Obligations of U.S. states and
their political subdivisions 2,672 204 1 2,875
Foreign government bonds 3,156 253 52 3,357
Corporate securities 57,373 2,545 553 59,365
Mortgage-backed securities 7,935 208 14 8,129
Other fixed maturities 100 - - 100
-----------------------------------------------------------
Total fixed maturities available for sale $ 76,997 $ 3,790 $ 629 $ 80,158
===========================================================
EQUITY SECURITIES AVAILABLE FOR SALE $ 2,583 $ 472 $ 296 $ 2,759
===========================================================
</TABLE>
16
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY (In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5 $ - $ - $ 5
Obligations of U.S. states and
their political subdivisions 62 2 1 63
Foreign government bonds 31 4 - 35
Corporate securities 16,699 1,096 49 17,746
Mortgage-backed securities 1 - - 1
Other fixed maturities 50 6 - 56
------------------------------------------------------------
Total fixed maturities held to maturity $ 16,848 $ 1,108 $ 50 $ 17,906
============================================================
<CAPTION>
1997
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE (In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 9,071 $ 671 $ - $ 9,742
Obligations of U.S. states and
their political subdivisions 1,529 152 - 1,681
Foreign government bonds 3,177 218 17 3,378
Corporate securities 50,043 2,611 144 52,510
Mortgage-backed securities 7,576 288 5 7,859
Other fixed maturities 100 - - 100
-----------------------------------------------------------
Total fixed maturities available for sale $ 71,496 $ 3,940 $ 166 $ 75,270
===========================================================
EQUITY SECURITIES AVAILABLE FOR SALE $ 2,376 $ 680 $ 246 $ 2,810
===========================================================
</TABLE>
17
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ----------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY
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
============================================================
</TABLE>
18
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1998, is shown below:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------- -----------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ -------------- ----------- ----------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
Due in one year or less $ 2,638 $ 2,644 $ 730 $ 736
Due after one year through five years 17,551 17,874 4,326 4,465
Due after five years through ten years 19,523 19,976 6,783 7,162
Due after ten years 29,350 31,535 5,008 5,542
Mortgage-backed securities 7,935 8,129 1 1
--------- ---------- -------- --------
Total $ 76,997 $ 80,158 $ 16,848 $ 17,906
========= ========== ======== ========
</TABLE>
Actual maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations.
Proceeds from the repayment of held to maturity fixed maturities during
1998, 1997 and 1996 were $4,466 million, $4,042 million and $4,268 million,
respectively. Gross gains of $135 million, $62 million and $78 million, and
gross losses of $2 million, $1 million and $7 million, were realized on
prepayment of held to maturity fixed maturities during 1998, 1997 and 1996,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1998,
1997 and 1996 were $119,096 million, $120,604 million and $121,910 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1998, 1997 and 1996 were $ 4,055 million, $2,946 million
and $1,458 million, respectively. Gross gains of $1,765 million, $1,310
million and $1,562 million and gross losses of $443 million, $639 million
and $1,026 million were realized on sales and prepayments of available for
sale fixed maturities during 1998, 1997 and 1996, respectively.
Writedowns for impairments of fixed maturities which were deemed to be
other than temporary were $96 million, $13 million and $54 million for the
years 1998, 1997 and 1996, respectively.
During the years ended December 31, 1998 and December 31, 1997, certain
securities classified as held to maturity 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 $73 million and $27 million, respectively with
gross unrealized investment losses of $.4 million and gross unrealized
investment gains of $.6 million included during the years ended December
31, 1998 and 1997, respectively, in "Accumulated other comprehensive
income" at the time of the transfer.
19
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans were collateralized by the following property
types at December 31:
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
(IN MILLIONS) OF TOTAL (IN MILLIONS) OF TOTAL
------------- ---------- ------------- ----------
1998 1997
------------------------ -------------------------
Office buildings $ 4,267 25.2% $ 4,692 28.5%
Retail stores 3,021 17.9% 3,078 18.7%
Residential properties 716 4.2% 891 5.4%
Apartment complexes 4,362 25.8% 3,551 21.6%
Industrial buildings 1,989 11.8% 1,958 11.9%
Agricultural properties 1,936 11.4% 1,666 10.1%
Other 631 3.7% 618 3.8%
-------- ----- -------- -----
Subtotal 16,922 100.0% 16,454 100.0%
===== =====
Allowance for losses (427) (450)
-------- --------
Net carrying value $ 16,495 $ 16,004
======== ========
The mortgage loans are geographically dispersed throughout the United
States and Canada with the largest concentrations in California (23.8%)
and New York (9.5%) at December 31, 1998. Included in the above balances
are mortgage loans receivable from affiliated joint ventures of $87 million
and $225 million at December 31, 1998 and 1997, respectively.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
1998 1997 1996
----- ----- -----
(In Millions)
Allowance for losses, beginning of year $ 450 $ 515 $ 862
Additions charged to operations - - -
Release of allowance for losses - (41) (247)
Charge-offs, net of recoveries (23) (24) (100)
----- ----- -----
Allowance for losses, end of year $ 427 $ 450 $ 515
===== ===== =====
The $41 million and $247 million reductions of the mortgage loan allowance
for losses in 1997 and 1996, respectively, are 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.
20
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
Impaired mortgage loans identified in management's specific review of
probable loan losses and related allowance for losses at December 31, are
as follows:
1998 1997
------- -------
(In Millions)
Impaired mortgage loans with allowance for losses $ 149 $ 330
Impaired mortgage loans with no allowance for losses 924 1,303
Allowance for losses (45) (97)
------- -------
Net carrying value of impaired mortgage loans $ 1,028 $ 1,536
======= =======
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 $1,329 million, $2,102 million and $2,842 million
during 1998, 1997 and 1996, respectively. Net investment income recognized
on these loans totaled $94 million, $140 million and $265 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
INVESTMENT REAL ESTATE
The Company's "Investment real estate" of $801 million and $1,519 million
at December 31, 1998 and 1997, respectively, is held through direct
ownership. Of the Company's real estate, $675 million and $1,490 million
consists of commercial and agricultural assets held for disposal at
December 31, 1998 and 1997, respectively. Impairment losses aggregated $8
million, $40 million and $38 million for the years ended December 31, 1998,
1997 and 1996, respectively, and are included in "Realized investment
gains, net."
RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets of $3,135 million and $2,783 million at December 31, 1998 and 1997,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $3,727
million and $2,352 million at December 31, 1998 and 1997, respectively,
were held in voluntary trusts. Of this amount, $3,131 million and $1,801
million at December 31, 1998 and 1997, respectively, related to the
multi-state policyholder settlement as described in Note 16. 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 $403 million and $632 million at December 31,
1998 and 1997, respectively, were maintained as compensating balances,
which do not legally restrict the use of the funds, or pledged as
collateral for bank loans and other financing agreements. Restricted cash
and securities of $2,366 million and $1,835 million at December 31, 1998
and 1997, respectively, were included in the consolidated financial
statements in "Other assets." 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 $2,658 million and $2,489
million as of December 31, 1998 and 1997, respectively, are comprised of
$1,007 million and $1,498 million in real estate related interests and
$1,651 million and $991 million of non-real estate related interests. The
Company's share of net income from such entities was $285 million, $411
million and $245 million for 1998, 1997 and 1996, respectively, and is
reported in "Net investment income."
21
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES
NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Fixed maturities - available for sale $ 5,366 $ 5,074 $ 4,871
Fixed maturities - held to maturity 1,406 1,622 1,793
Trading account assets 677 504 444
Equity securities - available for sale 54 52 81
Mortgage loans on real estate 1,525 1,555 1,690
Investment real estate 230 565 685
Policy loans 410 396 384
Securities purchased under agreements to resell 18 15 11
Receivables from broker-dealer clients 836 706 579
Short-term investments 725 697 702
Other investment income 415 520 559
-------- -------- --------
Gross investment income 11,662 11,706 11,799
Less investment expenses (2,035) (2,038) (2,130)
-------- -------- --------
Subtotal 9,627 9,668 9,669
Less amount relating to discontinued operations (107) (212) (208)
-------- -------- --------
Net investment income $ 9,520 $ 9,456 $ 9,461
======== ======== ========
</TABLE>
REALIZED INVESTMENT GAINS, NET, for the years ended December 31, were from
the following sources:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Fixed maturities $ 1,381 $ 684 $ 513
Mortgage loans on real estate 22 68 248
Investment real estate 642 700 76
Equity securities - available for sale 427 363 267
Other 188 394 34
-------- -------- --------
Subtotal 2,660 2,209 1,138
Less amounts related to discontinued operations (30) (41) (10)
-------- -------- --------
Realized investment gains, net $ 2,630 $ 2,168 $ 1,128
======== ======== ========
</TABLE>
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1998 included in fixed maturities available
for sale, mortgage loans on real estate and other long term investments
totaled $1 million, $23 million and $13 million, respectively.
22
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
NET UNREALIZED INVESTMENT GAINS
Net unrealized investment gains on securities available for sale are
included in the Consolidated Statements of Financial Position as a
component of "Accumulated other comprehensive income." Changes in these
amounts include reclassification adjustments to avoid double-counting in
"Comprehensive income," items that are included as part of "Net income" for
a period that also had been part of "Other comprehensive income" in earlier
periods. The amounts for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Millions)
<S> <C> <C> <C>
Net unrealized investment gains, beginning of year $ 1,752 $ 1,136 $ 2,397
Changes in net unrealized investment gains attributable to:
Investments:
Net unrealized investment gains (losses) on investments arising
during the period 522 1,706 (1,281)
Reclassification adjustment for gains included in net income (1,087) (631) (471)
------- ------- -------
Change in net unrealized investment gains, net of adjustments (565) 1,075 (1,752)
Impact of net unrealized investment gains on:
Future policy benefits 23 (360) 318
Deferred policy acquisition costs 62 (99) 173
------- ------- -------
Change in net unrealized investment gains (480) 616 (1,261)
------- ------- -------
Net unrealized investment gains, end of year $ 1,272 $ 1,752 $ 1,136
======= ======= =======
</TABLE>
Unrealized gains (losses) on investments arising during the periods
reported in the above table are net of income tax expense (benefit) of $282
million, $961 million and $(647) million for the years ended December 31,
1998, 1997 and 1996, respectively.
Reclassification adjustments reported in the above table for the years
ended December 31, 1998, 1997 and 1996 are net of income tax expense of
$588 million, $355 million and $238 million, respectively.
The future policy benefits reported in the above table are net of income
tax expense (benefit) of $15 million, $(203) million and $161 million for
the years ended December 31, 1998, 1997 and 1996, respectively.
Deferred policy acquisition costs in the above tables for the years ended
December 31, 1998, 1997 and 1996 are net of income tax expense (benefit) of
$36 million, $(55) million and $88 million, respectively.
23
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. 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:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Millions)
<S> <C> <C> <C>
Balance, beginning of year $ 6,083 $ 6,095 $ 5,892
Capitalization of commissions, sales and issue expenses 1,313 1,409 1,260
Amortization (1,139) (1,176) (1,261)
Change in unrealized investment gains 77 (154) 261
Foreign currency translation 128 (91) (57)
------- ------- -------
Balance, end of year $ 6,462 $ 6,083 $ 6,095
======= ======= =======
</TABLE>
6. POLICYHOLDERS' LIABILITIES
FUTURE POLICY BENEFITS at December 31, are as follows:
1998 1997
------- -------
(In Millions)
Life insurance $48,927 $46,765
Annuities 15,360 15,469
Other contract liabilities 4,842 5,133
------- -------
Future policy benefits $69,129 $67,367
======= =======
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.
24
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (CONTINUED)
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- --------------------------- ------------------------- ------------------------- ------------------------
<S> <C> <C> <C>
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 3.5% 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
Table with certain payments
modifications based on historical
experience
Other contract liabilities - 5.3% to 7.0% Present value of
expected future
payments
based on historical
experience
</TABLE>
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 and to recover any unamortized
acquisition costs. A premium deficiency reserve has been recorded for the
group single premium annuity business, which consists of limited-payment,
long duration, traditional and non-participating annuities. A liability of
$1,780 million and $1,645 million is included in "Future policy benefits"
with respect to this deficiency for the years ended December 31, 1998 and
1997, respectively.
POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In Millions)
<S> <C> <C>
Individual annuities $ 4,997 $ 5,695
Group annuities and guaranteed investment contracts 16,770 19,053
Interest-sensitive life contracts 3,566 3,258
Dividend accumulations and other 5,641 5,240
------- --------
Policyholders' account balances $30,974 $ 33,246
======= ========
</TABLE>
Policyholders' account balances for interest-sensitive life and
investment-type contracts represent an accumulation of gross premium
payments plus credited interest less withdrawals, expenses and mortality
charges.
25
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (Continued)
Certain contract provisions that determine the policyholder account
balances are as follows:
<TABLE>
<CAPTION>
WITHDRAWAL/
PRODUCT INTEREST RATE SURRENDER CHARGES
--------------------------------- ------------- -----------------------------------
<S> <C> <C>
Individual annuities 3.0% to 6.6% 0% to 8% for up to 8 years
Group annuities 5.0% to 13.4% Contractually limited or subject
to market value adjustment
Guaranteed investment contracts 3.9% to 15.4% Subject to market value withdrawal
payout status 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 and other 3.0% to 4.5% --
</TABLE>
26
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (Continued)
Unpaid Claims and Claim Adjustment Expenses. The following table provides
a reconciliation of the activity in the liability for unpaid claims and
claim adjustment expenses for property and casualty and accident and
health insurance at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- -----------------------
ACCIDENT PROPERTY ACCIDENT PROPERTY ACCIDENT PROPERTY
AND HEALTH AND CASUALTY AND HEALTH AND CASUALTY AND HEALTH AND CASUALTY
---------- ------------ ---------- ------------ ---------- -------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 $ 1,908 $ 2,956 $ 1,990 $ 3,076 $ 2,033 $ 3,053
Less reinsurance recoverables 810 535 10 553 15 557
------- ------- ------- ------- ------- -------
Net balance at January 1 1,098 2,421 1,980 2,523 2,018 2,496
------- ------- ------- ------- ------- -------
Incurred related to:
Current year 6,127 1,354 8,348 1,525 8,391 1,760
Prior years 7 (194) 102 (91) (66) (25)
------- ------- ------- ------- ------- -------
Total incurred 6,134 1,160 8,450 1,434 8,325 1,735
------- ------- ------- ------- ------- -------
Paid related to:
Current year 5,289 717 6,676 739 6,589 908
Prior years 851 681 1,854 797 1,774 800
------- ------- ------- ------- ------- -------
Total paid 6,140 1,398 8,530 1,536 8,363 1,708
------- ------- ------- ------- ------- -------
Net balance at December 31 1,092 2,183 1,900 2,421 1,980 2,523
Plus reinsurance recoverables 52 533 8 535 10 553
------- ------- ------- ------- ------- -------
Balance at December 31 $ 1,144 $ 2,716 $ 1,908 $ 2,956 $ 1,990 $ 3,076
======= ======= ======= ======= ======= =======
</TABLE>
The Accident and Health balance at December 31 includes amounts
attributable to the Company's discontinued HealthCare business: 1998 -
$1,082; 1997 - $1,757 and 1996 - $1,750.
In 1998 and 1997, the changes in provision for claims and claim adjustment
expenses for property and casualty related to prior years are primarily
driven by lower than anticipated losses for the Voluntary Auto line of
business.
The changes in provision for claims and claim adjustment expense for
accident and health related to prior years are primarily due to such
factors as changes in claim cost trends and an accelerated decline in the
indemnity health business.
The unpaid claims and claim adjustment expenses presented above consist 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 Consolidated
Statement of Operations periodically as the estimates are revised.
Accident and health unpaid claims liabilities for 1998, 1997 and 1996
included above are discounted using interest rates ranging from 3.0%
to 6.0%.
27
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. REINSURANCE
The Company participates in reinsurance in order to provide greater
diversification of business, provide additional capacity for future growth
and limit the maximum net loss potential arising from large risks. Life
reinsurance is accomplished through various plans of reinsurance,
primarily yearly renewable term and coinsurance. Property-casualty
reinsurance is placed on both a pro-rata and excess of loss basis.
Reinsurance ceded arrangements do not discharge the Company or the
insurance subsidiaries as the primary insurer. Ceded balances would
represent a liability to the Company in the event the reinsurers were
unable to meet their obligations to the Company under the terms of the
reinsurance agreements. The Company periodically reviews the financial
condition of its reinsurers and amounts recoverable therefrom, recording
an allowance when necessary for uncollectible reinsurance.
Reinsurance amounts included in the Consolidated Statements of Operations,
excluding HealthCare, for the years ended December 31, were as follows:
1998 1997 1996
------- ------ -------
(In Millions)
Direct Premiums $9,615 $9,679 $10,690
Reinsurance Assumed 65 42 13
Reinsurance Ceded (656) (716) (704)
------ ------ -------
Premiums $9,024 $9,005 $ 9,999
====== ====== =======
Policyholders' benefits ceded $ 519 $ 530 $ 571
====== ====== =======
Reinsurance recoverables, included in "Other assets" in the Company's
Consolidated Statements of Financial Position, at December 31, were as
follows:
1998 1997
------ ------
(In Millions)
Life insurance $ 620 $ 685
Property-casualty 564 554
Other reinsurance 92 65
------ ------
$1,276 $1,304
====== ======
28
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT
Debt consists of the following at December 31:
SHORT-TERM DEBT
1998 1997
------- ------
(In Millions)
Commercial paper $ 7,057 $4,268
Notes payable 2,164 2,151
Current portion of long-term debt 861 355
------- ------
Total short-term debt $10,082 $6,774
======= ======
The weighted average interest rate on outstanding short-term debt was
approximately 5.4% and 6.0% at December 31, 1998 and 1997, 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
<TABLE>
<CAPTION>
DESCRIPTION MATURITY DATES RATE 1998 1997
- ----------- -------------- ---- ----- ----
(In Millions)
<S> <C> <C> <C> <C>
Floating rate notes ("FRN") 1999 - 2005 4.04-14.00%(a) $ 729 $ 324
Long term notes 1999 - 2023 5.5% - 12% 1,318 910
Zero coupon notes 1999 8.6% (b) 364 334
Canadian dollar notes - 7.0% - 9.125% - 117
Japanese yen notes 1999 - 2000 0.5% - 4.6% 160 178
Swiss francs notes - 3.875% - 120
Canadian dollar FRN 2003 5.25%-5.89% 96 96
Surplus notes 2003 - 2025 6.875% - 8.3% 987 986
Senior notes 1999 - 2006 6.375% 393 -
Commercial paper backed by long-term
credit agreements 1,500 1,500
Other notes payable 1999 - 2017 4% - 7.5% 48 63
------- -------
Subtotal 5,595 4,628
Less: current portion of long-term debt (861) (355)
------- -------
Total long-term debt $ 4,734 $ 4,273
======= =======
</TABLE>
(a) The Company issued an S&P 500 index linked note of $29 million in September
of 1997. The interest rate on the note is based on the appreciation of the
S&P 500 index, with a contractual cap of 14%. At December 31, 1998, this
rate was 14%. Excluding this note, floating rate note interest rates were
between 4.04% - 5.50%.
(b) The rate shown for zero coupon notes represents a level yield to maturity.
29
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
Payment of interest and principal on the surplus notes issued after 1993,
of which $686 million were outstanding at December 31, 1998, 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, 1998,
are as follows: $862 million in 1999, $560 million in 2000, $327 million
in 2001, $1,816 million in 2002, $458 million in 2003 and $1,575 million
thereafter.
At December 31, 1998, the Company had $9,853 million in lines of credit
from numerous financial institutions of which $8,330 million were unused.
These lines of credit generally have terms ranging from one to five years.
Interest expense for short-term and long-term debt is $920 million,
$743 million and $618 million for the years ended December 31, 1998, 1997
and 1996, respectively.
9. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT PLANS
The Company has funded non-contributory defined benefit pension plans
which cover substantially all of its employees. The Company also has
several non-funded non-contributory defined benefit plans covering
certain executives. 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.
The Company provides certain life insurance and health care benefits
("Other postretirement benefits") for its retired employees, their
beneficiaries and covered dependents. The healthcare plan is
contributory; the life insurance plan is non-contributory. Substantially
all of the Company's employees may become eligible to receive benefits if
they retire after age 55 with at least 10 years of service or under
certain circumstances after age 50 with at least 20 years of continuous
service. These benefits are funded as considered necessary by Company
management.
The Company has elected to amortize its transition obligation for other
postretirement benefits over 20 years.
30
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Prepaid and accrued benefit 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, is summarized below:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- ------------------------
1998 1997 1998 1997
-------- ------- ------- -------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at the beginning of period $(5,557) $(5,148) $(2,128) $(2,002)
Service cost (159) (127) (35) (38)
Interest cost (397) (376) (142) (149)
Plan participants' contributions - - ( 6) (4)
Amendments (58) - - 31
Actuarial losses (600) (334) (31) (84)
Transfer to third party - 32 - -
Contractual termination benefits (30) (63) - -
Benefits paid 485 460 128 117
Foreign currency changes 7 (1) 1 1
------- ------- ------- -------
Benefit obligation at end of period $(6,309) $(5,557) $(2,213) $(2,128)
======= ======= ======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of period $ 8,489 $ 7,306 $ 1,354 $ 1,313
Actual return on plan assets 445 1,693 146 120
Transfer to third party (4) (32) - -
Contribution from pension plan - - 31 25
Employer contributions 25 16 13 9
Plan participants' contributions - - 6 4
Withdrawal under IRS Section 420 (36) (35) - -
Benefits paid (485) (460) (128) (117)
Foreign currency changes (7) 1 - -
------- ------- ------- -------
Fair value of plan assets at end of period $ 8,427 $ 8,489 $ 1,422 $ 1,354
======= ======= ======= =======
FUNDED STATUS:
Funded status at end of period $ 2,118 $ 2,932 $ (791) $ (774)
Unrecognized transition (asset) liability (554) (661) 660 707
Unrecognized prior service cost 335 327 - -
Unrecognized actuarial net gain (813) (1,644) (353) (364)
Effects of 4th quarter activity (9) (63) 2 33
------- ------- ------- -------
Net amount recognized $ 1,077 $ 891 $ (482) $ (398)
======= ======= ======= =======
AMOUNTS RECOGNIZED IN THE STATEMENTS OF FINANCIAL
POSITION CONSIST OF:
Prepaid benefit cost $ 1,348 $ 1,150 $ - $ -
Accrued benefit liability (287) (270) (482) (398)
Intangible asset 7 5 - -
Accumulated other comprehensive income 9 6 - -
-------- -------- -------- ---------
Net amount recognized $ 1,077 $ 891 $ (482) $ (398)
======== ======== ======== =========
</TABLE>
31
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $384 million, $284 million and
$0, respectively, as of September 30, 1998 and $319 million, $226 million
and $ 0, respectively, as of September 30, 1997.
The effects of fourth quarter activity are summarized as follows:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- -----------------------
1998 1997 1998 1997
------ ------- ------ ------
(In Millions)
<S> <C> <C> <C> <C>
Effect of IRS Section 420 transfer $ - $ (36) $ - $ -
Contractual termination benefits (14) (30) - -
Contribution from pension plan - - - 31
Employer contributions 5 3 2 2
----- ------- ------ ------
Effects of 4th quarter activity $ (9) $ (63) $ 2 $ 33
====== ======= ====== ======
</TABLE>
Pension plan assets consist primarily of equity securities, bonds, real estate
and short-term investments, of which $5,926 million and $6,022 million are
included in Separate Account assets and liabilities at September 30, 1998 and
1997, respectively.
Other postretirement plan assets 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 $1,018
million and $1,044 million of Company insurance policies and contracts at
September 30, 1998 and 1997, 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 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, 1998 that their employment had been
terminated. Costs related to these amendments are reflected below in contractual
termination benefits.
32
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic benefit cost included in "General and administrative expenses"
in the Company's Consolidated Statements of Operations for the years ended
December 31, includes the following components:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------- ------------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------- ------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFITS COSTS:
Service cost $ 159 $ 127 $ 140 $ 35 $ 38 $ 45
Interest cost 397 376 354 142 149 157
Expected return on plan assets (674) (617) (594) (119) (87) (93)
Amortization of transition amount (106) (106) (107) 47 50 53
Amortization of prior service cost 45 42 26 - - -
Amortization of actuarial net (gain) loss 1 - - (13) (13) (3)
Curtailment gain (loss) 5 - - - - (9)
Contractual termination benefits 14 30 63 - - -
------- ------- ------- ------- ------- ------
Net periodic (benefit) cost $ (159) $ (148) $ (118) $ 92 $ 137 $ 150
======= ======= ======= ======= ======= ======
</TABLE>
The assumptions at September 30, used by the Company to calculate the benefit
obligations as of that date and to determine the benefit cost in the subsequent
year are as follows:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------ ----------------------------------------
1998 1997 1996 1998 1997 1996
------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate 6.50% 7.25% 7.75% 6.50% 7.25% 7.75%
Rate of increase in compensation levels 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Expected return on plan assets 9.50% 9.50% 9.50% 9.00% 9.00% 9.00%
Health care cost trend rates - - - 7.80-11.00% 8.20-11.80% 8.50-12.50%
Ultimate health care cost trend rate
after gradual decrease until 2006 - - - 5.00% 5.00% 5.00%
</TABLE>
33
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage point
increase and decrease in assumed health care cost trend rates would have
the following effects:
OTHER
POSTRETIREMENT BENEFITS
-----------------------
1998
------
(In Millions)
ONE PERCENTAGE POINT INCREASE
Effect on total service and interest costs $ 24
Effect on postretirement benefit obligation (226)
ONE PERCENTAGE POINT DECREASE
Effect on total service and interest costs $ (19)
Effect on postretirement benefit obligation 187
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, 1998 and 1997
was $135 million and $144 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 3% of annual salary,
resulting in $54 million, $63 million and $57 million of expenses included in
"General and administrative expenses" for 1998, 1997 and 1996, respectively.
DISCONTINUED OPERATIONS
In connection with the disposal of the Company's HealthCare business, as more
fully discussed in Note 3, the loss on disposal was reduced by an estimated
curtailment gain of $30 million.
34
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
1998 1997 1996
------ ------ ------
(In Millions)
Current tax expense (benefit):
U.S. $ 983 $ (14) $ 400
State and local 54 51 108
Foreign 148 64 48
------ ------ ------
Total $1,185 $ 101 $ 556
====== ====== ======
Deferred tax expense (benefit):
U.S. $ (193) $ 269 $ (428)
State and local (6) 4 (2)
Foreign (16) 33 54
------ ------ ------
Total $ (215) $ 306 $ (376)
====== ====== ======
Total income tax expense $ 970 $ 407 $ 180
====== ====== ======
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 continuing operations before income taxes for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Expected federal income tax expense $ 908 $ 480 $ 539
Equity tax (benefit) 75 (65) (365)
State and local income taxes 31 37 69
Tax-exempt interest and dividend received deduction (46) (67) (67)
Other
2 22 4
------ ------ ------
Total income tax expense $ 970 $ 407 $ 180
====== ====== ======
</TABLE>
35
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
1998 1997
------- -------
(In Millions)
Deferred tax assets
Insurance reserves $ 1,584 $ 1,482
Policyholder dividends 265 250
Net operating loss carryforwards 260 80
Litigation related reserves 104 178
Employee benefits 63 42
Other 134 287
------- -------
Deferred tax assets before valuation allowance 2,410 2,319
Valuation allowance (13) (18)
------- -------
Deferred tax assets after valuation allowance 2,397 2,301
------- -------
Deferred tax liabilities
Investments 1,414 1,867
Deferred policy acquisition costs 1,436 1,525
Depreciation 64 36
------- -------
Deferred tax liabilities 2,914 3,428
------- -------
Net deferred tax liability $ 517 $ 1,127
======= =======
Management believes that based on its historical pattern of taxable income, the
Company will produce sufficient income in the future to realize its 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, 1998 and 1997,
respectively, the Company had federal life net operating loss carryforwards of
$540 million and $1,200 million, which expire by 2012. At December 31, 1998 and
1997, respectively, the Company had state non-life operating loss carryforwards
for tax purposes approximating $1,059 million and $800 million, which expire by
2018.
The Internal Revenue Service (the "Service") has completed all examinations of
the consolidated federal income tax returns through 1989. The Service has
examined the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments. Management, however, 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.
36
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. STATUTORY EQUITY AND INCOME
Applicable insurance department regulations require that the Company
prepare statutory financial statements in accordance with statutory
accounting practices prescribed or permitted by the New Jersey Department
of Banking and Insurance. Statutory accounting practices primarily differ
from GAAP by charging policy acquisition costs to expense as incurred,
establishing future policy benefits reserves using different actuarial
assumptions, not providing for deferred taxes, and valuing securities on a
different basis. The Company's statutory net income, as filed with the New
Jersey Department of Banking and Insurance was $1,247 million, $1,471
million and $1,402 million for the years 1998, 1997 and 1996,
respectively. Statutory capital and surplus, as filed, at December 31,
1998 and 1997 was $8,536 million and $9,242 million, respectively.
12. 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, 1998, future minimum lease payments under non-cancelable
operating leases are estimated as follows:
(In Millions)
1999 $ 295
2000 263
2001 231
2002 198
2003 157
Remaining years after 2003 753
-------
Total $ 1,897
=======
Amounts presented in the table above include operating leases relating to
the Company's HealthCare business. See Note 3 for a discussion of the
pending sale of this business. Amounts applicable to the HealthCare
business are $65 million in 1999, $58 million in 2000, $52 million in
2001, $45 million in 2002, $34 million in 2003 and $89 million thereafter.
Rental expense incurred for the years ended December 31, 1998, 1997 and
1996 was approximately $320 million, $352 million and $343 million,
respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated 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
estimated fair values (for all other financial instruments presented in
the table, the carrying value approximates estimated fair value).
37
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FIXED MATURITIES AND EQUITY SECURITIES
Estimated 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 fair value of
certain non-performing private placement securities is based on amounts
estimated by management.
MORTGAGE LOANS ON REAL ESTATE
The estimated 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 loans, the
estimated 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 estimated 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
Estimated fair values of policyholders' account balances are derived by
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. For interest sensitive life
contracts, fair value approximates carrying value.
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.
38
<PAGE>
- -------------------------------------------------------------------------------
13. 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:
<TABLE>
<CAPTION>
1998 1997
----------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Other than trading:
Fixed maturities:
Available for sale $ 80,158 $ 80,158 $ 75,270 $ 75,270
Held to maturity 16,848 17,906 18,700 19,894
Equity securities 2,759 2,759 2,810 2,810
Mortgage loans on real estate 16,495 17,265 16,004 16,703
Policy loans 7,476 8,037 7,034 7,201
Securities purchased under agreements to resell 1,737 1,737 - -
Short-term investments 9,781 9,781 12,106 12,106
Cash 1,943 1,943 1,859 1,859
Restricted Assets 2,366 2,366 1,835 1,835
Separate Account assets 81,621 81,621 73,839 73,839
Derivative financial instruments 132 135 93 92
Trading:
Trading account assets $ 8,888 $ 8,888 $ 6,347 $ 6,347
Broker-dealer related receivables 10,142 10,142 8,442 8,442
Derivative financial instruments 765 765 910 910
Securities purchased under agreements to resell 8,515 8,515 8,661 8,661
Cash collateral for borrowed securities 5,622 5,622 5,047 5,047
FINANCIAL LIABILITIES:
Other than trading:
Policyholders' account balances $ 30,974 $ 31,940 $ 33,246 $ 34,201
Securities sold under agreements to repurchase 7,085 7,085 85 85
Cash collateral for loaned securities 2,450 2,450 9,647 9,647
Short-term and long-term debt 14,816 15,084 11,047 11,131
Securities sold but not yet purchased 2,215 2,215 - -
Separate Account liabilities 80,931 80,931 73,451 73,451
Derivative financial instruments 390 391 100 99
Trading:
Broker-dealer related payables $ 6,530 $ 6,530 $ 3,338 $ 3,338
Derivative financial instruments 725 725 1,019 1,019
Securities sold under agreements to repurchase 14,401 14,401 12,262 12,262
Cash collateral for loaned securities 4,682 4,682 4,470 4,470
Securities sold but not yet purchased 3,556 3,556 3,648 3,648
</TABLE>
39
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
INTEREST RATE SWAPS
The Company uses interest rate swaps to reduce market risks from changes in
interest rates and to alter interest rate exposures arising from mismatches
between assets and liabilities. Under interest rates swaps, the Company
agrees with other parties to exchange, at specified intervals the difference
between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Generally, no cash is
exchanged at the outset of the contract and no principal payments are made
by either party. Cash is paid or received based on the terms of the swap.
These transactions are entered into pursuant to master agreements that
provide for a single net payment to be made by one counterparty at each due
date. 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.
If swap agreements meet the criteria for hedge accounting, net interest
receipts or payments are accrued and recognized over the life of the swap
agreements as an adjustment to interest income or expense of the hedged
item. Any unrealized gains or losses are not recognized until the hedged
item is sold or matures. Gains or losses on early termination of interest
rate swaps are deferred and amortized over the remaining period originally
covered by the swaps. If the criteria for hedge accounting are not met, the
swap agreements are accounted for at market value with changes in fair value
reported in current period earnings.
FUTURES AND OPTIONS
The Company uses exchange-traded Treasury futures and options to reduce
market risks from changes in interest rates, to alter mismatches between the
duration of assets in a portfolio and the duration of liabilities supported
by those assets, and to hedge against changes in the value of securities it
owns or anticipates acquiring. The Company enters into exchange-traded
futures and options with regulated futures commissions merchants who are
members of a trading exchange. The fair value of futures and options is
based on market quotes for transactions with similar terms.
Under exchange-traded futures, the Company agrees to purchase a specified
number of contracts with other parties and to post variation margin on a
daily basis in an amount equal to the difference in the daily market values
of those contracts. Futures are typically used to hedge duration mismatches
between assets and liabilities by replicating Treasury performance. Treasury
futures move substantially in value as interest rates change and can be used
to either modify or hedge existing interest rate risk. This strategy
protects against the risk that cash flow requirements may necessitate
liquidation of investments at unfavorable prices resulting from increases in
interest rates. This strategy can be a more cost effective way of
temporarily reducing the Company's exposure to a market decline than selling
fixed income securities and purchasing a similar portfolio when such a
decline is believed to be over.
If futures meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing
financial instruments are amortized as a yield adjustment over the remaining
lives of the hedged item. Futures that do not qualify as hedges are carried
at fair value with changes in value reported in current period earnings. The
gains and losses associated with anticipatory transactions are not material.
40
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
When the Company anticipates a significant decline in the stock market
which will correspondingly affect its diversified portfolio, it may
purchase put index options where the basket of securities in the index is
appropriate to provide a hedge against a decrease in the value of the
equity portfolio or a portion thereof. This strategy effects an orderly
sale of hedged securities. When the Company has large cash flows which it
has allocated for investment in equity securities, it may purchase call
index options as a temporary hedge against an increase in the price of the
securities it intends to purchase. This hedge permits such investment
transactions to be executed with the least possible adverse market impact.
Option premium paid or received is reported as an asset or liability and
amortized into income over the life of the option. If options meet the
criteria for hedge accounting, changes in their fair value are deferred
and recognized as an adjustment to the hedged item. Deferred gains or
losses from the hedges for interest-bearing financial instruments are
recognized as an adjustment to interest income or expense of the hedged
item. If the options do not meet the criteria for hedge accounting, they
are fair valued, with changes in fair value reported in current period
earnings.
CURRENCY DERIVATIVES
The Company uses currency derivatives, including exchange-traded currency
futures and options, currency forwards and currency swaps to reduce market
risks from changes in currency values of investments denominated in
foreign currencies that the Company either holds or intends to acquire and
to alter the currency exposures arising from mismatches between such
foreign currencies and the U.S. Dollar.
Under currency forwards, the Company agrees with other parties upon
delivery of a specified amount of specified currency at a specified future
date. Typically, the price is agreed upon at the time of the contract and
payment for such a contract is made at the specified future date. Under
currency swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between one currency and another at a
forward exchange rate and calculated by reference to an agreed principal
amount. Generally, the principal amount of each currency is exchanged at
the beginning and termination of the currency swap by each party. These
transactions are entered into pursuant to master agreements that provide
for a single net payment to be made by one counterparty for payments made
in the same currency at each due date.
If currency derivatives are effective as hedges of foreign currency
translation and transaction exposures, gains or losses are recorded in
"Accumulated other comprehensive income." If currency derivatives do not
meet hedge accounting criteria, gains or losses from those derivatives are
recognized in current period earnings.
The tables below summarize the Company's outstanding positions by
derivative instrument types as of December 31, 1998 and 1997. 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.
41
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1998
(In Millions)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------- ------------------------- -------------------------
ESTIMATED ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 4,564 $ 309 $ 2,200 $ 96 $ 6,764 $ 405
Liabilities 4,734 274 3,065 349 7,799 623
Forwards:
Assets 45,651 282 1,004 14 46,655 296
Liabilities 39,153 280 2,039 37 41,192 317
Futures:
Assets 3,272 61 1,786 23 5,058 84
Liabilities 4,371 47 531 5 4,902 52
Options:
Assets 8,310 113 130 2 8,440 115
Liabilities 6,388 124 213 - 6,601 124
-------- -------- -------- ------- -------- --------
Total:
Assets $ 61,797 $ 765 $ 5,120 $ 135 $ 66,917 $ 900
======== ======== ======== ======= ======== ========
Liabilities $ 54,646 $ 725 $ 5,848 $ 391 $ 60,494 $ 1,116
======== ======== ======== ======= ======== ========
</TABLE>
42
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(In Millions)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
-------------------------- ------------------------- --------------------------
ESTIMATED ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ----------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 5,798 $ 316 $ 1,446 $ 67 $ 7,244 $ 383
Liabilities 5,439 418 1,197 70 6,636 488
Forwards:
Assets 29,947 438 1,171 25 31,118 463
Liabilities 29,985 461 687 8 30,672 469
Futures:
Assets 4,103 51 46 - 4,149 51
Liabilities 3,064 50 3,320 21 6,384 71
Options:
Assets 6,893 105 239 - 7,132 105
Liabilities 3,946 90 224 - 4,170 90
------- ------- ------- ------ ------- -------
Total:
Assets $46,741 $ 910 $ 2,902 $ 92 $49,643 $ 1,002
======= ======= ======= ====== ======= =======
Liabilities $42,434 $ 1,019 $ 5,428 $ 99 $47,862 $ 1,118
======= ======= ======= ====== ======= =======
</TABLE>
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. At December
31, 1998 and 1997 approximately 97% and 95%, respectively, 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, 1998, 1997 and 1996
relating to forwards, futures and swaps were $67 million, $(5) million and $(13)
million; $59 million, $37 million and $(13) million; and $42 million, $32
million and $(11) 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, 1998 and 1997 were $1,165 million and $1,015
million, respectively, and for derivatives in a liability position were $1,140
million and $1,166 million, respectively. Of those derivatives held for trading
purposes at December 31, 1998, 63% of the notional amount consisted of interest
rate derivatives, 32% consisted of foreign currency derivatives, and 5%
consisted of equity and commodity derivatives. Of those derivatives held for
purposes other than trading at December 31, 1998, 60% of notional consisted of
interest rate derivatives, 31% consisted of foreign currency derivatives, and 9%
consisted of equity and commodity derivatives.
43
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. 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
underfunded portion of commitments to fund investments in private placement
securities, and unused credit card and home equity lines. In connection
with the Company's commercial banking business, loan commitments for credit
cards and home equity lines of credit include agreements to lend up to
specified limits to customers. It is anticipated that commitment amounts
will only be partially drawn down based on overall customer usage patterns,
and, therefore, do not necessarily represent future cash requirements. The
Company evaluates each credit decision on such commitments at least
annually and has the ability to cancel or suspend such lines at its option.
The total available lines of credit card and home equity commitments were
$3.0 billion of which $2.2 billion remains available at December 31, 1998.
Also in connection with the Company's investment banking activities, the
Company enters into agreements with mortgage originators and others to
provide financing on both a secured and unsecured basis. Aggregate
financing commitments on a secured basis approximate $6.1 billion of which
$3.3 billion remains available at December 31, 1998. Unsecured commitments
approximate $65.0 million, the majority of which is outstanding at December
31, 1998.
Other commitments substantially include commitments to purchase and sell
mortgage loans and the underfunded portion of commitments to fund
investments in private placement securities. These mortgage loans and
private commitments were $2.5 billion of which $1.8 billion remain
available at December 31, 1998. Additionally, mortgage loans sold with
recourse were $0.5 billion at December 31, 1998.
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. At December 31,
1998 these were immaterial.
15. DIVESTITURE
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."
16. CONTINGENCIES AND LITIGATION
STOP-LOSS REINSURANCE 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. The Company
has guaranteed
44
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
Gibraltar's obligations arising under the stop-loss agreement subject to a
limit of $375 million. Through December 31, 1998, Gibraltar has incurred
$375 million in losses under the stop-loss agreement, including $90 million
in 1998. Gibraltar has paid $197 million to Pru Re under the stop-loss
agreement.
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
The Company has reviewed its obligations under certain managed care
arrangements for possible failure to comply with contractual and regulatory
requirements. It is the opinion of management that adequate reserves have
been established to provide for appropriate reimbursements to customers.
REINSURANCE AND PARTICIPATION AGREEMENT
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. In November 1998,
the Rehabilitation Court approved the sale of MBLLAC's individual life
insurance and individual group annuity business to affiliates of SunAmerica
Inc. Upon the end of the rehabilitation period, expected during 1999, the
agreement will terminate.
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.
Two putative class actions and approximately 320 individual actions were
pending against the Company in the United States as of January 31, 1999
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. 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 these cases seek substantial
damages while others seek unspecified compensatory, punitive and treble
damages. The Company intends to defend these cases vigorously.
45
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
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. 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 and that the
Company's efforts to prevent such practices were not sufficiently
effective. Based on the findings, the Task Force recommended, and the
Company agreed to, various changes to its sales and business practices
controls, and 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 U.S. District
Court for the District of 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 U.S. District Court 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 was affirmed by the U.S. Court of Appeals for the Third Circuit
in July 1998 although the issue of class counsel's fees was sent back to
the U.S. District Court for review. The Supreme Court denied certiorari in
January 1999, thereby making final the approval of the class action
settlement.
While the approval of the class action settlement is now final, the Company
remains subject to oversight and review by insurance regulators and other
regulatory authorities with respect to its sales practices and the conduct
of the remediation program. The releases granted by the state insurance
regulators pursuant to the individual state settlement agreements do not
become final until the remediation program has been completed without any
material changes to which those regulators have not agreed. The U.S.
District Court has also retained jurisdiction as to all matters relating to
the administration, consummation, enforcement and interpretation of the
class action settlement.
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 in
46
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
October 1996, 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.
In January 1997 the U.S. District Court sanctioned and fined the Company
$1 million for failure to properly implement procedures for its employees
to retain documents in violation of the Courts' order that required the
parties to preserve all documents relevant to the class action and
remediation program. The Court ordered the Company to implement a document
retention policy and directed that an independent expert be engaged to
investigate the extent of document destruction and its impact on the
remediation program.
In response to the class notices, the owners of approximately 503,000
policies indicated an interest in a Basic Claim Relief remedy. Management
believes that costs associated with providing Basic Claim Relief will not
be material to the Company's financial position or results of operations.
The owners of approximately 1.16 million policies responded to the class
notices by indicating an intent to file an ADR claim. All policyholders
who responded were provided an ADR claim form for completion and
submission. The ADR process generally requires that individual claim forms
and files be reviewed by the Company and by one or more independent claim
evaluators. Approximately 649,000 claim forms were completed and returned
and approximately 591,000 decision letters had been mailed to claimants as
of January 31, 1999. In many instances, claimants have the right to
"appeal" the Company's decision to an independent reviewer. Management
believes that the bulk of such appeals will be resolved in 1999.
In 1996, the Company recorded in its Consolidated Statement of Operations
the cost of $410 million as a guaranteed minimum remediation expense
pursuant to the settlement agreement. Management had no better information
available at that time upon which to make a reasonable estimate of losses
associated with the settlement. In 1997, based on additional information
derived from claim sampling techniques, the terms of the settlement and
the number of claim forms received, management 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 was funded in a settlement trust. Management
expressly noted that additional cost items were anticipated that could not
be fully evaluated at that time.
In 1998, based on estimates derived from an analysis of claims actually
remedied (including interest), a sample of claims still to be remedied, an
estimate of additional liability associated with the results of the
investigation by the independent expert regarding the impact of document
destruction on the ADR program, and an estimate of additional liabilities
associated with a claimant's right to "appeal" the Company's decision,
management increased the estimated liability for the cost of ADR remedies
by $.51 billion before taxes to a total of $2.56 billion before taxes, all
of which has been funded in a settlement trust as discussed in Note 4. The
Company has also recorded from 1996 through 1998 additional charges to
reflect ongoing administrative costs related to the ADR program,
regulatory fines, penalties and related payments, litigation costs and
settlements, and other fees and expenses associated with the resolution of
sales practices issues. While management believes the foregoing provisions
are reasonable estimates based on information currently available, the
ultimate amount of the total cost of remedied policyholder claims and
other related costs is dependent on complex and varying factors, including
the relief options still to be chosen by claimants, the dollar value of
those options, and the number and type of claims that may successfully be
appealed.
47
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted with precision. 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 the matters specifically discussed
above. Management believes, however, that the ultimate resolution of all
such matters, after consideration of applicable reserves, should not have a
material adverse effect on the Company's financial position.
******
48
<PAGE>
PROSPECTUS
May 1, 1999
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI - 2
GROUP VARIABLE UNIVERSAL LIFE INSURANCE
This document is a prospectus. It tells you about GROUP VARIABLE UNIVERSAL LIFE
INSURANCE contracts offered by The Prudential Insurance Company of America
("Prudential," "we," "our," or "us") for insurance programs that are sponsored
by groups.
We will give a Certificate to each Eligible Group Member or Applicant Owner who
buys coverage under a Group Contract. We will refer to each person who buys
coverage as a "Participant." When we use the terms "you" or "your," we mean a
Participant. Certain Group Contracts may also permit a Participant to apply for
separate insurance coverage for his or her dependents.
The Group Contracts and Certificates provide life insurance protection with
flexible premium payments and a choice of underlying investment options. The
Death Benefit and Cash Surrender Value will change daily, depending on the
performance of the investment options you select. The Death Benefit will usually
not be less than the Face Amount of the Certificate. Surrenders, partial
withdrawals and loans are available but certain rules and limits apply to how
they work.
We have tried to make this prospectus easy to understand. Still, the meaning of
some terms are special because they describe concepts used mostly in insurance
contracts. To help you understand what these terms mean, we added a DEFINITIONS
OF SPECIAL TERMS section on page 51. It's easy to recognize a defined term - we
capitalize them.
A WORD ABOUT REPLACING YOUR LIFE INSURANCE. You should know that, most times, it
is not in your best interest to replace one life insurance policy with another
one. When you need additional life insurance, it is usually better for you to
add coverage - either by asking for a new policy or by buying additional
insurance - than it is for you to replace a policy. In that way, you don't lose
benefits under the policy you already have.
If you are thinking about replacing a life insurance policy you already have so
that you can obtain Group Variable Universal Life Insurance, you should consider
your choices carefully. Compare the costs and benefits of adding coverage to
your current policy against the costs and benefits of Group Variable Universal
Life Insurance. You should also get advice from a tax advisor.
YOU SHOULD READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. THIS
DOCUMENT WILL BE FOLLOWED BY PROSPECTUSES FOR EACH OF THE FUNDS UNDER THE GROUP
PROGRAM THAT WILL BE AVAILABLE TO YOU. THIS PROSPECTUS WILL BE ACCOMPANIED BY A
SUPPLEMENT THAT DESCRIBES THE UNIQUE FEATURES OF THE GROUP CONTRACT AND
CERTIFICATES. THE PROSPECTUS AND THE SUPPLEMENT TOGETHER PROVIDE ALL THE
INFORMATION YOU NEED TO KNOW ABOUT GROUP VARIABLE UNIVERSAL LIFE INSURANCE, AND
YOU SHOULD READ THEM TOGETHER.
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES, OR DETERMINED THAT 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) 562-9874
The SEC maintains a Web site (http://www.sec.gov) that contains material
incorporated by reference and other information regarding issuers that file
electronically with the SEC. You may also obtain and copy information at the
SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for
information. You may obtain copies of available information upon payment of a
duplicating fee by writing the Public Reference Section of the SEC, Washington,
D.C. 20549-6009.
GL.99.561
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
The Prudential Variable Contract Account GI-2 (called the "Separate Account")
has 131 variable investment options. We call each option a "Subaccount." We will
invest the assets of each Subaccount in The Prudential Series Fund, Inc. (called
the "Series Fund") or in certain other mutual fund portfolios. When we refer to
Funds" in this prospectus, we mean all or any of these funds.
We will permit each Group Contractholder to choose up to 20 of these Funds. The
Series Fund Money Market Portfolio must be one of the selected Funds. Generally,
half of the Funds selected by the Group Contractholder must be from the Series
Fund.
You may then choose as investment options from among the Funds selected by your
Group Contractholder. You may also choose to invest in the Fixed Account. (The
Fixed Account is an investment option for which Prudential guarantees that the
effective annual interest rate will be at least 4%.)
Once you select the investment options you want, Prudential will direct your
premium payments to the Subaccount associated with those Funds or to the Fixed
Account.
We describe the Funds chosen by your Group Contractholder briefly in the section
called "The Funds" that appears in the accompanying supplement. We will send you
a prospectus for each Fund selected by your Group Contractholder. The Fund
prospectuses tell you about the objectives and policies for each Fund, as well
as about the risks of investing in each Fund.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
BRIEF DESCRIPTION OF THE GROUP CONTRACT AND CERTIFICATE......................................................... 1
ILLUSTRATIONS OF DEATH BENEFITS AND CASH SURRENDER VALUES....................................................... 7
GENERAL INFORMATION ABOUT PRUDENTIAL, THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2............................. 8
The Prudential Insurance Company of America............................................................ 8
The Prudential Variable Contract Account GI-2.......................................................... 9
The Funds.............................................................................................. 9
The Fixed Account..................................................................................... 10
DETAILED INFORMATION ABOUT THE CERTIFICATES..................................................................... 10
How Prudential Issues Certificates..................................................................... 10
A "Free Look" Period................................................................................... 11
Procedures............................................................................................. 12
Premiums............................................................................................... 12
Effective Date of Insurance............................................................................ 13
How Prudential Will Deposit and Invest Premium Payments................................................ 14
How You Can Change the Way Prudential Allocates Future Premium Payments................................ 14
How You Can Transfer Amounts in Your Certificate Fund
from One Investment Option to Another............................................................. 15
Dollar Cost Averaging.................................................................................. 16
Death Benefits......................................................................................... 17
Changes in Face Amount................................................................................. 19
Charges and Expenses................................................................................... 20
Reduction of Charges................................................................................... 24
Dividends or Experience Credits........................................................................ 24
Cash Surrender Value................................................................................... 25
Full Surrenders........................................................................................ 25
Paid-up Coverage....................................................................................... 26
Partial Withdrawals.................................................................................... 26
Loans.................................................................................................. 27
Telephone and Electronic Transactions.................................................................. 28
Lapse.................................................................................................. 29
Termination of a Group Contractholder's Participation in the Group Contract............................ 29
Participants Who Are No Longer Eligible Group Members.................................................. 30
Options on Termination of Coverage..................................................................... 30
Reinstatement.......................................................................................... 32
Tax Treatment of Certificate Benefits.................................................................. 33
ERISA Considerations................................................................................... 36
When Proceeds Are Paid................................................................................. 38
Beneficiary............................................................................................ 38
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Incontestability....................................................................................... 38
Misstatement of Age.................................................................................... 38
Suicide Exclusion...................................................................................... 39
Modes of Settlement.................................................................................... 39
Assignment............................................................................................. 40
Applicant Owner Provision.............................................................................. 41
Voting Rights.......................................................................................... 41
Substitution of Fund Shares............................................................................ 42
Additional Insurance Benefits.......................................................................... 43
Reports................................................................................................ 44
Sale of the Contract and Sales Commissions............................................................. 45
Ratings and Advertisements............................................................................. 46
Services Performed by Third Parties.................................................................... 46
State Regulation....................................................................................... 46
Experts................................................................................................ 47
Litigation............................................................................................. 47
The Year 2000 Issue.................................................................................... 48
Subsequent Events...................................................................................... 50
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS............................................................ 51
DIRECTORS AND OFFICERS OF PRUDENTIAL............................................................................ 54
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2........................................... A1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA AND SUBSIDIARIES........................................................................ B1
</TABLE>
YOU SHOULD NOT CONSIDER THIS PROSPECTUS TO BE AN OFFERING IN ANY JURISDICTION
WHERE AN OFFERING MAY NOT BE LAWFULLY MADE. YOU SHOULD RELY ON THE INFORMATION
CONTAINED IN THIS PROSPECTUS AND THE ACCOMPANYING SUPPLEMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
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BRIEF DESCRIPTION OF THE GROUP CONTRACT AND CERTIFICATE
In this section of the prospectus, we answer some questions that are frequently
asked about Group Variable Universal Life Insurance. You can find more detailed
information on later pages of the prospectus.
The Group Contract and Certificate provide even more detailed information. You
will get a Certificate if you buy the Group Variable Universal Life Insurance.
WHAT IS A GROUP VARIABLE UNIVERSAL LIFE INSURANCE CONTRACT?
It is an insurance contract issued by Prudential to the group that sponsors the
Group Variable Universal Life Insurance program. Often, the group that sponsors
a program is an employer. Other groups, such as membership associations, may
also sponsor programs.
The Group Contract states all the terms of the agreement between Prudential and
the sponsoring group. It forms the entire agreement between them. Among other
things, the Group Contract defines which members of the group are eligible to
buy the Group Variable Universal Life Insurance. The Group Contract also says
whether or not Eligible Group Members may also buy coverage for their
dependents.
We will give a Certificate to each Eligible Group Member or Applicant Owner who
buys coverage under the Group Contract. The Certificate provides for a Death
Benefit and a Cash Surrender Value. The Death Benefit and the Cash Surrender
Value can change every day. They change based on the performance of the
investment options you selected.
HOW DOES PRUDENTIAL CALCULATE THE CERTIFICATE'S DEATH BENEFIT?
When you buy Group Variable Universal Life Insurance, you will choose a Face
Amount of insurance, based on the amounts available for your group. Prudential
will calculate the Death Benefit like this:
o The DEATH BENEFIT is the Face Amount of insurance PLUS the
value of your Certificate Fund on the date of your death MINUS
any Certificate Debt and outstanding charges.
(In some cases, we will increase the Death Benefit to an amount that is more
than the Face Amount plus the value of the Certificate Fund. We will do that to
make sure that the Certificate meets the definition of "life insurance" under
the Internal Revenue Code. We will still deduct any Certificate Debt and
outstanding charges.)
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The CERTIFICATE FUND consists of the Net Premiums that we invest in the
investment options you selected. Prudential will deduct its charges for the
insurance from the Certificate Fund. The value of the Certificate Fund will
change each day based on the performance of those investment options and to
reflect the deduction of daily charges.
See the DEATH BENEFITS section on page 17.
HOW DOES PRUDENTIAL CALCULATE THE CASH SURRENDER VALUE OF THE CERTIFICATE?
Prudential calculates the Cash Surrender Value of a Certificate like this:
o The CASH SURRENDER VALUE is the value of the Certificate Fund on the day of
the surrender MINUS any Certificate Debt and outstanding charges.
(Under the terms of some Group Contracts, Prudential is permitted to also deduct
a charge for the surrender. The charge may be up to $20.)
See the CASH SURRENDER VALUE section on page 25.
WHAT PREMIUMS MUST I PAY?
You can usually choose how often you pay premiums and the amount of premiums.
Prudential will keep your insurance in force as long as the balance in your
Certificate Fund is enough to pay the charges that are due to Prudential each
month. Prudential may also require you to pay a minimum initial premium.
If the balance in your Certificate Fund is not enough to pay any month's
charges, you must make a premium payment that is enough to bring your
Certificate Fund balance above this minimum amount. You must make that payment
during the grace period. If you don't, your insurance coverage will end.
See the PREMIUMS section on page 12.
WHAT INVESTMENT OPTIONS ARE AVAILABLE?
The Separate Account has Subaccounts. We invest the assets of each Subaccount in
its corresponding Fund.
We permit each Group Contractholder to choose up to 20 of these Funds for the
Group Contractholder's Participants to invest in. The Series Fund Money Market
Portfolio must be one of the selected Funds. And generally, half of the Funds
selected by the Group Contractholder must be from the Series Fund.
2
<PAGE>
Instead of choosing Funds for itself, a Group Contractholder may ask Prudential
to present it with one or more predetermined groups of Funds for the Group
Contractholder's Participants to invest in.
We will not permit a Group Contractholder to substitute other Funds for Funds it
has already selected (whether the Group Contractholder chose its own Funds or
selected a predetermined group of Funds). But, if a Group Contractholder chooses
fewer than 20 Funds, we will permit that Group Contractholder to select
additional Funds.
You may invest only in the Funds chosen by your Group Contractholder and in the
Fixed Account. (The Fixed Account is an investment option for which Prudential
guarantees that the effective annual interest rate will be at least 4%. See THE
FIXED ACCOUNT section on page 10.)
We recommend that the Group Contractholder get advice from an investment advisor
when choosing the investment options for its Participants.
See THE FUNDS section in the accompanying supplement. Each Fund prospectus
provides more detailed information about the specific Fund.
DOES GROUP VARIABLE UNIVERSAL LIFE INSURANCE OFFER CHOICE AND FLEXIBILITY IN THE
AMOUNT OF INSURANCE PROTECTION I CAN GET?
Yes. The Death Benefit under a Certificate includes, among other things, the
value of your Certificate Fund. The value of your Certificate Fund will vary
with the investment performance of the investment options you select. So, your
Death Benefit could grow more than it could under a certificate that does not
include investment options. But, the Death Benefit may also go down if the
investment options in your Certificate Fund have poor investment performance.
You choose how to invest the amount you have in your Certificate Fund. You may
choose more aggressive Funds or less aggressive Funds. What you choose depends
on your personal circumstances and your investment objectives and how they may
change over time.
If you prefer to avoid or reduce the risks that come with investing in the
Funds, you can choose to direct some or all of the amount in your Certificate
Fund to the Fixed Account. Prudential guarantees that the part of your
Certificate Fund that is directed to the Fixed Account will earn interest daily
at a rate that Prudential declares periodically. That rate will change from time
to time, but it will never be lower than 4%. See THE FIXED ACCOUNT section on
page 10.
WHAT CHARGES DOES PRUDENTIAL MAKE?
We deduct certain charges from each premium payment that you make and from the
amounts that are held in each investment option. These charges compensate us for
insurance costs, risks and expenses.
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<PAGE>
All charges made by Prudential are described in detail in the CHARGES AND
EXPENSES section on page 20. This chart briefly outlines the charges that may be
made:
- --------------------------------------------------------------------------------
YOU MAKE A PREMIUM PAYMENT.
- --------------------------------------------------------------------------------
|
- --------------------------------------------------------------------------------
THEN, PRUDENTIAL DEDUCTS THESE CHARGES:
o A CHARGE FOR TAXES ON PREMIUM PAYMENTS. Currently, this charge is 2.6%, but
some Group Contracts may permit a charge up to 5.35%. We reserve the right
to increase this charge if the cost of our taxes related to premium
payments increases. (In some states, this charge is known as a
premium-based administrative charge.)
o A PROCESSING CHARGE of up to $2. (Under some Group Contracts, this charge
is waived.)
o A SALES CHARGE of up to 3-1/2%. (Under some Group Contracts, this charge is
waived.)
- --------------------------------------------------------------------------------
|
- --------------------------------------------------------------------------------
The remainder is your NET PREMIUM
This is the amount that you can invest in one or more of the investment options
selected by your Group Contractholder.
- --------------------------------------------------------------------------------
|
- --------------------------------------------------------------------------------
DAILY CHARGES
After your Net Premium is directed to your investment option(s), Prudential
deducts these DAILY CHARGES from the Subaccounts (but not from the Fixed
Account):
o A DAILY CHARGE for mortality and expense risks. This charge is deducted
from the assets of the Subaccount(s) that correspond to the Fund(s) you
selected.
Currently, this charge is equivalent to an effective annual rate of 0.45%.
Prudential guarantees that this charge will not be more than an effective
annual rate of 0.90%.
o A DAILY CHARGE for investment management fees and expenses. These charges
are deducted from the assets of the Fund(s) you selected. The Funds set
these charges.
- --------------------------------------------------------------------------------
|
4
<PAGE>
- --------------------------------------------------------------------------------
MONTHLY CHARGES
Prudential deducts these charges from your Certificate Fund each month:
o A CHARGE FOR ADMINISTRATIVE EXPENSES. Currently, this charge may be up to
$3 per month. Prudential guarantees that it will not be more than $6 per
month.
o A CHARGE FOR THE COST OF INSURANCE.
o A CHARGE FOR ANY ADDITIONAL INSURANCE BENEFITS not already included in the
charge for the cost of insurance.
Under some Group Contracts, Prudential may deduct these charges more or less
frequently.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
POSSIBLE ADDITIONAL CHARGES
Some Group Contracts may also permit Prudential to make the following
TRANSACTION CHARGES:
o When you use the DOLLAR COST AVERAGING feature.
o When you ask Prudential to REALLOCATE the way your premium payments will be
invested.
o When you SURRENDER your Certificate Fund or when you make a WITHDRAWAL from
it. The charge can be up to $20 or 2% of the amount you surrender or
withdraw, whichever amount is less.
o Each time you take a LOAN from your Certificate Fund. The charge may be up
to $20.
o Each time you request an ADDITIONAL STATEMENT about your Certificate Fund.
The charge may be up to $20.
o When you request MORE THAN 12 TRANSFERS BETWEEN INVESTMENT OPTIONS in a
Certificate Year. The charge may be up to $20 for each transfer after the
12th one.
Also, Prudential has the right to make a charge for any taxes that may be
imposed on the operations of the Separate Account.
5
<PAGE>
CAN I MAKE WITHDRAWALS FROM THE CERTIFICATE FUND?
Yes. You may request a partial withdrawal from the Certificate Fund. You may
also surrender your insurance and receive its Cash Surrender Value. See the
PARTIAL WITHDRAWALS section on page 26 and the FULL SURRENDERS section on page
25.
CAN I TAKE LOANS?
Yes. You may borrow money from your Certificate Fund. The Loan Value, which is
the maximum amount you may borrow, is 90% of your Certificate Fund minus any
existing loan (and its accrued interest), outstanding charges, and the amount of
the next month's charges. In states that require it, you may borrow a greater
amount.
When you take a loan from your Certificate Fund, here's what happens:
o The amount of the loan is transferred from your investment options to a
Loan Account. This Loan Account is still part of your Certificate Fund.
o The Loan Account earns interest at an effective annual rate that is usually
2% less than the rate Prudential charges as interest on the loan.
The term "Certificate Debt" is used to mean any outstanding loan plus its
accrued interest. Certificate Debt is deducted from any amount payable at the
Covered Person's death. It is also deducted from the Certificate's Cash
Surrender Value.
HOW IS MY INSURANCE COVERAGE AFFECTED WHEN I AM NO LONGER A MEMBER OF THE GROUP?
Each Group Contract has different rules. Under some Group Contracts, you may
continue your insurance even though you are no longer part of the group. The
charges for continued insurance may be higher.
You may also surrender the insurance for its Cash Surrender Value, elect to use
the Cash Surrender Value to buy Paid-up Coverage, or convert the insurance to an
individual life insurance policy.
See the OPTIONS ON TERMINATION OF COVERAGE section on page 30.
WHAT IS THE FEDERAL INCOME TAX STATUS OF AMOUNTS RECEIVED UNDER THE CERTIFICATE?
Variable life insurance contracts receive the same Federal income tax treatment
as conventional life insurance contracts (those where the amount of the death
benefit is fixed instead of variable). Here's what that means:
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<PAGE>
o First, the Death Benefit is generally not included in the gross income of
the beneficiary.
o Second, increases in the value of the Certificate Fund are generally not
included in the taxable income of the Participant. This is true whether the
increases are from income or capital gains.
o Third, surrenders and partial withdrawals are generally treated first as a
return of your investment in the Certificate and then as a distribution of
taxable income.
o Fourth, loans are not generally treated as distributions.
See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page 33. You should
consult your tax advisor for guidance on your specific situation.
WHAT ARE THE FUNDS' CHARGES?
Information about the Funds' fees and expenses appear in THE FUNDS section of
the accompanying supplement.
ILLUSTRATIONS OF DEATH BENEFITS AND CASH SURRENDER VALUES
In the accompanying supplement, we show you examples of how the Death Benefit
and the Cash Surrender Value of your Certificate can change as a result of the
performance of the investment options you select. The examples are not our
prediction of how value will grow. They are hypothetical examples and are just
intended to show you how a Certificate works.
We call these examples "ILLUSTRATIONS."
7
<PAGE>
GENERAL INFORMATION ABOUT:
o PRUDENTIAL
o THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
The Prudential Insurance Company of America ("Prudential" or the "Company") 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 publicly
traded stock company through a process known as "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. On July 1,
1998, legislation was enacted in New Jersey that would permit this conversion to
occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption of a
plan by the Company's Board of Directors, a public hearing, voting by qualified
policyholders and regulatory approval, all of which could take two or more years
to complete. Prudential's management and Board of Directors have not yet
determined to demutualize and it is possible that, after careful review,
Prudential could decide not to go public.
The plan of reorganization, which has not been developed and approved, would
provide the criteria for determining eligibility and the methodology for
allocating shares or other consideration to those who would be eligible.
Generally, the amount of shares or other consideration eligible customers would
receive would be based on a number of factors, including the types, amounts, and
issue years of their policies. As a general rule, owners of Prudential-issued
insurance policies and annuity contracts would be eligible, while mutual fund
customers and customers of the Company's subsidiaries would not be. It has not
yet been determined whether any exceptions to that general rule will be made
with respect to policyholders and contract owners of Prudential's subsidiaries.
Eligible policyholders would generally include employers, associations, other
groups, and trusts established by or for such entities, that own group policies
issued by Prudential, and generally would include Group Contractholders. The
individuals covered under a group plan, such as the Participants under a Group
Contract, generally would not be eligible to receive stock or other
consideration from Prudential.
Prudential is licensed to sell life insurance and annuities in all states, in
the District of Columbia, and in all United States territories and possessions.
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 Group Contracts and the insurance provided thereunder. Prudential and
its affiliates act in a variety of capacities with respect to registered
investment companies including as depositor, adviser, and principal underwriter.
8
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
The Prudential Variable Contract Account GI-2 (the "Separate Account") was
established on June 14, 1988 under New Jersey law as a separate investment
account. The Separate Account meets the definition of a "separate account" under
the federal securities laws. The Separate Account holds assets that are
segregated from all of Prudential's other assets.
The obligations arising under the Group Contracts and the Certificates are
general corporate obligations of Prudential. Prudential is also the legal owner
of the assets in the Separate Account. Prudential will maintain assets in the
Separate Account with a total market value at least equal to the liabilities
relating to the benefits attributable to the Separate Account. These assets may
not be charged with liabilities which arise from any other business Prudential
conducts. In addition to these assets, the Separate Account's assets may include
funds contributed by Prudential to commence operation of the Separate Account
and may include accumulations of the charges Prudential makes against the
Separate Account. From time to time, these additional assets will be transferred
to Prudential's general account. Before making any such transfer, Prudential
will consider any possible adverse impact the transfer might have on the
Separate Account.
The Separate Account is registered with the Securities and Exchange Commission
("SEC") under the federal securities laws as a unit investment trust, which is a
type of investment company. This does not involve any supervision by the SEC of
the management or investment policies or practices of the Separate Account. For
state law purposes, the Separate Account is treated as a part or division of
Prudential. There are currently 131 Subaccounts within the Separate Account,
each of which invests in a corresponding Fund. Prudential reserves the right to
take all actions in connection with the operation of the Separate Account that
are permitted by applicable law (including those permitted upon regulatory
approval).
THE FUNDS
Information about each Fund, its investment objective, investment management
fees and other expenses, and its investment advisor/investment manager appears
in the accompanying supplement.
CERTAIN FUNDS HAVE INVESTMENT OBJECTIVES AND POLICIES CLOSELY RESEMBLING THOSE
OF MUTUAL FUNDS WITHIN THE SAME COMPLEX THAT ARE SOLD DIRECTLY TO INDIVIDUAL
INVESTORS. DESPITE SUCH SIMILARITIES, THERE CAN BE NO ASSURANCE THAT THE
INVESTMENT PERFORMANCE OF ANY SUCH FUND WILL RESEMBLE THAT OF ITS RETAIL FUND
COUNTERPART.
YOU WILL RECEIVE A PROSPECTUS FOR EACH AVAILABLE FUND. THAT PROSPECTUS WILL
DESCRIBE THE FUND, ITS INVESTMENT OBJECTIVE AND STRATEGIES, ITS RISKS, AND ITS
MANAGEMENT FEES AND OTHER EXPENSES. YOU SHOULD READ THE FUND PROSPECTUSES
TOGETHER WITH THIS PROSPECTUS. AS WITH ALL MUTUAL FUNDS, A FUND MAY NOT MEET ITS
INVESTMENT OBJECTIVE. SUBJECT TO APPLICABLE LAW, PRUDENTIAL MAY STOP OFFERING
ONE OR MORE FUNDS OR MAY SUBSTITUTE A DIFFERENT MUTUAL FUND FOR ANY FUND.
9
<PAGE>
EACH FUND HAS PROVIDED PRUDENTIAL WITH INFORMATION ABOUT ITS MANAGEMENT FEES AND
OTHER EXPENSES. EXCEPT FOR THE SERIES FUND, PRUDENTIAL HAS NOT VERIFIED THAT
INFORMATION INDEPENDENTLY.
THE FIXED ACCOUNT
You may invest all or part of your Certificate Fund in the Fixed Account. The
amount invested in the Fixed Account becomes part of Prudential's general
assets, commonly referred to as the general account. The part of the Certificate
Fund that you invest in the Fixed Account will accrue interest daily at a rate
that Prudential declares periodically. This rate will not be less than an
effective annual rate of 4%. Prudential may in its sole discretion sometimes
declare a higher rate. At least annually and anytime you ask, we will tell you
what interest rate currently applies. Under some Group Contracts, Prudential may
determine interest rates based on the contract year we receive the premium
payments.
We strictly limit your right to make transfers out of the Fixed Account. See the
HOW YOU CAN TRANSFER AMOUNTS IN YOUR CERTIFICATE FUND FROM ONE INVESTMENT OPTION
TO ANOTHER section on page 15. Prudential has the right to delay payment of any
Cash Surrender Value attributable to the Fixed Account for up to 6 months. See
the WHEN PROCEEDS ARE PAID section on page 38.
Because of exemptive and exclusionary provisions, Prudential has not registered
the Fixed Account or the general account under the federal securities laws.
Prudential has been advised that the staff of the Securities and Exchange
Commission has not reviewed the disclosure in this Prospectus relating to the
Fixed Account. Disclosures concerning the Fixed Account may, however, be subject
to certain provisions of the federal securities laws relating to the accuracy of
statements made in a prospectus.
DETAILED INFORMATION ABOUT THE CERTIFICATES
HOW PRUDENTIAL ISSUES CERTIFICATES
To apply for coverage under a Group Variable Universal Life Insurance Contract,
an Eligible Group Member must fill out an enrollment form. Prudential may ask
questions about the health of the person whose life is to be covered, and may
ask that person to have a medical exam. If Prudential approves the person for
coverage, that person will become a Covered Person under the Group Variable
Universal Life Insurance.
COVERAGE ON THE LIFE OF A SPOUSE. Usually, the Eligible Group Member buys
coverage on his or her own life. But, some Group Contracts allow an Eligible
Group Member to also apply for coverage on his or her spouse's life. No matter
whose life is covered, the Participant is the person who "owns" the right to
make decisions about the coverage (for example, deciding who the
10
<PAGE>
beneficiary will be). When we use the term "Participant" or "you," we mean the
person who owns those rights. When we use the term "Covered Person," we mean the
person whose life is covered.
The Eligible Group Member is usually the Participant. But, under some Group
Contracts, an Eligible Group Member may allow another person the right to make
decisions about the coverage. When that happens, Prudential considers the other
person to be a Participant. See the ASSIGNMENT and APPLICANT OWNER PROVISION
sections on pages 40 and 41.
Prudential will issue a Certificate to each Participant. Prudential will issue a
separate Certificate for spouse coverage. The Certificate tells you about the
rights, benefits, coverage, and obligations of the Group Variable Universal Life
Insurance. The minimum Face Amount of insurance for a Certificate is $10,000.
MAXIMUM AGES. Generally, Prudential will not issue Certificates for a person who
is older than age 74. And, Prudential will generally end a Participant's
coverage at the maximum age shown in the Certificate (usually, that is age 100).
When a Participant reaches the maximum age, we make available these three
options:
o You may ask to receive the Cash Surrender Value of the Certificate.
(Prudential believes that a cash surrender upon termination of coverage
will be subject to the same tax treatment as other surrenders. See the TAX
TREATMENT OF CERTIFICATE BENEFITS section on page 33.)
o You may use some or all of the Certificate Fund to buy Paid-up Coverage.
See the PAID-UP COVERAGE section on page 26.
o You can remain invested in your investment options. Under this option, we
will no longer deduct monthly charges for the cost of insurance and for
additional insurance benefits. The Death Benefit will change. Specifically,
the Death Benefit will be equal to the amount of the Certificate Fund,
minus any Certificate Debt and outstanding charges. The Death Benefit will
no longer include the Face Amount of insurance. Also, we will no longer
allow you to make premium contributions. You can still make loan
repayments.
Under some Group Contracts, coverage may end at an age less than 100. You should
refer to your particular Certificate and Group Contract to learn when coverage
under your Certificate will end.
A "FREE LOOK" PERIOD
Generally, you may return a Certificate for a refund within 10 days after you
receive it. This 10- day period is known as the "free look" period. Some states
allow a longer period. You can ask for a refund by mailing the Certificate back
to Prudential.
11
<PAGE>
If you cancel your coverage during the free look period, we will generally
refund the premium payments you made, minus any loans or withdrawals that you
took. We will not add or subtract any gain or loss that would have come from the
investment options you chose (unless a state law requires that we take those
gains or losses into account when we make a refund). When we make a refund, we
will not deduct any charges.
During the first 20 days after the Certificate Date, your premium payments will
be invested in the Fixed Account (or, under some Group Contracts, in the Series
Fund Money Market Portfolio). Prudential reserves the right to limit
contributions and transactions during the free look period.
PROCEDURES
Each Group Contract has different procedures for how you will conduct
transactions under your Group Variable Universal Life Insurance - for example,
how you will submit an enrollment form, make premium payments, take loans and
withdrawals, and transfer or reallocate money in your Certificate Fund. Your
Group Contractholder can tell you what those procedures are.
Under some Group Contracts, Participants will be required to make transactions
through the Group Contractholder. Under other Group Contracts, Participants will
be required to deal directly with Prudential. Either way, Prudential will
consider enrollment forms, payments, orders and other documents to be "received"
when Prudential receives them in good order.
WHEN PRUDENTIAL RECONCILES FINANCIAL TRANSACTIONS. Prudential usually reconciles
financial transactions at the end of the day, when most banks and financial
institutions have closed for the evening. As a result, some transactions (for
example, premium payments, loan repayments, or withdrawals) cannot be completed
until the next business day. Usually, this will result in a one-day delay in the
movement of money from one investment option to another. During any delay,
Prudential may place this money in an unallocated account owned by Prudential
that pays a market rate of interest. The short term interest ("float") earned on
this money will be retained by Prudential as compensation for services rendered.
This interest will not be paid from a Participant's Certificate Fund, and will
not reduce the value of the Certificate Fund. Transfers among the Funds and
dollar cost averaging are not subject to this possible delay.
PREMIUMS
ROUTINE PREMIUM PAYMENTS. You will usually be able to decide when to make
premium payments and how much each premium payment will be. You just have to
make sure that there is enough money in your Certificate Fund - minus
Certificate Debt and outstanding charges - to cover each month's charges. If
there is not, your insurance will end (in insurance terms, it will "lapse"). See
the LAPSE section on page 29 to learn how your insurance will end and what you
can do to stop it from ending.
12
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Under some Group Contracts, you may also be required to pay a minimum initial
premium to become a Participant. The minimum initial premium will vary for each
Group Contract, but it will not be more than 50% of the Guideline Annual
Premium. We define Guideline Annual Premium in the DEFINITIONS OF SPECIAL TERMS
section on page 51.
ADDITIONAL PREMIUM PAYMENTS. In addition to routine premium payments, you may
make additional premium payments at any time. Each additional premium payment
must be at least $100. Prudential reserves the right to limit the amount of
additional premiums.
HOW YOU WILL PAY PREMIUMS. Your Group Contractholder sets up the premium payment
method. Some Participants will make payments through the Group Contractholder
(who will pass them on to us). Other Participants will pay us directly. Monthly
charges may be higher when premium payments are made directly to Prudential. See
the CHARGES AND EXPENSES section on page 20.
DEDUCTING PREMIUMS FROM YOUR PAYCHECK. Some Group Contractholders might set up a
way for you to make routine premium payments by deducting them from your
paycheck. Each Group Contractholder's rules for paycheck deduction will be
different and some may require your premium payment to meet a minimum before the
automatic deduction will be allowed. If that's the case, you may still make
premium payments below the minimum directly to Prudential.
EFFECT OF PREMIUM PAYMENTS ON TAX STATUS. If you pay additional premiums, we may
need to increase your Death Benefit (and corresponding cost of insurance
charges) to continue to qualify it as life insurance for federal tax purposes.
Also, if you make premium payments above certain limits, the tax status of the
insurance may change to that of a Modified Endowment Contract under the Internal
Revenue Code. That status could have significant disadvantages from a tax
standpoint. We have procedures designed to identify most situations in which a
premium payment would cause your Certificate to be treated as a Modified
Endowment Contract. When we identify such a situation, we generally will notify
you and ask whether you want us to refund the premium payment. If you fail to
respond within a reasonable time, we will continue to process the premium
payment as usual.
We reserve the right to return any premium payment that would cause your
insurance to fail to qualify as life insurance under applicable tax laws, or
that would increase the Death Benefit by more than it increases the Certificate
Fund.
See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page 33.
EFFECTIVE DATE OF INSURANCE
When your insurance begins depends on what day of the month Prudential approves
your completed enrollment form. If we approve your completed enrollment form
prior to the 20th day of a month, your insurance will begin on the first day of
the next month. If we receive your completed enrollment form on or after the
20th day of a month, your insurance will begin on the first day of the month
after the next month.
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HOW PRUDENTIAL WILL DEPOSIT AND INVEST PREMIUM PAYMENTS
Prudential will deposit premium payments in your Certificate Fund after we
deduct any charges that apply. The amount of your premium after we deduct those
charges is called "Net Premiums." See the CHARGES AND EXPENSES section on page
20.
Here's how Prudential will deposit and invest your Net Premiums: we generally
will make deposits to your investment options at the end of the Business Day on
which Prudential receives the payment. Any payments received before the
Certificate Date will be deposited as of the Certificate Date.
o BEFORE THE CERTIFICATE DATE. Prudential will hold any premium payment that
it receives before the Certificate Date in our general account (on your
behalf). We will not pay interest on those amounts. If we receive a premium
payment before we have approved your enrollment under the Group Contract,
however, we generally will return the premium payment to you.
o DURING THE FIRST 20 DAYS THAT YOUR CERTIFICATE IS IN EFFECT. We will invest
any Net Premiums that we receive during the first 20 days in the Fixed
Account. We will leave the Net Premiums in the Fixed Account for those
first 20 days. After that, we will allocate the Net Premiums plus any
interest earned to the investment options you selected. (Under some Group
Contracts, we would use the Series Fund Money Market Portfolio instead of
the Fixed Account.)
o AFTER YOUR CERTIFICATE HAS BEEN IN EFFECT FOR 20 DAYS. After your
Certificate has been in effect for 20 days, Prudential will invest Net
Premiums in your Certificate Fund and allocate them to the investment
options you selected.
If you have not given us complete instructions on how you want Net Premiums to
be invested, we will leave your Net Premiums invested in the Fixed Account until
you furnish complete information. (Again, under some Group Contracts, we would
use the Series Fund Money Market Portfolio, rather than the Fixed Account.)
HOW YOU CAN CHANGE THE WAY PRUDENTIAL ALLOCATES FUTURE PREMIUM PAYMENTS
You may ask Prudential to change the way your future premium payments will be
allocated among the available investment options. Prudential will give you a
form to use for this purpose. We will start to allocate premium payments in the
new way as of the end of the Business Day on which we receive your request form
in good order.
The minimum percent that you may allocate to an available investment option is
5%. All allocations must be in whole percents.
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You may not change the way Prudential allocates future premiums if, at the time
we receive your request, there is not enough money in your Certificate Fund -
minus Certificate Debt and outstanding charges - to cover each month's charges.
See the LAPSE section on page 29.
We do not currently charge for changing the allocation of your future premiums.
But, we may charge for it in the future.
HOW YOU CAN TRANSFER AMOUNTS IN YOUR CERTIFICATE FUND FROM ONE INVESTMENT OPTION
TO ANOTHER
You may transfer amounts from one investment option to another. You may request
a transfer in terms of dollars (such as transfer of $10,000 from one available
option to another) or in terms of a percent reallocation (such as a transfer of
25% of your Certificate Fund from one option to another).
There are some rules about how transfers can be made:
o The minimum amount you may transfer from one option to another is $100 (or
the entire balance in the investment option, if it is less than $100).
o The minimum percent that you may allocate to an available investment option
is 5%. All allocations must be in whole percents.
o We limit the number of times you may transfer amounts out of the Fixed
Account. You may make only one transfer from the Fixed Account to one of
the available Funds each Certificate Year. The transfer cannot be for more
than $5,000 or 25% of the amount you have invested in the Fixed Account,
whichever is greater. We may change these limits in the future.
Transfers will take effect as of the end of the Business Day in which a proper
transfer request is received by Prudential (or Prudential's designee) on the
form we require you to use for this purpose. Prudential will give you a form to
request a transfer.
Under some Group Contracts, if you make more than twelve transfers in a
Certificate Year, Prudential may charge up to $20 for each transfer after the
twelfth.
Group Variable Universal Life Insurance was not designed for professional market
timing organizations or for other organizations or persons that use programmed,
large or frequent transfers. We will discourage a pattern of exchanges that
coincides with a "market timing" strategy, since they may be disruptive to the
Separate Account and the Funds. If we were to find such a pattern, we might
modify the transfer procedures, including not accepting transfer requests of an
agent acting under a power of attorney on behalf of more than one Certificate
owner.
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DOLLAR COST AVERAGING
Dollar Cost Averaging (which we refer to as "DCA") lets you systematically
transfer specified dollar amounts from the Series Fund Money Market Portfolio to
the other available Funds at monthly intervals. You can request that a
designated number of transfers be made under the DCA feature. When we make
transfers under the DCA feature, the transfers are effective as of the end of
the first Business Day following the first of the month.
You may use DCA at any time after your Certificate becomes effective. But, to
start the DCA feature, you usually have to make a premium payment of at least
$1,000 to the Series Fund Money Market Portfolio. And, the minimum transfer
amount is $100.
Prudential will give you a form to request DCA. If we receive your request form
in good order by the tenth of a month, we will start DCA processing during the
next month. If we receive it after the tenth day of a month, we will start DCA
processing during the month after the next month.
We will terminate the DCA arrangement when any of the following events occurs:
o We have completed the designated number of transfers.
o The amount you have invested in the Series Fund Money Market Portfolio is
not enough to complete the next transfer.
o Prudential receives your written request to end the DCA arrangement. (If we
receive your request by the tenth of a month, we will cancel the transfer
scheduled for the next following month. If we receive it after the tenth
day of a month, we will cancel the transfer scheduled for the month after
the next month.)
o You no longer have coverage under the Group Variable Universal Life
Insurance.
Currently, we do not charge for the DCA arrangement but we may in the future.
Transfers made under the DCA arrangement do not count against the number of
transfers that may be subject to the transfer charge described in the HOW YOU
CAN TRANSFER AMOUNTS IN YOUR CERTIFICATE FUND FROM ONE INVESTMENT OPTION TO
ANOTHER section on page 15.
The main objective of DCA is to shield investments from short-term price
fluctuations. Since the same dollar amount is transferred to an available Fund
with each transfer, you buy more of the Fund when its price is low and less of
the Fund when its price is high. Therefore, you may achieve a lower than average
cost over the long term. This plan of investing does not assure a profit or
protect against a loss in declining markets.
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DEATH BENEFITS
Prudential will pay a Death Benefit to the beneficiary when the Covered Person
dies.
AMOUNT OF THE DEATH BENEFIT. The Death Benefit is the Face Amount of insurance
PLUS the value of the Certificate Fund as of the date of death MINUS any
Certificate Debt and any past due monthly charges.
ADJUSTMENT IN THE DEATH BENEFIT. The Certificate Fund may have grown to the
point where we would need to increase the Death Benefit to be certain that the
insurance will meet the Internal Revenue Code's definition of life insurance. If
that were the case for your Certificate, we would use one of two methods to
increase the Death Benefit. Each Group Contract will use one method or the
other.
Under the first method, we would increase the Death Benefit (before we deduct
any Certificate Debt and outstanding charges) to make it equal to the following
"corridor percentage" of the Certificate Fund based on your Attained Age:
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COVERED PERSON'S CORRIDOR COVERED PERSON'S CORRIDOR
ATTAINED AGE PERCENTAGE ATTAINED AGE PERCENTAGE
------------ ---------- ------------ ----------
0-40 250% 70 115%
41 243 71 113
42 236 72 111
43 229 73 109
44 222 74 107
---- ---- --- ----
45 215 75 105
46 209 76 105
47 203 77 105
48 197 78 105
49 191 79 105
---- ---- --- ----
50 185 80 105
51 178 81 105
52 171 82 105
53 164 83 105
54 157 84 105
---- ---- --- ----
55 150 85 105
56 146 86 105
57 142 87 105
58 138 88 105
59 134 89 105
---- ---- --- ----
60 130 90 105
61 128 91 104
62 126 92 103
63 124 93 102
64 122 94 101
---- ---- --- ----
65 120 95 100
66 119 96 100
67 118 97 100
68 117 98 100
69 116 99 100
Under the second method, we would increase the Death Benefit (before we deduct
any Certificate Debt and outstanding charges) to make it equal the Certificate
Fund divided by the "Net Single Premium" per dollar of insurance for the Covered
Person's Attained Age. For this purpose, we base the "Net Single Premium" on the
1980 CSO Table.
HOW YOUR BENEFICIARY MAY RECEIVE THE DEATH BENEFIT: Your beneficiary may receive
the Death Benefit in the following ways:
o PRUDENTIAL'S ALLIANCE ACCOUNT. The Alliance Account is an interest-bearing
account that holds the Death Benefit while your beneficiary takes time to
consider other options. Your beneficiary has complete ownership of funds
held in the Alliance Account, and may draw on all or part of the funds by
writing a draft. Interest earnings in the Alliance Account are compounded
daily and credited monthly. Your beneficiary can transfer proceeds from the
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Alliance Account to other modes of settlement at any time. Proceeds in the
Alliance Account are part of Prudential's general account. If your beneficiary
does not want the money to go to the Alliance Account, he or she can ask
Prudential to issue a check instead.
o OTHER OPTIONS. Your beneficiary can arrange with Prudential for the Death
Benefit to be paid in a different way (known as "modes of settlement"), if
the Death Benefit is $1,000 or more. (You can also elect a different mode
of settlement for your beneficiary while you are living). See the MODES OF
SETTLEMENT section on page 39.
CHANGES IN FACE AMOUNT
The rules for changing the Face Amount of insurance will be different for each
Group Contract, depending on the options selected by the Group Contractholder
and on Prudential's rules.
The Face Amount of insurance may increase or decrease. The increase or decrease
may happen automatically, or when you ask. Here are some general statements
about changes in your Face Amount of insurance. But you should read your
Certificate to learn how changes work in your case.
INCREASES IN THE FACE AMOUNT OF INSURANCE
o Some Group Contracts allow Participants to ask for an increase in the Face
Amount of insurance at certain times.
o Some Group Contracts provide for automatic increases in the Face Amount of
insurance when a Participant's salary increases.
o Some Group Contracts may not allow increases at all.
o Whenever the Face Amount of insurance increases, Prudential may ask
questions about the Covered Person's health, or require the Covered Person
to have a medical exam, before the increase can become effective. Based on
the answers to the questions or on the exam, Prudential may not allow the
increase.
o An increase in the Face Amount will result in higher monthly insurance
charges because our net amount at risk will increase.
DECREASES IN THE FACE AMOUNT OF INSURANCE
o Some Group Contracts allow Participants to decrease the Face Amount of
insurance at certain times.
o A Participant may not decrease the Face Amount to less than $10,000 or
below the minimum amount required to maintain status as life insurance
under federal tax laws.
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o Some Group Contracts allow Prudential to automatically decrease the Face
Amount when certain "triggering events" occur. "Triggering events" are
events like reaching a certain age, retiring, or having a Certificate in
effect for a certain number of years.
Generally, Prudential will make the automatic decrease at latest of: the Covered
Person's 70th birthday, retirement, and the tenth Certificate Anniversary. We
will calculate the amount of the deduction at the end of the first Business Day
on or after the triggering event or receipt of your instructions to decrease the
Face Amount. The actual decrease will generally take effect on the first Monthly
Deduction Date after that. Sometimes it may take an additional month before the
charges change. If that happens, we will adjust the amount we deduct the first
month after the decrease takes effect to credit you for any extra monthly
charges we deducted the previous month.
When your Face Amount of insurance changes - whether it increases or decreases -
the change may cause your insurance to be treated as a Modified Endowment
Contract under the Internal Revenue Code. Also, a decrease in coverage may limit
the amount of premiums that you may contribute in the future. See the TAX
TREATMENT OF CERTIFICATE BENEFITS section on page 33. You should consult your
tax advisor before you change the Face Amount of your insurance.
CHARGES AND EXPENSES
For a Certificate that is in effect, Prudential reserves the right to increase
the charges that we currently make, but we currently have no intention to do so.
We will not in any case increase charges above the maximum charges described
below. You should refer to your particular Certificate to learn what charges
apply to you.
CHARGES DEDUCTED FROM EACH PREMIUM PAYMENT. We will deduct the charges listed
below from each premium payment you make before we invest the payment in the
investment options you selected.
1. CHARGE FOR TAXES ON PREMIUM PAYMENTS. We will deduct a charge for taxes we
must pay on premiums. These taxes include federal, state or local income,
premium, excise, business or any other type of tax (or part of one) that is
based on the amount of premium we receive.
This charge is currently made up of two parts:
o The first part is for state and local premium taxes. Currently, it is 2.25%
of the premium Prudential receives. For some Group Contracts, the charge
may be up to 5%. (In some states, this charge is called a premium-based
administrative charge.)
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o The second part is for federal income taxes that are based on premiums.
Currently, it is 0.35% of premiums received by Prudential. We believe that
this second charge is a reasonable estimate of the increased cost for
premium-based federal income taxes resulting from a 1990 change in the
Internal Revenue Code.
We may increase this charge if the cost of our taxes related to premiums is
increased. During 1998, we received approximately $61,000 in charges for
taxes on premium payments.
2. CHARGE FOR PROCESSING PREMIUMS. We may deduct up to $2 to cover the costs
of collecting and processing premiums. We may reduce or eliminate this
charge under certain Group Contracts. See the REDUCTION OF CHARGES section
on page 24. During 1998, we received no charges for processing premiums.
3. CHARGE FOR SALES EXPENSES. We may deduct a charge to pay part of the costs
we incur in selling the Group Contract and Certificates. These costs
include commissions, advertising, and publishing prospectuses and sales
literature. The maximum sales charge is 3.5% of each premium payment. We
may reduce or eliminate this charge under certain Group Contracts. See the
REDUCTION OF CHARGES section on page 24. During 1998, we received no
charges for sales expenses.
MONTHLY CERTIFICATE FUND CHARGES. Prudential will deduct the following charges
from your Certificate Fund each month. We will take the charges from each
investment option you selected, in the same proportion that the value of your
Certificate Fund is invested.
Generally, we will deduct these charges on the Monthly Deduction Date. Under
some Group Contracts, we may deduct them when we receive the premium payments
from the Group Contractholder. But, we will never deduct them later than 45 days
past the Monthly Deduction Date.
1. CHARGE FOR THE COST OF INSURANCE. We will deduct a charge for the cost of
your insurance.
To calculate the cost of insurance charge, we multiply:
your Certificate's "net amount at risk" by
the "cost of insurance rate" for the Covered Person.
"Net amount at risk" means the amount by which your Certificate's Death Benefit
(computed as if there were no Certificate Debt) exceeds your Certificate Fund.
The "cost of insurance rate" is based on many factors, including:
o the Covered Person's age;
o the Covered Person's rate class (such as classes for smokers and
non-smokers, or for active employees and retired employees);
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o the life expectancy of the people covered under your Group Contract;
o whether the Group Contractholder elected to buy any of the additional
insurance benefits shown in the ADDITIONAL INSURANCE BENEFITS section on
page 43;
o whether or not the Certificate is provided on a Portable basis; and
o the expected expenses.
The cost of insurance rate will generally increase as the Covered Person ages.
The cost of insurance charges are generally lower than the 1980 CSO Table.
We may adjust the actual cost of insurance rates from time to time. The changes
in cost of insurance rates for each Group Contractholder are based on many
factors, including:
o the number of Certificates in effect;
o the number of new Certificates issued;
o the number of Certificates surrendered or becoming Portable;
o the expected claims (death benefits, living benefits and surrenders);
o the expected cost of any additional insurance benefits that the Group
Contractholder elected to buy;
o the expected expenses; and
o administrative services provided by the Group Contractholder, if any.
In addition to the list above, the past claims, expenses and the costs of
additional insurance benefits, if any, of the group are reviewed since they are
an important factor in calculating the expected claims, expenses and costs.
However, we are prohibited from recovering past losses by state insurance law.
If we change the cost of insurance rates, we will change them the same way for
all persons of the same age, rate class and group. We will not change them to be
higher than the guaranteed cost of insurance rates shown in your Certificate.
The guaranteed rates may be up to 150% of the 1980 CSO Table. The guaranteed
rates are based on many factors, including:
o guaranteed issue procedures, if any;
o simplified underwriting that may not require a medical exam, blood tests or
urine tests;
o groups with substandard risks characteristics; and
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o the expected maximum cost of any additional insurance benefits that the
Group Contractholder elected to buy.
During 1998, we received approximately $554,000 in charges for cost of
insurance.
2. CHARGE FOR ADDITIONAL INSURANCE BENEFITS. The ADDITIONAL INSURANCE BENEFITS
section on page 43 tells you about benefits that you may be able to buy in
addition to the Group Variable Universal Life Insurance and the additional
insurance benefits that the Group Contractholder elected to buy. We will
deduct a separate charge for any additional insurance benefits that you
elect to buy from your Certificate Fund.
3. CHARGE FOR ADMINISTRATIVE EXPENSES. We may deduct a charge for
administrative expenses. This charge pays for maintaining records and for
communicating with Participants and Group Contractholders. Currently, it is
not more than $3 per month and it is guaranteed not to be more than $6 per
month. We may reduce or eliminate this charge under certain Group
Contracts. See the REDUCTION OF CHARGES section on page 24. During 1998, we
received no charges for administrative expenses.
4. CHARGE FOR OTHER TAXES. We reserve the right to deduct a charge to cover
federal, state or local taxes that are imposed on the operations of the
Separate Account. These are taxes other than those described under the
"CHARGE FOR TAXES ON PREMIUM PAYMENTS" section above. Currently, we do not
charge for these other taxes.
DAILY DEDUCTION FROM THE SEPARATE ACCOUNT. Each day, Prudential deducts a charge
from the assets of the Separate Account in an amount currently equal to an
effective annual rate of 0.45%. We guarantee that the charge will not be more
than an effective annual rate of 0.90%.
This charge compensates us for assuming the mortality and expense risks of the
insurance provided under the Group Contract. The "mortality risk" is the risk
that Covered Persons may live for shorter periods of time than Prudential
estimated when we determined the mortality charge. The "expense risk" is the
risk that expenses for issuing and administering the insurance will be more than
Prudential estimated when we determined the charge for administrative expenses.
We will earn a profit from this risk charge to the extent we do not need it to
provide benefits and pay expenses under the Certificate. We do not assess this
charge on amounts allocated to the Fixed Account. During 1998, we received
approximately $7,000 in charges for mortality and expense risks.
TRANSACTION CHARGES. Under some Group Contracts, we may deduct a charge for
surrenders, partial withdrawals, loans, transfers, reinstatements, and
additional statement requests. See the sections of this prospectus that describe
each of those transactions. Those sections also describe the charges that
Prudential may deduct.
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EXPENSES INCURRED BY THE FUNDS. Participants indirectly bear the charges and
expenses of the Funds. To find out details about the management fees and other
underlying Fund expenses, you should see THE FUNDS section in the accompanying
supplement. You should also read the prospectuses for the available Funds.
REDUCTION OF CHARGES
Prudential may reduce or waive the charge for sales expenses, the charge for
processing premiums, or other charges under certain Group Contracts where we
expect that the Group Contract will involve reduced sales or administrative
expenses. In deciding whether to reduce such charges, and by how much, we
consider the following factors:
o The size of the group.
o The total amount of premium payments we expect to receive.
o How long Participants will hold their Certificates.
o The purpose for which the Group Contractholder bought the Group Contract
and whether that purpose makes it likely that expenses will go down.
o Any other circumstances Prudential believes to be relevant in determining
whether sales or administrative expenses will go down.
In some cases, we may guarantee the reduction or waivers of charges in the Group
Contract. In other cases, we may decide to discontinue the reductions or
waivers. Prudential's reductions and waivers of charges will not be unfairly
discriminatory to the interests of any individual Participants.
DIVIDENDS OR EXPERIENCE CREDITS
The Group Contract is eligible to receive Dividends or Experience Credits. But,
we have set the premium rates in such a way that we will not generally pay a
dividend or experience credit.
If there is a Dividend or Experience Credit, Prudential will pay it to the Group
Contractholder.
You should refer to your particular Group Contract for details on Dividends or
Experience Credits.
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CASH SURRENDER VALUE
The Cash Surrender Value of your Certificate is equal to your Certificate Fund
MINUS any Certificate Debt, outstanding charges, and any transaction charge that
may apply. On any day, your Certificate Fund equals the sum of the amounts in
the Funds, the amount invested in the Fixed Account, and the Loan Account (see
the LOANS section on page 27).
The Cash Surrender Value will change daily to reflect:
o Net Premiums;
o withdrawals;
o increases or decreases in the value of the Funds you selected;
o interest credited on any amounts allocated to the Fixed Account and on the
Loan Account;
o interest accrued on any loan;
o the daily asset charge for mortality and expense risks assessed against the
variable investment options; and
o monthly charges that Prudential deducts from your Certificate Fund.
If you ask Prudential, we (or our designee) will tell you what the Cash
Surrender Value of your Certificate is. Prudential does not guarantee a minimum
Cash Surrender Value. It is possible for the Cash Surrender Value of your
Certificate to go down to zero.
The illustrations in the supplement give examples of what Cash Surrender Values
would be for two sample Certificates. The examples assume there would be uniform
investment results in the selected Subaccount portfolios. The examples are only
hypothetical and are only meant to help you understand how the Certificate
works.
FULL SURRENDERS
You may surrender your Certificate for its Cash Surrender Value at any time. If
you do, all insurance coverage will end. Prudential will calculate the Cash
Surrender Value as of the end of the Business Day on which we receive your
request form in good order.
We will pay the proceeds as described in the WHEN PROCEEDS ARE PAID section on
page 38. Under certain Group Contracts, Prudential may charge a transaction
charge for the surrender of up to the lesser of $20 or 2% of the amount that you
receive.
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A surrender may have tax consequences. See the TAX TREATMENT OF CERTIFICATE
BENEFITS section on page 33.
During 1998, we received approximately $30 in surrender charges.
PAID-UP COVERAGE
At any time, you may elect to use the Cash Surrender Value of your Certificate
to buy Paid-up Coverage. The minimum amount of Cash Surrender Value that you can
exchange is $1,000. Under certain Group Contracts, Prudential may impose a
transaction charge of up to $20 for the exchange.
The amount of Paid-up Coverage that you can have will be limited to the amount
that you can buy with your Certificate's Cash Surrender Value. Also, it cannot
be more than the Death Benefit under your Certificate at the time you make the
exchange.
Paid-up Coverage will start as of the end of the Business Day on which we
receive your request form in good order. Once the Paid-up Coverage starts, all
other coverage under your Certificate, including any additional insurance
benefits, will end.
If you did not use your entire Cash Surrender Value to buy the Paid-up Coverage,
Prudential will pay you the remaining amount as of the end of the first Business
Day after we receive your request form. We will pay it as described in the WHEN
PROCEEDS ARE PAID section on page 38. This withdrawal may affect the way you are
taxed. See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page 33.
The purchase of Paid-up Coverage could make your Certificate a Modified
Endowment Contract. See the TAX TREATMENT OF CERTIFICATE BENEFITS section on
page 33.
PARTIAL WITHDRAWALS
While your Certificate is in effect, you may withdraw part of your Certificate's
Cash Surrender Value. We will take it from each investment option you selected
in the same proportions as the value of your Certificate Fund is invested,
unless your request tells us to take the withdrawal from only selected
investment options.
Partial withdrawals will be effective as of the end of the Business Day on which
we receive your request form. We will pay you the withdrawn money as described
in the WHEN PROCEEDS ARE PAID section on page 38.
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You must withdraw at least $200 in any partial withdrawal. You may withdraw any
amount that is more than $200, but you must leave enough in your Certificate
Fund (less any Certificate Debt and outstanding charges) to pay the next month's
charges.
Some Group Contracts may have a limit on the number of partial withdrawals you
can make in a year. Some Group Contracts may impose a transaction charge for
each partial withdrawal. The charge can be up to the lesser of $20 or 2% of the
amount you withdraw. We will deduct the transaction charge from the amount you
withdraw.
You may not repay any amount that you withdraw.
Withdrawals may have tax consequences. See the TAX TREATMENT OF CERTIFICATE
BENEFITS section on page 33.
LOANS
You may borrow up to the Loan Value of your Certificate Fund. The Loan Value is
90% of your Certificate Fund minus any existing loan (and its accrued interest),
outstanding charges, and the amount of the next month's charges. In states that
require it, you may borrow a greater amount.
Under certain Group Contracts, Prudential may make a charge of up to $20 for
each loan. The charge will be added to the principal amount of your loan.
The minimum amount that you can borrow at any one time is $200. You cannot take
a loan if the Certificate Debt exceeds the Loan Value. Prudential will pay loan
proceeds as described in the WHEN PROCEEDS ARE PAID section on page 38.
Interest on the loan will accrue daily at a rate that Prudential sets each year.
Interest payments are due the day before the Contract Anniversary. If you do not
pay the interest when it is due, we will add it to the principal amount of the
loan. When this happens, we will take an amount out of your investment options
to make the loan and the Loan Account equal in value.
When you take a loan from your Certificate Fund, here's what happens:
o We will take an amount equal to the loan out of each of your investment
options on a pro-rata basis unless you tell us to take it only from
selected investment options.
o We will start a Loan Account for you and will credit the Loan Account with
an amount equal to the loan.
o We will generally credit interest to the amount in the Loan Account at an
effective annual rate that is usually 2% less than the rate Prudential
charges as interest on the loan. The crediting rate will generally be equal
to the Fixed Account crediting rate.
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You may repay all or part of a loan at any time. We will apply a loan repayment
first against any unpaid loan interest and then to reduce the principal amount
of the loan. You may repay a loan either by repayment or by withdrawing amounts
from the Certificate Fund. When you send us a payment, you should tell us
whether the payment is intended as a premium payment or as a loan repayment. If
you do not indicate whether it is a premium or loan repayment, we will assume it
is a loan repayment.
If you repay a loan by using the Certificate Fund, we will treat the repayment
as a partial withdrawal from the Certificate Fund. A partial withdrawal may have
tax consequences. See the PARTIAL WITHDRAWALS section on page 26 and the TAX
TREATMENT OF CERTIFICATE BENEFITS section on page 33.
Your Loan Account plus accrued interest (together, these are called "Certificate
Debt") may not exceed the value of your Certificate Fund. If Certificate Debt
exceeds the value of your Certificate Fund, you will not have enough money in
your Certificate Fund to cover the month's charges. See the LAPSE section on
page 29.
If you still have Certificate Debt outstanding when you surrender your
Certificate or when you allow your Certificate to lapse, the amount you borrowed
may become taxable. Also, loans from Modified Endowment Contracts may be treated
for tax purposes as distributions of income. See the TAX TREATMENT OF
CERTIFICATE BENEFITS section on page 33.
If we pay the Death Benefit or the Cash Surrender Value while a loan is
outstanding, we will reduce the Death Benefit or the Cash Surrender Value by the
amount of the loan plus any accrued interest.
A loan will have a permanent effect on your Certificate's Cash Surrender Value.
It may also have a permanent effect on the Death Benefit. This happens because
the investment results of the investment options you selected will apply only to
the amount remaining in those investment options after the loan amount is
transferred to the Loan Account. The longer a loan is outstanding, the greater
the effect is likely to be.
TELEPHONE AND ELECTRONIC TRANSACTIONS
Under some Group Contracts, you may be able to perform some transactions by
telephone or electronically. These transactions include: transferring amounts
among available investment options, making surrenders and partial withdrawals,
and requesting loans.
Prudential will not be liable when we follow instructions that we receive by
telephone or electronically, if we reasonably believe the instructions were
genuine. We have adopted security procedures that are reasonably designed to
verify that such communications are genuine. We cannot guarantee that you will
be able to get through to complete a telephone or electronic transaction during
peak periods such as periods of drastic economic or market change, or during
system failures or power outages.
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LAPSE
In general, your Certificate will remain in force as long as the balance in your
Certificate Fund (less any Certificate Debt and outstanding charges) is enough
to pay the monthly charges when due. If it is not enough, Prudential will send
you a notice to tell you that your insurance is going to end, how much you must
pay to stop it from ending, and when you must pay it.
In insurance terms, we call it a LAPSE when insurance ends because the charges
for it are not paid.
HOW YOU CAN STOP YOUR INSURANCE FROM LAPSING. You must make a payment that is
enough to pay outstanding charges. Prudential must receive the payment by the
later of:
o 61 days after the Monthly Deduction Date; or
o 30 days after the date we mailed you the notice.
If you do not, your insurance will lapse and your Certificate will no longer
have any value. A Certificate that lapses with Certificate Debt may affect the
way you are taxed. See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page
33.
We will send the notice to the last known address we have on file for you. If
the Covered Person dies during the grace period, we will reduce the Death
Benefit by any past due monthly charges and by any Certificate Debt.
TERMINATION OF A GROUP CONTRACTHOLDER'S PARTICIPATION IN THE GROUP CONTRACT
The Group Contractholder may decide to terminate the Group Contract with
Prudential, by giving Prudential 90 days' written notice.
In addition, Prudential may terminate a Group Contract:
o If the aggregate Face Amount of all Certificates, or the number of
Certificates issued, falls below the permitted minimum, by giving the Group
Contractholder 90 days' written notice.
o If the Group Contractholder fails to remit premium payments to Prudential
in a timely way, at the end of the grace period.
o For any other reason, effective on a Contract Anniversary, by giving the
Group Contractholder 31 days' written notice.
Termination of the Group Contract means that the Group Contractholder will not
remit premiums to Prudential. In that event, no new Certificates will be issued
under the Group Contract. How the termination affects you is described in the
OPTIONS ON TERMINATION OF COVERAGE section on
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page 30. The options that are available to you from Prudential may depend on
what other insurance options are available to you. You should refer to your
particular Certificate to find out more about your options at termination of
coverage.
PARTICIPANTS WHO ARE NO LONGER ELIGIBLE GROUP MEMBERS
Each Group Contract has different rules for what happens when a Participant is
no longer an Eligible Group Member.
Under some Group Contracts, Participants may be able to continue insurance
coverage even though they are no longer an Eligible Group Member. This is called
Portable Coverage. With Portable Coverage, you will start to make premium
payments directly to Prudential (or to Prudential Mutual Fund Services, Inc.).
We will start to send premium reminders directly to you. We will let you know
about this change in the way premiums are paid within 61 days after you are no
longer eligible under the Group Contract. We might impose certain rules and
limits on the continued insurance. The rules and limits are shown in your
Certificate. The notice that we send you will also tell you what the charges and
expenses are for Portable Certificates. See also the CHARGES AND EXPENSES
section on page 20. Charges and expenses for Portable Certificates may be higher
than those you paid while you were still an Eligible Group Member. But the
charges and expenses will not be higher than the maximums described in this
prospectus. Prudential may require that you keep a specified minimum amount in
your Certificate Fund to continue as a Portable Certificate holder.
Under other Group Contracts, Participants will not be able to continue insurance
coverage when no longer an Eligible Group Member. Those Participants have the
options of Conversion, Paid-up Coverage, and payment of Cash Surrender Value,
which are described in the OPTIONS ON TERMINATION OF COVERAGE section on page
30.
OPTIONS ON TERMINATION OF COVERAGE
Your insurance coverage under the Group Contract will end when the Group
Contract itself ends. Under some Group Contracts, insurance coverage will also
end when a Participant is no longer an Eligible Group Member.
When the Group Contractholder ends a Group Contract, the effect on Participants
depends on whether or not the Group Contractholder replaces the Group Contract
with another life insurance contract that allows for the accumulation of cash
value. Generally, here is what will happen:
o If the Group Contractholder DOES replace the Group Contract with another
life insurance contract that allows for the accumulation of cash value,
Prudential will terminate your Certificate. We will also transfer the Cash
Surrender Value of your Certificate directly to that new contract, unless
you elect to receive the Cash Surrender Value.
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Under some Group Contracts, you may continue your insurance coverage on a
Portable basis. Prudential might impose certain rules and limits on the
continued insurance. The rules and limits are shown in your Certificate. You
should read your Certificate to find out what rules and limits apply when you
want to continue your insurance on a Portable basis.
o If the Group Contractholder DOES NOT replace the Group Contract with
another life insurance contract that allows for the accumulation of cash
value, you will have the options listed below. Under some Group Contracts,
you may also have the option of continuing your insurance coverage on a
Portable basis, as stated above.
CONVERSION. You may elect to convert your Certificate to an individual life
insurance policy without giving Prudential evidence that the Covered Person is
in good health, if your Certificate has been in force for at least 5 years
(under some Group Contracts, the requirement may be less than 5 years). To elect
this option, you must apply for it within 31 days (or longer, depending on the
state law that applies) after your Certificate ends. You may select any form of
individual life insurance policy (other than term insurance) that Prudential
normally makes available for conversion to persons who are the same age as you
and who are asking for the same amount of life insurance. Your premiums for the
individual life insurance policy will be based on the type and amount of life
insurance you select, your age and your risk class.
If your Certificate ended because you are no longer an Eligible Group Member,
you may not convert more than the Face Amount of your Certificate. If your
Certificate ended because the Group Contract ended, the amount you are able to
convert may, depending on the state law that applies, be limited to the lesser
of:
o $10,000 or
o the Face Amount of your Certificate MINUS the amount of any group insurance
that you become eligible for within 45 days after your Certificate ends.
If a Covered Person dies within 31 days (or longer, depending on the state law
that applies) after the Certificate ends and you had the right to convert to an
individual policy, we will pay a Death Benefit under the Certificate. But, the
Death Benefit will be equal to the amount of individual insurance you could have
had if you had actually made the conversion to the individual policy.
PAID-UP COVERAGE. You may elect to use your Certificate's Cash Surrender Value
to buy fixed Paid-up Coverage on the Covered Person. To use this option, you
must have at least $1,000 of Cash Surrender Value on the day your Certificate
ends. The insurance amount will depend on how much the Cash Surrender Value is
and on the age of the Covered Person. But, the amount of Paid-up Coverage cannot
be more than your Certificate's Death Benefit right before you buy the Paid-up
Coverage.
You may elect this option within 61 days of the date your Certificate ended.
Prudential will make the Paid-up Coverage effective as of the end of the
Business Day on which we (or our designee) receive your request on the form we
require you to use for this purpose. If you elect this option,
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your insurance may become a Modified Endowment Contract under the Internal
Revenue Code. See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page 33.
PAYMENT OF CASH SURRENDER VALUE. You may receive the Cash Surrender Value by
surrendering your Certificate. To do this, you must make a request to Prudential
on the form that we require you to use for this purpose.
If you do not choose one of the options described above within 61 days of the
date the Certificate ends, we will exchange your Certificate Fund for Paid-up
Coverage if your Certificate Fund value is at least $1,000. If it does not have
that much value, we will pay the Cash Surrender Value.
REINSTATEMENT
You may request reinstatement of a lapsed Certificate any time within 3 years
after the end of the grace period. But, you must be less than the maximum age at
which a Certificate may be held. We will not reinstate a lapsed Certificate if
the Group Contract under which the Certificate was issued ended and you did not
have the right to continue your insurance on a Portable basis.
To reinstate your Certificate, you must send the following items to Prudential
(or our designee):
o A written request for reinstatement.
o Evidence of the good health of the Covered Person. The evidence must be
satisfactory to Prudential.
o A premium payment (less any charges that apply) that is at least enough to
pay the monthly charges for the grace period and for two more months. See
the CHARGES AND EXPENSES section on page 20.
o We will make your Certificate effective again on the Monthly Deduction Date
that occurs after we approve your request. The terms of your original
Certificate will still apply. We will apply a new two-year period of
incontestability, and the period during which the suicide exclusion applies
will start over again. See the INCONTESTABILITY section on page 38 and the
SUICIDE EXCLUSION section on page 39. When the original Certificate lapsed,
we would have required you to pay off any outstanding Certificate Debt. We
will not allow you to continue the loan under the reinstated Certificate.
o Currently, we do not charge for a reinstatement. But, we reserve the right
to charge for reinstatements in the future.
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TAX TREATMENT OF CERTIFICATE BENEFITS
INTRODUCTION
This summary provides general information on the federal income tax treatment of
a Certificate under the Group Contract. It is not a complete statement of what
the federal income taxes will be in all circumstances. It is based on current
law and interpretations, which may change. It does not cover state taxes or
other taxes. It is not intended as tax advice. You should consult your own tax
advisor for complete information and advice.
TREATMENT AS LIFE INSURANCE AND INVESTOR CONTROL
The Certificate must meet certain requirements to qualify as life insurance for
tax purposes. These requirements include certain definitional tests and rules
for diversification of investments. For further information on the
diversification requirements, see Dividends, Distributions and Taxes in the
applicable Fund prospectuses.
We believe we have taken adequate steps to insure that the Certificate qualifies
as life insurance for tax purposes. Generally speaking, this means that:
o you will not be taxed on the growth of the funds in the Certificate Fund,
unless you receive a distribution, and
o the Certificate's Death Benefit will be tax free to your beneficiary.
Although we believe that the Certificate should qualify as life insurance for
tax purposes, there are some uncertainties, particularly because the Secretary
of Treasury has not yet issued permanent regulations that bear on this question.
Moreover, regulations issued to date do not provide guidance concerning the
extent to which Participants may direct their investments to the particular
available subaccounts of a separate account without causing the Participants
(instead of Prudential) to be considered the owners of the underlying assets.
The ownership rights under the Certificate are similar to, but different in
certain respects from, those addressed by the Internal Revenue Service in
rulings holding that the insurance company was the owner of the assets. For
example, Participants have the choice of more funds and the ability to
reallocate amounts among available Subaccounts more frequently than in the
rulings. While we believe that Prudential will be treated as the owner of the
Separate Account assets, it is possible that the Participants may be considered
to own the assets.
Because of these uncertainties, we reserve the right to make changes - which
will be applied uniformly to all Participants after advance written notice -
that we deem necessary to insure that the Certificates under the Group Contract
will qualify as life insurance and that Prudential will be treated as the owner
of the underlying assets.
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DISTRIBUTIONS
The tax treatment of any distribution you receive before the Covered Person's
death depends on whether your Certificate is classified as a Modified Endowment
Contract.
CERTIFICATES NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS
o If you surrender your Certificate or allow it to lapse, you will be taxed
on the amount you receive in excess of the premiums you paid less the
untaxed portion of any prior withdrawals. For this purpose, you will be
treated as receiving any portion of the Cash Surrender Value used to repay
Certificate Debt. The tax consequences of a surrender may differ if you
take the proceeds under an income payment settlement option.
o Generally, you will be taxed on a withdrawal to the extent the amount you
receive exceeds the premiums you paid for the Certificate less the untaxed
portion of any prior withdrawals. However, under some limited
circumstances, in the first 15 Certificate Years, all or a portion of a
withdrawal may be taxed if the Certificate Fund exceeds the total premiums
paid less the untaxed portions of any prior withdrawals, even if total
withdrawals do not exceed total premiums paid.
o Extra premiums for optional benefits and riders generally do not count in
computing the premiums paid for the Certificate for the purposes of
determining whether a withdrawal is taxable.
o Loans you take against the Certificate are ordinarily treated as debt and
are not considered distributions subject to tax.
MODIFIED ENDOWMENT CONTRACTS
o The rules change if the Certificate is classified as a Modified Endowment
Contract. The Certificate could be classified as a Modified Endowment
Contract if premiums in excess of certain IRS limits are paid, or a change
in the Face Amount of insurance is made (or a rider is added or removed).
The addition of a rider or an increase in the Face Amount of insurance may
also cause the Certificate to be classified as a Modified Endowment
Contract. You should first consult a tax advisor if you are contemplating
any of these steps.
o If the Certificate is classified as a Modified Endowment Contract, then
amounts you receive under the Certificate before the Covered Person's
death, including loans and withdrawals, are included in income to the
extent that the Certificate Fund before surrender charges exceeds the
premiums paid for the Certificate increased by the amount of any loans
previously included in income and reduced by any untaxed amounts previously
received other than the amount of any loans excludible from income. An
assignment of a Modified Endowment Contract is taxable in the same way.
These rules also apply to loans, withdrawals, and full surrenders made
during the two-year period before the time that the Certificate became a
Modified Endowment Contract.
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o Any taxable income on pre-death distributions (including full surrenders)
is subject to a penalty tax of 10 percent unless the amount is received on
or after age 59 1/2 , on account of your becoming disabled or as a life
annuity.
o All Modified Endowment Contracts issued by us to you during the same
calendar year are treated as a single Certificate for purposes of applying
these rules.
Any dividends or Experience Credits applied to reduce premiums due will
effectively reduce the premiums paid for purposes of these rules.
TREATMENT AS GROUP TERM LIFE INSURANCE
In most cases, employee-pay-all coverage under the Group Contract will not
qualify as group term life insurance under the Internal Revenue Code, or be
deemed to be part of a group term life insurance plan. The Certificate will
therefore be treated the same as any individually purchased life insurance
policy for tax purposes. However, under certain circumstances, a portion of the
coverage under the Group Contract may qualify as group term life insurance and,
in addition, Participants may be taxed on certain increases in cash values under
an IRS-prescribed formula.
WITHHOLDING
You must affirmatively elect that no taxes be withheld from a pre-death
distribution. Otherwise, the taxable portion of any amounts you receive will be
subject to withholding. You are not permitted to elect out of withholding if you
do not provide a social security number or other taxpayer identification number.
You may be subject to penalties under the estimated tax payment rules if your
withholding and estimated tax payments are insufficient to cover the tax due.
OTHER TAX CONSIDERATIONS
If you transfer or assign the Certificate to someone else, there may be gift,
estate and/or income tax consequences. If you transfer the Certificate to a
person two or more generations younger than you (or designate such a younger
person as a beneficiary), there may be Generation Skipping Transfer tax
consequences. Deductions for interest paid or accrued on Certificate Debt or on
other loans that are incurred or continued to purchase or carry the Certificate
may be denied. Your individual situation or that of your beneficiary will
determine the federal estate taxes and the state and local estate, inheritance
and other taxes due if you or the Covered Person dies.
The earnings of the Separate Account are taxed as part of Prudential's
operations. The Separate Account does not intend to qualify as a regulated
investment company under the Internal Revenue Code.
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ERISA CONSIDERATIONS
If the Group Contract is treated as or acquired by an "employee benefit plan,"
as defined under the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), certain legal requirements may apply.
DEFINITION OF AN EMPLOYEE BENEFIT PLAN
An "employee benefit plan" includes two broad categories of arrangements that
are established by certain entities (employers or unions) to cover employees -
"pension" plans or "welfare" plans.
A "pension plan" includes any program that provides retirement income to
employees, or results in a deferral of income by employees for periods extending
to the termination of covered employment or beyond. For these purposes, the term
"pension plan" includes, but is not limited to, retirement plans that meet tax
qualification requirements (for example, a "401(k) plan"), as well as other
arrangements which, by their operation, are intended to provide retirement
income or deferrals beyond termination of employment.
A "welfare plan" includes a program established or maintained for the purposes
of providing to employees, among other things, medical, accident, disability,
death, vacation, and unemployment benefits.
GROUP CONTRACTS AS EMPLOYEE BENEFIT PLANS
Regulations issued by the United States Department of Labor ("Labor") clarify
when specific plans, programs or other arrangements will not be either pension
or welfare plans (and thus not considered "employee benefit plans" for purposes
of ERISA). Among other exceptions, "group" or "group-type insurance programs"
offered by an insurer to employees of an employer will not be a "plan" where:
o no contributions are made by the employer for the coverage;
o participation in the program is completely voluntary for employees;
o the "sole" function of the employer with respect to the program is, without
endorsing the arrangement, to permit the insurer to publicize the program,
to collect premiums through payroll deductions and to remit them to the
insurer; and
o the employer does not receive any consideration in connection with the
program, other than reasonable compensation (excluding any profit) for
administrative services actually provided in connection with payroll
deductions.
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Whether or not a particular group insurance arrangement satisfies these
conditions is a question of fact depending on the particular circumstances. You
should consult counsel and other advisors to determine whether, under the facts
of the particular case, a particular Group Contract might be treated as an
"employee benefit plan" (either a pension or a welfare plan) subject to the
requirements of ERISA.
INVESTMENT OF PLAN ASSETS IN A GROUP CONTRACT
The decision to invest employee benefit plan assets in a Group Contract is
subject to rules under ERISA and/or tax law. Any plan fiduciary, which proposes
to cause a plan to acquire a Group Contract, should consult with its counsel
with respect to the potential legal consequences of the plan's acquisition and
ownership of such Contract.
FIDUCIARY/PROHIBITED TRANSACTION REQUIREMENTS UNDER ERISA
If applicable, ERISA and tax law impose certain restrictions on employee benefit
plans and on persons who are (1) "parties in interest" (as defined under ERISA)
or "disqualified persons" (as defined under tax law) and (2) "fiduciaries" with
respect to such plans. These restrictions may, in particular, prohibit certain
transactions in connection with a Group Contract, absent a statutory or
administrative exemption. You should consult counsel and other advisors to
determine the application of ERISA under these circumstances.
For example, administrative exemptions issued by Labor under ERISA permit
transactions (including the sale of insurance contracts like the Group Contract)
between insurance agents and employee benefit plans. To be able to rely upon
such exemptions, certain information must be disclosed to the plan fiduciary
approving such purchase on behalf of the plan. The information that must be
disclosed includes:
o the relationship between the agent and the insurer;
o a description of any charges, fees, discounts, penalties or adjustments
that may be imposed in connection with the purchase, holding, exchange or
termination of the Group Contract; and
o the commissions received by the agent.
Information about any applicable charges, fees, discounts, penalties or
adjustments may be found in the CHARGES AND EXPENSES section on page 20.
Information about sales representatives and commissions may be found in the SALE
OF THE CONTRACT AND SALES COMMISSIONS section on page 45.
Execution of a Group Contract by a Group Contractholder and an enrollment form
by a Participant will be deemed an acknowledgment of receipt of this information
and approval of transactions under the Group Contract.
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WHEN PROCEEDS ARE PAID
Prudential will generally pay any Death Benefit, Cash Surrender Value, partial
withdrawal or loan proceeds within 7 days after we receive the request for
payment at the office specified in our request form. We will determine the
amount of the Death Benefit as of the date of the Covered Person's death. For
other types of redemptions, we will determine the amount of the proceeds as of
the end of the Business Day on which we received the request in good order.
There are certain circumstances when we delay payment of proceeds:
o We may delay payment of proceeds that come from the Funds and the variable
part of the Death Benefit if any of the following events occurs: the New
York Stock Exchange is closed (other than for a regular holiday or a
weekend), trading is restricted by the SEC, or the SEC declares that an
emergency exists.
o We expect to pay proceeds that come from the Fixed Account or from Paid-up
Coverage promptly upon request. But, we do have the right to delay these
payments (other than the Death Benefit) for up to six months (or a shorter
period, if required by state law). We will pay interest at the Fixed
Account rate if we delay payment for more than 30 days (or a shorter
period, if required by state law).
BENEFICIARY
You have the right to name the beneficiary who will receive the Death Benefit
from your Certificate. You must use the form that Prudential requires you to
use. You may change the beneficiary at any time. You do not need the consent of
the present beneficiary. If you have more than one beneficiary at the time the
Covered Person dies, we will pay the Death Benefit in equal parts to each
beneficiary, unless you have given us other instructions.
INCONTESTABILITY
After your Certificate has been in force for two years or more during the
Covered Person's lifetime, Prudential will not contest liability under the
Certificate. We will also not contest liability for any change in your
Certificate that required our approval after the change has been in force for
two years or more during the Covered Person's lifetime.
MISSTATEMENT OF AGE
If the Covered Person's age is stated incorrectly in the Certificate, we will
adjust the amount of the Death Benefit to reflect the correct age, as permitted
by law.
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SUICIDE EXCLUSION
Generally, if the Covered Person dies by suicide within two years from the
Certificate Date, Prudential will not pay the Death Benefit described in other
sections of this prospectus. Instead, we will pay your beneficiary an amount
equal to your premium payments minus any Certificate Debt, outstanding charges,
and any partial withdrawals. This limit will apply whether the suicide occurred
while the Covered Person was sane or insane.
If the Covered Person dies by suicide within two years after the effective date
of an increase in the Face Amount of your Certificate that required our
approval, we will not pay the increased amount of insurance. Instead of the
amount of the increase, we will pay your beneficiary the monthly charges that
were attributable to the increased amount. Again, this limit will apply whether
the suicide occurred while the Covered Person was sane or insane.
MODES OF SETTLEMENT
The DEATH BENEFITS section describes how your beneficiary may receive the Death
Benefit. In addition to the methods described in the DEATH BENEFITS section,
Prudential also makes these methods available. They are known as "modes of
settlement":
OPTION 1: PAYMENTS FOR A FIXED PERIOD
The Death Benefit plus interest is paid over a fixed number of years (1 -
25). The payment may be received monthly, quarterly, semi-annually or
annually. The payment amount will be higher or lower depending on the
period selected.
The interest rate can change, but will not be less than the guaranteed rate
shown in the claim settlement certificate that your beneficiary will
receive. Your beneficiary may withdraw the total present value of payments
not yet made at any time.
OPTION 2: PAYMENT IN INSTALLMENTS FOR LIFE
The Death Benefit provides monthly payments in installments for as long as
your beneficiary lives. Your beneficiary may choose a guaranteed minimum
payment period (5, 10 or 20 years) or an installment refund, which will
guarantee that the sum of the payments equals the amount of the Death
Benefit payable under this option. If your beneficiary dies before
Prudential has made all guaranteed payments, Prudential will pay the
present value of the remaining guaranteed payments to a payee your
beneficiary designated.
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OPTION 3: INTEREST INCOME
The Death Benefit remains with Prudential and earns interest. This option
allows you or your beneficiary to leave the Death Benefit with Prudential
and choose another settlement option at a later time. Withdrawals of $100
or more (including the entire unpaid Death Benefit) can be made at any
time. The interest income may be received monthly, quarterly, semi-annually
or annually.
The interest rate can change, but will not be less than the guaranteed rate
shown in the claim settlement certificate that you or your beneficiary will
receive.
OPTION 4: PAYMENTS OF A FIXED AMOUNT
You or your beneficiary receives a guaranteed specified sum for a limited
number of years. This guaranteed specified sum represents a return of the
principal (Death Benefit) and interest paid over the selected number of
years. The payment may be received monthly, quarterly, semi-annually, or
annually.
The interest rate can change, but will not be less than the guaranteed rate
shown in the claim settlement certificate that you or your beneficiary will
receive. Any interest credited will be used to extend the payment period.
OPTION 5: CERTIFICATE OF DEPOSIT
The Death Benefit is used to purchase a certificate of deposit that is
issued by The Prudential Bank. Certificates of Deposit (CDs) are
investments that allow your beneficiary to choose a variety of short- and
long-term deposit options. They are designed to pay interest monthly,
quarterly, semi-annually, annually or at maturity. Interest rates are
guaranteed for the term of the CD. There is generally a $10,000 minimum
amount for this option.
Under each of the above options, each payment must generally be at least $20.
If your beneficiary elects one of these settlement options, the tax treatment of
the Death Benefit may be different than it would have been had the option not
been elected. Your beneficiary should get advice from a tax advisor.
ASSIGNMENT
You may assign your Certificate, including all rights, benefits and privileges
that you have. Prudential will honor the assignment only if: (1) you make the
assignment in writing; (2) you sign it; and (3) Prudential receives a copy of
the assignment at the Prudential office shown in your Certificate. We are not
responsible for determining whether the assignment is legal or valid.
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Throughout this prospectus, we describe various rights that you have. You may
assign those rights to someone else. If you do, you should consider the
references to "you" in this prospectus as applying to the person to whom you
validly assigned your Certificate.
If you assign a Certificate that is a Modified Endowment Contract, it might
affect the way you are taxed. It might also affect the way the person to whom
you assign the Certificate is taxed. See the TAX TREATMENT OF CERTIFICATE
BENEFITS section on page 33.
APPLICANT OWNER PROVISION
Some Group Contracts have an "applicant owner" provision. An "applicant owner"
is a person who may apply for coverage on the life of an Eligible Group Member.
And, as with an assignment, if a Participant agrees to let another person be the
applicant owner of the Certificate, that person would have all of the rights to
make decisions about the coverage. References to "Participant" and "you" in this
prospectus also apply to an applicant owner.
When naming an applicant owner, the Eligible Group Member must agree to have his
or her life covered. Examples of people who may be applicant owners are the
Eligible Group Member's spouse, child, parent, grandparent, grandchild, sister,
brother, or the trustee of any trust set up by the Eligible Group Member. At any
one time, only one person may be an "applicant owner" under a Certificate.
An "applicant owner" must fill out an enrollment form. The Eligible Group Member
must sign the enrollment form to show his or her agreement. Prudential may
require the Eligible Group Member to answer questions about his or her health,
or to have a medical examination. If we approve the enrollment form, we will
issue the Certificate to the applicant owner.
VOTING RIGHTS
The assets that are held in the Separate Account are invested in the Funds.
Prudential is the legal owner of those shares. Because we are the owner, we have
the right to vote on any matter that shareholders of the Funds vote on. The
voting happens at regular and special shareholder meetings. We will (as required
by law) vote in accordance with voting instructions we receive from
Participants. A Fund may not hold annual shareholder meetings when not required
to do so under the laws of the state of its incorporation or under the federal
securities laws.
If we do not receive timely voting instructions for Fund shares from
Participants, we will vote those shares in the same proportion as shares in the
Funds for which we do receive instructions. We will do the same thing for shares
held as general account investments of Prudential. If the federal securities
laws change so that Prudential is allowed to vote on Fund shares in our own
right, we may decide to do so.
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Generally, you may give us voting instructions on matters that would be changes
in fundamental policies of the Funds. You may also give us voting instructions
on any matter that requires a vote of the Fund's shareholders. But, if a Fund
that you participate in has a vote on approval of the investment advisory
agreement or any change in a Fund's fundamental investment policy, you will vote
separately by Fund. This practice is dictated by the federal securities laws.
Here's how we will determine the number of Fund shares and votes for which you
may give instructions:
o To determine the number of Fund shares, we will divide the part of your
Certificate Fund that is derived from participation in a Subaccount by the
value of one share in the corresponding portfolio of the applicable Fund.
o The number of votes will be determined as of the record date chosen by the
Board of Directors of the applicable Fund.
We will give you the proper forms and proxies to give these instructions. We
reserve the right to change the way in which we calculate the weight we give to
voting instructions. We would make such a change to comply with federal
regulations.
If we are required by state insurance regulations, we may disregard voting
instructions in certain instances. We may disregard instructions if: (1) the
instructions would require shares to be voted in a way that would cause a change
in the sub-classification or investment objectives of one or more of the Funds'
portfolios, or (2) the instruction would approve or disapprove an investment
advisory contract for a Fund. Also, Prudential itself may disregard voting
instructions that would require changes in the investment policy or investment
advisor of one or more of the Funds' portfolios, provided that Prudential
reasonably disapproves such changes in accordance with applicable federal
regulations. If Prudential does disregard voting instructions, we will tell you
that we did and our reasons for it in the next annual or semi-annual report to
Participants.
SUBSTITUTION OF FUND SHARES
If Prudential's management thinks that an available portfolio of the Funds
becomes unsuitable for investment by Participants, we may substitute the shares
of another portfolio or of an entirely different mutual fund. Our management
might find a portfolio to be unsuitable because of investment policy changes,
tax law changes or considerations, the unavailability of shares for investment
or other reasons, including our discretion. Before Prudential can substitute
shares, the SEC, and possibly one or more state insurance departments, must
approve the substitution. We would notify Group Contractholders and Participants
if we were to make such a substitution.
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ADDITIONAL INSURANCE BENEFITS
One or more of the following additional insurance benefits may be available to
you. These benefits may be provided to all Participants under a Group Contract.
Or, the Group Contract may require you to pay an additional charge to receive
the benefits. Each Group Contract will have different rules about how the
additional benefits are made available. You should refer to the Group Contract
and your Certificate to find out what additional insurance benefits are
available to you.
ACCELERATED DEATH BENEFIT. Under an accelerated death benefit, you can elect to
receive an early payment of part of the Certificate's Death Benefit when the
Covered Person is diagnosed as being terminally ill. "Terminally ill" means the
Covered Person has a life expectancy of 12 months or less (under some Group
Contracts, the number of months might be higher or lower). You must give
Prudential satisfactory evidence that the Covered Person is terminally ill. You
may receive the accelerated payment in a lump sum.
When we pay the Death Benefit under this option, it will be adjusted to reflect
its present value. The adjusted Death Benefit will always be less than the Death
Benefit, but will generally be greater than the Certificate's Cash Surrender
Value. Under some Group Contracts, the accelerated death benefit may be
discounted for interest. Prudential may charge a fee of up to $350 when we pay
an accelerated death benefit.
We will not pay an accelerated death benefit if you are required to elect it to
meet the claims of creditors or to obtain a government benefit. We can furnish
details about the amount of accelerated death benefit that is available to you.
Unless required by law, you can no longer request an increase in the Face Amount
of your Certificate once you have elected to receive an accelerated death
benefit. The amount of future premium payments you can make will also be
limited.
Adding the Accelerated Death Benefit to your Certificate will not affect the way
you are taxed. This income tax exclusion may not apply if the benefit is paid to
someone other than the Participant. But, if you actually receive proceeds from
the Accelerated Death Benefit, it could have tax consequences and may affect
your eligibility for certain government benefits or entitlements. In general,
the accelerated death benefit is excluded from income if the Covered Person 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 tax advisor
before you elect to receive this benefit.
ACCIDENTAL DEATH AND DISMEMBERMENT BENEFIT. An Accidental Death and
Dismemberment Benefit provides you insurance for accidental loss of life, sight,
hand, or foot. This benefit excludes certain types of losses. For example,
losses due to suicide or attempted suicide, diseases and infirmities, medical or
surgical treatments, and acts of war are not covered. The benefit may be subject
to other exclusions from coverage, age limitations, and benefit limitations. You
should refer to your Certificate and the Group Contract to learn the details of
any benefit that may be available to you.
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EXTENDED DEATH PROTECTION DURING TOTAL DISABILITY. An extended death benefit
provides protection during your total disability. Under this provision, even if
your insurance would have ended because of your total disability, Prudential
will extend your insurance coverage if you became totally disabled prior to age
60. The amount of insurance that will be extended is your Face Amount of
insurance. We will extend your insurance coverage for successive one-year
periods, generally until age 65. You must provide satisfactory proof of
continued total disability.
DEPENDENT LIFE BENEFITS. Dependent life benefits provide insurance on the life
of a qualified dependent. A qualified dependent may be the Participant's spouse
and/or unmarried child.
SEAT BELT COVERAGE. Seat belt coverage provides a death benefit for the loss of
life while driving or riding in a motor vehicle while wearing a seat belt.
"Motor vehicle" means a private automobile, van, four-wheel drive vehicle,
self-propelled motor home and truck. It does not mean a motor vehicle used for
farming, military, business, racing, or any other type of competitive speed
event. Certain exclusions will apply.
REPORTS
At least once each Certificate Year, Prudential will send you a statement that
gives you certain information about your insurance. These statements will give
you details about the value of your Certificate Fund, about transactions that
you made, and specific insurance data about your coverage.
If you make a request, we will also send you a current statement about your
insurance. It will give you the same kind of information as the annual statement
does. We may limit the number of current statements you may request or may
charge you for additional statements. Any such charge will not exceed $20 for an
additional report.
We will also send to you and to the Group Contractholder, annual and semi-annual
reports that list the securities held in each available portfolio of the Funds.
The federal securities laws require these reports. Prudential keeps records
about the Separate Account according to the federal securities laws.
If you invest in the Series Fund through more than one variable insurance
contract, you will receive only one copy of each annual and semi-annual report
issued by the Series Fund. But, if you want another copy of a report, you may
ask us for one by calling the telephone number listed on the inside cover page
of this prospectus.
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SALE OF THE CONTRACT AND SALES COMMISSIONS
Prudential Investment Management Services LLC (referred to as "PIMS") acts as
the principal underwriter of the Group Contracts and Certificates. PIMS is a
direct, wholly-owned subsidiary of Prudential.
PIMS, organized in 1996 under Delaware law, is registered as a broker-dealer
under the federal securities laws. PIMS is also a member of the National
Association of Securities Dealers, Inc. PIMS's principal business address is 751
Broad Street, Newark, New Jersey 07102. PIMS also acts as principal underwriter
with respect to the securities of other Prudential investment companies.
The Group Contracts and Certificates are sold by persons who are registered
representatives of PIMS and who are also authorized by state insurance
departments. The Group Contracts and Certificates may also be sold through other
broker-dealers authorized by PIMS and applicable law to do so. Registered
representatives of such other broker-dealers may be paid on a different basis
than the basis described below.
The maximum commission that Prudential will pay to the representative upon the
purchase of the Contract is 15% of the premium payment received. The amount
Prudential will pay to the broker-dealer to cover both the individual
representative's commission and other distribution expenses will not exceed 15%
of the premium payment. Prudential may require the representative to return all
of the first year commission if the Group Contract is not continued through the
first year. Sales representatives who meet certain productivity, profitability,
and persistency standards with regard to the sale of the Group Contract will be
eligible for additional bonus compensation from Prudential. Generally,
Prudential will pay PIMS a commission of no more than 15% of the premium
payment. The commission and distribution percentages will depend on factors such
as the size of the group involved and the amount of sales and administrative
effort required in connection with the particular Group Contract. In total, they
will not exceed 15% of the premium payment.
The distribution agreement between PIMS and Prudential will terminate
automatically upon its assignment (as that term is defined in the federal
securities laws). But, PIMS may transfer the agreement, without the prior
written consent of Prudential, under the circumstances set forth in the federal
securities laws. Either party may terminate the agreement at any time if the
party
gives 60 days' written notice to the other party.
Sales expenses in any year are not equal to the sales charge in that year.
Prudential may not recover its total sales expenses for some or all Group
Contracts over the periods the Certificates for such Group Contracts are in
effect. To the extent that the sales charges are insufficient to cover total
sales expenses, the sales expenses will be recovered from Prudential's surplus,
which may include amounts derived from the mortality and expense risk charge and
the monthly cost of insurance charge. See the CHARGES AND EXPENSES section on
page 20.
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RATINGS AND ADVERTISEMENTS
Independent financial rating services - including Moody's, Standard & Poors,
Duff & Phelps and A.M. Best Company - rate Prudential. These ratings reflect our
financial strength and claims-paying ability. They are not intended to rate the
investment experience or financial strength of the Separate Account. We may
advertise these ratings from time to time. Furthermore, we may include in
advertisements comparisons of currently taxable and tax-deferred investment
programs, based on selected tax brackets, or discussions of alternative
investment vehicles and general economic conditions.
SERVICES PERFORMED BY THIRD PARTIES
Throughout this prospectus, we describe how Prudential and the Group
Contractholder will perform transactions with you and how you will perform
transactions with them. Prudential has the right to ask another party (referred
to as a "third party") to perform or receive transactions in its place. The
Group Contractholder has the same right. That means that, for a particular Group
Contract, you may conduct transactions via a third party rather than directly
with Prudential or the Group Contractholder.
In some cases, the third party might be another part of Prudential. (For
example, when you make premium payments to Prudential, they could be received by
Prudential Mutual Fund Services, Inc., a wholly-owned subsidiary of Prudential).
In other cases, the third party might be a third party administrator or even the
group that sponsors the Group Contract.
Prudential may make payments to third party administrators or groups sponsoring
the Group Contracts for their services related to administration and sponsorship
of the Group Contracts.
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. We
reserve the right to change the Group Contract and Certificate to comply with
applicable state insurance laws and interpretations thereof.
We are required to submit annual statements of our operations, including
financial statements, to the insurance departments of the various jurisdictions
in which we do business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, we are required to file
with New Jersey and other jurisdictions a separate statement with respect to the
operations of all our variable contract accounts, in a form promulgated by the
National Association of Insurance Commissioners.
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EXPERTS
The consolidated financial statements of Prudential and Subsidiaries as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 and the financial statements of the Separate Account as of
December 31, 1998 and for the period July l, 1998 through December 31, 1998
included in this registration statement have been so included in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants given on the
authority of said firm as experts in auditing and accounting.
PricewaterhouseCoopers LLP's principal business address is 1177 Avenue of the
Americas, New York, New York 10036.
Actuarial matters included in this prospectus have been examined by Stuart L.
Liebeskind, FSA, MAAA, Vice President and Actuary 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. The Supreme Court denied certiorari in January
1999, thereby making final the approval of the class action settlement.
Pursuant to the Settlement, Prudential agreed to provide and has been
implementing 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, 1998, based on an analysis of claims
actually remedied, a sample of claims still to be remedied, and estimates of
additional liabilities associated with the ADR program, management estimated the
cost, before taxes, of remedying policyholder claims in the ADR process to be
approximately $2.56 billion. While management believes these to be reasonable
estimates based on available information, the ultimate amount of the total cost
of remedied policyholder claims and other related costs is dependent on complex
and varying factors, including the relief options still to be chosen by
claimants, the dollar value of those options, and the number and type of claims
that may successfully be appealed.
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.
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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.
Prudential's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted with precision. 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 the matters specifically discussed above.
Management believes, however, that the ultimate resolution of all such matters,
after consideration of applicable reserves, should not have a material adverse
effect on Prudential's financial position.
THE YEAR 2000 ISSUE
The services provided to a Group Contractholder or Participant of Group Variable
Universal Life depend on the smooth functioning of numerous computer systems.
Many computer systems in use today are programmed to recognize only the last two
digits of a date as the year. As a result, any systems using this kind of
programming can not distinguish a date using "00" and may treat it as "1900"
instead of "2000." This problem may impact computer systems that store business
information, but it could also affect other equipment used in our business like
telephones, fax machines and elevators. If this problem is not corrected, the
"Year 2000" issue could affect the accuracy and integrity of business records.
Prudential's regular business operations could be interrupted as well as those
of other companies that deal with us.
In addition, the operations of the mutual funds associated with Group Variable
Universal Life could experience problems resulting from the Year 2000 issue.
Please refer to the respective mutual fund's prospectus for information
regarding their approach to Year 2000 concerns. The following describes
Prudential's effort to address Year 2000 concerns.
To address this potential problem Prudential organized its Year 2000 efforts
around the following three areas:
o BUSINESS SYSTEMS - Computer programs directly used to support our business;
----------------
o INFRASTRUCTURE - Computers and other business equipment like telephones and
fax machines; and --------------
o BUSINESS PARTNERS - Year 2000 readiness of essential business partners.
-----------------
BUSINESS SYSTEMS. The business systems component includes a wide range of
computer programs that directly support Prudential's business operations
including systems for: insurance product processing, securities trading,
personnel record keeping and general accounting systems. All
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business systems were analyzed to determine whether each computer program with a
Year 2000 problem should be retired, replaced or renovated. The majority of this
work has been completed. A few remaining programs are currently being tested and
completion of this process is expected by June 1999.
INFRASTRUCTURE. As with business applications, we established a specific
methodology and process for addressing infrastructure issues. The infrastructure
effort includes mainframe computer system hardware and operating system
software, mid-range systems and servers, telecommunications equipment and
systems, buildings and facilities systems, personal computers, and vendor
hardware and software. Other than desktop systems, substantially all other
infrastructure systems have been tested. Presently a small number of midrange
computers, and building and facility systems are still in the testing phase. We
expect to have the infrastructure implementation process completed by June 1999.
BUSINESS PARTNERS. Prudential recognizes the importance of determining the Year
2000 readiness of external business relationships especially those that involve
electronic data transfer products and services, and products that impact our
essential business processes. Prudential first classified each business partner
as "highly critical" or "less critical" to our business and then began to
develop risk assessment and contingency plans to address the potential that a
business partner could experience a Year 2000 failure. All highly critical
business partner relationships have been assessed and contingency planning is
completed. Risk assessment and contingency planning continues for less critical
business partners, and the target completion date for these relationships is
June 1999.
Prudential believes that the Business Application, Infrastructure and Business
Partners components of the Year 2000 project are substantially on schedule. A
small number of the projects may not meet their targeted completion date.
However, Prudential expects that these projects will be completed by September
1999. If there are any delays, they should not have a significant impact on the
timing of the project as a whole.
THE COST OF YEAR 2000 READINESS
Prudential is funding the Year 2000 program from internal operating budgets, and
estimates that its costs to address the Year 2000 issue will total approximately
$220 million. Because these expenses were part of the operating budget, they did
not impact the management of Group Variable Universal Life. During the course of
the Year 2000 program, some optional computer projects have been delayed, but
these delays have not had any material effect on Group Variable Universal Life.
YEAR 2000 RISKS AND CONTINGENCY PLANNING
Prudential believes that it is well positioned to lessen the impact of the Year
2000 problem. However, given the nature of this issue, we can not be 100%
certain that we are completely prepared, particularly because we can not be
certain of Year 2000 readiness of third parties. As a result, we are unable to
determine at this time whether the consequences of Year 2000 failures may have a
material adverse effect on the results of Prudential's operations, liquidity or
financial
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condition. In the worst case, it is possible that a Year 2000 technology
failure, whether internal or external, could have a material impact on
Prudential's results of operations, liquidity, or financial position. If
Prudential is unable to address the Year 2000 problem, we may have difficulty in
responding to your incoming phone calls, calculating your unit values or
processing withdrawals and purchase payments. It is also possible that the
mutual funds associated with Group Variable Universal Life will be unable to
value their securities, in turn creating difficulties in purchasing or selling
shares of the respective mutual funds and calculating corresponding unit asset
values. The objective of Prudential's Year 2000 program has been to reduce these
risks as much as possible.
Most of the operations of Group Variable Universal Life involve such a large
number of individual transactions that they can only be handled with the help of
computers. As a result, our current contingency plans include responses to the
failure of specific business programs or infrastructure components. However, our
contingency responses are now being reviewed and we expect to finalize them by
June, 1999 to ensure that they are workable under the special conditions of a
Year 2000 failure. Prudential believes that with the completion of its Year 2000
program as scheduled, the possibility of significant interruptions of normal
operations will be reduced.
SUBSEQUENT EVENTS
On December 10, 1998, Prudential 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 Prudential HealthCare Health Maintenance
Organization (HMO), Point of Service (POS), Preferred Provider Organization
(PPO), and indemnity health lines, as well as its dental business.
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DEFINITIONS OF SPECIAL TERMS
USED IN THIS PROSPECTUS
ATTAINED AGE -- Your age as defined by the Group Contract.
BUSINESS DAY -- A day on which the New York Stock Exchange is open for trading.
CASH SURRENDER VALUE -- The amount you receive upon surrender of the
Certificate. The Cash Surrender Value is equal to your Certificate Fund on the
date of surrender, less any Certificate Debt, outstanding charges, and any
applicable transaction charge.
CERTIFICATE -- A document issued to you, as a Participant under a Group
Contract, setting forth or summarizing your rights and benefits.
CERTIFICATE ANNIVERSARY -- The same date each year as the Certificate Date.
CERTIFICATE DATE -- The effective date of coverage under a Certificate.
CERTIFICATE DEBT -- The principal amount of any outstanding loans you borrowed
under your Certificate plus any accrued interest.
CERTIFICATE FUND -- The total amount credited to you under your Certificate. On
any date it is equal to the sum of the amounts under that Certificate allocated
to: (1) the Subaccounts, (2) the Fixed Account, and (3) the Loan Account.
CERTIFICATE YEAR -- The year from the Certificate Date to the first Certificate
Anniversary or from one Certificate Anniversary to the next.
CONTRACT ANNIVERSARY -- The same date each year as the Contract Date.
CONTRACT DATE -- The date as of which the Group Contract is issued.
COVERED PERSON -- The person whose life is insured under the Group Contract. The
Covered Person is generally the Participant. Some Group Contracts may permit a
Participant to apply for insurance under a second Certificate naming the
Participant's spouse as the Covered Person.
DEATH BENEFIT -- The amount payable upon the death of the Covered Person (before
the deduction of any Certificate Debt or any outstanding charges).
DIVIDEND -- A portion of Prudential's divisible surplus attributable to the
Group Contract that may be credited to the Group Contract as determined annually
by Prudential's Board of Directors.
ELIGIBLE GROUP MEMBERS -- The persons specified in the Group Contract as
eligible to apply for insurance protection under the Group Contract.
EXPERIENCE CREDIT -- A refund that Prudential may provide under certain Group
Contracts based on favorable experience.
FACE AMOUNT -- The amount of life insurance in your Certificate. The Face
Amount, along with your Certificate Fund, are each parts of your Death Benefit.
FIXED ACCOUNT -- An investment option under which Prudential guarantees that
interest will be added to the amount deposited at a rate we declare
periodically.
FUNDS -- The Series Fund portfolios and other mutual fund portfolios in which
the Separate Account invests. Your investment options include the Funds and the
Fixed Account. We describe the Funds in the accompanying supplement.
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GROUP CONTRACT -- A Group Variable Universal Life insurance contract that
Prudential issues to the Group Contractholder. The term Group Contract also
includes a participating employer's participation in a multi-employer trust.
GROUP CONTRACTHOLDER -- The employer, association, sponsoring organization or
trust that is issued a Group Contract. In the case of an employer that joins a
multiple employer trust, the employer exercises the rights accorded to a Group
Contractholder as described throughout this prospectus.
GUIDELINE ANNUAL PREMIUM -- A level annual premium that would be payable
throughout the duration of a Certificate to fund the future benefits if the
Certificate were a fixed premium contract, based on certain assumptions set
forth in a rule of the SEC. Upon request, Prudential will advise you of the
guideline annual premium under the Certificate.
ISSUE AGE -- The Covered Person's Attained Age on the date that the insurance on
that Covered Person goes into effect as defined by the Group Contract.
LOAN ACCOUNT -- An account within Prudential's general account to which we
transfer from the Separate Account and/or the Fixed Account an amount equal to
the amount of any loan.
LOAN VALUE -- The amount (before any applicable transaction charge) that you may
borrow at any given time under your Certificate. We calculate the Loan Value by
multiplying the Certificate Fund by 90% (or higher where required by state law)
and then subtracting any existing loan with accrued interest, outstanding
charges, and the amount of the next month's charges.
MODIFIED ENDOWMENT CONTRACT -- A type of life insurance contract or Certificate
under the Internal Revenue Code which has been funded in excess of certain IRS
limits. Less favorable tax rules, and in some cases a penalty tax, apply if you
take distributions (such as withdrawals, loans or assignments) from a MEC.
Regardless of classification as a MEC, cash value accrues on a tax deferred
basis and the Death Benefit is generally received free of income tax. See the
TAX TREATMENT OF CERTIFICATE BENEFITS section for a more complete description of
the MEC rules.
MONTHLY DEDUCTION DATE -- Generally, the Contract Date and the first day of each
succeeding month, except that whenever the Monthly Deduction Date falls on a
date other than a Business Day, the Monthly Deduction Date will be the next
Business Day. Some Group Contracts may define Monthly Deduction Date slightly
differently, in which case a supplement to this prospectus will define Monthly
Deduction Date.
NET PREMIUM -- Your premium payment minus any charges for taxes attributable to
premiums, any processing fee, and any sales charge. Net Premiums are the amounts
that we allocate to the Separate Account and/or the Fixed Account.
PAID-UP COVERAGE -- This type of life insurance coverage pays a Death Benefit of
a specific amount that does not change. You make one initial premium payment to
begin the coverage and never make any additional payments.
PARTICIPANT -- An Eligible Group Member or "applicant owner" under a Group
Contract who obtains insurance under the Group Contract and is eligible to
exercise the rights described in the Certificate. The Participant will be the
person entitled to exercise all rights under a Certificate, regardless of
whether the Covered Person under the Certificate is the Participant or his or
her spouse. We refer to
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Participants as "you" in this prospectus. If you validly assign your rights as a
Participant to someone else, then that person may exercise those rights.
PORTABLE -- Under some Group Contracts, you may continue your insurance coverage
even if you are no longer an Eligible Group Member. This type of insurance
coverage is called Portable. Cost of insurance rates and charges may increase
under a Portable Certificate since the Covered Person under a Portable
Certificate may no longer be considered to be a member of the Group
Contractholder's group for purposes of determining those rates and charges.
SEPARATE ACCOUNT -- Prudential Variable Contract Account GI-2, a separate
investment account registered as a unit investment trust under the federal
securities laws and established by Prudential to receive some or all of the Net
Premiums and to invest them in the Funds.
SERIES FUND -- The Prudential Series Fund, Inc., a mutual fund with separate
portfolios, some of which are available as investment options for the Group
Contract.
SUBACCOUNT -- A division of the Separate Account. Each Subaccount invests its
assets in the shares of a corresponding Fund.
WE -- The Prudential Insurance Company of America.
YOU -- A Participant.
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DIRECTORS AND OFFICERS OF PRUDENTIAL
DIRECTORS OF PRUDENTIAL
FRANKLIN E. AGNEW--Director since 1994 (current term expires April, 2000).
Member, Committee on Finance & Dividends; Member, Corporate Governance
Committee. Business consultant since 1986 Senior Vice President, H.J. Heinz from
1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb, Inc. and Erie
Plastics Corporation. Age 64. Address: 600 Grant Street, Suite 660, Pittsburgh,
PA 15219.
FREDERICK K. BECKER--Director since 1994 (current term expires April, 2005).
Member, Auditing Committee; Member, Corporate Governance Committee. President,
Wilentz Goldman and Spitzer, P.A. (law firm) since 1989, with firm since 1960.
Age 63. Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
GILBERT F. CASELLAS--Director since 1998 (current term expires April, 2003).
Member, Compensation Committee. President, The Swarthmore Group, Inc. since
1999. Partner, McConnell Valdes, LLP in 1998. Chairman, U.S. Equal Employment
Opportunity Commission from 1994 to 1998. Age 46. Address: 1646 West Chester
Pike, Suite 3, West Chester, PA 19382.
JAMES G. CULLEN--Director since 1994 (current term expires April, 2001). Member,
Compensation Committee; Member, Committee on Business Ethics. President & Chief
Operating Officer, Bell Atlantic Corporation, since 1998. President & Chief
Executive Officer, Telecom Group, Bell Atlantic Corporation, from 1997 to 1998.
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 56. Address: 1310 North Court
House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS--Director since 1989 (current term expires April, 2001).
Member, Committee on Business Ethics; Member, Compensation Committee.
Independent Health Care Advisor since 1997. National and International Health
Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr. Davis is also a director
of Beckman Coulter Instruments, Inc., Merck & Co., Inc., Minimed Incorporated,
and Beverley Enterprises. Age 67. 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. Mr.
Enrico originally joined PepsiCo, Inc. in 1971. Mr. Enrico is also a director of
A.H. Belo Corporation and Dayton Hudson Corporation. Age 54. Address: 700
Anderson Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR--Director since 1995 (current term expires April, 2003).
Member, Investment Committee; Member, Committee on Finance & 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 Whirlpool
Corporation, MeidiaOne Group, Inc., AP Automotive
54
<PAGE>
Systems, Inc., The Dow Chemical Company, and DTE Energy Company. Age 64.
Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
WILLIAM H. GRAY, III--Director since 1991 (current term expires April, 2000).
Chairman, Committees on Nominations & Corporate Governance. Member, Executive
Committee; Member, Committee on Business Ethics. 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, CBS Corporation, and
Electronic Data Systems. Age 57. Address: 8260 Willow Oaks Corp. Drive, Fairfax,
VA 22031-4511.
JON F. HANSON--Director since 1991 (current term expires April, 2003). Member,
Investment Committee; Member, Committee on Business Ethics. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of James E. Hanson
Management Company, Neumann Distributors, Inc., Fleet Trust and Investment
Services Company, N.A., United Water Resources, Orange & Rockland Utilities,
Inc., and Consolidated Delivery and Logistics. Age 62. 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 and Owens Corning. Age 64. Address: One Owens Corning Parkway,
Toledo, OH 43659.
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 56. 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. Chairman and Chief Executive
Officer, The Perkin Elmer Corporation from 1990 to 1996. Mr. Kelley is also a
director of Hercules Incorporated and Alliant Techsystems. Age 67. Address: 751
Broad Street, 23rd Floor, Newark, NJ 07102-3777.
BURTON G. MALKIEL--Director since 1978 (current term expires April, 2002).
Chairman, Investment Committee; Member, Executive Committee; Member, Committee
on Finance & 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 66. 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
Bank from 1990 to 1994, with Chase since 1972. Age 56. Address: 751 Broad
Street, Newark, NJ 07102.
55
<PAGE>
IDA F.S. SCHMERTZ--Director since 1997 (current term expires April, 2004).
Member, Audit Committee. Principal, Investment Strategies International since
1994. Age 64. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
CHARLES R. SITTER--Director since 1995 (current term expires April, 2003).
Member, Committee on Finance & Dividend; Member, Investment Committee. Retired
since 1996. President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his
career with Exxon in 1957. Age 68. Address: 5959 Las Colinas Boulevard, Irving,
TX 75039-2298.
DONALD L. STAHELI--Director since 1995 (current term expires April, 2003).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1996.
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, Conti-Financial
Corporation and Continental Grain Company. Age 67. 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. Retired since
1998. Chairman of the Board, The Toronto-Dominion Bank from 1997 to 1998.
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, Canadian Occidental Petroleum, Ltd., The Toronto- Dominion Bank,
and Ontario Hydro. 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,
Committees on Nominations & Corporate Governance; Member, Investment Committee.
Retired since 1997. Chairman and Chief Executive Officer, Unisys Corporation,
from 1990 to 1997. Mr. Unruh is also a director of Ameritech Corporation and
Moss Micro. Age 57. Address: 751 Broad Street, Newark, NJ 07102-3777.
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, Advanced Medicines, Inc. since 1997. Chairman, Chief Executive
Officer and President, Merck & Co., Inc. from 1986 to 1995. Dr. Vagelos
originally joined Merck in 1975. Dr. Vagelos is also a director of The Estee
Lauder Companies, Inc. and PepsiCo., Inc. Age 69. 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. Partner, Herbert, Van Ness, Cayci & Goodell (law firm) since
1998. Counselor at Law, Picco Herbert Kennedy (law firm) from 1990 to 1998. Mr.
Van Ness is also a director of Jersey Central Power & Light Company. Age 64.
Address: 22 Chambers Street, Princeton, NJ 08542.
56
<PAGE>
PAUL A. VOLCKER--Director since 1988 (current term expires April, 2000).
Chairman, Committee on Finance & Dividends; Member, Executive Committee; Member,
Committee on Nominations & Corporate Governance. Consultant since 1997.
Chairman, Wolfensohn & Co., Inc. 1988 to 1996. Chairman, James D. Wolfensohn,
Inc. 1988 to 1996. Chief Executive Officer, James D. Wolfensohn, Inc. from 1995
to 1996. Mr. Volcker is also a director of Nestle, S.A. and Bankers Trust New
York Corporation, as well as a Director of the Board of Overseers of TIAA- CREF.
Age 71, Address: 610 Fifth Avenue, Suite 420, New York, NY 10020.
JOSEPH H. WILLIAMS--Director since 1994 (current term expires April, 2002).
Member, Committee on Finance & Dividends; Member, Investment Committee.
Director, The Williams Companies since 1979. Chairman & Chief Executive Officer,
The Williams Companies from 1979 to 1993. Mr. Williams is also a director of The
Orvis Company, MTC Investors, LLC., and AEA Investors, Inc. Age 64. Address: One
Williams Center, Tulsa, OK 74102.
PRINCIPAL OFFICERS OF PRUDENTIAL
ARTHUR F. RYAN--Chairman of the Board, President and Chief Executive Officer
since 1994; prior to 1994, President and Chief Operating Officer, Chase
Manhattan Corporation. Age 56.
E. MICHAEL CAULFIELD--Executive Vice President, Financial Management since 1998;
Chief Executive Officer, Prudential Investments from 1995 to 1998; Chief
Executive Officer, Money Management Group in 1995; prior to 1995, President,
Prudential Preferred Financial Services. Age 52.
MICHELE S. DARLING--Executive Vice President, Human Resources since 1997; prior
to 1997, Executive Vice President, Canadian Imperial Bank of Commerce. Age 45.
ROBERT C. GOLDEN--Executive Vice President, Operations and Systems since 1997;
prior to 1997, Executive Vice President, Prudential Securities. Age 53.
MARK B. GRIER--Executive Vice President, Corporate Governance since 1998;
Executive Vice President, Financial Management from 1997 to 1998; Chief
Financial Officer from 1995 to 1997; prior to 1995, Executive Vice President,
Chase Manhattan Corporation. Age 46.
JEAN D. HAMILTON--Executive Vice President, Institutional since 1998; President,
Diversified Group since 1995 to 1998; prior to 1995, President, Prudential
Capital Group. Age 52.
RODGER A. LAWSON--Executive Vice President, International Investments & Global
Marketing since 1998; Executive Vice President, Marketing and Planning from 1996
to 1998; President and CEO, Van Eck Global, from 1994 to 1996; prior to 1994,
President and CEO, Global Private Banking, Bankers Trust Company. Age 52.
57
<PAGE>
KIYOFUMI SAKAGUCHI--Executive Vice President, International Insurance since
1998; President, International Insurance Group from 1995 to 1998; prior to 1995,
Chairman and CEO, The Prudential Life Insurance Co., Ltd. Age 56.
JOHN V. SCICUTELLA--Executive Vice President, Individual Financial Services
since 1998; Chief Executive Officer, Individual Insurance Group from 1997 to
1998; Executive Vice President Operations and Systems from 1995 to 1997; prior
to 1995, Executive Vice President, Chase Manhattan Corporation. Age 49.
JOHN R. STRANGFELD--Executive Vice President, Global Asset Management since
1998; Chief Executive Officer, Private Asset Management Group (PAMG) from 1996
to 1998; President, PAMG, from 1994 to 1996; prior to 1994, Senior Managing
Director. Age 45.
JAMES J. AVERY, JR.--Senior Vice President & Chief Actuary, Individual Insurance
Group since 1997; President Prudential Select from 1996 to 1997; prior to 1995,
Executive Vice President and Chief Operating Officer, Prudential Select. Age 47.
MARTIN A. BERKOWITZ--Senior Vice President, Financial Management since 1998;
Senior Vice President and Comptroller from 1995 to 1998; prior to 1995, Senior
Vice President and CFO, Prudential Investment Corporation. Age 50.
WILLIAM M. BETHKE--Senior Vice President and Chief Investment Officer since
1997; prior to 1997, President, Capital Management Group. Age 51.
ANNE E. BOSSI--Senior Vice President, Institutional since 1998; President, Group
Life & Disability 1997 to 1998; President, Group Life Insurance 1995 to 1997;
prior to 1995, President, Northeastern Group Operations. Age 47.
RICHARD J. CARBONE--Senior Vice President and Chief Financial Officer since
1997; Controller, Salomon Brothers from 1995 to 1997; prior to 1995, Controller,
Bankers Trust. Age 51.
THOMAS J. CARROLL-- Senior Vice President and Chief Auditor since 1999; Managing
Director, Bankers Trust Company from 1996 to 1998; prior to 1996, Global Chief
Auditor and Managing Director, Credit Suisse First Boston. Age 57.
THOMAS W. CRAWFORD--Senior Vice President, Individual Financial Services since
1998; President and Chief Executive Officer, Prudential Property & Casualty
Company from 1996 to 1998; Vice President, Prudential Property & Casualty
Company in 1996; prior to 1996, President & CEO, Southern Heritage Insurance
Company. Age 55.
WILLIAM D. FRIEL--Senior Vice President and Chief Information Officer since
1996; prior to 1996, Chief Executive Officer, Prudential Service Company. Age
60.
MICHAEL J. HINES--Senior Vice President, Marketing and Communications since
1999; 1996 to 1998 Vice President, Marketing and Communications. Age 47.
58
<PAGE>
RONALD P. JOELSON--Senior Vice President, Financial Management since 1999;
Senior Vice President, Guaranteed Products from 1996 to 1999; Vice President,
Guaranteed Investments during 1996; prior to 1996, Managing Director, Retirement
Services. Age 40.
IRA J. KLEINMAN--Senior Vice President, International Insurance since 1997;
prior to 1997, Chief Marketing & Product Development Officer. Age 51.
KATHLEEN KRALL--Senior Vice President, Individual Financial Services since 1999;
Vice President, Individual Financial Services from 1996 to 1999; Vice President,
Operations and Systems from 1995 to 1996; prior to 1995, Vice President, Chase
Manhattan Bank. Age 41.
JOYCE R. LEIBOWITZ--Senior Vice President, Management Internal Controls since
1999; Vice President, Management Internal Controls from 1995 to 1999; prior to
1995, Integrated Control Officer. Age 51.
JOHN M. LIFTIN--Senior Vice President and General Counsel since 1998;
Self-employed from 1997 to 1998; prior to 1997, Senior Vice President and
General Counsel, Kidder & Peabody Group, Inc. Age 55.
NEIL A. MCGUINNESS--Senior Vice President, Individual Financial Services since
1996; Director, Putnam Investments, in 1996; prior to 1996, President, Fidelity
Investment Employer Services Company. Age 52.
PRISCILLA A. MYERS--Senior Vice President, Demutualization since 1998; Senior
Vice President and Auditor from 1995 to 1998; prior to 1995, Vice President and
Auditor. Age 48.
I. EDWARD PRICE--Senior Vice President, Individual Financial Services since
1996; Senior Vice President and Actuary from 1995 to 1996; prior to 1995, Chief
Executive Officer, Prudential International Insurance. Age 56.
ROBERT J. SULLIVAN--Senior Vice President, Individual Financial Services since
1997; prior to 1997, Managing Director, Fidelity Investments. Age 60.
SUSAN J. BLOUNT--Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 41.
C. EDWARD CHAPLIN--Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
ANTHONY S. PISZEL--Vice President and Controller since 1998; Vice President,
Enterprise Financial Management from 1997 to 1998; prior to 1997, Chief
Financial Officer, Individual Insurance Group. Age 44.
Prudential officers are elected annually.
59
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
STATEMENTS OF NET ASSETS
December 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY MARKET FLEXIBLE MANAGED STOCK INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------ ------------ ----------
ASSETS
<S> <C> <C> <C> <C>
Investment in The Prudential Series Fund, Inc.
Portfolios and non-Prudential administered
funds, at net asset value [Note 3] ..................... $ 231,517 $ 417,696 $ 1,404,003 $ 811,509
Accrued expenses payable to The Prudential
Insurance Company of America [Note 2] .................. (277) (509) (1,607) (970)
----------- ----------- ----------- -----------
Net Assets ............................................... $ 231,240 $ 417,187 $ 1,402,396 $ 810,539
=========== =========== =========== ===========
NET ASSETS, representing:
Equity of Participants ................................... $ 231,240 $ 417,187 $ 1,402,396 $ 810,539
----------- ----------- ----------- -----------
$ 231,240 $ 417,187 $ 1,402,396 $ 810,539
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A1
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ----------------------------------------------------------------------------------------
NEUBERGER & FRANKLIN
BERMAN KEMPER TEMPLETON
AMT LIMITED SERIES MFS DREYFUS FRANKLIN TEMPLETON DEVELOPING
MATURITY BOND HIGH YIELD RESEARCH SMALL CAP INTERNATIONAL MARKETS
PORTFOLIO PORTFOLIO SERIES PORTFOLIO FUND FUND
- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 159,827 $ 356,155 $ 891,261 $ 1,305,969 $ 387,597 $ 166,733
(193) (461) (1,026) (1,561) (499) (197)
- ----------- ----------- ----------- ----------- ----------- -----------
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
=========== =========== =========== =========== =========== ===========
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
- ----------- ----------- ----------- ----------- ----------- -----------
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A2
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
STATEMENTS OF OPERATIONS
For the period July 1, 1998* to December 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY MARKET FLEXIBLE MANAGED STOCK INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ---------------- ----------- ------
INVESTMENT INCOME:
<S> <C> <C> <C> <C>
Dividend income ........................................... $ 3,241 $ 5,648 $ 6,340 $ 5,495
--------- --------- --------- ---------
EXPENSES
Charges to Participants for assuming
mortality risk and expense risk [Note 5A] ............... 277 509 1,607 970
--------- --------- --------- ---------
NET INVESTMENT INCOME (LOSS) ................................ 2,964 5,139 4,733 4,525
--------- --------- --------- ---------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received ...................... 0 33,105 17,051 78,110
Realized gain (loss) on shares redeemed ................... 0 (1,147) (1,408) (2,032)
Net change in unrealized gain (loss)
on investments .......................................... 0 (12,978) 151,883 (41,420)
--------- --------- --------- ---------
NET GAIN ON INVESTMENTS ..................................... 0 18,980 167,526 34,658
--------- --------- --------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................. $ 2,964 $ 24,119 $ 172,259 $ 39,183
========= ========= ========= =========
*Commenced Operations
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A3
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -------------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER FRANKLIN TEMPLETON
AMT LIMITED SERIES MFS DREYFUS FRANKLIN TEMPLETON DEVELOPING
MATURITY BOND HIGH YIELD RESEARCH SMALL CAP INTERNATIONAL MARKETS
PORTFOLIO PORTFOLIO SERIES PORTFOLIO FUND FUND
- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0 $ 0 $ 0 $ 3 $ 0 $ 0
- --------- --------- --------- --------- --------- ---------
193 461 1,026 1,561 499 197
- --------- --------- --------- --------- --------- ---------
(193) (461) (1,026) (1,558) (499) (197)
- --------- --------- --------- --------- --------- ---------
0 0 0 15,555 0 0
7 (1,269) (1,568) (4,972) (1,543) (596)
1,200 2,494 115,832 123,615 14,401 22,483
- --------- --------- --------- --------- --------- ---------
1,207 1,225 114,264 134,198 12,858 21,887
- --------- --------- --------- --------- --------- ---------
$ 1,014 $ 764 $ 113,238 $ 132,640 $ 12,359 $ 21,690
========= ========= ========= ========= ========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A4
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
STATEMENTS OF CHANGES IN NET ASSETS
For the period July 1, 1998* to December 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY MARKET FLEXIBLE MANAGED STOCK INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ----------- -----------
1998 1998 1998 1998
----------- ----------- ----------- -----------
OPERATIONS
<S> <C> <C> <C> <C>
Net investment income (loss) ................................. $ 2,964 $ 5,139 $ 4,733 $ 4,525
Capital gains distributions received ......................... 0 33,105 17,051 78,110
Realized gain (loss) on shares redeemed ...................... 0 (1,147) (1,408) (2,032)
Net change in unrealized gain (loss) on investments .......... 0 (12,978) 151,883 (41,420)
----------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .................................... 2,964 24,119 172,259 39,183
----------- ----------- ----------- -----------
PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
Participant Net Payments .................................... 22,979 63,947 191,087 125,032
Policy Loans ................................................ (71) (3,208) (2,866) (149)
Policy Loan Repayments and Interest ......................... 0 2,147 2,205 2,005
Surrenders, Withdrawals and Death Benefits .................. 0 (1,089) (1,648) (1,301)
Net Transfers From (To) Other Subaccounts or
Fixed Rate Options ...................................... 205,368 331,276 1,041,359 645,774
Administrative and Other Charges ............................ 0 (5) 0 (5)
----------- ----------- ----------- -----------
TOTAL PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS ................................ 228,276 393,068 1,230,137 771,356
----------- ----------- ----------- -----------
TOTAL INCREASE IN NET ASSETS ................................... 231,240 417,187 1,402,396 810,539
NET ASSETS
Beginning of period .......................................... 0 0 0 0
----------- ----------- ----------- -----------
End of period ................................................ $ 231,240 $ 417,187 $ 1,402,396 $ 810,539
=========== =========== =========== ===========
</TABLE>
*Commenced Operations
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A5
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- --------------------------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER FRANKLIN TEMPLETON
AMT LIMITED SERIES MFS DREYFUS FRANKLIN TEMPLETON DEVELOPING
MATURITY BOND HIGH YIELD RESEARCH SMALL CAP INTERNATIONAL MARKETS
PORTFOLIO PORTFOLIO SERIES PORTFOLIO FUND FUND
- ----------- ----------- ----------- ----------- ----------- -----------
1998 1998 1998 1998 1998 1998
- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ (193) $ (461) $ (1,026) $ (1,558) $ (499) $ (197)
0 0 0 15,555 0 0
7 (1,269) (1,568) (4,972) (1,543) (596)
1,200 2,494 115,832 123,615 14,401 22,483
- ----------- ----------- ----------- ----------- ----------- -----------
1,014 764 113,238 132,640 12,359 21,690
- ----------- ----------- ----------- ----------- ----------- -----------
32,082 53,378 133,668 214,097 75,071 26,331
(4,183) (147) (161) (243) (328) (37)
210 0 2,032 0 0 0
0 (283) (1,701) (807) (237) 0
130,511 301,982 643,159 958,721 300,233 118,552
0 0 0 0 0 0
- ----------- ----------- ----------- ----------- ----------- -----------
158,620 354,930 776,997 1,171,768 374,739 144,846
- ----------- ----------- ----------- ----------- ----------- -----------
159,634 355,694 890,235 1,304,408 387,098 166,536
0 0 0 0 0 0
- ----------- ----------- ----------- ----------- ----------- -----------
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A6
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
December 31, 1998
NOTE 1: GENERAL
The Prudential Variable Contract Account GI-2 (the "Account") of
The Prudential Insurance Company of America ("Prudential") was
established on June 14, 1988 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 purchases of Group Variable Universal
Life 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 one hundred
thirty-six subaccounts within the Account. Group Variable Universal
Life contracts offer the option to invest in up to twenty of the
subaccounts, each of which invests in either a corresponding
portfolio of The Prudential Series Fund, Inc. (the "Series Fund")
or any of the non-Prudential administered funds shown in Note 3.
The Series Fund is a diversified open-end management investment
company, and is managed by Prudential.
The contracts are group insurance contracts and generally are
issued to either employers, associations, sponsoring organizations
or trusts. A person entitled to make contributions under the
contract is a "Participant."
Group Variable Universal Life insurance contracts became available
to Participants on July 1, 1998.
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 or the
non-Prudential administered funds 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 or
the non-Prudential administered funds and are recorded on the
ex-dividend date.
Accrued Expenses Payable to The Prudential Insurance Company of
America--The payable represents amounts due to Prudential for
mortality risk and expense risk charges.
NOTE 3: INVESTMENT INFORMATION FOR THE SUBACCOUNTS OF THE PRUDENTIAL
VARIABLE CONTRACT ACCOUNT GI-2
The net asset value per share for each (rounded) for each portfolio
of the Series Fund or the non-Prudential administered funds, 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, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------
<S> <C> <C> <C> <C>
Number of shares: .................. 23,152 25,222 37,202 27,382
Net asset value per share (rounded): $ 10.00 $ 16.56 $ 37.74 $ 29.64
Cost: .............................. $ 231,517 $ 430,674 $1,252,120 $ 852,929
</TABLE>
A7
<PAGE>
NOTE 3: INVESTMENT INFORMATION FOR THE SUBACCOUNTS OF THE PRUDENTIAL
VARIABLE CONTRACT ACCOUNT GI-2 (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
---------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Number of shares: 11,565 290,175 46,785 24,225
Net asset value per share (rounded): $ 13.82 $ 1.23 $ 19.05 $ 53.91
Cost: $ 158,627 $ 353,661 $ 775,429 $1,182,354
</TABLE>
SUBACCOUNTS (CONTINUED)
--------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------- ---------
Number of shares: 18,806 32,565
Net asset value per share (rounded): $ 20.61 $ 5.12
Cost: $373,196 $144,250
NOTE 4: PARTICIPANT UNIT INFORMATION
Outstanding Participant units, unit values and total value of
Participant equity at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Participant Units Outstanding: 22,672 40,582 127,123 80,739
Unit Value: $ 10.19956 $ 10.28010 $ 11.03184 $ 10.03902
---------- ---------- ---------- ----------
TOTAL PARTICIPANT EQUITY: $ 231,240 $ 417,187 $1,402,396 $ 810,539
========== ========== ========== ==========
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Participant Units Outstanding: 15,785 37,005 83,841 129,380
Unit Value: $ 10.11316 $ 9.61199 $ 10.61812 $ 10.08199
---------- ---------- ---------- ----------
TOTAL PARTICIPANT EQUITY: $ 159,634 $ 355,694 $ 890,235 $1,304,408
========== ========== ========== ==========
</TABLE>
A8
<PAGE>
NOTE 4: PARTICIPANT UNIT INFORMATION (CONTINUED)
SUBACCOUNTS (CONTINUED)
---------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------- --------
Participant Units Outstanding: 40,981 16,259
Unit Value: .................. $9.44570 $10.24261
-------- ---------
TOTAL PARTICIPANT EQUITY: .... $387,098 $ 166,536
======== =========
NOTE 5: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges, currently equal to
an effective annual rate of 0.45%, are applied daily against
the net assets representing equity of Participants in each
subaccount. This charge is guaranteed not to exceed an
effective annual rate of 0.90%. Mortality risk is that
Participants may not live as long as estimated and expense risk
is that the cost of issuing and administering the insurance may
exceed related charges by Prudential.
B. Transaction Related Charges
There may be charges, if applicable, associated with
surrenders, partial withdrawals, loans, transfers and requests
for additional statements as follows:
o Surrenders and partial withdrawals-- Not to exceed the
lesser of $20 or 2% of the amount received.
o Loans-- Not to exceed $20 for each loan made.
o Transfers-- Not to exceed $20 for each transfer, after
the twelfth transfer, in a period of generally 12 months
depending on the provisions of the contract.
o Additional statement requests related to a Participant's
insurance-- Not to exceed $20 per statement.
C. Cost of Insurance Charges
Participant's contributions may be subject to certain
deductions prior to being invested in the Account. The
deductions are for (1) state premium taxes, (2) transaction
costs which are deducted from each premium payment to cover
premium collection and processing costs and (3) sales charges
which are deducted in order to compensate Prudential for the
cost of selling the contract. Contracts are also subject to
monthly charges to compensate Prudential for the portion of the
face amount of insurance applicable to the Participant. In
addition, monthly charges may also be deducted to compensate
Prudential for costs related to administering the contract and
for additional insurance benefits, if applicable.
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.
A9
<PAGE>
NOTE 7: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) for
the period July 1, 1998* through December 31, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------- --------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Participant Contributions: 23,681 45,583 137,804 87,843
Participant Redemptions: (1,009) (5,001) (10,681) (7,104)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
------------------- --------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Participant Contributions: 17,321 40,569 90,308 143,602
Participant Redemptions: (1,536) (3,564) (6,467) (14,222)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------------------- -------------------
<S> <C> <C>
Participant Contributions: 45,363 17,730
Participant Redemptions: (4,382) (1,471)
</TABLE>
* Commenced Operations
A10
<PAGE>
NOTE 8: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of
investments in the Series Fund or the non-Prudential administered
funds for the period July 1, 1998* through December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
--------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Purchases: $ 238,485 $ 441,301 $1,333,505 $ 837,735
Sales: $ (10,210) $ (48,234) $ (103,368) $ (66,378)
<CAPTION>
PORTFOLIOS (CONTINUED)
---------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Purchases: $ 174,083 $ 387,952 $ 836,499 $1,296,655
Sales: $ (15,463) $ (33,022) $ (59,503) $ (124,887)
<CAPTION>
PORTFOLIOS (CONTINUED)
-----------------------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------------- ---------------
<S> <C> <C>
Purchases: $ 413,671 $ 157,961
Sales: $ (38,932) $ (13,115)
</TABLE>
* Commenced operations
A11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Participants of the
Prudential Variable Contract Account GI-2
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 (Prudential Money
Market Portfolio, Prudential Flexible Managed Portfolio, Prudential Stock Index
Portfolio, Prudential Equity Portfolio, Neuberger & Berman AMT Limited Maturity
Bond Portfolio, Kemper Series High Yield Portfolio, MFS Research Series, Dreyfus
Small Cap Portfolio, Franklin Templeton International Fund and Franklin
Templeton Developing Markets Fund) of the Prudential Variable Contact Account
GI-2 at December 31, 1998, and the results of each of their operations and the
changes in each of their net assets for the period July 1, 1998 through December
31, 1998, 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 audit. We conducted our audit 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 audit, which included
confirmation of fund shares owned at December 31, 1998, provides a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 26, 1999
A12
<PAGE>
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT ACCOUNTANTS
DECEMBER 31, 1998 AND 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 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 audits. 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.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
2
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1998 AND 1997 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1998: $76,997; 1997: $71,496) $ 80,158 $ 75,270
Held to maturity, at amortized cost (fair value, 1998: $17,906; 1997: $19,894) 16,848 18,700
Trading account assets, at fair value 8,888 6,347
Equity securities, available for sale, at fair value (cost, 1998: $2,583; 1997: $2,376) 2,759 2,810
Mortgage loans on real estate 16,495 16,004
Investment real estate 801 1,519
Policy loans 7,476 7,034
Securities purchased under agreements to resell 10,252 8,661
Cash collateral for borrowed securities 5,622 5,047
Other long-term investments 2,658 2,489
Short-term investments 9,781 12,106
--------- ---------
Total investments 161,738 155,987
Cash 1,943 1,859
Accrued investment income 1,795 1,909
Broker-dealer related receivables 10,142 8,442
Deferred policy acquisition costs 6,462 6,083
Other assets 15,721 11,452
Separate Account assets 81,621 73,839
--------- ---------
TOTAL ASSETS $ 279,422 $ 259,571
========= =========
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits $ 69,129 $ 67,367
Policyholders' account balances 30,974 33,246
Unpaid claims and claim adjustment expenses 3,860 4,864
Policyholders' dividends 1,444 1,269
Securities sold under agreements to repurchase 21,486 12,347
Cash collateral for loaned securities 7,132 14,117
Income taxes payable 785 500
Broker-dealer related payables 6,530 3,338
Securities sold but not yet purchased 5,771 3,648
Other liabilities 16,169 14,659
Short-term debt 10,082 6,774
Long-term debt 4,734 4,273
Separate Account liabilities 80,931 73,451
--------- ---------
Total liabilities 259,027 239,853
--------- ---------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 16)
EQUITY
Accumulated other comprehensive income 1,232 1,661
Retained earnings 19,163 18,057
--------- ---------
Total equity 20,395 19,718
--------- ---------
TOTAL LIABILITIES AND EQUITY $ 279,422 $ 259,571
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums $ 9,024 $ 9,005 $ 9,999
Policy charges and fee income 1,462 1,434 1,490
Net investment income 9,520 9,456 9,461
Realized investment gains, net 2,630 2,168 1,128
Commissions and other income 4,451 4,481 4,512
-------- -------- --------
Total revenues 27,087 26,544 26,590
-------- -------- --------
BENEFITS AND EXPENSES
Policyholders' benefits 9,976 10,076 11,094
Interest credited to policyholders' account balances 1,806 2,044 2,251
Dividends to policyholders 2,478 2,422 2,339
General and administrative expenses 9,720 8,992 8,956
Sales practices remedies 510 1,640 410
-------- -------- --------
Total benefits and expenses 24,490 25,174 25,050
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,597 1,370 1,540
-------- -------- --------
Income taxes
Current 1,185 101 556
Deferred (215) 306 (376)
-------- -------- --------
970 407 180
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 1,627 963 1,360
-------- -------- --------
DISCONTINUED OPERATIONS
Loss from Healthcare operations, net of taxes (298) (353) (282)
Loss on disposal of Healthcare operations, net of taxes (223) -- --
-------- -------- --------
Net loss from discontinued operations (521) (353) (282)
-------- -------- --------
NET INCOME $ 1,106 $ 610 $ 1,078
======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED OTHER COMPREHENSIVE INCOME
------------------------------------------------------
FOREIGN NET TOTAL
CURRENCY UNREALIZED PENSION ACCUMULATED OTHER
TRANSLATION INVESTMENT LIABILITY COMPREHENSIVE RETAINED TOTAL
ADJUSTMENTS GAINS ADJUSTMENT INCOME EARNINGS EQUITY
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ (24) $ 2,397 $ -- $ 2,373 $ 16,369 $ 18,742
Comprehensive income (loss):
Net income 1,078 1,078
Other comprehensive income (loss), net of tax:
Change in foreign currency translation
adjustments (32) (32) (32)
Change in net unrealized investment gains (1,261) (1,261) (1,261)
Additional pension liability adjustment (4) (4) (4)
--------
Other comprehensive income (loss) (1,297)
--------
Total comprehensive income (loss) (219)
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 (56) 1,136 (4) 1,076 17,447 18,523
Comprehensive income:
Net income 610 610
Other comprehensive income (loss), net of tax:
Change in foreign currency translation
adjustments (29) (29) (29)
Change in net unrealized investment gains 616 616 616
Additional pension liability adjustment (2) (2) (2)
--------
Other comprehensive income 585
--------
Total comprehensive income 1,195
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 (85) 1,752 (6) 1,661 18,057 19,718
Comprehensive income:
Net income 1,106 1,106
Other comprehensive income, net of tax:
Change in foreign currency translation
adjustments 54 54 54
Change in net unrealized investment gains (480) (480) (480)
Additional pension liability adjustment (3) (3) (3)
--------
Other comprehensive income (429)
--------
Total comprehensive income 677
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ (31) $ 1,272 $ (9) $ 1,232 $ 19,163 $ 20,395
=============================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,106 $ 610 $ 1,078
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net (2,660) (2,209) (1,138)
Policy charges and fee income (135) (258) (208)
Interest credited to policyholders' account balances 1,806 2,044 2,251
Depreciation and amortization 305 258 266
Loss (gain) on disposal of businesses 223 -- (116)
Change in:
Deferred policy acquisition costs (165) (142) (122)
Future policy benefits and other insurance liabilities 584 2,762 2,471
Securities purchased under agreements to resell (1,591) (3,314) (217)
Trading account assets (2,540) (1,825) (433)
Income taxes receivable/payable 594 (1,391) (937)
Cash collateral for borrowed securities (575) (2,631) (332)
Cash collateral for securities loaned (net) (6,985) 5,668 2,891
Broker-dealer related receivables/payables 1,495 (672) (607)
Securities sold but not yet purchased 2,122 1,633 251
Securities sold under agreements to repurchase 9,139 4,844 (490)
Other, net (5,168) 4,142 (1,334)
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES (2,445) 9,519 3,274
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale 123,151 123,550 123,368
Fixed maturities, held to maturity 4,466 4,042 4,268
Equity securities, available for sale 2,792 2,572 2,162
Mortgage loans on real estate 4,839 4,299 5,731
Investment real estate 1,364 1,842 615
Other long-term investments 1,848 5,081 3,203
Disposal of businesses -- -- 52
Payments for the purchase of:
Fixed maturities, available for sale (126,742) (129,854) (125,093)
Fixed maturities, held to maturity (2,244) (2,317) (2,844)
Equity securities, available for sale (2,547) (2,461) (2,384)
Mortgage loans on real estate (4,885) (3,363) (1,906)
Investment real estate (31) (241) (142)
Other long-term investments (1,415) (4,148) (2,060)
Short-term investments (net) 2,145 (2,848) (1,915)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES 2,741 (3,846) 3,055
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits 6,955 5,020 2,676
Policyholders' account withdrawals (11,111) (9,873) (8,099)
Net increase in short-term debt 2,422 305 583
Proceeds from the issuance of long-term debt 1,940 324 93
Repayments of long-term debt (418) (464) (1,306)
-------- -------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES (212) (4,688) (6,053)
-------- -------- --------
NET INCREASE IN CASH 84 985 276
CASH, BEGINNING OF YEAR 1,859 874 598
-------- -------- --------
CASH, END OF YEAR $ 1,943 $ 1,859 $ 874
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 163 $ 968 $ 793
-------- -------- --------
Interest paid $ 864 $ 708 $ 595
-------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
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 financial services throughout the
United States and several locations worldwide. The Company's businesses
provide a full range of insurance, investment, securities brokerage and
other financial products and services to both retail consumers and
institutions. Principal products and services provided include life
insurance, property and casualty insurance, annuities, mutual funds,
pension and retirement related investments and administration, asset
management, and securities brokerage.
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 stock company. On July 1, 1998,
legislation was enacted in New Jersey that would permit this conversion to
occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption
of a plan by the Company's Board of Directors, a public hearing, voting by
qualified voters and regulatory approval. There can be no assurance that
the Company will demutualize or, if it does so, when demutualization will
occur.
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 consolidated 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 a 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, "Accumulated other
comprehensive income."
TRADING ACCOUNT ASSETS AND SECURITIES SOLD BUT NOT YET PURCHASED are
carried at estimated fair value. Realized and unrealized gains and losses
on trading account assets and securities sold but not yet purchased are
included in "Commissions and other income."
EQUITY SECURITIES, available for sale, are comprised of common and
non-redeemable preferred stock and are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax, and the effects
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, "Accumulated other
comprehensive income."
8
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal
balances, net of unamortized discounts and allowance for losses. The
allowance for losses is based upon a loan specific review and, for
performing loans collectively evaluated, a portfolio review. The loan
specific review includes consideration of expected future cash flows
relative to outstanding balances. The portfolio review includes
consideration of the composition of the loan portfolio, current economic
conditions, past results, current trends, the estimated aggregate value of
the underlying collateral, and other relevant environmental factors.
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, identified in management's
specific review of probable loan losses, 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.
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 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 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. 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 and is reviewed for
impairment whenever events or circumstances indicate the carrying value may
not be recoverable. In reviewing recoverability, an impairment loss is
recognized for an other than temporary decline in value to the extent the
reduction in carrying values of investment real estate exceeds estimated
undiscounted future cash flows. Charges relating to real estate to be
disposed of and impairments of real estate held for investment are included
in "Realized investment gains, net." Depreciation on real estate is
computed using the straight-line method over the estimated lives of the
properties.
POLICY LOANS are carried at unpaid principal balances.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE are treated as financing arrangements and 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 or resold is monitored, and additional collateral is requested,
where appropriate, to protect against credit exposure.
SECURITIES BORROWED AND SECURITIES LOANED are treated as financing
arrangements and 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 because the debtor typically
has the right to redeem the collateral on short notice. Substantially all
of 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.
9
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities repurchase and resale agreements and securities borrowed and
loaned 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.
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.
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.
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." Decreases in the lower of
depreciated cost or fair value less selling costs of investment real estate
held for sale are recorded in "Realized investment gains, net."
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, for certain products, 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 "Accumulated
other comprehensive income."
For participating 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. The average rate of assumed investment yield in
estimating expected gross margins was 9.97%, 9.39%, and 8.39% for 1998,
1997 and 1996, respectively. Deferred policy acquisition costs related to
non-participatory term insurance are amortized over the expected life of
the contracts in proportion to the premium income.
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.
10
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For disability 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 Statements of Operations. Mortality, policy administration and
surrender charges on the accounts are included in "Policy charges and fee
income."
OTHER ASSETS AND OTHER LIABILITIES
Other assets consist primarily of prepaid benefit costs, reinsurance
recoverables, certain restricted assets, trade receivables and property and
equipment. Property and equipment are stated at cost less accumulated
depreciation. Depreciation is determined using the straight-line method
over the estimated useful lives of the related assets which generally range
from 3 to 40 years. Other liabilities consist primarily of trade payables
and reserves for sales practice remediation costs.
INSURANCE REVENUE AND EXPENSE RECOGNITION
Premiums from participating insurance policies are 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
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, 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.
11
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premiums, benefits and expenses are stated net of reinsurance ceded to
other companies. Estimated reinsurance receivables and the cost of
reinsurance are recognized over the life of the reinsured policies using
assumptions consistent with those used to account for the underlying
policies.
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. The effects of
translating the Statements of Financial Position of non-U.S. entities with
functional currencies other than the U.S. dollar are recorded, net of
related hedge gains and losses and income taxes, as "Other comprehensive
income," a separate component of equity.
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 from trading activities of the
Company's broker-dealer subsidiary.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose values are derived from
interest rates, foreign exchange rates, various financial indices, or the
value of securities or commodities. Derivative financial instruments can be
exchange-traded or contracted in the over-the-counter market and those used
by the Company include swaps, futures, forwards and options contracts. The
Company uses derivative financial instruments to hedge market risk from
changes in interest rates or foreign currency exchange rates, and to alter
interest rate or currency exposures arising from mismatches between assets
and liabilities. Additionally, derivatives are used in the broker-dealer
business and in a limited-purpose subsidiary for trading purposes.
To qualify as a hedge, derivatives must be designated as hedges for
existing assets, liabilities, firm commitments, or anticipated transactions
which are identified and probable to occur, and effective in reducing the
market risk to which the Company is exposed. The effectiveness of the
derivatives are evaluated at the inception of the hedge and throughout the
hedge period.
DERIVATIVES HELD FOR TRADING PURPOSES are used in the Company's securities
broker-dealer business and in a limited-purpose subsidiary to meet the
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. Trading derivative positions are
valued daily, generally by obtaining quoted market prices or through the
use of pricing models. Values are affected by changes in interest rates,
currency exchange rates, credit spreads, market volatility and liquidity.
The Company monitors these exposures through the use of various analytical
techniques.
Derivatives held for trading are recorded at fair value in "Trading account
assets," "Other liabilities" or "Receivables from/Payables to broker-dealer
clients" in the Consolidated Statements of Financial Position, and realized
and unrealized changes in fair value are included in "Commissions and other
income" of the Consolidated Statements of Operations in the periods in
which the changes occur. Cash flows from trading derivatives are reported
in the operating activities section of the Consolidated Statements of Cash
Flows.
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.
12
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
See Note 14 for a discussion of the accounting treatment of derivatives
that qualify as hedges. If the Company's use of other than trading
derivatives does not meet the criteria to apply hedge accounting, the
derivatives are recorded at fair value in "Other long-term investments" or
"Other liabilities" in the Consolidated Statements of Financial Position,
and changes in their fair value are recognized in earnings in "Realized
investment gains, net" without considering changes in the hedged assets or
liabilities. Cash flows from other than trading derivative assets and
liabilities are reported in the investing activities section in the
Consolidated Statements of Cash Flows.
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 life
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 that is expected 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 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
was 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 delayed the implementation of SFAS 125 for one year
for certain provisions, including repurchase agreements, dollar rolls,
securities lending and similar transactions. The Company adopted the
delayed provisions of SFAS 125 in 1998. The adoption of SFAS 125 did not
have a material impact on the Company's results of operations or financial
position.
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which was issued by the FASB in June 1997. This statement defines
comprehensive income 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 Statements of Financial Position. Application of this
statement did not change recognition or measurement of net income and,
therefore, did not affect the Company's financial position or results of
operations.
During 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which was issued by the
FASB in February 1998. This statement standardizes the disclosure
requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligations and fair
values of plan assets and eliminates certain disclosures. This statement is
limited to changes in reporting and presentation and does not change
recognition or measurement of pension or other postretirement benefit
plans. Therefore, its adoption did not affect the Company's financial
position or results of operations.
13
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On January 1, 1998, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP
97-3"). This statement provides guidance for determining when an insurance
company or other enterprise should recognize a liability for guaranty-fund
assessments as well as guidance for measuring the liability. The adoption
of SOP 97-3 did not have a material effect on the Company's financial
condition or results of operations. In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133 provides, if certain conditions are met, that a
derivative may be specifically designated as (1) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment (fair value hedge), (2) a hedge of the
exposure to variable cash flows of a forecasted transaction (cash flow
hedge), or (3) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign-currency-denominated forecasted
transaction (foreign currency hedge).
SFAS No. 133 does not apply to most traditional insurance contracts.
However, certain hybrid contracts that contain features which can affect
settlement amounts similarly to derivatives may require separate accounting
for the "host contract" and the underlying "embedded derivative"
provisions. The latter provisions would be accounted for as derivatives as
specified by the statement.
Under SFAS No. 133, the accounting for changes in fair value of a
derivative depends on its intended use and designation. For a fair value
hedge, the gain or loss is recognized in earnings in the period of change
together with the offsetting loss or gain on the hedged item. For a cash
flow hedge, the effective portion of the derivative's gain or loss is
initially reported as a component of other comprehensive income and
subsequently reclassified into earnings when the forecasted transaction
affects earnings. For a foreign currency hedge, the gain or loss is
reported in other comprehensive income as part of the foreign currency
translation adjustment. For all other derivatives not designated as hedging
instruments, the gain or loss is recognized in earnings in the period of
change. The Company is required to adopt this Statement no later than
January 1, 2000 and is currently assessing the effect of the new standard.
In October 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk," ("SOP 98-7"). This statement provides guidance on
how to account for insurance and reinsurance contracts that do not transfer
insurance risk. SOP 98-7 is effective for fiscal years beginning after June
15, 1999. The adoption of this statement is not expected to have a material
effect on the Company's financial position or results of operations.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to current
year presentation.
14
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS
In December 1998, the Company entered into a definitive agreement to sell
its HealthCare business to Aetna Inc. ("Aetna"). Included in this
transaction are the Company's managed medical care, point of service,
preferred provider organization and indemnity health lines, dental
business, as well as the Company's Administrative Services Only ("ASO")
businesses. The transaction was approved by the boards of directors of both
companies and is expected to be completed in the second quarter of 1999,
subject to review by federal antitrust authorities and approval by state
regulators, and other customary closing conditions. Proceeds from the sale
will consist of $500 million of cash and $500 million of Aetna three year
senior notes.
Loss from operations of discontinued businesses for 1998 includes results
through December 31, 1998 (the measurement date). The Statements of
Operations for 1997 and 1996 have been restated to conform with the 1998
presentation. Amounts within the footnotes have been adjusted, where noted,
to eliminate the impact of discontinued operations and to be consistent
with the presentation in the Consolidated Statements of Operations. The
following table presents the results of operations and the loss on the
disposal of the Company's HealthCare business, determined as of the
measurement date, which are included in "Discontinued Operations" in the
Consolidated Statements of Operations. Amounts for 1997 and 1996 include
revenues and expenses relating to a contract with the American Association
of Retired Persons for healthcare and similar coverages which was
terminated effective December 31, 1997.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(In Millions)
<S> <C> <C> <C>
Revenues $ 7,461 $ 10,305 $ 9,187
Policyholder benefits (6,064) (8,484) (7,711)
General and administrative expenses (1,822) (2,364) (1,921)
--------- --------- ---------
Loss before income taxes (425) (543) (445)
Income tax benefit 127 190 163
--------- --------- ---------
Loss from operations (298) (353) (282)
Loss on disposal, net of tax benefit of $131 (223) - -
--------- --------- ---------
Loss from discontinued operations, net of taxes $ (521) $ (353) $ (282)
========= ========= =========
</TABLE>
The loss on disposal includes anticipated operating losses to be incurred
by the HealthCare business subsequent to the measurement date through the
expected date of the sale, as well as estimates of other costs the Company
will incur in connection with the disposition of the HealthCare business.
Actual amounts may differ from these estimates. These include costs
attributable to facilities closure and systems terminations, severance,
payments to Aetna related to the ASO business, and estimated payments in
connection with an agreement covering the fully insured medical and dental
business. The latter agreement provides for payments either to or from
Aetna in the event that medical loss ratios (i.e., incurred medical expense
divided by earned premiums) for covered businesses are either less
favorable or more favorable than levels specified in the agreement for the
years 1999 and 2000. The loss on disposition was reduced by the estimated
impact of expected modifications of certain pension and other
postretirement benefit plans in which employees of the HealthCare business
participate. This amount includes curtailment gains and the cost of
termination benefits. (See Note 9.)
15
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS (CONTINUED)
The following table presents the assets and liabilities pertaining to the
Company's HealthCare business at December 31, 1998 which are included in
the Company's Consolidated Statements of Financial Position.
(In Millions)
Cash and investments $ 1,652
Other assets 1,030
-------
Total assets 2,682
Future policy benefits 1,241
Other liabilities 1,105
-------
Total liabilities 2,346
-------
Net assets $ 336
=======
4. 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:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5,761 $ 580 $ 9 $ 6,332
Obligations of U.S. states and
their political subdivisions 2,672 204 1 2,875
Foreign government bonds 3,156 253 52 3,357
Corporate securities 57,373 2,545 553 59,365
Mortgage-backed securities 7,935 208 14 8,129
Other fixed maturities 100 - - 100
-----------------------------------------------------------
Total fixed maturities available for sale $ 76,997 $ 3,790 $ 629 $ 80,158
===========================================================
EQUITY SECURITIES AVAILABLE FOR SALE $ 2,583 $ 472 $ 296 $ 2,759
===========================================================
</TABLE>
16
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY (In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5 $ - $ - $ 5
Obligations of U.S. states and
their political subdivisions 62 2 1 63
Foreign government bonds 31 4 - 35
Corporate securities 16,699 1,096 49 17,746
Mortgage-backed securities 1 - - 1
Other fixed maturities 50 6 - 56
------------------------------------------------------------
Total fixed maturities held to maturity $ 16,848 $ 1,108 $ 50 $ 17,906
============================================================
<CAPTION>
1997
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE (In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 9,071 $ 671 $ - $ 9,742
Obligations of U.S. states and
their political subdivisions 1,529 152 - 1,681
Foreign government bonds 3,177 218 17 3,378
Corporate securities 50,043 2,611 144 52,510
Mortgage-backed securities 7,576 288 5 7,859
Other fixed maturities 100 - - 100
-----------------------------------------------------------
Total fixed maturities available for sale $ 71,496 $ 3,940 $ 166 $ 75,270
===========================================================
EQUITY SECURITIES AVAILABLE FOR SALE $ 2,376 $ 680 $ 246 $ 2,810
===========================================================
</TABLE>
17
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ----------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY
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
============================================================
</TABLE>
18
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1998, is shown below:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------- -----------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ -------------- ----------- ----------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
Due in one year or less $ 2,638 $ 2,644 $ 730 $ 736
Due after one year through five years 17,551 17,874 4,326 4,465
Due after five years through ten years 19,523 19,976 6,783 7,162
Due after ten years 29,350 31,535 5,008 5,542
Mortgage-backed securities 7,935 8,129 1 1
--------- ---------- -------- --------
Total $ 76,997 $ 80,158 $ 16,848 $ 17,906
========= ========== ======== ========
</TABLE>
Actual maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations.
Proceeds from the repayment of held to maturity fixed maturities during
1998, 1997 and 1996 were $4,466 million, $4,042 million and $4,268 million,
respectively. Gross gains of $135 million, $62 million and $78 million, and
gross losses of $2 million, $1 million and $7 million, were realized on
prepayment of held to maturity fixed maturities during 1998, 1997 and 1996,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1998,
1997 and 1996 were $119,096 million, $120,604 million and $121,910 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1998, 1997 and 1996 were $ 4,055 million, $2,946 million
and $1,458 million, respectively. Gross gains of $1,765 million, $1,310
million and $1,562 million and gross losses of $443 million, $639 million
and $1,026 million were realized on sales and prepayments of available for
sale fixed maturities during 1998, 1997 and 1996, respectively.
Writedowns for impairments of fixed maturities which were deemed to be
other than temporary were $96 million, $13 million and $54 million for the
years 1998, 1997 and 1996, respectively.
During the years ended December 31, 1998 and December 31, 1997, certain
securities classified as held to maturity 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 $73 million and $27 million, respectively with
gross unrealized investment losses of $.4 million and gross unrealized
investment gains of $.6 million included during the years ended December
31, 1998 and 1997, respectively, in "Accumulated other comprehensive
income" at the time of the transfer.
19
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans were collateralized by the following property
types at December 31:
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
(IN MILLIONS) OF TOTAL (IN MILLIONS) OF TOTAL
------------- ---------- ------------- ----------
1998 1997
------------------------ -------------------------
Office buildings $ 4,267 25.2% $ 4,692 28.5%
Retail stores 3,021 17.9% 3,078 18.7%
Residential properties 716 4.2% 891 5.4%
Apartment complexes 4,362 25.8% 3,551 21.6%
Industrial buildings 1,989 11.8% 1,958 11.9%
Agricultural properties 1,936 11.4% 1,666 10.1%
Other 631 3.7% 618 3.8%
-------- ----- -------- -----
Subtotal 16,922 100.0% 16,454 100.0%
===== =====
Allowance for losses (427) (450)
-------- --------
Net carrying value $ 16,495 $ 16,004
======== ========
The mortgage loans are geographically dispersed throughout the United
States and Canada with the largest concentrations in California (23.8%)
and New York (9.5%) at December 31, 1998. Included in the above balances
are mortgage loans receivable from affiliated joint ventures of $87 million
and $225 million at December 31, 1998 and 1997, respectively.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
1998 1997 1996
----- ----- -----
(In Millions)
Allowance for losses, beginning of year $ 450 $ 515 $ 862
Additions charged to operations - - -
Release of allowance for losses - (41) (247)
Charge-offs, net of recoveries (23) (24) (100)
----- ----- -----
Allowance for losses, end of year $ 427 $ 450 $ 515
===== ===== =====
The $41 million and $247 million reductions of the mortgage loan allowance
for losses in 1997 and 1996, respectively, are 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.
20
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
Impaired mortgage loans identified in management's specific review of
probable loan losses and related allowance for losses at December 31, are
as follows:
1998 1997
------- -------
(In Millions)
Impaired mortgage loans with allowance for losses $ 149 $ 330
Impaired mortgage loans with no allowance for losses 924 1,303
Allowance for losses (45) (97)
------- -------
Net carrying value of impaired mortgage loans $ 1,028 $ 1,536
======= =======
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 $1,329 million, $2,102 million and $2,842 million
during 1998, 1997 and 1996, respectively. Net investment income recognized
on these loans totaled $94 million, $140 million and $265 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
INVESTMENT REAL ESTATE
The Company's "Investment real estate" of $801 million and $1,519 million
at December 31, 1998 and 1997, respectively, is held through direct
ownership. Of the Company's real estate, $675 million and $1,490 million
consists of commercial and agricultural assets held for disposal at
December 31, 1998 and 1997, respectively. Impairment losses aggregated $8
million, $40 million and $38 million for the years ended December 31, 1998,
1997 and 1996, respectively, and are included in "Realized investment
gains, net."
RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets of $3,135 million and $2,783 million at December 31, 1998 and 1997,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $3,727
million and $2,352 million at December 31, 1998 and 1997, respectively,
were held in voluntary trusts. Of this amount, $3,131 million and $1,801
million at December 31, 1998 and 1997, respectively, related to the
multi-state policyholder settlement as described in Note 16. 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 $403 million and $632 million at December 31,
1998 and 1997, respectively, were maintained as compensating balances,
which do not legally restrict the use of the funds, or pledged as
collateral for bank loans and other financing agreements. Restricted cash
and securities of $2,366 million and $1,835 million at December 31, 1998
and 1997, respectively, were included in the consolidated financial
statements in "Other assets." 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 $2,658 million and $2,489
million as of December 31, 1998 and 1997, respectively, are comprised of
$1,007 million and $1,498 million in real estate related interests and
$1,651 million and $991 million of non-real estate related interests. The
Company's share of net income from such entities was $285 million, $411
million and $245 million for 1998, 1997 and 1996, respectively, and is
reported in "Net investment income."
21
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES
NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Fixed maturities - available for sale $ 5,366 $ 5,074 $ 4,871
Fixed maturities - held to maturity 1,406 1,622 1,793
Trading account assets 677 504 444
Equity securities - available for sale 54 52 81
Mortgage loans on real estate 1,525 1,555 1,690
Investment real estate 230 565 685
Policy loans 410 396 384
Securities purchased under agreements to resell 18 15 11
Receivables from broker-dealer clients 836 706 579
Short-term investments 725 697 702
Other investment income 415 520 559
-------- -------- --------
Gross investment income 11,662 11,706 11,799
Less investment expenses (2,035) (2,038) (2,130)
-------- -------- --------
Subtotal 9,627 9,668 9,669
Less amount relating to discontinued operations (107) (212) (208)
-------- -------- --------
Net investment income $ 9,520 $ 9,456 $ 9,461
======== ======== ========
</TABLE>
REALIZED INVESTMENT GAINS, NET, for the years ended December 31, were from
the following sources:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Fixed maturities $ 1,381 $ 684 $ 513
Mortgage loans on real estate 22 68 248
Investment real estate 642 700 76
Equity securities - available for sale 427 363 267
Other 188 394 34
-------- -------- --------
Subtotal 2,660 2,209 1,138
Less amounts related to discontinued operations (30) (41) (10)
-------- -------- --------
Realized investment gains, net $ 2,630 $ 2,168 $ 1,128
======== ======== ========
</TABLE>
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1998 included in fixed maturities available
for sale, mortgage loans on real estate and other long term investments
totaled $1 million, $23 million and $13 million, respectively.
22
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
NET UNREALIZED INVESTMENT GAINS
Net unrealized investment gains on securities available for sale are
included in the Consolidated Statements of Financial Position as a
component of "Accumulated other comprehensive income." Changes in these
amounts include reclassification adjustments to avoid double-counting in
"Comprehensive income," items that are included as part of "Net income" for
a period that also had been part of "Other comprehensive income" in earlier
periods. The amounts for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Millions)
<S> <C> <C> <C>
Net unrealized investment gains, beginning of year $ 1,752 $ 1,136 $ 2,397
Changes in net unrealized investment gains attributable to:
Investments:
Net unrealized investment gains (losses) on investments arising
during the period 522 1,706 (1,281)
Reclassification adjustment for gains included in net income (1,087) (631) (471)
------- ------- -------
Change in net unrealized investment gains, net of adjustments (565) 1,075 (1,752)
Impact of net unrealized investment gains on:
Future policy benefits 23 (360) 318
Deferred policy acquisition costs 62 (99) 173
------- ------- -------
Change in net unrealized investment gains (480) 616 (1,261)
------- ------- -------
Net unrealized investment gains, end of year $ 1,272 $ 1,752 $ 1,136
======= ======= =======
</TABLE>
Unrealized gains (losses) on investments arising during the periods
reported in the above table are net of income tax expense (benefit) of $282
million, $961 million and $(647) million for the years ended December 31,
1998, 1997 and 1996, respectively.
Reclassification adjustments reported in the above table for the years
ended December 31, 1998, 1997 and 1996 are net of income tax expense of
$588 million, $355 million and $238 million, respectively.
The future policy benefits reported in the above table are net of income
tax expense (benefit) of $15 million, $(203) million and $161 million for
the years ended December 31, 1998, 1997 and 1996, respectively.
Deferred policy acquisition costs in the above tables for the years ended
December 31, 1998, 1997 and 1996 are net of income tax expense (benefit) of
$36 million, $(55) million and $88 million, respectively.
23
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. 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:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Millions)
<S> <C> <C> <C>
Balance, beginning of year $ 6,083 $ 6,095 $ 5,892
Capitalization of commissions, sales and issue expenses 1,313 1,409 1,260
Amortization (1,139) (1,176) (1,261)
Change in unrealized investment gains 77 (154) 261
Foreign currency translation 128 (91) (57)
------- ------- -------
Balance, end of year $ 6,462 $ 6,083 $ 6,095
======= ======= =======
</TABLE>
6. POLICYHOLDERS' LIABILITIES
FUTURE POLICY BENEFITS at December 31, are as follows:
1998 1997
------- -------
(In Millions)
Life insurance $48,927 $46,765
Annuities 15,360 15,469
Other contract liabilities 4,842 5,133
------- -------
Future policy benefits $69,129 $67,367
======= =======
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.
24
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (CONTINUED)
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- --------------------------- ------------------------- ------------------------- ------------------------
<S> <C> <C> <C>
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 3.5% 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
Table with certain payments
modifications based on historical
experience
Other contract liabilities - 5.3% to 7.0% Present value of
expected future
payments
based on historical
experience
</TABLE>
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 and to recover any unamortized
acquisition costs. A premium deficiency reserve has been recorded for the
group single premium annuity business, which consists of limited-payment,
long duration, traditional and non-participating annuities. A liability of
$1,780 million and $1,645 million is included in "Future policy benefits"
with respect to this deficiency for the years ended December 31, 1998 and
1997, respectively.
POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In Millions)
<S> <C> <C>
Individual annuities $ 4,997 $ 5,695
Group annuities and guaranteed investment contracts 16,770 19,053
Interest-sensitive life contracts 3,566 3,258
Dividend accumulations and other 5,641 5,240
------- --------
Policyholders' account balances $30,974 $ 33,246
======= ========
</TABLE>
Policyholders' account balances for interest-sensitive life and
investment-type contracts represent an accumulation of gross premium
payments plus credited interest less withdrawals, expenses and mortality
charges.
25
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (Continued)
Certain contract provisions that determine the policyholder account
balances are as follows:
<TABLE>
<CAPTION>
WITHDRAWAL/
PRODUCT INTEREST RATE SURRENDER CHARGES
--------------------------------- ------------- -----------------------------------
<S> <C> <C>
Individual annuities 3.0% to 6.6% 0% to 8% for up to 8 years
Group annuities 5.0% to 13.4% Contractually limited or subject
to market value adjustment
Guaranteed investment contracts 3.9% to 15.4% Subject to market value withdrawal
payout status 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 and other 3.0% to 4.5% --
</TABLE>
26
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (Continued)
Unpaid Claims and Claim Adjustment Expenses. The following table provides
a reconciliation of the activity in the liability for unpaid claims and
claim adjustment expenses for property and casualty and accident and
health insurance at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- -----------------------
ACCIDENT PROPERTY ACCIDENT PROPERTY ACCIDENT PROPERTY
AND HEALTH AND CASUALTY AND HEALTH AND CASUALTY AND HEALTH AND CASUALTY
---------- ------------ ---------- ------------ ---------- -------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 $ 1,908 $ 2,956 $ 1,990 $ 3,076 $ 2,033 $ 3,053
Less reinsurance recoverables 810 535 10 553 15 557
------- ------- ------- ------- ------- -------
Net balance at January 1 1,098 2,421 1,980 2,523 2,018 2,496
------- ------- ------- ------- ------- -------
Incurred related to:
Current year 6,127 1,354 8,348 1,525 8,391 1,760
Prior years 7 (194) 102 (91) (66) (25)
------- ------- ------- ------- ------- -------
Total incurred 6,134 1,160 8,450 1,434 8,325 1,735
------- ------- ------- ------- ------- -------
Paid related to:
Current year 5,289 717 6,676 739 6,589 908
Prior years 851 681 1,854 797 1,774 800
------- ------- ------- ------- ------- -------
Total paid 6,140 1,398 8,530 1,536 8,363 1,708
------- ------- ------- ------- ------- -------
Net balance at December 31 1,092 2,183 1,900 2,421 1,980 2,523
Plus reinsurance recoverables 52 533 8 535 10 553
------- ------- ------- ------- ------- -------
Balance at December 31 $ 1,144 $ 2,716 $ 1,908 $ 2,956 $ 1,990 $ 3,076
======= ======= ======= ======= ======= =======
</TABLE>
The Accident and Health balance at December 31 includes amounts
attributable to the Company's discontinued HealthCare business: 1998 -
$1,082; 1997 - $1,757 and 1996 - $1,750.
In 1998 and 1997, the changes in provision for claims and claim adjustment
expenses for property and casualty related to prior years are primarily
driven by lower than anticipated losses for the Voluntary Auto line of
business.
The changes in provision for claims and claim adjustment expense for
accident and health related to prior years are primarily due to such
factors as changes in claim cost trends and an accelerated decline in the
indemnity health business.
The unpaid claims and claim adjustment expenses presented above consist 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 Consolidated
Statement of Operations periodically as the estimates are revised.
Accident and health unpaid claims liabilities for 1998, 1997 and 1996
included above are discounted using interest rates ranging from 3.0%
to 6.0%.
27
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. REINSURANCE
The Company participates in reinsurance in order to provide greater
diversification of business, provide additional capacity for future growth
and limit the maximum net loss potential arising from large risks. Life
reinsurance is accomplished through various plans of reinsurance,
primarily yearly renewable term and coinsurance. Property-casualty
reinsurance is placed on both a pro-rata and excess of loss basis.
Reinsurance ceded arrangements do not discharge the Company or the
insurance subsidiaries as the primary insurer. Ceded balances would
represent a liability to the Company in the event the reinsurers were
unable to meet their obligations to the Company under the terms of the
reinsurance agreements. The Company periodically reviews the financial
condition of its reinsurers and amounts recoverable therefrom, recording
an allowance when necessary for uncollectible reinsurance.
Reinsurance amounts included in the Consolidated Statements of Operations,
excluding HealthCare, for the years ended December 31, were as follows:
1998 1997 1996
------- ------ -------
(In Millions)
Direct Premiums $9,615 $9,679 $10,690
Reinsurance Assumed 65 42 13
Reinsurance Ceded (656) (716) (704)
------ ------ -------
Premiums $9,024 $9,005 $ 9,999
====== ====== =======
Policyholders' benefits ceded $ 519 $ 530 $ 571
====== ====== =======
Reinsurance recoverables, included in "Other assets" in the Company's
Consolidated Statements of Financial Position, at December 31, were as
follows:
1998 1997
------ ------
(In Millions)
Life insurance $ 620 $ 685
Property-casualty 564 554
Other reinsurance 92 65
------ ------
$1,276 $1,304
====== ======
28
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT
Debt consists of the following at December 31:
SHORT-TERM DEBT
1998 1997
------- ------
(In Millions)
Commercial paper $ 7,057 $4,268
Notes payable 2,164 2,151
Current portion of long-term debt 861 355
------- ------
Total short-term debt $10,082 $6,774
======= ======
The weighted average interest rate on outstanding short-term debt was
approximately 5.4% and 6.0% at December 31, 1998 and 1997, 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
<TABLE>
<CAPTION>
DESCRIPTION MATURITY DATES RATE 1998 1997
- ----------- -------------- ---- ----- ----
(In Millions)
<S> <C> <C> <C> <C>
Floating rate notes ("FRN") 1999 - 2005 4.04-14.00%(a) $ 729 $ 324
Long term notes 1999 - 2023 5.5% - 12% 1,318 910
Zero coupon notes 1999 8.6% (b) 364 334
Canadian dollar notes - 7.0% - 9.125% - 117
Japanese yen notes 1999 - 2000 0.5% - 4.6% 160 178
Swiss francs notes - 3.875% - 120
Canadian dollar FRN 2003 5.25%-5.89% 96 96
Surplus notes 2003 - 2025 6.875% - 8.3% 987 986
Senior notes 1999 - 2006 6.375% 393 -
Commercial paper backed by long-term
credit agreements 1,500 1,500
Other notes payable 1999 - 2017 4% - 7.5% 48 63
------- -------
Subtotal 5,595 4,628
Less: current portion of long-term debt (861) (355)
------- -------
Total long-term debt $ 4,734 $ 4,273
======= =======
</TABLE>
(a) The Company issued an S&P 500 index linked note of $29 million in September
of 1997. The interest rate on the note is based on the appreciation of the
S&P 500 index, with a contractual cap of 14%. At December 31, 1998, this
rate was 14%. Excluding this note, floating rate note interest rates were
between 4.04% - 5.50%.
(b) The rate shown for zero coupon notes represents a level yield to maturity.
29
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
Payment of interest and principal on the surplus notes issued after 1993,
of which $686 million were outstanding at December 31, 1998, 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, 1998,
are as follows: $862 million in 1999, $560 million in 2000, $327 million
in 2001, $1,816 million in 2002, $458 million in 2003 and $1,575 million
thereafter.
At December 31, 1998, the Company had $9,853 million in lines of credit
from numerous financial institutions of which $8,330 million were unused.
These lines of credit generally have terms ranging from one to five years.
Interest expense for short-term and long-term debt is $920 million,
$743 million and $618 million for the years ended December 31, 1998, 1997
and 1996, respectively.
9. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT PLANS
The Company has funded non-contributory defined benefit pension plans
which cover substantially all of its employees. The Company also has
several non-funded non-contributory defined benefit plans covering
certain executives. 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.
The Company provides certain life insurance and health care benefits
("Other postretirement benefits") for its retired employees, their
beneficiaries and covered dependents. The healthcare plan is
contributory; the life insurance plan is non-contributory. Substantially
all of the Company's employees may become eligible to receive benefits if
they retire after age 55 with at least 10 years of service or under
certain circumstances after age 50 with at least 20 years of continuous
service. These benefits are funded as considered necessary by Company
management.
The Company has elected to amortize its transition obligation for other
postretirement benefits over 20 years.
30
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Prepaid and accrued benefit 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, is summarized below:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- ------------------------
1998 1997 1998 1997
-------- ------- ------- -------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at the beginning of period $(5,557) $(5,148) $(2,128) $(2,002)
Service cost (159) (127) (35) (38)
Interest cost (397) (376) (142) (149)
Plan participants' contributions - - ( 6) (4)
Amendments (58) - - 31
Actuarial losses (600) (334) (31) (84)
Transfer to third party - 32 - -
Contractual termination benefits (30) (63) - -
Benefits paid 485 460 128 117
Foreign currency changes 7 (1) 1 1
------- ------- ------- -------
Benefit obligation at end of period $(6,309) $(5,557) $(2,213) $(2,128)
======= ======= ======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of period $ 8,489 $ 7,306 $ 1,354 $ 1,313
Actual return on plan assets 445 1,693 146 120
Transfer to third party (4) (32) - -
Contribution from pension plan - - 31 25
Employer contributions 25 16 13 9
Plan participants' contributions - - 6 4
Withdrawal under IRS Section 420 (36) (35) - -
Benefits paid (485) (460) (128) (117)
Foreign currency changes (7) 1 - -
------- ------- ------- -------
Fair value of plan assets at end of period $ 8,427 $ 8,489 $ 1,422 $ 1,354
======= ======= ======= =======
FUNDED STATUS:
Funded status at end of period $ 2,118 $ 2,932 $ (791) $ (774)
Unrecognized transition (asset) liability (554) (661) 660 707
Unrecognized prior service cost 335 327 - -
Unrecognized actuarial net gain (813) (1,644) (353) (364)
Effects of 4th quarter activity (9) (63) 2 33
------- ------- ------- -------
Net amount recognized $ 1,077 $ 891 $ (482) $ (398)
======= ======= ======= =======
AMOUNTS RECOGNIZED IN THE STATEMENTS OF FINANCIAL
POSITION CONSIST OF:
Prepaid benefit cost $ 1,348 $ 1,150 $ - $ -
Accrued benefit liability (287) (270) (482) (398)
Intangible asset 7 5 - -
Accumulated other comprehensive income 9 6 - -
-------- -------- -------- ---------
Net amount recognized $ 1,077 $ 891 $ (482) $ (398)
======== ======== ======== =========
</TABLE>
31
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $384 million, $284 million and
$0, respectively, as of September 30, 1998 and $319 million, $226 million
and $ 0, respectively, as of September 30, 1997.
The effects of fourth quarter activity are summarized as follows:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- -----------------------
1998 1997 1998 1997
------ ------- ------ ------
(In Millions)
<S> <C> <C> <C> <C>
Effect of IRS Section 420 transfer $ - $ (36) $ - $ -
Contractual termination benefits (14) (30) - -
Contribution from pension plan - - - 31
Employer contributions 5 3 2 2
----- ------- ------ ------
Effects of 4th quarter activity $ (9) $ (63) $ 2 $ 33
====== ======= ====== ======
</TABLE>
Pension plan assets consist primarily of equity securities, bonds, real estate
and short-term investments, of which $5,926 million and $6,022 million are
included in Separate Account assets and liabilities at September 30, 1998 and
1997, respectively.
Other postretirement plan assets 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 $1,018
million and $1,044 million of Company insurance policies and contracts at
September 30, 1998 and 1997, 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 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, 1998 that their employment had been
terminated. Costs related to these amendments are reflected below in contractual
termination benefits.
32
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic benefit cost included in "General and administrative expenses"
in the Company's Consolidated Statements of Operations for the years ended
December 31, includes the following components:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------- ------------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------- ------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFITS COSTS:
Service cost $ 159 $ 127 $ 140 $ 35 $ 38 $ 45
Interest cost 397 376 354 142 149 157
Expected return on plan assets (674) (617) (594) (119) (87) (93)
Amortization of transition amount (106) (106) (107) 47 50 53
Amortization of prior service cost 45 42 26 - - -
Amortization of actuarial net (gain) loss 1 - - (13) (13) (3)
Curtailment gain (loss) 5 - - - - (9)
Contractual termination benefits 14 30 63 - - -
------- ------- ------- ------- ------- ------
Net periodic (benefit) cost $ (159) $ (148) $ (118) $ 92 $ 137 $ 150
======= ======= ======= ======= ======= ======
</TABLE>
The assumptions at September 30, used by the Company to calculate the benefit
obligations as of that date and to determine the benefit cost in the subsequent
year are as follows:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------ ----------------------------------------
1998 1997 1996 1998 1997 1996
------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate 6.50% 7.25% 7.75% 6.50% 7.25% 7.75%
Rate of increase in compensation levels 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Expected return on plan assets 9.50% 9.50% 9.50% 9.00% 9.00% 9.00%
Health care cost trend rates - - - 7.80-11.00% 8.20-11.80% 8.50-12.50%
Ultimate health care cost trend rate
after gradual decrease until 2006 - - - 5.00% 5.00% 5.00%
</TABLE>
33
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage point
increase and decrease in assumed health care cost trend rates would have
the following effects:
OTHER
POSTRETIREMENT BENEFITS
-----------------------
1998
------
(In Millions)
ONE PERCENTAGE POINT INCREASE
Effect on total service and interest costs $ 24
Effect on postretirement benefit obligation (226)
ONE PERCENTAGE POINT DECREASE
Effect on total service and interest costs $ (19)
Effect on postretirement benefit obligation 187
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, 1998 and 1997
was $135 million and $144 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 3% of annual salary,
resulting in $54 million, $63 million and $57 million of expenses included in
"General and administrative expenses" for 1998, 1997 and 1996, respectively.
DISCONTINUED OPERATIONS
In connection with the disposal of the Company's HealthCare business, as more
fully discussed in Note 3, the loss on disposal was reduced by an estimated
curtailment gain of $30 million.
34
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
1998 1997 1996
------ ------ ------
(In Millions)
Current tax expense (benefit):
U.S. $ 983 $ (14) $ 400
State and local 54 51 108
Foreign 148 64 48
------ ------ ------
Total $1,185 $ 101 $ 556
====== ====== ======
Deferred tax expense (benefit):
U.S. $ (193) $ 269 $ (428)
State and local (6) 4 (2)
Foreign (16) 33 54
------ ------ ------
Total $ (215) $ 306 $ (376)
====== ====== ======
Total income tax expense $ 970 $ 407 $ 180
====== ====== ======
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 continuing operations before income taxes for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Expected federal income tax expense $ 908 $ 480 $ 539
Equity tax (benefit) 75 (65) (365)
State and local income taxes 31 37 69
Tax-exempt interest and dividend received deduction (46) (67) (67)
Other
2 22 4
------ ------ ------
Total income tax expense $ 970 $ 407 $ 180
====== ====== ======
</TABLE>
35
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
1998 1997
------- -------
(In Millions)
Deferred tax assets
Insurance reserves $ 1,584 $ 1,482
Policyholder dividends 265 250
Net operating loss carryforwards 260 80
Litigation related reserves 104 178
Employee benefits 63 42
Other 134 287
------- -------
Deferred tax assets before valuation allowance 2,410 2,319
Valuation allowance (13) (18)
------- -------
Deferred tax assets after valuation allowance 2,397 2,301
------- -------
Deferred tax liabilities
Investments 1,414 1,867
Deferred policy acquisition costs 1,436 1,525
Depreciation 64 36
------- -------
Deferred tax liabilities 2,914 3,428
------- -------
Net deferred tax liability $ 517 $ 1,127
======= =======
Management believes that based on its historical pattern of taxable income, the
Company will produce sufficient income in the future to realize its 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, 1998 and 1997,
respectively, the Company had federal life net operating loss carryforwards of
$540 million and $1,200 million, which expire by 2012. At December 31, 1998 and
1997, respectively, the Company had state non-life operating loss carryforwards
for tax purposes approximating $1,059 million and $800 million, which expire by
2018.
The Internal Revenue Service (the "Service") has completed all examinations of
the consolidated federal income tax returns through 1989. The Service has
examined the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments. Management, however, 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.
36
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. STATUTORY EQUITY AND INCOME
Applicable insurance department regulations require that the Company
prepare statutory financial statements in accordance with statutory
accounting practices prescribed or permitted by the New Jersey Department
of Banking and Insurance. Statutory accounting practices primarily differ
from GAAP by charging policy acquisition costs to expense as incurred,
establishing future policy benefits reserves using different actuarial
assumptions, not providing for deferred taxes, and valuing securities on a
different basis. The Company's statutory net income, as filed with the New
Jersey Department of Banking and Insurance was $1,247 million, $1,471
million and $1,402 million for the years 1998, 1997 and 1996,
respectively. Statutory capital and surplus, as filed, at December 31,
1998 and 1997 was $8,536 million and $9,242 million, respectively.
12. 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, 1998, future minimum lease payments under non-cancelable
operating leases are estimated as follows:
(In Millions)
1999 $ 295
2000 263
2001 231
2002 198
2003 157
Remaining years after 2003 753
-------
Total $ 1,897
=======
Amounts presented in the table above include operating leases relating to
the Company's HealthCare business. See Note 3 for a discussion of the
pending sale of this business. Amounts applicable to the HealthCare
business are $65 million in 1999, $58 million in 2000, $52 million in
2001, $45 million in 2002, $34 million in 2003 and $89 million thereafter.
Rental expense incurred for the years ended December 31, 1998, 1997 and
1996 was approximately $320 million, $352 million and $343 million,
respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated 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
estimated fair values (for all other financial instruments presented in
the table, the carrying value approximates estimated fair value).
37
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FIXED MATURITIES AND EQUITY SECURITIES
Estimated 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 fair value of
certain non-performing private placement securities is based on amounts
estimated by management.
MORTGAGE LOANS ON REAL ESTATE
The estimated 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 loans, the
estimated 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 estimated 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
Estimated fair values of policyholders' account balances are derived by
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. For interest sensitive life
contracts, fair value approximates carrying value.
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.
38
<PAGE>
- -------------------------------------------------------------------------------
13. 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:
<TABLE>
<CAPTION>
1998 1997
----------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Other than trading:
Fixed maturities:
Available for sale $ 80,158 $ 80,158 $ 75,270 $ 75,270
Held to maturity 16,848 17,906 18,700 19,894
Equity securities 2,759 2,759 2,810 2,810
Mortgage loans on real estate 16,495 17,265 16,004 16,703
Policy loans 7,476 8,037 7,034 7,201
Securities purchased under agreements to resell 1,737 1,737 - -
Short-term investments 9,781 9,781 12,106 12,106
Cash 1,943 1,943 1,859 1,859
Restricted Assets 2,366 2,366 1,835 1,835
Separate Account assets 81,621 81,621 73,839 73,839
Derivative financial instruments 132 135 93 92
Trading:
Trading account assets $ 8,888 $ 8,888 $ 6,347 $ 6,347
Broker-dealer related receivables 10,142 10,142 8,442 8,442
Derivative financial instruments 765 765 910 910
Securities purchased under agreements to resell 8,515 8,515 8,661 8,661
Cash collateral for borrowed securities 5,622 5,622 5,047 5,047
FINANCIAL LIABILITIES:
Other than trading:
Policyholders' account balances $ 30,974 $ 31,940 $ 33,246 $ 34,201
Securities sold under agreements to repurchase 7,085 7,085 85 85
Cash collateral for loaned securities 2,450 2,450 9,647 9,647
Short-term and long-term debt 14,816 15,084 11,047 11,131
Securities sold but not yet purchased 2,215 2,215 - -
Separate Account liabilities 80,931 80,931 73,451 73,451
Derivative financial instruments 390 391 100 99
Trading:
Broker-dealer related payables $ 6,530 $ 6,530 $ 3,338 $ 3,338
Derivative financial instruments 725 725 1,019 1,019
Securities sold under agreements to repurchase 14,401 14,401 12,262 12,262
Cash collateral for loaned securities 4,682 4,682 4,470 4,470
Securities sold but not yet purchased 3,556 3,556 3,648 3,648
</TABLE>
39
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
INTEREST RATE SWAPS
The Company uses interest rate swaps to reduce market risks from changes in
interest rates and to alter interest rate exposures arising from mismatches
between assets and liabilities. Under interest rates swaps, the Company
agrees with other parties to exchange, at specified intervals the difference
between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Generally, no cash is
exchanged at the outset of the contract and no principal payments are made
by either party. Cash is paid or received based on the terms of the swap.
These transactions are entered into pursuant to master agreements that
provide for a single net payment to be made by one counterparty at each due
date. 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.
If swap agreements meet the criteria for hedge accounting, net interest
receipts or payments are accrued and recognized over the life of the swap
agreements as an adjustment to interest income or expense of the hedged
item. Any unrealized gains or losses are not recognized until the hedged
item is sold or matures. Gains or losses on early termination of interest
rate swaps are deferred and amortized over the remaining period originally
covered by the swaps. If the criteria for hedge accounting are not met, the
swap agreements are accounted for at market value with changes in fair value
reported in current period earnings.
FUTURES AND OPTIONS
The Company uses exchange-traded Treasury futures and options to reduce
market risks from changes in interest rates, to alter mismatches between the
duration of assets in a portfolio and the duration of liabilities supported
by those assets, and to hedge against changes in the value of securities it
owns or anticipates acquiring. The Company enters into exchange-traded
futures and options with regulated futures commissions merchants who are
members of a trading exchange. The fair value of futures and options is
based on market quotes for transactions with similar terms.
Under exchange-traded futures, the Company agrees to purchase a specified
number of contracts with other parties and to post variation margin on a
daily basis in an amount equal to the difference in the daily market values
of those contracts. Futures are typically used to hedge duration mismatches
between assets and liabilities by replicating Treasury performance. Treasury
futures move substantially in value as interest rates change and can be used
to either modify or hedge existing interest rate risk. This strategy
protects against the risk that cash flow requirements may necessitate
liquidation of investments at unfavorable prices resulting from increases in
interest rates. This strategy can be a more cost effective way of
temporarily reducing the Company's exposure to a market decline than selling
fixed income securities and purchasing a similar portfolio when such a
decline is believed to be over.
If futures meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing
financial instruments are amortized as a yield adjustment over the remaining
lives of the hedged item. Futures that do not qualify as hedges are carried
at fair value with changes in value reported in current period earnings. The
gains and losses associated with anticipatory transactions are not material.
40
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
When the Company anticipates a significant decline in the stock market
which will correspondingly affect its diversified portfolio, it may
purchase put index options where the basket of securities in the index is
appropriate to provide a hedge against a decrease in the value of the
equity portfolio or a portion thereof. This strategy effects an orderly
sale of hedged securities. When the Company has large cash flows which it
has allocated for investment in equity securities, it may purchase call
index options as a temporary hedge against an increase in the price of the
securities it intends to purchase. This hedge permits such investment
transactions to be executed with the least possible adverse market impact.
Option premium paid or received is reported as an asset or liability and
amortized into income over the life of the option. If options meet the
criteria for hedge accounting, changes in their fair value are deferred
and recognized as an adjustment to the hedged item. Deferred gains or
losses from the hedges for interest-bearing financial instruments are
recognized as an adjustment to interest income or expense of the hedged
item. If the options do not meet the criteria for hedge accounting, they
are fair valued, with changes in fair value reported in current period
earnings.
CURRENCY DERIVATIVES
The Company uses currency derivatives, including exchange-traded currency
futures and options, currency forwards and currency swaps to reduce market
risks from changes in currency values of investments denominated in
foreign currencies that the Company either holds or intends to acquire and
to alter the currency exposures arising from mismatches between such
foreign currencies and the U.S. Dollar.
Under currency forwards, the Company agrees with other parties upon
delivery of a specified amount of specified currency at a specified future
date. Typically, the price is agreed upon at the time of the contract and
payment for such a contract is made at the specified future date. Under
currency swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between one currency and another at a
forward exchange rate and calculated by reference to an agreed principal
amount. Generally, the principal amount of each currency is exchanged at
the beginning and termination of the currency swap by each party. These
transactions are entered into pursuant to master agreements that provide
for a single net payment to be made by one counterparty for payments made
in the same currency at each due date.
If currency derivatives are effective as hedges of foreign currency
translation and transaction exposures, gains or losses are recorded in
"Accumulated other comprehensive income." If currency derivatives do not
meet hedge accounting criteria, gains or losses from those derivatives are
recognized in current period earnings.
The tables below summarize the Company's outstanding positions by
derivative instrument types as of December 31, 1998 and 1997. 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.
41
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1998
(In Millions)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------- ------------------------- -------------------------
ESTIMATED ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 4,564 $ 309 $ 2,200 $ 96 $ 6,764 $ 405
Liabilities 4,734 274 3,065 349 7,799 623
Forwards:
Assets 45,651 282 1,004 14 46,655 296
Liabilities 39,153 280 2,039 37 41,192 317
Futures:
Assets 3,272 61 1,786 23 5,058 84
Liabilities 4,371 47 531 5 4,902 52
Options:
Assets 8,310 113 130 2 8,440 115
Liabilities 6,388 124 213 - 6,601 124
-------- -------- -------- ------- -------- --------
Total:
Assets $ 61,797 $ 765 $ 5,120 $ 135 $ 66,917 $ 900
======== ======== ======== ======= ======== ========
Liabilities $ 54,646 $ 725 $ 5,848 $ 391 $ 60,494 $ 1,116
======== ======== ======== ======= ======== ========
</TABLE>
42
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(In Millions)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
-------------------------- ------------------------- --------------------------
ESTIMATED ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ----------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 5,798 $ 316 $ 1,446 $ 67 $ 7,244 $ 383
Liabilities 5,439 418 1,197 70 6,636 488
Forwards:
Assets 29,947 438 1,171 25 31,118 463
Liabilities 29,985 461 687 8 30,672 469
Futures:
Assets 4,103 51 46 - 4,149 51
Liabilities 3,064 50 3,320 21 6,384 71
Options:
Assets 6,893 105 239 - 7,132 105
Liabilities 3,946 90 224 - 4,170 90
------- ------- ------- ------ ------- -------
Total:
Assets $46,741 $ 910 $ 2,902 $ 92 $49,643 $ 1,002
======= ======= ======= ====== ======= =======
Liabilities $42,434 $ 1,019 $ 5,428 $ 99 $47,862 $ 1,118
======= ======= ======= ====== ======= =======
</TABLE>
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. At December
31, 1998 and 1997 approximately 97% and 95%, respectively, 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, 1998, 1997 and 1996
relating to forwards, futures and swaps were $67 million, $(5) million and $(13)
million; $59 million, $37 million and $(13) million; and $42 million, $32
million and $(11) 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, 1998 and 1997 were $1,165 million and $1,015
million, respectively, and for derivatives in a liability position were $1,140
million and $1,166 million, respectively. Of those derivatives held for trading
purposes at December 31, 1998, 63% of the notional amount consisted of interest
rate derivatives, 32% consisted of foreign currency derivatives, and 5%
consisted of equity and commodity derivatives. Of those derivatives held for
purposes other than trading at December 31, 1998, 60% of notional consisted of
interest rate derivatives, 31% consisted of foreign currency derivatives, and 9%
consisted of equity and commodity derivatives.
43
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. 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
underfunded portion of commitments to fund investments in private placement
securities, and unused credit card and home equity lines. In connection
with the Company's commercial banking business, loan commitments for credit
cards and home equity lines of credit include agreements to lend up to
specified limits to customers. It is anticipated that commitment amounts
will only be partially drawn down based on overall customer usage patterns,
and, therefore, do not necessarily represent future cash requirements. The
Company evaluates each credit decision on such commitments at least
annually and has the ability to cancel or suspend such lines at its option.
The total available lines of credit card and home equity commitments were
$3.0 billion of which $2.2 billion remains available at December 31, 1998.
Also in connection with the Company's investment banking activities, the
Company enters into agreements with mortgage originators and others to
provide financing on both a secured and unsecured basis. Aggregate
financing commitments on a secured basis approximate $6.1 billion of which
$3.3 billion remains available at December 31, 1998. Unsecured commitments
approximate $65.0 million, the majority of which is outstanding at December
31, 1998.
Other commitments substantially include commitments to purchase and sell
mortgage loans and the underfunded portion of commitments to fund
investments in private placement securities. These mortgage loans and
private commitments were $2.5 billion of which $1.8 billion remain
available at December 31, 1998. Additionally, mortgage loans sold with
recourse were $0.5 billion at December 31, 1998.
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. At December 31,
1998 these were immaterial.
15. DIVESTITURE
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."
16. CONTINGENCIES AND LITIGATION
STOP-LOSS REINSURANCE 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. The Company
has guaranteed
44
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
Gibraltar's obligations arising under the stop-loss agreement subject to a
limit of $375 million. Through December 31, 1998, Gibraltar has incurred
$375 million in losses under the stop-loss agreement, including $90 million
in 1998. Gibraltar has paid $197 million to Pru Re under the stop-loss
agreement.
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
The Company has reviewed its obligations under certain managed care
arrangements for possible failure to comply with contractual and regulatory
requirements. It is the opinion of management that adequate reserves have
been established to provide for appropriate reimbursements to customers.
REINSURANCE AND PARTICIPATION AGREEMENT
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. In November 1998,
the Rehabilitation Court approved the sale of MBLLAC's individual life
insurance and individual group annuity business to affiliates of SunAmerica
Inc. Upon the end of the rehabilitation period, expected during 1999, the
agreement will terminate.
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.
Two putative class actions and approximately 320 individual actions were
pending against the Company in the United States as of January 31, 1999
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. 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 these cases seek substantial
damages while others seek unspecified compensatory, punitive and treble
damages. The Company intends to defend these cases vigorously.
45
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
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. 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 and that the
Company's efforts to prevent such practices were not sufficiently
effective. Based on the findings, the Task Force recommended, and the
Company agreed to, various changes to its sales and business practices
controls, and 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 U.S. District
Court for the District of 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 U.S. District Court 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 was affirmed by the U.S. Court of Appeals for the Third Circuit
in July 1998 although the issue of class counsel's fees was sent back to
the U.S. District Court for review. The Supreme Court denied certiorari in
January 1999, thereby making final the approval of the class action
settlement.
While the approval of the class action settlement is now final, the Company
remains subject to oversight and review by insurance regulators and other
regulatory authorities with respect to its sales practices and the conduct
of the remediation program. The releases granted by the state insurance
regulators pursuant to the individual state settlement agreements do not
become final until the remediation program has been completed without any
material changes to which those regulators have not agreed. The U.S.
District Court has also retained jurisdiction as to all matters relating to
the administration, consummation, enforcement and interpretation of the
class action settlement.
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 in
46
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
October 1996, 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.
In January 1997 the U.S. District Court sanctioned and fined the Company
$1 million for failure to properly implement procedures for its employees
to retain documents in violation of the Courts' order that required the
parties to preserve all documents relevant to the class action and
remediation program. The Court ordered the Company to implement a document
retention policy and directed that an independent expert be engaged to
investigate the extent of document destruction and its impact on the
remediation program.
In response to the class notices, the owners of approximately 503,000
policies indicated an interest in a Basic Claim Relief remedy. Management
believes that costs associated with providing Basic Claim Relief will not
be material to the Company's financial position or results of operations.
The owners of approximately 1.16 million policies responded to the class
notices by indicating an intent to file an ADR claim. All policyholders
who responded were provided an ADR claim form for completion and
submission. The ADR process generally requires that individual claim forms
and files be reviewed by the Company and by one or more independent claim
evaluators. Approximately 649,000 claim forms were completed and returned
and approximately 591,000 decision letters had been mailed to claimants as
of January 31, 1999. In many instances, claimants have the right to
"appeal" the Company's decision to an independent reviewer. Management
believes that the bulk of such appeals will be resolved in 1999.
In 1996, the Company recorded in its Consolidated Statement of Operations
the cost of $410 million as a guaranteed minimum remediation expense
pursuant to the settlement agreement. Management had no better information
available at that time upon which to make a reasonable estimate of losses
associated with the settlement. In 1997, based on additional information
derived from claim sampling techniques, the terms of the settlement and
the number of claim forms received, management 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 was funded in a settlement trust. Management
expressly noted that additional cost items were anticipated that could not
be fully evaluated at that time.
In 1998, based on estimates derived from an analysis of claims actually
remedied (including interest), a sample of claims still to be remedied, an
estimate of additional liability associated with the results of the
investigation by the independent expert regarding the impact of document
destruction on the ADR program, and an estimate of additional liabilities
associated with a claimant's right to "appeal" the Company's decision,
management increased the estimated liability for the cost of ADR remedies
by $.51 billion before taxes to a total of $2.56 billion before taxes, all
of which has been funded in a settlement trust as discussed in Note 4. The
Company has also recorded from 1996 through 1998 additional charges to
reflect ongoing administrative costs related to the ADR program,
regulatory fines, penalties and related payments, litigation costs and
settlements, and other fees and expenses associated with the resolution of
sales practices issues. While management believes the foregoing provisions
are reasonable estimates based on information currently available, the
ultimate amount of the total cost of remedied policyholder claims and
other related costs is dependent on complex and varying factors, including
the relief options still to be chosen by claimants, the dollar value of
those options, and the number and type of claims that may successfully be
appealed.
47
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted with precision. 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 the matters specifically discussed
above. Management believes, however, that the ultimate resolution of all
such matters, after consideration of applicable reserves, should not have a
material adverse effect on the Company's financial position.
******
48
<PAGE>
SUPPLEMENT DATED MAY 1, 1999
TO PROSPECTUS DATED MAY 1, 1999
FOR GROUP VARIABLE UNIVERSAL LIFE INSURANCE
THIS DOCUMENT IS A SUPPLEMENT TO THE PROSPECTUS DATED MAY 1, 1999 (THE
"PROSPECTUS") FOR THE GROUP VARIABLE UNIVERSAL LIFE INSURANCE CONTRACT AND
CERTIFICATES THAT PRUDENTIAL OFFERS TO YOU. THIS SUPPLEMENT IS NOT A COMPLETE
PROSPECTUS, AND MUST BE ACCOMPANIED BY THE PROSPECTUS. THE PROSPECTUS DESCRIBES
THE INSURANCE FEATURES AND CERTAIN OTHER ASPECTS OF THE GROUP CONTRACT AND
CERTIFICATES. IN THIS SUPPLEMENT, WE DESCRIBE THE FUNDS THAT ARE AVAILABLE TO
YOU UNDER THE GROUP CONTRACT AND CERTIFICATES.
The following table summarizes the fee and expense information for the Funds.
For more information about the Funds, see THE FUNDS section on page 10.
<TABLE>
<CAPTION>
=====================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS) (1)
============================================= ============== ====== =========== =====================
<S> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND, INC.
Conservative Balanced Portfolio (2) 0.55% - 0.02% 0.57%
Diversified Bond Portfolio (2) 0.40% - 0.02% 0.42%
Equity Portfolio (2) 0.45% - 0.02% 0.47%
Equity Income Portfolio (2) 0.40% - 0.02% 0.42%
Flexible Managed Portfolio (2) 0.60% - 0.01% 0.61%
Global Portfolio (2) 0.75% - 0.11% 0.86%
Government Income Portfolio (2) 0.40% - 0.03% 0.43%
High Yield Bond Portfolio (2) 0.55% - 0.03% 0.58%
Money Market Portfolio (2) 0.40% - 0.01% 0.41%
Natural Resources Portfolio (2) 0.45% - 0.04% 0.49%
Prudential Jennison Portfolio (2) 0.60% - 0.03% 0.63%
Small Capitalization Stock Portfolio (2) 0.40% - 0.07% 0.47%
Stock Index Portfolio (2) 0.35% - 0.02% 0.37%
Zero Coupon Bond 2005 Portfolio (2) 0.40% - 0.21% 0.61%
- --------------------------------------------- -------------- ------ ----------- ---------------------
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Capital Appreciation Fund 0.62% - 0.05% 0.67%
AIM V.I. Diversified Income Fund 0.60% - 0.17% 0.77%
AIM V.I. Global Utilities Fund 0.65% - 0.46% 1.11%
AIM V.I. Government Securities Fund 0.50% - 0.26% 0.76%
AIM V.I. Growth Fund 0.64% - 0.08% 0.72%
AIM V.I. Growth and Income Fund 0.61% - 0.04% 0.65%
AIM V.I. International Equity Fund 0.75% - 0.16% 0.91%
AIM V.I. Value Fund 0.61% - 0.05% 0.66%
- --------------------------------------------- -------------- ------ ----------- ---------------------
</TABLE>
GL.99.597
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS) (1)
============================================= ============== ====== =========== =====================
<S> <C> <C> <C> <C>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
Global Bond Portfolio (3) 0.64% - 0.29% 0.93%
Global Dollar Government Portfolio (3) 0.39% - 0.56% 0.95%
Growth Portfolio (3) 0.75% - 0.12% 0.87%
Growth and Income Portfolio (3) 0.63% - 0.10% 0.73%
International Portfolio (3) 0.58% - 0.37% 0.95%
Premier Growth Portfolio (3) 0.97% - 0.09% 1.06%
Quasar Portfolio (3) 0.73% - 0.22% 0.95%
Real Estate Investment Portfolio (3) 0.08% - 0.87% 0.95%
Technology Portfolio (3) 0.81% - 0.14% 0.95%
U.S. Government/High Grade
Securities Portfolio (3) 0.60% - 0.18% 0.78%
Utility Income Portfolio (3) 0.58% - 0.37% 0.95%
Worldwide Privatization Portfolio (3) 0.25% - 0.70% 0.95%
- --------------------------------------------- -------------- ------ ----------- ---------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
VP Balanced Portfolio (4) N/A - N/A 1.00%
VP International Portfolio (4) N/A - N/A 1.50%
VP Value Portfolio (4) N/A - N/A 1.00%
- --------------------------------------------- -------------- ------ ----------- ---------------------
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger IPT - 100 Fund (5) 0.75% - 0.25% 1.00%
Berger IPT - Growth and Income Fund (6) 0.75% - 0.25% 1.00%
Berger IPT - Small Company Growth Fund (7) 0.90% - 0.25% 1.15%
Berger/BIAM IPT - International Fund (8) 0.90% - 0.30% 1.20%
- --------------------------------------------- -------------- ------ ----------- ---------------------
DREYFUS FUNDS
Capital Appreciation Portfolio 0.75% - 0.06% 0.81%
Disciplined Stock Portfolio 0.75% - 0.13% 0.88%
Growth and Income Portfolio 0.75% - 0.03% 0.78%
International Equity Portfolio 0.75% - 0.24% 0.99%
International Value Portfolio 1.00% - 0.29% 1.29%
Quality Bond Portfolio 0.65% - 0.08% 0.73%
Small Cap Portfolio 0.75% - 0.02% 0.77%
Small Company Stock Portfolio 0.75% - 0.23% 0.98%
Socially Responsible Growth Fund 0.75% - 0.05% 0.80%
Special Value Portfolio 0.75% - 0.08% 0.83%
- --------------------------------------------- -------------- ------ ----------- ---------------------
FRANKLIN(R) TEMPLETON(R): TEMPLETON VARIABLE
PRODUCTS SERIES FUND (CLASS 2 SHARES)
Templeton Asset Allocation Fund (9) 0.60% 0.25% 0.18% 1.03%
Templeton Bond Fund (10) 0.50% 0.15% 0.23% 0.88%
Templeton Developing Markets Fund (9) 1.25% 0.25% 0.41% 1.91%
Templeton International Fund (9) 0.69% 0.25% 0.17% 1.11%
Templeton Stock Fund (9) 0.70% 0.25% 0.19% 1.14%
- --------------------------------------------- -------------- ------ ----------- ---------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS) (1)
============================================= ============== ====== =========== =====================
<S> <C> <C> <C> <C>
INVESCO VARIABLE INVESTMENT FUNDS, INC.
VIF-Blue Chip Growth Fund (11) (12) 0.85% - 0.72% 1.57%
VIF-Dynamics Fund (11) (12) 0.60% - 0.85% 1.45%
VIF-Equity Income Fund (11) (12) 0.75% - 0.18% 0.93%
VIF-Health Sciences Fund (11) (12) 0.75% - 0.52% 1.27%
VIF-High Yield Fund (12) 0.60% - 0.47% 1.07%
VIF-Small Company Growth Fund (11) (12) 0.75% - 1.12% 1.87%
VIF-Technology Fund (11) (12) 0.75% - 0.65% 1.40%
VIF-Total Return Fund (11) (12) 0.75% - 0.42% 1.17%
VIF-Utilities Fund (11) (12) 0.60% - 0.48% 1.08%
- --------------------------------------------- -------------- ------ ----------- ---------------------
JANUS ASPEN SERIES
Aggressive Growth Portfolio (13) 0.72% - 0.03% 0.75%
Balanced Portfolio (13) 0.72% - 0.02% 0.74%
Flexible Income Portfolio 0.65% - 0.08% 0.73%
Growth Portfolio (13) 0.65% - 0.03% 0.68%
High-Yield Portfolio (13) 0.00% - 1.00% 1.00%
International Growth Portfolio (13) 0.66% - 0.20% 0.86%
Worldwide Growth Portfolio (13) 0.65% - 0.07% 0.72%
- --------------------------------------------- -------------- ------ ----------- ---------------------
J.P. MORGAN SERIES TRUST II
J.P. Morgan Bond Portfolio (14) 0.30% - 0.45% 0.75%
J.P. Morgan Equity Portfolio (14) 0.40% - 0.50% 0.90%
J.P. Morgan International Opportunities
Portfolio (14) 0.60% - 0.60% 1.20%
J.P. Morgan Small Company Portfolio (14) 0.60% - 0.55% 1.15%
- --------------------------------------------- -------------- ------ ----------- ---------------------
KEMPER VARIABLE SERIES
Blue Chip Portfolio (15) 0.65% - 0.11% 0.76%
Contrarian Value Portfolio (15) 0.75% - 0.03% 0.78%
Government Securities Portfolio 0.55% - 0.11% 0.66%
Growth Portfolio 0.60% - 0.05% 0.65%
High Yield Portfolio 0.60% - 0.05% 0.65%
Horizon 5 Portfolio (15) 0.60% - 0.06% 0.66%
Horizon 10+ Portfolio (15) 0.60% - 0.04% 0.64%
International Portfolio 0.75% - 0.18% 0.93%
Investment Grade Bond Portfolio (15) 0.60% - 0.07% 0.67%
Small Cap Growth Portfolio 0.65% - 0.05% 0.70%
Small Cap Value Portfolio (15) 0.75% - 0.05% 0.80%
Total Return Portfolio 0.55% - 0.05% 0.60%
Value + Growth Portfolio (15) 0.75% - 0.03% 0.78%
- --------------------------------------------- -------------- ------ ----------- ---------------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS) (1)
============================================= ============== ====== =========== =====================
<S> <C> <C> <C> <C>
LAZARD RETIREMENT SERIES, INC.
Emerging Markets Portfolio (16) 1.00% 0.25% 0.35% 1.60%
Equity Portfolio (16) 0.75% 0.25% 0.25% 1.25%
International Equity Portfolio (16) 0.75% 0.25% 0.25% 1.25%
Small Cap Portfolio (16) 0.75% 0.25% 0.25% 1.25%
- --------------------------------------------- -------------- ------ ----------- ---------------------
MFS(R) VARIABLE INSURANCE TRUST(SM)
MFS Bond Series (17) (18) 0.60% - 0.42% 1.02%
MFS Capital Opportunities Series (17) (18) 0.75% - 0.27% 1.02%
MFS Emerging Growth Series (17) 0.75% - 0.10% 0.85%
MFS Global Government Series (17) (18) 0.75% - 0.26% 1.01%
MFS Growth With Income Series (17) 0.75% - 0.13% 0.88%
MFS High Income Series (17) (18) 0.75% - 0.28% 1.03%
MFS Research Series (17) 0.75% - 0.11% 0.86%
MFS Total Return Series (17) (18) 0.75% - 0.16% 0.91%
MFS Utilities Series (17) (18) 0.75% - 0.26% 1.01%
- --------------------------------------------- -------------- ------ ----------- ---------------------
NEUBERGER BERMAN ADVISORS MANAGEMENT
TRUST ("AMT") (19)
AMT Balanced Portfolio 0.85% - 0.18% 1.03%
AMT Growth Portfolio 0.83% - 0.09% 0.92%
AMT Limited Maturity Bond Portfolio 0.65% - 0.11% 0.76%
AMT Partners Portfolio 0.78% - 0.06% 0.84%
- --------------------------------------------- -------------- ------ ----------- ---------------------
THE ROYCE PORTFOLIOS
Royce Micro-Cap Portfolio (20) 1.25% - 0.10% 1.35%
Royce Premier Portfolio (20) 1.00% - 0.35% 1.35%
Royce Total Return Portfolio (20) 1.00% - 0.35% 1.35%
- --------------------------------------------- -------------- ------ ----------- ---------------------
SCUDDER VARIABLE LIFE INVESTMENT FUND
(CLASS B SHARES)
Balanced Portfolio 0.475% 0.00% 0.082% 0.56%
Bond Portfolio 0.475% 0.00% 0.094% 0.57%
Capital Growth Portfolio 0.466% 0.25% 0.037% 0.75%
Global Discovery Portfolio (21) 0.975% 0.25% 0.815% 2.04%
Growth & Income Portfolio 0.475% 0.23% 0.086% 0.79%
International Portfolio 0.867% 0.23% 0.177% 1.28%
- --------------------------------------------- -------------- ------ ----------- ---------------------
THE STRONG FUNDS
Strong Discovery Fund II (22) 1.00% - 0.18% 1.18%
Strong Mid Cap Growth Fund II (22) (23) 1.00% - 0.20% 1.20%
Strong International Stock Fund II (22) (24) 1.00% - 0.62% 1.62%
Strong Opportunity Fund II (22) 1.00% - 0.16% 1.16%
- --------------------------------------------- -------------- ------ ----------- ---------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS) (1)
============================================= ============== ====== =========== =====================
<S> <C> <C> <C> <C>
T. ROWE PRICE VARIABLE FUNDS
Equity Income Portfolio (25) 0.85% - 0.00% 0.85%
International Stock Portfolio (25) 1.05% - 0.00% 1.05%
Limited-Term Bond Portfolio (25) 0.70% - 0.00% 0.70%
Mid-Cap Growth Portfolio (25) 0.85% - 0.00% 0.85%
New America Growth Portfolio (25) 0.85% - 0.00% 0.85%
Personal Strategy Balanced Portfolio (25) 0.90% - 0.00% 0.90%
- --------------------------------------------- -------------- ------ ----------- ---------------------
WARBURG PINCUS TRUST I
Emerging Markets Portfolio (26) 0.20% - 1.20% 1.40%
International Equity Portfolio 1.00% - 0.33% 1.33%
Post-Venture Capital Portfolio (26) 1.08% - 0.32% 1.40%
Small Company Growth Portfolio 0.90% - 0.24% 1.14%
WARBURG PINCUS TRUST II
Fixed Income Portfolio (27) 0.20% - 0.79% 0.99%
Global Fixed Income Portfolio (27) 0.48% - 0.51% 0.99%
============================================= ============== ====== =========== =====================
</TABLE>
- ----------
(1) Some, but not all, of the Funds have expense reimbursement or fee waiver
arrangements. Without these arrangements, Total Fund Annual Expenses would
have been higher. More information appears in the footnotes that accompany
the Funds that have expense reimbursement or fee waiver arrangements.
(2) With respect to the Prudential Series Fund, Inc. portfolios, except for
the Global Portfolio, Prudential reimburses a portfolio when its ordinary
operating expenses, excluding taxes, interest, and brokerage commissions
exceed 0.75% of the portfolio's average daily net assets. The amounts
listed for the portfolios under Other Expenses are based on amounts
incurred in the last fiscal year.
(3) Total Fund Annual Expenses for the Alliance Variable Products Series Fund,
Inc. are stated net of expenses waived or reimbursed. The expenses of the
following Portfolios, before expense reimbursements, would be: Global Bond
Portfolio: investment management fee 0.65%, other expenses 0.52% and total
fund annual expenses 1.17%; Global Dollar Government Portfolio: investment
management fee 0.75%, other expenses 1.00% and total fund annual expenses
1.75%; Growth Portfolio: investment management fee 0.75%, other expenses
0.12% and total fund annual expenses 0.87%; Growth and Income Portfolio:
investment management fee 0.625%, other expenses 0.105% and total fund
annual expenses 0.73%; International Portfolio: investment management fee
1.00%, other expenses 0.37% and total fund annual expenses 1.37%; Premier
Growth Portfolio: investment management fee 1.00%, other expenses 0.09%
and total fund annual expenses 1.09%; Quasar Portfolio: investment
management fee 1.00%, other expenses 0.30% and total fund annual expenses
1.30%; Real Estate Investment Portfolio: investment management fee 0.90%,
other expenses 0.87% and total fund annual expenses 1.77%; Technology
Portfolio: investment management fee 1.00%, other expenses 0.20% and total
fund annual expenses 1.20%; U.S.
5
<PAGE>
Government/High Grade Securities Portfolio: investment management fee
0.60%, other expenses 0.31% and total fund annual expenses 0.91%; Utility
Income Portfolio: investment management fee 0.75%, other expenses 0.60%
and total fund annual expenses 1.35%; and Worldwide Privatization
Portfolio: investment management fee 1.00%, other expenses 0.70% and total
fund annual expenses 1.70%.
(4) Fees for the American Century Variable Portfolios, Inc. are all-inclusive.
(5) Under a written contract, the Berger IPT - 100 Fund's investment advisor
waives its fee and reimburses the Fund to the extent that, at any time
during the life of the Fund, the Fund's annual operating expenses exceed
1.00%. The contract may not be terminated or amended except by a vote of
the Fund's Board of Trustees. Absent the fee waiver and expense
reimbursement, the Fund's total operating expenses would have been 2.88%.
(6) Under a written contract, the Berger IPT - Growth and Income Fund's
investment advisor waives its fee and reimburses the Fund to the extent
that, at any time during the life of the Fund, the Fund's annual operating
expenses exceed 1.00%. The contract may not be terminated or amended
except by a vote of the Fund's Board of Trustees. Absent the fee waiver
and expense reimbursement, the Fund's total operating expenses would have
been 1.99%.
(7) Under a written contract, the Berger IPT - Small Company Growth Fund's
investment advisor waives its fee and reimburses the Fund to the extent
that, at any time during the life of the Fund, the Fund's annual operating
expenses exceed 1.15%. The contract may not be terminated or amended
except by a vote of the Fund's Board of Trustees. Absent the fee waiver
and expense reimbursement, the Fund's total operating expenses would have
been 2.19%.
(8) Under a written contract, the Berger/BIAM IPT - International Fund's
investment advisor waives its fee and reimburses the Fund to the extent
that, at any time during the life of the Fund, the Fund's annual operating
expenses exceed 1.20%. The contract may not be terminated or amended
except by a vote of the Fund's Board of Trustees. Absent the fee waiver
and expense reimbursement, the Fund's total operating expenses would have
been 2.85%.
(9) Class 2 of the Templeton Variable Products Series Templeton Asset
Allocation Fund, Templeton Developing Markets Fund, Templeton
International Fund, and Templeton Stock Fund has a distribution plan or
"Rule 12b-1 Plan" which is described in the Fund's prospectus. Expenses
may vary.
(10) Class 2 of the Templeton Variable Products Series Templeton Bond Fund has
a distribution plan or "Rule 12b-1 Plan" which is described in the Fund's
prospectus. Because no Class 2 shares were issued as of December 31, 1998,
figures (other than "Rule 12b-1 Fees") are based on the Fund's Class 1
expenses for the fiscal year ended December 31, 1998, plus Class 2's
maximum annual Rule 12b-1 fee of 0.15%. Expenses may vary.
6
<PAGE>
(11) Certain expenses of the VIF-Blue Chip Growth Fund, the VIF-Dynamics Fund,
the VIF-Equity Income Fund, the VIF-Health Sciences Fund, the VIF-Small
Company Growth Fund, the VIF-Technology Fund, the VIF-Total Return Fund,
and the VIF-Utilities Fund for the INVESCO Variable Investment, Inc. are
being voluntarily absorbed by INVESCO. If such expenses had not been
voluntarily absorbed, the ratio of expenses to average net assets for Blue
Chip Growth, Dynamics, Equity Income, Health Sciences, Small Company
Growth, Technology, Total Return and Utilities Portfolios would have been
12.29%, 15.01%, 1.17%, 4.32%, 12.67%, 6.60%, 1.24% and 1.84%,
respectively.
(12) Each actual Total Fund Operating Expenses for the INVESCO Variable
Investment Funds, Inc. were lower than the figures shown, because their
transfer agent fees and/or custodian fees were reduced under expense
offset arrangements. Because of SEC requirements, the figures shown do not
reflect these reductions.
(13) All expenses are stated with contractual waivers and fee reductions by
Janus Capital. Fee reductions for the Aggressive Growth, Balanced, Growth,
International Growth and Worldwide Growth Portfolios 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. Janus Capital has agreed to continue the other waivers and
fee reductions until at least the next annual renewal of the advisory
agreement. Without such waivers and fee reductions, the Total Fund Annual
Expenses would have been: 0.75% for Aggressive Growth; 0.74% for Balanced;
0.73% for Flexible Income; 0.75% for Growth; 2.11% for High-Yield; 0.95%
for International Growth; and 0.74% for Worldwide Growth Portfolios.
(14) The information in the J.P. Morgan Series Trust II section of the
foregoing table has been restated to reflect an agreement by Morgan
Guaranty Trust Company of New York ("Morgan Guaranty"), an affiliate of
Morgan, to reimburse the Trust to the extent certain expenses exceed in
any fiscal year 0.75%, 0.90%, 1.20% and 1.15% of the average daily net
assets of J.P. Morgan Bond Portfolio, J.P. Morgan Equity Portfolio, J.P.
Morgan International Opportunities Portfolio and J.P. Morgan Small Company
Portfolio, respectively. Without such reimbursements, total fund annual
expenses would have been 1.02% for the J.P. Morgan Bond Portfolio, 1.48%
for the J.P. Morgan Equity Portfolio, 3.26% for the J.P. Morgan
International Opportunities Portfolio and 3.43% for the J.P. Morgan Small
Company Portfolio.
(15) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on the date of this prospectus, to limit their
respective fees and to reimburse other operating expenses, in a manner
communicated to the Board of the Fund, to the extent necessary to limit
total operating expenses of the following described Portfolios to the
amounts set forth after the Portfolio names: Kemper Value + Growth
Portfolio (.84%), Kemper Contrarian Value Portfolio (.80%), Kemper Small
Cap Value Portfolio (.84%), Kemper Horizon 5 Portfolio (.97%), Kemper
Horizon 10+ Portfolio (.83%), Kemper Investment Grade Bond
7
<PAGE>
Portfolio (.80%), and Kemper Blue Chip Portfolio (.95%). The amounts set
forth in the table above reflect actual expenses for the past fiscal year,
which were lower than these expense limits.
(16) Lazard Asset Management, the Fund's Investment Manager, agrees to
reimburse the Emerging Markets Portfolio, Equity Portfolio, International
Equity Portfolio and Small Cap Portfolio through December 31, 1999 to the
extent Total Fund Annual Expenses exceed 1.60%, 1.25%, 1.25% and 1.25%,
respectively, of the Portfolio's average daily net assets. Absent such an
agreement with the Investment Manager, the actual Total Fund Annual
Expenses for the year ended December 31, 1998 would have been: 14.37% for
the Emerging Markets Portfolio, 21.32% for the Equity Portfolio, 48.67%
for the International Equity Portfolio, and 16.20% for the Small Cap
Portfolio.
(17) Each series in the MFS(R) Variable Insurance Trust(sm) has an expense
offset arrangement which reduces the series' custodian fee based upon the
amount of cash maintained by the series with its custodian and dividend
disbursing agent. Each series may enter into other such arrangements and
directed brokerage arrangements, which would also have the effect of
reducing the series' expenses. Expenses do not take into account these
expense reductions, and are therefore higher than the actual expenses of
the series.
(18) MFS has agreed to bear expenses for these series, subject to reimbursement
by these series, such that each such series' "Other Expenses" shall not
exceed the following percentages of the average daily net assets of the
series during the current fiscal year: 0.40% for the Bond Series, and
0.25% for each remaining series, except for the Emerging Growth Series,
the Research Series, and the Growth With Income Series, which have no such
limitation. The payments made by MFS on behalf of each series under this
arrangement are subject to reimbursement by the series to MFS, which will
be accomplished by the payment of an expense reimbursement fee by the
series to MFS computed and paid monthly at a percentage of the series'
average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the series' "Other
Expenses" will not exceed the percentage set forth above for that series.
The obligation of MFS to bear a series' "Other Expenses" pursuant to this
arrangement and the series' obligation to pay the reimbursement fee to
MFS, terminates on the earlier of the date on which payments made by the
series equal the prior payment of such reimbursable expenses by MFS or
December 31, 2004. Without such waivers and fee reductions, the Total Fund
Annual Expenses would have been: 1.23% for Bond Series; 1.11% for Capital
Opportunities Series; 1.11% for Global Government Series; 0.96% for High
Income Series; 0.91% for Total Return Series; and 0.98% for Utilities
Series Portfolios.
(19) Neuberger Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in
a corresponding series ("Series") of Advisers Managers Trust. The figures
reported under "Investment Management/Administration Fees" include the
aggregate of the administration fees paid by the Portfolio and the
management fees paid by the corresponding Series. Similarly, the figures
reported under "Other Expenses" include all other expenses of the
Portfolio and its corresponding Series.
8
<PAGE>
(20) Royce & Associates, Inc., the Royce Portfolios' investment adviser, has
contractually agreed to waive its fees and reimburse expenses to the
extent necessary to maintain the Net Annual Operating Expense ratio at or
below 1.35% through December 31, 1999. Absent such waivers and fee
reductions, the Total Fund Annual Expenses would have been: 2.59% for
Royce Micro-Cap; 7.05% for Royce Premier; and 18.08% for Royce Total
Return Portfolios.
(21) Until April 30, 1998, the Adviser for the Scudder Variable Life Investment
Fund-(Class B Shares) agreed to waive a portion of its management fee to
the extent necessary to limit the expenses of the Global Discovery
Portfolio to 1.50% of average daily net assets. As a result, net 1998
expenses were: management fee 0.92% and total expenses 1.98%. The Scudder
Variable Life Investment Fund (Class B Shares) section of the chart above
shows the expenses without this expense limitation.
(22) Fees and expenses for all Strong Funds are calculated on an annualized
basis as of December 31, 1998 through the fiscal year end.
(23) The Strong Mid Cap Growth Fund II advisor may from time to time
voluntarily limit expenses of the fund. During 1998, the advisor absorbed
expenses of 0.24%. If these expenses had not been absorbed, Total Fund
Annual Expenses would have equaled 1.44%.
(24) The Strong International Stock Fund II advisor may from time to time
voluntarily limit expenses of the fund. During 1998, the advisor absorbed
expenses of 0.06%. If these expenses had not been absorbed, Total Fund
Annual Expenses would have equaled 1.68%.
(25) The investment management fee for all Portfolios in the T. Rowe Price
Variable Funds includes the ordinary expenses of operating the Portfolios.
Fees and expenses are for the year ended December 31, 1998.
(26) Absent the waiver of fees and reimbursement of expenses by the Warburg
Pincus Trust I investment adviser and co-administrator, the investment
management fee would have equaled 1.25% and 1.25%; other expenses would
have equaled 6.96% and 0.45%; and total fund annual expenses would have
equaled 8.21% and 1.70% for the Emerging Markets and Post-Venture Capital
Portfolios, respectively, based on actual fees and expenses for the fiscal
year ended December 31, 1998. Fee waivers and expense reimbursements or
credits may be discontinued at any time.
(27) Absent the waiver of fees and reimbursement of expenses by the Warburg
Pincus Trust II investment adviser and co-administrator, investment
management fees would have equaled 0.50% and 1.00%, other expenses would
have equaled 4.82% and 2.99% and total portfolio annual expenses would
have equaled 5.32% and 3.99% for the Fixed Income and Global Fixed Income
Portfolios, respectively, based on actual fees and expenses for the fiscal
year ended December 31, 1998. Fee waivers and expense reimbursements or
credits may be discontinued at any time.
9
<PAGE>
THE FUNDS
Set out below is a list of each Fund, its investment objective, investment
management fees and other expenses, and its investment advisor/investment
manager. Some Funds also provide information about their principal strategies.
Certain Funds have adopted distribution plans pursuant to the federal securities
laws, and under those plans, the Fund may make payments to Prudential and/or its
affiliates for certain marketing efforts.
THE PRUDENTIAL SERIES FUND, INC.
The portfolios of the Series Fund in which the Separate Account may currently
invest and their investment objectives, principal strategies and fees are as
follows:
CONSERVATIVE BALANCED PORTFOLIO: The investment objective is a total investment
return consistent with a conservatively managed diversified portfolio. The
Portfolio invests in a mix of equity securities, debt obligations and money
market instruments.
DIVERSIFIED BOND PORTFOLIO: The investment objective is a high level of income
over a longer term while providing reasonable safety of capital. The Portfolio
invests primarily in higher grade debt obligations and high quality money market
investments.
EQUITY PORTFOLIO: The investment objective is capital appreciation. The
Portfolio invests primarily in common stocks of major established corporations
as well as smaller companies that offer attractive prospects of appreciation.
EQUITY INCOME PORTFOLIO: The investment objective is both current income and
capital appreciation. The Portfolio invests primarily in common stocks and
convertible securities that provide good prospects for returns above those of
the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500 Index") or
the NYSE Composite Index.
FLEXIBLE MANAGED PORTFOLIO: The investment objective is a total investment
return consistent with an aggressively managed diversified portfolio. The
Portfolio invests in a mix of equity securities, debt obligations and money
market instruments.
GLOBAL PORTFOLIO: The investment objective is long-term growth of capital. The
Portfolio invests primarily in common stocks (and their equivalents) of foreign
and U.S. companies.
GOVERNMENT INCOME PORTFOLIO: The investment objective is a high level of income
over the longer term consistent with the preservation of capital. The Portfolio
invests primarily in U.S. Government securities, including intermediate and
long-term U.S. Treasury securities and debt obligations issued by agencies or
instrumentalities established by the U.S. government.
HIGH YIELD BOND PORTFOLIO: The investment objective is a high total return. The
Portfolio invests primarily in high yield/high risk debt securities.
MONEY MARKET PORTFOLIO: The investment objective is maximum current income
consistent with the stability of capital and the maintenance of liquidity. The
Portfolio invests in high quality short-term debt obligations that mature in 13
months or less.
10
<PAGE>
NATURAL RESOURCES PORTFOLIO: The investment objective is long-term growth of
capital. The Portfolio invests primarily in common stocks and convertible
securities of natural resource companies and securities that are related to the
market value of some natural resource.
PRUDENTIAL JENNISON PORTFOLIO: The investment objective is to achieve long-term
growth of capital. The Portfolio invests primarily in equity securities of major
established corporations that offer above-average growth prospects.
SMALL CAPITALIZATION STOCK PORTFOLIO: The investment objective is long-term
growth of capital. The Portfolio invests primarily in equity securities of
publicly-traded companies with small market capitalization.
STOCK INDEX PORTFOLIO: The investment objective is investment results that
generally correspond to the performance of publicly-traded common stocks. The
Portfolio attempts to duplicate the price and yield performance of the Standard
& Poor's 500 Composite Stock Price Index (the "S&P 500 Index").
ZERO COUPON BOND 2005 PORTFOLIO: The investment objective of this portfolio is
the highest predictable compound investment for a specific period of time,
consistent with the safety of invested capital. The Portfolio invests primarily
in debt obligations of the U.S. Treasury and corporations that have been issued
without interest coupons or have been stripped of their interest coupons, or
have interest coupons that have been stripped from the debt obligations.
Prudential is the investment adviser 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"), which 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 provides
investment advisory services for the Prudential Jennison Portfolio. Further
detail is provided in the prospectus and statement of additional information for
the Series Fund. Prudential, PIC and Jennison are registered as investment
advisers under the Investment Advisers Act of 1940.
11
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
- ------------------------------------------ --------------- -------------- -----------------
<S> <C> <C> <C>
THE SERIES FUND
Conservative Balanced Portfolio (1) 0.55% 0.02% 0.57%
Diversified Bond Portfolio (1) 0.40% 0.02% 0.42%
Equity Portfolio (1) 0.45% 0.02% 0.47%
Equity Income Portfolio (1) 0.40% 0.02% 0.42%
Flexible Managed Portfolio (1) 0.60% 0.01% 0.61%
Global Portfolio (1) 0.75% 0.11% 0.86%
Government Income Portfolio (1) 0.40% 0.03% 0.43%
High Yield Bond Portfolio (1) 0.55% 0.03% 0.58%
Money Market Portfolio (1) 0.40% 0.01% 0.41%
Natural Resources Portfolio (1) 0.45% 0.04% 0.49%
Prudential Jennison Portfolio (1) 0.60% 0.03% 0.63%
Small Capitalization Stock Portfolio (1) 0.40% 0.07% 0.47%
Stock Index Portfolio (1) 0.35% 0.02% 0.37%
Zero Coupon Bond 2005 Portfolio (1) 0.40% 0.21% 0.61%
========================================== =============== ============== =================
</TABLE>
- ----------
(1) SERIES FUND. With respect to the Series Fund portfolios, except for the
Global Portfolio, Prudential reimburses a portfolio when its ordinary
operating expenses, excluding taxes, interest, and brokerage commissions
exceed 0.75% of the portfolio's average daily net assets. The amounts
listed for the portfolios under Other Expenses are based on amounts
incurred in the last fiscal year.
AIM VARIABLE INSURANCE FUNDS, INC.
The portfolios of the AIM Variable Insurance Funds, Inc. in which the Separate
Account may currently invest and their investment objectives and fees are as
follows:
AIM V.I. CAPITAL APPRECIATION FUND: The fund's investment objective is growth of
capital through investment in common stocks, with emphasis on medium- and
small-sized growth companies.
AIM V.I. DIVERSIFIED INCOME FUND: The fund's investment objective is to achieve
a high level of current income.
AIM V.I. GLOBAL UTILITIES FUND: The fund's investment objectives are to achieve
a high level of current income and secondarily, growth of capital, by investing
primarily in the common and preferred stocks of public utility companies (either
domestic or foreign).
AIM V.I. GOVERNMENT SECURITIES FUND: The fund's investment objective is to
achieve a high level of current income consistent with reasonable concern for
safety of principal by investing in debt securities issued, guaranteed or
otherwise backed by the United States Government.
12
<PAGE>
AIM V.I. GROWTH FUND: The fund's investment objective is to seek growth of
capital primarily by investing in seasoned and better capitalized companies
considered to have strong earnings momentum.
AIM V.I. GROWTH AND INCOME FUND: The fund's primary investment objective is
growth of capital with a secondary objective of current income.
AIM V.I. INTERNATIONAL EQUITY FUND: The fund's investment objective is to
provide long-term growth of capital by investing in a diversified portfolio of
international equity securities whose issuers are considered to have strong
earnings momentum.
AIM V.I. VALUE FUND: The fund's investment objective is to achieve long-term
growth of capital by investing primarily in equity securities judged by the
fund's investment advisor to be undervalued relative to the investment advisor's
appraisal of the current or projected earnings of the companies issuing the
securities, or relative to current market values of assets owned by the
companies issuing the securities or relative to the equity market generally.
Income is a secondary objective.
A I M Advisors, Inc. ("AIM") serves as the investment advisor to each Fund.
AIM's principal business address is 11 Greenway Plaza, Suite 100, Houston, Texas
77046-1173.
<TABLE>
<CAPTION>
=======================================================================================
FUNDS MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES ANNUAL EXPENSES
- ----------------------------------------- ------------- ------------- -----------------
<S> <C> <C> <C>
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Capital Appreciation Fund 0.62% 0.05% 0.67%
AIM V.I. Diversified Income Fund 0.60% 0.17% 0.77%
AIM V.I. Global Utilities Fund 0.65% 0.46% 1.11%
AIM V.I. Government Securities Fund 0.50% 0.26% 0.76%
AIM V.I. Growth Fund 0.64% 0.08% 0.72%
AIM V.I. Growth and Income Fund 0.61% 0.04% 0.65%
AIM V.I. International Equity Fund 0.75% 0.16% 0.91%
AIM V.I. Value Fund 0.61% 0.05% 0.66%
========================================= ============= ============= =================
</TABLE>
ALLIANCE CAPITAL
The portfolios of the Alliance Variable Products Series Fund, Inc. in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
GLOBAL BOND PORTFOLIO: Seeks a high level of return from a combination of
current income and capital appreciation by investing in a globally diversified
portfolio of high quality debt securities denominated in the U.S. Dollar and a
range of foreign currencies.
13
<PAGE>
GLOBAL DOLLAR GOVERNMENT PORTFOLIO: Seeks a high level of current income through
investing substantially all of its assets in U.S. and non-U.S. fixed-income
securities denominated only in U.S. dollars. As a secondary objective, the
Portfolio seeks capital appreciation. Substantially all of the Portfolio's
assets will be invested in high yield, high risk securities that are low-rated
(i.e., below investment grade), or of comparable quality and unrated, and that
are considered to be predominantly speculative as regards the issuer's capacity
to pay interest and repay principal.
GROWTH PORTFOLIO: Seeks long-term growth of capital by investing primarily in
common stocks and other equity securities.
GROWTH AND INCOME PORTFOLIO: Seeks to balance the objectives of reasonable
current income and reasonable opportunities for appreciation through investments
primarily in dividend-paying common stocks of good quality.
INTERNATIONAL PORTFOLIO: Seeks to obtain a total return on its assets from
long-term growth of capital and from income principally through a broad
portfolio of marketable securities of established non-United States companies
(or United States companies having their principal activities and interests
outside the United States), companies participating in foreign economies with
prospects for growth, and foreign government securities.
PREMIER GROWTH PORTFOLIO: Seeks growth of capital rather than current income. In
pursuing its investment objective, the Premier Growth Portfolio will employ
aggressive investment policies. Since investments will be made based upon their
potential for capital appreciation, current income will be incidental to the
objective of capital growth. This portfolio is not intended for investors whose
principal objective is assured income or preservation of capital.
QUASAR PORTFOLIO: Seeks growth of capital by pursuing aggressive investment
policies. This portfolio invests principally in a diversified portfolio of
equity securities of any company and industry and in any type of security which
is believed to offer possibilities for capital appreciation.
REAL ESTATE INVESTMENT PORTFOLIO: Seeks a total return on its assets from
long-term growth of capital and from income principally through investing in a
portfolio of equity securities of issuers that are primarily engaged in or
related to the real estate industry.
TECHNOLOGY PORTFOLIO: Seeks growth of capital through investment in companies
expected to benefit from advances in technology. This portfolio will invest
principally in a diversified portfolio of securities of companies which use
technology extensively in the development of new or improved products or
processes.
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO: Seeks a high level of current
income consistent with preservation of capital by investing principally in a
portfolio of U.S. Government Securities and other high grade debt securities.
UTILITY INCOME PORTFOLIO: Seeks current income and capital appreciation by
investing primarily in the equity and fixed-income securities of companies in
the "utilities industry." The Portfolio's investment objective and policies are
designed to take advantage of the characteristics and historical performance of
securities of utilities companies. The utilities industry consists of companies
engaged in the manufacture, production, generation, provision, transmission,
sale and distribution of gas, electric energy, and communications equipment and
services, and in the provision of other utility or utility-related goods and
services.
14
<PAGE>
WORLDWIDE PRIVATIZATION PORTFOLIO: Seeks long-term capital appreciation by
investing principally in equity securities issued by enterprises that are
undergoing, or have undergone, privatization. The balance of the Portfolio's
investment portfolio will include equity securities of companies that are
believed by the Fund's Adviser to be beneficiaries of the privatization process.
Alliance Capital Management L.P. ("Alliance") is the investment adviser to each
of the above-mentioned funds. Alliance's principal business address is 1345
Avenue of the Americas, New York, New York 10105. The principal underwriter of
the funds is Alliance Fund Distributors, Inc., a subsidiary of Alliance, located
at 1345 Avenue of the Americas, New York, New York 10105.
<TABLE>
<CAPTION>
============================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
- ---------------------------------------------- -------------- ------------ -----------------
<S> <C> <C> <C>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
Global Bond Portfolio (1) 0.64% 0.29% 0.93%
Global Dollar Government Portfolio (1) 0.39% 0.56% 0.95%
Growth Portfolio (1) 0.75% 0.12% 0.87%
Growth and Income Portfolio (1) 0.63% 0.10% 0.73%
International Portfolio (1) 0.58% 0.37% 0.95%
Premier Growth Portfolio (1) 0.97% 0.09% 1.06%
Quasar Portfolio (1) 0.73% 0.22% 0.95%
Real Estate Investment Portfolio (1) 0.08% 0.87% 0.95%
Technology Portfolio (1) 0.81% 0.14% 0.95%
U.S. Government/High Grade Securities
Portfolio (1) 0.60% 0.18% 0.78%
Utility Income Portfolio (1) 0.58% 0.37% 0.95%
Worldwide Privatization Portfolio (1) 0.25% 0.70% 0.95%
============================================== ============== ============ =================
</TABLE>
- ----------
(1) Net of expenses waived or reimbursed. The expenses of the following
Portfolios, before expense reimbursements, would be: Global Bond
Portfolio: investment management fee 0.65%, other expenses 0.52% and total
fund annual expenses 1.17%; Global Dollar Government Portfolio: investment
management fee 0.75%, other expenses 1.00% and total fund annual expenses
1.75%; Growth Portfolio: investment management fee 0.75%, other expenses
0.12% and total fund annual expenses 0.87%; Growth and Income Portfolio:
investment management fee 0.625%, other expenses 0.105% and total fund
annual expenses 0.73%; International Portfolio: investment management fee
1.00%, other expenses 0.37% and total fund annual expenses 1.37%; Premier
Growth Portfolio: investment management fee 1.00%, other expenses 0.09%
and total fund annual expenses 1.09%; Quasar Portfolio: investment
management fee 1.00%, other expenses 0.30% and total fund annual expenses
1.30%; Real Estate Investment Portfolio: investment management fee 0.90%,
other expenses 0.87% and total fund annual expenses 1.77%; Technology
Portfolio: investment management fee 1.00%, other expenses 0.20% and total
fund annual expenses 1.20%; U.S. Government/High Grade Securities
Portfolio: investment management fee 0.60%, other
15
<PAGE>
expenses 0.31% and total fund annual expenses 0.91%; Utility Income
Portfolio: investment management fee 0.75%, other expenses 0.60% and total
fund annual expenses 1.35%; and Worldwide Privatization Portfolio:
investment management fee 1.00%, other expenses 0.70% and total fund
annual expenses 1.70%.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The portfolios of American Century Variable Portfolios, Inc. in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
VP BALANCED PORTFOLIO: The investment objective of the VP Balanced Portfolio is
capital growth and current income. Management of the Portfolio intends to
maintain approximately 60% of the Portfolio's assets in the equity securities
described in the prospectus, and intends to maintain approximately 40% of the
Portfolio's assets in fixed income securities.
VP INTERNATIONAL PORTFOLIO: Seeks capital growth over time by investing in
common stocks of foreign companies considered to have better-than-average
prospects for appreciation.
VP VALUE PORTFOLIO: Seeks long-term capital growth with income as a secondary
objective. The fund seeks to achieve its objectives by investing primarily in
equity securities of well-established companies that are believed by management
to be undervalued at the time of purchase.
The investment adviser for each fund is American Century Investment Management,
Inc. ("ACIM"). ACIM's principal business address is American Century Tower, 4500
Main Street, Kansas City, Missouri 64111. Funds Distributor, Inc. distributes
shares of American Century funds, and all sales of fund shares are subject to
approval by Funds Distributor, Inc.
---------------------------------------------------------------------
FUNDS TOTAL FUND
ANNUAL EXPENSES
------------------------------------------------ --------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
VP Balanced Portfolio (1) 1.00%
VP International Portfolio (1) 1.50%
VP Value Portfolio (1) 1.00%
================================================ ====================
- ----------
(1) Fees are all-inclusive.
THE BERGER FUNDS
The portfolios of the Berger Institutional Products Trust ("Berger IPT") in
which the Separate Account may currently invest and their investment objectives
and fees are as follows:
BERGER IPT - 100 FUND: The investment objective of the Berger IPT - 100 Fund is
long term capital appreciation. The Berger IPT - 100 Fund seeks to achieve this
objective by investing primarily in common stocks of established companies which
are believed to offer favorable
16
<PAGE>
growth prospects. Current income is not an investment objective of the Berger
IPT - 100 Fund, and any income produced will be a by-product of the effort to
achieve the Fund's objective.
BERGER IPT - GROWTH AND INCOME FUND: The primary investment objective of the
Berger IPT Growth and Income Fund is capital appreciation. A secondary objective
is to provide a moderate level of current income. The Berger IPT - Growth and
Income Fund seeks to achieve these objectives by investing primarily in common
stocks and other securities, such as convertible securities and preferred
stocks, which the Fund's advisor believes offer favorable growth prospects and
are expected to also provide current income.
BERGER IPT - SMALL COMPANY GROWTH FUND: The investment objective of the Berger
IPT - Small Company Growth Fund is capital appreciation. The Berger IPT - Small
Company Growth Fund seeks to achieve this objective by investing primarily in
equity securities (including common and preferred stocks, convertible debt
securities and other securities having equity features) of small growth
companies whose market capitalization, at the time of the initial purchase, is
less than the 12-month average of the maximum market capitalization for
companies included in the Russell 2000(TM) Index.
BERGER/BIAM IPT - INTERNATIONAL FUND: The investment objective of the
Berger/BIAM IPT International Fund is long- term capital appreciation. The
Berger/BIAM IPT - International Fund seeks to achieve this objective by
investing primarily in common stocks of well established companies located
outside the United States. The Fund intends to diversify its holdings among
several countries and to have, under normal market conditions, at least 65% of
the Fund's total assets invested in the securities of companies located in at
least five countries, not including the United States.
Berger Associates, Inc. ("Berger") is the investment adviser to the Berger IPT -
100 Fund, Berger IPT - Growth and Income Fund and Berger IPT - Small Company
Growth Fund. BBOI Worldwide LLC ("BBOI"), a joint venture of Berger and Bank of
Ireland Asset Management (U.S.) Limited ("BIAM"), is the adviser to the
Berger/BIAM IPT - International Fund, and BIAM serves as the Fund's subadviser.
Berger Distributors, Inc., a wholly-owned subsidiary of Berger, is the principal
underwriter for all of the portfolios of Berger IPT. The principal business
address of Berger, BBOI and Berger Distributors, Inc. is 210 University
Boulevard, Denver, Colorado 80206.
<TABLE>
<CAPTION>
===========================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
-------------------------------------------- -------------- ------------ -----------------
<S> <C> <C> <C>
BERGER INSTITUTIONAL PRODUCTS TRUST
Berger IPT - 100 Fund (1) 0.75% 0.25% 1.00%
Berger IPT - Growth and Income Fund (2) 0.75% 0.25% 1.00%
Berger IPT - Small Company Growth Fund (3) 0.90% 0.25% 1.15%
Berger/BIAM IPT - International Fund (4) 0.90% 0.30% 1.20%
============================================ ============== ============ =================
</TABLE>
17
<PAGE>
- ----------
(1) Under a written contract, the Fund's investment advisor waives its fee and
reimburses the Fund to the extent that, at any time during the life of the
Fund, the Fund's annual operating expenses exceed 1.00%. The contract may
not be terminated or amended except by a vote of the Fund's Board of
Trustees. Absent the fee waiver and expense reimbursement, the Fund's
total operating expenses would have been 2.88%.
(2) Under a written contract, the Fund's investment advisor waives its fee and
reimburses the Fund to the extent that, at any time during the life of the
Fund, the Fund's annual operating expenses exceed 1.00%. The contract may
not be terminated or amended except by a vote of the Fund's Board of
Trustees. Absent the fee waiver and expense reimbursement, the Fund's
total operating expenses would have been 1.99%.
(3) Under a written contract, the Fund's investment advisor waives its fee and
reimburses the Fund to the extent that, at any time during the life of the
Fund, the Fund's annual operating expenses exceed 1.15%. The contract may
not be terminated or amended except by a vote of the Fund's Board of
Trustees. Absent the fee waiver and expense reimbursement, the Fund's
total operating expenses would have been 2.19%.
(4) Under a written contract, the Fund's investment advisor waives its fee and
reimburses the Fund to the extent that, at any time during the life of the
Fund, the Fund's annual operating expenses exceed 1.20%. The contract may
not be terminated or amended except by a vote of the Fund's Board of
Trustees. Absent the fee waiver and expense reimbursement, the Fund's
total operating expenses would have been 2.85%.
DREYFUS CORPORATION FUNDS
The portfolios of the Dreyfus Variable Investment Fund, The Dreyfus Socially
Responsible Growth Fund, Inc., and the Dreyfus Stock Index Fund in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
CAPITAL APPRECIATION PORTFOLIO: Seeks to provide long-term capital growth
consistent with the preservation of capital; current income is a secondary
investment objective. This portfolio invests primarily in the common stocks of
domestic and foreign issuers.
DISCIPLINED STOCK PORTFOLIO: Seeks to provide investment results that are
greater than the total return performance of publicly-traded common stocks in
the aggregate, as represented by the Standard & Poor's 500 Composite Stock
Index. This portfolio will use quantitative statistical modeling techniques to
construct a portfolio in an attempt to achieve its investment objective, without
assuming undue risk relative to the broad stock market.
GROWTH AND INCOME PORTFOLIO: Seeks to provide long-term capital growth, current
income and growth of income, consistent with reasonable investment risk. This
portfolio invests primarily in equity securities of domestic and foreign
issuers. The portfolio also may invest in debt securities and money market
instruments of domestic and foreign issuers.
INTERNATIONAL EQUITY PORTFOLIO: Seeks to maximize capital growth. This portfolio
invests primarily in equity securities of foreign issuers located throughout the
world.
18
<PAGE>
INTERNATIONAL VALUE PORTFOLIO: Seeks long-term capital growth. This portfolio
invests primarily in a portfolio of publicly-traded equity securities of foreign
issuers which would be characterized as "value" companies according to criteria
established by The Dreyfus Corporation.
QUALITY BOND PORTFOLIO: Seeks to provide the maximum amount of current income to
the extent consistent with the preservation of capital and the maintenance of
liquidity. This portfolio invests principally in the debt obligations of
corporations, the U.S. Government and its agencies and instrumentalities, and
U.S. major banking institutions.
SMALL CAP PORTFOLIO: Seeks to maximize capital appreciation. This portfolio
invests primarily in common stocks of domestic and foreign issuers. This
portfolio will be particularly alert to companies that The Dreyfus Corporation
considers to be emerging smaller-sized companies which are believed to be
characterized by new or innovative products, services, or processes which should
enhance prospects for growth in future earnings.
SMALL COMPANY STOCK PORTFOLIO: Seeks to provide investment results that are
greater than the total return performance in publicly-traded common stocks in
the aggregate, as represented by the Russell 2500(TM) Index. This portfolio
invests primarily in a portfolio of equity securities of small to medium-sized
domestic issuers, while attempting to maintain volatility and diversification
similar to that of the Russell 2500(TM) Index.
SOCIALLY RESPONSIBLE GROWTH FUND: The Fund's primary goal is to provide capital
growth through equity investment in companies that, in the opinion of the Fund's
management, not only meet traditional investment standards but which also show
evidence that they conduct their business in a manner that contributes to the
enhancement of the quality of life in America. Current income is secondary to
the primary goal.
SPECIAL VALUE PORTFOLIO: Seeks to maximize total return, consisting of capital
appreciation and current income. This portfolio follows an asset allocation
strategy by investing in equity securities, debt securities and money market
instruments of domestic and foreign issuers.
The Dreyfus Corporation ("Dreyfus") is the investment adviser to each of the
above mentioned portfolios and funds. Dreyfus' principal business address is 200
Park Avenue, New York, New York 10166. The principal underwriter of the
portfolios and funds is Premier Mutual Fund Services, Inc., located at 60 State
Street, Boston, Massachusetts 02109.
19
<PAGE>
<TABLE>
<CAPTION>
=========================================================================================
INVESTMENT
FUNDS MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES ANNUAL EXPENSES
- ------------------------------------ ----------------- -------------- -------------------
<S> <C> <C> <C>
DREYFUS FUNDS
Capital Appreciation Portfolio 0.75% 0.06% 0.81%
Disciplined Stock Portfolio 0.75% 0.13% 0.88%
Growth and Income Portfolio 0.75% 0.03% 0.78%
International Equity Portfolio 0.75% 0.24% 0.99%
International Value Portfolio 1.00% 0.29% 1.29%
Quality Bond Portfolio 0.65% 0.08% 0.73%
Small Cap Portfolio 0.75% 0.02% 0.77%
Small Company Stock Portfolio 0.75% 0.23% 0.98%
Socially Responsible Growth Fund 0.75% 0.05% 0.80%
Special Value Portfolio 0.75% 0.08% 0.83%
==================================== ================= ============== ===================
</TABLE>
FRANKLIN TEMPLETON
The Class 2 portfolios of the Templeton Variable Products Series Fund in which
the Separate Account may currently invest and their investment objectives and
fees are as follows:
TEMPLETON ASSET ALLOCATION FUND: The fund's investment goal is high total
return. Under normal market conditions, the fund will invest in equity and debt
securities of any nation, including emerging markets, and in money market
instruments.
TEMPLETON BOND FUND: The fund's investment goal is high current income. Capital
appreciation is a secondary consideration. Under normal market conditions, the
fund will invest at least 65% of its total assets in the debt securities of
governments and their political subdivisions and agencies, supranational
organizations, and companies located anywhere in the world, including emerging
markets.
TEMPLETON DEVELOPING MARKETS FUND: The fund's investment goal is long-term
capital appreciation. Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities that trade in emerging
markets and are issued by companies that have their principal activities in
emerging market countries.
TEMPLETON INTERNATIONAL FUND: The fund's investment goal is long-term capital
growth. Under normal market conditions, the fund will invest at least 65% of its
total assets in the equity securities of companies located outside the U.S.,
including emerging markets.
TEMPLETON STOCK FUND: The fund's investment goal is long-term capital growth.
Under normal market conditions, the fund will invest at least 65% of its total
assets in the equity securities of companies located anywhere in the world,
including in the U.S. and emerging markets.
Templeton Investment Counsel, Inc. ("TICI") serves as the investment manager for
the Asset Allocation Fund, Bond Fund, International Fund, and Stock Fund. TICI
is a Florida corporation with offices at Broward Financial Centre, Fort
Lauderdale, Florida 33394-3091. The Investment
20
<PAGE>
Manager for the Developing Markets Fund is Templeton Asset Management Ltd., a
Singapore corporation with offices at 7 Temasek Blvd., #38-03, Suntec Tower One,
Singapore 038987. The principal underwriter of the Funds is Franklin Templeton
Distributors, Inc., 100 Fountain Parkway, St. Petersburg, Florida 33716-1205.
<TABLE>
<CAPTION>
=============================================================================================
INVESTMENT
FUNDS MANAGEMENT 12B-1 OTHER TOTAL FUND
FEE FEES EXPENSES ANNUAL EXPENSES
- ------------------------------------- -------------- --------- ------------ -----------------
<S> <C> <C> <C> <C>
FRANKLIN(R) TEMPLETON(R):
TEMPLETON VARIABLE PRODUCTS
SERIES FUND (CLASS 2 SHARES)
Templeton Asset Allocation
Fund (1) 0.60% 0.25% 0.18% 1.03%
Templeton Bond Fund (2) 0.50% 0.15% 0.23% 0.88%
Templeton Developing Markets
Fund (1) 1.25% 0.25% 0.41% 1.91%
Templeton International Fund (1) 0.69% 0.25% 0.17% 1.11%
Templeton Stock Fund (1) 0.70% 0.25% 0.19% 1.14%
===================================== ============== ========= ============ =================
</TABLE>
- ----------
(1) Class 2 of the Fund has a distribution plan or "Rule 12b-1 Plan" which is
described in the Fund's prospectus. Expenses may vary.
(2) Class 2 of the Fund has a distribution plan or "Rule 12b-1 Plan" which is
described in the Fund's prospectus. Because no Class 2 shares were issued
as of December 31, 1998, figures (other than "Rule 12b-1 Fees") are based
on the Fund's Class 1 expenses for the fiscal year ended December 31,
1998, plus Class 2's maximum annual Rule 12b-1 fee of 0.15%. Expenses may
vary.
INVESCO FUNDS
The portfolios of the INVESCO Variable Investment Funds, Inc. in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
VIF-BLUE CHIP GROWTH FUND: The Fund attempts to make your investment grow over
the long term; current income is an additional goal.
The Fund invests primarily in common stocks of large companies with market
capitalizations of more than $10 billion that have a history of consistent
earnings growth regardless of business cycle. In addition, the Fund tries to
identify companies that have -- or are expected to have -- growing earnings,
revenues and strong cash flows. The Fund also examines a variety of industries
and businesses, and seeks to purchase the securities of companies that we
believe are best situated in their industry categories. We also consider the
dividend payment record of the companies whose securities the Fund buys. The
Fund also may invest in preferred stocks (which generally pay higher dividends
than common stocks) and debt instruments that are convertible into common
21
<PAGE>
stocks, as well as in securities of foreign companies. In recent years, the core
of the Fund's investments has been concentrated in the securities of three or
four dozen large, high quality companies.
VIF-DYNAMICS FUND: The Fund attempts to make your investment grow over the long
term. It is aggressively managed. Because its strategy includes many short-term
factors -- including current information about a company, investor interest,
price movements of a company's securities and general market and monetary
conditions -- securities in its portfolio usually are bought and sold relatively
frequently.
The Fund invests in a variety of securities that we believe present
opportunities for capital growth -- primarily common stocks of companies traded
on U.S. securities exchanges, as well as over-the-counter. The Fund also may
invest in preferred stocks (which generally pay higher dividends than common
stocks) and debt instruments that are convertible into common stocks, as well as
in securities of foreign companies.
Because these companies are comparatively small, the prices of their securities
tends to move up and down more rapidly than the securities prices of larger,
more established companies. Therefore, the price of Fund shares tends to
fluctuate more than it would if the Fund invested in the securities of larger
companies.
VIF-EQUITY INCOME FUND: The Fund normally invests at least 65% of its assets in
dividend-paying common and preferred stocks, although in recent years that
percentage has been somewhat higher. Stocks held by the Fund generally are
expected to produce a relatively high level of income and a consistent, stable
return. Although it focuses on the stocks of larger companies with a strong
record of paying dividends, the Fund also may invest in companies that have not
paid regular dividends. The Fund's equity investments are limited to stocks that
can be traded easily in the United States; it may, however, invest in foreign
securities in the form of American Depository Receipts (ADRs).
The rest of the Fund's assets are invested in debt securities, generally
corporate bonds that are rated investment grade or better. The Fund also may
invest up to 15% of its assets in lower-grade debt securities commonly known as
"junk bonds," which generally offer higher interest rates, but are riskier
investments than investment grade securities.
VIF-HEALTH SCIENCES FUND: The Fund seeks capital appreciation and invests
primarily in the equity securities of companies that develop, produce or
distribute products or services related to health care. These industries
include, but are not limited to, medical equipment or supplies, pharmaceuticals,
health care facilities, and applied research and development of new products or
services.
The Fund normally invests at least 80% of its assets in companies doing business
in the health sciences economic sector. The remainder of the Fund's assets are
not required to be invested in the sector. To determine whether a potential
investment is truly doing business in a particular sector, a company must meet
at least one of the following tests:
22
<PAGE>
- At least 50% of its gross income or its net sales must come from
activities in the sector;
- At least 50% of its assets must be devoted to producing revenues from the
sector; or
- Based on other available information, we determine that its primary
business is within the sector.
VIF-HIGH YIELD FUND: The Fund attempts to provide a high level of current
income, with growth of capital as a secondary objective.
It invests substantially all of its assets in lower-rated debt securities,
commonly called "junk bonds," and preferred stock, including securities issued
by foreign companies. Although these securities carry with them higher risks,
they generally provide higher yields - and therefore higher income - than
higher-rated debt securities.
VIF-SMALL COMPANY GROWTH FUND: The Fund attempts to make your investment grow
over the long term.
The Fund normally invests at least 80% of its assets in equity securities of
companies with market capitalizations of $1 billion or less. INVESCO uses a
bottom-up investment approach to the Fund's investment portfolio, focusing on
companies that are in the developing stages of their life cycles. Using this
approach, we try to identify companies that we believe are undervalued in the
marketplace, have earnings which may be expected to grow faster than the U.S.
economy in general, and/or offer the potential for accelerated earnings growth
due to rapid growth of sales, new products, management changes, or structural
changes in the economy. The prices of securities issued by these small companies
tend to rise and fall more rapidly than those of more established companies.
The remainder of the Fund's assets can be invested in a wide range of securities
that may or may not be issued by small companies. In addition to equity
securities, the Fund can invest in foreign securities and debt securities,
including so-called "junk bonds."
VIF-TECHNOLOGY FUND: The Fund seeks capital appreciation and invests primarily
in the equity securities of companies engaged in technology-related industries.
These include, but are not limited to, communications, computers, video,
electronics, oceanography, office and factory automation, and robotics. Many of
these products and services are subject to rapid obsolescence, which may lower
the market value of the securities of the companies in this sector.
A core portion of the Fund's portfolio is invested in market-leading technology
companies that we believe will maintain or improve their market share regardless
of overall economic conditions. These companies are usually large, established
firms which are leaders in their field and have a strategic advantage over many
of their competitors. The remainder of the Fund's portfolio consists of
faster-growing, more volatile technology companies that INVESCO believes to be
emerging leaders in their fields. The market prices of these companies tend to
rise and fall more rapidly than those of larger, more established companies.
VIF-TOTAL RETURN FUND: The Fund attempts to provide you with high total return
through both growth and current income from those investments. It normally
invests at least 30% of its assets in common stocks of companies with a strong
history of paying regular dividends and 30% of its
23
<PAGE>
assets in debt securities. Debt securities include obligations of the U.S.
Government and government agencies. The remaining 40% of the Fund is allocated
among these and other investments at INVESCO's discretion, based upon current
business, economics and market conditions.
VIF-UTILITIES FUND: The Fund seeks capital appreciation and income.
The Fund is aggressively managed. Although the Fund can invest in debt
securities, it primarily invests in equity securities that INVESCO believes will
rise in price faster than other investments, as well as options and other
investments whose value is based upon the values of equity securities.
The Fund normally invests at least 80% of its assets in companies doing business
in the utilities economic sector. The remainder of the Fund's assets are not
required to be invested in the sector. To determine whether a potential
investment is truly doing business in a particular sector, a company must meet
at least one of the following tests:
- At least 50% of its gross income or its net sales must come from
activities in the sector;
- At least 50% of its assets must be devoted to producing revenues from the
sector; or
- Based on other available information, we determine that its primary
business is within the sector.
INVESCO Funds Group, Inc. ("INVESCO") serves as the investment adviser and
principal underwriter of each of the above-mentioned funds. INVESCO's principal
business address is 7800 E. Union Avenue, Denver, Colorado 80237.
<TABLE>
<CAPTION>
============================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
- ------------------------------------------ --------------- -------------- ------------------
<S> <C> <C> <C>
INVESCO VARIABLE INVESTMENT FUNDS, INC.
VIF-Blue Chip Growth Fund (1) (2) 0.85% 0.72% 1.57%
VIF-Dynamics Fund (1) (2) 0.60% 0.85% 1.45%
VIF-Equity Income Fund (1) (2) 0.75% 0.18% 0.93%
VIF-Health Sciences Fund (1) (2) 0.75% 0.52% 1.27%
VIF-High Yield Fund (2) 0.60% 0.47% 1.07%
VIF-Small Company Growth Fund (1) (2) 0.75% 1.12% 1.87%
VIF-Technology Fund (1) (2) 0.75% 0.65% 1.40%
VIF-Total Return Fund (1) (2) 0.75% 0.42% 1.17%
VIF-Utilities Fund (1) (2) 0.60% 0.48% 1.08%
========================================== =============== ============== ==================
</TABLE>
- ----------
(1) Certain expenses of each Fund are being voluntarily absorbed by INVESCO.
If such expenses had not been voluntarily absorbed, the ratio of expenses
to average net assets for Blue Chip Growth, Dynamics, Equity Income,
Health Sciences, Small Company Growth, Technology, Total Return and
Utilities Portfolios would have been 12.29%, 15.01%, 1.17%, 4.32%, 12.67%,
6.60%, 1.24% and 1.84%, respectively.
24
<PAGE>
(2) Each Fund's actual Total Fund Operating Expenses were lower than the
figures shown, because their transfer agent fees and/or custodian fees
were reduced under expense offset arrangements. Because of SEC
requirements, the figures shown do not reflect these reductions.
JANUS ASPEN SERIES
The portfolios of the Janus Aspen Series in which the Separate Account may
currently invest and their investment objectives and fees are as follows:
AGGRESSIVE GROWTH PORTFOLIO: The investment objective of this Portfolio is
long-term growth of capital. It is a nondiversified portfolio that pursues its
investment objective by normally investing at least 50% of its equity assets in
securities issued by medium-sized companies.
BALANCED PORTFOLIO: The investment objective of this Portfolio is long-term
capital growth, consistent with preservation of capital and balanced by current
income. It is a diversified portfolio that, under normal circumstances, pursues
its objective by investing 40-60% of its assets in securities selected primarily
for their growth potential and 40-60% of its assets in securities selected
primarily for their income potential.
FLEXIBLE INCOME PORTFOLIO: The investment objective of this Portfolio is to
obtain maximum total return, consistent with preservation of capital. The
Portfolio pursues its objective primarily through investments in
income-producing securities. Total return is expected to result from a
combination of current income and capital appreciation, although income will
normally be the dominant component of total return. The Portfolio invests in
many types of income-producing securities and may have substantial holdings in
debt securities rated below investment grade.
GROWTH PORTFOLIO: The investment objective of this Portfolio is long-term growth
of capital in a manner consistent with the preservation of capital. It is a
diversified portfolio that pursues its objective by investing in common stocks
of issuers of any size. This Portfolio generally invests in larger, more
established issuers.
HIGH-YIELD PORTFOLIO: The primary investment objective of this Portfolio is to
obtain high current income. Capital appreciation is a secondary objective when
consistent with its primary objective.
INTERNATIONAL GROWTH PORTFOLIO: The investment objective of this Portfolio is
long-term growth of capital. It is a diversified portfolio that pursues its
objective primarily through investments in common stocks of issuers located
outside the United States.
WORLDWIDE GROWTH PORTFOLIO: The investment objective of this Portfolio is
long-term growth of capital in a manner consistent with the preservation of
capital. It is a diversified portfolio that pursues its objective primarily
through investments in common stocks of foreign and domestic issuers.
Janus Capital Corporation ("Janus Capital") serves as the investment adviser and
principal underwriter to each of the above-mentioned portfolios. Janus Capital's
principal business address is 100 Fillmore Street, Denver, Colorado 80206-4928.
25
<PAGE>
<TABLE>
<CAPTION>
========================================================================================
TOTAL OPERATING
EXPENSES
FUNDS MANAGEMENT OTHER (AFTER FEE WAIVERS
FEE EXPENSES AND REDUCTIONS)*
- ------------------------------------- ---------------- ------------- -------------------
<S> <C> <C> <C>
JANUS ASPEN SERIES
Aggressive Growth Portfolio 0.72% 0.03% 0.75%
Balanced Portfolio 0.72% 0.02% 0.74%
Flexible Income Portfolio 0.65% 0.08% 0.73%
Growth Portfolio 0.65% 0.03% 0.68%
High-Yield Portfolio 0.00% 1.00% 1.00%
International Growth Portfolio 0.66% 0.20% 0.86%
Worldwide Growth Portfolio 0.65% 0.07% 0.72%
===================================== ================ ============= ===================
</TABLE>
- ----------
* All expenses are stated with contractual waivers and fee reductions by
Janus Capital. Fee reductions for the Aggressive Growth, Balanced, Growth,
International Growth and Worldwide Growth Portfolios 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. Janus Capital has agreed to continue the other waivers and
fee reductions until at least the next annual renewal of the advisory
agreement. Without such waivers and fee reductions, the Total Fund Annual
Expenses would have been: 0.75% for Aggressive Growth; 0.74% for Balanced;
0.73% for Flexible Income; 0.75% for Growth; 2.11% for High-Yield; 0.95%
for International Growth; and 0.74% for Worldwide Growth Portfolios.
J.P. MORGAN SERIES TRUST II
The portfolios of the J.P. Morgan Series Trust II in which the Separate Account
may currently invest and their investment objectives and fees are as follows:
J.P. MORGAN BOND PORTFOLIO: Seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. Total return will consist
of realized and unrealized capital gains and losses plus income less expenses.
J.P. MORGAN EQUITY PORTFOLIO: Seeks to provide a high total return from a
portfolio of selected equity securities. Total return will consist of realized
and unrealized capital gains and losses plus income less expenses. The Portfolio
invests primarily in large- and medium-capitalization U.S. companies, typically
represented by the Standard & Poor's 500 Stock Index.
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO: Seeks to provide a high total
return from a portfolio of equity securities of foreign corporations. Total
return will consist of realized and unrealized capital gains and losses plus
income less expenses.
26
<PAGE>
J.P. MORGAN SMALL COMPANY PORTFOLIO: Seeks to provide a high total return from a
portfolio of small company stocks. Total return will consist of realized and
unrealized capital gains and losses plus income less expenses. The Portfolio
invests at least 65% of the value of its total assets in the common stock of
small and medium sized U.S. companies whose market capitalizations are greater
than $110 million and less than $1.5 billion.
J.P. Morgan Investment Management Inc. ("Morgan" or the "Adviser") serves as the
investment adviser to each of the above-mentioned portfolios. Morgan's principal
business address is 522 Fifth Avenue, New York, New York 10036. The Trust's
distributor is Funds Distributor, Inc. located at 60 State Street, Suite 1300,
Boston, Massachusetts 02109.
<TABLE>
<CAPTION>
==============================================================================================
TOTAL FUND ANNUAL
INVESTMENT EXPENSES
FUNDS MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
- --------------------------------------------- -------------- ------------- -------------------
<S> <C> <C> <C>
J.P. MORGAN SERIES TRUST II
J.P. Morgan Bond Portfolio (1) 0.30% 0.45% 0.75%
J.P. Morgan Equity Portfolio (1) 0.40% 0.50% 0.90%
J.P. Morgan International Opportunities
Portfolio (1) 0.60% 0.60% 1.20%
J.P. Morgan Small Company Portfolio (1) 0.60% 0.55% 1.15%
============================================= ============== ============= ===================
</TABLE>
- ----------
(1) The information in the foregoing table has been restated to reflect an
agreement by Morgan Guaranty Trust Company of New York ("Morgan
Guaranty"), an affiliate of Morgan, to reimburse the Trust to the extent
certain expenses exceed in any fiscal year 0.75%, 0.90%, 1.20% and 1.15%
of the average daily net assets of J.P. Morgan Bond Portfolio, J.P. Morgan
Equity Portfolio, J.P. Morgan International Opportunities Portfolio and
J.P. Morgan Small Company Portfolio, respectively. Without such
reimbursements, total fund annual expenses would have been 1.02% for the
J.P. Morgan Bond Portfolio, 1.48% for the J.P. Morgan Equity Portfolio,
3.26% for the J.P. Morgan International Opportunities Portfolio and 3.43%
for the J.P. Morgan Small Company Portfolio.
KEMPER VARIABLE SERIES
The portfolios of Kemper Variable Series in which the Separate Account may
currently invest (the "Kemper Series") and their investment objectives and fees
are as follows:
BLUE CHIP PORTFOLIO: Seeks growth of capital and income by investing primarily
in common stocks of well capitalized, established companies having potential for
growth of capital, earnings and dividends.
CONTRARIAN VALUE PORTFOLIO: Seeks to achieve a high rate of total return from a
diversified portfolio consisting primarily of common stocks of large U.S.
companies believed to be undervalued.
27
<PAGE>
GOVERNMENT SECURITIES PORTFOLIO: Seeks high current return consistent with
preservation of capital from a portfolio composed primarily of high quality U.S.
Government securities.
GROWTH PORTFOLIO: Seeks maximum appreciation of capital through diversification
of investment securities having the potential for capital appreciation.
HIGH YIELD PORTFOLIO: Seeks to provide a high level of current income by
investing in lower rated fixed-income securities.
HORIZON 5 PORTFOLIO: Designed for investors with approximately a 5 year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective.
HORIZON 10+ PORTFOLIO: Designed for investors with approximately a 10+ year
investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
INTERNATIONAL PORTFOLIO: Seeks total return by investing primarily in common
stocks of established non-U.S. companies that have potential for capital growth,
income or both.
INVESTMENT GRADE BOND PORTFOLIO: Seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities.
SMALL CAP GROWTH PORTFOLIO: Seeks maximum appreciation of capital primarily from
a portfolio of growth stocks of smaller companies.
SMALL CAP VALUE PORTFOLIO: Seeks long-term capital appreciation, principally
from a portfolio of equity securities of small U.S. companies believed to be
undervalued.
TOTAL RETURN PORTFOLIO: Seeks a high total return, a combination of income and
capital appreciation consistent with reasonable risk, by investing in a
combination of debt securities and common stocks.
VALUE+GROWTH PORTFOLIO: Seeks growth of capital through a portfolio of growth
and value stocks by investing primarily in a diversified portfolio of U.S.
common stocks.
The asset manager of the portfolios is Scudder Kemper Investments, Inc.
("Scudder Kemper"). Scudder Kemper's principal business address is Two
International Place, Boston, Massachusetts 02110-4103.
28
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
FUNDS OTHER TOTAL ANNUAL
MANAGEMENT FEE EXPENSES PORTFOLIO CHARGES
- --------------------------------------- ------------------ -------------- -------------------
<S> <C> <C> <C>
KEMPER VARIABLE SERIES
Blue Chip Portfolio (1) 0.65% 0.11% 0.76%
Contrarian Value Portfolio (1) 0.75% 0.03% 0.78%
Government Securities Portfolio 0.55% 0.11% 0.66%
Growth Portfolio 0.60% 0.05% 0.65%
High Yield Portfolio 0.60% 0.05% 0.65%
Horizon 5 Portfolio (1) 0.60% 0.06% 0.66%
Horizon 10+ Portfolio (1) 0.60% 0.04% 0.64%
International Portfolio 0.75% 0.18% 0.93%
Investment Grade Bond Portfolio (1) 0.60% 0.07% 0.67%
Small Cap Growth Portfolio 0.65% 0.05% 0.70%
Small Cap Value Portfolio (1) 0.75% 0.05% 0.80%
Total Return Portfolio 0.55% 0.05% 0.60%
Value + Growth Portfolio (1) 0.75% 0.03% 0.78%
======================================= ================== ============== ===================
</TABLE>
- ----------
(1) Pursuant to their respective agreements with Kemper Variable Series, the
investment manager and the accounting agent have agreed, for the one year
period commencing on the date of this prospectus, to limit their
respective fees and to reimburse other operating expenses of the following
described portfolios to the amounts set forth after the portfolio names:
Kemper Value + Growth Portfolio (.84%), Kemper Contrarian Value Portfolio
(.80%), Kemper Small Cap Value Portfolio (.84%), Kemper Horizon 5
Portfolio (.97%), Kemper Horizon 10+ Portfolio (.83%), Kemper Investment
Grade Band Portfolio (.80%), and Kemper Blue Chip Portfolio (.95%). The
amounts set forth in the table above reflect actual expenses for the past
fiscal year, which were lower than these expense limits.
LAZARD RETIREMENT SERIES, INC.
The portfolios of the Lazard Retirement Series, Inc. in which the Separate
Account may currently invest and their investment objectives and fees are as
follows:
LAZARD RETIREMENT EMERGING MARKETS PORTFOLIO: Seeks long-term capital
appreciation by investing primarily in equity securities, principally common
stocks, of non-U.S. companies whose principal activities are in emerging market
countries that the Investment Manager believes are undervalued based on their
earnings, cash flow or asset values.
LAZARD RETIREMENT EQUITY PORTFOLIO: Seeks long-term capital appreciation by
investing primarily in equity securities, principally common stocks, of
relatively large U.S. companies (those whose total market value is more than $1
billion) that the Investment Manager believes are undervalued based on their
earnings, cash flow or asset values.
29
<PAGE>
LAZARD RETIREMENT INTERNATIONAL EQUITY PORTFOLIO: Seeks long-term capital
appreciation by investing primarily in equity securities, principally common
stocks, of relatively large non-U.S. companies (those whose total market value
is more than $1 billion) that the Investment Manager believes are undervalued
based on their earnings, cash flow or asset values.
LAZARD RETIREMENT SMALL CAP PORTFOLIO: Seeks long-term capital appreciation by
investing primarily in equity securities, principally common stocks, of
relatively small U.S. companies in the range of the Russell 2000 Index that the
Investment Manager believes are undervalued based on their earnings, cash flow
or asset values.
Lazard Asset Management is a division of Lazard Freres & Co. LLC ("Lazard
Freres"), a New York limited liability company, serves as the investment manager
and principal underwriter to each of the above-mentioned portfolios. Lazard
Freres' principal business address is 30 Rockefeller Plaza, New York, New York
10112.
<TABLE>
<CAPTION>
=============================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS)
- -------------------------------------- ------------- ---------- ----------- -----------------
<S> <C> <C> <C> <C>
LAZARD RETIREMENT SERIES, INC.
Emerging Markets Portfolio (1) 1.00% 0.25% 0.35% 1.60%
Equity Portfolio (1) 0.75% 0.25% 0.25% 1.25%
International Equity Portfolio (1) 0.75% 0.25% 0.25% 1.25%
Small Cap Portfolio (1) 0.75% 0.25% 0.25% 1.25%
====================================== ============= ========== =========== =================
</TABLE>
- ----------
(1) Lazard Asset Management, the Fund's Investment Manager, agrees to
reimburse the Emerging Markets Portfolio, Equity Portfolio, International
Equity Portfolio and Small Cap Portfolio through December 31, 1999 to the
extent Total Fund Annual Expenses exceed 1.60%, 1.25%, 1.25% and 1.25%,
respectively, of the Portfolio's average daily net assets. Absent such an
agreement with the Investment Manager, the actual Total Fund Annual
Expenses for the year ended December 31, 1998 would have been: 14.37% for
the Emerging Markets Portfolio, 21.32% for the Equity Portfolio, 48.67%
for the International Equity Portfolio, and 16.20% for the Small Cap
Portfolio.
MFS(R) VARIABLE INSURANCE TRUST(sm)
The portfolios of the MFS Variable Insurance Trust in which the Separate Account
may currently invest and their investment objectives and fees are as follows:
MFS BOND SERIES: Seeks primarily to provide as high a level of current income as
is believed consistent with prudent investment risk and secondarily to protect
shareholders' capital.
MFS CAPITAL OPPORTUNITIES SERIES: Seeks capital appreciation.
MFS EMERGING GROWTH SERIES: Seeks to provide long-term growth of capital.
30
<PAGE>
MFS GLOBAL GOVERNMENT SERIES: Seeks income and capital appreciation.
MFS GROWTH WITH INCOME SERIES: Seeks to provide reasonable current income and
long-term growth of capital and income.
MFS HIGH INCOME SERIES: Seeks high current income by investing primarily in a
professionally managed diversified portfolio of fixed income securities, some of
which may involve equity features.
MFS RESEARCH SERIES: Seeks to provide long-term growth of capital and future
income.
MFS TOTAL RETURN SERIES: Seeks primarily to provide above-average income
(compared to a portfolio invested entirely in equity securities) consistent with
the prudent employment of capital, and secondarily to provide a reasonable
opportunity for growth of capital and income.
MFS UTILITIES SERIES: Seeks capital growth and current income (income above that
available from a portfolio invested entirely in equity securities).
The investment adviser for each series is Massachusetts Financial Services
Company ("MFS"). MFS' principal business address is 500 Boylston Street, Boston,
Massachusetts 02116. The principal underwriter of the series is MFS Fund
Distributors, Inc. located at 500 Boylston Street, Boston, Massachusetts 02116.
<TABLE>
<CAPTION>
================================================================================================
INVESTMENT
MANAGEMENT TOTAL FUND ANNUAL
FUNDS AND FUND OTHER EXPENSES
ADMINISTRATION EXPENSES (1) (AFTER EXPENSE
FEE REIMBURSEMENTS)
- ---------------------------------------- ------------------ ---------------- -------------------
<S> <C> <C> <C>
MFS(R) VARIABLE INSURANCE TRUST(sm)
MFS Bond Series (2) 0.60% 0.42% 1.02%
MFS Capital Opportunities Series (2) 0.75% 0.27% 1.02%
MFS Emerging Growth Series 0.75% 0.10% 0.85%
MFS Global Government Series (2) 0.75% 0.26% 1.01%
MFS Growth With Income Series 0.75% 0.13% 0.88%
MFS High Income Series (2) 0.75% 0.28% 1.03%
MFS Research Series 0.75% 0.11% 0.86%
MFS Total Return Series (2) 0.75% 0.16% 0.91%
MFS Utilities Series (2) 0.75% 0.26% 1.01%
======================================== ================== ================ ===================
</TABLE>
- ----------
(1) Each series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series with
its custodian and dividend disbursing agent. Each series may enter into
other such arrangements and directed brokerage arrangements, which would
also have the effect of reducing the series' expenses. Expenses do not
take into account these expense reductions, and are therefore higher than
the actual expenses of the series.
31
<PAGE>
(2) MFS has agreed to bear expenses for these series, subject to reimbursement
by these series, such that each such series' "Other Expenses" shall not
exceed the following percentages of the average daily net assets of the
series during the current fiscal year: 0.40% for the Bond Series, and
0.25% for each remaining series, except for the Emerging Growth Series,
the Research Series, and the Growth With Income Series, which have no such
limitation. The payments made by MFS on behalf of each series under this
arrangement are subject to reimbursement by the series to MFS, which will
be accomplished by the payment of an expense reimbursement fee by the
series to MFS computed and paid monthly at a percentage of the series'
average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the series' "Other
Expenses" will not exceed the percentage set forth above for that series.
The obligation of MFS to bear a series' "Other Expenses" pursuant to this
arrangement and the series' obligation to pay the reimbursement fee to
MFS, terminates on the earlier of the date on which payments made by the
series equal the prior payment of such reimbursable expenses by MFS or
December 31, 2004. Without such waivers and fee reductions, the Total Fund
Annual Expenses would have been: 1.23% for Bond Series; 1.11% for Capital
Opportunities Series; 1.11% for Global Government Series; 0.96% for High
Income Series; 0.91% for Total Return Series; and 0.98% for Utilities
Series Portfolios.
NEUBERGER BERMAN MANAGEMENT INC. ("NBMI")
The portfolios of the Neuberger Berman Advisers Management Trust ("AMT") in
which the Separate Account may currently invest and their investment objectives
and fees are as follows:
AMT BALANCED PORTFOLIO: Seeks long-term capital growth and reasonable current
income without undue risk to principal.
AMT GROWTH PORTFOLIO: Seeks growth of capital. To pursue this goal, the
portfolio invests mainly in stocks of mid-capitalization companies. The
portfolio seeks to reduce risk by diversifying among many companies and
industries. The managers look for fast-growing companies that are in emerging or
rapidly evolving industries.
AMT LIMITED MATURITY BOND PORTFOLIO: Seeks the highest available current income
consistent with liquidity and low risk to principal; total return is a secondary
goal. To pursue these goals, the portfolio invests mainly in investment-grade
bonds and other debt securities from U.S. government and corporate issuers.
AMT PARTNERS PORTFOLIO: Seeks growth of capital. To pursue this goal, the
portfolio invests mainly in common stocks of mid- to large-capitalization
companies. The portfolio seeks to reduce risk by diversifying among many
companies and industries. The managers look for well-managed companies whose
stock prices are believed to be undervalued.
Neuberger Berman Management Inc. ("NBMI") serves as the investment manager of
the portfolios and is also the principal underwriter of the portfolios. NBMI's
principal business address is 605 Third Avenue, New York, New York 10158-0180.
32
<PAGE>
<TABLE>
<CAPTION>
============================================================================================
INVESTMENT
MANAGEMENT/
FUNDS ADMINISTRATIVE OTHER TOTAL FUND ANNUAL
FEES EXPENSES EXPENSES
- ---------------------------------------- ------------------ ------------- ------------------
<S> <C> <C> <C>
NEUBERGER BERMAN ADVISORS
MANAGEMENT TRUST ("AMT") (1)
AMT Balanced Portfolio 0.85% 0.18% 1.03%
AMT Growth Portfolio 0.83% 0.09% 0.92%
AMT Limited Maturity Bond Portfolio 0.65% 0.11% 0.76%
AMT Partners Portfolio 0.78% 0.06% 0.84%
======================================== ================== ============= =================
</TABLE>
- ----------
(1) Neuberger Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in
a corresponding series ("Series") of Advisers Managers Trust. The figures
reported under "Investment Management/Administration Fees" include the
aggregate of the administration fees paid by the Portfolio and the
management fees paid by the corresponding Series. Similarly, the figures
reported under "Other Expenses" include all other expenses of the
Portfolio and its corresponding Series.
THE ROYCE PORTFOLIOS
The portfolios of Royce Capital Fund (Series Trust) in which the Separate
Account may currently invest and their investment objectives and fees are as
follows:
ROYCE MICRO-CAP PORTFOLIO: Seeks long-term growth of capital primarily through
investments in a broadly diversified portfolio of equity securities of micro-cap
companies (companies with stock market capitalization below $300 million).
ROYCE PREMIER PORTFOLIO: Investment objectives are primarily long-term growth
and secondarily current income. It seeks to achieve these objectives through
investments in a limited number of equity securities of small-cap companies
viewed by Royce as having superior financial characteristics and/or unusually
attractive business prospects.
ROYCE TOTAL RETURN PORTFOLIO: Investment goals are both long term growth of
capital and current income by investing in a diversified portfolio of dividend
paying securities of small and micro-cap companies selected on a value basis.
Royce & Associates, Inc. ("Royce") serves as the investment manager of the
portfolios. Royce's principal business address is 1414 Avenue of the Americas,
New York, New York 10019.
33
<PAGE>
<TABLE>
<CAPTION>
======================================================================================
TOTAL FUND ANNUAL
INVESTMENT EXPENSES
FUNDS MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
- ------------------------------------- ---------------- ------------ ------------------
<S> <C> <C> <C>
THE ROYCE PORTFOLIOS
Royce Micro-Cap Portfolio (1) 1.25% 0.10% 1.35%
Royce Premier Portfolio (1) 1.00% 0.35% 1.35%
Royce Total Return Portfolio (1) 1.00% 0.35% 1.35%
===================================== ================ ============ ==================
</TABLE>
- ----------
(1) Royce & Associates, Inc., the Funds' investment adviser, has contractually
agreed to waive its fees and reimburse expenses to the extent necessary to
maintain the Funds' Net Annual Operating Expense ratio at or below 1.35%
through December 31, 1999. Absent such waivers and fee reductions, the
Total Fund Annual Expenses would have been: 2.59% for Royce Micro-Cap;
7.05% for Royce Premier; and 18.08% for Royce Total Return Portfolios.
SCUDDER VARIABLE LIFE INVESTMENT FUND
The portfolios of the Scudder Variable Life Investment Fund in which the
Separate Account may currently invest and their investment objectives and fees
are as follows:
BALANCED PORTFOLIO: Seeks a balance of growth and income, as well as long-term
preservation of capital, from a diversified portfolio of equity and fixed income
securities.
BOND PORTFOLIO: Seeks high income from a high quality portfolio of debt
securities.
CAPITAL GROWTH PORTFOLIO: Seeks to maximize long-term capital growth from a
portfolio consisting primarily of equity securities.
GLOBAL DISCOVERY PORTFOLIO: Seeks above-average capital appreciation over the
long term by investing primarily in the equity securities of small companies
throughout the world.
GROWTH & INCOME PORTFOLIO: Seeks long-term growth of capital, current income and
growth of income from a portfolio consisting of primarily common stocks and
securities convertible into common stocks.
INTERNATIONAL PORTFOLIO: Seeks long-term growth of capital principally from
diversified holdings of marketable foreign equity investments.
The investment adviser for each portfolio is Scudder Kemper Investments, Inc.
("Scudder Kemper"). Scudder Kemper's principal business address is Two
International Place, Boston, Massachusetts 02110-4103. The principal underwriter
of the portfolios is Scudder Investor Services, Inc., a Scudder Kemper
subsidiary, located at Two International Place, Boston, Massachusetts
02110-4103.
34
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================
FUNDS MANAGEMENT 12B-1 OTHER TOTAL FUND
FEE FEE EXPENSES ANNUAL EXPENSES
- ------------------------------------- -------------- --------- ----------- ----------------
<S> <C> <C> <C> <C>
SCUDDER VARIABLE LIFE INVESTMENT
FUND-(CLASS B SHARES)
Balanced Portfolio 0.475% 0.00% 0.082% 0.56%
Bond Portfolio 0.475% 0.00% 0.094% 0.57%
Capital Growth Portfolio 0.466% 0.25% 0.037% 0.75%
Global Discovery Portfolio (1) 0.975% 0.25% 0.815% 2.04%
Growth & Income Portfolio 0.475% 0.23% 0.086% 0.79%
International Portfolio 0.867% 0.23% 0.177% 1.28%
===================================== ============== ========= =========== ================
</TABLE>
- ----------
(1) Until April 30, 1998, the Adviser has agreed to waive a portion of its
management fee to the extent necessary to limit the expenses of the Global
Discovery Portfolio to 1.50% of average daily net assets. As a result, net
1998 expenses were: management fee 0.92% and total expenses 1.98%. The
above chart shows the expenses without this expense limitation.
THE STRONG FUNDS
The Strong Funds in which the Separate Account may currently invest and their
investment objectives and fees are as follows:
STRONG DISCOVERY FUND II: Seeks capital growth by investing primarily in equity
securities that are believed to represent attractive growth opportunities. The
Fund also has the flexibility to invest in debt obligations and short-term fixed
income securities for capital appreciation potential. The fund's investment
advisor may invest in companies, regardless of size or maturity, that are poised
for accelerated earnings growth due to innovative products or services, new
management, or favorable economic or market cycles.
STRONG MID CAP GROWTH FUND II: Seeks capital growth by investing primarily in
equity securities that are believed to have above-average growth prospects. The
fund will generally invest in companies whose earnings are believed to be in a
relatively strong growth trend, and to a lesser extent, in companies in which
significant further growth is not anticipated but whose market value is thought
to be undervalued.
STRONG INTERNATIONAL STOCK FUND II: Seeks capital growth by investing primarily
in equity securities of issuers located outside the United States. The fund will
normally invest in securities of issuers in at least three different countries.
The fund attempts to deliver a competitive Risk adjusted Return by reducing the
fund's overall volatility by analyzing currencies, country allocations, and
individual stocks.
STRONG OPPORTUNITY FUND II: Seeks capital growth by investing in equity
securities emphasizing investments in medium-sized companies that the investment
advisor believes are under-researched and attractively valued. The fund's
investment advisor looks for companies with fundamental value or growth
potential that is not yet reflected in their current market prices.
35
<PAGE>
The Strong Funds are not available to California residents.
The investment adviser for each fund is Strong Capital Management, Inc.
("Strong"). Strong's principal business address is P.O. Box 2936, Milwaukee,
Wisconsin 53201. The principal underwriter of the funds is Strong Funds
Distributors, Inc., located at P.O. Box 2936, Milwaukee, Wisconsin 53201.
<TABLE>
<CAPTION>
============================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS)
- --------------------------------------------- -------------- ------------- -----------------
<S> <C> <C> <C>
THE STRONG FUNDS
Strong Discovery Fund II (1) 1.00% 0.18% 1.18%
Strong Mid Cap Growth Fund II (1) (2) 1.00% 0.20% 1.20%
Strong International Stock Fund II (1) (3) 1.00% 0.62% 1.62%
Strong Opportunity Fund II (1) 1.00% 0.16% 1.16%
============================================= ============== ============= =================
</TABLE>
- ----------
(1) Calculated on an annualized basis as of December 31, 1998 through the
fiscal year end.
(2) The Fund's advisor may from time to time voluntarily limit expenses of the
fund. During 1998, the advisor absorbed expenses of 0.24%. If these
expenses had not been absorbed, Total Fund Annual Expenses would have
equaled 1.44%.
(3) The Fund's advisor may from time to time voluntarily limit expenses of the
fund. During 1998, the advisor absorbed expenses of 0.06%. If these
expenses had not been absorbed, Total Fund Annual Expenses would have
equaled 1.68%.
T. ROWE PRICE VARIABLE FUNDS
The portfolios of the T. Rowe Price Equity Series, Inc., T. Rowe Price
International Series, Inc., and the T. Rowe Price Fixed Income Series, Inc. in
which the Separate Account may currently invest and their investment objectives
and fees are as follows:
EQUITY INCOME PORTFOLIO: Seeks to provide substantial dividend income as well as
long-term growth of capital by investing primarily in the common stocks of
established companies paying above-average dividends, with favorable prospects
for both increasing dividends and capital appreciation.
INTERNATIONAL STOCK PORTFOLIO: Seeks to provide long-term growth of capital
through investments primarily in the common stocks of established companies
based outside the United States.
LIMITED-TERM BOND PORTFOLIO: Seeks a high level of income consistent with
moderate fluctuations in principal value by investing primarily in short- and
intermediate-term investment-grade, corporate bonds.
36
<PAGE>
MID-CAP GROWTH PORTFOLIO: Seeks to provide long-term capital appreciation by
investing primarily in a diversified portfolio of common stocks of medium-sized
(mid-cap) companies whose earnings T. Rowe Price expects to grow at a faster
rate than the average company. Mid-cap companies are defined as those with a
market capitalization within the range of companies in the S&P 400 Mid-Cap
Index.
NEW AMERICA GROWTH PORTFOLIO: Seeks to provide long-term growth of capital by
investing primarily in common stocks of U.S. growth companies operating in
service industries. The portfolio invests in stocks that range from large to
small service companies expected by the fund's investment adviser to show
superior earnings growth and that are above-average performers in their fields.
PERSONAL STRATEGY BALANCED PORTFOLIO: Seeks the highest total return over time,
with an emphasis on both capital growth and income by investing in a diversified
portfolio typically consisting of 60% stocks, 30% bonds, and 10% money market
securities.
The investment manager for each portfolio, except the International Stock
Portfolio, is T. Rowe Price Associates, Inc. ("T. Rowe Price"). T. Rowe Price's
principal business address is 100 East Pratt Street, Baltimore, Maryland 21202.
Rowe Price-Fleming International Inc. ("Price-Fleming"), an affiliate of T.
Rowe Price, serves as investment adviser to the International Stock Portfolio
and its U.S. office is located at 100 East Pratt Street, Baltimore, Maryland
21202. T. Rowe Price Investment Services, Inc. serves as the principal
underwriter of the portfolios.
<TABLE>
<CAPTION>
==================================================================================================
INVESTMENT TOTAL FUND
FUNDS MANAGEMENT FEE OTHER ANNUAL EXPENSES
YEAR ENDED 12/31/98 EXPENSES YEAR ENDED 12/31/98
- ------------------------------------------- --------------------- ----------- --------------------
<S> <C> <C> <C>
T. ROWE PRICE VARIABLE FUNDS
Equity Income Portfolio (1) 0.85% 0.00% 0.85%
International Stock Portfolio (1) 1.05% 0.00% 1.05%
Limited-Term Bond Portfolio (1) 0.70% 0.00% 0.70%
Mid-Cap Growth Portfolio (1) 0.85% 0.00% 0.85%
New America Growth Portfolio (1) 0.85% 0.00% 0.85%
Personal Strategy Balanced Portfolio (1) 0.90% 0.00% 0.90%
=========================================== ===================== =========== ===================
</TABLE>
- ----------
(1) The investment management fee includes the ordinary expenses of operating
the Portfolios.
37
<PAGE>
WARBURG PINCUS PORTFOLIOS
The portfolios of Warburg Pincus Trust I and Warburg Pincus Trust II in which
the Separate Account may currently invest and their investment objectives and
fees are as follows:
WARBURG PINCUS TRUST I
EMERGING MARKETS PORTFOLIO: The goal of the Portfolio is long-term growth of
capital. To achieve this goal, the Portfolio: invests in foreign equity
securities; focuses on the world's less developed countries; and analyzes a
company's growth potential, using a bottom-up investment approach.
INTERNATIONAL EQUITY PORTFOLIO: The goal of the Portfolio is long-term capital
appreciation. To achieve this goal, the Portfolio: invests in foreign equity
securities; diversifies its investments across countries, including emerging
markets; and favors stocks with discounted valuations, using a value-based,
bottom-up investment approach.
POST-VENTURE CAPITAL PORTFOLIO: The goal of the Portfolio is long-term growth of
capital. To achieve this goal, the Portfolio: invests primarily in equity
securities of U.S. companies considered to be in their post-venture-capital
stage of development; may invest in companies of any size; and takes a growth
investment approach to identifying attractive post-venture-capital investments.
SMALL COMPANY GROWTH PORTFOLIO: The goal of the Portfolio is capital growth. To
achieve this goal, the Portfolio: invests in equity securities of small U.S.
companies; may look for either developing or older companies in a growth stage
or companies providing products or services with a high unit-volume growth rate
by using a growth investment style.
WARBURG PINCUS TRUST II
FIXED INCOME PORTFOLIO: The goal of the Portfolio is total return consistent
with prudent investment management. To achieve this goal, the Portfolio: invests
in fixed-income securities denominated primarily in U.S. dollars; normally
maintains a weighted-average portfolio maturity of 10 years or less; and favors
investment-grade securities, but may diversify credit quality in pursuit of its
goal.
GLOBAL FIXED INCOME PORTFOLIO: The goal of the Portfolio is total return
consistent with prudent management, consisting of a combination of interest
income, currency gains and capital appreciation. To achieve this goal, the
Portfolio: invests in U.S. and foreign fixed-income securities denominated in
various currencies; favors investment-grade securities, but may diversify credit
quality in pursuit of its goal; and makes investment decisions based on
fundamental market factors, currency trends and credit quality.
The investment adviser for each portfolio is Warburg Pincus Asset Management,
Inc. ("Warburg"). Warburg's principal business address is 466 Lexington Avenue,
New York, New York 10017-3147. The principal underwriter of the portfolios is
Counsellors Securities, Inc., a Warburg subsidiary, located at 466 Lexington
Avenue, New York, New York 10017-3147.
38
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================
Total Fund
Investment Annual Expenses
PORTFOLIOS Management Other (After Expense
Fee Expenses Reimbursements)
- ------------------------------------- ---------------- ------------- ----------------
<S> <C> <C> <C>
WARBURG PINCUS TRUST I
Emerging Markets Portfolio (1) 0.20% 1.20% 1.40%
International Equity Portfolio 1.00% 0.33% 1.33%
Post-Venture Capital Portfolio (1) 1.08% 0.32% 1.40%
Small Company Growth Portfolio 0.90% 0.24% 1.14%
WARBURG PINCUS TRUST II
Fixed Income Portfolio (2) 0.20% 0.79% 0.99%
Global Fixed Income Portfolio (2) 0.48% 0.51% 0.99%
===================================== ================ ============= ================
</TABLE>
- ----------
(1) Absent the waiver of fees and reimbursement of expenses by the Portfolio's
investment adviser and co-administrator, the investment management fee
would have equaled 1.25% and 1.25%; other expenses would have equaled
6.96% and 0.45%; and total fund annual expenses would have equaled 8.21%
and 1.70% for the Emerging Markets and Post-Venture Capital Portfolios,
respectively, based on actual fees and expenses for the fiscal year ended
December 31, 1998. Fee waivers and expense reimbursements or credits may
be discontinued at any time.
(2) Absent the waiver of fees and reimbursement of expenses by the Portfolio's
investment adviser and co-administrator, investment management fees would
have equaled 0.50% and 1.00%, other expenses would have equaled 4.82% and
2.99% and total portfolio annual expenses would have equaled 5.32% and
3.99% for the Fixed Income and Global Fixed Income Portfolios,
respectively, based on actual fees and expenses for the fiscal year ended
December 31, 1998. Fee waivers and expense reimbursements or credits may
be discontinued at any time.
CERTAIN FUNDS HAVE INVESTMENT OBJECTIVES AND POLICIES CLOSELY RESEMBLING THOSE
OF MUTUAL FUNDS WITHIN THE SAME COMPLEX THAT ARE SOLD DIRECTLY TO INDIVIDUAL
INVESTORS. DESPITE SUCH SIMILARITIES, THERE CAN BE NO ASSURANCE THAT THE
INVESTMENT PERFORMANCE OF ANY SUCH FUND WILL RESEMBLE THAT OF ITS RETAIL FUND
COUNTERPART.
YOU WILL RECEIVE A PROSPECTUS FOR EACH AVAILABLE FUND. THAT PROSPECTUS WILL
DESCRIBE THE FUND, ITS INVESTMENT OBJECTIVE AND STRATEGIES, ITS RISKS, AND ITS
MANAGEMENT FEES AND OTHER EXPENSES. YOU SHOULD READ THE FUND PROSPECTUSES
TOGETHER WITH THIS PROSPECTUS AND SUPPLEMENT. AS WITH ALL MUTUAL FUNDS, A FUND
MAY NOT MEET ITS INVESTMENT OBJECTIVE. SUBJECT TO APPLICABLE LAW, PRUDENTIAL MAY
STOP OFFERING ONE OR MORE FUNDS OR MAY SUBSTITUTE A DIFFERENT MUTUAL FUND FOR
ANY FUND.
EACH FUND HAS PROVIDED PRUDENTIAL WITH INFORMATION ABOUT ITS MANAGEMENT FEES AND
OTHER EXPENSES. EXCEPT FOR THE SERIES FUND, PRUDENTIAL HAS NOT VERIFIED THAT
INFORMATION INDEPENDENTLY.
39
<PAGE>
ILLUSTRATIONS OF DEATH BENEFITS AND CASH SURRENDER VALUES
On the next several pages, we show you two examples of how the Death Benefit and
the Cash Surrender Value of your Certificate can change as a result of the
performance of the investment options you select. The examples are not our
prediction of how value will grow. They are hypothetical examples and are just
intended to show you how a Certificate works.
We call these examples "ILLUSTRATIONS." The illustrations are based on several
ASSUMPTIONS about the age of the Participant, the amount of insurance, and the
rules of your Group Contract.
ASSUMPTIONS WE USED FOR BOTH ILLUSTRATIONS
Here's what we assumed about the Certificate in both illustrations:
o The Participant was 40 years old when he or she bought the Group Variable
Universal Life Insurance Certificate.
o The Face Amount of insurance under the Certificate is $100,000.
o The Participant paid a premium of $1,200 when the Certificate was first
issued. He or she pays the same premium amount each year on the
Certificate Anniversary.
ILLUSTRATION #1
In Illustration #1, we assumed that the CURRENT CHARGES Prudential deducts would
stay the same as long as the Certificate remains in effect. Accordingly, we
assumed the following charges:
o The charge deducted from each premium payment for taxes on premium
payments is 2.6%.
o Prudential deducts no sales charge from premium payments.
o Prudential deducts no processing charge from premium payments.
o Each month, Prudential deducts a $3 charge for administrative expenses.
o Prudential deducts a charge equal to an annual rate of 0.45% for mortality
and expense risks.
o Prudential does not deduct a surrender charge.
o The Participant has current standardized cost of insurance charges from
the following table, which is excerpted from Table I under Section 79 of
the Internal Revenue Code:
40
<PAGE>
MONTHLY CURRENT COST
OF INSURANCE RATES
=================================
AGE RATE PER THOUSAND
DOLLARS OF
INSURANCE
------------ --------------------
40 to 44 $0.17
45 to 49 $0.29
50 to 54 $0.48
55 to 59 $0.75
60 to 64 $1.17
65 to 69 $2.10
70 to 79 $3.76
------------ --------------------
ILLUSTRATION #2
In Illustration #2, we changed our assumptions about the charges Prudential will
deduct from the Certificate. Instead of current charges, we assumed that the
MAXIMUM CHARGES permitted under the Group Contract would be made.
Here's what we assumed:
o The charge deducted from each premium payment for taxes on premium
payments is 2.6%. (Since Prudential would increase this charge only if a
state increases its tax charge to us, we left this charge at the current
level.)
o Prudential deducts a sales charge equal to 3.5% from each premium payment.
o Prudential deducts a processing charge of $2 from each premium payment.
o Each month, Prudential deducts a $6 charge for administrative expenses.
o Prudential deducts a charge equal to an annual rate of 0.90% for mortality
and expense risks.
o The Participant has cost of insurance charges equal to the maximum rates.
(The maximum rates that Prudential can charge are 150% of the 1980
Commissioner's Standard Ordinary Mortality Table [Male], Age Last Birthday
(the "1980 CSO")).
o Prudential deducts a charge upon surrender equal to the lesser of $20 or
2% of the amount surrendered.
41
<PAGE>
ASSUMPTIONS ABOUT HOW THE CERTIFICATE FUND WAS INVESTED
We assumed that the Certificate Fund was invested in equal amounts in each of
the 131 Funds available under Group Variable Universal Life Insurance. (We used
all 131 only for the purpose of this illustration. As we told you earlier in
this prospectus, Prudential will permit each Group Contractholder to make no
more than 20 Funds available to its Participants.)
Each illustration shows three different assumptions about the investment
performance - or "investment return" - of the Funds. The three different
assumptions are:
o gross annual rate of return is 0%
o gross annual rate of return is 4.5%
o gross annual rate of return is 9%
These are only assumptions to show how the Death Benefit and Cash Surrender
Value change depending on the investment return. Actual investment return will
depend on the investment options you select and will vary from year to year.
WALKING THROUGH THE ILLUSTRATIONS
Here's what to look for in the illustrations:
o The first column shows the CERTIFICATE YEAR.
o The second column gives you some CONTEXT FOR COMPARING the investment
return under the Certificate to the return you might expect from a savings
account. It shows the amount you would accumulate if you invested the same
premiums in a savings account paying a 4% effective annual rate. (Of
course, unlike the Certificate, a savings account does not offer life
insurance protection.)
o The next three columns show what the DEATH BENEFIT would be for each of
the three investment return assumptions (0%, 4.5% and 9%).
o The last three columns show what the CASH SURRENDER VALUE would be for
each of the three investment return assumptions (0%, 4.5% and 9%).
You should note that:
o Both "gross" and "net" investment returns are shown.
42
<PAGE>
o "Gross" investment return reflects the combined effect of both income on
the investment and capital gains. It is the amount of return before
Prudential takes out any of its charges and before any Fund investment
management fees and other expenses are taken out.
o "Net" investment return is the amount of the investment return after
Prudential takes out its charges and after Fund investment management fees
and other expenses are taken out. Since Illustration #1 and Illustration
#2 use different assumptions about charges, the "net" investment returns
for each illustration are different. For some of the Funds, the Fund's
investment advisor or other entity is absorbing certain of the Fund's
expenses. In deriving net investment return, we used those reduced Fund
expenses.
- Fund investment management fees and other expenses were assumed to
equal 0.94% per year, which was the average Fund expense in 1998.
- For Illustration #1, Prudential's mortality and expense risk charges
are 0.45% per year. (In Illustration #1, we assumed that Prudential's
current charges are in effect.) So, including both Fund expenses and
the mortality and expense risk charges, gross returns of 0%, 4.5% and
9% become net returns of -1.39%, 3.11% and 7.61%.
- For Illustration #2, Prudential's mortality and expense risk charges
are 0.90% per year. (In Illustration #2, we assumed that Prudential's
maximum charges are in effect.) So, including both Fund expenses and
the mortality and expense risk charges, gross returns of 0%, 4.5% and
9% become net returns of -1.84%, 2.66% and 7.16%.
o The Death Benefits and Cash Surrender Values are shown with all of
Prudential's charges and Fund investment management fees and other
expenses taken out.
o We assumed no loans or partial withdrawals were taken.
o Neither illustration reflects Dividends or Experience Credits.
IF YOU ASK, PRUDENTIAL WILL GIVE YOU A SIMILAR ILLUSTRATION FOR A CERTIFICATE
THAT SHOWS YOUR AGE, RISK CLASS, PROPOSED FACE AMOUNT OF INSURANCE, AND PROPOSED
PREMIUM PAYMENTS. WE REFER TO THIS AS A "PERSONALIZED ILLUSTRATION."
WE SHOW THESE RATES OF INVESTMENT RETURN ONLY TO HELP YOU UNDERSTAND HOW THE
CERTIFICATE WORKS. YOU SHOULD NOT ASSUME THAT THE INVESTMENT RATES OF RETURN ARE
ACTUAL RATES OF RETURN. YOU SHOULD ALSO NOT ASSUME THAT THESE RATES ARE EXAMPLES
OF PAST OR FUTURE INVESTMENT PERFORMANCE. NEITHER PRUDENTIAL NOR THE FUNDS CAN
TELL YOU WHETHER THESE RATES OF INVESTMENT RETURN CAN ACTUALLY BE ACHIEVED.
THE ACTUAL RATES OF INVESTMENT RETURN FOR YOUR CERTIFICATE WILL DEPEND ON HOW
THE INVESTMENT OPTIONS THAT YOU CHOOSE PERFORM. YOU MAY EARN MORE OR LESS THAN
WHAT IS SHOWN IN THE ILLUSTRATION.
43
<PAGE>
THE DEATH BENEFITS AND CASH SURRENDER VALUES WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATE OF RETURN FOR A CERTIFICATE YEAR VARIED ABOVE OR BELOW THE
AVERAGE, HYPOTHETICAL RATES OF 0%, 4.5% AND 9%.
44
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #1
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 40
ASSUME PAYMENT OF $1,200 ANNUAL PREMIUMS FOR ALL YEARS
USING CURRENT EXPENSE CHARGES
Death Benefit (1) Cash Surrender Value (1)
------------------------------------------------- -------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums ------------------------------------------------- -------------------------------------------------
Certificate Accumulated 0% Gross 4.5% Gross 9% Gross 0% Gross 4.5% Gross 9% Gross
Year at 4% per year (-1.39%) Net (3.11% Net) (7.61% Net) (-1.39%) Net (3.11% Net) (7.61% Net)
---- ------------- -------------- --------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $1,248 $100,914 $100,961 $101,008 $914 $961 $1,008
2 2,546 101,816 101,952 102,093 1,816 1,952 2,093
3 3,896 102,705 102,974 103,260 2,705 2,974 3,260
4 5,300 103,582 104,028 104,516 3,582 4,028 4,516
5 6,760 104,446 105,114 105,868 4,446 5,114 5,868
6 8,278 105,156 106,088 107,172 5,156 6,088 7,172
7 9,857 105,856 107,092 108,576 5,856 7,092 8,576
8 11,499 106,546 108,127 110,087 6,546 8,127 10,087
9 13,207 107,226 109,195 111,712 7,226 9,195 11,712
10 14,984 107,897 110,295 113,462 7,897 10,295 13,462
15 24,989 110,015 115,100 123,039 10,015 15,100 23,039
20 37,163 110,425 118,948 134,896 10,425 18,948 34,896
25 51,974 108,376 120,705 148,952 8,376 20,705 48,952
30 69,994 0 (2) 116,715 162,473 0 (2) 16,715 62,473
35 91,918 0 0 (2) 169,916 0 0 (2) 69,916
40 118,592 0 0 180,656 0 0 80,656
(1) Assumes no loan or partial withdrawal has been made.
(2) Based on the interest rate and charges illustrated, the premiums paid are insufficient to keep the certificate in force. The
certificate would lapse under this scenario.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4.5%, AND 9% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
T1
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #2
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 40
ASSUME PAYMENT OF $1,200 ANNUAL PREMIUMS FOR ALL YEARS
USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1)
------------------------------------------------ -----------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums ------------------------------------------------ -----------------------------------------------
Certificate Accumulated 0% Gross 4.5% Gross 9% Gross 0% Gross 4.5% Gross 9% Gross
Year at 4% per year (-1.84%) Net (2.66% Net) (7.16% Net) (-1.84%) Net (2.66% Net) (7.16% Net)
----- --------------- -------------- ------------- -------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $1,248 $100,564 $100,601 $100,639 $553 $589 $626
2 2,546 101,079 101,179 101,283 1,059 1,159 1,263
3 3,896 101,539 101,726 101,926 1,519 1,706 1,906
4 5,300 101,945 102,240 102,566 1,925 2,220 2,546
5 6,760 102,293 102,717 103,200 2,273 2,697 3,180
6 8,278 102,580 103,149 103,821 2,560 3,129 3,801
7 9,857 102,805 103,535 104,428 2,785 3,515 4,408
8 11,499 102,964 103,869 105,013 2,944 3,849 4,993
9 13,207 103,055 104,145 105,572 3,035 4,125 5,552
10 14,984 103,073 104,354 106,096 3,053 4,334 6,076
15 24,989 101,731 103,944 107,662 1,711 3,924 7,642
20 37,163 0 (2) 0 (2) 105,703 0 (2) 0 (2) 5,683
25 51,974 0 0 0 (2) 0 0 0 (2)
30 69,994 0 0 0 0 0 0
35 91,918 0 0 0 0 0 0
40 118,592 0 0 0 0 0 0
(1) Assumes no loan or partial withdrawal has been made.
(2) Based on the interest rate and charges illustrated, the premiums paid are
insufficient to keep the certificate in force. The certificate would lapse
under this scenario.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4.5%, AND 9% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
T2
<PAGE>
PROSPECTUS
May 1, 1999
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI - 2
GROUP VARIABLE UNIVERSAL LIFE INSURANCE
This document is a prospectus. It tells you about a GROUP VARIABLE UNIVERSAL
LIFE INSURANCE contract issued by The Prudential Insurance Company of America
("Prudential," "we," "our," or "us") for group insurance sponsored by the
American Institute of Certified Public Accountants ("AICPA") Insurance Trust.
Prudential has issued the Group Contract to Bankers Trust Company, as Trustee of
the AICPA Insurance Trust. We refer in this prospectus to Bankers Trust Company
as "your Group Contractholder."
We will give a Certificate to each Eligible Group Member or Applicant Owner who
buys coverage under the Group Contract. We will refer to each person who buys
coverage as a "Participant." When we use the terms "you" or "your," we mean a
Participant.
The Group Contract and Certificates provide life insurance protection with
flexible premium payments and a choice of underlying investment options. The
Death Benefit and Cash Surrender Value will change daily, depending on the
performance of the investment options you select. The Death Benefit will usually
not be less than the Face Amount of the Certificate. Surrenders, partial
withdrawals and loans are available but certain rules and limits apply to how
they work.
We have tried to make this prospectus easy to understand. Still, the meaning of
some terms are special because they describe concepts used mostly in insurance
contracts. To help you understand what these terms mean, we added a DEFINITIONS
OF SPECIAL TERMS section on page 55. It's easy to recognize a defined term - we
capitalize them.
A WORD ABOUT REPLACING YOUR LIFE INSURANCE. You should know that, most times, it
is not in your best interest to replace one life insurance policy with another
one. When you need additional life insurance, it is usually better for you to
add coverage - either by asking for a new policy or by buying additional
insurance - than it is for you to replace a policy. In that way, you don't lose
benefits under the policy you already have.
If you are thinking about replacing a life insurance policy you already have so
that you can obtain Group Variable Universal Life Insurance, you should consider
your choices carefully. Compare the costs and benefits of adding coverage to
your current policy against the costs and benefits of Group Variable Universal
Life Insurance. You should also get advice from a tax advisor.
YOU SHOULD READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. THIS
DOCUMENT WILL BE FOLLOWED BY PROSPECTUSES FOR EACH OF THE AVAILABLE FUNDS.
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES, OR DETERMINED THAT 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) 562-9874
The SEC maintains a Web site (http://www.sec.gov) that contains material
incorporated by reference and other information regarding issuers that file
electronically with the SEC. You may also obtain and copy information at the
SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for
information. You may obtain copies of available information upon payment of a
duplicating fee by writing the Public Reference Section of the SEC, Washington,
D.C. 20549-6009.
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
The Prudential Variable Contract Account GI-2 (called the "Separate Account")
has a number of variable investment options, ten of which are currently
available to Participants. We call each option a "Subaccount." We will invest
the assets of each Subaccount in The Prudential Series Fund, Inc. (called the
"Series Fund") or in certain other mutual fund portfolios. When we refer to
"Funds" in this prospectus, we mean all or any of these funds.
Participants may choose as investment options from among the ten Funds selected
by your Group Contractholder. Participants may also choose to invest in the
Fixed Account. (The Fixed Account is an investment option for which Prudential
guarantees that the effective annual interest rate will be at least 4%.) Your
Group Contractholder may, in the future, select up to ten additional Funds that
would then be available to Participants.
Once you select the investment options you want, Prudential will direct your
premium payments to the Subaccount associated with those Funds or to the Fixed
Account.
We describe the ten Funds chosen by your Group Contractholder briefly in the
section called "THE FUNDS." It starts on page 14. We will send you a prospectus
for each Fund. The Fund prospectuses tell you about the objectives and policies
for each Fund, as well as about the risks of investing in each Fund.
<PAGE>
TABLE OF CONTENTS
PAGE
BRIEF DESCRIPTION OF THE GROUP CONTRACT AND CERTIFICATE...................... 1
ILLUSTRATIONS OF DEATH BENEFITS AND CASH SURRENDER VALUES.................... 8
GENERAL INFORMATION ABOUT PRUDENTIAL, THE PRUDENTIAL
VARIABLE CONTRACT ACCOUNT GI-2, AND THE VARIABLE
INVESTMENT OPTIONS UNDER THE CERTIFICATES................................. 13
The Prudential Insurance Company of America........................... 13
The Prudential Variable Contract Account GI-2......................... 14
THE FUNDS................................................................... 14
Fund Names and Objectives............................................. 14
Fund Fees and Expenses................................................ 17
Fund Advisers .................................................... 18
The Fixed Account..................................................... 19
DETAILED INFORMATION ABOUT THE CERTIFICATES................................. 20
How Prudential Issues Certificates.................................... 20
A "Free Look" Period.................................................. 21
Procedures............................................................ 21
Premiums.............................................................. 21
Effective Date of Insurance........................................... 22
How Prudential Will Deposit and Invest Premium Payments............... 22
How You Can Change the Way Prudential Allocates
Future Premium Payments............................................ 23
How You Can Transfer Amounts in Your Certificate Fund
from One Investment Option to Another.............................. 24
Dollar Cost Averaging................................................. 24
Death Benefits........................................................ 25
Changes in Face Amount................................................ 28
Charges and Expenses.................................................. 30
Dividends or Experience Credits....................................... 32
Cash Surrender Value.................................................. 33
Full Surrenders....................................................... 33
Paid-up Coverage...................................................... 34
Partial Withdrawals................................................... 34
Loans................................................................. 35
Lapse................................................................. 36
Termination of the Group Contractholder's Participation
in the Group Contract37 Participants Who Are No Longer
Eligible Group Members................................................ 37
Options on Termination of Coverage.................................... 38
Reinstatement......................................................... 39
ii
<PAGE>
Tax Treatment of Certificate Benefits................................. 40
When Proceeds Are Paid................................................ 42
Beneficiary........................................................... 43
Incontestability...................................................... 43
Misstatement of Age................................................... 43
Suicide Exclusion..................................................... 44
Modes of Settlement................................................... 44
Assignment............................................................ 45
Applicant Owner Provision............................................. 46
Voting Rights......................................................... 46
Substitution of Fund Shares........................................... 47
Additional Insurance Benefits......................................... 48
Reports............................................................... 49
Sale of the Contract.................................................. 49
Ratings and Advertisements............................................ 50
State Regulation...................................................... 50
Experts............................................................... 51
Litigation............................................................ 51
The Year 2000 Issue................................................... 52
Subsequent Events..................................................... 54
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS........................ 55
DIRECTORS AND OFFICERS OF PRUDENTIAL........................................ 58
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2....... A1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA AND SUBSIDIARIES...................................... B1
YOU SHOULD NOT CONSIDER THIS PROSPECTUS TO BE AN OFFERING IN ANY JURISDICTION
WHERE AN OFFERING MAY NOT BE LAWFULLY MADE. YOU SHOULD RELY ON THE INFORMATION
CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT.
iii
<PAGE>
BRIEF DESCRIPTION OF THE GROUP CONTRACT AND CERTIFICATE
In this section of the prospectus, we answer some questions that are frequently
asked about Group Variable Universal Life Insurance issued under the AICPA
Insurance Trust. You can find more detailed information on later pages of the
prospectus.
The Group Contract and Certificate provide even more detailed information. You
will get a Certificate if you buy the Group Variable Universal Life Insurance.
WHAT IS THE GROUP VARIABLE UNIVERSAL LIFE INSURANCE CONTRACT?
It is the insurance contract issued by Prudential to Bankers Trust Company, as
trustee of the AICPA Insurance Trust.
The Group Contract states all the terms of the agreement between Prudential and
the sponsoring group. It forms the entire agreement between them. Among other
things, the Group Contract defines which members of the group are eligible to
buy the Group Variable Universal Life Insurance. Eligible Group Members may buy
coverage for certain dependents.
We will give a Certificate to each Eligible Group Member or Applicant Owner who
buys coverage under the Group Contract. The Certificate provides for a Death
Benefit and a Cash Surrender Value. The Death Benefit and the Cash Surrender
Value can change every day. They change based on the performance of the
investment options you selected.
On the date of the Contract Anniversary, if all required premium payments have
been paid for the year and the Group Contract remains in force, Prudential will
determine whether a divisible surplus exists. If a divisible surplus exists,
Prudential will determine the share to allocate to the Group Contract. You will
receive your portion of the divisible surplus in the form of an annual refund
that ordinarily will be applied as a premium payment. However, you may choose to
receive your refund in cash by notifying Aon Securities Corporation in writing.
HOW DOES PRUDENTIAL CALCULATE THE CERTIFICATE'S DEATH BENEFIT?
When you buy Group Variable Universal Life Insurance, you will choose a Face
Amount of insurance, based on the amounts available for your group. Prudential
will calculate the Death Benefit like this:
o The DEATH BENEFIT is the Face Amount of insurance PLUS the value of your
Certificate Fund on the date of your death MINUS any Certificate Debt and
outstanding charges.
1
<PAGE>
(In some cases, we will increase the Death Benefit to an amount that is more
than the Face Amount plus the value of the Certificate Fund. We will do that to
make sure that the Certificate meets the definition of "life insurance" under
the Internal Revenue Code. We will still deduct any Certificate Debt and
outstanding charges.)
The CERTIFICATE FUND consists of the Net Premiums that we invest in the
investment options you selected. Prudential will deduct its charges for the
insurance from the Certificate Fund. The value of the Certificate Fund will
change each day based on the performance of those investment options and to
reflect the deduction of daily charges.
See the DEATH BENEFITS section on page 25.
HOW DOES PRUDENTIAL CALCULATE THE CASH SURRENDER VALUE OF THE CERTIFICATE?
Prudential calculates the Cash Surrender Value of a Certificate like this:
o The CASH SURRENDER VALUE is the value of the Certificate Fund on the day of
the surrender MINUS any Certificate Debt and outstanding charges.
See the CASH SURRENDER VALUE section on page 33.
WHAT PREMIUMS MUST I PAY?
You can usually choose how often you pay premiums and the amount of premiums.
Prudential will keep your insurance in force as long as the balance in your
Certificate Fund is enough to pay the charges that are due to Prudential each
month. Prudential also requires you to pay an initial premium for the cost of
coverage for the first two months.
If the balance in your Certificate Fund is not enough to pay any month's
charges, you must make a premium payment that is enough to bring your
Certificate Fund balance above this minimum amount. You must make that payment
during the grace period. If you don't, your insurance coverage will end.
See the PREMIUMS section on page 21.
WHAT INVESTMENT OPTIONS ARE AVAILABLE?
The Separate Account has ten Subaccounts currently available to Participants. We
invest the assets of each Subaccount in its corresponding Fund.
We will not permit your Group Contractholder to substitute other Funds for the
ten Funds it has already selected. However, in the future your Group
Contractholder may select up to ten additional Funds.
2
<PAGE>
You may invest only in the Funds chosen by your Group Contractholder and in the
Fixed Account. (The Fixed Account is an investment option for which Prudential
guarantees that the effective annual interest rate will be at least 4%. See THE
FIXED ACCOUNT section on page 19.)
See THE FUNDS section on page 14. Each Fund prospectus provides more detailed
information about the specific Fund.
DOES GROUP VARIABLE UNIVERSAL LIFE INSURANCE OFFER CHOICE AND FLEXIBILITY IN THE
AMOUNT OF INSURANCE PROTECTION I CAN GET?
Yes. The Death Benefit under a Certificate includes, among other things, the
value of your Certificate Fund. The value of your Certificate Fund will vary
with the investment performance of the investment options you select. So, your
Death Benefit could grow more than it could under a certificate that does not
include investment options. But, the Death Benefit may also go down if the
investment options in your Certificate Fund have poor investment performance.
You choose how to invest the amount you have in your Certificate Fund. You may
choose more aggressive Funds or less aggressive Funds. What you choose depends
on your personal circumstances and your investment objectives and how they may
change over time.
If you prefer to avoid or reduce the risks that come with investing in the
Funds, you can choose to direct some or all of the amount in your Certificate
Fund to the Fixed Account. Prudential guarantees that the part of your
Certificate Fund that is directed to the Fixed Account will earn interest daily
at a rate that Prudential declares periodically. That rate will change from time
to time, but it will never be lower than 4%. See THE FIXED ACCOUNT section on
page 19.
WHAT CHARGES DOES PRUDENTIAL MAKE?
We deduct certain charges from each premium payment that you make and from the
amounts that are held in each investment option. These charges compensate us for
insurance costs, risks, and expenses.
All charges made by Prudential are described in detail in the CHARGES AND
EXPENSES section on page 30. This chart briefly outlines the charges that may be
made:
3
<PAGE>
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YOU MAKE A PREMIUM PAYMENT.
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THEN, PRUDENTIAL DEDUCTS:
o A CHARGE FOR TAXES ON PREMIUM PAYMENTS. Currently, this charge is 2.5%.
(In some states, this charge is known as a premium-based administrative
charge.)
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The remainder is your NET PREMIUM
This is the amount that you can invest in one or more of the investment
options selected by your Group Contractholder.
------------------------------------------------------------------------------
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DAILY CHARGES
After your Net Premium is directed to your investment option(s), Prudential
deducts these DAILY CHARGES from the Subaccounts (but not from the Fixed
Account):
o A DAILY CHARGE for mortality and expense risks. This charge is deducted
from the assets of the Subaccount(s) that correspond to the Fund(s) you
selected.
Currently, this charge is equivalent to an effective annual rate of 0.45%.
Prudential guarantees that this charge will not be more than an effective
annual rate of 0.90%.
o A DAILY CHARGE for investment management fees and expenses. These
charges are deducted from the assets of the Fund(s) you selected. The
Funds set these charges.
In 1998, the total expenses (after expense reimbursement) of the Funds ranged
from 0.37% to 1.91% of their average net assets.
------------------------------------------------------------------------------
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MONTHLY CHARGES
Prudential deducts these charges from your Certificate Fund each month:
o A CHARGE FOR THE COST OF INSURANCE.
o Currently, there is no monthly ADMINISTRATIVE EXPENSE CHARGE. Prudential
reserves the right to deduct such a charge in the future, but such a
charge will not exceed $4 per month.
------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
POSSIBLE ADDITIONAL CHARGES
Your Group Contract also permits Prudential to make the following TRANSACTION
CHARGES:
o When you make a WITHDRAWAL from your Certificate Fund. The charge is $10
or 2% of the amount you withdraw, whichever amount is less. Prudential may
increase this charge in the future, but it will not exceed $20.
o Each time you request an additional statement about your Certificate Fund.
The charge is $10. Prudential may increase this charge in the future, but
it will not exceed $20.
o When you request MORE THAN 12 TRANSFERS BETWEEN INVESTMENT OPTIONS in a
Certificate Year. The charge is $10 for each transfer after the 12th one.
Prudential may increase this charge in the future, but it will not exceed
$20.
Prudential does not assess a charge for any taxes that may be imposed on the
operations of the Separate Account, but reserves the right to do so.
- --------------------------------------------------------------------------------
CAN I MAKE WITHDRAWALS FROM THE CERTIFICATE FUND?
Yes. You may request a partial withdrawal from the Certificate Fund. You may
also surrender your insurance and receive its Cash Surrender Value. See the
PARTIAL WITHDRAWALS section on page 34 and the FULL SURRENDERS section on page
33.
CAN I TAKE LOANS?
Yes. You may borrow money from your Certificate Fund. The Loan Value, which is
the maximum amount you may borrow, is 90% of your Certificate Fund minus any
existing loan (and its accrued interest), outstanding charges, and the amount of
the next month's charges. In states that require it, you may borrow a greater
amount.
When you take a loan from your Certificate Fund, here's what happens:
o The amount of the loan is transferred from your investment options to a
Loan Account. This Loan Account is still part of your Certificate Fund.
o The Loan Account earns interest at an effective annual rate equal to the
crediting rate of the Fixed Account, which will never be less than 4%.
Generally, the interest rate Prudential charges on the loan will range
from 1% to 2% greater than the rate of interest Prudential will credit
to your Loan Account. Currently, the interest rate on the loan is 1%
greater than the interest Prudential will credit to your Loan Account.
5
<PAGE>
The term "Certificate Debt" is used to mean any outstanding loan plus its
accrued interest. Certificate Debt is deducted from any amount payable at the
Covered Person's death. It is also deducted from the Certificate's Cash
Surrender Value.
HOW IS MY INSURANCE COVERAGE AFFECTED WHEN I AM NO LONGER A MEMBER OF THE GROUP?
You may surrender the insurance for its Cash Surrender Value, elect to use the
Cash Surrender Value to buy Paid-up Coverage, or convert the insurance to an
individual life insurance policy.
See the OPTIONS ON TERMINATION OF COVERAGE section on page 38.
WHAT IS THE FEDERAL INCOME TAX STATUS OF AMOUNTS RECEIVED UNDER THE CERTIFICATE?
Variable life insurance contracts receive the same Federal income tax treatment
as conventional life insurance contracts (those where the amount of the death
benefit is fixed instead of variable).
Here's what that means:
o First, the Death Benefit is generally not included in the gross income
of the beneficiary.
o Second, increases in the value of the Certificate Fund are generally not
included in the taxable income of the Participant. This is true whether
the increases are from income or capital gains.
o Third, surrenders and partial withdrawals are generally treated first as
a return of your investment in the Certificate and then as a
distribution of taxable income.
o Fourth, loans are not generally treated as distributions.
See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page 40. You should
consult your tax advisor for guidance on your specific situation.
WHAT ARE THE FUNDS' CHARGES?
The following table summarizes the fee and expense information for the available
Funds. For more information about the Funds, see THE FUNDS section on page 14.
6
<PAGE>
================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS)(1)
- --------------------------- ------------- ------- ---------- -------------------
THE PRUDENTIAL SERIES
FUND, INC.
Equity Portfolio (2) 0.45% - 0.02% 0.47%
Flexible Managed Portfolio (2) 0.60% - 0.01% 0.61%
Money Market Portfolio (2) 0.40% - 0.01% 0.41%
Stock Index Portfolio (2) 0.35% - 0.02% 0.37%
DREYFUS FUNDS
Small Cap Portfolio 0.75% - 0.02% 0.77%
FRANKLIN(R) TEMPLETON(R):
TEMPLETON VARIABLE PRODUCTS
SERIES FUND (CLASS 2 SHARES)
Developing Markets Fund (3) 1.25% 0.25% 0.41% 1.91%
Templeton International
Fund (3) 0.69% 0.25% 0.17% 1.11%
KEMPER VARIABLE SERIES
High Yield Portfolio 0.60% - 0.05% 0.65%
MFS(R) VARIABLE INSURANCE
TRUST(SM)
MFS Research Series (4) 0.75% - 0.11% 0.86%
- --------------------------- ------------- ------- ---------- -------------------
NEUBERGER BERMAN ADVISERS
MANAGEMENT TRUST
("AMT") (5)
AMT Limited Maturity Bond
Portfolio 0.65% - 0.11% 0.76%
=========================== ============= ======= ========== ===================
(1) Some, but not all, of the Funds have expense reimbursement or fee waiver
arrangements. Without these arrangements, Total Fund Annual Expenses would
have been higher. More information appears in the footnotes that accompany
the Funds that have expense reimbursement or fee waiver arrangements.
(2) With respect to the Prudential Series Fund, Inc. portfolios, Prudential
reimburses a portfolio when its ordinary operating expenses, excluding
taxes, interest, and brokerage commissions exceed 0.75% of the portfolio's
average daily net assets. The amounts listed for the portfolios under Other
Expenses are based on amounts incurred in the last fiscal year.
(3) Class 2 of the Templeton Variable Products Series Templeton Developing
Markets Fund and Templeton International Fund has a distribution plan or
"Rule 12b-1 Plan" which is described in the Templeton Variable Products
Series Fund's prospectus. Expenses may vary.
7
<PAGE>
(4) Each series in the MFS(R) Variable Insurance Trust(sm) has an expense offset
arrangement which reduces the series' custodian fee based upon the amount of
cash maintained by the series with its custodian and dividend disbursing
agent. Each series may enter into other such arrangements and directed
brokerage arrangements, which would also have the effect of reducing the
series' expenses. Expenses do not take into account these expense
reductions, and are therefore higher than the actual expenses of the series.
(5) Neuberger Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in a
corresponding series ("Series") of Advisers Managers Trust. The figures
reported under "Investment Management/Administration Fees" include the
aggregate of the administration fees paid by the Portfolio and the
management fees paid by the corresponding Series. Similarly, "Other
Expenses" includes all other expenses of the Portfolio and its corresponding
Series.
ILLUSTRATIONS OF DEATH BENEFITS AND CASH SURRENDER VALUES
On the following pages, we show you examples of how the Death Benefit and the
Cash Surrender Value of your Certificate can change as a result of the
performance of the investment options you select. The examples are not our
prediction of how value will grow. They are hypothetical examples and are just
intended to show you how a Certificate works.
We call these examples "ILLUSTRATIONS." The illustrations are based on several
ASSUMPTIONS about the age of the Participant, the amount of insurance, and the
rules of the Group Contract that the Participant is covered under.
Two SETS of three illustrations follow. For each set, we offer three
illustrations of how the Certificate works under different assumptions.
ASSUMPTIONS WE USED FOR THE ILLUSTRATIONS
In the FIRST SET of illustrations, the Participant was 35 YEARS OLD when he or
she bought the Group Variable Universal Life Insurance Certificate.
In the SECOND SET of illustrations, the Participant was 50 YEARS OLD when he or
she bought the Group Variable Universal Life Insurance Certificate.
Here's what we assumed about the Certificate in the illustrations in BOTH SETS
of illustrations:
o The Face Amount of insurance under the Certificate is $100,000.
o The Participant paid a premium of $1,200 when the Certificate was first
issued. He or she pays the same premium amount each year on the
Certificate Anniversary.
8
<PAGE>
o Prudential deducted a 2.5% charge from each premium payment for taxes.
We offer three different illustrations for each set. The illustrations make the
same assumptions in both sets, but the outcome will be different because the age
of the Participant when he or she bought the insurance is different in each set.
ILLUSTRATION #1
In Illustration #1, we assumed that the charges that Prudential deducts the
MAXIMUM LEVEL OF CHARGES for mortality and expense risks, administrative
expenses, and cost of insurance charges.
Specifically,
o The charge each month for administrative expenses is $4.
o Prudential deducts daily charges for mortality and expense risks
equivalent to an annual charge of 0.90%.
o The Participant has cost of insurance charges equal to the maximum
rates. (The maximum rates that can be charged are the 1980
Commissioner's Standard Ordinary Mortality Table [Male], Age Last
Birthday (the "1980 CSO")).
ILLUSTRATION #2
In Illustration #2, we changed our assumptions about the charges Prudential will
deduct from the Certificate. Instead of maximum charges, we assumed that the
CURRENT CHARGES would be made for the indefinite future.
Specifically,
o There is no monthly administrative charge.
o Prudential deducts daily charges for mortality and expense risks
equivalent to an annual charge of 0.45%.
o The Participant has cost of insurance charges equal to the current rates
for the indefinite future for a Covered Person in the STANDARD RISK
CLASS.
9
<PAGE>
ILLUSTRATION #3
In Illustration #3, we make the same assumptions about the charges Prudential
will deduct from the Certificate as in Illustration #2 - we assumed that CURRENT
CHARGES would be made for the indefinite future.
However, we changed our assumptions about the Participant's cost of insurance
charges. Instead of using rates for a Covered Person in the standard risk class,
we assumed that the Participant has cost of insurance charges for a Covered
Person in the SELECT RISK CLASS.
ASSUMPTIONS ABOUT HOW THE CERTIFICATE FUND WAS INVESTED
We assumed that the Certificate Fund was invested in equal amounts in each of
the ten Funds available to you under the Group Variable Universal Life Insurance
contract.
Each illustration shows four different assumptions about the investment
performance - or "investment return" - of the Funds. The four different
assumptions are:
o gross annual rate of return is 0%
o gross annual rate of return is 4%
o gross annual rate of return is 8%
o gross annual rate of return is 12%
These are only assumptions to show how the Death Benefit and Cash Surrender
Value change depending on the investment return. Actual investment return will
depend on the investment options you select and will vary from year to year.
WALKING THROUGH THE ILLUSTRATIONS
Here's what to look for in the illustrations:
o The first column shows the CERTIFICATE YEAR.
o The second column gives you some CONTEXT FOR COMPARING the investment
return under the Certificate to the return you might expect from a savings
account. It shows the amount you would accumulate if you invested the same
premiums in a savings account paying a 4% effective annual rate. (Of
course, unlike the Certificate, a savings account does not offer life
insurance protection.)
10
<PAGE>
o The next four columns show what the DEATH BENEFIT would be for each of the
four investment return assumptions (0%, 4%, 8%, and 12%).
o The last four columns show what the CASH SURRENDER VALUE would be for each
of the four investment return assumptions (0%, 4%, 8%, and 12%).
You should note that:
o Both "gross" and "net" investment returns are shown.
o "Gross" investment return reflects the combined effect of both income on
the investment and capital gains. It is the amount of return before
Prudential takes out any of its charges and before any Fund investment
management fees and other expenses are taken out.
o "Net" investment return is the amount of the investment return after
Prudential takes out its charges and after Fund investment management fees
and other expenses are taken out. Since Illustration #1 on the one hand,
and Illustrations #2 and #3 on the other hand, use different assumptions
about charges, the "net" investment returns are different. For some of the
Funds, the Fund's investment advisor or other entity is absorbing certain
of the Fund's expenses. In deriving net investment return, we used those
reduced Fund expenses.
o Fund expenses equaled 0.79%, which was the average Fund expense in 1998.
o For Illustration #1, Prudential's charges are at 0.90% per year. (In
Illustration #1, we assumed that Prudential's maximum charges are in
effect.) So, including both Fund expenses and mortality and expense risk
charges, gross returns of 0%, 4%, 8% and 12% become net returns of -1.69%,
2.31%, 6.31%, and 10.31%.
o For Illustrations #2 and #3, Prudential's charges are at 0.45% per year.
(In Illustrations #2 and #3, we assumed that Prudential's current charges
are in effect.) So, including both Fund expenses and mortality and expense
risk charges, gross returns of 0%, 4%, 8% and 12% become net returns of
-1.24%, 2.76%, 6.76%, and 10.76%.
o The Death Benefits and Cash Surrender Values are shown with all of
Prudential's charges and investment management fees and other expenses
taken out.
o We assumed no loans or partial withdrawals were taken.
o None of the illustrations reflects Dividends or Experience Credits.
(Prudential may pay Dividends or Experience Credits to your Group
Contractholder, which would be distributed to Participants through annual
refunds. See the DIVIDENDS OR EXPERIENCE CREDITS section on page 32.)
11
<PAGE>
IF YOU ASK, PRUDENTIAL WILL GIVE YOU A SIMILAR ILLUSTRATION FOR A CERTIFICATE
THAT SHOWS YOUR AGE, RISK CLASS, PROPOSED FACE AMOUNT OF INSURANCE, AND PROPOSED
PREMIUM PAYMENTS. WE REFER TO THIS AS A "PERSONALIZED ILLUSTRATION."
WE SHOW THESE RATES OF INVESTMENT RETURN ONLY TO HELP YOU UNDERSTAND HOW THE
CERTIFICATE WORKS. YOU SHOULD NOT ASSUME THAT THE INVESTMENT RATES OF RETURN ARE
ACTUAL RATES OF RETURN. YOU SHOULD ALSO NOT ASSUME THAT THESE RATES ARE EXAMPLES
OF PAST OR FUTURE INVESTMENT PERFORMANCE. NEITHER PRUDENTIAL NOR THE FUNDS CAN
TELL YOU WHETHER THESE RATES OF INVESTMENT RETURN CAN ACTUALLY BE ACHIEVED.
THE ACTUAL RATES OF INVESTMENT RETURN FOR YOUR CERTIFICATE WILL DEPEND ON HOW
THE INVESTMENT OPTIONS THAT YOU CHOOSE PERFORM. YOU MAY EARN MORE OR LESS THAN
WHAT IS SHOWN IN THE ILLUSTRATION.
THE DEATH BENEFITS AND CASH SURRENDER VALUES WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATE OF RETURN FOR A CERTIFICATE YEAR VARIED ABOVE OR BELOW THE
AVERAGE, HYPOTHETICAL RATES OF 0%, 4%, 8%, AND 12%.
12
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #1
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 35
ASSUME PAYMENT OF $1,200 ANNUAL PREMIUMS FOR ALL YEARS
USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1)
------------------------------------------------- ------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums ------------------------------------------------- ------------------------------------------------
Certificate Accumulated 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year at 4% per year (-1.69% Net) (2.31% Net) (6.31% Net) (10.31% Net) (-1.69% Net)(2.31% Net) (6.31% Net) (10.31% Net)
- ---------- -------------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,248 $100,887 $100,929 $100,970 $101,011 $ 887 $ 929 $ 970 $ 1,011
2 2,546 101,746 101,864 101,986 102,111 1,746 1,864 1,986 2,111
3 3,896 102,573 102,804 103,048 103,306 2,573 2,804 3,048 3,306
4 5,300 103,366 103,745 104,157 104,604 3,366 3,745 4,157 4,604
5 6,760 104,124 104,686 105,313 106,012 4,124 4,686 5,313 6,012
6 8,278 104,844 105,623 106,516 107,539 4,844 5,623 6,516 7,539
7 9,857 105,526 106,555 107,768 109,195 5,526 6,555 7,768 9,195
8 11,499 106,167 107,478 109,068 110,991 6,167 7,478 9,068 10,991
9 13,207 106,765 108,391 110,417 112,938 6,765 8,391 10,417 12,938
10 14,984 107,321 109,291 111,817 115,051 7,321 9,291 11,817 15,051
15 24,989 109,380 113,488 119,588 128,648 9,380 13,488 19,588 28,648
20 37,163 109,898 116,687 128,487 149,046 9,898 16,687 28,487 49,046
25 51,974 108,121 117,793 137,845 179,367 8,121 17,793 37,845 79,367
30 69,994 103,022 115,228 146,378 224,312 3,022 15,228 46,378 124,312
35 91,918 0 (2) 106,187 151,186 290,274 0 (2) 6,187 51,186 190,274
40 118,592 0 0 (2) 146,921 390,937 (3) 0 0 (2) 46,921 286,076 (3)
(1) Assumes no loan or partial withdrawal has been made.
(2) Based on the interest rate and charges illustrated, the premiums paid are insufficient to keep the certificate in force. The
certificate would lapse under this scenario.
(3) As illustrated, the certificate's Death Benefit has been increased in order to satisfy the Definition of Life Insurance.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW
THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
T1
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #2
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 35
ASSUME PAYMENT OF $1,200 ANNUAL PREMIUMS FOR ALL YEARS
USING CURRENT CHARGES AND STANDARD COST OF INSURANCE CHARGES
Death Benefit (1) Cash Surrender Value (1)
--------------------------------------------------- ------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums --------------------------------------------------- ------------------------------------------------
Certificate Accumulated 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year at 4% 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)
- ----------- -------------- ---------- ----------- ----------- ------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,248 $101,039 $101,084 $101,128 $101,172 $ 1,039 $ 1,084 $ 1,128 $ 1,172
2 2,546 102,066 102,197 102,332 102,470 2,066 2,197 2,332 2,470
3 3,896 103,079 103,341 103,617 103,908 3,079 3,341 3,617 3,908
4 5,300 104,080 104,517 104,990 105,501 4,080 4,517 4,990 5,501
5 6,760 105,069 105,725 106,455 107,265 5,069 5,725 6,455 7,265
6 8,278 105,987 106,907 107,959 109,157 5,987 6,907 7,959 9,157
7 9,857 106,894 108,122 109,564 111,253 6,894 8,122 9,564 11,253
8 11,499 107,790 109,370 111,277 113,574 7,790 9,370 11,277 13,574
9 13,207 108,674 110,653 113,107 116,145 8,674 10,653 13,107 16,145
10 14,984 109,548 111,971 115,060 118,992 9,548 11,971 15,060 18,992
15 24,989 113,473 118,815 126,648 138,157 13,473 18,815 26,648 38,157
20 37,163 116,310 125,715 141,677 168,953 16,310 25,715 41,677 68,953
25 51,974 117,274 131,739 160,440 223,954(3) 17,274 31,739 60,440 117,975 (3)
30 69,994 116,197 136,446 184,034 328,702 16,197 36,446 84,034 195,896
35 91,918 110,934 137,134 211,552 474,825 10,934 37,134 111,552 315,787
40 118,592 0(2) 126,943 237,573 670,740 0(2) 26,943 137,573 490,827
(1) Assumes no loan or partial withdrawal has been made.
(2) Based on the interest rate and charges illustrated, the premiums paid are insufficient to keep the certificate in force. The
certificate would lapse under this scenario.
(3) As illustrated, the certificate's Death Benefit has been increased in order to satisfy the Definition of Life Insurance.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW
THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
T2
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #3
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 35
ASSUME PAYMENT OF $1,200 ANNUAL PREMIUMS FOR ALL YEARS
USING CURRENT CHARGES AND SELECT COST OF INSURANCE CHARGES
Death Benefit (1) Cash Surrender Value (1)
----------------------------------------------- ------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums ----------------------------------------------- ------------------------------------------------
Certificate Accumulated 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year at 4% 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)
- ----------- -------------- ------------ ---------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,248 $101,039 $101,084 $101,128 $101,172 $ 1,039 $ 1,084 $ 1,128 $ 1,172
2 2,546 102,066 102,197 102,332 102,470 2,066 2,197 2,332 2,470
3 3,896 103,079 103,341 103,617 103,908 3,079 3,341 3,617 3,908
4 5,300 104,080 104,517 104,990 105,501 4,080 4,517 4,990 5,501
5 6,760 105,069 105,725 106,455 107,265 5,069 5,725 6,455 7,265
6 8,278 105,987 106,907 107,959 109,157 5,987 6,907 7,959 9,157
7 9,857 106,894 108,122 109,564 111,253 6,894 8,122 9,564 11,253
8 11,499 107,790 109,370 111,277 113,574 7,790 9,370 11,277 13,574
9 13,207 108,674 110,653 113,107 116,145 8,674 10,653 13,107 16,145
10 14,984 109,548 111,971 115,060 118,992 9,548 11,971 15,060 18,992
15 24,989 113,473 118,815 126,648 138,157 13,473 18,815 26,648 38,157
20 37,163 116,905 126,374 142,406 169,758 16,905 26,374 42,406 69,758
25 51,974 118,939 133,717 162,804 229,327 (2) 18,939 33,717 62,804 120,805 (2)
30 69,994 119,462 140,595 189,394 340,730 19,462 40,595 89,394 203,065
35 91,918 116,977 145,182 222,628 500,374 16,977 45,182 122,628 332,779
40 118,592 107,698 142,752 260,221 724,527 7,698 42,752 160,221 530,187
(1) Assumes no loan or partial withdrawal has been made.
(2) As illustrated, the certificate's Death Benefit has been increased in order to satisfy the Definition of Life Insurance.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW
THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
T3
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #1
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 50
ASSUME PAYMENT OF $1,200 ANNUAL PREMIUMS FOR ALL YEARS
USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1)
------------------------------------------------ ------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums ------------------------------------------------ ------------------------------------------------
Certificate Accumulated 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year at 4% per year (-1.69% Net)(2.31% Net) (6.31% Net) (10.31% Net) (-1.69% Net) (2.31% Net) (6.31% Net) (10.31% Net)
------------ ---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,248 $100,408 $100,439 $100,470 $100,501 $ 408 $ 439 $ 470 $ 501
2 2,546 100,748 100,825 100,904 100,987 748 825 904 987
3 3,896 101,013 101,149 101,295 101,450 1,013 1,149 1,295 1,450
4 5,300 101,193 101,399 101,627 101,876 1,193 1,399 1,627 1,876
5 6,760 101,284 101,567 101,889 102,254 1,284 1,567 1,889 2,254
6 8,278 101,279 101,641 102,068 102,569 1,279 1,641 2,068 2,569
7 9,857 101,173 101,615 102,155 102,810 1,173 1,615 2,155 2,810
8 11,499 100,965 101,481 102,137 102,965 965 1,481 2,137 2,965
9 13,207 100,647 101,229 102,001 103,016 647 1,229 2,001 3,016
10 14,984 100,211 100,844 101,728 102,940 211 844 1,728 2,940
15 24,989 0 (2) 0 (2) 0 (2) 0 (2) 0 (2) 0 (2) 0 (2) 0 (2)
20 37,163 0 0 0 0 0 0 0 0
25 51,974 0 0 0 0 0 0 0 0
30 69,994 0 0 0 0 0 0 0 0
35 91,918 0 0 0 0 0 0 0 0
40 118,592 0 0 0 0 0 0 0 0
(1) Assumes no loan or partial withdrawal has been made.
(2) Based on the interest rate and charges illustrated, the premiums paid are insufficient to keep the certificate in force. The
certificate would lapse under this scenario.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW
THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
T4
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #2
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 50
ASSUME PAYMENT OF $1,200 ANNUAL PREMIUMS FOR ALL YEARS
USING CURRENT CHARGES AND STANDARD COST OF INSURANCE CHARGES
Death Benefit (1) Cash Surrender Value (1)
--------------------------------------------------- -------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums --------------------------------------------------- -------------------------------------------------
Certificate Accumulated 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year at 4% 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)
- ---------- -------------- ------------ ----------- ----------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,248 $100,749 $100,787 $100,825 $100,863 $ 749 $ 787 $ 825 $ 863
2 2,546 101,488 101,595 101,705 101,819 1,488 1,595 1,705 1,819
3 3,896 102,218 102,426 102,645 102,877 2,218 2,426 2,645 2,877
4 5,300 102,940 103,279 103,649 104,049 2,940 3,279 3,649 4,049
5 6,760 103,652 104,156 104,720 105,348 3,652 4,156 4,720 5,348
6 8,278 104,007 104,701 105,500 106,415 4,007 4,701 5,500 6,415
7 9,857 104,357 105,262 106,333 107,597 4,357 5,262 6,333 7,597
8 11,499 104,703 105,837 107,222 108,906 4,703 5,837 7,222 8,906
9 13,207 105,045 106,429 108,171 110,356 5,045 6,429 8,171 10,356
10 14,984 105,382 107,037 109,184 111,962 5,382 7,037 9,184 11,962
15 24,989 105,024 108,141 112,947 120,304 5,024 8,141 12,947 20,304
20 37,163 100,437 104,701 112,962 128,459 437 4,701 12,962 28,459
25 51,974 0 (2) 0 (2) 100,839 128,633 0 (2) 0 (2) 839 28,633
30 69,994 0 0 0 (2) 114,674 0 0 0 (2) 14,674
35 91,918 0 0 0 0 (2) 0 0 0 0(2)
40 118,592 0 0 0 0 0 0 0 0
(1) Assumes no loan or partial withdrawal has been made.
(2) Based on the interest rate and charges illustrated, the premiums paid are insufficient to keep the certificate in force. The
certificate would lapse under this scenario.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW
THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
T5
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #3
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 50
ASSUME PAYMENT OF $1,200 ANNUAL PREMIUMS FOR ALL YEARS
USING CURRENT CHARGES AND SELECT COST OF INSURANCE CHARGES
Death Benefit (1) Cash Surrender Value (1)
------------------------------------------------- ------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums ------------------------------------------------- ------------------------------------------------
Certificate Accumulated 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year at 4% 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)
- ----------- -------------- ----------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,248 $100,871 $100,911 $100,952 $100,993 $ 871 $ 911 $ 952 $ 993
2 2,546 101,731 101,848 101,968 102092 1,731 1,848 1,968 2,092
3 3,896 102,580 102,810 103,053 103310 2,580 2,810 3,053 3,310
4 5,300 103,419 103,799 104,212 104659 3,419 3,799 4,212 4,659
5 6,760 104,247 104,815 105,449 106153 4,247 4,815 5,449 6,153
6 8,278 104,821 105,610 106,514 107,548 4,821 5,610 6,514 7,548
7 9,857 105,388 106,427 107,652 109,093 5,388 6,427 7,652 9,093
8 11,499 105,948 107,266 108,867 110,805 5,948 7,266 8,867 10,805
9 13,207 106,501 108,129 110,163 112,700 6,501 8,129 10,163 12,700
10 14,984 107,047 109,015 111,548 114,800 7,047 9,015 11,548 14,800
15 24,989 108,289 112,290 118,307 127,334 8,289 12,290 18,307 27,334
20 37,163 106,479 112,749 124,039 144,203 6,479 12,749 24,039 44,203
25 51,974 0 (2) 105,590 123,487 162,929 0 (2) 5,590 23,487 62,929
30 69,994 0 0 (2) 102,542 171,842 0 0 (2) 2,542 71,842
35 91,918 0 0 0 (2) 165,786 0 0 0 (2) 65,786
40 118,592 0 0 0 124,018 0 0 0 24,018
(1) Assumes no loan or partial withdrawal has been made.
(2) Based on the interest rate and charges illustrated, the premiums paid are insufficient to keep the certificate in force. The
certificate would lapse under this scenario.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW
THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
T6
<PAGE>
GENERAL INFORMATION ABOUT:
O PRUDENTIAL
O THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
O THE VARIABLE INVESTMENT OPTIONS UNDER THE CERTIFICATES
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
The Prudential Insurance Company of America ("Prudential" or the "Company") 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 publicly
traded stock company through a process known as "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. On July 1,
1998, legislation was enacted in New Jersey that would permit this conversion to
occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption of a
plan by the Company's Board of Directors, a public hearing, voting by qualified
policyholders, and regulatory approval, all of which could take two or more
years to complete. Prudential's management and Board of Directors have not yet
determined to demutualize and it is possible that, after careful review,
Prudential could decide not to go public.
The plan of reorganization, which has not been developed and approved, would
provide the criteria for determining eligibility and the methodology for
allocating shares or other consideration to those who would be eligible.
Generally, the amount of shares or other consideration eligible customers would
receive would be based on a number of factors, including the types, amounts, and
issue years of their policies. As a general rule, owners of Prudential-issued
insurance policies and annuity contracts would be eligible, while mutual fund
customers and customers of the Company's subsidiaries would not be. It has not
yet been determined whether any exceptions to that general rule will be made
with respect to policyholders and contract owners of Prudential's subsidiaries.
Eligible policyholders would generally include employers, associations, other
groups, and trusts established by or for such entities, that own group policies
issued by Prudential, and generally would include Group Contractholders. The
individuals covered under a group plan, such as the Participants under a Group
Contract, generally would not be eligible to receive stock or other
consideration from Prudential.
Prudential is licensed to sell life insurance and annuities in all states, in
the District of Columbia, and in all United States territories and possessions.
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 Group Contracts and the insurance provided thereunder. Prudential and
its affiliates act in a variety of capacities with respect to registered
investment companies including as depositor, adviser, and principal underwriter.
13
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
The Prudential Variable Contract Account GI-2 (the "Separate Account") was
established on June 14, 1988 under New Jersey law as a separate investment
account. The Separate Account meets the definition of a "separate account" under
the federal securities laws. The Separate Account holds assets that are
segregated from all of Prudential's other assets.
The obligations arising under the Group Contracts and the Certificates are
general corporate obligations of Prudential. Prudential is also the legal owner
of the assets in the Separate Account. Prudential will maintain assets in the
Separate Account with a total market value at least equal to the liabilities
relating to the benefits attributable to the Separate Account. These assets may
not be charged with liabilities which arise from any other business Prudential
conducts. In addition to these assets, the Separate Account's assets may include
funds contributed by Prudential to commence operation of the Separate Account
and may include accumulations of the charges Prudential makes against the
Separate Account. From time to time, these additional assets will be transferred
to Prudential's general account. Before making any such transfer, Prudential
will consider any possible adverse impact the transfer might have on the
Separate Account.
The Separate Account is registered with the Securities and Exchange Commission
("SEC") under the federal securities laws as a unit investment trust, which is a
type of investment company. This does not involve any supervision by the SEC of
the management or investment policies or practices of the Separate Account. For
state law purposes, the Separate Account is treated as a part or division of
Prudential. There are currently 131 Subaccounts within the Separate Account,
each of which invests in a corresponding Fund. Currently, ten Subaccounts are
available to Participants as investment options. Prudential reserves the right
to take all actions in connection with the operation of the Separate Account
that are permitted by applicable law (including those permitted upon regulatory
approval).
THE FUNDS
Set out below is a list of each available Fund, its investment objective,
investment management fees and other expenses, and its investment
advisor/investment manager. Some Funds also provide information about their
principal strategies.
Two of the Funds have adopted distribution plans under the federal securities
laws, and under those plans, the Fund may make payments to Prudential and/or its
affiliates for certain marketing efforts.
FUND NAMES AND OBJECTIVES
THE PRUDENTIAL SERIES FUND, INC.
The portfolios of the Series Fund in which the Separate Account may currently
invest and their investment objectives and principal strategies are as follows:
14
<PAGE>
EQUITY PORTFOLIO: The investment objective is capital appreciation. The
Portfolio invests primarily in common stocks of major established corporations
as well as smaller companies that offer attractive prospects of appreciation.
FLEXIBLE MANAGED PORTFOLIO: The investment objective is a total investment
return consistent with an aggressively managed diversified portfolio. The
Portfolio invests in a mix of equity securities, debt obligations and money
market instruments.
MONEY MARKET PORTFOLIO: The investment objective is maximum current income
consistent with the stability of capital and the maintenance of liquidity. The
Portfolio invests in high quality short-term debt obligations that mature in 13
months or less.
STOCK INDEX PORTFOLIO: The investment objective is investment results that
generally correspond to the performance of publicly-traded common stocks. The
Portfolio attempts to duplicate the price and yield performance of the Standard
& Poor's 500 Composite Stock Price Index (the "S&P 500 Index").
DREYFUS CORPORATION FUNDS
The portfolio of the Dreyfus Variable Investment Fund in which the Separate
Account may currently invest and its investment objective are as follows:
SMALL CAP PORTFOLIO: Seeks to maximize capital appreciation. This portfolio
invests primarily in common stocks of domestic and foreign issuers. This
portfolio will be particularly alert to companies that The Dreyfus Corporation
considers to be emerging smaller-sized companies which are believed to be
characterized by new or innovative products, services, or processes which should
enhance prospects for growth in future earnings.
FRANKLIN TEMPLETON
The Class 2 portfolios of the Templeton Variable Products Series Fund in which
the Separate Account may currently invest and their investment objectives are as
follows:
TEMPLETON DEVELOPING MARKETS FUND: The fund's investment goal is long-term
capital appreciation. Under normal market conditions, the fund will invest at
least 65% of its total assets in equity securities that trade in emerging
markets and are issued by companies that have their principal activities in
emerging market countries.
TEMPLETON INTERNATIONAL FUND: The fund's investment goal is long-term capital
growth. Under normal market conditions, the fund will invest at least 65% of its
total assets in the equity securities of companies located outside the U.S.,
including emerging markets.
15
<PAGE>
KEMPER VARIABLE SERIES
The portfolio of the Kemper Variable Series in which the Separate Account may
currently invest (the "Kemper Series") and its investment objective are as
follows:
HIGH YIELD PORTFOLIO: Seeks to provide a high level of current income by
investing in lower rated fixed-income securities.
MFS(R) VARIABLE INSURANCE TRUST(sm)
The portfolio of the MFS Variable Insurance Trust in which the Separate Account
may currently invest and its investment objective are as follows:
MFS RESEARCH SERIES: Seeks to provide long-term growth of capital and future
income.
NEUBERGER BERMAN MANAGEMENT INC.
The portfolio of the Neuberger Berman Advisers Management Trust ("AMT") in which
the Separate Account may currently invest and its investment objective are as
follows:
AMT LIMITED MATURITY BOND PORTFOLIO: Seeks the highest available current income
consistent with liquidity and low risk to principal; total return is a secondary
goal. To pursue these goals, the portfolio invests mainly in investment-grade
bonds and other debt securities from U.S. government and corporate issuers.
16
<PAGE>
FUND FEES AND EXPENSES
================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS)(1)
- --------------------------- ---------- ----- --------- -----------------
THE PRUDENTIAL SERIES
FUND, INC.
Equity Portfolio (2) 0.45% - 0.02% 0.47%
Flexible Managed Portfolio (2) 0.60% - 0.01% 0.61%
Money Market Portfolio (2) 0.40% - 0.01% 0.41%
Stock Index Portfolio (2) 0.35% - 0.02% 0.37%
DREYFUS FUNDS
Small Cap Portfolio 0.75% - 0.02% 0.77%
FRANKLIN TEMPLETON:
TEMPLETON VARIABLE PRODUCTS
SERIES FUND (CLASS 2 SHARES)
Developing Markets Fund (3) 1.25% 0.25% 0.41% 1.91%
International Fund (3) 0.69% 0.25% 0.17% 1.11%
KEMPER VARIABLE SERIES
High Yield Portfolio 0.60% - 0.05% 0.65%
MFS(R) VARIABLE INSURANCE
TRUST(SM)
MFS Research Series (4) 0.75% - 0.11% 0.86%
NEUBERGER BERMAN ADVISERS
MANAGEMENT TRUST
("AMT") (5)
AMT Limited Maturity Bond
Portfolio 0.65% - 0.11% 0.76%
- --------------------------- ---------- ----- --------- -----------------
- ----------
(1) Some, but not all, of the Funds have expense reimbursement or fee waiver
arrangements. Without these arrangements, Total Fund Annual Expenses would
have been higher. More information appears in the footnotes that accompany
the Funds that have expense reimbursement or fee waiver arrangements.
(2) With respect to the Prudential Series Fund, Inc. portfolios, Prudential
reimburses a portfolio when its ordinary operating expenses, excluding
taxes, interest, and brokerage commissions exceed 0.75% of the portfolio's
average daily net assets. The amounts listed for the portfolios under Other
Expenses are based on amounts incurred in the last fiscal year.
17
<PAGE>
(3) Class 2 of the Templeton Variable Products Series Developing Markets Fund
and International Fund has a distribution plan or "Rule 12b-1 Plan" which
is described in the Fund's prospectus.
(4) Each series in the MFS(R) Variable Insurance Trust(sm) has an expense
offset arrangement which reduces the series' custodian fee based upon the
amount of cash maintained by the series with its custodian and dividend
disbursing agent. Each series may enter into other such arrangements and
directed brokerage arrangements, which would also have the effect of
reducing the series' expenses. Expenses do not take into account these
expense reductions, and are therefore higher than the actual expenses of
the series.
(5) Neuberger Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in a
corresponding series ("Series") of Advisers Managers Trust ("Managers
Trust"). The figures reported under "Investment Management/Administrative
Fees" include the aggregate of the administration fees paid by the
Portfolio and the management fees paid by the corresponding Series.
FUND ADVISERS
Prudential is the investment adviser of each of the portfolios of the Prudential
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"), which
provides that, subject to Prudential's supervision, PIC will furnish investment
advisory services in connection with the management of the Series Fund. Further
detail is provided in the prospectus and statement of additional information for
the Series Fund. Prudential and PIC are registered as investment advisers under
the Investment Advisers Act of 1940.
The Dreyfus Corporation ("Dreyfus") is the investment adviser to the Dreyfus
Variable Investment Fund Small Cap Portfolio. Dreyfus' principal business
address is 200 Park Avenue, New York, New York 10166. The principal underwriter
of the Small Cap Portfolio is Premier Mutual Fund Services, Inc., located at 60
State Street, Boston, Massachusetts 02109.
Templeton Investment Counsel, Inc. ("TICI") serves as the investment manager for
the Templeton Variable Products Series (Class 2 Shares) Templeton International
Fund. TICI is a Florida corporation with offices at Broward Financial Centre,
Fort Lauderdale, Florida 33394- 3091. The Investment Manager for the Developing
Markets Fund is Templeton Asset Management Ltd., a Singapore corporation with
offices at 7 Temasek Blvd., #38-03, Suntec Tower One, Singapore 038987. The
principal underwriter of the Funds is Franklin Templeton Distributors, Inc., 100
Fountain Parkway, St. Petersburg, Florida 33716-1205.
The asset manager of the Kemper Variable Series High Yield Portfolio is Scudder
Kemper Investments, Inc. ("Scudder Kemper"). Scudder Kemper's principal business
address is Two International Place, Boston, Massachusetts 02110-4103.
18
<PAGE>
The investment adviser for the MFS(R) Variable Insurance Trust(sm) MFS Research
Series is Massachusetts Financial Services Company ("MFS"). MFS' principal
business address is 500 Boylston Street, Boston, Massachusetts 02116. The
principal underwriter of the series is MFS Fund Distributors, Inc. located at
500 Boylston Street, Boston, Massachusetts 02116.
Neuberger Berman Management Inc. ("NBMI") serves as the investment manager of
the Neuberger Berman Advisers Management Trust AMT Limited Maturity Bond
Portfolio and is also the principal underwriter of the portfolio. NBMI's
principal business address is 605 Third Avenue, New York, New York 10158-0180.
CERTAIN FUNDS HAVE INVESTMENT OBJECTIVES AND POLICIES CLOSELY RESEMBLING THOSE
OF MUTUAL FUNDS WITHIN THE SAME COMPLEX THAT ARE SOLD DIRECTLY TO INDIVIDUAL
INVESTORS. DESPITE SUCH SIMILARITIES, THERE CAN BE NO ASSURANCE THAT THE
INVESTMENT PERFORMANCE OF ANY SUCH FUND WILL RESEMBLE THAT OF ITS RETAIL FUND
COUNTERPART.
YOU WILL RECEIVE A PROSPECTUS FOR EACH AVAILABLE FUND. THAT PROSPECTUS WILL
DESCRIBE THE FUND, ITS INVESTMENT OBJECTIVE AND STRATEGIES, ITS RISKS, AND ITS
MANAGEMENT FEES AND OTHER EXPENSES. YOU SHOULD READ THE FUND PROSPECTUSES
TOGETHER WITH THIS PROSPECTUS. AS WITH ALL MUTUAL FUNDS, A FUND MAY NOT MEET ITS
INVESTMENT OBJECTIVE. SUBJECT TO APPLICABLE LAW, PRUDENTIAL MAY STOP OFFERING
ONE OR MORE FUNDS OR MAY SUBSTITUTE A DIFFERENT MUTUAL FUND FOR ANY FUND.
EACH FUND HAS PROVIDED PRUDENTIAL WITH INFORMATION ABOUT ITS MANAGEMENT FEES AND
OTHER EXPENSES. EXCEPT FOR THE SERIES FUND, PRUDENTIAL HAS NOT VERIFIED THAT
INFORMATION INDEPENDENTLY.
THE FIXED ACCOUNT
You may invest all or part of your Certificate Fund in the Fixed Account. The
amount invested in the Fixed Account becomes part of Prudential's general
assets, commonly referred to as the general account. The part of the Certificate
Fund that you invest in the Fixed Account will accrue interest daily at a rate
that Prudential declares periodically. This rate will not be less than an
effective annual rate of 4%. Prudential may in its sole discretion sometimes
declare a higher rate. At least annually and anytime you ask, we will tell you
what interest rate currently applies.
We strictly limit your right to make transfers out of the Fixed Account. See the
HOW YOU CAN TRANSFER AMOUNTS IN YOUR CERTIFICATE FUND section on page 24.
Prudential has the right to delay payment of any Cash Surrender Value
attributable to the Fixed Account for up to 6 months. See the WHEN PROCEEDS ARE
PAID section on page 42.
Because of exemptive and exclusionary provisions, Prudential has not registered
the Fixed Account or the general account under the federal securities laws.
Prudential has been advised that the staff of the Securities and Exchange
Commission has not reviewed the disclosure in this Prospectus relating to the
Fixed Account. Disclosures concerning the Fixed Account may, however, be subject
to certain provisions of the federal securities laws relating to the accuracy of
statements made in a prospectus.
19
<PAGE>
DETAILED INFORMATION ABOUT THE CERTIFICATES
HOW PRUDENTIAL ISSUES CERTIFICATES
To apply for coverage under a Group Variable Universal Life Insurance Contract,
an Eligible Group Member must fill out and submit an enrollment form. Prudential
may ask questions about the health of the person whose life is to be covered,
and may ask that person to have a medical exam. If Prudential approves the
person for coverage, that person will become a Covered Person under the Group
Variable Universal Life Insurance.
The Eligible Group Member is usually the Participant. But, under your Group
Contract, an Eligible Group Member may allow another person the right to make
decisions about the coverage. When that happens, Prudential considers the other
person to be a Participant. See the ASSIGNMENT and APPLICANT OWNER PROVISION
sections on pages 45 and 46.
Prudential will issue a Certificate to each Participant. The Certificate tells
you about the rights, benefits, coverage, and obligations of the Group Variable
Universal Life Insurance. The minimum Face Amount of insurance for a Certificate
is $10,000.
MAXIMUM AGES. Prudential will not issue Certificates for a person who is older
than age 74. And, Prudential will generally end a Participant's coverage at the
maximum age shown in the Certificate (usually, that is age 100).
When a Participant reaches the maximum age, we make available these two options:
o You may ask to receive the Cash Surrender Value of the Certificate.
(Prudential believes that a cash surrender upon termination of coverage
will be subject to the same tax treatment as other surrenders. See the TAX
TREATMENT OF CERTIFICATE BENEFITS section on page 40.)
o You can remain invested in your investment options. Under this option, we
will no longer deduct monthly charges for the cost of insurance. The Death
Benefit will change. Specifically, the Death Benefit will be equal to the
amount of the Certificate Fund, minus any Certificate Debt and outstanding
charges. The Death Benefit will no longer include the Face Amount of
insurance. Also, we will no longer allow you to make premium contributions.
You can still make loan repayments.
The Face Amount of your life insurance coverage may be reduced when you become
75 years old, and again when you become 80 years old. See CHANGES IN FACE AMOUNT
on page 28. Also, additional insurance coverages, such as Accidental Death and
Dismemberment, will end according to special rules. See ADDITIONAL INSURANCE
BENEFITS on page 48. You should refer to your Certificate to learn when coverage
under your Certificate will end.
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A "FREE LOOK" PERIOD
Generally, you may return a Certificate for a refund within 30 days after you
receive it. This 30- day period is known as the "free look" period. Some states
allow a longer period. You can ask for a refund by mailing or delivering the
Certificate to Aon Securities Corporation. (You may not ask for a refund if your
Certificate is a replacement for one previously issued under the Group
Contract.)
If you cancel your coverage during the free look period, we will generally
refund the premium payments you made, minus any loans or withdrawals that you
took. We will not add or subtract any gain or loss that would have come from the
investment options you chose (unless a state law requires that we take those
gains or losses into account when we make a refund). When we make a refund, we
will not deduct any charges.
During the first 30 days after the initial Group Variable Universal Life
Insurance Certificate Date, your premium payments will be invested in the Fixed
Account. Prudential reserves the right to limit contributions and transactions
during the free look period.
If there is a change in your Group Variable Universal Life Insurance Coverage
which results in a new Certificate Date, the free look provision will not apply.
PROCEDURES
Your Group Contract has procedures for how you will conduct transactions under
your Group Variable Universal Life Insurance - for example, how you will submit
an enrollment form, make premium payments, take loans and withdrawals, and
transfer or reallocate money in your Certificate Fund. You should consult the
appropriate form to learn what those procedures are.
You should submit all forms to Aon Securities Corporation, which is a
wholly-owned subsidiary of Aon Corporation and an affiliate of Aon Insurance
Services, the plan agent for the Contract. Aon Securities Corporation will
forward the forms to Prudential. Prudential will consider enrollment forms,
payments, orders, and other documents to be "received" when Aon Securities
Corporation receives them in good order at the address on the forms.
PREMIUMS
ROUTINE PREMIUM PAYMENTS. You will usually be able to decide when to make
premium payments and how much each premium payment will be. You just have to
make sure that there is enough money in your Certificate Fund - minus
Certificate Debt and outstanding charges - to cover each month's charges. If
there is not, your insurance will end (in insurance terms, it will "lapse"). See
the LAPSE section on page 36 to learn how your insurance will end and what you
can do to stop it from ending.
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You will also be required to pay a minimum initial premium to become a
Participant. The minimum initial premium equals the cost of coverage for the
first two months.
ADDITIONAL PREMIUM PAYMENTS. In addition to routine premium payments, you may
make additional premium payments, called "lump sums," at any time. Each lump sum
must be at least $100. Prudential reserves the right to limit the amount of
additional premiums.
HOW YOU WILL PAY PREMIUMS. Participants will remit payments to Aon Securities
Corporation (who will pass them on to us).
DEDUCTING PREMIUMS BY AUTOMATIC DEBIT. You may choose to have your premium
deducted automatically from your checking account.
EFFECT OF PREMIUM PAYMENTS ON TAX STATUS. If you pay additional premiums, we may
need to increase your Death Benefit (and corresponding cost of insurance
charges) to continue to qualify it as life insurance for federal tax purposes.
Also, if you make premium payments above certain limits, the tax status of the
insurance may change to that of a Modified Endowment Contract under the Internal
Revenue Code. That status could have significant disadvantages from a tax
standpoint. We have procedures designed to identify most situations in which a
premium payment would cause your Certificate to be treated as a Modified
Endowment Contract. When we identify such a situation, we generally will notify
you and ask whether you want us to refund the premium payment. If you fail to
respond within a reasonable time, we will continue to process the premium
payment as usual.
We reserve the right to return any premium payment that would cause your
insurance to fail to qualify as life insurance under applicable tax laws, or
that would increase the Death Benefit by more than it increases the Certificate
Fund.
See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page 40.
EFFECTIVE DATE OF INSURANCE
When your insurance begins depends on what day of the month Prudential approves
your completed enrollment form. If we approve your completed enrollment form
prior to the 20th day of a month, your insurance will begin on the first day of
the month after you meet all of the requirements. If we approve your completed
enrollment form on or after the 20th day of a month, your insurance will begin
on the first day of the second month after you meet all of the requirements.
HOW PRUDENTIAL WILL DEPOSIT AND INVEST PREMIUM PAYMENTS
Prudential will deposit premium payments in your Certificate Fund after we
deduct any charges that apply. The amount of your premium after we deduct those
charges is called "Net Premiums." See the CHARGES AND EXPENSES section on page
30.
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Here's how Prudential will deposit and invest your Net Premiums: we generally
will make deposits to your investment options at the end of the Business Day on
which Prudential receives the payment. Any payments received before the
Certificate Date will be deposited as of the Certificate Date.
o BEFORE THE CERTIFICATE DATE. Prudential will hold any premium payment that
it receives before the Certificate Date in our general account (on your
behalf). We will not pay interest on those amounts. If we receive a premium
payment before we have approved your enrollment under the Group Contract,
however, we generally will return the premium payment to you.
o DURING THE FIRST 30 DAYS THAT YOUR CERTIFICATE IS IN EFFECT. We will invest
any Net Premiums that we receive during the first 30 days in the Fixed
Account. We will leave the Net Premiums in the Fixed Account for those
first 30 days. After that, we will allocate the Net Premiums plus any
interest earned to the investment options you selected.
o AFTER YOUR CERTIFICATE HAS BEEN IN EFFECT FOR 30 DAYS. After your
Certificate has been in effect for 30 days, Prudential will invest Net
Premiums in your Certificate Fund and allocate them to the investment
options you selected.
If you have not given us complete instructions on how you want Net Premiums to
be invested, we will leave your Net Premiums invested in the Fixed Account until
you furnish complete information.
HOW YOU CAN CHANGE THE WAY PRUDENTIAL ALLOCATES FUTURE PREMIUM
PAYMENTS
You may ask Prudential to change the way your future premium payments will be
allocated among the available investment options. Aon Securities Corporation
will give you a form to use for this purpose. We will start to allocate premium
payments in the new way as of the end of the Business Day on which Aon
Securities Corporation receives your request form in good order.
The minimum percent that you may allocate to an available investment option is
5%. All allocations must be in whole percents.
You may not change the way Prudential allocates future premiums if, at the time
we receive your request, there is not enough money in your Certificate Fund -
minus Certificate Debt and outstanding charges - to cover each month's charges.
See the LAPSE section on page 36.
We do not charge for changing the allocation of your future premiums.
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HOW YOU CAN TRANSFER AMOUNTS IN YOUR CERTIFICATE FUND FROM ONE
INVESTMENT OPTION TO ANOTHER
You may transfer amounts from one investment option to another. You may request
a transfer in terms of dollars (such as transfer of $10,000 from one available
option to another) or in terms of a percent reallocation (such as a transfer of
25% of your Certificate Fund from one option to another).
There are some rules about how transfers can be made:
o The minimum amount you may transfer from one option to another is $100 (or
the entire balance in the investment option, if it is less than $100).
o The minimum percent that you may allocate to an available investment option
is 5%. All allocations must be in whole percents.
o We limit the number of times you may transfer amounts out of the Fixed
Account. You may make only one transfer from the Fixed Account to one of
the available Funds each Certificate Year. The transfer cannot be for more
than $5,000 or 25% of the amount you have invested in the Fixed Account,
whichever is greater. We may change these limits in the future.
Transfers will take effect as of the end of the Business Day in which a proper
transfer request is received by Aon Securities Corporation on the form we
require you to use for this purpose. Aon Securities Corporation will give you a
form to use to request a transfer.
Prudential charges $10 for each transfer if you make more than twelve transfers
in a Certificate Year. Prudential may increase this charge in the future, up to
a maximum of $20.
Group Variable Universal Life Insurance was not designed for professional market
timing organizations or for other organizations or persons that use programmed,
large, or frequent transfers. We will discourage a pattern of exchanges that
coincides with a "market timing" strategy, since they may be disruptive to the
Separate Account and the Funds. If we were to find such a pattern, we might
modify the transfer procedures, including not accepting transfer requests of an
agent acting under a power of attorney on behalf of more than one Certificate
owner.
DOLLAR COST AVERAGING
Dollar Cost Averaging (which we refer to as "DCA") lets you systematically
transfer specified dollar amounts from the Series Fund Money Market Portfolio to
the other available Funds at monthly intervals. You can request that a
designated number of transfers be made under the DCA feature. When we make
transfers under the DCA feature, the transfers are effective as of the end of
the first Business Day following the first of the month.
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You may use DCA at any time after your Certificate becomes effective. But, to
start the DCA feature, you usually have to make a premium payment of at least
$1,000 to the Series Fund Money Market Portfolio. And, the minimum transfer
amount is $100.
Aon Securities Corporation will give you a form to request DCA. If Aon
Securities Corporation receives your request form in good order by the tenth of
a month, we will start DCA processing during the next month. If Aon Securities
Corporation receives it after the tenth day of a month, we will start DCA
processing during the month after the next month.
We will terminate the DCA arrangement when any of the following events occurs:
o We have completed the designated number of transfers.
o The amount you have invested in the Series Fund Money Market Portfolio is
not enough to complete the next transfer.
o Aon Securities Corporation receives your written request to end the DCA
arrangement. (If Aon Securities Corporation receives your request by the
tenth of a month, we will cancel the transfer scheduled for the next
following month. If Aon Securities Corporation receives it after the tenth
day of a month, we will cancel the transfer scheduled for the month after
the next month.)
o You no longer have coverage under the Group Variable Universal Life
Insurance.
We do not charge for the DCA arrangement. Transfers made under the DCA
arrangement do not count against the number of transfers that may be subject to
the transfer charge described in the HOW YOU CAN TRANSFER AMOUNTS IN YOUR
CERTIFICATE FUND FROM ONE INVESTMENT OPTION TO ANOTHER section on page 24.
The main objective of DCA is to shield investments from short-term price
fluctuations. Since the same dollar amount is transferred to an available Fund
with each transfer, you buy more of the Fund when its price is low and less of
the Fund when its price is high. Therefore, you may achieve a lower than average
cost over the long term. This plan of investing does not assure a profit or
protect against a loss in declining markets.
DEATH BENEFITS
Prudential will pay a Death Benefit to the beneficiary when the Covered Person
dies.
AMOUNT OF THE DEATH BENEFIT. The Death Benefit is the Face Amount of Insurance
PLUS the value of the Certificate Fund as of the date of death MINUS any
Certificate Debt and any past due monthly charges.
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ADJUSTMENT IN THE DEATH BENEFIT. The Certificate Fund may have grown to the
point where we would need to increase the Death Benefit to be certain that the
insurance will meet the Internal Revenue Code's definition of life insurance
using the "Cash Value Accumulation Test."
If that were the case for your Certificate, we would increase the Death Benefit
(before we deduct any Certificate Debt and outstanding charges) to make it equal
the Certificate Fund divided by the Net Single Premium per dollar of insurance
for the Covered Person's Attained Age, at 4% interest. For this purpose, we base
the Net Single Premium on the 1980 CSO Table.
The following table shows the Net Single Premiums by Attained Age.
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TABLE OF NET SINGLE PREMIUMS
(Per $1.00 of Insurance Amount)
PERSON'S PERSON'S PERSON'S
ATTAINED AGE FACTOR ATTAINED AGE FACTOR ATTAINED AGE FACTOR
- ------------ ------ ------------ ------ ------------ ------
0 0.08507 34 0.24280 68 0.63861
1 0.08607 35 0.25097 69 0.65210
2 0.08857 36 0.25940 70 0.66554
3 0.09122 37 0.26808 71 0.67888
4 0.09399 38 0.27700 72 0.69204
5 0.09692 39 0.28616 73 0.70495
6 0.10000 40 0.29556 74 0.71751
7 0.10326 41 0.30519 75 0.72970
8 0.10669 42 0.31505 76 0.74150
9 0.11029 43 0.32515 77 0.75295
10 0.11405 44 0.33548 78 0.76411
11 0.11796 45 0.34604 79 0.77503
12 0.12196 46 0.35684 80 0.78573
13 0.12604 47 0.36787 81 0.79617
14 0.13015 48 0.37916 82 0.80631
15 0.13428 49 0.39068 83 0.81605
16 0.13843 50 0.40245 84 0.82531
17 0.14260 51 0.41445 85 0.83407
18 0.14683 52 0.42665 86 0.84238
19 0.15116 53 0.43904 87 0.85029
20 0.15562 54 0.45159 88 0.85791
21 0.16025 55 0.46429 89 0.86536
22 0.16507 56 0.47713 90 0.87279
23 0.17012 57 0.49011 91 0.88038
24 0.17540 58 0.50324 92 0.88834
25 0.18095 59 0.51652 93 0.89693
26 0.18676 60 0.52993 94 0.90640
27 0.19285 61 0.54346 95 0.91689
28 0.19920 62 0.55706 96 0.92836
29 0.20581 63 0.57071 97 0.94040
30 0.21269 64 0.58436 98 0.95211
31 0.21983 65 0.59798 99 0.96154
32 0.22722 66 0.61156
33 0.23488 67 0.62510
HOW YOUR BENEFICIARY MAY RECEIVE THE DEATH BENEFIT: Your beneficiary may receive
the Death Benefit in the following ways:
o PRUDENTIAL'S ALLIANCE ACCOUNT. The Alliance Account is an
interest-bearing account that holds the Death Benefit while your
beneficiary takes time to consider other options. Your beneficiary has
complete ownership of funds held in the Alliance Account, and may draw
on all or part of the funds by writing a draft. Interest earnings in
the Alliance Account are compounded daily and credited monthly. Your
beneficiary can transfer proceeds from the Alliance Account to other
modes of settlement at any time. Proceeds in the Alliance Account are
part of Prudential's general account. If your beneficiary does not
want the money to go to the Alliance Account, he or she can ask
Prudential to issue a check instead.
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o OTHER OPTIONS. Your beneficiary can arrange with Prudential for the
Death Benefit to be paid in a different way (known as "modes of
settlement"), if the Death Benefit is $1,000 or more. (You can also
elect a different mode of settlement for your beneficiary while you
are living.) See the MODES OF SETTLEMENT section on page 44.
CHANGES IN FACE AMOUNT
The Face Amount of Insurance may increase or decrease.
You may choose to increase or decrease the Face Amount of your insurance at
certain times according to the Group Contract and Prudential's rules. The Face
Amount may also decrease automatically when you reach age 75 and age 80.
Here are some things to keep in mind about changes to the Face Amount of your
insurance. You should read your Certificate for more information about how
changes work in your case.
When your Face Amount of insurance changes - whether it increases or decreases -
the change may cause your insurance to be treated as a Modified Endowment
Contract under the Internal Revenue Code. Also, a decrease in coverage may limit
the amount of premiums that you may contribute in the future. See the TAX
TREATMENT OF CERTIFICATE BENEFITS section on page 40. You should consult your
tax advisor before you change the Face Amount of your insurance.
INCREASES IN THE FACE AMOUNT OF INSURANCE
Whether you are eligible to increase the Face Amount will depend on several
factors at the time you request an increase. These factors include:
o your current Face Amount;
o your age;
o your AICPA membership;
o your State Society of CPA membership; and
o the schedule of coverage available.
o Whenever the Face Amount of insurance increases, Prudential may ask
questions about the Covered Person's health, or require the Covered
Person to have a medical exam, before the increase can become
effective. Based on the answers to the questions or on the exam,
Prudential may not allow the increase.
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o An increase in the Face Amount will result in higher insurance charges
because our net amount at risk will increase.
DECREASES IN THE FACE AMOUNT OF INSURANCE
o You may also be eligible to decrease the Face Amount of your insurance
at certain times. The reduced Face Amount must be a scheduled amount
available to you.
o A Participant may not decrease the Face Amount to less than $10,000 or
below the minimum amount required to maintain status as life insurance
under federal tax laws.
o The Face Amount may decrease automatically when you attain ages 75 and
80.
We will calculate the change in the Face Amount at the end of the first Business
Day on or after the receipt of your instructions to decrease the Face Amount or
when you attain age 75 or 80. The actual decrease will generally take effect on
the first Monthly Deduction Date after that. Sometimes it may take an additional
month before the charges change. If that happens, we will adjust the amount we
deduct the first month after the decrease takes effect to credit you for any
extra monthly charges we deducted the previous month.
HOW WE CALCULATE THE FACE AMOUNT OF YOUR INSURANCE WHEN YOU REACH AGE 75
AND AGE 80
o When you reach age 75, we will reduce the Face Amount to:
(1) twice the value of the Certificate Fund, or
(2) 75% of the Face Amount prior to age 75,
whichever is greater.
o When you reach age 80, we will reduce the Face Amount to:
(1) twice the value of the Certificate Fund, or
(2) 25% of the Face Amount prior to age 75,
whichever is greater.
We will calculate the amount of any reduction that occurs on the first Business
Day on or after your 75th or 80th birthday, but the reduction will not take
effect until the next Contract Anniversary (October 1). We will not reduce the
Face Amount if the Face Amount is already less than (or equal to) twice the
value of the Certificate Fund on your 75th or 80th birthday.
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CHARGES AND EXPENSES
For a Certificate that is in effect, Prudential reserves the right to increase
the charges that we currently make, but we currently have no intention to do so.
We will not in any case increase charges above the maximum charges described
below. You should refer to your particular Certificate to learn what charges
apply to you.
CHARGE DEDUCTED FROM EACH PREMIUM PAYMENT. We will deduct the following charge
from each premium payment you make before we invest the payment in the
investment options you selected.
o Charge for taxes on premium payments. We will deduct a charge for taxes we
must pay on premiums. These taxes include federal, state or local income,
premium, excise, business, or any other type of tax (or part of one) that
is based on the amount of premium we receive.
This charge is currently made up of two parts:
o The first part is for state and local premium taxes. Currently,
it is 2.15% of the premium Prudential receives. (In some states,
this charge is called a premium-based administrative charge.)
o The second part is for federal income taxes that are based on
premiums. Currently, it is 0.35% of premiums received by
Prudential. We believe that this second charge is a reasonable
estimate of the increased cost for premium-based federal income
taxes resulting from a 1990 change in the Internal Revenue Code.
We may increase this charge if the cost of our taxes related to premiums is
increased. During 1998, we received approximately $61,000 in charges for
taxes on premium payments.
MONTHLY CERTIFICATE FUND CHARGES. Prudential will deduct the following charges
from your Certificate Fund each month. We will take the charges from each
investment option you selected, in the same proportion that the value of your
Certificate Fund is invested.
Generally, we will deduct these charges on the Monthly Deduction Date.
1. CHARGE FOR THE COST OF INSURANCE. We will deduct a charge for the cost of
your insurance.
To calculate the cost of insurance charge, we multiply:
your Certificate's "net amount at risk" by
the "cost of insurance rate" for the Covered Person.
"Net amount at risk" means the amount by which your Certificate's Death Benefit
(computed as if there were no Certificate Debt) exceeds your Certificate Fund.
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The "cost of insurance rate" is based on many factors, including:
o the Covered Person's age
o the Covered Person's rate class (such as classes for standard and
select status)
o the life expectancy of the people covered under your Group Contract
o the additional insurance benefits that the Group Contractholder
elected to buy as shown in the ADDITIONAL INSURANCE BENEFITS section
on page 48
o the expected expenses
The cost of insurance rate will generally increase as the Covered Person ages.
We may adjust the cost of insurance rates from time to time. The changes in cost
of insurance rates for each Group Contractholder are based on a number of
factors, including:
o the number of Certificates in effect
o the number of new Certificates issued
o the number of Certificates surrendered
o the expected claims (death benefits, living benefits, and surrenders)
o the expected cost of additional insurance benefits that the Group
Contractholder elected to buy
o the expected expenses
o administrative services provided by the Group Contractholder.
In addition to the list above, the past claims, expenses, and the costs of
additional insurance benefits of the group are reviewed since they are an
important factor in calculating the expected claims, expenses, and costs.
However, we are prohibited from recovering past losses by state insurance law.
If we change the cost of insurance rates, we will change them the same way for
all persons of the same age and rate class. We will not change them to be higher
than the guaranteed cost of insurance rates shown in your Certificate. The
guaranteed rates are set out in the 1980 CSO Table.
During 1998, we received approximately $554,000 in charges for cost of
insurance.
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2. CHARGE FOR ADMINISTRATIVE EXPENSES. Currently, we do not impose a monthly
charge for administrative expenses, but we may deduct such a charge in the
future. This charge would pay for maintaining records and for communicating
with Participants and your Group Contractholder. If we did deduct such a
charge, it would not exceed $4 per month. During 1998, we received no
charges for administrative expenses.
3. CHARGE FOR OTHER TAXES. We reserve the right to deduct a charge to cover
federal, state, or local taxes that are imposed on the operations of the
Separate Account. These are taxes other than those described under "CHARGE
FOR TAXES ON PREMIUM PAYMENTS" section above. Currently, we do not charge
for these other taxes.
DAILY DEDUCTION FROM THE SEPARATE ACCOUNT. Each day, Prudential deducts a charge
from the assets of the Separate Account in an amount currently equal to an
effective annual rate of 0.45%. We guarantee that the charge will not be more
than an effective annual rate of 0.90%.
This charge compensates us for assuming the mortality and expense risks of the
insurance provided under the Group Contract. The "mortality risk" is the risk
that Covered Persons may live for shorter periods of time than Prudential
estimated when we determined the mortality charge. The "expense risk" is the
risk that expenses for issuing and administering the insurance will be more than
Prudential estimated when we determined the charge for administrative expenses.
We will earn a profit from this risk charge to the extent we do not need it to
provide benefits and pay expenses under the Certificate. We do not assess this
charge on amounts allocated to the Fixed Account. During 1998, we received
approximately $7,000 in charges for mortality and expense risks.
TRANSACTION CHARGES. A Participant may incur a charge for partial withdrawals,
transfers, reinstatements, and additional statement requests. See the sections
of this prospectus that describe each of those transactions. Those sections also
describe the charges that Prudential may deduct.
EXPENSES INCURRED BY THE FUNDS. Participants indirectly bear the charges and
expenses of the Funds. To find out details about the investment management fees
and other underlying Fund expenses, you should see THE FUNDS section on page 14.
You should also read the prospectuses for the available Funds.
DIVIDENDS OR EXPERIENCE CREDITS
The Group Variable Universal Life Contract is eligible to receive Dividends or
Experience Credits. We do not guarantee, however, that we will pay Dividends or
Experience Credits.
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If there is a Dividend or Experience Credit, Prudential will pay it to your
Group Contractholder, who will pass it on to you in the form of a refund.
Ordinarily, any refund will be reinvested in your insurance - that is, as a
premium payment. However, you may choose to receive your refund in cash by
notifying Aon Securities Corporation in writing.
CASH SURRENDER VALUE
The Cash Surrender Value of your Certificate is equal to your Certificate Fund
MINUS any Certificate Debt and outstanding charges. On any day, your Certificate
Fund equals the sum of the amounts in the Funds, the amount invested in the
Fixed Account, and the Loan Account (see the LOANS section on page 35).
The Cash Surrender Value will change daily to reflect:
o Net Premiums;
o withdrawals;
o increases or decreases in the value of the Funds you selected;
o interest credited on any amounts allocated to the Fixed Account and on
the Loan Account;
o interest accrued on any loan;
o the daily asset charge for mortality and expense risks assessed
against the variable investment options; and
o monthly charges that Prudential deducts from your Certificate Fund.
If you ask, Aon Securities Corporation will tell you what the Cash Surrender
Value of your Certificate is. Prudential does not guarantee a minimum Cash
Surrender Value. It is possible for the Cash Surrender Value of your Certificate
to go down to zero.
The tables on pages T-1 through T-6 (following page 12) of this prospectus give
examples of what Cash Surrender Values would be for selected sample
Certificates. The examples assume there would be uniform investment results in
the selected Subaccount portfolios. The examples are only hypothetical and are
only meant to help you understand how the Certificate works.
FULL SURRENDERS
You may surrender your Certificate for its Cash Surrender Value at any time. If
you do, all insurance coverage will end. Prudential will calculate the Cash
Surrender Value as of the end of the Business Day on which Aon Securities
Corporation receives your request form in good order.
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We will pay the proceeds as described in the WHEN PROCEEDS ARE PAID section on
page 42.
A surrender may have tax consequences. See the TAX TREATMENT OF CERTIFICATE
BENEFITS section on page 40.
During 1998, we received approximately $30 in surrender charges.
PAID-UP COVERAGE
At any time, you may elect to use the Cash Surrender Value of your Certificate
to buy Paid-up Coverage. The minimum amount of Cash Surrender Value that you can
exchange is $1,000.
The amount of Paid-up Coverage that you can have will be limited to the amount
that you can buy with your Certificate's Cash Surrender Value. Also, it cannot
be more than the Death Benefit under your Certificate at the time you make the
exchange.
Paid-up Coverage will start as of the end of the Business Day on which Aon
Securities Corporation receives your request form in good order. Once the
Paid-up Coverage starts, all other coverage under your Certificate, including
any additional insurance benefits, will end. If you later decide to enroll under
the Group Contract again, Prudential may limit your future amount of coverage.
If you did not use your entire Cash Surrender Value to buy the Paid-up Coverage,
Prudential will pay you the remaining amount as of the end of the first Business
Day after Aon Securities Corporation receives your request form. We will pay it
as described in the WHEN PROCEEDS ARE PAID section on page 42. This withdrawal
may affect the way you are taxed. See the TAX TREATMENT OF CERTIFICATE BENEFITS
section on page 40.
The purchase of Paid-up Coverage could make your Certificate a Modified
Endowment Contract. See the TAX TREATMENT OF CERTIFICATE BENEFITS section on
page 40.
PARTIAL WITHDRAWALS
While your Certificate is in effect, you may withdraw part of your Certificate's
Cash Surrender Value. We will take it from each investment option you selected
in the same proportions as the value of your Certificate Fund is invested,
unless your request tells us to take the withdrawal from only selected
investment options.
Partial withdrawals will be effective as of the end of the Business Day on which
Aon Securities Corporation receives your request form. We will pay you the
withdrawn money as described in the WHEN PROCEEDS ARE PAID section on page 42.
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You must withdraw at least $200 in any partial withdrawal. You may withdraw any
amount that is more than $200, but you must leave enough in your Certificate
Fund (less any Certificate Debt and outstanding charges) to pay the next month's
charges.
There is no limit on the number of partial withdrawals you can make in a year.
However, there is a transaction charge for each partial withdrawal. Currently,
this charge is $10 or 2% of the amount you withdraw, whichever is less. In the
future, Prudential may raise this charge, but not above $20. We will deduct the
transaction charge from the amount you withdraw.
You may not repay any amount that you withdraw.
Withdrawals may have tax consequences. See the TAX TREATMENT OF CERTIFICATE
BENEFITS section on page 40.
LOANS
You may borrow up to the Loan Value of your Certificate Fund. The Loan Value is
90% of your Certificate Fund minus any existing loan (and its accrued interest),
any outstanding charges, and the amount of the next month's charges. In states
that require it, you may borrow a greater amount.
The minimum amount that you can borrow at any one time is $200. You cannot take
a loan if Certificate Debt exceeds the Loan Value, or if the Loan Value is less
than the $200 minimum. Prudential will pay loan proceeds as described in the
WHEN PROCEEDS ARE PAID section on page 42.
Interest on the loan will accrue daily at a rate of between 5% and 8%. Interest
payments are due the day before the Contract Anniversary. If you do not pay the
interest when it is due, we will add it to the principal amount of the loan.
When this happens, we will take an amount out of your investment options to make
the loan and the Loan Account equal in value.
When you take a loan from your Certificate Fund, here's what happens:
o We will take an amount equal to the loan out of each of your
investment options on a pro-rata basis unless you tell us to take it
only from selected investment options.
o We will start a Loan Account for you and will credit the Loan Account
with an amount equal to the loan.
o We will generally credit interest to the amount in the Loan Account at
an effective annual rate that is currently 1% less than the rate
Prudential charges as interest on the loan. This may change in the
future, but the difference in the rates will range between 1% and 2%.
The crediting rate will generally be equal to the Fixed Account
crediting rate, but will never be less than 4%.
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You may repay all or part of a loan at any time. We will apply a loan repayment
first against any unpaid loan interest and then to reduce the principal amount
of the loan. You may repay a loan either by repayment or by withdrawing amounts
from the Certificate Fund. You should send your loan repayments directly to
Prudential. You may request a loan repayment form from Aon Securities
Corporation.
If you repay a loan by using the Certificate Fund, we will treat the repayment
as a partial withdrawal from the Certificate Fund. A partial withdrawal may have
tax consequences. See the PARTIAL WITHDRAWALS section on page 34 and the TAX
TREATMENT OF CERTIFICATE BENEFITS section on page 40.
Your Loan Account plus accrued interest (together, these are called "Certificate
Debt") may not exceed the value of your Certificate Fund. If Certificate Debt
exceeds the value of your Certificate Fund, you will not have enough money in
your Certificate Fund to cover the month's charges. See the LAPSE section on
page 36.
If you still have Certificate Debt outstanding when you surrender your
Certificate or when you allow your Certificate to lapse, the amount you borrowed
may become taxable. Also, loans from Modified Endowment Contracts may be treated
for tax purposes as distributions of income. See the TAX TREATMENT OF
CERTIFICATE BENEFITS section on page 40.
If we pay the Death Benefit or the Cash Surrender Value while a loan is
outstanding, we will reduce the Death Benefit or the Cash Surrender Value by the
Certificate Debt.
A loan will have a permanent effect on your Certificate's Cash Surrender Value.
It may also have a permanent effect on the Death Benefit. This happens because
the investment results of the investment options you selected will apply only to
the amount remaining in those investment options after the loan amount is
transferred to the Loan Account. The longer a loan is outstanding, the greater
the effect is likely to be.
LAPSE
In general, your Certificate will remain in force as long as the balance in your
Certificate Fund (less any Certificate Debt and outstanding charges) is enough
to pay the monthly charges when due. If it is not enough, Aon Securities
Corporation will send you a notice to tell you that your insurance is going to
end, how much you must pay to stop it from ending, and when you must pay it.
In insurance terms, we call it a LAPSE when insurance ends because the charges
for it are not paid.
HOW YOU CAN STOP YOUR INSURANCE FROM LAPSING. You must make a payment that is
enough to pay outstanding charges. Aon Securities Corporation must receive the
payment by the later of:
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o 61 days after the Monthly Deduction Date; or
o 30 days after the date Aon Securities Corporation mailed you the
notice.
If you do not, your insurance will lapse and your Certificate will no longer
have any value. A Certificate that lapses with Certificate Debt may affect the
way you are taxed. See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page
40.
Aon Securities Corporation will send the notice to your last known address on
file. If the Covered Person dies during the grace period, we will reduce the
Death Benefit by any past due monthly charges and by any Certificate Debt.
TERMINATION OF THE GROUP CONTRACTHOLDER'S PARTICIPATION IN THE GROUP
CONTRACT
Your Group Contractholder may decide to terminate the Group Contract with
Prudential. In addition, Prudential may terminate a Group Contract:
o If the aggregate Face Amount of all Certificates, or the number of
Certificates issued, falls below the permitted minimum, by giving the
Group Contractholder 90 days' written notice.
o If the Group Contractholder fails to remit premium payments to
Prudential in a timely way, at the end of the grace period.
o For any other reason, effective on a Contract Anniversary, by giving
the Group Contractholder 31 days' written notice.
Termination of the Group Contract means that your Group Contractholder will not
remit premiums to Prudential. In that event, no new Certificates will be issued
under the Group Contract. How the termination affects you is described in the
OPTIONS ON TERMINATION OF COVERAGE section on page 38. The options that are
available to you from Prudential may depend on what other insurance options are
available to you. You should refer to your particular Certificate to find out
more about your options at termination of coverage.
PARTICIPANTS WHO ARE NO LONGER ELIGIBLE GROUP MEMBERS
If you are no longer a member of either the AICPA or any Qualified State Society
of CPAs, you are no longer eligible for coverage. Your Group Variable Universal
Life Insurance will end on the last day of the month in which Aon Securities
Corporation receives notice that you are no longer eligible for coverage.
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If your insurance ends, you have the options of Conversion, Paid-up Coverage,
and payment of Cash Surrender Value, which are described in the OPTIONS ON
TERMINATION OF COVERAGE section on page 38.
If you are a member of both the AICPA and a Qualified State Society of CPAs, and
you end one of those memberships, your coverage may be reduced. If that happens,
you will have a Conversion Privilege to the extent of the reduction.
OPTIONS ON TERMINATION OF COVERAGE
Your insurance coverage under the Group Contract will end when the Group
Contract itself ends or when you are no longer an Eligible Group Member.
When your Group Contractholder ends a Group Contract, the effect on Participants
depends on whether or not your Group Contractholder replaces the Group Contract
with another life insurance contract that allows for the accumulation of cash
value. Generally, here is what will happen:
o If your Group Contractholder DOES replace the Group Contract with
another life insurance contract that allows for the accumulation of
cash value, Prudential will terminate your Certificate. We will also
transfer the Cash Surrender Value of your Certificate directly to that
new contract, unless you elect to receive the Cash Surrender Value.
o If your Group Contractholder DOES NOT replace the Group Contract with
another life insurance contract that allows for the accumulation of
cash value, you will have the options listed below.
CONVERSION. You may elect to convert your Certificate to an individual life
insurance policy without giving Prudential evidence that the Covered Person is
in good health. To elect this option, you must apply for it:
o within 45 days after your Certificate ends, if you were given written
notice more than 15 days, but less than 90 days, after coverage under
the Group Contract ends, or
o within 90 days after your Certificate ends, if you were not given
written notice.
You may select any form of individual life insurance policy (other than term
insurance) that Prudential normally makes available to persons who are the same
age as you and who are asking for the same amount of life insurance. Your
premiums for the individual life insurance policy will be based on the type and
amount of life insurance you select, your age, and your risk class.
If your Certificate ended because you are no longer an Eligible Group Member,
you may not convert more than the Face Amount of your Certificate. If your
Certificate ended because the Group Contract ended, the amount you are able to
convert may be limited to the Face Amount of your Certificate MINUS the amount
of any group insurance that you become eligible for within 45 days after your
Certificate ends.
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If a Covered Person dies within 90 days after the Certificate ends and you had
the right to convert to an individual policy, we will pay a Death Benefit under
the Certificate. But, the Death Benefit will be equal to the amount of
individual insurance you could have had if you had actually made the conversion
to the individual policy.
PAID-UP COVERAGE. You may elect to use your Certificate's Cash Surrender Value
to buy fixed Paid-up Coverage on the Covered Person. To use this option, you
must have at least $1,000 of Cash Surrender Value on the day your Certificate
ends. The insurance amount will depend on how much the Cash Surrender Value is
and on the age of the Covered Person. But, the amount of Paid-up Coverage cannot
be more than your Certificate's Death Benefit right before you buy the Paid-up
Coverage.
You may elect this option within 91 days of the date your Certificate ends.
Prudential will make the Paid-up Coverage effective as of the end of the
Business Day on which Aon Securities Corporation receives your request on the
form we require you to use for this purpose. If you elect this option, your
insurance may become a Modified Endowment Contract under the Internal Revenue
Code. See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page 40.
PAYMENT OF CASH SURRENDER VALUE. You may receive the Cash Surrender Value by
surrendering your Certificate. To do this, you must make a request to Aon
Securities Corporation on the form that we require you to use for this purpose.
If you do not choose one of the options described above within 91 days of the
date the Certificate ends, we will exchange your Certificate Fund for Paid-up
Coverage if your Certificate Fund value is at least $1,000. If it does not have
that much value, we will pay the Cash Surrender Value.
REINSTATEMENT
You may request reinstatement of a lapsed Certificate any time within 3 years
after the end of the grace period. But, you must be less than the maximum age at
which a Certificate may be held. We will not reinstate a lapsed Certificate if
the Group Contract under which the Certificate was issued ended or if you are no
longer an Eligible Group Member. (If you are an Applicant Owner, we will not
reinstate a lapsed Certificate if the Covered Person is no longer eligible for
coverage under the Group Contract.)
To reinstate your Certificate, you must send the following items to Aon
Securities Corporation:
o A written request for reinstatement.
o Evidence of the good health of the Covered Person. The evidence must
be satisfactory to Prudential.
o A premium payment (less any charges that apply) that is at least
enough to pay the monthly charges for the grace period and for two
more months. See the CHARGES AND EXPENSES section on page 30.
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o If your Certificate Debt was not repaid at lapse, you must repay it
upon reinstatement. (Such repayment would not be subject to any
charges deducted from premium payments.)
o We will make your Certificate effective again on the Monthly Deduction
Date that occurs after we approve your request for reinstatement. The
terms of your original Certificate will still apply. We will apply a
new 2-year period of incontestability, and the period during which the
suicide exclusion applies will start over again. See the
INCONTESTABILITY section on page 43 and the SUICIDE EXCLUSION section
on page 44.
o Currently, we do not charge for a reinstatement. But, we reserve the
right to charge for reinstatements in the future.
TAX TREATMENT OF CERTIFICATE BENEFITS
INTRODUCTION
This summary provides general information on the federal income tax treatment of
a Certificate under the Group Contract. It is not a complete statement of what
the federal income taxes will be in all circumstances. It is based on current
law and interpretations, which may change. It does not cover state taxes or
other taxes. It is not intended as tax advice. You should consult your own tax
advisor for complete information and advice.
TREATMENT AS LIFE INSURANCE AND INVESTOR CONTROL
The Certificate must meet certain requirements to qualify as life insurance for
tax purposes. These requirements include certain definitional tests and rules
for diversification of investments. For further information on the
diversification requirements, see Dividends, Distributions and Taxes in the
applicable Fund prospectuses.
We believe we have taken adequate steps to insure that the Certificate qualifies
as life insurance for tax purposes. Generally speaking, this means that:
o you will not be taxed on the growth of the funds in the Certificate
Fund, unless you receive a distribution, and
o the Certificate's Death Benefit will be tax free to your beneficiary.
Although we believe that the Certificate should qualify as life insurance for
tax purposes, there are some uncertainties, particularly because the Secretary
of Treasury has not yet issued permanent regulations that bear on this question.
Moreover, regulations issued to date do not provide guidance concerning the
extent to which Participants may direct their investments to the particular
available subaccounts of a separate account without causing the Participants
(instead of Prudential) to be considered the owners of the underlying assets.
The ownership rights under the Certificate are similar to, but different in
certain respects from, those addressed by the Internal Revenue Service in
rulings holding that the insurance company was the owner of the assets. For
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example, Participants have the choice of more funds and the ability to
reallocate amounts among available Subaccounts more frequently than in the
rulings. While we believe that Prudential will be treated as the owner of the
Separate Account assets, it is possible that the Participants may be considered
to own the assets.
Because of these uncertainties, we reserve the right to make changes - which
will be applied uniformly to all Participants after advance written notice -
that we deem necessary to insure that the Certificates under the Group Contract
will qualify as life insurance and that Prudential will be treated as the owner
of the underlying assets.
DISTRIBUTIONS
The tax treatment of any distribution you receive before the Covered Person's
death depends on whether your Certificate is classified as a Modified Endowment
Contract.
CERTIFICATES NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS
o If you surrender your Certificate or allow it to lapse, you will be taxed
on the amount you receive in excess of the premiums you paid less the
untaxed portion of any prior withdrawals. For this purpose, you will be
treated as receiving any portion of the Cash Surrender Value used to repay
Certificate Debt. The tax consequences of a surrender may differ if you
take the proceeds under an income payment settlement option.
o Generally, you will be taxed on a withdrawal to the extent the amount you
receive exceeds the premiums you paid for the Certificate less the untaxed
portion of any prior withdrawals. However, under some limited
circumstances, in the first 15 Certificate Years, all or a portion of a
withdrawal may be taxed if the Certificate Fund exceeds the total premiums
paid less the untaxed portions of any prior withdrawals, even if total
withdrawals do not exceed total premiums paid.
o Extra premiums for optional benefits and riders generally do not count in
computing the premiums paid for the Certificate for the purposes of
determining whether a withdrawal is taxable.
o Loans you take against the Certificate are ordinarily treated as debt and
are not considered distributions subject to tax.
MODIFIED ENDOWMENT CONTRACTS
o The rules change if the Certificate is classified as a Modified Endowment
Contract. The Certificate could be classified as a Modified Endowment
Contract if premiums in excess of certain IRS limits are paid, or a change
in the Face Amount of insurance is made (or a rider is added or removed).
The addition of a rider or an increase in the Face Amount of insurance
may also cause the Certificate to be classified as a Modified Endowment
Contract. You should first consult a tax advisor if you are contemplating
any of these steps.
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o If the Certificate is classified as a Modified Endowment Contract, then
amounts you receive under the Certificate before the Covered Person's
death, including loans and withdrawals, are included in income to the
extent that the Certificate Fund before surrender charges exceeds the
premiums paid for the Certificate increased by the amount of any loans
previously included in income and reduced by any untaxed amounts previously
received other than the amount of any loans excludible from income. An
assignment of a Modified Endowment Contract is taxable in the same way.
These rules also apply to loans, withdrawals, and full surrenders made
during the two-year period before the time that the Certificate became a
Modified Endowment Contract.
o Any taxable income on pre-death distributions (including full surrenders)
is subject to a penalty tax of 10 percent unless the amount is received on
or after age 59-1/2, on account of your becoming disabled or as a life
annuity.
o All Modified Endowment Contracts issued by us to you during the same
calendar year are treated as a single Certificate for purposes of applying
these rules.
WITHHOLDING
You must affirmatively elect that no taxes be withheld from a pre-death
distribution. Otherwise, the taxable portion of any amounts you receive will be
subject to withholding. You are not permitted to elect out of withholding if you
do not provide a social security number or other taxpayer identification number.
You may be subject to penalties under the estimated tax payment rules if your
withholding and estimated tax payments are insufficient to cover the tax due.
OTHER TAX CONSIDERATIONS
If you transfer or assign the Certificate to someone else, there may be gift,
estate and/or income tax consequences. If you transfer the Certificate to a
person two or more generations younger than you (or designate such a younger
person as a beneficiary), there may be Generation Skipping Transfer tax
consequences. Deductions for interest paid or accrued on Certificate Debt or on
other loans that are incurred or continued to purchase or carry the Certificate
may be denied. Your individual situation or that of your beneficiary will
determine the federal estate taxes and the state and local estate, inheritance
and other taxes due if you or the Covered Person dies.
The earnings of the Separate Account are taxed as part of Prudential's
operations. The Separate Account does not intend to qualify as a regulated
investment company under the Internal Revenue Code.
WHEN PROCEEDS ARE PAID
Prudential will generally pay any Death Benefit, Cash Surrender Value, partial
withdrawal or loan proceeds within 7 days after Aon Securities Corporation
receives the request for payment. We will determine the amount of the Death
Benefit as of the date of the Covered Person's death. For other types of
redemptions, we will determine the amount of the proceeds as of the end of the
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Business Day on which we received the request in good order. There are certain
circumstances when we delay payment of proceeds:
o We may delay payment of proceeds that come from the Funds and the
variable part of the Death Benefit if any of the following events
occurs: the New York Stock Exchange is closed (other than for a
regular holiday or a weekend), trading is restricted by the SEC, or
the SEC declares that an emergency exists.
o We expect to pay proceeds that come from the Fixed Account or from
Paid-up Coverage promptly upon request. But, we do have the right to
delay these payments (other than the Death Benefit) for up to six
months (or a shorter period, if required by state law). We will pay
interest at the current rate for settlement options left with
Prudential to accumulate with interest if we delay payment for more
than 10 days.
BENEFICIARY
You have the right to name the beneficiary who will receive the Death Benefit
from your Certificate. You must use the form that Prudential requires you to
use. You may change the beneficiary at any time. You do not need the consent of
the present beneficiary. If you have more than one beneficiary at the time the
Covered Person dies, we will pay the Death Benefit in equal parts to each
beneficiary, unless you have given us other instructions.
INCONTESTABILITY
After your Certificate has been in force for two years or more during the
Covered Person's lifetime, Prudential will not contest liability under the
Certificate. We will also not contest liability for any change in your
Certificate that required our approval after the change has been in force for
two years or more during the Covered Person's lifetime.
MISSTATEMENT OF AGE
If the Covered Person's age is stated incorrectly in the Certificate, we will
adjust the monthly cost of insurance deduction to reflect the proper amount
based on the correct age.
If an adjustment results in an increased cost of insurance, Aon Securities
Corporation will bill for the difference. If an adjustment results in a
decreased cost of insurance, Aon Securities Corporation will refund the
difference. If the change in age affects the amount of the person's insurance,
Prudential will change the amount and the cost of insurance accordingly.
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SUICIDE EXCLUSION
Generally, if the Covered Person dies by suicide within one year from the
Certificate Date or reinstatement, Prudential will not pay the Death Benefit
described in other sections of this prospectus. Instead, we will pay your
beneficiary an amount equal to your premium payments minus any Certificate Debt,
outstanding charges, and any partial withdrawals since the Certificate Date or
reinstatement. This limit will apply whether the suicide occurred while the
Covered Person was sane or insane.
If the Covered Person dies by suicide within one year after the effective date
of an increase in the Face Amount of your Certificate that required our
approval, we will not pay the increased amount of insurance. Instead of the
amount of the increase, we will pay your beneficiary the monthly charges that
were attributable to the increased amount. Again, this limit will apply whether
the suicide occurred while the Covered Person was sane or insane.
MODES OF SETTLEMENT
The DEATH BENEFITS section describes how your beneficiary may receive the Death
Benefit. In addition to the methods described in the DEATH BENEFITS section,
Prudential also makes these methods available. They are known as "modes of
settlement":
OPTION 1: PAYMENTS FOR A FIXED PERIOD
The Death Benefit plus interest is paid over a fixed number of years
(1-25). The payment may be received monthly, quarterly, semi-annually or
annually. The payment amount will be higher or lower depending on the
period selected.
The interest rate can change, but will not be less than the guaranteed rate
shown in the claim settlement certificate that your beneficiary will
receive. Your beneficiary may withdraw the total present value of payments
not yet made at any time.
OPTION 2: PAYMENT IN INSTALLMENTS FOR LIFE
The Death Benefit provides monthly payments in installments for as long as
your beneficiary lives. Your beneficiary may choose a guaranteed minimum
payment period (5, 10 or 20 years) or an installment refund, which will
guarantee that the sum of the payments equals the amount of the Death
Benefit payable under this option. If your beneficiary dies before
Prudential has made all guaranteed payments, Prudential will pay the
present value of the remaining guaranteed payments to a payee your
beneficiary designated.
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OPTION 3: INTEREST INCOME
The Death Benefit remains with Prudential and earns interest. This option
allows you or your beneficiary to leave the Death Benefit with Prudential
and choose another settlement option at a later time. Withdrawals of $100
or more (including the entire unpaid Death Benefit) can be made at any
time. The interest income may be received monthly, quarterly,
semi-annually, or annually.
The interest rate can change, but will not be less than the guaranteed rate
shown in the claim settlement certificate that you or your beneficiary will
receive.
OPTION 4: PAYMENTS OF A FIXED AMOUNT
Your beneficiary receives a guaranteed specified sum for a limited number
of years. This guaranteed specified sum represents a return of the
principal (Death Benefit) and interest paid. The payment may be received
monthly, quarterly, semi-annually, or annually, as determined by the
beneficiary.
The interest rate can change, but will not be less than the guaranteed rate
shown in the claim settlement certificate that your beneficiary will
receive. Any interest credited will be used to extend the payment period.
OPTION 5: CERTIFICATE OF DEPOSIT
The Death Benefit is used to purchase a certificate of deposit that is
issued by The Prudential Bank. Certificates of Deposit (CDs) are
investments that allow your beneficiary to choose a variety of short- and
long-term deposit options. They are designed to accrue interest monthly,
quarterly, semi-annually, annually or at maturity. Interest rates are
guaranteed for the term of the CD. There is generally a $10,000 minimum
amount for this option.
Under each of the above options, each payment must generally be at least $20.
If your beneficiary elects one of these settlement options, the tax treatment of
the Death Benefit may be different than it would have been had the option not
been elected. Your beneficiary should get advice from a tax advisor.
ASSIGNMENT
You may assign your Certificate, including all rights, benefits and privileges
that you have. Prudential will honor the assignment only if: (1) you make the
assignment in writing; (2) you sign it; and (3) Aon Securities Corporation
receives a copy of the assignment, or Prudential receives a copy of the
assignment at the Prudential office shown in your Certificate. We are not
responsible for determining whether the assignment is legal or valid.
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Throughout this prospectus, we describe various rights that you have. You may
assign those rights to someone else. If you do, you should consider the
references to "you" in this prospectus as applying to the person to whom you
validly assigned your Certificate.
If you assign a Certificate that is a Modified Endowment Contract, it might
affect the way you are taxed. It might also affect the way the person to whom
you assign the Certificate is taxed. See the TAX TREATMENT OF CERTIFICATE
BENEFITS section on page 40.
APPLICANT OWNER PROVISION
The Group Contract has an "applicant owner" provision. An Applicant Owner is a
person who may apply for coverage on the life of an Eligible Group Member. And,
as with an assignment, if a Participant agrees to let another person be the
Applicant Owner of the Certificate, that person would have all of the rights to
make decisions about the coverage. References to "Participant" and "you" in this
prospectus apply to both (1) an Eligible Group Member who has obtained insurance
coverage on his or her own life, and (2) an Applicant Owner who has obtained
insurance coverage on the life of an Eligible Group Member.
When naming an Applicant Owner, the Eligible Group Member must agree to have his
or her life covered. Examples of people who may be Applicant Owners are the
Eligible Group Member's spouse, child, parent, grandparent, grandchild, sister,
brother, or the trustee of any trust set up by the Eligible Group Member. A
person must have attained the age of majority to be an Applicant Owner. At any
one time, only one person may be an Applicant Owner under a Certificate.
An Applicant Owner must fill out an enrollment form. The Eligible Group Member
must sign the enrollment form to show his or her agreement. Prudential may
require the Eligible Group Member to answer questions about his or her health,
or to have a medical examination. If we approve the enrollment form, we will
issue the Certificate to the Applicant Owner.
VOTING RIGHTS
The assets that are held in the Separate Account are invested in the Funds.
Prudential is the legal owner of those shares. Because we are the owner, we have
the right to vote on any matter that shareholders of the Funds vote on. The
voting happens at regular and special shareholder meetings. We will (as required
by law) vote in accordance with voting instructions we receive from
Participants. A Fund may not hold annual shareholder meetings when not required
to do so under the laws of the state of its incorporation or under the federal
securities laws.
If we do not receive timely voting instructions for Fund shares from
Participants, we will vote those shares in the same proportion as shares in the
Funds for which we do receive instructions. We will do the same thing for shares
held as general account investments of Prudential. If the federal securities
laws change so that Prudential is allowed to vote on Fund shares in our own
right, we may decide to do so.
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Generally, you may give us voting instructions on matters that would be changes
in fundamental investment policies of the Funds. You may also give us voting
instructions on any matter that requires a vote of the Fund's shareholders. But,
if a Fund that you participate in has a vote on approval of the investment
advisory agreement or any change in a Fund's fundamental investment policy, you
will vote separately by Fund. This practice is dictated by the federal
securities laws.
Here's how we will determine the number of Fund shares and votes for which you
may give instructions:
o To determine the number of Fund shares, we will divide the part of
your Certificate Fund that is derived from participation in a
Subaccount by the value of one share in the corresponding portfolio of
the applicable Fund.
o The number of votes will be determined as of the record date chosen by
the Board of Directors of the applicable Fund.
We will give you the proper forms and proxies to give these instructions. We
reserve the right to change the way in which we calculate the weight we give to
voting instructions. We would make such a change to comply with federal
regulations.
If we are required by state insurance regulations, we may disregard voting
instructions in certain instances. We may disregard instructions if: (1) the
instructions would require shares to be voted in a way that would cause a change
in the sub-classification or investment objectives of one or more of the Funds'
portfolios, or (2) the instruction would approve or disapprove an investment
advisory contract for a Fund. Also, Prudential itself may disregard voting
instructions that would require changes in the investment policy or investment
advisor of one or more of the Funds' portfolios, provided that Prudential
reasonably disapproves such changes in accordance with applicable federal
regulations. If Prudential does disregard voting instructions, we will tell you
that we did and our reasons for it in the next annual or semi-annual report to
Participants.
SUBSTITUTION OF FUND SHARES
If Prudential's management thinks that an available portfolio of the Funds
becomes unsuitable for investment by Participants, we may substitute the shares
of another portfolio or of an entirely different mutual fund. Our management
might find a portfolio to be unsuitable because of investment policy changes,
tax law changes or considerations, the unavailability of shares for investment
or other reasons, including our discretion. Before Prudential can substitute
shares, the SEC, and possibly one or more state insurance departments, must
approve the substitution. We would notify you and your Group Contractholder if
we were to make such a substitution.
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ADDITIONAL INSURANCE BENEFITS
The following additional insurance benefits are available to you, either
automatically or as options.
If you choose Extension of Coverage and Waiver of Cost of Insurance Charges
During Total Disability, any annual refund you might receive will generally be
reduced. (You may receive an annual refund if your Group Contractholder receives
a share of Prudential's divisible surplus. See DIVIDENDS OR EXPERIENCE CREDITS
on page 32.)
ACCELERATED DEATH BENEFIT. You are automatically covered for the Accelerated
Death Benefit. Under an accelerated death benefit, you can elect to receive an
early payment of part of the Certificate's Death Benefit when the Covered Person
is diagnosed as being terminally ill. "Terminally ill" means the Covered Person
has a life expectancy of 6 months or less. You must give Prudential satisfactory
evidence that the Covered Person is terminally ill. You may receive the
accelerated payment in a lump sum.
When we pay the Death Benefit under this option, it will be adjusted to reflect
its present value. The adjusted Death Benefit will always be less than the Death
Benefit, but may be greater than the Certificate's Cash Surrender Value.
We will not pay an accelerated death benefit if coverage was assigned or if you
are required to elect it to meet the claims of creditors or to obtain a
government benefit. We can furnish details about the amount of accelerated death
benefit that is available to you. Unless required by law, you can no longer
request an increase in the Face Amount of your Certificate once you have elected
to receive an accelerated death benefit. The amount of future premium payments
you can make will also be limited.
Adding the Accelerated Death Benefit to your Certificate will not affect the way
you are taxed. This income tax exclusion may not apply if the benefit is paid to
someone other than the Participant. But, if you actually receive proceeds from
the Accelerated Death Benefit, it could have tax consequences and may affect
your eligibility for certain government benefits or entitlements. In general,
the accelerated death benefit is excluded from income if the Covered Person 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 tax advisor
before you elect to receive this benefit.
ACCIDENTAL DEATH AND DISMEMBERMENT BENEFIT. If you are younger than age 75, you
are automatically covered for an Accidental Death and Dismemberment Benefit.
This benefit provides you insurance, up to the Face Amount, for accidental loss
of life, sight, hand, or foot. This benefit excludes certain types of losses.
For example, losses due to suicide or attempted suicide, diseases and
infirmities and acts of war are not covered. The benefit may be subject to other
exclusions from coverage, age limitations, and benefit limitations. You should
refer to your Certificate to learn the details of any benefit that may be
available to you. This benefit ends when you reach age 75.
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EXTENSION OF COVERAGE AND WAIVER OF COST OF INSURANCE DURING TOTAL DISABILITY.
You may choose an extended death benefit that provides protection during your
total disability. Under this provision, we will waive your monthly charges if
you become totally disabled for at least 9 months prior to age 60. The amount of
insurance that will be extended is your Face Amount of insurance.
We will extend your insurance coverage for successive one-year periods,
generally until age 75. You must provide satisfactory proof of continued total
disability. At age 75, Monthly Charges will again be deducted and coverage may
lapse if the Certificate Fund is insufficient. See the LAPSE section on page 36.
If you choose this optional benefit, it will reduce the amount of the annual
refund that you would otherwise receive from your Group Contractholder.
REPORTS
Prudential will send you quarterly statements that give you certain information
about your insurance. These statements will give you details about the value of
your Certificate Fund, about transactions that you made, and specific insurance
data about your coverage.
If you make a request, we will also send you a current statement about your
insurance. It will give you the same kind of information as the quarterly
statement does. We may limit the number of current statements you may request.
We will charge you $10 for additional statements. We may increase this charge in
the future, but we will not increase it above $20 for each additional report.
We will also send to you and to your Group Contractholder, annual and
semi-annual reports that list the securities held in each available portfolio of
the Funds. The federal securities laws require these reports. Prudential keeps
records about the Separate Account pursuant to the federal securities laws.
If you invest in the Series Fund through more than one variable insurance
contract, you will ordinarily receive only one copy of each annual and
semi-annual report issued by the Series Fund. But, if you want another copy of a
report, you may ask us for one by calling the telephone number listed on the
inside cover page of this prospectus.
SALE OF THE CONTRACT
Prudential Investment Management Services LLC (referred to as "PIMS") acts as
the principal underwriter of the Group Contracts and Certificates. PIMS is a
direct, wholly-owned subsidiary of Prudential.
PIMS, organized in 1996 under Delaware law, is registered as a broker-dealer
under the federal securities laws. PIMS is also a member of the National
Association of Securities Dealers, Inc. PIMS's principal business address is 751
Broad Street, Newark, New Jersey 07102. PIMS also acts as principal underwriter
with respect to the securities of other Prudential investment companies.
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The Group Contracts and Certificates are sold by persons who are registered
representatives of PIMS and who are also authorized by state insurance
departments. The Group Contracts and Certificates may also be sold through other
broker-dealers authorized by PIMS and applicable law to do so.
The distribution agreement between PIMS and Prudential will terminate
automatically upon its assignment (as that term is defined in the federal
securities laws). But, PIMS may transfer the agreement, without the prior
written consent of Prudential, under the circumstances set forth in the federal
securities laws. Either party may terminate the agreement at any time if the
party gives 60 days written notice to the other party.
RATINGS AND ADVERTISEMENTS
Independent financial rating services - including Moody's, Standard & Poors,
Duff & Phelps and A.M. Best Company - rate Prudential. These ratings reflect our
financial strength and claims-paying ability. They are not intended to rate the
investment experience or financial strength of the Separate Account. We may
advertise these ratings from time to time. Furthermore, we may include in
advertisements comparisons of currently taxable and tax-deferred investment
programs, based on selected tax brackets, or discussions of alternative
investment vehicles and general economic conditions.
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. We
reserve the right to change the Group Contract and Certificate to comply with
applicable state insurance laws and interpretations thereof.
We are required to submit annual statements of our operations, including
financial statements, to the insurance departments of the various jurisdictions
in which we do business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, we are required to file
with New Jersey and other jurisdictions a separate statement with respect to the
operations of all our variable contract accounts, in a form promulgated by the
National Association of Insurance Commissioners.
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EXPERTS
The consolidated financial statements of Prudential and Subsidiaries as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 and the financial statements of the Separate Account as of
December 31, 1998 and for the period July l, 1998 through December 31, 1998
included in this registration statement have been so included in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants given on the
authority of said firm as experts in auditing and accounting.
PricewaterhouseCoopers LLP's principal business address is 1177 Avenue of the
Americas, New York, New York 10036.
Actuarial matters included in this prospectus have been examined by Stuart L.
Liebeskind, FSA, MAAA, Vice President and Actuary 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. The Supreme Court denied certiorari in January
1999, thereby making final the approval of the class action settlement.
Pursuant to the Settlement, Prudential agreed to provide and has been
implementing 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, 1998, based on an analysis of claims
actually remedied, a sample of claims still to be remedied, and estimates of
additional liabilities associated with the ADR program, management estimated the
cost, before taxes, of remedying policyholder claims in the ADR process to be
approximately $2.56 billion. While management believes these to be reasonable
estimates based on available information, the ultimate amount of the total cost
of remedied policyholder claims and other related costs is dependent on complex
and varying factors, including the relief options still to be chosen by
claimants, the dollar value of those options, and the number and type of claims
that may successfully be appealed.
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.
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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.
Prudential's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted with precision. 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 the matters specifically discussed above.
Management believes, however, that the ultimate resolution of all such matters,
after consideration of applicable reserves, should not have a material adverse
effect on Prudential's financial position.
THE YEAR 2000 ISSUE
The services provided to a Group Contractholder or Participant of Group Variable
Universal Life depend on the smooth functioning of numerous computer systems.
Many computer systems in use today are programmed to recognize only the last two
digits of a date as the year. As a result, any systems using this kind of
programming can not distinguish a date using "00" and may treat it as "1900"
instead of "2000." This problem may impact computer systems that store business
information, but it could also affect other equipment used in our business like
telephones, fax machines and elevators. If this problem is not corrected, the
"Year 2000" issue could affect the accuracy and integrity of business records.
Prudential's regular business operations could be interrupted as well as those
of other companies that deal with us.
In addition, the operations of the mutual funds associated with Group Variable
Universal Life could experience problems resulting from the Year 2000 issue.
Please refer to the respective mutual fund's prospectus for information
regarding their approach to Year 2000 concerns. The following describes
Prudential's effort to address Year 2000 concerns.
To address this potential problem Prudential organized its Year 2000 efforts
around the following three areas:
o BUSINESS SYSTEMS - Computer programs directly used to support our
business;
o INFRASTRUCTURE - Computers and other business equipment like
telephones and fax machines; and
o BUSINESS PARTNERS - Year 2000 readiness of essential business
partners.
BUSINESS SYSTEMS. The business systems component includes a wide range of
computer programs that directly support Prudential's business operations
including systems for: insurance product processing, securities trading,
personnel record keeping and general accounting systems. All
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business systems were analyzed to determine whether each computer program with a
Year 2000 problem should be retired, replaced or renovated. The majority of this
work has been completed. A few remaining programs are currently being tested and
completion of this process is expected by June 1999.
INFRASTRUCTURE. As with business applications, we established a specific
methodology and process for addressing infrastructure issues. The infrastructure
effort includes mainframe computer system hardware and operating system
software, mid-range systems and servers, telecommunications equipment and
systems, buildings and facilities systems, personal computers, and vendor
hardware and software. Other than desktop systems, substantially all other
infrastructure systems have been tested. Presently a small number of midrange
computers, and building and facility systems are still in the testing phase. We
expect to have the infrastructure implementation process completed by June 1999.
BUSINESS PARTNERS. Prudential recognizes the importance of determining the Year
2000 readiness of external business relationships especially those that involve
electronic data transfer products and services, and products that impact our
essential business processes. Prudential first classified each business partner
as "highly critical" or "less critical" to our business and then began to
develop risk assessment and contingency plans to address the potential that a
business partner could experience a Year 2000 failure. All highly critical
business partner relationships have been assessed and contingency planning is
completed. Risk assessment and contingency planning continues for less critical
business partners, and the target completion date for these relationships is
June 1999.
Prudential believes that the Business Application, Infrastructure and Business
Partners components of the Year 2000 project are substantially on schedule. A
small number of the projects may not meet their targeted completion date.
However, Prudential expects that these projects will be completed by September
1999. If there are any delays, they should not have a significant impact on the
timing of the project as a whole.
THE COST OF YEAR 2000 READINESS
Prudential is funding the Year 2000 program from internal operating budgets, and
estimates that its costs to address the Year 2000 issue will total approximately
$220 million. Because these expenses were part of the operating budget, they did
not impact the management of Group Variable Universal Life. During the course of
the Year 2000 program, some optional computer projects have been delayed, but
these delays have not had any material effect on Group Variable Universal Life.
YEAR 2000 RISKS AND CONTINGENCY PLANNING
Prudential believes that it is well positioned to lessen the impact of the Year
2000 problem. However, given the nature of this issue, we can not be 100%
certain that we are completely prepared, particularly because we can not be
certain of Year 2000 readiness of third parties. As a result, we are unable to
determine at this time whether the consequences of Year 2000 failures may have a
material adverse effect on the results of Prudential's operations, liquidity or
financial
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condition. In the worst case, it is possible that a Year 2000 technology
failure, whether internal or external, could have a material impact on
Prudential's results of operations, liquidity, or financial position. If
Prudential is unable to address the Year 2000 problem, we may have difficulty in
responding to your incoming phone calls, calculating your unit values or
processing withdrawals and purchase payments. It is also possible that the
mutual funds associated with Group Variable Universal Life will be unable to
value their securities, in turn creating difficulties in purchasing or selling
shares of the respective mutual funds and calculating corresponding unit asset
values. The objective of Prudential's Year 2000 program has been to reduce these
risks as much as possible.
Most of the operations of Group Variable Universal Life involve such a large
number of individual transactions that they can only be handled with the help of
computers. As a result, our current contingency plans include responses to the
failure of specific business programs or infrastructure components. However, our
contingency responses are now being reviewed and we expect to finalize them by
June, 1999 to ensure that they are workable under the special conditions of a
Year 2000 failure. Prudential believes that with the completion of its Year 2000
program as scheduled, the possibility of significant interruptions of normal
operations will be reduced.
SUBSEQUENT EVENTS
On December 10, 1998, Prudential 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 Prudential HealthCare Health Maintenance
Organization (HMO), Point of Service (POS), Preferred Provider Organization
(PPO), and indemnity health lines, as well as its dental business.
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DEFINITIONS OF SPECIAL TERMS
USED IN THIS PROSPECTUS
AON SECURITIES CORPORATION -- A direct wholly-owned subsidiary of Aon
Corporation and an affiliate of Aon Insurance Services, the plan agent for the
Contract.
APPLICANT OWNER -- A person other than the Eligible Group Member who obtains new
insurance coverage on the life of an Eligible Group Member. An Applicant Owner
may be, but is not limited to, the Eligible Group Member's spouse, child,
parent, grandparent, grandchild, sister, brother, or the trustee of any trust of
which the Eligible Group Member is the grantor.
ATTAINED AGE -- Your age on your last birthday on or prior to October 1 of each
year.
BUSINESS DAY -- A day on which the New York Stock Exchange is open for trading.
CASH SURRENDER VALUE -- The amount you receive upon surrender of the
Certificate. The Cash Surrender Value is equal to your Certificate Fund on the
date of surrender, less any Certificate Debt and outstanding charges.
CERTIFICATE -- A document issued to you under the Group Contract, setting forth
or summarizing your rights and benefits.
CERTIFICATE ANNIVERSARY -- The same date each year as the Certificate Date.
CERTIFICATE DATE -- The effective date of coverage under a Certificate.
CERTIFICATE DEBT -- The principal amount of any outstanding loans you borrowed
under your Certificate plus any accrued interest.
CERTIFICATE FUND -- The total amount credited to you under your Certificate. On
any date it is equal to the sum of the amounts under that Certificate allocated
to: (1) the Subaccounts, (2) the Fixed Account, and (3) the Loan Account.
CERTIFICATE YEAR -- The year from the Certificate Date to the first Certificate
Anniversary or from one Certificate Anniversary to the next.
CONTRACT ANNIVERSARY -- October 1 of each year.
CONTRACT DATE -- The date as of which the Group Contract is issued.
COVERED PERSON -- The person whose life is insured under the Group Contract. The
Covered Person is generally the Participant.
DEATH BENEFIT -- The amount payable upon the death of the Covered Person (before
the deduction of any Certificate Debt or any outstanding charges).
DIVIDEND -- A portion of Prudential's divisible surplus allocable to the Group
Contract that may be credited to the Group Contract as determined annually by
Prudential's Board of Directors.
ELIGIBLE GROUP MEMBERS -- Members of the AICPA and/or a Qualified State Society
of CPAs who are less than age 75 and not disabled under the terms of the CPA
Flexible Life Insurance Plan. You may only be covered under either the CPA
Flexible Life Insurance Plan (Contract GO-14273) or the Group Variable Universal
Life Insurance, but not both.
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EXPERIENCE CREDIT -- A refund that Prudential may pay based on favorable
experience under the Group Contract.
FACE AMOUNT -- The amount of life insurance in your Certificate. The Face
Amount, along with your Certificate Fund, are each parts of
your Death Benefit.
FIXED ACCOUNT -- An investment option under which Prudential guarantees that
interest will be added to the amount deposited at a rate we declare periodically
in advance of the effective date of the new rate.
FUNDS -- The Series Fund portfolios and other mutual fund portfolios in which
the Separate Account invests. Your investment options include the Funds and the
Fixed Account.
GROUP CONTRACT -- A Group Variable Universal Life insurance contract that
Prudential issues to Bankers Trust Company, as Trustee of the American Institute
of Certified Public Accountants Insurance Trust.
GROUP CONTRACTHOLDER -- Bankers Trust Company, as Trustee of the American
Institute of Certified Public Accountants Insurance Trust.
ISSUE AGE -- The Covered Person's Attained Age on the date that the insurance on
that Covered Person goes into effect as defined by the Group Contract.
LOAN ACCOUNT -- An account within Prudential's general account to which we
transfer from the Separate Account and/or the Fixed Account an amount equal to
the amount of any loan.
LOAN VALUE -- The amount (before any applicable transaction charge) that you may
borrow at any given time under your Certificate. We calculate the Loan Value by
multiplying the Certificate Fund by 90% (or higher where required by state law)
and then subtracting any existing loan with accrued interest, any outstanding
charges, and the amount of the next month's charges.
MODIFIED ENDOWMENT CONTRACT -- A type of life insurance contract or Certificate
under the Internal Revenue Code which has been funded in excess of certain IRS
limits. Less favorable tax rules, and in some cases a penalty tax, apply if you
take distributions (such as withdrawals, loans or assignments) from a MEC.
Regardless of classification as a MEC, cash value accrues on a tax deferred
basis and the Death Benefit is generally received free of income tax. See the
TAX TREATMENT OF CERTIFICATE BENEFITS section for a more complete description of
the MEC rules.
MONTHLY DEDUCTION DATE -- The Contract Date and the first day of each succeeding
month, except that whenever the Monthly Deduction Date falls on a date other
than a Business Day, the Monthly Deduction Date will be the next Business Day.
NET PREMIUM -- Your premium payment minus any charges for taxes attributable to
premiums or any other charges deducted from premium payments. Net Premiums are
the amounts we allocate to the Separate Account and/or the Fixed Account.
PAID-UP COVERAGE -- This type of life insurance coverage pays a Death Benefit of
a specific amount that does not change. You make one initial premium payment to
begin the coverage and never make any additional payments.
PARTICIPANT -- An Eligible Group Member or Applicant Owner under a Group
Contract who obtains insurance under the Group Contract and is eligible to
exercise the rights described in the Certificate. We refer to Participants as
"you" in this prospectus. If you validly assign your rights as a Participant to
someone else, then that person may exercise those rights.
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SEPARATE ACCOUNT -- Prudential Variable Contract Account GI-2, a separate
investment account registered as a unit investment trust under the federal
securities laws and established by Prudential to receive some or all of the Net
Premiums and to invest them in the Funds.
SERIES FUND -- The Prudential Series Fund, Inc., a mutual fund with separate
portfolios, some of which are available as investment options for the Group
Contract.
SUBACCOUNT -- A division of the Separate Account. Each Subaccount invests its
assets in the shares of a corresponding Fund.
WE -- The Prudential Insurance Company of America.
YOU -- A Participant.
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DIRECTORS AND OFFICERS OF PRUDENTIAL
DIRECTORS OF PRUDENTIAL
FRANKLIN E. AGNEW--Director since 1994 (current term expires April, 2000).
Member, Committee on Finance & Dividends; Member, Corporate Governance
Committee. Business consultant since 1986 Senior Vice President, H.J. Heinz from
1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb, Inc. and Erie
Plastics Corporation. Age 64. Address: 600 Grant Street, Suite 660, Pittsburgh,
PA 15219.
FREDERICK K. BECKER--Director since 1994 (current term expires April, 2005).
Member, Auditing Committee; Member, Corporate Governance Committee. President,
Wilentz Goldman and Spitzer, P.A. (law firm) since 1989, with firm since 1960.
Age 63. Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
GILBERT F. CASELLAS--Director since 1998 (current term expires April, 2003).
Member, Compensation Committee. President, The Swarthmore Group, Inc. since
1999. Partner, McConnell Valdes, LLP in 1998. Chairman, U.S. Equal Employment
Opportunity Commission from 1994 to 1998. Age 46. Address: 1646 West Chester
Pike, Suite 3, West Chester, PA 19382.
JAMES G. CULLEN--Director since 1994 (current term expires April, 2001). Member,
Compensation Committee; Member, Committee on Business Ethics. President & Chief
Operating Officer, Bell Atlantic Corporation, since 1998. President & Chief
Executive Officer, Telecom Group, Bell Atlantic Corporation, from 1997 to 1998.
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 56. Address: 1310 North Court
House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS--Director since 1989 (current term expires April, 2001).
Member, Committee on Business Ethics; Member, Compensation Committee.
Independent Health Care Advisor since 1997. National and International Health
Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr. Davis is also a director
of Beckman Coulter Instruments, Inc., Merck & Co., Inc., Minimed Incorporated,
and Beverley Enterprises. Age 67. 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. Mr.
Enrico originally joined PepsiCo, Inc. in 1971. Mr. Enrico is also a director of
A.H. Belo Corporation and Dayton Hudson Corporation. Age 54. Address: 700
Anderson Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR--Director since 1995 (current term expires April, 2003).
Member, Investment Committee; Member, Committee on Finance & 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 Whirlpool
Corporation, MeidiaOne Group, Inc., AP Automotive
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Systems, Inc., The Dow Chemical Company, and DTE Energy Company. Age 64.
Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
WILLIAM H. GRAY, III--Director since 1991 (current term expires April, 2000).
Chairman, Committees on Nominations & Corporate Governance. Member, Executive
Committee; Member, Committee on Business Ethics. 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, CBS Corporation, and
Electronic Data Systems. Age 57. Address: 8260 Willow Oaks Corp. Drive, Fairfax,
VA 22031-4511.
JON F. HANSON--Director since 1991 (current term expires April, 2003). Member,
Investment Committee; Member, Committee on Business Ethics. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of James E. Hanson
Management Company, Neumann Distributors, Inc., Fleet Trust and Investment
Services Company, N.A., United Water Resources, Orange & Rockland Utilities,
Inc., and Consolidated Delivery and Logistics. Age 62. 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 and Owens Corning. Age 64. Address: One Owens Corning Parkway,
Toledo, OH 43659.
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 56. 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. Chairman and Chief Executive
Officer, The Perkin Elmer Corporation from 1990 to 1996. Mr. Kelley is also a
director of Hercules Incorporated and Alliant Techsystems. Age 67. Address: 751
Broad Street, 23rd Floor, Newark, NJ 07102-3777.
BURTON G. MALKIEL--Director since 1978 (current term expires April, 2002).
Chairman, Investment Committee; Member, Executive Committee; Member, Committee
on Finance & 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 66. 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
Bank from 1990 to 1994, with Chase since 1972. Age 56. Address: 751 Broad
Street, Newark, NJ 07102.
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IDA F.S. SCHMERTZ--Director since 1997 (current term expires April, 2004).
Member, Audit Committee. Principal, Investment Strategies International since
1994. Age 64. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
CHARLES R. SITTER--Director since 1995 (current term expires April, 2003).
Member, Committee on Finance & Dividend; Member, Investment Committee. Retired
since 1996. President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his
career with Exxon in 1957. Age 68. Address: 5959 Las Colinas Boulevard, Irving,
TX 75039-2298.
DONALD L. STAHELI--Director since 1995 (current term expires April, 2003).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1996.
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, Conti-Financial
Corporation and Continental Grain Company. Age 67. 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. Retired since
1998. Chairman of the Board, The Toronto-Dominion Bank from 1997 to 1998.
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, Canadian Occidental Petroleum, Ltd., The Toronto-Dominion Bank,
and Ontario Hydro. 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,
Committees on Nominations & Corporate Governance; Member, Investment Committee.
Retired since 1997. Chairman and Chief Executive Officer, Unisys Corporation,
from 1990 to 1997. Mr. Unruh is also a director of Ameritech Corporation and
Moss Micro. Age 57. Address: 751 Broad Street, Newark, NJ 07102-3777.
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, Advanced Medicines, Inc. since 1997. Chairman, Chief Executive
Officer and President, Merck & Co., Inc. from 1986 to 1995. Dr. Vagelos
originally joined Merck in 1975. Dr. Vagelos is also a director of The Estee
Lauder Companies, Inc. and PepsiCo., Inc. Age 69. 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. Partner, Herbert, Van Ness, Cayci & Goodell (law firm) since
1998. Counselor at Law, Picco Herbert Kennedy (law firm) from 1990 to 1998. Mr.
Van Ness is also a director of Jersey Central Power & Light Company. Age 64.
Address: 22 Chambers Street, Princeton, NJ 08542.
60
<PAGE>
PAUL A. VOLCKER--Director since 1988 (current term expires April, 2000).
Chairman, Committee on Finance & Dividends; Member, Executive Committee; Member,
Committee on Nominations & Corporate Governance. Consultant since 1997.
Chairman, Wolfensohn & Co., Inc. 1988 to 1996. Chairman, James D. Wolfensohn,
Inc. 1988 to 1996. Chief Executive Officer, James D. Wolfensohn, Inc. from 1995
to 1996. Mr. Volcker is also a director of Nestle, S.A. and Bankers Trust New
York Corporation, as well as a Director of the Board of Overseers of TIAA- CREF.
Age 71, Address: 610 Fifth Avenue, Suite 420, New York, NY 10020.
JOSEPH H. WILLIAMS--Director since 1994 (current term expires April, 2002).
Member, Committee on Finance & Dividends; Member, Investment Committee.
Director, The Williams Companies since 1979. Chairman & Chief Executive Officer,
The Williams Companies from 1979 to 1993. Mr. Williams is also a director of The
Orvis Company, MTC Investors, LLC., and AEA Investors, Inc. Age 64. Address: One
Williams Center, Tulsa, OK 74102.
PRINCIPAL OFFICERS OF PRUDENTIAL
ARTHUR F. RYAN--Chairman of the Board, President and Chief Executive Officer
since 1994; prior to 1994, President and Chief Operating Officer, Chase
Manhattan Corporation. Age 56.
E. MICHAEL CAULFIELD--Executive Vice President, Financial Management since 1998;
Chief Executive Officer, Prudential Investments from 1995 to 1998; Chief
Executive Officer, Money Management Group in 1995; prior to 1995, President,
Prudential Preferred Financial Services. Age 52.
MICHELE S. DARLING--Executive Vice President, Human Resources since 1997; prior
to 1997, Executive Vice President, Canadian Imperial Bank of Commerce. Age 45.
ROBERT C. GOLDEN--Executive Vice President, Operations and Systems since 1997;
prior to 1997, Executive Vice President, Prudential Securities. Age 53.
MARK B. GRIER--Executive Vice President, Corporate Governance since 1998;
Executive Vice President, Financial Management from 1997 to 1998; Chief
Financial Officer from 1995 to 1997; prior to 1995, Executive Vice President,
Chase Manhattan Corporation. Age 46.
JEAN D. HAMILTON--Executive Vice President, Institutional since 1998; President,
Diversified Group since 1995 to 1998; prior to 1995, President, Prudential
Capital Group. Age 52.
RODGER A. LAWSON--Executive Vice President, International Investments & Global
Marketing since 1998; Executive Vice President, Marketing and Planning from 1996
to 1998; President and CEO, Van Eck Global, from 1994 to 1996; prior to 1994,
President and CEO, Global Private Banking, Bankers Trust Company. Age 52.
61
<PAGE>
KIYOFUMI SAKAGUCHI--Executive Vice President, International Insurance since
1998; President, International Insurance Group from 1995 to 1998; prior to 1995,
Chairman and CEO, The Prudential Life Insurance Co., Ltd. Age 56.
JOHN V. SCICUTELLA--Executive Vice President, Individual Financial Services
since 1998; Chief Executive Officer, Individual Insurance Group from 1997 to
1998; Executive Vice President Operations and Systems from 1995 to 1997; prior
to 1995, Executive Vice President, Chase Manhattan Corporation. Age 49.
JOHN R. STRANGFELD--Executive Vice President, Global Asset Management since
1998; Chief Executive Officer, Private Asset Management Group (PAMG) from 1996
to 1998; President, PAMG, from 1994 to 1996; prior to 1994, Senior Managing
Director. Age 45.
JAMES J. AVERY, JR.--Senior Vice President & Chief Actuary, Individual Insurance
Group since 1997; President Prudential Select from 1996 to 1997; prior to 1995,
Executive Vice President and Chief Operating Officer, Prudential Select. Age 47.
MARTIN A. BERKOWITZ--Senior Vice President, Financial Management since 1998;
Senior Vice President and Comptroller from 1995 to 1998; prior to 1995, Senior
Vice President and CFO, Prudential Investment Corporation. Age 50.
WILLIAM M. BETHKE--Senior Vice President and Chief Investment Officer since
1997; prior to 1997, President, Capital Management Group. Age 51.
ANNE E. BOSSI--Senior Vice President, Institutional since 1998; President, Group
Life & Disability 1997 to 1998; President, Group Life Insurance 1995 to 1997;
prior to 1995, President, Northeastern Group Operations. Age 47.
RICHARD J. CARBONE--Senior Vice President and Chief Financial Officer since
1997; Controller, Salomon Brothers from 1995 to 1997; prior to 1995, Controller,
Bankers Trust. Age 51.
THOMAS J. CARROLL-- Senior Vice President and Chief Auditor since 1999; Managing
Director, Bankers Trust Company from 1996 to 1998; prior to 1996, Global Chief
Auditor and Managing Director, Credit Suisse First Boston. Age 57.
THOMAS W. CRAWFORD--Senior Vice President, Individual Financial Services since
1998; President and Chief Executive Officer, Prudential Property & Casualty
Company from 1996 to 1998; Vice President, Prudential Property & Casualty
Company in 1996; prior to 1996, President & CEO, Southern Heritage Insurance
Company. Age 55.
WILLIAM D. FRIEL--Senior Vice President and Chief Information Officer since
1996; prior to 1996, Chief Executive Officer, Prudential Service Company. Age
60.
MICHAEL J. HINES--Senior Vice President, Marketing and Communications since
1999; 1996 to 1998 Vice President, Marketing and Communications. Age 47.
62
<PAGE>
RONALD P. JOELSON--Senior Vice President, Financial Management since 1999;
Senior Vice President, Guaranteed Products from 1996 to 1999; Vice President,
Guaranteed Investments during 1996; prior to 1996, Managing Director, Retirement
Services. Age 40.
IRA J. KLEINMAN--Senior Vice President, International Insurance since 1997;
prior to 1997, Chief Marketing & Product Development Officer. Age 51.
KATHLEEN KRALL--Senior Vice President, Individual Financial Services since 1999;
Vice President, Individual Financial Services from 1996 to 1999; Vice President,
Operations and Systems from 1995 to 1996; prior to 1995, Vice President, Chase
Manhattan Bank. Age 41.
JOYCE R. LEIBOWITZ--Senior Vice President, Management Internal Controls since
1999; Vice President, Management Internal Controls from 1995 to 1999; prior to
1995, Integrated Control Officer. Age 51.
JOHN M. LIFTIN--Senior Vice President and General Counsel since 1998;
Self-employed from 1997 to 1998; prior to 1997, Senior Vice President and
General Counsel, Kidder & Peabody Group, Inc. Age 55.
NEIL A. MCGUINNESS--Senior Vice President, Individual Financial Services since
1996; Director, Putnam Investments, in 1996; prior to 1996, President, Fidelity
Investment Employer Services Company. Age 52.
PRISCILLA A. MYERS--Senior Vice President, Demutualization since 1998; Senior
Vice President and Auditor from 1995 to 1998; prior to 1995, Vice President and
Auditor. Age 48.
I. EDWARD PRICE--Senior Vice President, Individual Financial Services since
1996; Senior Vice President and Actuary from 1995 to 1996; prior to 1995, Chief
Executive Officer, Prudential International Insurance. Age 56.
ROBERT J. SULLIVAN--Senior Vice President, Individual Financial Services since
1997; prior to 1997, Managing Director, Fidelity Investments. Age 60.
SUSAN J. BLOUNT--Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 41.
C. EDWARD CHAPLIN--Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
ANTHONY S. PISZEL--Vice President and Controller since 1998; Vice President,
Enterprise Financial Management from 1997 to 1998; prior to 1997, Chief
Financial Officer, Individual Insurance Group. Age 44.
Prudential officers are elected annually.
63
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
STATEMENTS OF NET ASSETS
December 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY MARKET FLEXIBLE MANAGED STOCK INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------ ------------ ----------
ASSETS
<S> <C> <C> <C> <C>
Investment in The Prudential Series Fund, Inc.
Portfolios and non-Prudential administered
funds, at net asset value [Note 3] ..................... $ 231,517 $ 417,696 $ 1,404,003 $ 811,509
Accrued expenses payable to The Prudential
Insurance Company of America [Note 2] .................. (277) (509) (1,607) (970)
----------- ----------- ----------- -----------
Net Assets ............................................... $ 231,240 $ 417,187 $ 1,402,396 $ 810,539
=========== =========== =========== ===========
NET ASSETS, representing:
Equity of Participants ................................... $ 231,240 $ 417,187 $ 1,402,396 $ 810,539
----------- ----------- ----------- -----------
$ 231,240 $ 417,187 $ 1,402,396 $ 810,539
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A1
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ----------------------------------------------------------------------------------------
NEUBERGER & FRANKLIN
BERMAN KEMPER TEMPLETON
AMT LIMITED SERIES MFS DREYFUS FRANKLIN TEMPLETON DEVELOPING
MATURITY BOND HIGH YIELD RESEARCH SMALL CAP INTERNATIONAL MARKETS
PORTFOLIO PORTFOLIO SERIES PORTFOLIO FUND FUND
- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 159,827 $ 356,155 $ 891,261 $ 1,305,969 $ 387,597 $ 166,733
(193) (461) (1,026) (1,561) (499) (197)
- ----------- ----------- ----------- ----------- ----------- -----------
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
=========== =========== =========== =========== =========== ===========
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
- ----------- ----------- ----------- ----------- ----------- -----------
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A2
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
STATEMENTS OF OPERATIONS
For the period July 1, 1998* to December 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY MARKET FLEXIBLE MANAGED STOCK INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ---------------- ----------- ------
INVESTMENT INCOME:
<S> <C> <C> <C> <C>
Dividend income ........................................... $ 3,241 $ 5,648 $ 6,340 $ 5,495
--------- --------- --------- ---------
EXPENSES
Charges to Participants for assuming
mortality risk and expense risk [Note 5A] ............... 277 509 1,607 970
--------- --------- --------- ---------
NET INVESTMENT INCOME (LOSS) ................................ 2,964 5,139 4,733 4,525
--------- --------- --------- ---------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received ...................... 0 33,105 17,051 78,110
Realized gain (loss) on shares redeemed ................... 0 (1,147) (1,408) (2,032)
Net change in unrealized gain (loss)
on investments .......................................... 0 (12,978) 151,883 (41,420)
--------- --------- --------- ---------
NET GAIN ON INVESTMENTS ..................................... 0 18,980 167,526 34,658
--------- --------- --------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................. $ 2,964 $ 24,119 $ 172,259 $ 39,183
========= ========= ========= =========
*Commenced Operations
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A3
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -------------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER FRANKLIN TEMPLETON
AMT LIMITED SERIES MFS DREYFUS FRANKLIN TEMPLETON DEVELOPING
MATURITY BOND HIGH YIELD RESEARCH SMALL CAP INTERNATIONAL MARKETS
PORTFOLIO PORTFOLIO SERIES PORTFOLIO FUND FUND
- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0 $ 0 $ 0 $ 3 $ 0 $ 0
- --------- --------- --------- --------- --------- ---------
193 461 1,026 1,561 499 197
- --------- --------- --------- --------- --------- ---------
(193) (461) (1,026) (1,558) (499) (197)
- --------- --------- --------- --------- --------- ---------
0 0 0 15,555 0 0
7 (1,269) (1,568) (4,972) (1,543) (596)
1,200 2,494 115,832 123,615 14,401 22,483
- --------- --------- --------- --------- --------- ---------
1,207 1,225 114,264 134,198 12,858 21,887
- --------- --------- --------- --------- --------- ---------
$ 1,014 $ 764 $ 113,238 $ 132,640 $ 12,359 $ 21,690
========= ========= ========= ========= ========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A4
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
STATEMENTS OF CHANGES IN NET ASSETS
For the period July 1, 1998* to December 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY MARKET FLEXIBLE MANAGED STOCK INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ----------- -----------
1998 1998 1998 1998
----------- ----------- ----------- -----------
OPERATIONS
<S> <C> <C> <C> <C>
Net investment income (loss) ................................. $ 2,964 $ 5,139 $ 4,733 $ 4,525
Capital gains distributions received ......................... 0 33,105 17,051 78,110
Realized gain (loss) on shares redeemed ...................... 0 (1,147) (1,408) (2,032)
Net change in unrealized gain (loss) on investments .......... 0 (12,978) 151,883 (41,420)
----------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .................................... 2,964 24,119 172,259 39,183
----------- ----------- ----------- -----------
PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
Participant Net Payments .................................... 22,979 63,947 191,087 125,032
Policy Loans ................................................ (71) (3,208) (2,866) (149)
Policy Loan Repayments and Interest ......................... 0 2,147 2,205 2,005
Surrenders, Withdrawals and Death Benefits .................. 0 (1,089) (1,648) (1,301)
Net Transfers From (To) Other Subaccounts or
Fixed Rate Options ...................................... 205,368 331,276 1,041,359 645,774
Administrative and Other Charges ............................ 0 (5) 0 (5)
----------- ----------- ----------- -----------
TOTAL PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS ................................ 228,276 393,068 1,230,137 771,356
----------- ----------- ----------- -----------
TOTAL INCREASE IN NET ASSETS ................................... 231,240 417,187 1,402,396 810,539
NET ASSETS
Beginning of period .......................................... 0 0 0 0
----------- ----------- ----------- -----------
End of period ................................................ $ 231,240 $ 417,187 $ 1,402,396 $ 810,539
=========== =========== =========== ===========
</TABLE>
*Commenced Operations
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A5
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- --------------------------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER FRANKLIN TEMPLETON
AMT LIMITED SERIES MFS DREYFUS FRANKLIN TEMPLETON DEVELOPING
MATURITY BOND HIGH YIELD RESEARCH SMALL CAP INTERNATIONAL MARKETS
PORTFOLIO PORTFOLIO SERIES PORTFOLIO FUND FUND
- ----------- ----------- ----------- ----------- ----------- -----------
1998 1998 1998 1998 1998 1998
- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ (193) $ (461) $ (1,026) $ (1,558) $ (499) $ (197)
0 0 0 15,555 0 0
7 (1,269) (1,568) (4,972) (1,543) (596)
1,200 2,494 115,832 123,615 14,401 22,483
- ----------- ----------- ----------- ----------- ----------- -----------
1,014 764 113,238 132,640 12,359 21,690
- ----------- ----------- ----------- ----------- ----------- -----------
32,082 53,378 133,668 214,097 75,071 26,331
(4,183) (147) (161) (243) (328) (37)
210 0 2,032 0 0 0
0 (283) (1,701) (807) (237) 0
130,511 301,982 643,159 958,721 300,233 118,552
0 0 0 0 0 0
- ----------- ----------- ----------- ----------- ----------- -----------
158,620 354,930 776,997 1,171,768 374,739 144,846
- ----------- ----------- ----------- ----------- ----------- -----------
159,634 355,694 890,235 1,304,408 387,098 166,536
0 0 0 0 0 0
- ----------- ----------- ----------- ----------- ----------- -----------
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A6
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
December 31, 1998
NOTE 1: GENERAL
The Prudential Variable Contract Account GI-2 (the "Account") of
The Prudential Insurance Company of America ("Prudential") was
established on June 14, 1988 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 purchases of Group Variable Universal
Life 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 one hundred
thirty-six subaccounts within the Account. Group Variable Universal
Life contracts offer the option to invest in up to twenty of the
subaccounts, each of which invests in either a corresponding
portfolio of The Prudential Series Fund, Inc. (the "Series Fund")
or any of the non-Prudential administered funds shown in Note 3.
The Series Fund is a diversified open-end management investment
company, and is managed by Prudential.
The contracts are group insurance contracts and generally are
issued to either employers, associations, sponsoring organizations
or trusts. A person entitled to make contributions under the
contract is a "Participant."
Group Variable Universal Life insurance contracts became available
to Participants on July 1, 1998.
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 or the
non-Prudential administered funds 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 or
the non-Prudential administered funds and are recorded on the
ex-dividend date.
Accrued Expenses Payable to The Prudential Insurance Company of
America--The payable represents amounts due to Prudential for
mortality risk and expense risk charges.
NOTE 3: INVESTMENT INFORMATION FOR THE SUBACCOUNTS OF THE PRUDENTIAL
VARIABLE CONTRACT ACCOUNT GI-2
The net asset value per share for each (rounded) for each portfolio
of the Series Fund or the non-Prudential administered funds, 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, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------
<S> <C> <C> <C> <C>
Number of shares: .................. 23,152 25,222 37,202 27,382
Net asset value per share (rounded): $ 10.00 $ 16.56 $ 37.74 $ 29.64
Cost: .............................. $ 231,517 $ 430,674 $1,252,120 $ 852,929
</TABLE>
A7
<PAGE>
NOTE 3: INVESTMENT INFORMATION FOR THE SUBACCOUNTS OF THE PRUDENTIAL
VARIABLE CONTRACT ACCOUNT GI-2 (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
---------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Number of shares: 11,565 290,175 46,785 24,225
Net asset value per share (rounded): $ 13.82 $ 1.23 $ 19.05 $ 53.91
Cost: $ 158,627 $ 353,661 $ 775,429 $1,182,354
</TABLE>
SUBACCOUNTS (CONTINUED)
--------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------- ---------
Number of shares: 18,806 32,565
Net asset value per share (rounded): $ 20.61 $ 5.12
Cost: $373,196 $144,250
NOTE 4: PARTICIPANT UNIT INFORMATION
Outstanding Participant units, unit values and total value of
Participant equity at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Participant Units Outstanding: 22,672 40,582 127,123 80,739
Unit Value: $ 10.19956 $ 10.28010 $ 11.03184 $ 10.03902
---------- ---------- ---------- ----------
TOTAL PARTICIPANT EQUITY: $ 231,240 $ 417,187 $1,402,396 $ 810,539
========== ========== ========== ==========
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Participant Units Outstanding: 15,785 37,005 83,841 129,380
Unit Value: $ 10.11316 $ 9.61199 $ 10.61812 $ 10.08199
---------- ---------- ---------- ----------
TOTAL PARTICIPANT EQUITY: $ 159,634 $ 355,694 $ 890,235 $1,304,408
========== ========== ========== ==========
</TABLE>
A8
<PAGE>
NOTE 4: PARTICIPANT UNIT INFORMATION (CONTINUED)
SUBACCOUNTS (CONTINUED)
---------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------- --------
Participant Units Outstanding: 40,981 16,259
Unit Value: .................. $9.44570 $10.24261
-------- ---------
TOTAL PARTICIPANT EQUITY: .... $387,098 $ 166,536
======== =========
NOTE 5: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges, currently equal to
an effective annual rate of 0.45%, are applied daily against
the net assets representing equity of Participants in each
subaccount. This charge is guaranteed not to exceed an
effective annual rate of 0.90%. Mortality risk is that
Participants may not live as long as estimated and expense risk
is that the cost of issuing and administering the insurance may
exceed related charges by Prudential.
B. Transaction Related Charges
There may be charges, if applicable, associated with
surrenders, partial withdrawals, loans, transfers and requests
for additional statements as follows:
o Surrenders and partial withdrawals-- Not to exceed the
lesser of $20 or 2% of the amount received.
o Loans-- Not to exceed $20 for each loan made.
o Transfers-- Not to exceed $20 for each transfer, after
the twelfth transfer, in a period of generally 12 months
depending on the provisions of the contract.
o Additional statement requests related to a Participant's
insurance-- Not to exceed $20 per statement.
C. Cost of Insurance Charges
Participant's contributions may be subject to certain
deductions prior to being invested in the Account. The
deductions are for (1) state premium taxes, (2) transaction
costs which are deducted from each premium payment to cover
premium collection and processing costs and (3) sales charges
which are deducted in order to compensate Prudential for the
cost of selling the contract. Contracts are also subject to
monthly charges to compensate Prudential for the portion of the
face amount of insurance applicable to the Participant. In
addition, monthly charges may also be deducted to compensate
Prudential for costs related to administering the contract and
for additional insurance benefits, if applicable.
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.
A9
<PAGE>
NOTE 7: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) for
the period July 1, 1998* through December 31, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------- --------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Participant Contributions: 23,681 45,583 137,804 87,843
Participant Redemptions: (1,009) (5,001) (10,681) (7,104)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
------------------- --------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Participant Contributions: 17,321 40,569 90,308 143,602
Participant Redemptions: (1,536) (3,564) (6,467) (14,222)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------------------- -------------------
<S> <C> <C>
Participant Contributions: 45,363 17,730
Participant Redemptions: (4,382) (1,471)
</TABLE>
* Commenced Operations
A10
<PAGE>
NOTE 8: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of
investments in the Series Fund or the non-Prudential administered
funds for the period July 1, 1998* through December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
--------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Purchases: $ 238,485 $ 441,301 $1,333,505 $ 837,735
Sales: $ (10,210) $ (48,234) $ (103,368) $ (66,378)
<CAPTION>
PORTFOLIOS (CONTINUED)
---------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Purchases: $ 174,083 $ 387,952 $ 836,499 $1,296,655
Sales: $ (15,463) $ (33,022) $ (59,503) $ (124,887)
<CAPTION>
PORTFOLIOS (CONTINUED)
-----------------------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------------- ---------------
<S> <C> <C>
Purchases: $ 413,671 $ 157,961
Sales: $ (38,932) $ (13,115)
</TABLE>
* Commenced operations
A11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Participants of the
Prudential Variable Contract Account GI-2
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 (Prudential Money
Market Portfolio, Prudential Flexible Managed Portfolio, Prudential Stock Index
Portfolio, Prudential Equity Portfolio, Neuberger & Berman AMT Limited Maturity
Bond Portfolio, Kemper Series High Yield Portfolio, MFS Research Series, Dreyfus
Small Cap Portfolio, Franklin Templeton International Fund and Franklin
Templeton Developing Markets Fund) of the Prudential Variable Contact Account
GI-2 at December 31, 1998, and the results of each of their operations and the
changes in each of their net assets for the period July 1, 1998 through December
31, 1998, 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 audit. We conducted our audit 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 audit, which included
confirmation of fund shares owned at December 31, 1998, provides a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 26, 1999
A12
<PAGE>
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT ACCOUNTANTS
DECEMBER 31, 1998 AND 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 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 audits. 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.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
2
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1998 AND 1997 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1998: $76,997; 1997: $71,496) $ 80,158 $ 75,270
Held to maturity, at amortized cost (fair value, 1998: $17,906; 1997: $19,894) 16,848 18,700
Trading account assets, at fair value 8,888 6,347
Equity securities, available for sale, at fair value (cost, 1998: $2,583; 1997: $2,376) 2,759 2,810
Mortgage loans on real estate 16,495 16,004
Investment real estate 801 1,519
Policy loans 7,476 7,034
Securities purchased under agreements to resell 10,252 8,661
Cash collateral for borrowed securities 5,622 5,047
Other long-term investments 2,658 2,489
Short-term investments 9,781 12,106
--------- ---------
Total investments 161,738 155,987
Cash 1,943 1,859
Accrued investment income 1,795 1,909
Broker-dealer related receivables 10,142 8,442
Deferred policy acquisition costs 6,462 6,083
Other assets 15,721 11,452
Separate Account assets 81,621 73,839
--------- ---------
TOTAL ASSETS $ 279,422 $ 259,571
========= =========
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits $ 69,129 $ 67,367
Policyholders' account balances 30,974 33,246
Unpaid claims and claim adjustment expenses 3,860 4,864
Policyholders' dividends 1,444 1,269
Securities sold under agreements to repurchase 21,486 12,347
Cash collateral for loaned securities 7,132 14,117
Income taxes payable 785 500
Broker-dealer related payables 6,530 3,338
Securities sold but not yet purchased 5,771 3,648
Other liabilities 16,169 14,659
Short-term debt 10,082 6,774
Long-term debt 4,734 4,273
Separate Account liabilities 80,931 73,451
--------- ---------
Total liabilities 259,027 239,853
--------- ---------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 16)
EQUITY
Accumulated other comprehensive income 1,232 1,661
Retained earnings 19,163 18,057
--------- ---------
Total equity 20,395 19,718
--------- ---------
TOTAL LIABILITIES AND EQUITY $ 279,422 $ 259,571
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums $ 9,024 $ 9,005 $ 9,999
Policy charges and fee income 1,462 1,434 1,490
Net investment income 9,520 9,456 9,461
Realized investment gains, net 2,630 2,168 1,128
Commissions and other income 4,451 4,481 4,512
-------- -------- --------
Total revenues 27,087 26,544 26,590
-------- -------- --------
BENEFITS AND EXPENSES
Policyholders' benefits 9,976 10,076 11,094
Interest credited to policyholders' account balances 1,806 2,044 2,251
Dividends to policyholders 2,478 2,422 2,339
General and administrative expenses 9,720 8,992 8,956
Sales practices remedies 510 1,640 410
-------- -------- --------
Total benefits and expenses 24,490 25,174 25,050
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,597 1,370 1,540
-------- -------- --------
Income taxes
Current 1,185 101 556
Deferred (215) 306 (376)
-------- -------- --------
970 407 180
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 1,627 963 1,360
-------- -------- --------
DISCONTINUED OPERATIONS
Loss from Healthcare operations, net of taxes (298) (353) (282)
Loss on disposal of Healthcare operations, net of taxes (223) -- --
-------- -------- --------
Net loss from discontinued operations (521) (353) (282)
-------- -------- --------
NET INCOME $ 1,106 $ 610 $ 1,078
======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED OTHER COMPREHENSIVE INCOME
------------------------------------------------------
FOREIGN NET TOTAL
CURRENCY UNREALIZED PENSION ACCUMULATED OTHER
TRANSLATION INVESTMENT LIABILITY COMPREHENSIVE RETAINED TOTAL
ADJUSTMENTS GAINS ADJUSTMENT INCOME EARNINGS EQUITY
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ (24) $ 2,397 $ -- $ 2,373 $ 16,369 $ 18,742
Comprehensive income (loss):
Net income 1,078 1,078
Other comprehensive income (loss), net of tax:
Change in foreign currency translation
adjustments (32) (32) (32)
Change in net unrealized investment gains (1,261) (1,261) (1,261)
Additional pension liability adjustment (4) (4) (4)
--------
Other comprehensive income (loss) (1,297)
--------
Total comprehensive income (loss) (219)
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 (56) 1,136 (4) 1,076 17,447 18,523
Comprehensive income:
Net income 610 610
Other comprehensive income (loss), net of tax:
Change in foreign currency translation
adjustments (29) (29) (29)
Change in net unrealized investment gains 616 616 616
Additional pension liability adjustment (2) (2) (2)
--------
Other comprehensive income 585
--------
Total comprehensive income 1,195
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 (85) 1,752 (6) 1,661 18,057 19,718
Comprehensive income:
Net income 1,106 1,106
Other comprehensive income, net of tax:
Change in foreign currency translation
adjustments 54 54 54
Change in net unrealized investment gains (480) (480) (480)
Additional pension liability adjustment (3) (3) (3)
--------
Other comprehensive income (429)
--------
Total comprehensive income 677
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ (31) $ 1,272 $ (9) $ 1,232 $ 19,163 $ 20,395
=============================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,106 $ 610 $ 1,078
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net (2,660) (2,209) (1,138)
Policy charges and fee income (135) (258) (208)
Interest credited to policyholders' account balances 1,806 2,044 2,251
Depreciation and amortization 305 258 266
Loss (gain) on disposal of businesses 223 -- (116)
Change in:
Deferred policy acquisition costs (165) (142) (122)
Future policy benefits and other insurance liabilities 584 2,762 2,471
Securities purchased under agreements to resell (1,591) (3,314) (217)
Trading account assets (2,540) (1,825) (433)
Income taxes receivable/payable 594 (1,391) (937)
Cash collateral for borrowed securities (575) (2,631) (332)
Cash collateral for securities loaned (net) (6,985) 5,668 2,891
Broker-dealer related receivables/payables 1,495 (672) (607)
Securities sold but not yet purchased 2,122 1,633 251
Securities sold under agreements to repurchase 9,139 4,844 (490)
Other, net (5,168) 4,142 (1,334)
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES (2,445) 9,519 3,274
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale 123,151 123,550 123,368
Fixed maturities, held to maturity 4,466 4,042 4,268
Equity securities, available for sale 2,792 2,572 2,162
Mortgage loans on real estate 4,839 4,299 5,731
Investment real estate 1,364 1,842 615
Other long-term investments 1,848 5,081 3,203
Disposal of businesses -- -- 52
Payments for the purchase of:
Fixed maturities, available for sale (126,742) (129,854) (125,093)
Fixed maturities, held to maturity (2,244) (2,317) (2,844)
Equity securities, available for sale (2,547) (2,461) (2,384)
Mortgage loans on real estate (4,885) (3,363) (1,906)
Investment real estate (31) (241) (142)
Other long-term investments (1,415) (4,148) (2,060)
Short-term investments (net) 2,145 (2,848) (1,915)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES 2,741 (3,846) 3,055
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits 6,955 5,020 2,676
Policyholders' account withdrawals (11,111) (9,873) (8,099)
Net increase in short-term debt 2,422 305 583
Proceeds from the issuance of long-term debt 1,940 324 93
Repayments of long-term debt (418) (464) (1,306)
-------- -------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES (212) (4,688) (6,053)
-------- -------- --------
NET INCREASE IN CASH 84 985 276
CASH, BEGINNING OF YEAR 1,859 874 598
-------- -------- --------
CASH, END OF YEAR $ 1,943 $ 1,859 $ 874
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 163 $ 968 $ 793
-------- -------- --------
Interest paid $ 864 $ 708 $ 595
-------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
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 financial services throughout the
United States and several locations worldwide. The Company's businesses
provide a full range of insurance, investment, securities brokerage and
other financial products and services to both retail consumers and
institutions. Principal products and services provided include life
insurance, property and casualty insurance, annuities, mutual funds,
pension and retirement related investments and administration, asset
management, and securities brokerage.
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 stock company. On July 1, 1998,
legislation was enacted in New Jersey that would permit this conversion to
occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption
of a plan by the Company's Board of Directors, a public hearing, voting by
qualified voters and regulatory approval. There can be no assurance that
the Company will demutualize or, if it does so, when demutualization will
occur.
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 consolidated 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 a 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, "Accumulated other
comprehensive income."
TRADING ACCOUNT ASSETS AND SECURITIES SOLD BUT NOT YET PURCHASED are
carried at estimated fair value. Realized and unrealized gains and losses
on trading account assets and securities sold but not yet purchased are
included in "Commissions and other income."
EQUITY SECURITIES, available for sale, are comprised of common and
non-redeemable preferred stock and are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax, and the effects
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, "Accumulated other
comprehensive income."
8
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal
balances, net of unamortized discounts and allowance for losses. The
allowance for losses is based upon a loan specific review and, for
performing loans collectively evaluated, a portfolio review. The loan
specific review includes consideration of expected future cash flows
relative to outstanding balances. The portfolio review includes
consideration of the composition of the loan portfolio, current economic
conditions, past results, current trends, the estimated aggregate value of
the underlying collateral, and other relevant environmental factors.
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, identified in management's
specific review of probable loan losses, 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.
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 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 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. 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 and is reviewed for
impairment whenever events or circumstances indicate the carrying value may
not be recoverable. In reviewing recoverability, an impairment loss is
recognized for an other than temporary decline in value to the extent the
reduction in carrying values of investment real estate exceeds estimated
undiscounted future cash flows. Charges relating to real estate to be
disposed of and impairments of real estate held for investment are included
in "Realized investment gains, net." Depreciation on real estate is
computed using the straight-line method over the estimated lives of the
properties.
POLICY LOANS are carried at unpaid principal balances.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE are treated as financing arrangements and 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 or resold is monitored, and additional collateral is requested,
where appropriate, to protect against credit exposure.
SECURITIES BORROWED AND SECURITIES LOANED are treated as financing
arrangements and 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 because the debtor typically
has the right to redeem the collateral on short notice. Substantially all
of 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.
9
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities repurchase and resale agreements and securities borrowed and
loaned 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.
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.
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.
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." Decreases in the lower of
depreciated cost or fair value less selling costs of investment real estate
held for sale are recorded in "Realized investment gains, net."
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, for certain products, 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 "Accumulated
other comprehensive income."
For participating 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. The average rate of assumed investment yield in
estimating expected gross margins was 9.97%, 9.39%, and 8.39% for 1998,
1997 and 1996, respectively. Deferred policy acquisition costs related to
non-participatory term insurance are amortized over the expected life of
the contracts in proportion to the premium income.
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.
10
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For disability 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 Statements of Operations. Mortality, policy administration and
surrender charges on the accounts are included in "Policy charges and fee
income."
OTHER ASSETS AND OTHER LIABILITIES
Other assets consist primarily of prepaid benefit costs, reinsurance
recoverables, certain restricted assets, trade receivables and property and
equipment. Property and equipment are stated at cost less accumulated
depreciation. Depreciation is determined using the straight-line method
over the estimated useful lives of the related assets which generally range
from 3 to 40 years. Other liabilities consist primarily of trade payables
and reserves for sales practice remediation costs.
INSURANCE REVENUE AND EXPENSE RECOGNITION
Premiums from participating insurance policies are 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
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, 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.
11
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premiums, benefits and expenses are stated net of reinsurance ceded to
other companies. Estimated reinsurance receivables and the cost of
reinsurance are recognized over the life of the reinsured policies using
assumptions consistent with those used to account for the underlying
policies.
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. The effects of
translating the Statements of Financial Position of non-U.S. entities with
functional currencies other than the U.S. dollar are recorded, net of
related hedge gains and losses and income taxes, as "Other comprehensive
income," a separate component of equity.
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 from trading activities of the
Company's broker-dealer subsidiary.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose values are derived from
interest rates, foreign exchange rates, various financial indices, or the
value of securities or commodities. Derivative financial instruments can be
exchange-traded or contracted in the over-the-counter market and those used
by the Company include swaps, futures, forwards and options contracts. The
Company uses derivative financial instruments to hedge market risk from
changes in interest rates or foreign currency exchange rates, and to alter
interest rate or currency exposures arising from mismatches between assets
and liabilities. Additionally, derivatives are used in the broker-dealer
business and in a limited-purpose subsidiary for trading purposes.
To qualify as a hedge, derivatives must be designated as hedges for
existing assets, liabilities, firm commitments, or anticipated transactions
which are identified and probable to occur, and effective in reducing the
market risk to which the Company is exposed. The effectiveness of the
derivatives are evaluated at the inception of the hedge and throughout the
hedge period.
DERIVATIVES HELD FOR TRADING PURPOSES are used in the Company's securities
broker-dealer business and in a limited-purpose subsidiary to meet the
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. Trading derivative positions are
valued daily, generally by obtaining quoted market prices or through the
use of pricing models. Values are affected by changes in interest rates,
currency exchange rates, credit spreads, market volatility and liquidity.
The Company monitors these exposures through the use of various analytical
techniques.
Derivatives held for trading are recorded at fair value in "Trading account
assets," "Other liabilities" or "Receivables from/Payables to broker-dealer
clients" in the Consolidated Statements of Financial Position, and realized
and unrealized changes in fair value are included in "Commissions and other
income" of the Consolidated Statements of Operations in the periods in
which the changes occur. Cash flows from trading derivatives are reported
in the operating activities section of the Consolidated Statements of Cash
Flows.
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.
12
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
See Note 14 for a discussion of the accounting treatment of derivatives
that qualify as hedges. If the Company's use of other than trading
derivatives does not meet the criteria to apply hedge accounting, the
derivatives are recorded at fair value in "Other long-term investments" or
"Other liabilities" in the Consolidated Statements of Financial Position,
and changes in their fair value are recognized in earnings in "Realized
investment gains, net" without considering changes in the hedged assets or
liabilities. Cash flows from other than trading derivative assets and
liabilities are reported in the investing activities section in the
Consolidated Statements of Cash Flows.
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 life
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 that is expected 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 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
was 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 delayed the implementation of SFAS 125 for one year
for certain provisions, including repurchase agreements, dollar rolls,
securities lending and similar transactions. The Company adopted the
delayed provisions of SFAS 125 in 1998. The adoption of SFAS 125 did not
have a material impact on the Company's results of operations or financial
position.
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which was issued by the FASB in June 1997. This statement defines
comprehensive income 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 Statements of Financial Position. Application of this
statement did not change recognition or measurement of net income and,
therefore, did not affect the Company's financial position or results of
operations.
During 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which was issued by the
FASB in February 1998. This statement standardizes the disclosure
requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligations and fair
values of plan assets and eliminates certain disclosures. This statement is
limited to changes in reporting and presentation and does not change
recognition or measurement of pension or other postretirement benefit
plans. Therefore, its adoption did not affect the Company's financial
position or results of operations.
13
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On January 1, 1998, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP
97-3"). This statement provides guidance for determining when an insurance
company or other enterprise should recognize a liability for guaranty-fund
assessments as well as guidance for measuring the liability. The adoption
of SOP 97-3 did not have a material effect on the Company's financial
condition or results of operations. In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133 provides, if certain conditions are met, that a
derivative may be specifically designated as (1) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment (fair value hedge), (2) a hedge of the
exposure to variable cash flows of a forecasted transaction (cash flow
hedge), or (3) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign-currency-denominated forecasted
transaction (foreign currency hedge).
SFAS No. 133 does not apply to most traditional insurance contracts.
However, certain hybrid contracts that contain features which can affect
settlement amounts similarly to derivatives may require separate accounting
for the "host contract" and the underlying "embedded derivative"
provisions. The latter provisions would be accounted for as derivatives as
specified by the statement.
Under SFAS No. 133, the accounting for changes in fair value of a
derivative depends on its intended use and designation. For a fair value
hedge, the gain or loss is recognized in earnings in the period of change
together with the offsetting loss or gain on the hedged item. For a cash
flow hedge, the effective portion of the derivative's gain or loss is
initially reported as a component of other comprehensive income and
subsequently reclassified into earnings when the forecasted transaction
affects earnings. For a foreign currency hedge, the gain or loss is
reported in other comprehensive income as part of the foreign currency
translation adjustment. For all other derivatives not designated as hedging
instruments, the gain or loss is recognized in earnings in the period of
change. The Company is required to adopt this Statement no later than
January 1, 2000 and is currently assessing the effect of the new standard.
In October 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk," ("SOP 98-7"). This statement provides guidance on
how to account for insurance and reinsurance contracts that do not transfer
insurance risk. SOP 98-7 is effective for fiscal years beginning after June
15, 1999. The adoption of this statement is not expected to have a material
effect on the Company's financial position or results of operations.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to current
year presentation.
14
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS
In December 1998, the Company entered into a definitive agreement to sell
its HealthCare business to Aetna Inc. ("Aetna"). Included in this
transaction are the Company's managed medical care, point of service,
preferred provider organization and indemnity health lines, dental
business, as well as the Company's Administrative Services Only ("ASO")
businesses. The transaction was approved by the boards of directors of both
companies and is expected to be completed in the second quarter of 1999,
subject to review by federal antitrust authorities and approval by state
regulators, and other customary closing conditions. Proceeds from the sale
will consist of $500 million of cash and $500 million of Aetna three year
senior notes.
Loss from operations of discontinued businesses for 1998 includes results
through December 31, 1998 (the measurement date). The Statements of
Operations for 1997 and 1996 have been restated to conform with the 1998
presentation. Amounts within the footnotes have been adjusted, where noted,
to eliminate the impact of discontinued operations and to be consistent
with the presentation in the Consolidated Statements of Operations. The
following table presents the results of operations and the loss on the
disposal of the Company's HealthCare business, determined as of the
measurement date, which are included in "Discontinued Operations" in the
Consolidated Statements of Operations. Amounts for 1997 and 1996 include
revenues and expenses relating to a contract with the American Association
of Retired Persons for healthcare and similar coverages which was
terminated effective December 31, 1997.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(In Millions)
<S> <C> <C> <C>
Revenues $ 7,461 $ 10,305 $ 9,187
Policyholder benefits (6,064) (8,484) (7,711)
General and administrative expenses (1,822) (2,364) (1,921)
--------- --------- ---------
Loss before income taxes (425) (543) (445)
Income tax benefit 127 190 163
--------- --------- ---------
Loss from operations (298) (353) (282)
Loss on disposal, net of tax benefit of $131 (223) - -
--------- --------- ---------
Loss from discontinued operations, net of taxes $ (521) $ (353) $ (282)
========= ========= =========
</TABLE>
The loss on disposal includes anticipated operating losses to be incurred
by the HealthCare business subsequent to the measurement date through the
expected date of the sale, as well as estimates of other costs the Company
will incur in connection with the disposition of the HealthCare business.
Actual amounts may differ from these estimates. These include costs
attributable to facilities closure and systems terminations, severance,
payments to Aetna related to the ASO business, and estimated payments in
connection with an agreement covering the fully insured medical and dental
business. The latter agreement provides for payments either to or from
Aetna in the event that medical loss ratios (i.e., incurred medical expense
divided by earned premiums) for covered businesses are either less
favorable or more favorable than levels specified in the agreement for the
years 1999 and 2000. The loss on disposition was reduced by the estimated
impact of expected modifications of certain pension and other
postretirement benefit plans in which employees of the HealthCare business
participate. This amount includes curtailment gains and the cost of
termination benefits. (See Note 9.)
15
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS (CONTINUED)
The following table presents the assets and liabilities pertaining to the
Company's HealthCare business at December 31, 1998 which are included in
the Company's Consolidated Statements of Financial Position.
(In Millions)
Cash and investments $ 1,652
Other assets 1,030
-------
Total assets 2,682
Future policy benefits 1,241
Other liabilities 1,105
-------
Total liabilities 2,346
-------
Net assets $ 336
=======
4. 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:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5,761 $ 580 $ 9 $ 6,332
Obligations of U.S. states and
their political subdivisions 2,672 204 1 2,875
Foreign government bonds 3,156 253 52 3,357
Corporate securities 57,373 2,545 553 59,365
Mortgage-backed securities 7,935 208 14 8,129
Other fixed maturities 100 - - 100
-----------------------------------------------------------
Total fixed maturities available for sale $ 76,997 $ 3,790 $ 629 $ 80,158
===========================================================
EQUITY SECURITIES AVAILABLE FOR SALE $ 2,583 $ 472 $ 296 $ 2,759
===========================================================
</TABLE>
16
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY (In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5 $ - $ - $ 5
Obligations of U.S. states and
their political subdivisions 62 2 1 63
Foreign government bonds 31 4 - 35
Corporate securities 16,699 1,096 49 17,746
Mortgage-backed securities 1 - - 1
Other fixed maturities 50 6 - 56
------------------------------------------------------------
Total fixed maturities held to maturity $ 16,848 $ 1,108 $ 50 $ 17,906
============================================================
<CAPTION>
1997
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE (In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 9,071 $ 671 $ - $ 9,742
Obligations of U.S. states and
their political subdivisions 1,529 152 - 1,681
Foreign government bonds 3,177 218 17 3,378
Corporate securities 50,043 2,611 144 52,510
Mortgage-backed securities 7,576 288 5 7,859
Other fixed maturities 100 - - 100
-----------------------------------------------------------
Total fixed maturities available for sale $ 71,496 $ 3,940 $ 166 $ 75,270
===========================================================
EQUITY SECURITIES AVAILABLE FOR SALE $ 2,376 $ 680 $ 246 $ 2,810
===========================================================
</TABLE>
17
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ----------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY
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
============================================================
</TABLE>
18
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1998, is shown below:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------- -----------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ -------------- ----------- ----------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
Due in one year or less $ 2,638 $ 2,644 $ 730 $ 736
Due after one year through five years 17,551 17,874 4,326 4,465
Due after five years through ten years 19,523 19,976 6,783 7,162
Due after ten years 29,350 31,535 5,008 5,542
Mortgage-backed securities 7,935 8,129 1 1
--------- ---------- -------- --------
Total $ 76,997 $ 80,158 $ 16,848 $ 17,906
========= ========== ======== ========
</TABLE>
Actual maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations.
Proceeds from the repayment of held to maturity fixed maturities during
1998, 1997 and 1996 were $4,466 million, $4,042 million and $4,268 million,
respectively. Gross gains of $135 million, $62 million and $78 million, and
gross losses of $2 million, $1 million and $7 million, were realized on
prepayment of held to maturity fixed maturities during 1998, 1997 and 1996,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1998,
1997 and 1996 were $119,096 million, $120,604 million and $121,910 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1998, 1997 and 1996 were $ 4,055 million, $2,946 million
and $1,458 million, respectively. Gross gains of $1,765 million, $1,310
million and $1,562 million and gross losses of $443 million, $639 million
and $1,026 million were realized on sales and prepayments of available for
sale fixed maturities during 1998, 1997 and 1996, respectively.
Writedowns for impairments of fixed maturities which were deemed to be
other than temporary were $96 million, $13 million and $54 million for the
years 1998, 1997 and 1996, respectively.
During the years ended December 31, 1998 and December 31, 1997, certain
securities classified as held to maturity 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 $73 million and $27 million, respectively with
gross unrealized investment losses of $.4 million and gross unrealized
investment gains of $.6 million included during the years ended December
31, 1998 and 1997, respectively, in "Accumulated other comprehensive
income" at the time of the transfer.
19
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans were collateralized by the following property
types at December 31:
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
(IN MILLIONS) OF TOTAL (IN MILLIONS) OF TOTAL
------------- ---------- ------------- ----------
1998 1997
------------------------ -------------------------
Office buildings $ 4,267 25.2% $ 4,692 28.5%
Retail stores 3,021 17.9% 3,078 18.7%
Residential properties 716 4.2% 891 5.4%
Apartment complexes 4,362 25.8% 3,551 21.6%
Industrial buildings 1,989 11.8% 1,958 11.9%
Agricultural properties 1,936 11.4% 1,666 10.1%
Other 631 3.7% 618 3.8%
-------- ----- -------- -----
Subtotal 16,922 100.0% 16,454 100.0%
===== =====
Allowance for losses (427) (450)
-------- --------
Net carrying value $ 16,495 $ 16,004
======== ========
The mortgage loans are geographically dispersed throughout the United
States and Canada with the largest concentrations in California (23.8%)
and New York (9.5%) at December 31, 1998. Included in the above balances
are mortgage loans receivable from affiliated joint ventures of $87 million
and $225 million at December 31, 1998 and 1997, respectively.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
1998 1997 1996
----- ----- -----
(In Millions)
Allowance for losses, beginning of year $ 450 $ 515 $ 862
Additions charged to operations - - -
Release of allowance for losses - (41) (247)
Charge-offs, net of recoveries (23) (24) (100)
----- ----- -----
Allowance for losses, end of year $ 427 $ 450 $ 515
===== ===== =====
The $41 million and $247 million reductions of the mortgage loan allowance
for losses in 1997 and 1996, respectively, are 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.
20
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
Impaired mortgage loans identified in management's specific review of
probable loan losses and related allowance for losses at December 31, are
as follows:
1998 1997
------- -------
(In Millions)
Impaired mortgage loans with allowance for losses $ 149 $ 330
Impaired mortgage loans with no allowance for losses 924 1,303
Allowance for losses (45) (97)
------- -------
Net carrying value of impaired mortgage loans $ 1,028 $ 1,536
======= =======
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 $1,329 million, $2,102 million and $2,842 million
during 1998, 1997 and 1996, respectively. Net investment income recognized
on these loans totaled $94 million, $140 million and $265 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
INVESTMENT REAL ESTATE
The Company's "Investment real estate" of $801 million and $1,519 million
at December 31, 1998 and 1997, respectively, is held through direct
ownership. Of the Company's real estate, $675 million and $1,490 million
consists of commercial and agricultural assets held for disposal at
December 31, 1998 and 1997, respectively. Impairment losses aggregated $8
million, $40 million and $38 million for the years ended December 31, 1998,
1997 and 1996, respectively, and are included in "Realized investment
gains, net."
RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets of $3,135 million and $2,783 million at December 31, 1998 and 1997,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $3,727
million and $2,352 million at December 31, 1998 and 1997, respectively,
were held in voluntary trusts. Of this amount, $3,131 million and $1,801
million at December 31, 1998 and 1997, respectively, related to the
multi-state policyholder settlement as described in Note 16. 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 $403 million and $632 million at December 31,
1998 and 1997, respectively, were maintained as compensating balances,
which do not legally restrict the use of the funds, or pledged as
collateral for bank loans and other financing agreements. Restricted cash
and securities of $2,366 million and $1,835 million at December 31, 1998
and 1997, respectively, were included in the consolidated financial
statements in "Other assets." 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 $2,658 million and $2,489
million as of December 31, 1998 and 1997, respectively, are comprised of
$1,007 million and $1,498 million in real estate related interests and
$1,651 million and $991 million of non-real estate related interests. The
Company's share of net income from such entities was $285 million, $411
million and $245 million for 1998, 1997 and 1996, respectively, and is
reported in "Net investment income."
21
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES
NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Fixed maturities - available for sale $ 5,366 $ 5,074 $ 4,871
Fixed maturities - held to maturity 1,406 1,622 1,793
Trading account assets 677 504 444
Equity securities - available for sale 54 52 81
Mortgage loans on real estate 1,525 1,555 1,690
Investment real estate 230 565 685
Policy loans 410 396 384
Securities purchased under agreements to resell 18 15 11
Receivables from broker-dealer clients 836 706 579
Short-term investments 725 697 702
Other investment income 415 520 559
-------- -------- --------
Gross investment income 11,662 11,706 11,799
Less investment expenses (2,035) (2,038) (2,130)
-------- -------- --------
Subtotal 9,627 9,668 9,669
Less amount relating to discontinued operations (107) (212) (208)
-------- -------- --------
Net investment income $ 9,520 $ 9,456 $ 9,461
======== ======== ========
</TABLE>
REALIZED INVESTMENT GAINS, NET, for the years ended December 31, were from
the following sources:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Fixed maturities $ 1,381 $ 684 $ 513
Mortgage loans on real estate 22 68 248
Investment real estate 642 700 76
Equity securities - available for sale 427 363 267
Other 188 394 34
-------- -------- --------
Subtotal 2,660 2,209 1,138
Less amounts related to discontinued operations (30) (41) (10)
-------- -------- --------
Realized investment gains, net $ 2,630 $ 2,168 $ 1,128
======== ======== ========
</TABLE>
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1998 included in fixed maturities available
for sale, mortgage loans on real estate and other long term investments
totaled $1 million, $23 million and $13 million, respectively.
22
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
NET UNREALIZED INVESTMENT GAINS
Net unrealized investment gains on securities available for sale are
included in the Consolidated Statements of Financial Position as a
component of "Accumulated other comprehensive income." Changes in these
amounts include reclassification adjustments to avoid double-counting in
"Comprehensive income," items that are included as part of "Net income" for
a period that also had been part of "Other comprehensive income" in earlier
periods. The amounts for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Millions)
<S> <C> <C> <C>
Net unrealized investment gains, beginning of year $ 1,752 $ 1,136 $ 2,397
Changes in net unrealized investment gains attributable to:
Investments:
Net unrealized investment gains (losses) on investments arising
during the period 522 1,706 (1,281)
Reclassification adjustment for gains included in net income (1,087) (631) (471)
------- ------- -------
Change in net unrealized investment gains, net of adjustments (565) 1,075 (1,752)
Impact of net unrealized investment gains on:
Future policy benefits 23 (360) 318
Deferred policy acquisition costs 62 (99) 173
------- ------- -------
Change in net unrealized investment gains (480) 616 (1,261)
------- ------- -------
Net unrealized investment gains, end of year $ 1,272 $ 1,752 $ 1,136
======= ======= =======
</TABLE>
Unrealized gains (losses) on investments arising during the periods
reported in the above table are net of income tax expense (benefit) of $282
million, $961 million and $(647) million for the years ended December 31,
1998, 1997 and 1996, respectively.
Reclassification adjustments reported in the above table for the years
ended December 31, 1998, 1997 and 1996 are net of income tax expense of
$588 million, $355 million and $238 million, respectively.
The future policy benefits reported in the above table are net of income
tax expense (benefit) of $15 million, $(203) million and $161 million for
the years ended December 31, 1998, 1997 and 1996, respectively.
Deferred policy acquisition costs in the above tables for the years ended
December 31, 1998, 1997 and 1996 are net of income tax expense (benefit) of
$36 million, $(55) million and $88 million, respectively.
23
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. 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:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Millions)
<S> <C> <C> <C>
Balance, beginning of year $ 6,083 $ 6,095 $ 5,892
Capitalization of commissions, sales and issue expenses 1,313 1,409 1,260
Amortization (1,139) (1,176) (1,261)
Change in unrealized investment gains 77 (154) 261
Foreign currency translation 128 (91) (57)
------- ------- -------
Balance, end of year $ 6,462 $ 6,083 $ 6,095
======= ======= =======
</TABLE>
6. POLICYHOLDERS' LIABILITIES
FUTURE POLICY BENEFITS at December 31, are as follows:
1998 1997
------- -------
(In Millions)
Life insurance $48,927 $46,765
Annuities 15,360 15,469
Other contract liabilities 4,842 5,133
------- -------
Future policy benefits $69,129 $67,367
======= =======
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.
24
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (CONTINUED)
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- --------------------------- ------------------------- ------------------------- ------------------------
<S> <C> <C> <C>
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 3.5% 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
Table with certain payments
modifications based on historical
experience
Other contract liabilities - 5.3% to 7.0% Present value of
expected future
payments
based on historical
experience
</TABLE>
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 and to recover any unamortized
acquisition costs. A premium deficiency reserve has been recorded for the
group single premium annuity business, which consists of limited-payment,
long duration, traditional and non-participating annuities. A liability of
$1,780 million and $1,645 million is included in "Future policy benefits"
with respect to this deficiency for the years ended December 31, 1998 and
1997, respectively.
POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In Millions)
<S> <C> <C>
Individual annuities $ 4,997 $ 5,695
Group annuities and guaranteed investment contracts 16,770 19,053
Interest-sensitive life contracts 3,566 3,258
Dividend accumulations and other 5,641 5,240
------- --------
Policyholders' account balances $30,974 $ 33,246
======= ========
</TABLE>
Policyholders' account balances for interest-sensitive life and
investment-type contracts represent an accumulation of gross premium
payments plus credited interest less withdrawals, expenses and mortality
charges.
25
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (Continued)
Certain contract provisions that determine the policyholder account
balances are as follows:
<TABLE>
<CAPTION>
WITHDRAWAL/
PRODUCT INTEREST RATE SURRENDER CHARGES
--------------------------------- ------------- -----------------------------------
<S> <C> <C>
Individual annuities 3.0% to 6.6% 0% to 8% for up to 8 years
Group annuities 5.0% to 13.4% Contractually limited or subject
to market value adjustment
Guaranteed investment contracts 3.9% to 15.4% Subject to market value withdrawal
payout status 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 and other 3.0% to 4.5% --
</TABLE>
26
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (Continued)
Unpaid Claims and Claim Adjustment Expenses. The following table provides
a reconciliation of the activity in the liability for unpaid claims and
claim adjustment expenses for property and casualty and accident and
health insurance at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- -----------------------
ACCIDENT PROPERTY ACCIDENT PROPERTY ACCIDENT PROPERTY
AND HEALTH AND CASUALTY AND HEALTH AND CASUALTY AND HEALTH AND CASUALTY
---------- ------------ ---------- ------------ ---------- -------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 $ 1,908 $ 2,956 $ 1,990 $ 3,076 $ 2,033 $ 3,053
Less reinsurance recoverables 810 535 10 553 15 557
------- ------- ------- ------- ------- -------
Net balance at January 1 1,098 2,421 1,980 2,523 2,018 2,496
------- ------- ------- ------- ------- -------
Incurred related to:
Current year 6,127 1,354 8,348 1,525 8,391 1,760
Prior years 7 (194) 102 (91) (66) (25)
------- ------- ------- ------- ------- -------
Total incurred 6,134 1,160 8,450 1,434 8,325 1,735
------- ------- ------- ------- ------- -------
Paid related to:
Current year 5,289 717 6,676 739 6,589 908
Prior years 851 681 1,854 797 1,774 800
------- ------- ------- ------- ------- -------
Total paid 6,140 1,398 8,530 1,536 8,363 1,708
------- ------- ------- ------- ------- -------
Net balance at December 31 1,092 2,183 1,900 2,421 1,980 2,523
Plus reinsurance recoverables 52 533 8 535 10 553
------- ------- ------- ------- ------- -------
Balance at December 31 $ 1,144 $ 2,716 $ 1,908 $ 2,956 $ 1,990 $ 3,076
======= ======= ======= ======= ======= =======
</TABLE>
The Accident and Health balance at December 31 includes amounts
attributable to the Company's discontinued HealthCare business: 1998 -
$1,082; 1997 - $1,757 and 1996 - $1,750.
In 1998 and 1997, the changes in provision for claims and claim adjustment
expenses for property and casualty related to prior years are primarily
driven by lower than anticipated losses for the Voluntary Auto line of
business.
The changes in provision for claims and claim adjustment expense for
accident and health related to prior years are primarily due to such
factors as changes in claim cost trends and an accelerated decline in the
indemnity health business.
The unpaid claims and claim adjustment expenses presented above consist 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 Consolidated
Statement of Operations periodically as the estimates are revised.
Accident and health unpaid claims liabilities for 1998, 1997 and 1996
included above are discounted using interest rates ranging from 3.0%
to 6.0%.
27
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. REINSURANCE
The Company participates in reinsurance in order to provide greater
diversification of business, provide additional capacity for future growth
and limit the maximum net loss potential arising from large risks. Life
reinsurance is accomplished through various plans of reinsurance,
primarily yearly renewable term and coinsurance. Property-casualty
reinsurance is placed on both a pro-rata and excess of loss basis.
Reinsurance ceded arrangements do not discharge the Company or the
insurance subsidiaries as the primary insurer. Ceded balances would
represent a liability to the Company in the event the reinsurers were
unable to meet their obligations to the Company under the terms of the
reinsurance agreements. The Company periodically reviews the financial
condition of its reinsurers and amounts recoverable therefrom, recording
an allowance when necessary for uncollectible reinsurance.
Reinsurance amounts included in the Consolidated Statements of Operations,
excluding HealthCare, for the years ended December 31, were as follows:
1998 1997 1996
------- ------ -------
(In Millions)
Direct Premiums $9,615 $9,679 $10,690
Reinsurance Assumed 65 42 13
Reinsurance Ceded (656) (716) (704)
------ ------ -------
Premiums $9,024 $9,005 $ 9,999
====== ====== =======
Policyholders' benefits ceded $ 519 $ 530 $ 571
====== ====== =======
Reinsurance recoverables, included in "Other assets" in the Company's
Consolidated Statements of Financial Position, at December 31, were as
follows:
1998 1997
------ ------
(In Millions)
Life insurance $ 620 $ 685
Property-casualty 564 554
Other reinsurance 92 65
------ ------
$1,276 $1,304
====== ======
28
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT
Debt consists of the following at December 31:
SHORT-TERM DEBT
1998 1997
------- ------
(In Millions)
Commercial paper $ 7,057 $4,268
Notes payable 2,164 2,151
Current portion of long-term debt 861 355
------- ------
Total short-term debt $10,082 $6,774
======= ======
The weighted average interest rate on outstanding short-term debt was
approximately 5.4% and 6.0% at December 31, 1998 and 1997, 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
<TABLE>
<CAPTION>
DESCRIPTION MATURITY DATES RATE 1998 1997
- ----------- -------------- ---- ----- ----
(In Millions)
<S> <C> <C> <C> <C>
Floating rate notes ("FRN") 1999 - 2005 4.04-14.00%(a) $ 729 $ 324
Long term notes 1999 - 2023 5.5% - 12% 1,318 910
Zero coupon notes 1999 8.6% (b) 364 334
Canadian dollar notes - 7.0% - 9.125% - 117
Japanese yen notes 1999 - 2000 0.5% - 4.6% 160 178
Swiss francs notes - 3.875% - 120
Canadian dollar FRN 2003 5.25%-5.89% 96 96
Surplus notes 2003 - 2025 6.875% - 8.3% 987 986
Senior notes 1999 - 2006 6.375% 393 -
Commercial paper backed by long-term
credit agreements 1,500 1,500
Other notes payable 1999 - 2017 4% - 7.5% 48 63
------- -------
Subtotal 5,595 4,628
Less: current portion of long-term debt (861) (355)
------- -------
Total long-term debt $ 4,734 $ 4,273
======= =======
</TABLE>
(a) The Company issued an S&P 500 index linked note of $29 million in September
of 1997. The interest rate on the note is based on the appreciation of the
S&P 500 index, with a contractual cap of 14%. At December 31, 1998, this
rate was 14%. Excluding this note, floating rate note interest rates were
between 4.04% - 5.50%.
(b) The rate shown for zero coupon notes represents a level yield to maturity.
29
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
Payment of interest and principal on the surplus notes issued after 1993,
of which $686 million were outstanding at December 31, 1998, 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, 1998,
are as follows: $862 million in 1999, $560 million in 2000, $327 million
in 2001, $1,816 million in 2002, $458 million in 2003 and $1,575 million
thereafter.
At December 31, 1998, the Company had $9,853 million in lines of credit
from numerous financial institutions of which $8,330 million were unused.
These lines of credit generally have terms ranging from one to five years.
Interest expense for short-term and long-term debt is $920 million,
$743 million and $618 million for the years ended December 31, 1998, 1997
and 1996, respectively.
9. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT PLANS
The Company has funded non-contributory defined benefit pension plans
which cover substantially all of its employees. The Company also has
several non-funded non-contributory defined benefit plans covering
certain executives. 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.
The Company provides certain life insurance and health care benefits
("Other postretirement benefits") for its retired employees, their
beneficiaries and covered dependents. The healthcare plan is
contributory; the life insurance plan is non-contributory. Substantially
all of the Company's employees may become eligible to receive benefits if
they retire after age 55 with at least 10 years of service or under
certain circumstances after age 50 with at least 20 years of continuous
service. These benefits are funded as considered necessary by Company
management.
The Company has elected to amortize its transition obligation for other
postretirement benefits over 20 years.
30
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Prepaid and accrued benefit 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, is summarized below:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- ------------------------
1998 1997 1998 1997
-------- ------- ------- -------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at the beginning of period $(5,557) $(5,148) $(2,128) $(2,002)
Service cost (159) (127) (35) (38)
Interest cost (397) (376) (142) (149)
Plan participants' contributions - - ( 6) (4)
Amendments (58) - - 31
Actuarial losses (600) (334) (31) (84)
Transfer to third party - 32 - -
Contractual termination benefits (30) (63) - -
Benefits paid 485 460 128 117
Foreign currency changes 7 (1) 1 1
------- ------- ------- -------
Benefit obligation at end of period $(6,309) $(5,557) $(2,213) $(2,128)
======= ======= ======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of period $ 8,489 $ 7,306 $ 1,354 $ 1,313
Actual return on plan assets 445 1,693 146 120
Transfer to third party (4) (32) - -
Contribution from pension plan - - 31 25
Employer contributions 25 16 13 9
Plan participants' contributions - - 6 4
Withdrawal under IRS Section 420 (36) (35) - -
Benefits paid (485) (460) (128) (117)
Foreign currency changes (7) 1 - -
------- ------- ------- -------
Fair value of plan assets at end of period $ 8,427 $ 8,489 $ 1,422 $ 1,354
======= ======= ======= =======
FUNDED STATUS:
Funded status at end of period $ 2,118 $ 2,932 $ (791) $ (774)
Unrecognized transition (asset) liability (554) (661) 660 707
Unrecognized prior service cost 335 327 - -
Unrecognized actuarial net gain (813) (1,644) (353) (364)
Effects of 4th quarter activity (9) (63) 2 33
------- ------- ------- -------
Net amount recognized $ 1,077 $ 891 $ (482) $ (398)
======= ======= ======= =======
AMOUNTS RECOGNIZED IN THE STATEMENTS OF FINANCIAL
POSITION CONSIST OF:
Prepaid benefit cost $ 1,348 $ 1,150 $ - $ -
Accrued benefit liability (287) (270) (482) (398)
Intangible asset 7 5 - -
Accumulated other comprehensive income 9 6 - -
-------- -------- -------- ---------
Net amount recognized $ 1,077 $ 891 $ (482) $ (398)
======== ======== ======== =========
</TABLE>
31
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $384 million, $284 million and
$0, respectively, as of September 30, 1998 and $319 million, $226 million
and $ 0, respectively, as of September 30, 1997.
The effects of fourth quarter activity are summarized as follows:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- -----------------------
1998 1997 1998 1997
------ ------- ------ ------
(In Millions)
<S> <C> <C> <C> <C>
Effect of IRS Section 420 transfer $ - $ (36) $ - $ -
Contractual termination benefits (14) (30) - -
Contribution from pension plan - - - 31
Employer contributions 5 3 2 2
----- ------- ------ ------
Effects of 4th quarter activity $ (9) $ (63) $ 2 $ 33
====== ======= ====== ======
</TABLE>
Pension plan assets consist primarily of equity securities, bonds, real estate
and short-term investments, of which $5,926 million and $6,022 million are
included in Separate Account assets and liabilities at September 30, 1998 and
1997, respectively.
Other postretirement plan assets 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 $1,018
million and $1,044 million of Company insurance policies and contracts at
September 30, 1998 and 1997, 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 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, 1998 that their employment had been
terminated. Costs related to these amendments are reflected below in contractual
termination benefits.
32
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic benefit cost included in "General and administrative expenses"
in the Company's Consolidated Statements of Operations for the years ended
December 31, includes the following components:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------- ------------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------- ------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFITS COSTS:
Service cost $ 159 $ 127 $ 140 $ 35 $ 38 $ 45
Interest cost 397 376 354 142 149 157
Expected return on plan assets (674) (617) (594) (119) (87) (93)
Amortization of transition amount (106) (106) (107) 47 50 53
Amortization of prior service cost 45 42 26 - - -
Amortization of actuarial net (gain) loss 1 - - (13) (13) (3)
Curtailment gain (loss) 5 - - - - (9)
Contractual termination benefits 14 30 63 - - -
------- ------- ------- ------- ------- ------
Net periodic (benefit) cost $ (159) $ (148) $ (118) $ 92 $ 137 $ 150
======= ======= ======= ======= ======= ======
</TABLE>
The assumptions at September 30, used by the Company to calculate the benefit
obligations as of that date and to determine the benefit cost in the subsequent
year are as follows:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------ ----------------------------------------
1998 1997 1996 1998 1997 1996
------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate 6.50% 7.25% 7.75% 6.50% 7.25% 7.75%
Rate of increase in compensation levels 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Expected return on plan assets 9.50% 9.50% 9.50% 9.00% 9.00% 9.00%
Health care cost trend rates - - - 7.80-11.00% 8.20-11.80% 8.50-12.50%
Ultimate health care cost trend rate
after gradual decrease until 2006 - - - 5.00% 5.00% 5.00%
</TABLE>
33
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage point
increase and decrease in assumed health care cost trend rates would have
the following effects:
OTHER
POSTRETIREMENT BENEFITS
-----------------------
1998
------
(In Millions)
ONE PERCENTAGE POINT INCREASE
Effect on total service and interest costs $ 24
Effect on postretirement benefit obligation (226)
ONE PERCENTAGE POINT DECREASE
Effect on total service and interest costs $ (19)
Effect on postretirement benefit obligation 187
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, 1998 and 1997
was $135 million and $144 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 3% of annual salary,
resulting in $54 million, $63 million and $57 million of expenses included in
"General and administrative expenses" for 1998, 1997 and 1996, respectively.
DISCONTINUED OPERATIONS
In connection with the disposal of the Company's HealthCare business, as more
fully discussed in Note 3, the loss on disposal was reduced by an estimated
curtailment gain of $30 million.
34
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
1998 1997 1996
------ ------ ------
(In Millions)
Current tax expense (benefit):
U.S. $ 983 $ (14) $ 400
State and local 54 51 108
Foreign 148 64 48
------ ------ ------
Total $1,185 $ 101 $ 556
====== ====== ======
Deferred tax expense (benefit):
U.S. $ (193) $ 269 $ (428)
State and local (6) 4 (2)
Foreign (16) 33 54
------ ------ ------
Total $ (215) $ 306 $ (376)
====== ====== ======
Total income tax expense $ 970 $ 407 $ 180
====== ====== ======
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 continuing operations before income taxes for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Expected federal income tax expense $ 908 $ 480 $ 539
Equity tax (benefit) 75 (65) (365)
State and local income taxes 31 37 69
Tax-exempt interest and dividend received deduction (46) (67) (67)
Other
2 22 4
------ ------ ------
Total income tax expense $ 970 $ 407 $ 180
====== ====== ======
</TABLE>
35
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
1998 1997
------- -------
(In Millions)
Deferred tax assets
Insurance reserves $ 1,584 $ 1,482
Policyholder dividends 265 250
Net operating loss carryforwards 260 80
Litigation related reserves 104 178
Employee benefits 63 42
Other 134 287
------- -------
Deferred tax assets before valuation allowance 2,410 2,319
Valuation allowance (13) (18)
------- -------
Deferred tax assets after valuation allowance 2,397 2,301
------- -------
Deferred tax liabilities
Investments 1,414 1,867
Deferred policy acquisition costs 1,436 1,525
Depreciation 64 36
------- -------
Deferred tax liabilities 2,914 3,428
------- -------
Net deferred tax liability $ 517 $ 1,127
======= =======
Management believes that based on its historical pattern of taxable income, the
Company will produce sufficient income in the future to realize its 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, 1998 and 1997,
respectively, the Company had federal life net operating loss carryforwards of
$540 million and $1,200 million, which expire by 2012. At December 31, 1998 and
1997, respectively, the Company had state non-life operating loss carryforwards
for tax purposes approximating $1,059 million and $800 million, which expire by
2018.
The Internal Revenue Service (the "Service") has completed all examinations of
the consolidated federal income tax returns through 1989. The Service has
examined the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments. Management, however, 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.
36
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. STATUTORY EQUITY AND INCOME
Applicable insurance department regulations require that the Company
prepare statutory financial statements in accordance with statutory
accounting practices prescribed or permitted by the New Jersey Department
of Banking and Insurance. Statutory accounting practices primarily differ
from GAAP by charging policy acquisition costs to expense as incurred,
establishing future policy benefits reserves using different actuarial
assumptions, not providing for deferred taxes, and valuing securities on a
different basis. The Company's statutory net income, as filed with the New
Jersey Department of Banking and Insurance was $1,247 million, $1,471
million and $1,402 million for the years 1998, 1997 and 1996,
respectively. Statutory capital and surplus, as filed, at December 31,
1998 and 1997 was $8,536 million and $9,242 million, respectively.
12. 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, 1998, future minimum lease payments under non-cancelable
operating leases are estimated as follows:
(In Millions)
1999 $ 295
2000 263
2001 231
2002 198
2003 157
Remaining years after 2003 753
-------
Total $ 1,897
=======
Amounts presented in the table above include operating leases relating to
the Company's HealthCare business. See Note 3 for a discussion of the
pending sale of this business. Amounts applicable to the HealthCare
business are $65 million in 1999, $58 million in 2000, $52 million in
2001, $45 million in 2002, $34 million in 2003 and $89 million thereafter.
Rental expense incurred for the years ended December 31, 1998, 1997 and
1996 was approximately $320 million, $352 million and $343 million,
respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated 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
estimated fair values (for all other financial instruments presented in
the table, the carrying value approximates estimated fair value).
37
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FIXED MATURITIES AND EQUITY SECURITIES
Estimated 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 fair value of
certain non-performing private placement securities is based on amounts
estimated by management.
MORTGAGE LOANS ON REAL ESTATE
The estimated 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 loans, the
estimated 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 estimated 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
Estimated fair values of policyholders' account balances are derived by
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. For interest sensitive life
contracts, fair value approximates carrying value.
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.
38
<PAGE>
- -------------------------------------------------------------------------------
13. 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:
<TABLE>
<CAPTION>
1998 1997
----------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Other than trading:
Fixed maturities:
Available for sale $ 80,158 $ 80,158 $ 75,270 $ 75,270
Held to maturity 16,848 17,906 18,700 19,894
Equity securities 2,759 2,759 2,810 2,810
Mortgage loans on real estate 16,495 17,265 16,004 16,703
Policy loans 7,476 8,037 7,034 7,201
Securities purchased under agreements to resell 1,737 1,737 - -
Short-term investments 9,781 9,781 12,106 12,106
Cash 1,943 1,943 1,859 1,859
Restricted Assets 2,366 2,366 1,835 1,835
Separate Account assets 81,621 81,621 73,839 73,839
Derivative financial instruments 132 135 93 92
Trading:
Trading account assets $ 8,888 $ 8,888 $ 6,347 $ 6,347
Broker-dealer related receivables 10,142 10,142 8,442 8,442
Derivative financial instruments 765 765 910 910
Securities purchased under agreements to resell 8,515 8,515 8,661 8,661
Cash collateral for borrowed securities 5,622 5,622 5,047 5,047
FINANCIAL LIABILITIES:
Other than trading:
Policyholders' account balances $ 30,974 $ 31,940 $ 33,246 $ 34,201
Securities sold under agreements to repurchase 7,085 7,085 85 85
Cash collateral for loaned securities 2,450 2,450 9,647 9,647
Short-term and long-term debt 14,816 15,084 11,047 11,131
Securities sold but not yet purchased 2,215 2,215 - -
Separate Account liabilities 80,931 80,931 73,451 73,451
Derivative financial instruments 390 391 100 99
Trading:
Broker-dealer related payables $ 6,530 $ 6,530 $ 3,338 $ 3,338
Derivative financial instruments 725 725 1,019 1,019
Securities sold under agreements to repurchase 14,401 14,401 12,262 12,262
Cash collateral for loaned securities 4,682 4,682 4,470 4,470
Securities sold but not yet purchased 3,556 3,556 3,648 3,648
</TABLE>
39
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
INTEREST RATE SWAPS
The Company uses interest rate swaps to reduce market risks from changes in
interest rates and to alter interest rate exposures arising from mismatches
between assets and liabilities. Under interest rates swaps, the Company
agrees with other parties to exchange, at specified intervals the difference
between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Generally, no cash is
exchanged at the outset of the contract and no principal payments are made
by either party. Cash is paid or received based on the terms of the swap.
These transactions are entered into pursuant to master agreements that
provide for a single net payment to be made by one counterparty at each due
date. 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.
If swap agreements meet the criteria for hedge accounting, net interest
receipts or payments are accrued and recognized over the life of the swap
agreements as an adjustment to interest income or expense of the hedged
item. Any unrealized gains or losses are not recognized until the hedged
item is sold or matures. Gains or losses on early termination of interest
rate swaps are deferred and amortized over the remaining period originally
covered by the swaps. If the criteria for hedge accounting are not met, the
swap agreements are accounted for at market value with changes in fair value
reported in current period earnings.
FUTURES AND OPTIONS
The Company uses exchange-traded Treasury futures and options to reduce
market risks from changes in interest rates, to alter mismatches between the
duration of assets in a portfolio and the duration of liabilities supported
by those assets, and to hedge against changes in the value of securities it
owns or anticipates acquiring. The Company enters into exchange-traded
futures and options with regulated futures commissions merchants who are
members of a trading exchange. The fair value of futures and options is
based on market quotes for transactions with similar terms.
Under exchange-traded futures, the Company agrees to purchase a specified
number of contracts with other parties and to post variation margin on a
daily basis in an amount equal to the difference in the daily market values
of those contracts. Futures are typically used to hedge duration mismatches
between assets and liabilities by replicating Treasury performance. Treasury
futures move substantially in value as interest rates change and can be used
to either modify or hedge existing interest rate risk. This strategy
protects against the risk that cash flow requirements may necessitate
liquidation of investments at unfavorable prices resulting from increases in
interest rates. This strategy can be a more cost effective way of
temporarily reducing the Company's exposure to a market decline than selling
fixed income securities and purchasing a similar portfolio when such a
decline is believed to be over.
If futures meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing
financial instruments are amortized as a yield adjustment over the remaining
lives of the hedged item. Futures that do not qualify as hedges are carried
at fair value with changes in value reported in current period earnings. The
gains and losses associated with anticipatory transactions are not material.
40
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
When the Company anticipates a significant decline in the stock market
which will correspondingly affect its diversified portfolio, it may
purchase put index options where the basket of securities in the index is
appropriate to provide a hedge against a decrease in the value of the
equity portfolio or a portion thereof. This strategy effects an orderly
sale of hedged securities. When the Company has large cash flows which it
has allocated for investment in equity securities, it may purchase call
index options as a temporary hedge against an increase in the price of the
securities it intends to purchase. This hedge permits such investment
transactions to be executed with the least possible adverse market impact.
Option premium paid or received is reported as an asset or liability and
amortized into income over the life of the option. If options meet the
criteria for hedge accounting, changes in their fair value are deferred
and recognized as an adjustment to the hedged item. Deferred gains or
losses from the hedges for interest-bearing financial instruments are
recognized as an adjustment to interest income or expense of the hedged
item. If the options do not meet the criteria for hedge accounting, they
are fair valued, with changes in fair value reported in current period
earnings.
CURRENCY DERIVATIVES
The Company uses currency derivatives, including exchange-traded currency
futures and options, currency forwards and currency swaps to reduce market
risks from changes in currency values of investments denominated in
foreign currencies that the Company either holds or intends to acquire and
to alter the currency exposures arising from mismatches between such
foreign currencies and the U.S. Dollar.
Under currency forwards, the Company agrees with other parties upon
delivery of a specified amount of specified currency at a specified future
date. Typically, the price is agreed upon at the time of the contract and
payment for such a contract is made at the specified future date. Under
currency swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between one currency and another at a
forward exchange rate and calculated by reference to an agreed principal
amount. Generally, the principal amount of each currency is exchanged at
the beginning and termination of the currency swap by each party. These
transactions are entered into pursuant to master agreements that provide
for a single net payment to be made by one counterparty for payments made
in the same currency at each due date.
If currency derivatives are effective as hedges of foreign currency
translation and transaction exposures, gains or losses are recorded in
"Accumulated other comprehensive income." If currency derivatives do not
meet hedge accounting criteria, gains or losses from those derivatives are
recognized in current period earnings.
The tables below summarize the Company's outstanding positions by
derivative instrument types as of December 31, 1998 and 1997. 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.
41
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1998
(In Millions)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------- ------------------------- -------------------------
ESTIMATED ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 4,564 $ 309 $ 2,200 $ 96 $ 6,764 $ 405
Liabilities 4,734 274 3,065 349 7,799 623
Forwards:
Assets 45,651 282 1,004 14 46,655 296
Liabilities 39,153 280 2,039 37 41,192 317
Futures:
Assets 3,272 61 1,786 23 5,058 84
Liabilities 4,371 47 531 5 4,902 52
Options:
Assets 8,310 113 130 2 8,440 115
Liabilities 6,388 124 213 - 6,601 124
-------- -------- -------- ------- -------- --------
Total:
Assets $ 61,797 $ 765 $ 5,120 $ 135 $ 66,917 $ 900
======== ======== ======== ======= ======== ========
Liabilities $ 54,646 $ 725 $ 5,848 $ 391 $ 60,494 $ 1,116
======== ======== ======== ======= ======== ========
</TABLE>
42
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(In Millions)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
-------------------------- ------------------------- --------------------------
ESTIMATED ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ----------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 5,798 $ 316 $ 1,446 $ 67 $ 7,244 $ 383
Liabilities 5,439 418 1,197 70 6,636 488
Forwards:
Assets 29,947 438 1,171 25 31,118 463
Liabilities 29,985 461 687 8 30,672 469
Futures:
Assets 4,103 51 46 - 4,149 51
Liabilities 3,064 50 3,320 21 6,384 71
Options:
Assets 6,893 105 239 - 7,132 105
Liabilities 3,946 90 224 - 4,170 90
------- ------- ------- ------ ------- -------
Total:
Assets $46,741 $ 910 $ 2,902 $ 92 $49,643 $ 1,002
======= ======= ======= ====== ======= =======
Liabilities $42,434 $ 1,019 $ 5,428 $ 99 $47,862 $ 1,118
======= ======= ======= ====== ======= =======
</TABLE>
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. At December
31, 1998 and 1997 approximately 97% and 95%, respectively, 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, 1998, 1997 and 1996
relating to forwards, futures and swaps were $67 million, $(5) million and $(13)
million; $59 million, $37 million and $(13) million; and $42 million, $32
million and $(11) 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, 1998 and 1997 were $1,165 million and $1,015
million, respectively, and for derivatives in a liability position were $1,140
million and $1,166 million, respectively. Of those derivatives held for trading
purposes at December 31, 1998, 63% of the notional amount consisted of interest
rate derivatives, 32% consisted of foreign currency derivatives, and 5%
consisted of equity and commodity derivatives. Of those derivatives held for
purposes other than trading at December 31, 1998, 60% of notional consisted of
interest rate derivatives, 31% consisted of foreign currency derivatives, and 9%
consisted of equity and commodity derivatives.
43
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. 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
underfunded portion of commitments to fund investments in private placement
securities, and unused credit card and home equity lines. In connection
with the Company's commercial banking business, loan commitments for credit
cards and home equity lines of credit include agreements to lend up to
specified limits to customers. It is anticipated that commitment amounts
will only be partially drawn down based on overall customer usage patterns,
and, therefore, do not necessarily represent future cash requirements. The
Company evaluates each credit decision on such commitments at least
annually and has the ability to cancel or suspend such lines at its option.
The total available lines of credit card and home equity commitments were
$3.0 billion of which $2.2 billion remains available at December 31, 1998.
Also in connection with the Company's investment banking activities, the
Company enters into agreements with mortgage originators and others to
provide financing on both a secured and unsecured basis. Aggregate
financing commitments on a secured basis approximate $6.1 billion of which
$3.3 billion remains available at December 31, 1998. Unsecured commitments
approximate $65.0 million, the majority of which is outstanding at December
31, 1998.
Other commitments substantially include commitments to purchase and sell
mortgage loans and the underfunded portion of commitments to fund
investments in private placement securities. These mortgage loans and
private commitments were $2.5 billion of which $1.8 billion remain
available at December 31, 1998. Additionally, mortgage loans sold with
recourse were $0.5 billion at December 31, 1998.
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. At December 31,
1998 these were immaterial.
15. DIVESTITURE
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."
16. CONTINGENCIES AND LITIGATION
STOP-LOSS REINSURANCE 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. The Company
has guaranteed
44
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
Gibraltar's obligations arising under the stop-loss agreement subject to a
limit of $375 million. Through December 31, 1998, Gibraltar has incurred
$375 million in losses under the stop-loss agreement, including $90 million
in 1998. Gibraltar has paid $197 million to Pru Re under the stop-loss
agreement.
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
The Company has reviewed its obligations under certain managed care
arrangements for possible failure to comply with contractual and regulatory
requirements. It is the opinion of management that adequate reserves have
been established to provide for appropriate reimbursements to customers.
REINSURANCE AND PARTICIPATION AGREEMENT
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. In November 1998,
the Rehabilitation Court approved the sale of MBLLAC's individual life
insurance and individual group annuity business to affiliates of SunAmerica
Inc. Upon the end of the rehabilitation period, expected during 1999, the
agreement will terminate.
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.
Two putative class actions and approximately 320 individual actions were
pending against the Company in the United States as of January 31, 1999
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. 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 these cases seek substantial
damages while others seek unspecified compensatory, punitive and treble
damages. The Company intends to defend these cases vigorously.
45
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
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. 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 and that the
Company's efforts to prevent such practices were not sufficiently
effective. Based on the findings, the Task Force recommended, and the
Company agreed to, various changes to its sales and business practices
controls, and 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 U.S. District
Court for the District of 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 U.S. District Court 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 was affirmed by the U.S. Court of Appeals for the Third Circuit
in July 1998 although the issue of class counsel's fees was sent back to
the U.S. District Court for review. The Supreme Court denied certiorari in
January 1999, thereby making final the approval of the class action
settlement.
While the approval of the class action settlement is now final, the Company
remains subject to oversight and review by insurance regulators and other
regulatory authorities with respect to its sales practices and the conduct
of the remediation program. The releases granted by the state insurance
regulators pursuant to the individual state settlement agreements do not
become final until the remediation program has been completed without any
material changes to which those regulators have not agreed. The U.S.
District Court has also retained jurisdiction as to all matters relating to
the administration, consummation, enforcement and interpretation of the
class action settlement.
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 in
46
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
October 1996, 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.
In January 1997 the U.S. District Court sanctioned and fined the Company
$1 million for failure to properly implement procedures for its employees
to retain documents in violation of the Courts' order that required the
parties to preserve all documents relevant to the class action and
remediation program. The Court ordered the Company to implement a document
retention policy and directed that an independent expert be engaged to
investigate the extent of document destruction and its impact on the
remediation program.
In response to the class notices, the owners of approximately 503,000
policies indicated an interest in a Basic Claim Relief remedy. Management
believes that costs associated with providing Basic Claim Relief will not
be material to the Company's financial position or results of operations.
The owners of approximately 1.16 million policies responded to the class
notices by indicating an intent to file an ADR claim. All policyholders
who responded were provided an ADR claim form for completion and
submission. The ADR process generally requires that individual claim forms
and files be reviewed by the Company and by one or more independent claim
evaluators. Approximately 649,000 claim forms were completed and returned
and approximately 591,000 decision letters had been mailed to claimants as
of January 31, 1999. In many instances, claimants have the right to
"appeal" the Company's decision to an independent reviewer. Management
believes that the bulk of such appeals will be resolved in 1999.
In 1996, the Company recorded in its Consolidated Statement of Operations
the cost of $410 million as a guaranteed minimum remediation expense
pursuant to the settlement agreement. Management had no better information
available at that time upon which to make a reasonable estimate of losses
associated with the settlement. In 1997, based on additional information
derived from claim sampling techniques, the terms of the settlement and
the number of claim forms received, management 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 was funded in a settlement trust. Management
expressly noted that additional cost items were anticipated that could not
be fully evaluated at that time.
In 1998, based on estimates derived from an analysis of claims actually
remedied (including interest), a sample of claims still to be remedied, an
estimate of additional liability associated with the results of the
investigation by the independent expert regarding the impact of document
destruction on the ADR program, and an estimate of additional liabilities
associated with a claimant's right to "appeal" the Company's decision,
management increased the estimated liability for the cost of ADR remedies
by $.51 billion before taxes to a total of $2.56 billion before taxes, all
of which has been funded in a settlement trust as discussed in Note 4. The
Company has also recorded from 1996 through 1998 additional charges to
reflect ongoing administrative costs related to the ADR program,
regulatory fines, penalties and related payments, litigation costs and
settlements, and other fees and expenses associated with the resolution of
sales practices issues. While management believes the foregoing provisions
are reasonable estimates based on information currently available, the
ultimate amount of the total cost of remedied policyholder claims and
other related costs is dependent on complex and varying factors, including
the relief options still to be chosen by claimants, the dollar value of
those options, and the number and type of claims that may successfully be
appealed.
47
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THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted with precision. 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 the matters specifically discussed
above. Management believes, however, that the ultimate resolution of all
such matters, after consideration of applicable reserves, should not have a
material adverse effect on the Company's financial position.
******
48
<PAGE>
PROSPECTUS
May 1, 1999
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI - 2
GROUP VARIABLE UNIVERSAL LIFE INSURANCE
FOR EMPLOYEES OF MORGAN GUARANTY TRUST COMPANY OF NY
This document is a prospectus. It tells you about A GROUP VARIABLE UNIVERSAL
LIFE INSURANCE contract offered by The Prudential Insurance Company of America
("Prudential," "we," "our," or "us") to Morgan Guaranty Trust Company of NY
("Morgan Guaranty"). The benefits available under the Group Variable Universal
Life Insurance Contract (the "Group Contract") are in addition to any Basic
Employee Term Life Insurance benefits.
Eligible Group Members are full-time and regular part-time employees of Morgan
Guaranty, including its subsidiaries and its affiliated companies, who are on
the U.S. payroll and scheduled to work 20 hours or more in a week.
We will give a Certificate to each Eligible Group Member or spouse who buys
coverage under the Group Contract. We will refer to each person who buys
coverage as a "Participant." When we use the terms "you" or "your," we mean a
Participant.
The Group Contract and Certificates provide life insurance protection with
flexible premium payments and a choice of underlying investment options. The
Death Benefit and Cash Surrender Value will change daily, depending on the
performance of the investment options you select. The Death Benefit will usually
not be less than the Face Amount of the Certificate. Surrenders, partial
withdrawals, and loans are available but certain rules and limits apply to how
they work.
We have tried to make this prospectus easy to understand. Still, the meaning of
some terms are special because they describe concepts used mostly in insurance
contracts. To help you understand what these terms mean, we added a DEFINITIONS
OF SPECIAL TERMS section on page 53. It's easy to recognize a defined term - we
capitalize any defined terms that we use.
A WORD ABOUT REPLACING YOUR LIFE INSURANCE: You should know that, most times, it
is not in your best interest to replace one life insurance policy with another
one. When you need additional life insurance, it is usually better for you to
add coverage - either by asking for a new policy or by buying additional
insurance - than it is for you to replace a policy. In that way, you don't lose
benefits under the policy you already have.
If you are thinking about replacing a life insurance policy you already have so
that you can obtain Group Variable Universal Life Insurance, you should consider
your choices carefully. Compare the costs and benefits of adding coverage to
your current policy against the costs and benefits of Group Variable Universal
Life Insurance. You should get advice from a tax advisor.
YOU SHOULD READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. THIS
DOCUMENT WILL BE FOLLOWED BY PROSPECTUSES FOR EACH OF THE FUNDS UNDER THE GROUP
PROGRAM THAT WILL BE AVAILABLE TO YOU. THE GROUP CONTRACTHOLDER CHOSE THE FUNDS
THAT ARE AVAILABLE TO YOU.
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES, OR DETERMINED THAT 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) 562-9874
The SEC maintains a Web site (http://www.sec.gov) that contains material
incorporated by reference and other information regarding issuers that file
electronically with the SEC. You may also obtain and copy information at the
SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for
information. You may obtain copies of available information upon payment of a
duplicating fee by writing the Public Reference Section of the SEC, Washington,
D.C. 20549-6009.
GL.99.566
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
The Prudential Variable Contract Account GI-2 (called the "Separate Account")
has a number of investment options, twelve of which are currently available to
you. We call each option a "Subaccount." We will invest the assets of each
Subaccount in one of three families of mutual funds. They are:
o The Prudential Series Fund, Inc. (called the "Series Fund")
o The J.P. Morgan Series Trust II
o The American Century Variable Portfolios, Inc.
When we refer to "Funds" in this prospectus, we mean all or any of these funds.
You may choose investment options from among the twelve available Funds or you
may choose to invest in the Fixed Account. (The Fixed Account is an investment
option for which Prudential guarantees that the effective annual interest rate
will be at least 4%.)
Once you select the investment options you want, Prudential will direct your
premium payments to the Subaccount associated with those Funds or to the Fixed
Account.
We describe the twelve available Funds briefly in the section called "THE
FUNDS." It starts on page 13. We will send you a prospectus for each Fund
selected by your Group Contractholder. The Fund prospectuses tell you about the
objectives and policies for each Fund, as well as about the risks of investing
in each Fund.
<PAGE>
TABLE OF CONTENTS
PAGE
BRIEF DESCRIPTION OF THE GROUP CONTRACT AND CERTIFICATE...............,..... 1
ILLUSTRATIONS OF DEATH BENEFITS AND CASH SURRENDER VALUES............,...... 7
GENERAL INFORMATION ABOUT PRUDENTIAL, THE PRUDENTIAL VARIABLE CONTRACT
ACCOUNT GI-2, AND THE VARIABLE INVESTMENT OPTIONS UNDER THE
CERTIFICATES........................................................... 12
The Prudential Insurance Company of America....................... 12
The Prudential Variable Contract Account GI-2..................... 13
The Funds......................................................... 13
Fund Names and Objectives......................................... 13
Fund Fees and Expenses............................................ 15
Fund Advisers..................................................... 16
The Fixed Account................................................. 17
DETAILED INFORMATION ABOUT THE CERTIFICATES................................. 18
Who is Eligible for Coverage...................................... 18
How Prudential Issues Certificates................................ 18
A "Free Look" Period.............................................. 19
Evidence of Good Health........................................... 19
Procedures........................................................ 20
Premiums.......................................................... 20
Effective Date of Insurance....................................... 21
How Prudential Will Deposit and Invest Premium Payments........... 21
How You Can Change the Way Prudential Allocates Future Premium
Payments........................................................ 22
How You Can Transfer Amounts in Your Certificate Fund
from One Investment Option to Another........................... 23
Dollar Cost Averaging............................................. 23
Death Benefits.................................................... 24
Changes in Face Amount............................................ 26
Charges and Expenses.............................................. 26
Cash Surrender Value.............................................. 30
Full Surrenders................................................... 31
Paid-up Coverage.................................................. 31
Partial Withdrawals............................................... 32
Loans............................................................. 32
Lapse............................................................. 34
Termination of the Group Contract................................. 34
Participants Who Are No Longer Eligible Group Members
(or Spouses of Eligible Group Members)......................... 35
Options on Termination of Coverage................................ 36
Reinstatement..................................................... 37
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Tax Treatment of Certificate Benefits............................. 38
ERISA Considerations.............................................. 41
When Proceeds Are Paid............................................ 43
Beneficiary....................................................... 43
Incontestability.................................................. 43
Misstatement of Age............................................... 43
Suicide Exclusion................................................. 44
Assignment........................................................ 44
Voting Rights..................................................... 44
Substitution of Fund Shares....................................... 45
Accelerated Death Benefit......................................... 46
Reports........................................................... 46
Sale of the Contract and Sales Commissions........................ 47
Ratings and Advertisements........................................ 47
Services Performed by Third Parties............................... 48
State Regulation.................................................. 48
Experts........................................................... 48
Litigation........................................................ 49
The Year 2000 Issue............................................... 50
Subsequent Events................................................. 52
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS........................ 53
DIRECTORS AND OFFICERS OF PRUDENTIAL........................................ 56
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2....... A1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA AND SUBSIDIARIES.................................... B1
YOU SHOULD NOT CONSIDER THIS PROSPECTUS TO BE AN OFFERING IN ANY JURISDICTION
WHERE AN OFFERING MAY NOT BE LAWFULLY MADE. YOU SHOULD RELY ON THE INFORMATION
CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT.
iii
<PAGE>
BRIEF DESCRIPTION OF THE GROUP CONTRACT AND CERTIFICATE
In this section of the prospectus, we answer some questions that are frequently
asked about the Group Variable Universal Life Insurance issued to Morgan
Guaranty and about the Certificates issued under the Group Contract. You can
find more detailed information on later pages of the prospectus.
The Group Contract and Certificate provide even more detailed information. You
will get a Certificate if you buy the Group Variable Universal Life Insurance.
WHAT IS THE GROUP VARIABLE UNIVERSAL LIFE INSURANCE CONTRACT?
It is an insurance contract issued by Prudential to Morgan Guaranty. It states
all the terms of the agreement between Prudential and Morgan Guaranty. It forms
the entire agreement between them. Among other things, the Group Contract
defines which members of the group are eligible to buy the Group Variable
Universal Life Insurance.
We will give a Certificate to each Eligible Group Member and spouse who buys
coverage under the Group Contract. The Certificate provides for a Death Benefit
and a Cash Surrender Value. The Death Benefit and the Cash Surrender Value can
change every day. They change based on the performance of the investment options
you selected.
HOW DOES PRUDENTIAL CALCULATE THE CERTIFICATE'S DEATH BENEFIT?
When you buy Group Variable Universal Life Insurance, you will choose a Face
Amount of insurance, within certain limits. Prudential will calculate the Death
Benefit like this:
o The DEATH BENEFIT is the Face Amount of insurance PLUS the value of your
Certificate Fund on the date of your death MINUS any Certificate Debt and
outstanding charges.
(In some cases, we will increase the Death Benefit to an amount that is more
than the Face Amount plus the value of the Certificate Fund. We will do that to
make sure that the Certificate meets the definition of "life insurance" under
the Internal Revenue Code. We will still deduct any Certificate Debt and
outstanding charges.)
The CERTIFICATE FUND consists of the Net Premiums that we invest in the
investment options you selected. Prudential will deduct its charges for the
insurance from the Certificate Fund. The value of the Certificate Fund will
change each day based on the performance of those investment options and to
reflect the deduction of daily charges.
See the DEATH BENEFITS section on page 24.
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HOW DOES PRUDENTIAL CALCULATE THE CASH SURRENDER VALUE OF THE CERTIFICATE?
Prudential calculates the Cash Surrender Value of a Certificate like this:
o The CASH SURRENDER VALUE is the value of the Certificate Fund on the day of
the surrender MINUS any Certificate Debt and outstanding charges.
See the CASH SURRENDER VALUE section on page 30.
WHAT PREMIUMS MUST I PAY?
You can usually choose how often you pay premiums and the amount of premiums.
Participants and spouses employed by Morgan Guaranty, its subsidiaries and
affiliates will generally make premium payments by automatic payroll deduction.
Prudential will keep your insurance in force as long as the balance in your
Certificate Fund is enough to pay the charges that are due to Prudential each
month. If the balance in your Certificate Fund is not enough to pay any month's
charges, you must make a premium payment that is enough to bring your
Certificate Fund balance above this minimum amount. You must make that payment
during the grace period. If you don't, your insurance coverage will end.
See the PREMIUMS section on page 20.
WHAT INVESTMENT OPTIONS ARE AVAILABLE?
The Separate Account has twelve Subaccounts that are currently available to
Participants. We invest the assets of each Subaccount in its corresponding Fund.
In the future, Morgan Guaranty may make additional Funds available, up to a
maximum of twenty Funds.
You may invest in any of the twelve Funds and in the Fixed Account. (The Fixed
Account is an investment option for which Prudential guarantees that the
effective annual interest rate will be at least 4%. See THE FIXED ACCOUNT
section on page 17.)
See THE FUNDS section on page 13. The prospectuses for each Fund also give more
information about each Fund.
DOES GROUP VARIABLE UNIVERSAL LIFE INSURANCE OFFER CHOICE AND FLEXIBILITY IN THE
AMOUNT OF INSURANCE PROTECTION I CAN GET?
Yes. The Death Benefit under a Certificate includes, among other things, the
value of your Certificate Fund. The value of your Certificate Fund will vary
with the investment performance of
2
<PAGE>
the investment options you select. So, your Death Benefit could grow more
than it could under a certificate that does not include investment options. But,
the Death Benefit may also go down if the investment options in your Certificate
Fund have poor investment performance.
You choose how to invest the amount you have in your Certificate Fund. You may
choose more aggressive Funds or less aggressive Funds. What you choose depends
on your personal circumstances and your investment objectives and how they may
change over time.
If you prefer to avoid or reduce the risks that come with investing in the
Funds, you can choose to direct some or all of the amount in your Certificate
Fund to the Fixed Account. Prudential guarantees that the part of your
Certificate Fund that is directed to the Fixed Account will earn interest daily
at a rate that Prudential declares periodically. That rate will change from time
to time, but it will never be lower than 4%. See THE FIXED ACCOUNT section on
page 17.
WHAT CHARGES DOES PRUDENTIAL MAKE?
We deduct certain charges from each premium payment that you make and from the
amounts that are held in each investment option. These charges compensate us for
insurance costs, risks, and expenses.
All charges made by Prudential are described in detail in the CHARGES AND
EXPENSES section on page 26. This chart briefly outlines the charges that may be
made:
- --------------------------------------------------------------------------------
YOU MAKE A PREMIUM PAYMENT.
- --------------------------------------------------------------------------------
|
- --------------------------------------------------------------------------------
THEN, PRUDENTIAL DEDUCTS THESE CHARGES:
o A CHARGE FOR TAXES ON PREMIUM PAYMENTS. Currently, this charge is
2.3%. (In some states, this charge is known as a premium-based
administrative charge.)
o A PROCESSING CHARGE of up to $2. We do not currently impose this
charge.
o A SALES CHARGE of up to 3-1/2%. We do not currently impose this
charge.
- --------------------------------------------------------------------------------
|
- --------------------------------------------------------------------------------
THE REMAINDER IS YOUR NET PREMIUM
This is the amount that you can invest in one or more of the available
investment options.
- --------------------------------------------------------------------------------
|
3
<PAGE>
- --------------------------------------------------------------------------------
DAILY CHARGES
After your Net Premium is directed to your investment option(s), Prudential
deducts these DAILY CHARGES from the Subaccounts (but not from the Fixed
Account):
o A DAILY CHARGE for mortality and expense risks. This charge is deducted
from the assets of the Subaccount(s) that correspond to the Fund(s) you
selected.
Currently, this charge is equivalent to an effective annual rate of 0.45%.
Prudential guarantees that this charge will not be more than an effective
annual rate of 0.90%.
o A DAILY CHARGE for investment management fees and expenses. These charges
are deducted from the assets of the Fund(s) you selected. The Funds set
these charges.
In 1998, the total expenses (after expense reimbursement) of the Funds
ranged from 0.41% to 1.50% of their average net assets.
- --------------------------------------------------------------------------------
|
- --------------------------------------------------------------------------------
MONTHLY CHARGES
Prudential deducts these charges from your Certificate Fund each month:
o A CHARGE FOR ADMINISTRATIVE EXPENSES. Currently, this charge may be up
to $2 per month. Prudential guarantees that it will not be more than
$6 per month.
o A CHARGE FOR THE COST OF INSURANCE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL CHARGES
The Group Contract also permits Prudential to make the following
TRANSACTION CHARGES:
o When you request MORE THAN 12 TRANSFERS BETWEEN INVESTMENT OPTIONS in
a Certificate Year. The charge may be up to $20 for each transfer
after the 12th one. This charge will not increase.
o When a Participant who is no longer an Eligible Group Member continues
coverage on a Portable basis. The ADDITIONAL ADMINISTRATIVE CHARGE FOR
DIRECT BILLING is $3 per bill. The Participant may elect to receive
quarterly, semi-annual, or annual bills.
Also, Prudential has the right to make a charge for any taxes that may be
imposed on the operations of the Separate Account. No such charge is
currently made. Prudential also has the right to assess charges for certain
other transactions.
- --------------------------------------------------------------------------------
4
<PAGE>
CAN I MAKE WITHDRAWALS FROM THE CERTIFICATE FUND?
Yes. You may request a partial withdrawal from the Certificate Fund. You may
also surrender your insurance and receive its Cash Surrender Value. See the
PARTIAL WITHDRAWALS section on page 32 and the FULL SURRENDERS section on page
31.
CAN I TAKE LOANS?
Yes. You may borrow money from your Certificate Fund. The Loan Value, which is
the maximum amount you may borrow, is 90% of your Certificate Fund minus any
existing loan (and its accrued interest), outstanding charges, and the amount of
the next month's charges. In states that require it, you may borrow a greater
amount.
When you take a loan from your Certificate Fund, here's what happens:
o The amount of the loan is transferred from your investment options to a
Loan Account. This Loan Account is still part of your Certificate Fund.
o The Loan Account earns interest at an effective annual rate that is
currently 1% less than the rate Prudential charges as interest on the loan.
The term "Certificate Debt" is used to mean any outstanding loan plus its
accrued interest. Certificate Debt is deducted from any amount payable at the
Covered Person's death. It is also deducted from the Certificate's Cash
Surrender Value.
HOW IS MY INSURANCE COVERAGE AFFECTED WHEN I AM NO LONGER A MEMBER OF THE GROUP?
You may continue your insurance even though you are no longer part of the group
or no longer the spouse of an Eligible Group Member, if you meet eligibility
requirements. The charges for continued insurance may be higher.
You may also surrender the insurance for its Cash Surrender Value, elect to use
the Cash Surrender Value to buy Paid-up Coverage, or convert the insurance to an
individual life insurance policy.
See the OPTIONS ON TERMINATION OF COVERAGE section on page 36.
WHAT IS THE FEDERAL INCOME TAX STATUS OF AMOUNTS RECEIVED UNDER THE CERTIFICATE?
Variable life insurance contracts receive the same Federal income tax treatment
as conventional life insurance contracts (those where the amount of the death
benefit is fixed instead of variable). Here's what that means:
5
<PAGE>
o First, the Death Benefit is generally not included in the gross income of
the beneficiary.
o Second, increases in the value of the Certificate Fund are generally not
included in the taxable income of the Participant. This is true whether the
increases are from income or capital gains.
o Third, surrenders and partial withdrawals are generally treated first as a
return of your investment in the Certificate and then as a distribution of
taxable income.
o Fourth, loans are not generally treated as distributions.
See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page 38. You should
consult your tax advisor for guidance on your specific situation.
WHAT ARE THE FUNDS' CHARGES?
The following table summarizes the fee and expense information for the available
Funds. For more information about the Funds, see THE FUNDS section on page 13.
================================================================================
TOTAL FUND
INVESTMENT OTHER ANNUAL EXPENSES
FUNDS MANAGEMENT FEE EXPENSES (AFTER EXPENSE
REIMBURSEMENTS) (1)
================================================================================
THE PRUDENTIAL SERIES FUND, INC.
Flexible Managed Portfolio (2) 0.60% 0.01% 0.61%
Global Portfolio (2) 0.75% 0.11% 0.86%
High Yield Bond Portfolio (2) 0.55% 0.03% 0.58%
Money Market Portfolio (2) 0.40% 0.01% 0.41%
Prudential Jennison Portfolio (2) 0.60% 0.03% 0.63%
- --------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC.
VP Balanced Portfolio (3) N/A N/A 1.00%
VP International Portfolio (3) N/A N/A 1.50%
VP Value Portfolio (3) N/A N/A 1.00%
- --------------------------------------------------------------------------------
J.P. MORGAN SERIES TRUST II
J.P. Morgan Bond Portfolio (4) 0.30% 0.45% 0.75%
J.P. Morgan Equity Portfolio (4) 0.40% 0.50% 0.90%
J.P. Morgan International
Opportunities Portfolio (4) 0.60% 0.60% 1.20%
J.P. Morgan Small Company
Portfolio (4) 0.60% 0.55% 1.15%
================================================================================
6
<PAGE>
(1) Some, but not all, of the Funds have expense reimbursement or fee waiver
arrangements. Without these arrangements, Total Fund Annual Expenses would
have been higher. More information appears in the footnotes that accompany
the Funds that have expense reimbursement or fee waiver arrangements.
(2) With respect to the Prudential Series Fund, Inc. portfolios, except for the
Global Portfolio, Prudential reimburses a portfolio when its ordinary
operating expenses, excluding taxes, interest, and brokerage commissions
exceed 0.75% of the portfolio's average daily net assets. The amounts
listed for the portfolios under Other Expenses are based on amounts
incurred in the last fiscal year.
(3) Fees for the American Century Variable Portfolios, Inc. are all-inclusive.
(4) The information in the J.P. Morgan Series Trust II section of the foregoing
table has been restated to reflect an agreement by Morgan Guaranty Trust
Company of New York ("Morgan Guaranty"), an affiliate of Morgan, to
reimburse the Trust to the extent certain expenses exceed in any fiscal
year 0.75%, 0.90%, 1.20% and 1.15% of the average daily net assets of J.P.
Morgan Bond Portfolio, J.P. Morgan Equity Portfolio, J.P. Morgan
International Opportunities Portfolio and J.P. Morgan Small Company
Portfolio, respectively. Without such reimbursements, total fund annual
expenses would have been 1.02% for the J.P. Morgan Bond Portfolio, 1.48%
for the J.P. Morgan Equity Portfolio, 3.26% for the J.P. Morgan
International Opportunities Portfolio and 3.43% for the J.P. Morgan Small
Company Portfolio.
ILLUSTRATIONS OF DEATH BENEFITS AND CASH SURRENDER VALUES
On the following pages, we show you two examples of how the Death Benefit and
the Cash Surrender Value of your Certificate can change as a result of the
performance of the investment options you select. The examples are not our
prediction of how value will grow. They are hypothetical examples and are just
intended to show you how a Certificate works.
We call these examples "ILLUSTRATIONS." The illustrations are based on several
ASSUMPTIONS about the age of the Participant, the amount of insurance, and the
rules of the Group Contract that the Participant is covered under.
ASSUMPTIONS WE USED FOR BOTH ILLUSTRATIONS:
Here's what we assumed about the Certificate in both illustrations:
o The Participant was 40 years old when he or she bought the Group Variable
Universal Life Insurance Certificate.
7
<PAGE>
o The Face Amount of insurance under the Certificate is $100,000.
o The Participant makes a $100 payment on the first day of each month, for a
total of $1,200 over the course of each year.
o The Participant allocated the Certificate Fund so that an equal amount is
invested in each of the twelve available Funds.
o Prudential deducts monthly Certificate Fund charges on the first day of
each month.
o Prudential deducts a charge for taxes on premium payments of 2.3% of each
premium payment.
ILLUSTRATION #1
In Illustration #1, we assumed that Prudential will make the MAXIMUM CHARGES
PERMITTED BY THE GROUP CONTRACT for sales, processing, administrative expenses,
mortality and expense risk, cost of insurance, and surrender charges. We assumed
the maximum level of charges will stay in effect for the entire time the
Certificate is in effect. (Current charges are less than these assumptions, but
Prudential has the right to charge up to these maximum amounts.)
Specifically:
o The sales charge is 3.5% of premiums.
o The premium processing charge is $2.
o The surrender charge is equal to the lesser of $20 and 2% of the amount you
receive upon surrender.
o The charge each month for administrative expenses is $6.
o The daily charge for mortality and expense risks is equivalent to an
effective annual rate of 0.90%.
o The Participant has cost of insurance charges equal to the maximum rates.
(The maximum rates that can be charged are 150% of the 1980 Commissioner's
Standard Ordinary Mortality Table (Male), Age Last Birthday (the "1980 CSO
Table")).
8
<PAGE>
ILLUSTRATION #2
In Illustration #2, we changed our assumptions about the charges Prudential will
deduct - instead of maximum charges, we assumed that Prudential will deduct its
CURRENT LEVEL OF CHARGES for sales, processing, administrative expenses,
mortality and expense risk, cost of insurance, and surrender charges. We assumed
the current level of charges will stay in effect for the entire time the
Certificate is in effect.
Specifically:
o Prudential will make no sales charge, processing charge, or surrender
charge.
o The charge each month for administrative expenses is $2.
o The daily charge for mortality and expense risks is equivalent to an
effective annual rate of 0.45%.
o The cost of insurance charges are those currently used for a non-smoker
under the Morgan Guaranty Group Contract.
ASSUMPTIONS ABOUT INVESTMENT PERFORMANCE
Each illustration shows three different assumptions about the investment
performance - or "investment return" - of the Funds. The three different
assumptions are:
o Gross annual rate of return is 0%
o Gross annual rate of return is 4.5%
o Gross annual rate of return is 9%
These are only assumptions to show how the Death Benefit and Cash Surrender
Value change depending on the investment return. Actual investment return will
depend on the investment options you select and will vary from year to year.
WALKING THROUGH THE ILLUSTRATIONS
Here's what to look for in the illustrations:
o The first column shows the CERTIFICATE YEAR.
o The second column gives you some CONTEXT FOR COMPARING the investment
return under the Certificate to the return you might expect from a savings
account. It shows the amount you
9
<PAGE>
would accumulate if you invested the same premiums in a savings account
crediting a 4% effective annual rate. (Of course, unlike the Certificate, a
savings account does not offer life insurance protection.)
o The next three columns show what the DEATH BENEFIT would be for each of the
three investment return assumptions (0%, 4.5%, and 9%).
o The last three columns show what the CASH SURRENDER VALUE would be for each
of the three investment return assumptions (0%, 4.5%, and 9%).
You should note that:
o Both "gross" and "net" investment returns are shown.
o "Gross" investment return reflects the combined effect of both income on
the investment and capital gains. It is the amount of return before
Prudential takes out any of its charges and before any Fund investment
management fees and other expenses are taken out.
o "Net" investment return is the amount of the investment return after
Prudential takes out its charges and after Fund investment management fees
and other expenses are taken out. Since Illustration #1 and Illustration #2
use different assumptions about charges, the "net" investment returns for
each illustration are different. For some of the Funds, the Fund's
investment advisor or other entity is absorbing certain of the Fund's
expenses. In deriving net investment return, we used those reduced Fund
expenses.
o The net return reflects an average total annual expense ratio of the twelve
available Funds of 0.88% and the daily mortality and expense risk charges
described above.
o For Illustration #2, Prudential's charges are at 0.45% per year and Fund
expenses are 0.88%. So, including both Fund expenses and mortality and
expense risk charges, gross returns of 0%, 4.5%, and 9% become net returns
of -1.33%, 3.17%, and 7.67%.
o For Illustration #1, Prudential's charges are at 0.90% per year and Fund
expenses are 0.88%. So, including both Fund expenses and mortality and
expense risk charges, gross returns of 0%, 4.5%, and 9% become net returns
of -1.78%, 2.72%, and 7.22%.
o The Death Benefits and Cash Surrender Values are shown with all of
Prudential's charges and investment management fees and other expenses
taken out.
o We assumed no loans or partial withdrawals were taken.
IF YOU ASK, PRUDENTIAL WILL GIVE YOU A SIMILAR ILLUSTRATION FOR A CERTIFICATE
THAT SHOWS YOUR AGE, RISK CLASS, PROPOSED FACE AMOUNT OF INSURANCE, AND PROPOSED
PREMIUM PAYMENTS. WE REFER TO THIS AS A "PERSONALIZED ILLUSTRATION."
10
<PAGE>
WE SHOW THESE RATES OF INVESTMENT RETURN ONLY TO HELP YOU UNDERSTAND HOW THE
CERTIFICATE WORKS. YOU SHOULD NOT ASSUME THAT THE INVESTMENT RATES OF RETURN ARE
ACTUAL RATES OF RETURN. YOU SHOULD ALSO NOT ASSUME THAT THESE RATES ARE EXAMPLES
OF PAST OR FUTURE INVESTMENT PERFORMANCE. NEITHER PRUDENTIAL NOR THE FUNDS CAN
TELL YOU WHETHER THESE RATES OF INVESTMENT RETURN CAN ACTUALLY BE ACHIEVED.
THE ACTUAL RATES OF INVESTMENT RETURN FOR YOUR CERTIFICATE WILL DEPEND ON HOW
THE INVESTMENT OPTIONS THAT YOU CHOOSE PERFORM. YOU MAY EARN MORE OR LESS THAN
WHAT IS SHOWN IN THE ILLUSTRATION.
THE DEATH BENEFITS AND CASH SURRENDER VALUES WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATE OF RETURN FOR A CERTIFICATE YEAR VARIED ABOVE OR BELOW THE
AVERAGE, HYPOTHETICAL RATES OF 0%, 4.5%, AND 9%.
11
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #1
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 40
ASSUME PAYMENT OF $100 MONTHLY PREMIUMS FOR ALL YEARS
USING MAXIMUM CONTRACTUAL CHARGES
DEATH BENEFIT (1) CASH SURRENDER VALUE (1)
-------------------------------------------------- ---------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF PREMIUMS -------------------------------------------------- ---------------------------------------------------
CERTIFICATE ACCUMULATED 0% GROSS 4.5% GROSS 9% GROSS 0% GROSS 4.5% GROSS 9% GROSS
YEAR AT 4% PER YEAR (-1.78%) NET (2.72% NET) (7.22% NET) (-1.78%) NET (2.72% NET) (7.22% NET)
------ -------------- -------------- ------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $1,226 $100,712 $100,729 $100,747 $698 $715 $732
2 2,501 101,385 101,451 101,519 1,365 1,431 1,499
3 3,827 102,016 102,164 102,318 1,996 2,144 2,298
4 5,206 102,606 102,863 103,141 2,586 2,843 3,121
5 6,640 103,151 103,547 103,988 3,131 3,527 3,968
6 8,131 103,651 104,213 104,859 3,631 4,193 4,839
7 9,682 104,103 104,857 105,752 4,083 4,837 5,732
8 11,295 104,507 105,478 106,668 4,487 5,458 6,648
9 12,973 104,859 106,071 107,603 4,839 6,051 7,583
10 14,718 105,157 106,630 108,555 5,137 6,610 8,535
15 24,546 0 (2) 108,633 113,339 0 (2) 8,613 13,319
20 36,503 0 108,421 117,332 0 8,401 17,312
25 51,051 0 104,336 118,727 0 4,316 18,707
30 68,751 0 0 (2) 113,776 0 0 (2) 13,756
35 90,286 0 0 0 (2) 0 0 0 (2)
40 116,486 0 0 0 0 0 0
(1) Assumes no loan or partial withdrawal has been made.
(2) Based on the interest rate and charges illustrated, the premiums paid are insufficient to keep the certificate in force. The
certificate would lapse under this scenario.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4.5%, AND 9% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
T1
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #2
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 40
ASSUME PAYMENT OF $100 MONTHLY PREMIUMS FOR ALL YEARS
USING CURRENT EXPENSE CHARGES AND CURRENT NON-SMOKER COST OF INSURANCE CHARGES
DEATH BENEFIT (1) CASH SURRENDER VALUE (1)
-------------------------------------------------- -------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF PREMIUMS -------------------------------------------------- -------------------------------------------------
CERTIFICATE ACCUMULATED 0% GROSS 4.5% GROSS 9% GROSS 0% GROSS 4.5% GROSS 9% GROSS
YEAR AT 4% PER YEAR (-1.33%) NET (3.17% NET) (7.67% NET) (-1.33%) NET (3.17% NET) (7.67% NET)
- ---------- -------------- ------------ ---------------- ------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $1,226 $101,014 $101,039 $101,064 $1,014 $1,039 $1,064
2 2,501 102,015 102,111 102,209 2,015 2,111 2,209
3 3,827 103,003 103,218 103,442 3,003 3,218 3,442
4 5,206 103,977 104,359 104,770 3,977 4,359 4,770
5 6,640 104,939 105,536 106,200 4,939 5,536 6,200
6 8,131 105,800 106,662 107,647 5,800 6,662 7,647
7 9,682 106,650 107,823 109,206 6,650 7,823 9,206
8 11,295 107,489 109,020 110,884 7,489 9,020 10,884
9 12,973 108,316 110,256 112,692 8,316 10,256 12,692
10 14,718 109,133 111,531 114,637 9,133 11,531 14,637
15 24,546 112,392 117,795 126,014 12,392 17,795 26,014
20 36,503 114,494 124,056 141,289 14,494 24,056 41,289
25 51,051 114,998 129,735 161,556 14,998 29,735 61,556
30 68,751 112,211 132,721 186,793 12,211 32,721 86,793
35 90,286 103,807 129,712 216,034 3,807 29,712 116,034
40 116,486 0 (2) 119,405 250,742 0 (2) 19,405 150,742
(1) Assumes no loan or partial withdrawal has been made.
(2) Based on the interest rate and charges illustrated, the premiums paid are insufficient to keep the certificate in force. The
certificate would lapse under this scenario.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4.5%, AND 9% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
T2
<PAGE>
GENERAL INFORMATION ABOUT:
o PRUDENTIAL
o THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
o THE VARIABLE INVESTMENT OPTIONS UNDER THE CERTIFICATES
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
The Prudential Insurance Company of America ("Prudential" or the "Company") 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 publicly
traded stock company through a process known as "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. On July 1,
1998, legislation was enacted in New Jersey that would permit this conversion to
occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption of a
plan by the Company's Board of Directors, a public hearing, voting by qualified
policyholders, and regulatory approval, all of which could take two or more
years to complete. Prudential's management and Board of Directors have not yet
determined to demutualize and it is possible that, after careful review,
Prudential could decide not to go public.
The plan of reorganization, which has not been developed and approved, would
provide the criteria for determining eligibility and the methodology for
allocating shares or other consideration to those who would be eligible.
Generally, the amount of shares or other consideration eligible customers would
receive would be based on a number of factors, including the types, amounts, and
issue years of their policies. As a general rule, owners of Prudential-issued
insurance policies and annuity contracts would be eligible, while mutual fund
customers and customers of the Company's subsidiaries would not be. It has not
yet been determined whether any exceptions to that general rule will be made
with respect to policyholders and contract owners of Prudential's subsidiaries.
Eligible policyholders would generally include employers, associations, other
groups, and trusts established by or for such entities, that own group policies
issued by Prudential, and generally would include Group Contractholders. The
individuals covered under a group plan, such as the Participants under a Group
Contract, generally would not be eligible to receive stock or other
consideration from Prudential.
Prudential is licensed to sell life insurance and annuities in all states, in
the District of Columbia, and in all United States territories and possessions.
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 Group Contracts and Certificates.
Prudential and its affiliates act in several ways with respect to registered
investment companies, including depositor, advisor, and principal underwriter.
12
<PAGE>
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
The Prudential Variable Contract Account GI-2 (the "Separate Account") was
established on June 14, 1988 under New Jersey law as a separate investment
account. The Separate Account meets the definition of a "separate account" under
the federal securities laws. The Separate Account holds assets that are
segregated from all of Prudential's other assets.
The obligations arising under the Group Contracts and the Certificates are
general corporate obligations of Prudential. Prudential is also the legal owner
of the assets in the Separate Account. Prudential will maintain assets in the
Separate Account with a total market value at least equal to the liabilities
relating to the benefits attributable to the Separate Account. These assets may
not be charged with liabilities which arise from any other business Prudential
conducts. In addition to these assets, the Separate Account's assets may include
funds contributed by Prudential to commence operation of the Separate Account
and may include accumulations of the charges Prudential makes against the
Separate Account. From time to time, these additional assets will be transferred
to Prudential's general account. Before making any such transfer, Prudential
will consider any possible adverse impact the transfer might have on the
Separate Account.
The Separate Account is registered with the Securities and Exchange Commission
("SEC") under the federal securities laws as a unit investment trust, which is a
type of investment company. This does not involve any supervision by the SEC of
the management or investment policies or practices of the Separate Account. For
state law purposes, the Separate Account is treated as a part or division of
Prudential. There are currently 131 Subaccounts within the Separate Account,
each of which invests in a corresponding Fund. Prudential reserves the right to
take all actions in connection with the operation of the Separate Account that
are permitted by applicable law (including those permitted upon regulatory
approval).
THE FUNDS
Set out below is a list of each Fund, its investment objectives, investment
management fees, and other expenses, and its investment advisor/investment
manager. Some Funds also provide information about their principal strategies.
Certain Funds have adopted distribution plans pursuant to the federal securities
laws, and under those plans, the Fund may make payments to Prudential and/or its
affiliates for certain marketing efforts.
FUND NAMES AND OBJECTIVES
THE PRUDENTIAL SERIES FUND, INC.
The portfolios of the Series Fund in which the Separate Account may currently
invest and their investment objectives and principal strategies are as follows:
13
<PAGE>
FLEXIBLE MANAGED PORTFOLIO: The investment objective is a total investment
return consistent with an aggressively managed diversified portfolio. The
Portfolio invests in a mix of equity securities, debt obligations and money
market instruments.
GLOBAL PORTFOLIO: The investment objective is long-term growth of capital. The
Portfolio invests primarily in common stocks (and their equivalents) of foreign
and U.S. companies.
HIGH YIELD BOND PORTFOLIO: The investment objective is a high total return. The
Portfolio invests primarily in high yield/high risk debt securities.
MONEY MARKET PORTFOLIO: The investment objective is maximum current income
consistent with the stability of capital and the maintenance of liquidity. The
Portfolio invests in high quality short-term debt obligations that mature in 13
months or less.
PRUDENTIAL JENNISON PORTFOLIO: The investment objective is to achieve long-term
growth of capital. The Portfolio invests primarily in equity securities of major
established corporations that offer above-average growth prospects.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
The portfolios of American Century Variable Portfolios, Inc. in which the
Separate Account may currently invest and their investment objectives are as
follows:
VP BALANCED PORTFOLIO: The investment objective of the VP Balanced Portfolio is
capital growth and current income. Management of the Portfolio intends to
maintain approximately 60% of the Portfolio's assets in the equity securities
described in the prospectus, and intends to maintain approximately 40% of the
Portfolio's assets in fixed income securities.
VP INTERNATIONAL PORTFOLIO: Seeks capital growth over time by investing in
common stocks of foreign companies considered to have better-than-average
prospects for appreciation.
VP VALUE PORTFOLIO: Seeks long-term capital growth with income as a secondary
objective. The fund seeks to achieve its objectives by investing primarily in
equity securities of well-established companies that are believed by management
to be undervalued at the time of purchase.
J.P. MORGAN SERIES TRUST II
The portfolios of the J.P. Morgan Series Trust II in which the Separate Account
may currently invest and their investment objectives are as follows:
J.P. MORGAN BOND PORTFOLIO: Seeks to provide a high total return consistent with
moderate risk of capital and maintenance of liquidity. Total return will consist
of realized and unrealized capital gains and losses plus income less expenses.
14
<PAGE>
J.P. MORGAN EQUITY PORTFOLIO: Seeks to provide a high total return from a
portfolio of selected equity securities. Total return will consist of realized
and unrealized capital gains and losses plus income less expenses. The Portfolio
invests primarily in large- and medium-capitalization U.S. companies, typically
represented by the Standard & Poor's 500 Stock Index.
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO: Seeks to provide a high total
return from a portfolio of equity securities of foreign corporations. Total
return will consist of realized and unrealized capital gains and losses plus
income less expenses.
J.P. MORGAN SMALL COMPANY PORTFOLIO: Seeks to provide a high total return from a
portfolio of small company stocks. Total return will consist of realized and
unrealized capital gains and losses plus income less expenses. The Portfolio
invests at least 65% of the value of its total assets in the common stock of
small and medium sized U.S. companies whose market capitalizations are greater
than $110 million and less than $1.5 billion.
FUND FEES AND EXPENSES
================================================================================
TOTAL FUND
INVESTMENT OTHER ANNUAL EXPENSES
FUNDS MANAGEMENT FEE EXPENSES (AFTER EXPENSE
REIMBURSEMENTS) (1)
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC.
Flexible Managed Portfolio (2) 0.60% 0.01% 0.61%
Global Portfolio (2) 0.75% 0.11% 0.86%
High Yield Bond Portfolio (2) 0.55% 0.03% 0.58%
Money Market Portfolio (2) 0.40% 0.01% 0.41%
Prudential Jennison Portfolio (2) 0.60% 0.03% 0.63%
- --------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC.
VP Balanced Portfolio (3) N/A N/A 1.00%
VP International Portfolio (3) N/A N/A 1.50%
VP Value Portfolio (3) N/A N/A 1.00%
- --------------------------------------------------------------------------------
J.P. MORGAN SERIES TRUST II
J.P. Morgan Bond Portfolio (4) 0.30% 0.45% 0.75%
J.P. Morgan Equity Portfolio (4) 0.40% 0.50% 0.90%
J.P. Morgan International
Opportunities Portfolio (4) 0.60% 0.60% 1.20%
J.P. Morgan Small Company
Portfolio (4) 0.60% 0.55% 1.15%
================================================================================
15
<PAGE>
(1) Some, but not all, of the Funds have expense reimbursement or fee waiver
arrangements. Without these arrangements, Total Fund Annual Expenses would
have been higher. More information appears in the footnotes that accompany
the Funds that have expense reimbursement or fee waiver arrangements.
(2) With respect to the Prudential Series Fund, Inc. portfolios, except for the
Global Portfolio, Prudential reimburses a portfolio when its ordinary
operating expenses, excluding taxes, interest, and brokerage commissions
exceed 0.75% of the portfolio's average daily net assets. The amounts
listed for the portfolios under Other Expenses are based on amounts
incurred in the last fiscal year.
(3) Fees for the American Century Variable Portfolios, Inc. are all-inclusive.
(4) The information in the J.P. Morgan Series Trust II section of the foregoing
table has been restated to reflect an agreement by Morgan Guaranty Trust
Company of New York ("Morgan Guaranty"), an affiliate of Morgan, to
reimburse the Trust to the extent certain expenses exceed in any fiscal
year 0.75%, 0.90%, 1.20% and 1.15% of the average daily net assets of J.P.
Morgan Bond Portfolio, J.P. Morgan Equity Portfolio, J.P. Morgan
International
Opportunities Portfolio and J.P. Morgan Small Company Portfolio,
respectively. Without such reimbursements, total fund annual expenses would
have been 1.02% for the J.P. Morgan Bond Portfolio, 1.48% for the J.P.
Morgan Equity Portfolio, 3.26% for the J.P. Morgan International
Opportunities Portfolio and 3.43% for the J.P. Morgan Small Company
Portfolio.
FUND ADVISERS
Prudential is the investment adviser of each of the portfolios of the Prudential
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"), which
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 provides investment advisory services for the Prudential Jennison
Portfolio. Further detail is provided in the prospectus and statement of
additional information for the Series Fund. Prudential, PIC and Jennison are
registered as investment advisers under the Investment Advisers Act of 1940.
The investment adviser for American Century Variable Portfolios, Inc. is
American Century Investment Management, Inc. ("ACIM"). ACIM's principal business
address is American Century Tower, 4500 Main Street, Kansas City, Missouri
64111. Funds Distributor, Inc. distributes shares of American Century funds, and
all sales of fund shares are subject to approval by Funds Distributor, Inc.
16
<PAGE>
J.P. Morgan Investment Management Inc. ("Morgan" or the "Adviser") serves as the
investment adviser to J.P. Morgan Series Trust II. Morgan's principal business
address is 522 Fifth Avenue, New York, New York 10036. The Trust's distributor
is Funds Distributor, Inc. located at 60 State Street, Suite 1300, Boston,
Massachusetts 02109.
CERTAIN FUNDS HAVE INVESTMENT OBJECTIVES AND POLICIES CLOSELY RESEMBLING THOSE
OF MUTUAL FUNDS WITHIN THE SAME COMPLEX THAT ARE SOLD DIRECTLY TO INDIVIDUAL
INVESTORS. DESPITE SUCH SIMILARITIES, THERE CAN BE NO ASSURANCE THAT THE
INVESTMENT PERFORMANCE OF ANY SUCH FUND WILL RESEMBLE THAT OF ITS RETAIL FUND
COUNTERPART.
YOU WILL RECEIVE A PROSPECTUS FOR EACH AVAILABLE FUND. THAT PROSPECTUS WILL
DESCRIBE THE FUND, ITS INVESTMENT OBJECTIVE AND STRATEGIES, ITS RISKS, AND ITS
MANAGEMENT FEES AND OTHER EXPENSES. YOU SHOULD READ THE FUND PROSPECTUSES
TOGETHER WITH THIS PROSPECTUS. AS WITH ALL MUTUAL FUNDS, A FUND MAY NOT MEET ITS
INVESTMENT OBJECTIVE. SUBJECT TO APPLICABLE LAW, PRUDENTIAL MAY STOP OFFERING
ONE OR MORE FUNDS OR MAY SUBSTITUTE A DIFFERENT MUTUAL FUND FOR ANY FUND.
EACH FUND HAS PROVIDED PRUDENTIAL WITH INFORMATION ABOUT ITS MANAGEMENT FEES AND
OTHER EXPENSES. EXCEPT FOR THE SERIES FUND, PRUDENTIAL HAS NOT VERIFIED THAT
INFORMATION INDEPENDENTLY.
THE FIXED ACCOUNT
You may invest all or part of your Certificate Fund in the Fixed Account. The
amount invested in the Fixed Account becomes part of Prudential's general
assets, commonly referred to as the general account. The part of the Certificate
Fund that you invest in the Fixed Account will accrue interest daily at a rate
that Prudential declares periodically. This rate will not be less than an
effective annual rate of 4%. Prudential may in its sole discretion sometimes
declare a higher rate. At least annually and anytime you ask, we will tell you
what interest rate currently applies. Under some Group Contracts, Prudential may
determine interest rates based on the contract year we receive the premium
payments.
We strictly limit your right to make transfers out of the Fixed Account. See the
HOW YOU CAN TRANSFER AMOUNTS IN YOUR CERTIFICATE FUND FROM ONE INVESTMENT OPTION
TO ANOTHER section on page 23. Prudential has the right to delay payment of any
Cash Surrender Value attributable to the Fixed Account for up to 6 months. See
the WHEN PROCEEDS ARE PAID section on page 43.
Because of exemptive and exclusionary provisions, Prudential has not registered
the Fixed Account or the general account under the federal securities laws.
Prudential has been advised that the staff of the Securities and Exchange
Commission has not reviewed the disclosure in this Prospectus relating to the
Fixed Account. Disclosures concerning the Fixed Account may, however, be subject
to certain provisions of the federal securities laws relating to the accuracy of
statements made in a prospectus.
17
<PAGE>
DETAILED INFORMATION ABOUT THE CERTIFICATES
WHO IS ELIGIBLE FOR COVERAGE
Eligible Group Members are full-time and regular part-time employees of Morgan
Guaranty, including its subsidiaries and its affiliated companies, who are on
the U.S. payroll and scheduled to work 20 hours or more in a week. Subsidiaries
and affiliated companies include all companies that Morgan Guaranty asked
Prudential to include in the Group Contract, provided Prudential has agreed to
include them.
An Eligible Group Member's spouse may apply separately for coverage under the
Group Contract.
Former employees (and their spouses) who retire or otherwise end employment
after January 1, 1999 may continue their coverage on a Portable basis, if they
meet certain eligibility requirements. See the PARTICIPANTS WHO ARE NO LONGER
ELIGIBLE GROUP MEMBERS section on page 35.
HOW PRUDENTIAL ISSUES CERTIFICATES
To apply for coverage under a Group Variable Universal Life Insurance Contract,
an Eligible Group Member or spouse must fill out an enrollment form. Prudential
may ask questions about the health of the person whose life is to be covered,
and may ask that person to have a medical exam. See the EVIDENCE OF GOOD HEALTH
section on page 19.
If Prudential approves the person for coverage, that person will become a
Participant under the Group Variable Universal Life Insurance. Prudential will
issue a Certificate to each Participant. The Certificate tells you about the
rights, benefits, coverage, and obligations of the Group Variable Universal Life
Insurance.
MINIMUM AND MAXIMUM FACE AMOUNTS OF INSURANCE: For a Certificate that covers an
Eligible Group Member's life, the minimum Face Amount of insurance is generally
$50,000. The maximum Face Amount is generally the lesser of $1,500,000 and five
times that person's Annual Base Salary at the time of enrollment.
For a Certificate that covers the life of a spouse, the minimum Face Amount of
insurance is $50,000. The maximum Face Amount is $300,000.
MINIMUM AND MAXIMUM AGES: Generally, Prudential will not issue Certificates for
a person who is younger than 18 or older than 74. And, Prudential will generally
end a Participant's coverage at age 100.
18
<PAGE>
When a Participant reaches age 100, we make available these three options:
o You may ask to receive the Cash Surrender Value of the Certificate.
(Prudential believes that a cash surrender upon termination of coverage
will be subject to the same tax treatment as other surrenders. See the TAX
TREATMENT OF CERTIFICATE BENEFITS section on page 38.)
o You may use some or all of the Certificate Fund to buy Paid-up Coverage.
See the PAID-UP COVERAGE section on page 31.
o You may remain invested in your investment options. Under this option, we
will no longer deduct monthly charges for the cost of insurance. The Death
Benefit will change. Specifically, the Death Benefit will be equal to the
amount of the Certificate Fund, minus any Certificate Debt and outstanding
charges. The Death Benefit will no longer include the Face Amount of
insurance. Also, we will no longer allow you to make premium contributions.
You can still make loan repayments.
A "FREE LOOK" PERIOD
You may return a Certificate for a refund within 10 days after you receive it.
These 10 days are known as the "free look" period. Some states allow a longer
period. You can ask for a refund by mailing the Certificate back to Prudential.
If you cancel your coverage during the free look period, we will generally
refund the premium payments you made, minus any loans or withdrawals that you
took. We will not add or subtract any gain or loss that would have come from the
investment options you chose (unless a state law requires that we take those
gains or losses into account when we make a refund). When we make a refund, we
will not deduct any charges.
During the first 10 days after the Certificate Date, your premium payments will
be invested in the Series Fund Money Market Portfolio. Prudential reserves the
right to limit contributions and transactions during the free look period.
EVIDENCE OF GOOD HEALTH
For Face Amounts of Insurance up to the lesser of two times your Annual Base
Salary and $100,000, Prudential will ask you to answer questions about your
health. If you answer positively to any of the questions, Prudential may ask you
to have medical testing.
For amounts of insurance greater than the lesser of two times your Annual Base
Salary and $100,000, Prudential will ask you to have medical testing.
A Covered Person who was enrolled and approved prior to January 1, 1999 does not
have to provide evidence of good health for any amount of coverage already
approved by Prudential.
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PROCEDURES
An Eligible Group Member or spouse who wants to buy Group Variable Universal
Life Insurance will submit an enrollment form to Prudential. Eligible Group
Members will generally make routine premium payments by automatic payroll
deduction. The spouse of an Eligible Group Member will generally make routine
premium payments by automatic deduction from the Eligible Group Member's pay.
Participants should submit other premium payments, transfer orders,
reallocations, loan and withdrawal requests, and other communications about the
coverage directly to Prudential. Prudential has forms to use for each
transaction. The forms set out the procedures for each transaction. Forms are
available from Morgan Guaranty or from Prudential. Prudential will consider
enrollment forms, payments, orders, and other documents to be "received" when
they are received in good order by Prudential at the address shown on the form.
WHEN PRUDENTIAL RECONCILES FINANCIAL TRANSACTIONS. Prudential usually reconciles
financial transactions at the end of the day, when most banks and financial
institutions have closed for the evening. As a result, some transactions (for
example, premium payments, loan repayments, or withdrawals) cannot be completed
until the next business day. Usually, this will result in a one-day delay in the
movement of money from one investment option to another. During any delay,
Prudential may place this money in an unallocated account owned by Prudential
that pays a market rate of interest. The short term interest ("float") earned on
this money will be retained by Prudential as compensation for services rendered.
This interest will not be paid from a Participant's Certificate Fund, and will
not reduce the value of the Certificate Fund.
Transfers among the Funds and dollar cost averaging are not subject to this
possible delay.
PREMIUMS
ROUTINE PREMIUM PAYMENTS: You will be responsible for making all premium
payments. You will usually be able to decide when to make premium payments and
how much each premium payment will be. You just have to make sure that there is
enough money in your Certificate Fund - minus Certificate Debt and outstanding
charges - to cover each month's charges. If there is not enough money on any
Semi-Monthly Deduction Date (or Monthly Deduction Date for a Participant who
does not generally pay premium payments by automatic payroll deduction), your
insurance will end (in insurance terms, it will "lapse"). See the LAPSE section
on page 34 to learn how your insurance will end and what you can do to stop it
from ending.
Participants who are Eligible Group Members generally pay routine premiums
through automatic payroll deduction. Eligible Group Members whose spouses are
Participants also generally pay the spouse's routine premiums through automatic
payroll deduction. If an Eligible Group Member does pay routine premiums through
automatic payroll deduction, the minimum deduction per payroll period is $10. If
you make routine premium payments below the minimum, you can make them directly
to Prudential.
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Participants who continue their coverage on a Portable basis will be billed
directly by Prudential. The Participant may choose to be billed quarterly,
semi-annually, or annually.
ADDITIONAL PREMIUM PAYMENTS: In addition to routine premium payments, you may
make additional premium payments at any time directly to Prudential, subject to
the applicable charges. Each additional premium payment must be at least $100.
Prudential reserves the right to limit the amount of additional premiums.
EFFECT OF PREMIUM PAYMENTS ON TAX STATUS: If you pay additional premiums, we may
need to increase your Death Benefit (and corresponding cost of insurance
charges) to continue to qualify it as life insurance for federal tax purposes.
Also, if you make premium payments above certain limits, the tax status of the
insurance may change to that of a Modified Endowment Contract under the Internal
Revenue Code. That status could have significant disadvantages from a tax
standpoint. We have procedures designed to identify most situations in which a
premium payment would cause your Certificate to be treated as a Modified
Endowment Contract. When we identify such a situation, we generally will notify
you and ask whether you want us to refund the premium payment. If you fail to
respond within a reasonable time, we will continue to process the premium
payment as usual.
We reserve the right to return any premium payment that would cause your
insurance to fail to qualify as life insurance under applicable tax laws, or
that would increase the Death Benefit by more than it increases the Certificate
Fund.
See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page 38.
EFFECTIVE DATE OF INSURANCE
When your insurance begins depends on what day of the month Prudential approves
your completed enrollment form. If we approve your completed enrollment form
prior to the 20th day of a month, your insurance will begin on the first day of
the next month. If we receive your completed enrollment form on or after the
20th day of a month, your insurance will begin on the first day of the month
after the next month.
HOW PRUDENTIAL WILL DEPOSIT AND INVEST PREMIUM PAYMENTS
Prudential will deposit premium payments in your Certificate Fund after we
deduct any charges that apply. The amount of your premium after we deduct those
charges is called "Net Premiums." See the CHARGES AND EXPENSES section on page
26.
Here's how Prudential will deposit and invest your Net Premiums: we generally
will make deposits to your investment options at the end of the Business Day on
which Prudential receives the payment. Any payments received before the
Certificate Date will be deposited as of the Certificate Date.
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o BEFORE THE CERTIFICATE DATE. Prudential will hold any premium payment that
it receives before the Certificate Date in our general account. We will not
pay interest on those amounts. If we receive a premium payment before we
have approved your enrollment under the Group Contract, however, we
generally will return the premium payment to you.
o DURING THE FIRST 10 DAYS THAT YOUR CERTIFICATE IS IN EFFECT. We will invest
any Net Premiums that we receive during the first 10 days in the Series
Fund Money Market Portfolio. We will leave the Net Premiums in that Series
Fund Money Market Portfolio for those first 10 days. After that, we will
allocate the Net Premiums to the investment options you selected.
o AFTER YOUR CERTIFICATE HAS BEEN IN EFFECT FOR 10 DAYS. After your
Certificate has been in effect for 10 days, Prudential will invest Net
Premiums in your Certificate Fund and allocate them to the investment
options you selected.
If you do not give us complete instructions on how you want Net Premiums to be
invested, we will leave your Net Premiums invested in the Series Fund Money
Market Portfolio until you furnish complete information.
HOW YOU CAN CHANGE THE WAY PRUDENTIAL ALLOCATES FUTURE PREMIUM PAYMENTS
You may ask Prudential to change the way your future premium payments will be
allocated among the available investment options. Prudential will give you a
form to use for this purpose. We will start to allocate premium payments in the
new way as of the end of the Business Day on which we receive your request form
in good order.
The minimum percent that you may allocate to an available investment option is
5%. All allocations must be in whole percents.
You may not change the way Prudential allocates future premiums if, at the time
we receive your request, there is not enough money in your Certificate Fund -
minus Certificate Debt and outstanding charges - to cover each month's charges.
See the LAPSE section on page 34.
We do not currently charge for changing the allocation of your future premiums.
But, we may charge for it in the future.
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HOW YOU CAN TRANSFER AMOUNTS IN YOUR CERTIFICATE FUND FROM ONE
INVESTMENT OPTION TO ANOTHER
You may transfer amounts from one investment option to another. You may request
a transfer in terms of dollars (such as transfer of $10,000 from one available
option to another) or in terms of a percent reallocation (such as a transfer of
25% of your Certificate Fund from one option to another).
There are some rules about how transfers can be made:
o The minimum amount you may transfer from one option to another is $100 (or
the entire balance in the investment option if it is less than $100).
o The minimum percent that you may allocate to an available investment option
is 5%. All allocations must be in whole percents.
o We limit the number of times you may transfer amounts out of the Fixed
Account. You may make only one transfer from the Fixed Account to one of
the available Funds each Certificate Year. The transfer cannot be for more
than $5,000 or 25% of the amount you have invested in the Fixed Account,
whichever is greater. We may change these limits in the future.
Transfers will take effect as of the end of the Business Day in which a proper
transfer request is received by Prudential on the form we require you to use for
this purpose.
If you make more than twelve transfers in a Certificate Year, Prudential will
charge $20 for each transfer after the twelfth. This charge will not increase.
Group Variable Universal Life Insurance was not designed for professional market
timing organizations or for other organizations or persons that use programmed,
large or frequent transfers. We will discourage a pattern of exchanges that
coincides with a "market timing" strategy, since they may be disruptive to the
Separate Account and the Funds. If we were to find such a pattern, we might
modify the transfer procedures, including not accepting transfer requests of an
agent acting under a power of attorney on behalf of more than one Certificate
owner.
DOLLAR COST AVERAGING
Dollar Cost Averaging (which we refer to as "DCA") lets you systematically
transfer specified dollar amounts from the Series Fund Money Market Portfolio to
the other available Funds at monthly intervals. You can request that a
designated number of transfers be made under the DCA feature. When we make
transfers under the DCA feature, the transfers are effective as of the end of
the first Business Day following the first of the month.
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You may use DCA at any time after your Certificate becomes effective. But, to
start the DCA feature, you usually have to make a premium payment of at least
$1,000 to the Series Fund Money Market Portfolio. And, the minimum transfer
amount is $100.
Prudential will give you a form to request DCA. If we receive your request form
in good order by the tenth of a month, we will start DCA processing during the
next month. If we receive it after the tenth day of a month, we will start DCA
processing during the month after the next month.
We will terminate the DCA arrangement when any of the following events occurs:
o We have completed the designated number of transfers.
o The amount you have invested in the Series Fund Money Market Portfolio is
not enough to complete the next transfer.
o Prudential receives your written request to end the DCA arrangement. (If we
receive your request by the tenth of a month, we will cancel the transfer
scheduled for the next following month. If we receive it after the tenth
day of a month, we will cancel the transfer scheduled for the month after
the next month.)
o You no longer have coverage under the Group Variable Universal Life
Insurance.
Currently, we do not charge for the DCA arrangement but we may in the future.
Transfers made under the DCA arrangement do not count against the number of
transfers that may be subject to the transfer charge described in the HOW YOU
CAN TRANSFER AMOUNTS IN YOUR CERTIFICATE FUND FROM ONE INVESTMENT OPTION TO
ANOTHER section on page 23.
The main objective of DCA is to shield investments from short-term price
fluctuations. Since the same dollar amount is transferred to an available Fund
with each transfer, you buy more of the Fund when its price is low and less of
the Fund when its price is high. Therefore, you may achieve a lower than average
cost over the long term. This plan of investing does not assure a profit or
protect against a loss in declining markets.
DEATH BENEFITS
Prudential will pay a Death Benefit to the beneficiary when the Covered Person
dies.
AMOUNT OF THE DEATH BENEFIT. The Death Benefit is the Face Amount of insurance
PLUS the value of the Certificate Fund as of the date of death MINUS any
Certificate Debt and any past due monthly charges.
ADJUSTMENT IN THE DEATH BENEFIT. The Certificate Fund may have grown to the
point where we would need to increase the Death Benefit to be certain that the
insurance will meet the Internal Revenue Code's definition of life insurance. If
that were the case for your Certificate, we would
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increase the Death Benefit (before we deduct any Certificate Debt and
outstanding charges) to make it equal to the following "corridor percentage" of
the Certificate Fund based on your Attained Age:
COVERED PERSON'S CORRIDOR COVERED PERSON'S CORRIDOR
ATTAINED AGE PERCENTAGE ATTAINED AGE PERCENTAGE
---------------- ----------- ---------------- ----------
0-40 250% 70 115%
41 243 71 113
42 236 72 111
43 229 73 109
44 222 74 107
---- ---- --- ----
45 215 75 105
46 209 76 105
47 203 77 105
48 197 78 105
49 191 79 105
---- ---- --- ----
50 185 80 105
51 178 81 105
52 171 82 105
53 164 83 105
54 157 84 105
---- ---- --- ----
55 150 85 105
56 146 86 105
57 142 87 105
58 138 88 105
59 134 89 105
---- ---- --- ----
60 130 90 105
61 128 91 104
62 126 92 103
63 124 93 102
64 122 94 101
---- ---- --- ----
65 120 95 100
66 119 96 100
67 118 97 100
68 117 98 100
69 116 99 100
HOW YOUR BENEFICIARY MAY RECEIVE THE DEATH BENEFIT: Generally, Prudential will
deposit the Death Benefit in the Prudential Alliance Account. The Alliance
Account is an interest-bearing account that holds the Death Benefit while your
beneficiary takes time to consider other options. Your beneficiary has complete
ownership of funds held in the Alliance Account, and may draw on all or part of
the funds by writing a draft. Interest earnings in the Alliance Account are
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compounded daily and credited monthly. Proceeds in the Alliance Account are part
of Prudential's general account. Alternatively, your beneficiary can request to
receive the Death Benefit in a lump sum, in the form of a check.
CHANGES IN FACE AMOUNT
The Group Contract allows Participants to increase the Face Amount of their
insurance at any time if they can meet the requirements for giving evidence of
good health. The Face Amount must remain within the limits of coverage. See the
HOW PRUDENTIAL ISSUES CERTIFICATES section on page 18.
An increase in the Face Amount will result in higher insurance charges because
the net amount at risk for Prudential will increase.
The Group Contract also permits Participants to decrease the Face Amount of
their insurance. In no event, however, may a Participant decrease the Face
Amount below $50,000 or below the minimum required to maintain status as life
insurance under the federal tax laws. The decrease will generally take effect on
the first or second Semi-Monthly Deduction Date after we receive your
instructions to change the face amount. Sometimes it may take an additional
month before the charges change. If that happens, we will adjust the amount we
deduct the first month after the decrease takes effect to credit you for any
extra monthly charges we deducted the previous month.
When your Face Amount of insurance changes - whether it increases or decreases -
the change may cause your insurance to be treated as a Modified Endowment
Contract under the Internal Revenue Code. Also, a decrease in coverage may limit
the amount of premiums that you may contribute in the future.
See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page 38. You should
consult your tax advisor before you change the Face Amount of your insurance.
CHARGES AND EXPENSES
For a Certificate that is in effect, Prudential reserves the right to increase
the charges that we currently make, but we currently have no intention to do so.
We will not in any case increase charges above the maximum charges described
below. You should refer to your particular Certificate to learn what charges
apply to you.
CHARGES DEDUCTED FROM EACH PREMIUM PAYMENT. We will deduct the charges listed
below from each premium payment you make before we invest the payment in the
investment options you selected.
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1. CHARGE FOR TAXES ON PREMIUM PAYMENTS. We will deduct a charge for taxes we
must pay on premiums. These taxes include federal, state or local income,
premium, excise, business, or any other type of tax (or part of one) that
is based on the amount of premium we receive. This charge is currently made
up of two parts:
o The first part is for state and local premium taxes. Currently, it is
1.95% of the premium Prudential receives. (In some states, this charge
is called a premium-based administrative charge.)
o The second part is for federal income taxes that are based on
premiums. Currently, it is 0.35% of premiums received by Prudential.
We believe that this second charge is a reasonable estimate of the
increased cost for premium-based federal income taxes resulting from a
1990 change in the Internal Revenue Code.
We may increase this charge if the cost of our taxes related to premiums is
increased. During 1998, we received approximately $61,000 in charges for
taxes on premium payments.
2. CHARGE FOR PROCESSING PREMIUMS. We do not currently deduct a processing fee
from premium payments. But, we have the right to deduct up to $2 to cover
the costs of collecting and processing premiums. Participants who are
billed directly by Prudential should be aware that Prudential assesses a
charge of $3 per bill (you may choose whether to be billed quarterly,
semi-annually, or annually). During 1998, we received no charges for
processing premiums.
3. CHARGE FOR SALES EXPENSES. We do not currently deduct a sales charge. But,
we have the right to deduct a charge to pay part of the costs we incur in
selling the Group Contract and Certificates. If we were to deduct a sales
charge, it would not be more than 3.5% of each premium payment. During
1998, we received no charges for sales expenses.
MONTHLY CERTIFICATE FUND CHARGES. Prudential will deduct the following charges
from your Certificate Fund either monthly or semi-monthly, depending on whether
you make routine premium payments by automatic payroll deduction or pay them
directly to Prudential. We will take the charges from each investment option you
selected, in the same proportion that the value of your Certificate Fund is
invested.
FOR PARTICIPANTS WHO MAKE ROUTINE PREMIUM PAYMENTS BY AUTOMATIC PAYROLL
DEDUCTION: We will generally deduct the monthly Certificate Fund charges two
times per month, on the two Semi-Monthly Deduction Dates. For each Semi-Monthly
Deduction Date, we will calculate the applicable monthly charges but will deduct
only one-half of these charges.
The Semi-Monthly Deduction Dates will coincide with the two days that we credit
automatic payroll deduction premium payments we receive from Morgan Guaranty.
Morgan Guaranty has told Prudential that it will forward automatic payroll
deduction premium payments at the end of each pay period. Prudential expects
that the Semi-Monthly Deduction Dates will fall around approximately the middle
and the end of each month, with the exact dates dependent upon when Morgan
Guaranty forwards the payment. But, if Morgan Guaranty has not transferred both
automatic payroll deduction premium payments by the 45th day following the first
day of a particular
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month, Prudential will deduct any remaining part of that month's Certificate
Fund charges on the next Business Day following that 45th day.
FOR PARTICIPANTS WHO MAKE ROUTINE PREMIUM PAYMENTS DIRECTLY TO PRUDENTIAL:
Prudential will deduct the full monthly charges on the Monthly Deduction Date,
which is the first Business Day of each Month.
1. CHARGE FOR THE COST OF INSURANCE. We deduct a charge for the cost of your
insurance.
To calculate the cost insurance charge, we multiply:
your Certificate's "net amount at risk" by
the "cost of insurance rate" for the Covered Person.
"Net amount at risk" means the amount by which your Certificate's Death
Benefit (computed as if there were no Certificate Debt) exceeds your
Certificate Fund.
The "cost of insurance rates" are shown in your Certificate and are based
on many factors, including:
o the Covered Person's age;
o the Covered Person's rate class (such as classes for smokers and
non-smokers, or for active employees and retired employees);
o the life expectancy of the people covered under your Group Contract;
o whether or not the Certificate is provided on a Portable basis; and
o the expected expenses.
The cost of insurance rate will generally increase as the Covered Person
ages. The cost of insurance charges are generally lower than the 1980 CSO
Table.
We may adjust the actual cost of insurance rates from time to time. The
changes in cost of insurance rates for each Group Contractholder are based
on many factors, including:
o the number of Certificates in effect;
o the number of new Certificates issued;
o the number of Certificates surrendered or becoming Portable;
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o the expected claims (death benefits, living benefits, and surrenders);
o the expected cost of any additional insurance benefits that the Group
Contractholder elected to buy;
o the expected expenses; and
o administrative services provided by Morgan Guaranty.
We will not change the cost of insurance rates before December 31, 2001,
unless the number of Covered Persons (including both the Group Contract and
other supplemental insurance coverage obtained by Morgan Guaranty from
Prudential) decreases by 10% or more.
If we change the cost of insurance rates, we will change them for all
persons of the same age, rate class and group. Certificates continued on a
Portable basis may be considered a separate group. We will not change them
to be higher than the guaranteed cost of insurance rate shown in your
Certificate. That guaranteed rate will not be higher than a rate based on
150% of the 1980 Commissioner's Standard Ordinary Mortality Table, Male,
Age Last Birthday (also known as the "1980 CSO Table"). Currently, the cost
of insurance charges are lower than 100% of the 1980 CSO Table.
During 1998, we received approximately $554,000 in charges for costs of
insurance.
2. CHARGE FOR ADMINISTRATIVE EXPENSES. We currently deduct a charge of $2 for
administrative expenses. This charge pays for maintaining records and for
communicating with Morgan Guaranty and with Participants. We may increase
this charge in the future but we guarantee that it will not be more than $6
per month. During 1998, we received no charges for administrative expenses.
3. CHARGE FOR OTHER TAXES. We reserve the right to deduct a charge to cover
federal, state or local taxes that are imposed on the operations of the
Separate Account. These are taxes other than those described under the
CHARGE FOR TAXES ON PREMIUM PAYMENTS section above. Currently, we do not
charge for these other taxes.
DAILY DEDUCTION FROM THE SEPARATE ACCOUNT. Each day, Prudential deducts a charge
from the assets of the Separate Account in an amount currently equal to an
effective annual rate of 0.45%. We guarantee that the charge will not be more
than an effective annual rate of 0.90%.
This charge compensates us for assuming the mortality and expense risks of the
insurance provided under the Group Contract. The "mortality risk" is the risk
that Covered Persons may live for shorter periods of time than Prudential
estimated when we determined the mortality charge. The "expense risk" is the
risk that expenses for issuing and administering the insurance will be more than
Prudential estimated when we determined the charge for administrative expenses.
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We will earn a profit from this risk charge to the extent we do not need it to
provide benefits and pay expenses under the Certificate. We do not assess this
charge on amounts allocated to the Fixed Account. During 1998, we received
approximately $7,000 in charges for mortality and expense risks.
TRANSACTION CHARGES: For every transfer after the twelfth in a single
Certificate Year, Prudential will deduct a $20 charge. We may deduct charges for
other transactions. See the sections of this prospectus that describe each of
those transactions. Those sections also describe the charges that Prudential may
deduct.
DIRECT BILLING CHARGE: Prudential will assess a direct billing charge of $3 per
bill for Participants who are no longer Eligible Group Members (or spouses of
Eligible Group Members) but who continue coverage on a Portable basis. The
Participant may choose to receive a bill quarterly, semi-annually, or annually.
EXPENSES INCURRED BY THE FUNDS: Participants indirectly bear the charges and
expenses of the Funds. To find out details about the management fees and other
underlying Fund expenses, you should see THE FUNDS section on page 13. You
should also read the prospectuses for the available Funds.
CASH SURRENDER VALUE
The Cash Surrender Value of your Certificate is equal to your Certificate Fund
MINUS any Certificate Debt and outstanding charges. On any day, your Certificate
Fund equals the sum of the amounts in the Funds, the amount invested in the
Fixed Account, and the Loan Account (see the LOANS section on page 32).
The Cash Surrender Value will change daily to reflect:
o Net Premiums;
o withdrawals;
o increases or decreases in the value of the Funds you selected;
o interest credited on any amounts allocated to the Fixed Account and on the
Loan Account;
o interest accrued on any loan;
o the daily asset charge for mortality and expense risks assessed against the
variable investment options; and
o monthly charges that Prudential deducts from your Certificate Fund.
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If you ask Prudential, we will tell you what the Cash Surrender Value of your
Certificate is. Prudential does not guarantee a minimum Cash Surrender Value. It
is possible for the Cash Surrender Value of your Certificate to go down to zero.
The tables on pages T-1 and T-2 (following page 11) of this prospectus give
examples of what Cash Surrender Values would be for two sample Certificates. The
examples assume there would be uniform investment results in the selected
Subaccount portfolios. The examples are only hypothetical, and are only meant to
help you understand how the Certificate works.
FULL SURRENDERS
You may surrender your Certificate for its Cash Surrender Value at any time. If
you do, all insurance coverage will end. Prudential will calculate the Cash
Surrender Value as of the end of the Business Day on which we receive your
request form in good order.
We will pay the proceeds as described in the WHEN PROCEEDS ARE PAID section on
page 43. Prudential does not currently make a charge for a surrender but we have
the right to make such a charge in the future. If we do, the charge will not be
more than the lesser of $20 and 2% of the amount that you receive.
A surrender may have tax consequences. See the TAX TREATMENT OF CERTIFICATE
BENEFITS section on page 38.
During 1998, we received approximately $30 in surrender charges.
PAID-UP COVERAGE
At any time, you may elect to use the Cash Surrender Value of your Certificate
to buy Paid-up Coverage. The minimum amount of Cash Surrender Value that you can
exchange is $1,000.
The amount of Paid-up Coverage that you can have will be limited to the amount
that you can buy with your Certificate's Cash Surrender Value. Also, it cannot
be more than the Death Benefit under your Certificate at the time you make the
exchange.
Paid-up Coverage will start as of the end the Business Day on which we receive
your request form in good order. Once the Paid-up Coverage starts, all other
coverage under your Certificate, including any additional insurance benefits,
will end.
If you did not use your entire Cash Surrender Value to buy the Paid-up Coverage,
Prudential will pay you the remaining amount as of the end of the first Business
Day after we receive your request form. We will pay it as described in the WHEN
PROCEEDS ARE PAID section on page 43. This withdrawal may affect the way you are
taxed. See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page 38.
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The purchase of Paid-up Coverage could make your Certificate become a Modified
Endowment Contract. See the TAX TREATMENT OF CERTIFICATE BENEFITS section on
page 38.
PARTIAL WITHDRAWALS
While your Certificate is in effect, you may withdraw part of your Certificate's
Cash Surrender Value. We will take it from each investment option you selected
in the same proportions as the value of your Certificate Fund is invested,
unless your request tells us to take the withdrawal from only selected
investment options.
Partial withdrawals will be effective as of the end of the Business Day on which
we receive your request form. We will pay you the withdrawn money as described
in the WHEN PROCEEDS ARE PAID section on page 43.
You must withdraw at least $200 in any partial withdrawal. You may withdraw any
amount that is more than $200, but you must leave enough in your Certificate
Fund (less any Certificate Debt and outstanding charges) to pay the next month's
charges.
Prudential has the right to deduct a transaction charge for each partial
withdrawal. The charge can be up to the lesser of $20 or 2% of the amount you
withdraw. We will deduct the transaction charge from the amount you withdraw.
You may not repay any amount that you withdraw.
Withdrawals may have tax consequences. See the TAX TREATMENT OF CERTIFICATE
BENEFITS section on page 38.
LOANS
You may borrow up to the Loan Value of your Certificate Fund. The Loan Value is
90% of your Certificate Fund minus any existing loan (and its accrued interest),
outstanding charges, and the amount of the next month's charges. In states that
require it, you may borrow a greater amount.
The minimum amount that you can borrow at any one time is $200. You cannot take
a loan if Certificate Debt exceeds the Loan Value. Prudential will pay loan
proceeds as described in the WHEN PROCEEDS ARE PAID section on page 43.
Interest on the loan will accrue daily at a rate that Prudential sets each year.
Generally, the interest rate we charge will not be more than 1% above the
interest rate we credit on money in the Fixed Account. Interest payments are due
the day before the Contract Anniversary. If you do not pay the interest when it
is due, we will add it to the principal amount of the loan. When this happens,
we will take an amount out of your investment options to make the loan and the
Loan Account equal in value.
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When you take a loan from your Certificate Fund, here's what happens:
o We will take an amount equal to the loan out of each of your investment
options on a pro-rata basis unless you tell us to take it only from
selected investment options.
o We will start a Loan Account for you and will credit the Loan Account with
an amount equal to the loan.
o We will generally credit interest to the amount in the Loan Account at the
same rate that we use to credit interest on money in the Fixed Account. The
interest rate we credit to the Loan Account will not be more than 1% less
than the interest rate that we charge on the loan.
You may repay all or part of a loan at any time. We will apply a loan repayment
first against any unpaid loan interest and then to reduce the principal amount
of the loan. You may repay a loan either by repayment or by withdrawing amounts
from the Certificate Fund. When you send us a payment, you should tell us
whether the payment is intended as a premium payment or as a loan repayment. If
you do not indicate whether it is a premium or a loan repayment, we will assume
it is a loan repayment.
If you repay a loan by using the Certificate Fund, we will treat the repayment
as a partial withdrawal from the Certificate Fund. A partial withdrawal may have
tax consequences. See the PARTIAL WITHDRAWALS section on page 32 and the TAX
TREATMENT OF CERTIFICATE BENEFITS section on page 38.
Your Loan Account plus accrued interest (together, these are called "Certificate
Debt") may not exceed the value of your Certificate Fund. If Certificate Debt
exceeds the value of your Certificate Fund, you will not have enough money in
your Certificate Fund to cover the month's charges. See the LAPSE section on
page 34.
If you still have Certificate Debt outstanding when you surrender your
Certificate or when you allow your Certificate to lapse, the amount you borrowed
may become taxable. Also, loans from Modified Endowment Contracts may be treated
for tax purposes as distributions of income. See the TAX TREATMENT OF
CERTIFICATE BENEFITS section on page 38.
If we pay the Death Benefit or the Cash Surrender Value while a loan is
outstanding, we will reduce the Death Benefit or the Cash Surrender Value by the
amount of the loan plus any accrued interest.
A loan will have a permanent effect on your Certificate's Cash Surrender Value.
It may also have a permanent effect on the Death Benefit. This happens because
the investment results of the investment options you selected will apply only to
the amount remaining in those investment options after the loan amount is
transferred to the Loan Account. The longer a loan is outstanding, the greater
the effect is likely to be.
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LAPSE
In general, your Certificate will remain in force as long as the balance in your
Certificate Fund (less any Certificate Debt and outstanding charges) is enough
to pay the monthly charges when due. If it is not enough, Prudential will send
you a notice to tell you that your insurance is going to end, how much you must
pay to stop it from ending, and when you must pay it.
The due date of the monthly charges depends on whether you make routine premium
payments by automatic payroll deduction or pay them directly to Prudential. See
the CHARGES AND EXPENSES section on page 26.
In insurance terms, we call it a LAPSE when insurance ends because the charges
for it are not paid.
HOW YOU CAN STOP YOUR INSURANCE FROM LAPSING. You must make a payment that is
enough to pay outstanding charges. Prudential must receive the payment by the
later of:
o 61 days after the first Business Day of the month in which your Certificate
Fund was insufficient to pay the monthly charges; and
o 30 days after the date we mailed you the notice.
If you do not, your insurance will lapse and your Certificate will no longer
have any value. A Certificate that lapses with Certificate Debt may affect the
way you are taxed. See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page
38.
We will send the notice to the last known address we have on file for you. If
the Covered Person dies during the grace period, we will reduce the Death
Benefit by any past due monthly charges and by any Certificate Debt.
TERMINATION OF THE GROUP CONTRACT
Morgan Guaranty may decide to terminate the Group Contract with Prudential, by
giving Prudential 90 days' written notice.
In addition, Prudential may terminate a Group Contract:
o If the aggregate Face Amount of all Certificates, or the number of
Certificates issued, falls below the permitted minimum, by giving Morgan
Guaranty 90 days' written notice.
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o If Morgan Guaranty fails to remit premium payments to Prudential in a
timely way, at the end of the grace period.
o For any other reason, effective on a Contract Anniversary, by giving Morgan
Guaranty 31 days' written notice.
Termination of the Group Contract means that Morgan Guaranty will not remit
premiums to Prudential. In that event, no new Certificates will be issued under
the Group Contract. How the termination affects you is described in the OPTIONS
ON TERMINATION OF COVERAGE section on page 36. The options that are available to
you from Prudential may depend on what other insurance options are available to
you. You should refer to your particular Certificate to find out more about your
options at termination of coverage.
PARTICIPANTS WHO ARE NO LONGER ELIGIBLE GROUP MEMBERS (OR SPOUSES OF
ELIGIBLE GROUP MEMBERS)
If a Participant is no longer an Eligible Group Member (or the spouse of an
Eligible Group Member), the Participant may be able to continue insurance
coverage on a Portable basis. This is called Portable Coverage. Portable
Coverage is generally available only to Participants who have held a Certificate
for at least one year (or who obtained the Certificate during the initial
enrollment period).
With Portable Coverage, you will start to make premium payments directly to
Prudential, or you may authorize Prudential to receive payments by electronic
funds transfer. We will start to send premium reminders directly to you. You may
choose to receive these reminders quarterly, semi-annually, or annually.
We will let you know about this change in the way premiums are paid within 61
days after you are no longer an Eligible Group Member or the spouse of an
Eligible Group Member. We might impose certain rules and limits on the continued
insurance. The rules and limits are shown in your Certificate.
The notice that we send you will also tell you what the charges and expenses are
for Portable Certificates. See also the CHARGES AND EXPENSES section on page 26.
Charges and expenses will be the same as for the Eligible Group Member (or
spouses of Eligible Group Members) until at least December 31, 2001, except that
Prudential will charge a $3 fee per periodic premium reminder. Prudential will
track the experience of Participants that continue on a Portable basis. After
December 31, 2001, we may change the charges and expenses for Portable Coverage.
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OPTIONS ON TERMINATION OF COVERAGE
Your insurance coverage under the Group Contract will end when the Group
Contract itself ends. Insurance coverage will also end on the last day of the
month in which a Participant stops being an Eligible Group Member (or the spouse
of an Eligible Group Member) and does not elect to continue on a Portable basis.
See the TERMINATION OF THE GROUP CONTRACT section on page 34, and the
PARTICIPANTS WHO ARE NO LONGER ELIGIBLE GROUP MEMBERS section on page 35.
If the Group Contract were to end, the effect on Participants would depend on
whether or not Morgan Guaranty replaced the Group Contract with another life
insurance contract that allows for the accumulation of cash value. Generally,
here is what will happen:
o If Morgan Guaranty did replace the Group Contract with another life
insurance contract that allows for the accumulation of cash value,
Prudential would terminate your Certificate. We would also transfer the
Cash Surrender Value of your Certificate directly to that new contract,
unless you elect to receive the Cash Surrender Value. The new contract
might not cover persons holding Portable Certificates, in which case those
persons would have the options listed below.
o If Morgan Guaranty did not replace the Group Contract with another life
insurance contract that allows for the accumulation of cash value, you
would have the options listed below.
CONVERSION: You may elect to convert your Certificate to an individual life
insurance policy without giving Prudential evidence that the Covered Person is
in good health. To elect this option, you must apply for it within 31 days (or
longer, depending on the state law that applies) after your Certificate ends.
You may select any form of individual life insurance policy (other than term
insurance) that Prudential normally makes available for conversion to persons
who are the same age as you and who are asking for the same amount of life
insurance. Your premiums for the individual life insurance policy will be based
on the type and amount of life insurance you select, your age and your risk
class.
If your Certificate ended because you are no longer an Eligible Group Member,
you may not convert more than the Face Amount of your Certificate. If your
Certificate ended because the Group Contract ended, the amount you are able to
convert may, depending on the state law that applies, be limited to the lesser
of
o $10,000 or
o the Face Amount of your Certificate MINUS the amount of any group insurance
that you become eligible for within 45 days after your Certificate ends.
If a Covered Person dies within 31 days (or longer, depending on the state law
that applies) after the Certificate ends and you had the right to convert to an
individual policy, we will pay a Death Benefit under the Certificate. But, the
Death Benefit will be equal to the amount of individual insurance you could have
had if you had actually made the conversion to the individual policy.
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PAID-UP COVERAGE. You may elect to use your Certificate's Cash Surrender Value
to buy fixed Paid-up Coverage on the Covered Person. To use this option, you
must have at least $1,000 of Cash Surrender Value on the day your Certificate
ends. The insurance amount will depend on how much the Cash Surrender Value is
and on the age of the Covered Person. But, the amount of Paid-up Coverage cannot
be more than your Certificate's Death Benefit right before you buy the Paid-up
Coverage.
You may elect this option within 61 days of the date your Certificate ended.
Prudential will make the Paid-up Coverage effective as of the end of the
Business Day on which we (or our designee) receive your request on the form we
require you to use for this purpose. If you elect this option, your insurance
may become a Modified Endowment Contract under the Internal Revenue Code.
See the TAX TREATMENT OF CERTIFICATE BENEFITS section on page 38.
PAYMENT OF CASH SURRENDER VALUE. You may receive the Cash Surrender Value by
surrendering your Certificate. To do this, you must make a request to Prudential
on the form that we require you to use for this purpose.
If you do not choose one of the options described above within 61 days of the
date the Certificate ends, we will exchange your Certificate Fund for Paid-up
Coverage if your Certificate Fund value is at least $1,000. If it does not have
that much value, we will pay the Cash Surrender Value.
REINSTATEMENT
You may request reinstatement of a lapsed Certificate any time within 3 years
after the end of the grace period. But, you must be less than the maximum age at
which a Certificate may be held. We will not reinstate a lapsed Certificate if
the Group Contract under which the Certificate was issued ended and you did not
have the right to continue your insurance on a Portable basis.
To reinstate your Certificate, you must send the following items to Prudential:
o A written request for reinstatement.
o Evidence of the good health of the Covered Person. The evidence must be
satisfactory to Prudential.
o A premium payment (less any charges that apply) that is at least enough to
pay the monthly charges for the grace period and for two more months. See
the CHARGES AND EXPENSES section on page 26.
We will make your Certificate effective again on the first Semi-Monthly
Deduction Date (or Monthly Deduction Date, if you do not make routine premium
payments by automatic payroll deduction) that occurs after we approve your
request. The terms of your original Certificate will still apply. We will apply
a new 2-year period of incontestability, and the period during which the suicide
exclusion applies will start over again. See the INCONTESTABILITY section on
page 43 and the SUICIDE EXCLUSION section on page 44. When the original
Certificate lapsed, we would have
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required you to pay off any outstanding Certificate Debt. We will not allow you
to continue the loan under the reinstated Certificate.
Currently, we do not charge for a reinstatement. But, we reserve the right to
charge for reinstatements in the future.
TAX TREATMENT OF CERTIFICATE BENEFITS
INTRODUCTION
This summary provides general information on the federal income tax treatment of
a Certificate under the Group Contract. It is not a complete statement of what
the federal income taxes will be in all circumstances. It is based on current
law and interpretations, which may change. It does not cover state taxes or
other taxes. It is not intended as tax advice. You should consult your own tax
advisor for complete information and advice.
TREATMENT AS LIFE INSURANCE AND INVESTOR CONTROL
The Certificate must meet certain requirements to qualify as life insurance for
tax purposes. These requirements include certain definitional tests and rules
for diversification of investments. For further information on the
diversification requirements, see Dividends, Distributions and Taxes in the
applicable Fund prospectuses.
We believe we have taken adequate steps to insure that the Certificate qualifies
as life insurance for tax purposes. Generally speaking, this means that:
o you will not be taxed on the growth of the funds in the Certificate Fund,
unless you receive a distribution, and
o the Certificate's Death Benefit will be tax free to your beneficiary.
Although we believe that the Certificate should qualify as life insurance for
tax purposes, there are some uncertainties, particularly because the Secretary
of Treasury has not yet issued permanent regulations that bear on this question.
Moreover, regulations issued to date do not provide guidance concerning the
extent to which Participants may direct their investments to the particular
available subaccounts of a separate account without causing the Participants
(instead of Prudential) to be considered the owners of the underlying assets.
The ownership rights under the Certificate are similar to, but different in
certain respects from, those addressed by the Internal Revenue Service in
rulings holding that the insurance company was the owner of the assets. For
example, Participants have the choice of more funds and the ability to
reallocate amounts among available Subaccounts more frequently than in the
rulings. While we believe that Prudential will be treated as the owner of the
Separate Account assets, it is possible that the Participants may be considered
to own the assets.
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Because of these uncertainties, we reserve the right to make changes - which
will be applied uniformly to all Participants after advance written notice -
that we deem necessary to insure that the Certificates under the Group Contract
will qualify as life insurance and that Prudential will be treated as the owner
of the underlying assets.
DISTRIBUTIONS
The tax treatment of any distribution you receive before the Covered Person's
death depends on whether your Certificate is classified as a Modified Endowment
Contract.
CERTIFICATES NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS
o If you surrender your Certificate or allow it to lapse, you will be taxed
on the amount you receive in excess of the premiums you paid less the
untaxed portion of any prior withdrawals. For this purpose, you will be
treated as receiving any portion of the Cash Surrender Value used to repay
Certificate Debt. The tax consequences of a surrender may differ if you
take the proceeds under an income payment settlement option.
o Generally, you will be taxed on a withdrawal to the extent the amount you
receive exceeds the premiums you paid for the Certificate less the untaxed
portion of any prior withdrawals. However, under some limited
circumstances, in the first 15 Certificate Years, all or a portion of a
withdrawal may be taxed if the Certificate Fund exceeds the total premiums
paid less the untaxed portions of any prior withdrawals, even if total
withdrawals do not exceed total premiums paid.
o Extra premiums for optional benefits and riders generally do not count in
computing the premiums paid for the Certificate for the purposes of
determining whether a withdrawal is taxable.
o Loans you take against the Certificate are ordinarily treated as debt and
are not considered distributions subject to tax.
MODIFIED ENDOWMENT CONTRACTS
o The rules change if the Certificate is classified as a Modified Endowment
Contract. The Certificate could be classified as a Modified Endowment
Contract if premiums in excess of certain IRS limits are paid, or a change
in the Face Amount of insurance is made (or a rider is added or removed).
The addition of a rider or an increase in the Face Amount of insurance may
also cause the Certificate to be classified as a Modified Endowment
Contract. You should first consult a tax advisor if you are contemplating
any of these steps.
o If the Certificate is classified as a Modified Endowment Contract, then
amounts you receive under the Certificate before the Covered Person's
death, including loans and withdrawals, are included in income to the
extent that the Certificate Fund before surrender charges exceeds the
premiums paid for the Certificate increased by the amount of any loans
previously included in income and reduced by any untaxed amounts previously
received other than the amount of any
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loans excludible from income. An assignment of a Modified Endowment
Contract is taxable in the same way. These rules also apply to loans,
withdrawals, and full surrenders made during the two-year period before the
time that the Certificate became a Modified Endowment Contract.
o Any taxable income on pre-death distributions (including full surrenders)
is subject to a penalty tax of 10 percent unless the amount is received on
or after age 59-1/2, on account of your becoming disabled or as a life
annuity.
o All Modified Endowment Contracts issued by us to you during the same
calendar year are treated as a single Certificate for purposes of applying
these rules.
TREATMENT AS GROUP TERM LIFE INSURANCE
In most cases, employee-pay-all coverage under the Group Contract will not
qualify as group term life insurance under the Internal Revenue Code, or be
deemed to be part of a group term life insurance plan. The Certificate will
therefore be treated the same as any individually purchased life insurance
policy for tax purposes. However, under certain circumstances, a portion of the
coverage under the Group Contract may qualify as group term life insurance and,
in addition, Participants may be taxed on certain increases in cash values under
an IRS-prescribed formula.
WITHHOLDING
You must affirmatively elect that no taxes be withheld from a pre-death
distribution. Otherwise, the taxable portion of any amounts you receive will be
subject to withholding. You are not permitted to elect out of withholding if you
do not provide a social security number or other taxpayer identification number.
You may be subject to penalties under the estimated tax payment rules if your
withholding and estimated tax payments are insufficient to cover the tax due.
OTHER TAX CONSIDERATIONS
If you transfer or assign the Certificate to someone else, there may be gift,
estate, and/or income tax consequences. If you transfer the Certificate to a
person two or more generations younger than you (or designate such a younger
person as a beneficiary), there may be Generation Skipping Transfer tax
consequences. Deductions for interest paid or accrued on Certificate Debt or on
other loans that are incurred or continued to purchase or carry the Certificate
may be denied. Your individual situation or that of your beneficiary will
determine the federal estate taxes and the state and local estate, inheritance,
and other taxes due if you or the Covered Person dies.
The earnings of the Separate Account are taxed as part of Prudential's
operations. The Separate Account does not intend to qualify as a regulated
investment company under the Internal Revenue Code.
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ERISA CONSIDERATIONS
If the Group Contract is treated as or acquired by an "employee benefit plan,"
as defined under the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), certain legal requirements may apply.
DEFINITION OF AN EMPLOYEE BENEFIT PLAN
An "employee benefit plan" includes two broad categories of arrangements that
are established by certain entities (employers or unions) to cover employees -
"pension" plans or "welfare" plans.
A "pension plan" includes any program that provides retirement income to
employees, or results in a deferral of income by employees for periods extending
to the termination of covered employment or beyond. For these purposes, the term
"pension plan" includes, but is not limited to, retirement plans that meet tax
qualification requirements (for example, a "401(k) plan"), as well as other
arrangements which, by their operation, are intended to provide retirement
income or deferrals beyond termination of employment.
A "welfare plan" includes a program established or maintained for the purposes
of providing to employees, among other things, medical, accident, disability,
death, vacation, and unemployment benefits.
GROUP CONTRACTS AS EMPLOYEE BENEFIT PLANS
Regulations issued by the United States Department of Labor ("Labor") clarify
when specific plans, programs or other arrangements will not be either pension
or welfare plans (and thus not considered "employee benefit plans" for purposes
of ERISA). Among other exceptions, "group" or "group-type insurance programs"
offered by an insurer to employees of an employer will not be a "plan" where:
o no contributions are made by the employer for the coverage;
o participation in the program is completely voluntary for employees;
o the "sole" function of the employer with respect to the program is, without
endorsing the arrangement, to permit the insurer to publicize the program,
to collect premiums through payroll deductions, and to remit them to the
insurer; and
o the employer does not receive any consideration in connection with the
program, other than reasonable compensation (excluding any profit) for
administrative services actually provided in connection with payroll
deductions.
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Whether or not a particular group insurance arrangement satisfies these
conditions is a question of fact depending on the particular circumstances. You
should consult counsel and other advisors to determine whether, under the facts
of the particular case, a particular Group Contract might be treated as an
"employee benefit plan" (either a pension or a welfare plan) subject to the
requirements of ERISA.
INVESTMENT OF PLAN ASSETS IN A GROUP CONTRACT
The decision to invest employee benefit plan assets in a Group Contract is
subject to rules under ERISA and/or tax law. Any plan fiduciary, which proposes
to cause a plan to acquire a Group Contract, should consult with its counsel
with respect to the potential legal consequences of the plan's acquisition and
ownership of such Contract.
FIDUCIARY/PROHIBITED TRANSACTION REQUIREMENTS UNDER ERISA
If applicable, ERISA and tax law impose certain restrictions on employee benefit
plans and on persons who are (1) "parties in interest" (as defined under ERISA)
or "disqualified persons" (as defined under tax law) and (2) "fiduciaries" with
respect to such plans. These restrictions may, in particular, prohibit certain
transactions in connection with a Group Contract, absent a statutory or
administrative exemption. You should consult counsel and other advisors to
determine the application of ERISA under these circumstances.
For example, administrative exemptions issued by Labor under ERISA permit
transactions (including the sale of insurance contracts like the Group Contract)
between insurance agents and employee benefit plans. To be able to rely upon
such exemptions, certain information must be disclosed to the plan fiduciary
approving such purchase on behalf of the plan. The information that must be
disclosed includes:
o the relationship between the agent and the insurer;
o a description of any charges, fees, discounts, penalties, or adjustments
that may be imposed in connection with the purchase, holding, exchange or
termination of the Group Contract; and
o the commissions received by the agent.
Information about any applicable charges, fees, discounts, penalties, or
adjustments may be found in the CHARGES AND EXPENSES section on page 26.
Information about sales representatives and commissions may be found in the SALE
OF THE CONTRACT AND SALES COMMISSIONS section on page 47.
Execution of a Group Contract by a Group Contractholder and an enrollment form
by a Participant will be deemed an acknowledgment of receipt of this information
and approval of transactions under the Group Contract.
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WHEN PROCEEDS ARE PAID
Prudential will generally pay any Death Benefit, Cash Surrender Value, partial
withdrawal, or loan proceeds within 7 days after we receive the request for
payment at the office specified in our request form. We will determine the
amount of the Death Benefit as of the date of the Covered Person's death. For
other types of redemptions, we will determine the amount of the proceeds as of
the end of the Business Day on which we received the request in good order.
There are certain circumstances when we delay payment of proceeds:
o We may delay payment of proceeds that come from the Funds and the variable
part of the Death Benefit if any of the following events occurs: the New
York Stock Exchange is closed (other than for a regular holiday or a
weekend), trading is restricted by the SEC, or the SEC declares that an
emergency exists.
o We expect to pay proceeds that come from the Fixed Account or from Paid-up
Coverage promptly upon request. But, we do have the right to delay these
payments (other than the Death Benefit) for up to six months (or a shorter
period, if required by state law). We will pay interest at the Fixed
Account rate if we delay payment for more than 30 days (or a shorter
period, if required by state law).
BENEFICIARY
You have the right to name the beneficiary who will receive the Death Benefit
from your Certificate. You must use the form that Prudential requires you to
use. You may change the beneficiary at any time. You do not need the consent of
the present beneficiary. If you have more than one beneficiary at the time the
Covered Person dies, we will pay the Death Benefit in equal parts to each
beneficiary, unless you have given us other instructions.
INCONTESTABILITY
After your Certificate has been in force for two years or more during the
Covered Person's lifetime, Prudential will not contest liability under the
Certificate. We will also not contest liability for any change in your
Certificate that required our approval after the change has been in force for
two years or more during the Covered Person's lifetime.
MISSTATEMENT OF AGE
If the Covered Person's age is stated incorrectly in the Certificate, we will
adjust the amount of the Death Benefit to reflect the correct age, as permitted
by law.
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SUICIDE EXCLUSION
Generally, if a Covered Person dies by suicide within two years from the
Certificate Date, Prudential will not pay the Death Benefit described in other
sections of this prospectus. Instead, we will pay your beneficiary an amount
equal to your premium payments minus any Certificate Debt, outstanding charges,
and any partial withdrawals. This limit will apply whether the suicide occurred
while the Covered Person was sane or insane.
If the Covered Person dies by suicide within two years after the effective date
of an increase in the Face Amount of your Certificate that required our
approval, we will not pay the increased amount of insurance. Instead of the
amount of the increase, we will pay your beneficiary the monthly charges that
were attributable to the increased amount. Again, this limit will apply whether
the suicide occurred while the Covered Person was sane or insane.
ASSIGNMENT
You may assign your Certificate, including all rights, benefits, and privileges
that you have. Prudential will honor the assignment only if: (1) you make the
assignment in writing; (2) you sign it; and (3) Prudential receives a copy of
the assignment at the Prudential office shown in your Certificate. We are not
responsible for determining whether the assignment is legal or valid.
Throughout this prospectus, we describe various rights that you have. You may
assign those rights to someone else. If you do, you should consider the
references to "you" in this prospectus as applying to the person to whom you
validly assigned your Certificate.
If you assign a Certificate that is a Modified Endowment Contract, it might
affect the way you are taxed. It might also affect the way the person to whom
you assign the Certificate is taxed. See the TAX TREATMENT OF CERTIFICATE
BENEFITS section on page 38.
VOTING RIGHTS
The assets that are held in the Separate Account are invested in the Funds.
Prudential is the legal owner of those shares. Because we are the owner, we have
the right to vote on any matter that shareholders of the Funds vote on. The
voting happens at regular and special shareholder meetings. We will (as required
by law) vote in accordance with voting instructions we receive from
Participants. A Fund may not hold annual shareholder meetings when not required
to do so under the laws of the state of its incorporation or under the federal
securities laws.
If we do not receive timely voting instructions for Fund shares from
Participants, we will vote those shares in the same proportion as shares in the
Funds for which we do receive instructions. We will do the same thing for shares
held as general account investments of Prudential. If the federal securities
laws change so that Prudential is allowed to vote on Fund shares in our own
right, we may decide to do so.
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Generally, you may give us voting instructions on matters that would be changes
in fundamental policies of the Funds. You may also give us voting instructions
on any matter that requires a vote of the Fund's shareholders. But, if a Fund
that you participate in has a vote on approval of the investment advisory
agreement or any change in a Fund's fundamental investment policy, you will vote
separately by Fund. This practice is dictated by the federal securities laws.
Here's how we will determine the number of Fund shares and votes for which you
may give instructions:
o To determine the number of Fund shares, we will divide the part of your
Certificate Fund that is derived from participation in a Subaccount by the
value of one share in the corresponding portfolio of the applicable Fund.
o The number of votes will be determined as of the record date chosen by the
Board of Directors of the applicable Fund.
We will give you the proper forms and proxies to give these instructions. We
reserve the right to change the way in which we calculate the weight we give to
voting instructions. We would make such a change to comply with federal
regulations.
If we are required by state insurance regulations, we may disregard voting
instructions in certain instances. We may disregard instructions if: (1) the
instructions would require shares to be voted in a way that would cause a change
in the sub-classification or investment objectives of one or more of the Funds'
portfolios, or (2) the instruction would approve or disapprove an investment
advisory contract for a Fund. Also, Prudential itself may disregard voting
instructions that would require changes in the investment policy or investment
advisor of one or more of the Funds' portfolios, provided that Prudential
reasonably disapproves such changes in accordance with applicable federal
regulations. If Prudential does disregard voting instructions, we will tell you
that we did and our reasons for it in the next annual or semi-annual report to
Participants.
SUBSTITUTION OF FUND SHARES
If Prudential's management thinks that an available portfolio of the Funds
becomes unsuitable for investment by Participants, we may substitute the shares
of another portfolio or of an entirely different mutual fund. Our management
might find a portfolio to be unsuitable because of investment policy changes,
tax law changes or considerations, the unavailability of shares for investment,
or other reasons, including our discretion. Before Prudential can substitute
shares, the SEC, and possibly one or more state insurance departments, must
approve the substitution. We would notify Morgan Guaranty and Participants if we
were to make such a substitution.
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ACCELERATED DEATH BENEFIT
Under an accelerated death benefit, you can elect to receive an early payment of
part of the Certificate's Death Benefit when the Covered Person is diagnosed as
being terminally ill. "Terminally ill" means the Covered Person has a life
expectancy of 12 months or less. You must give Prudential satisfactory evidence
that the Covered Person is terminally ill. You may receive the accelerated
payment in a lump sum. The maximum part of the Death Benefit that may be
accelerated is the lesser of 50% of the full Death Benefit or $50,000.
Prudential may charge an accelerated payment fee of up to $350 if you decide to
use this benefit.
We will not pay an accelerated death benefit if you are required to elect it to
meet the claims of creditors or to obtain a government benefit. Unless required
by law, you can no longer request an increase in the Face Amount of your
Certificate once you have elected to receive an accelerated death benefit. The
amount of future premium payments you can make will also be limited.
If you actually receive proceeds from the Accelerated Death Benefit, it could
have tax consequences and may affect your eligibility for certain government
benefits or entitlements. In general, the accelerated death benefit is excluded
from income if the Covered Person 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 tax advisor before you elect to receive this
benefit.
REPORTS
Four times each Certificate Year, Prudential will send you a statement that
gives you certain information about your insurance. These statements will give
you details about the value of your Certificate Fund, about transactions that
you made, and specific insurance data about your coverage.
If you make a request, we will also send you a current statement about your
insurance. It will give you the same kind of information as the quarterly
statement does. We may limit the number of current statements you may request or
may charge you for additional statements. Any such charge will not exceed $20
for an additional report.
We will also send to you and to Morgan Guaranty annual and semi-annual reports
that list the securities held in each available portfolio of the Funds. These
reports are required by the federal securities laws. Prudential keeps records
about the Separate Account according to the federal securities laws.
If you invest in the Series Fund through more than one variable insurance
contract, you will receive only one copy of each annual and semi-annual report
issued by the Series Fund. But, if you want another copy of a report, you may
ask us for one by calling the telephone number listed on the inside cover page
of this prospectus.
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SALE OF THE CONTRACT AND SALES COMMISSIONS
Prudential Investment Management Services LLC (referred to as "PIMS") acts as
the principal underwriter of the Group Contracts and Certificates. PIMS is a
direct, wholly-owned subsidiary of Prudential.
PIMS, organized in 1996 under Delaware law, is registered as a broker-dealer
under the federal securities laws. PIMS is also a member of the National
Association of Securities Dealers, Inc. PIMS's principal business address is 751
Broad Street, Newark, New Jersey 07102. PIMS also acts as principal underwriter
with respect to the securities of other Prudential investment companies.
The Group Contracts and Certificates are sold by persons who are registered
representatives of PIMS and who are also authorized by state insurance
departments. The Group Contracts and Certificates may also be sold through other
broker-dealers authorized by PIMS and applicable law to do so. Registered
representatives of such other broker-dealers may be paid on a different basis
than the basis described below.
The maximum commission that Prudential will pay to the representative upon the
purchase of the Contract is 15% of the premium payment received. The amount
Prudential will pay to the broker-dealer to cover both the individual
representative's commission and other distribution expenses will not exceed 15%
of the premium payment. Prudential may require the representative to return all
of the first year commission if the Group Contract is not continued through the
first year. Sales representatives who meet certain productivity, profitability,
and persistency standards with regard to the sale of the Group Contract will be
eligible for additional bonus compensation from Prudential. Generally,
Prudential will pay PIMS a commission of no more than 15% of the premium
payment. The commission and distribution percentages will depend on factors such
as the size of the group involved and the amount of sales and administrative
effort required in connection with the particular Group Contract. In total, they
will not exceed 15% of the premium payment.
The distribution agreement between PIMS and Prudential will terminate
automatically upon its assignment (as that term is defined in the federal
securities laws). But, PIMS may transfer the agreement, without the prior
written consent of Prudential, under the circumstances set forth in the federal
securities laws. Either party may terminate the agreement at any time if the
party gives 60 days' written notice to the other party.
RATINGS AND ADVERTISEMENTS
Independent financial rating services - including Moody's, Standard & Poors,
Duff & Phelps, and A.M. Best Company - rate Prudential. These ratings reflect
our financial strength and claims-paying ability. They are not intended to rate
the investment experience or financial strength of the Separate Account. We may
advertise these ratings from time to time. Furthermore, we may include in
advertisements comparisons of currently taxable and tax-deferred investment
programs, based on selected tax brackets, or discussions of alternative
investment vehicles and general economic conditions.
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SERVICES PERFORMED BY THIRD PARTIES
Throughout this prospectus, we describe how Prudential will perform transactions
with you and how you will perform transactions with them. Prudential has the
right to ask another party (referred to as a "third party") to perform or
receive transactions in its place. That means that, for a particular Group
Contract, you may conduct transactions via a third party rather than directly
with Prudential.
In some cases, the third party might be another part of Prudential. (For
example, when you make certain premium payments to Prudential, they will be
received by Prudential Mutual Fund Services, Inc., a wholly-owned subsidiary of
Prudential.)
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. The
Group Contract is subject to the insurance laws and regulations of the State of
Delaware. We reserve the right to change the Group Contract and Certificate to
comply with applicable state insurance laws and interpretations thereof.
We are required to submit annual statements of our operations, including
financial statements, to the insurance departments of the various jurisdictions
in which we do business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, we are required to file
with New Jersey and other jurisdictions a separate statement with respect to the
operations of all our variable contract accounts, in a form promulgated by the
National Association of Insurance Commissioners.
EXPERTS
The consolidated financial statements of Prudential and Subsidiaries as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 and the financial statements of the Separate Account as of
December 31, 1998 and for the period July l, 1998 through December 31, 1998
included in this registration statement have been so included in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants given on the
authority of said firm as experts in auditing and accounting.
PricewaterhouseCoopers LLP's principal business address is 1177 Avenue of the
Americas, New York, New York 10036.
Actuarial matters included in this prospectus have been examined by Stuart L.
Liebeskind, FSA, MAAA, Vice President and Actuary of Prudential, whose opinion
is filed as an exhibit to the registration statement.
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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. The Supreme Court denied certiorari in January
1999, thereby making final the approval of the class action settlement.
Pursuant to the Settlement, Prudential agreed to provide and has been
implementing 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, 1998, based on an analysis of claims
actually remedied, a sample of claims still to be remedied, and estimates of
additional liabilities associated with the ADR program, management estimated the
cost, before taxes, of remedying policyholder claims in the ADR process to be
approximately $2.56 billion. While management believes these to be reasonable
estimates based on available information, the ultimate amount of the total cost
of remedied policyholder claims and other related costs is dependent on complex
and varying factors, including the relief options still to be chosen by
claimants, the dollar value of those options, and the number and type of claims
that may successfully be appealed.
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.
Prudential's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted with precision. 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 the matters specifically discussed above.
Management believes, however, that the ultimate resolution of all such matters,
after consideration of applicable reserves, should not have a material adverse
effect on Prudential's financial position.
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THE YEAR 2000 ISSUE
The services provided to a Group Contractholder or Participant of Group Variable
Universal Life depend on the smooth functioning of numerous computer systems.
Many computer systems in use today are programmed to recognize only the last two
digits of a date as the year. As a result, any systems using this kind of
programming can not distinguish a date using "00" and may treat it as "1900"
instead of "2000." This problem may impact computer systems that store business
information, but it could also affect other equipment used in our business like
telephones, fax machines and elevators. If this problem is not corrected, the
"Year 2000" issue could affect the accuracy and integrity of business records.
Prudential's regular business operations could be interrupted as well as those
of other companies that deal with us.
In addition, the operations of the mutual funds associated with Group Variable
Universal Life could experience problems resulting from the Year 2000 issue.
Please refer to the respective mutual fund's prospectus for information
regarding their approach to Year 2000 concerns. The following describes
Prudential's effort to address Year 2000 concerns.
To address this potential problem Prudential organized its Year 2000 efforts
around the following three areas:
o BUSINESS SYSTEMS - Computer programs directly used to support our business;
o INFRASTRUCTURE - Computers and other business equipment like telephones and
fax machines; and
o BUSINESS PARTNERS - Year 2000 readiness of essential business partners.
BUSINESS SYSTEMS. The business systems component includes a wide range of
computer programs that directly support Prudential's business operations
including systems for: insurance product processing, securities trading,
personnel record keeping and general accounting systems. All business systems
were analyzed to determine whether each computer program with a Year 2000
problem should be retired, replaced, or renovated. The majority of this work has
been completed. A few remaining programs are currently being tested and
completion of this process is expected by June 1999.
INFRASTRUCTURE. As with business applications, we established a specific
methodology and process for addressing infrastructure issues. The infrastructure
effort includes mainframe computer system hardware and operating system
software, mid-range systems and servers, telecommunications equipment and
systems, buildings and facilities systems, personal computers, and vendor
hardware and software. Other than desktop systems, substantially all other
infrastructure systems have been tested. Presently a small number of midrange
computers, and building and facility systems are still in the testing phase. We
expect to have the infrastructure implementation process completed by June 1999.
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BUSINESS PARTNERS. Prudential recognizes the importance of determining the Year
2000 readiness of external business relationships especially those that involve
electronic data transfer products and services, and products that impact our
essential business processes. Prudential first classified each business partner
as "highly critical" or "less critical" to our business and then began to
develop risk assessment and contingency plans to address the potential that a
business partner could experience a Year 2000 failure. All highly critical
business partner relationships have been assessed and contingency planning is
completed. Risk assessment and contingency planning continues for less critical
business partners, and the target completion date for these relationships is
June 1999.
Prudential believes that the Business Application, Infrastructure and Business
Partners components of the Year 2000 project are substantially on schedule. A
small number of the projects may not meet their targeted completion date.
However, Prudential expects that these projects will be completed by September
1999. If there are any delays, they should not have a significant impact on the
timing of the project as a whole.
THE COST OF YEAR 2000 READINESS
Prudential is funding the Year 2000 program from internal operating budgets, and
estimates that its costs to address the Year 2000 issue will total approximately
$220 million. Because these expenses were part of the operating budget, they did
not impact the management of Group Variable Universal Life. During the course of
the Year 2000 program, some optional computer projects have been delayed, but
these delays have not had any material effect on Group Variable Universal Life.
YEAR 2000 RISKS AND CONTINGENCY PLANNING
Prudential believes that it is well positioned to lessen the impact of the Year
2000 problem. However, given the nature of this issue, we can not be 100%
certain that we are completely prepared, particularly because we can not be
certain of Year 2000 readiness of third parties. As a result, we are unable to
determine at this time whether the consequences of Year 2000 failures may have a
material adverse effect on the results of Prudential's operations, liquidity or
financial condition. In the worst case, it is possible that a Year 2000
technology failure, whether internal or external, could have a material impact
on Prudential's results of operations, liquidity, or financial position. If
Prudential is unable to address the Year 2000 problem, we may have difficulty in
responding to your incoming phone calls, calculating your unit values or
processing withdrawals and purchase payments. It is also possible that the
mutual funds associated with Group Variable Universal Life will be unable to
value their securities, in turn creating difficulties in purchasing or selling
shares of the respective mutual funds and calculating corresponding unit asset
values. The objective of Prudential's Year 2000 program has been to reduce these
risks as much as possible.
Most of the operations of Group Variable Universal Life involve such a large
number of individual transactions that they can only be handled with the help of
computers. As a result, our current contingency plans include responses to the
failure of specific business programs or infrastructure components. However, our
contingency responses are now being reviewed and we expect to
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finalize them by June, 1999 to ensure that they are workable under the special
conditions of a Year 2000 failure. Prudential believes that with the completion
of its Year 2000 program as scheduled, the possibility of significant
interruptions of normal operations will be reduced.
SUBSEQUENT EVENTS
On December 10, 1998, Prudential 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 Prudential HealthCare Health Maintenance
Organization (HMO), Point of Service (POS), Preferred Provider Organization
(PPO), and indemnity health lines, as well as its dental business.
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DEFINITIONS OF SPECIAL TERMS
USED IN THIS PROSPECTUS
ANNUAL BASE SALARY -- An Eligible Group Member's basic annual rate of pay
including before-tax contributions for Flex Comp benefits and 401K
contributions. An Eligible Group Member's Annual Base Salary does not include
overtime, profit sharing awards, bonuses, long term disability benefits, or any
other form of extra compensation.
ATTAINED AGE -- Your age as of the first day of the month following your
birthday.
BASIC EMPLOYEE GROUP TERM LIFE INSURANCE -- Term life insurance automatically
purchased by Morgan Guaranty Trust Company of NY for each eligible employee. The
benefits available under the Group Variable Universal Life Insurance Contract
described in this prospectus are in addition to any benefits available under
Basic Employee Group Term Life Insurance coverage.
BUSINESS DAY -- A day on which the New York Stock Exchange is open for trading.
CASH SURRENDER VALUE -- The amount you receive upon surrender of the
Certificate. The Cash Surrender Value is equal to your Certificate Fund on the
date of surrender, less any Certificate Debt, outstanding charges, and any
applicable transaction charge.
CERTIFICATE -- A document issued to you, as a Participant under the Group
Contract, setting forth or summarizing your rights and benefits.
CERTIFICATE ANNIVERSARY -- The same date each year as the Certificate Date.
CERTIFICATE DATE -- The effective date of coverage under a Certificate.
CERTIFICATE DEBT -- The principal amount of any outstanding loans you borrowed
under your Certificate plus any accrued interest.
CERTIFICATE FUND -- The total amount credited to you under your Certificate. On
any date it is equal to the sum of the amounts under that Certificate allocated
to: (1) the Subaccounts, (2) the Fixed Account, and (3) the Loan Account.
CERTIFICATE YEAR -- The year from the Certificate Date to the first Certificate
Anniversary or from one Certificate Anniversary to the next.
CONTRACT ANNIVERSARY -- January 1 of each year.
CONTRACT DATE -- January 1, 1999, the date as of which the Group Contract was
issued.
COVERED PERSON -- The person whose life is insured under the Group Contract. The
Covered Person is generally the Participant.
DEATH BENEFIT -- The amount payable upon the death of the Covered Person (before
the deduction of any Certificate Debt or any outstanding charges).
ELIGIBLE GROUP MEMBERS -- All full-time or regular part-time employees of Morgan
Guaranty Trust Company of NY, its subsidiaries, and its affiliated companies (on
U.S. payroll) scheduled to work 20 or more hours weekly. Subsidiaries and
affiliated companies include all companies that Morgan Guaranty Trust Company of
NY has requested be included in the Group Contract, provided that Prudential has
granted the request. An Eligible Group Member and his or her spouse may each
separately apply for insurance
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coverage under the Group Contract for himself or herself.
FACE AMOUNT -- The amount of life insurance in your Certificate. The Face
Amount, along with your Certificate Fund, are each parts of
your Death Benefit.
FIXED ACCOUNT -- An investment option under which Prudential guarantees that
interest will be added to the amount deposited at a rate we declare
periodically.
FUNDS -- The Prudential Series Fund, J.P. Morgan Series Trust II, and American
Century Variable Portfolios, Inc. portfolios in which the Separate Account
invests. Your investment options include the Funds and the Fixed Account.
GROUP CONTRACT -- The Group Variable Universal Life insurance contract that
Prudential issued to Morgan Guaranty Trust Company of NY.
GROUP CONTRACTHOLDER -- Morgan Guaranty Trust Company of NY.
GUIDELINE ANNUAL PREMIUM -- A level annual premium that would be payable
throughout the duration of a Certificate to fund the future benefits if the
Certificate were a fixed premium contract, based on certain assumptions set
forth in a rule of the SEC. Upon request, Prudential will advise you of the
guideline annual premium under the Certificate.
ISSUE AGE -- The Covered Person's Attained Age on the date that the insurance on
that Covered Person goes into effect as defined by the Group Contract.
LOAN ACCOUNT -- An account within Prudential's general account to which we
transfer from the Separate Account and/or the Fixed Account an amount equal to
the amount of any loan.
LOAN VALUE -- The amount (before any applicable transaction charge) that you may
borrow at any given time under your Certificate. We calculate the Loan Value by
multiplying the Certificate Fund by 90% (or higher where required by state law)
and then subtracting any existing loan with accrued interest, outstanding
charges, and the amount of the next month's charges.
MODIFIED ENDOWMENT CONTRACT -- A type of life insurance contract or Certificate
under the Internal Revenue Code which has been funded in excess of certain IRS
limits. Less favorable tax rules, and in some cases a penalty tax, apply if you
take distributions (such as withdrawals, loans or assignments) from a MEC.
Regardless of classification as a MEC, cash value accrues on a tax deferred
basis and the Death Benefit is generally received free of income tax. See the
TAX TREATMENT OF CERTIFICATE BENEFITS section for a more complete description of
the MEC rules.
MONTHLY DEDUCTION DATE -- For Participants who do not pay premiums by automatic
payroll deduction, the first Business Day of the month. For these Participants,
Prudential will deduct the full monthly Certificate Fund charges on this Monthly
Deduction Date. Participants who are Eligible Group Members (or their spouses)
and who generally pay premiums by automatic payroll deduction instead have their
monthly Certificate Fund charges deducted on the two SEMI-Monthly Deduction
Dates.
NET PREMIUM -- Your premium payment minus any charges for taxes attributable to
premiums, any processing fee, and any sales charge. Net Premiums are the amounts
that we allocate to the Separate Account and/or the Fixed Account.
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PAID-UP COVERAGE -- This type of life insurance coverage pays a Death Benefit of
a specific amount that does not change. You make one initial premium payment to
begin the coverage and never make any additional payments.
PARTICIPANT -- An Eligible Group Member or spouse who obtains insurance under
the Group Contract and is eligible to exercise the rights described in the
Certificate. The Participant is generally the same as the Covered Person. We
refer to Participants as "you" in this prospectus. If you validly assign your
rights as a Participant to someone else, then that person may exercise those
rights.
PORTABLE -- You may continue your insurance coverage even if you are no longer
an Eligible Group Member. This type of insurance coverage is called Portable.
Cost of insurance rates and charges may increase under a Portable Certificate.
SEMI-MONTHLY DEDUCTION DATE -- For Participants who are Eligible Group Members
(or their spouses) and who generally pay premiums by automatic payroll
deduction, the two days each month that Prudential deducts monthly charges from
the Participant's Certificate Fund. The Semi-Monthly Deduction Dates will
coincide with the two days that Prudential credits automatic payroll deduction
premium payments it receives from Morgan Guaranty Trust Company of NY, which
Prudential anticipates will occur around the middle and end of each month.
Participants will have half of the monthly charges deducted on the first
Semi-Monthly Deduction Date and the remaining half deducted on the second
Semi-Monthly Deduction Date. Participants who do not generally pay premiums by
automatic payroll deduction have a single Monthly Deduction Date when Prudential
will deduct the full monthly Certificate Fund charges.
SEPARATE ACCOUNT -- Prudential Variable Contract Account GI-2, a separate
investment account registered as a unit investment trust under the federal
securities laws and established by Prudential to receive some or all of the Net
Premiums and to invest them in the Funds.
SERIES FUND -- The Prudential Series Fund, Inc., a mutual fund with separate
portfolios, some of which are available as investment options for the Group
Contract.
SUBACCOUNT -- A division of the Separate Account. Each Subaccount invests its
assets in the shares of a corresponding Fund.
WE -- The Prudential Insurance Company of America.
YOU -- A Participant.
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DIRECTORS AND OFFICERS OF PRUDENTIAL
DIRECTORS OF PRUDENTIAL
FRANKLIN E. AGNEW--Director since 1994 (current term expires April, 2000).
Member, Committee on Finance & Dividends; Member, Corporate Governance
Committee. Business consultant since 1986 Senior Vice President, H.J. Heinz from
1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb, Inc. and Erie
Plastics Corporation. Age 64. Address: 600 Grant Street, Suite 660, Pittsburgh,
PA 15219.
FREDERICK K. BECKER--Director since 1994 (current term expires April, 2005).
Member, Auditing Committee; Member, Corporate Governance Committee. President,
Wilentz Goldman and Spitzer, P.A. (law firm) since 1989, with firm since 1960.
Age 63. Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
GILBERT F. CASELLAS--Director since 1998 (current term expires April, 2003).
Member, Compensation Committee. President, The Swarthmore Group, Inc. since
1999. Partner, McConnell Valdes, LLP in 1998. Chairman, U.S. Equal Employment
Opportunity Commission from 1994 to 1998. Age 46. Address: 1646 West Chester
Pike, Suite 3, West Chester, PA 19382.
JAMES G. CULLEN--Director since 1994 (current term expires April, 2001). Member,
Compensation Committee; Member, Committee on Business Ethics. President & Chief
Operating Officer, Bell Atlantic Corporation, since 1998. President & Chief
Executive Officer, Telecom Group, Bell Atlantic Corporation, from 1997 to 1998.
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 56. Address: 1310 North Court
House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS--Director since 1989 (current term expires April, 2001).
Member, Committee on Business Ethics; Member, Compensation Committee.
Independent Health Care Advisor since 1997. National and International Health
Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr. Davis is also a director
of Beckman Coulter Instruments, Inc., Merck & Co., Inc., Minimed Incorporated,
and Beverley Enterprises. Age 67. 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. Mr.
Enrico originally joined PepsiCo, Inc. in 1971. Mr. Enrico is also a director of
A.H. Belo Corporation and Dayton Hudson Corporation. Age 54. Address: 700
Anderson Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR--Director since 1995 (current term expires April, 2003).
Member, Investment Committee; Member, Committee on Finance & 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 Whirlpool
Corporation, MeidiaOne Group, Inc., AP Automotive
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Systems, Inc., The Dow Chemical Company, and DTE Energy Company. Age 64.
Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
WILLIAM H. GRAY, III--Director since 1991 (current term expires April, 2000).
Chairman, Committees on Nominations & Corporate Governance. Member, Executive
Committee; Member, Committee on Business Ethics. 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, CBS Corporation, and
Electronic Data Systems. Age 57. Address: 8260 Willow Oaks Corp. Drive, Fairfax,
VA 22031-4511.
JON F. HANSON--Director since 1991 (current term expires April, 2003). Member,
Investment Committee; Member, Committee on Business Ethics. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of James E. Hanson
Management Company, Neumann Distributors, Inc., Fleet Trust and Investment
Services Company, N.A., United Water Resources, Orange & Rockland Utilities,
Inc., and Consolidated Delivery and Logistics. Age 62. 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 and Owens Corning. Age 64. Address: One Owens Corning Parkway,
Toledo, OH 43659.
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 56. 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. Chairman and Chief Executive
Officer, The Perkin Elmer Corporation from 1990 to 1996. Mr. Kelley is also a
director of Hercules Incorporated and Alliant Techsystems. Age 67. Address: 751
Broad Street, 23rd Floor, Newark, NJ 07102-3777.
BURTON G. MALKIEL--Director since 1978 (current term expires April, 2002).
Chairman, Investment Committee; Member, Executive Committee; Member, Committee
on Finance & 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 66. 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
Bank from 1990 to 1994, with Chase since 1972. Age 56. Address: 751 Broad
Street, Newark, NJ 07102.
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IDA F.S. SCHMERTZ--Director since 1997 (current term expires April, 2004).
Member, Audit Committee. Principal, Investment Strategies International since
1994. Age 64. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
CHARLES R. SITTER--Director since 1995 (current term expires April, 2003).
Member, Committee on Finance & Dividend; Member, Investment Committee. Retired
since 1996. President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his
career with Exxon in 1957. Age 68. Address: 5959 Las Colinas Boulevard, Irving,
TX 75039-2298.
DONALD L. STAHELI--Director since 1995 (current term expires April, 2003).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1996.
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, Conti-Financial
Corporation and Continental Grain Company. Age 67. 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. Retired since
1998. Chairman of the Board, The Toronto-Dominion Bank from 1997 to 1998.
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, Canadian Occidental Petroleum, Ltd., The Toronto- Dominion Bank,
and Ontario Hydro. 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,
Committees on Nominations & Corporate Governance; Member, Investment Committee.
Retired since 1997. Chairman and Chief Executive Officer, Unisys Corporation,
from 1990 to 1997. Mr. Unruh is also a director of Ameritech Corporation and
Moss Micro. Age 57. Address: 751 Broad Street, Newark, NJ 07102-3777.
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, Advanced Medicines, Inc. since 1997. Chairman, Chief Executive
Officer and President, Merck & Co., Inc. from 1986 to 1995. Dr. Vagelos
originally joined Merck in 1975. Dr. Vagelos is also a director of The Estee
Lauder Companies, Inc. and PepsiCo., Inc. Age 69. 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. Partner, Herbert, Van Ness, Cayci & Goodell (law firm) since
1998. Counselor at Law, Picco Herbert Kennedy (law firm) from 1990 to 1998. Mr.
Van Ness is also a director of Jersey Central Power & Light Company. Age 64.
Address: 22 Chambers Street, Princeton, NJ 08542.
58
<PAGE>
PAUL A. VOLCKER--Director since 1988 (current term expires April, 2000).
Chairman, Committee on Finance & Dividends; Member, Executive Committee; Member,
Committee on
Nominations & Corporate Governance. Consultant since 1997. Chairman, Wolfensohn
& Co., Inc. 1988 to 1996. Chairman, James D. Wolfensohn, Inc. 1988 to 1996.
Chief Executive Officer, James D. Wolfensohn, Inc. from 1995 to 1996. Mr.
Volcker is also a director of Nestle, S.A. and Bankers Trust New York
Corporation, as well as a Director of the Board of Overseers of TIAA-CREF. Age
71, Address: 610 Fifth Avenue, Suite 420, New York, NY 10020.
JOSEPH H. WILLIAMS--Director since 1994 (current term expires April, 2002).
Member, Committee on Finance & Dividends; Member, Investment Committee.
Director, The Williams Companies since 1979. Chairman & Chief Executive Officer,
The Williams Companies from 1979 to 1993. Mr. Williams is also a director of The
Orvis Company, MTC Investors, LLC., and AEA Investors, Inc. Age 64. Address: One
Williams Center, Tulsa, OK 74102.
PRINCIPAL OFFICERS OF PRUDENTIAL
ARTHUR F. RYAN--Chairman of the Board, President and Chief Executive Officer
since 1994; prior to 1994, President and Chief Operating Officer, Chase
Manhattan Corporation. Age 56.
E. MICHAEL CAULFIELD--Executive Vice President, Financial Management since 1998;
Chief Executive Officer, Prudential Investments from 1995 to 1998; Chief
Executive Officer, Money Management Group in 1995; prior to 1995, President,
Prudential Preferred Financial Services. Age 52.
MICHELE S. DARLING--Executive Vice President, Human Resources since 1997; prior
to 1997, Executive Vice President, Canadian Imperial Bank of Commerce. Age 45.
ROBERT C. GOLDEN--Executive Vice President, Operations and Systems since 1997;
prior to 1997, Executive Vice President, Prudential Securities. Age 53.
MARK B. GRIER--Executive Vice President, Corporate Governance since 1998;
Executive Vice President, Financial Management from 1997 to 1998; Chief
Financial Officer from 1995 to 1997; prior to 1995, Executive Vice President,
Chase Manhattan Corporation. Age 46.
JEAN D. HAMILTON--Executive Vice President, Institutional since 1998; President,
Diversified Group since 1995 to 1998; prior to 1995, President, Prudential
Capital Group. Age 52.
RODGER A. LAWSON--Executive Vice President, International Investments & Global
Marketing since 1998; Executive Vice President, Marketing and Planning from 1996
to 1998; President and CEO, Van Eck Global, from 1994 to 1996; prior to 1994,
President and CEO, Global Private Banking, Bankers Trust Company. Age 52.
59
<PAGE>
KIYOFUMI SAKAGUCHI--Executive Vice President, International Insurance since
1998; President, International Insurance Group from 1995 to 1998; prior to 1995,
Chairman and CEO, The Prudential Life Insurance Co., Ltd. Age 56.
JOHN V. SCICUTELLA--Executive Vice President, Individual Financial Services
since 1998; Chief Executive Officer, Individual Insurance Group from 1997 to
1998; Executive Vice President Operations and Systems from 1995 to 1997; prior
to 1995, Executive Vice President, Chase Manhattan Corporation. Age 49.
JOHN R. STRANGFELD--Executive Vice President, Global Asset Management since
1998; Chief Executive Officer, Private Asset Management Group (PAMG) from 1996
to 1998; President, PAMG, from 1994 to 1996; prior to 1994, Senior Managing
Director. Age 45.
JAMES J. AVERY, JR.--Senior Vice President & Chief Actuary, Individual Insurance
Group since 1997; President Prudential Select from 1996 to 1997; prior to 1995,
Executive Vice President and Chief Operating Officer, Prudential Select. Age 47.
MARTIN A. BERKOWITZ--Senior Vice President, Financial Management since 1998;
Senior Vice President and Comptroller from 1995 to 1998; prior to 1995, Senior
Vice President and CFO, Prudential Investment Corporation. Age 50.
WILLIAM M. BETHKE--Senior Vice President and Chief Investment Officer since
1997; prior to 1997, President, Capital Management Group. Age 51.
ANNE E. BOSSI--Senior Vice President, Institutional since 1998; President, Group
Life & Disability 1997 to 1998; President, Group Life Insurance 1995 to 1997;
prior to 1995, President, Northeastern Group Operations. Age 47.
RICHARD J. CARBONE--Senior Vice President and Chief Financial Officer since
1997; Controller, Salomon Brothers from 1995 to 1997; prior to 1995, Controller,
Bankers Trust. Age 51.
THOMAS J. CARROLL-- Senior Vice President and Chief Auditor since 1999; Managing
Director, Bankers Trust Company from 1996 to 1998; prior to 1996, Global Chief
Auditor and Managing Director, Credit Suisse First Boston. Age 57.
THOMAS W. CRAWFORD--Senior Vice President, Individual Financial Services since
1998; President and Chief Executive Officer, Prudential Property & Casualty
Company from 1996 to 1998; Vice President, Prudential Property & Casualty
Company in 1996; prior to 1996, President & CEO, Southern Heritage Insurance
Company. Age 55.
WILLIAM D. FRIEL--Senior Vice President and Chief Information Officer since
1996; prior to 1996, Chief Executive Officer, Prudential Service Company. Age
60.
MICHAEL J. HINES--Senior Vice President, Marketing and Communications since
1999; 1996 to 1998 Vice President, Marketing and Communications. Age 47.
60
<PAGE>
RONALD P. JOELSON--Senior Vice President, Financial Management since 1999;
Senior Vice President, Guaranteed Products from 1996 to 1999; Vice President,
Guaranteed Investments during 1996; prior to 1996, Managing Director, Retirement
Services. Age 40.
IRA J. KLEINMAN--Senior Vice President, International Insurance since 1997;
prior to 1997, Chief Marketing & Product Development Officer. Age 51.
KATHLEEN KRALL--Senior Vice President, Individual Financial Services since 1999;
Vice President, Individual Financial Services from 1996 to 1999; Vice President,
Operations and Systems from 1995 to 1996; prior to 1995, Vice President, Chase
Manhattan Bank. Age 41.
JOYCE R. LEIBOWITZ--Senior Vice President, Management Internal Controls since
1999; Vice President, Management Internal Controls from 1995 to 1999; prior to
1995, Integrated Control Officer. Age 51.
JOHN M. LIFTIN--Senior Vice President and General Counsel since 1998;
Self-employed from 1997 to 1998; prior to 1997, Senior Vice President and
General Counsel, Kidder & Peabody Group, Inc. Age 55.
NEIL A. MCGUINNESS--Senior Vice President, Individual Financial Services since
1996; Director, Putnam Investments, in 1996; prior to 1996, President, Fidelity
Investment Employer Services Company. Age 52.
PRISCILLA A. MYERS--Senior Vice President, Demutualization since 1998; Senior
Vice President and Auditor from 1995 to 1998; prior to 1995, Vice President and
Auditor. Age 48.
I. EDWARD PRICE--Senior Vice President, Individual Financial Services since
1996; Senior Vice President and Actuary from 1995 to 1996; prior to 1995, Chief
Executive Officer, Prudential International Insurance. Age 56.
ROBERT J. SULLIVAN--Senior Vice President, Individual Financial Services since
1997; prior to 1997, Managing Director, Fidelity Investments. Age 60.
SUSAN J. BLOUNT--Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 41.
C. EDWARD CHAPLIN--Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
ANTHONY S. PISZEL--Vice President and Controller since 1998; Vice President,
Enterprise Financial Management from 1997 to 1998; prior to 1997, Chief
Financial Officer, Individual I
nsurance Group. Age 44.
Prudential officers are elected annually.
61
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
STATEMENTS OF NET ASSETS
December 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY MARKET FLEXIBLE MANAGED STOCK INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------ ------------ ----------
ASSETS
<S> <C> <C> <C> <C>
Investment in The Prudential Series Fund, Inc.
Portfolios and non-Prudential administered
funds, at net asset value [Note 3] ..................... $ 231,517 $ 417,696 $ 1,404,003 $ 811,509
Accrued expenses payable to The Prudential
Insurance Company of America [Note 2] .................. (277) (509) (1,607) (970)
----------- ----------- ----------- -----------
Net Assets ............................................... $ 231,240 $ 417,187 $ 1,402,396 $ 810,539
=========== =========== =========== ===========
NET ASSETS, representing:
Equity of Participants ................................... $ 231,240 $ 417,187 $ 1,402,396 $ 810,539
----------- ----------- ----------- -----------
$ 231,240 $ 417,187 $ 1,402,396 $ 810,539
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A1
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ----------------------------------------------------------------------------------------
NEUBERGER & FRANKLIN
BERMAN KEMPER TEMPLETON
AMT LIMITED SERIES MFS DREYFUS FRANKLIN TEMPLETON DEVELOPING
MATURITY BOND HIGH YIELD RESEARCH SMALL CAP INTERNATIONAL MARKETS
PORTFOLIO PORTFOLIO SERIES PORTFOLIO FUND FUND
- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 159,827 $ 356,155 $ 891,261 $ 1,305,969 $ 387,597 $ 166,733
(193) (461) (1,026) (1,561) (499) (197)
- ----------- ----------- ----------- ----------- ----------- -----------
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
=========== =========== =========== =========== =========== ===========
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
- ----------- ----------- ----------- ----------- ----------- -----------
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A2
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
STATEMENTS OF OPERATIONS
For the period July 1, 1998* to December 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
-----------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY MARKET FLEXIBLE MANAGED STOCK INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ---------------- ----------- ------
INVESTMENT INCOME:
<S> <C> <C> <C> <C>
Dividend income ........................................... $ 3,241 $ 5,648 $ 6,340 $ 5,495
--------- --------- --------- ---------
EXPENSES
Charges to Participants for assuming
mortality risk and expense risk [Note 5A] ............... 277 509 1,607 970
--------- --------- --------- ---------
NET INVESTMENT INCOME (LOSS) ................................ 2,964 5,139 4,733 4,525
--------- --------- --------- ---------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received ...................... 0 33,105 17,051 78,110
Realized gain (loss) on shares redeemed ................... 0 (1,147) (1,408) (2,032)
Net change in unrealized gain (loss)
on investments .......................................... 0 (12,978) 151,883 (41,420)
--------- --------- --------- ---------
NET GAIN ON INVESTMENTS ..................................... 0 18,980 167,526 34,658
--------- --------- --------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................. $ 2,964 $ 24,119 $ 172,259 $ 39,183
========= ========= ========= =========
*Commenced Operations
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A3
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -------------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER FRANKLIN TEMPLETON
AMT LIMITED SERIES MFS DREYFUS FRANKLIN TEMPLETON DEVELOPING
MATURITY BOND HIGH YIELD RESEARCH SMALL CAP INTERNATIONAL MARKETS
PORTFOLIO PORTFOLIO SERIES PORTFOLIO FUND FUND
- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0 $ 0 $ 0 $ 3 $ 0 $ 0
- --------- --------- --------- --------- --------- ---------
193 461 1,026 1,561 499 197
- --------- --------- --------- --------- --------- ---------
(193) (461) (1,026) (1,558) (499) (197)
- --------- --------- --------- --------- --------- ---------
0 0 0 15,555 0 0
7 (1,269) (1,568) (4,972) (1,543) (596)
1,200 2,494 115,832 123,615 14,401 22,483
- --------- --------- --------- --------- --------- ---------
1,207 1,225 114,264 134,198 12,858 21,887
- --------- --------- --------- --------- --------- ---------
$ 1,014 $ 764 $ 113,238 $ 132,640 $ 12,359 $ 21,690
========= ========= ========= ========= ========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A4
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
STATEMENTS OF CHANGES IN NET ASSETS
For the period July 1, 1998* to December 31, 1998
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY MARKET FLEXIBLE MANAGED STOCK INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ----------- -----------
1998 1998 1998 1998
----------- ----------- ----------- -----------
OPERATIONS
<S> <C> <C> <C> <C>
Net investment income (loss) ................................. $ 2,964 $ 5,139 $ 4,733 $ 4,525
Capital gains distributions received ......................... 0 33,105 17,051 78,110
Realized gain (loss) on shares redeemed ...................... 0 (1,147) (1,408) (2,032)
Net change in unrealized gain (loss) on investments .......... 0 (12,978) 151,883 (41,420)
----------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .................................... 2,964 24,119 172,259 39,183
----------- ----------- ----------- -----------
PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
Participant Net Payments .................................... 22,979 63,947 191,087 125,032
Policy Loans ................................................ (71) (3,208) (2,866) (149)
Policy Loan Repayments and Interest ......................... 0 2,147 2,205 2,005
Surrenders, Withdrawals and Death Benefits .................. 0 (1,089) (1,648) (1,301)
Net Transfers From (To) Other Subaccounts or
Fixed Rate Options ...................................... 205,368 331,276 1,041,359 645,774
Administrative and Other Charges ............................ 0 (5) 0 (5)
----------- ----------- ----------- -----------
TOTAL PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS ................................ 228,276 393,068 1,230,137 771,356
----------- ----------- ----------- -----------
TOTAL INCREASE IN NET ASSETS ................................... 231,240 417,187 1,402,396 810,539
NET ASSETS
Beginning of period .......................................... 0 0 0 0
----------- ----------- ----------- -----------
End of period ................................................ $ 231,240 $ 417,187 $ 1,402,396 $ 810,539
=========== =========== =========== ===========
</TABLE>
*Commenced Operations
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A5
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- --------------------------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER FRANKLIN TEMPLETON
AMT LIMITED SERIES MFS DREYFUS FRANKLIN TEMPLETON DEVELOPING
MATURITY BOND HIGH YIELD RESEARCH SMALL CAP INTERNATIONAL MARKETS
PORTFOLIO PORTFOLIO SERIES PORTFOLIO FUND FUND
- ----------- ----------- ----------- ----------- ----------- -----------
1998 1998 1998 1998 1998 1998
- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ (193) $ (461) $ (1,026) $ (1,558) $ (499) $ (197)
0 0 0 15,555 0 0
7 (1,269) (1,568) (4,972) (1,543) (596)
1,200 2,494 115,832 123,615 14,401 22,483
- ----------- ----------- ----------- ----------- ----------- -----------
1,014 764 113,238 132,640 12,359 21,690
- ----------- ----------- ----------- ----------- ----------- -----------
32,082 53,378 133,668 214,097 75,071 26,331
(4,183) (147) (161) (243) (328) (37)
210 0 2,032 0 0 0
0 (283) (1,701) (807) (237) 0
130,511 301,982 643,159 958,721 300,233 118,552
0 0 0 0 0 0
- ----------- ----------- ----------- ----------- ----------- -----------
158,620 354,930 776,997 1,171,768 374,739 144,846
- ----------- ----------- ----------- ----------- ----------- -----------
159,634 355,694 890,235 1,304,408 387,098 166,536
0 0 0 0 0 0
- ----------- ----------- ----------- ----------- ----------- -----------
$ 159,634 $ 355,694 $ 890,235 $ 1,304,408 $ 387,098 $ 166,536
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A7 THROUGH A11
A6
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
December 31, 1998
NOTE 1: GENERAL
The Prudential Variable Contract Account GI-2 (the "Account") of
The Prudential Insurance Company of America ("Prudential") was
established on June 14, 1988 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 purchases of Group Variable Universal
Life 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 one hundred
thirty-six subaccounts within the Account. Group Variable Universal
Life contracts offer the option to invest in up to twenty of the
subaccounts, each of which invests in either a corresponding
portfolio of The Prudential Series Fund, Inc. (the "Series Fund")
or any of the non-Prudential administered funds shown in Note 3.
The Series Fund is a diversified open-end management investment
company, and is managed by Prudential.
The contracts are group insurance contracts and generally are
issued to either employers, associations, sponsoring organizations
or trusts. A person entitled to make contributions under the
contract is a "Participant."
Group Variable Universal Life insurance contracts became available
to Participants on July 1, 1998.
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 or the
non-Prudential administered funds 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 or
the non-Prudential administered funds and are recorded on the
ex-dividend date.
Accrued Expenses Payable to The Prudential Insurance Company of
America--The payable represents amounts due to Prudential for
mortality risk and expense risk charges.
NOTE 3: INVESTMENT INFORMATION FOR THE SUBACCOUNTS OF THE PRUDENTIAL
VARIABLE CONTRACT ACCOUNT GI-2
The net asset value per share for each (rounded) for each portfolio
of the Series Fund or the non-Prudential administered funds, 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, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------
<S> <C> <C> <C> <C>
Number of shares: .................. 23,152 25,222 37,202 27,382
Net asset value per share (rounded): $ 10.00 $ 16.56 $ 37.74 $ 29.64
Cost: .............................. $ 231,517 $ 430,674 $1,252,120 $ 852,929
</TABLE>
A7
<PAGE>
NOTE 3: INVESTMENT INFORMATION FOR THE SUBACCOUNTS OF THE PRUDENTIAL
VARIABLE CONTRACT ACCOUNT GI-2 (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
---------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Number of shares: 11,565 290,175 46,785 24,225
Net asset value per share (rounded): $ 13.82 $ 1.23 $ 19.05 $ 53.91
Cost: $ 158,627 $ 353,661 $ 775,429 $1,182,354
</TABLE>
SUBACCOUNTS (CONTINUED)
--------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------- ---------
Number of shares: 18,806 32,565
Net asset value per share (rounded): $ 20.61 $ 5.12
Cost: $373,196 $144,250
NOTE 4: PARTICIPANT UNIT INFORMATION
Outstanding Participant units, unit values and total value of
Participant equity at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Participant Units Outstanding: 22,672 40,582 127,123 80,739
Unit Value: $ 10.19956 $ 10.28010 $ 11.03184 $ 10.03902
---------- ---------- ---------- ----------
TOTAL PARTICIPANT EQUITY: $ 231,240 $ 417,187 $1,402,396 $ 810,539
========== ========== ========== ==========
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Participant Units Outstanding: 15,785 37,005 83,841 129,380
Unit Value: $ 10.11316 $ 9.61199 $ 10.61812 $ 10.08199
---------- ---------- ---------- ----------
TOTAL PARTICIPANT EQUITY: $ 159,634 $ 355,694 $ 890,235 $1,304,408
========== ========== ========== ==========
</TABLE>
A8
<PAGE>
NOTE 4: PARTICIPANT UNIT INFORMATION (CONTINUED)
SUBACCOUNTS (CONTINUED)
---------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------- --------
Participant Units Outstanding: 40,981 16,259
Unit Value: .................. $9.44570 $10.24261
-------- ---------
TOTAL PARTICIPANT EQUITY: .... $387,098 $ 166,536
======== =========
NOTE 5: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges, currently equal to
an effective annual rate of 0.45%, are applied daily against
the net assets representing equity of Participants in each
subaccount. This charge is guaranteed not to exceed an
effective annual rate of 0.90%. Mortality risk is that
Participants may not live as long as estimated and expense risk
is that the cost of issuing and administering the insurance may
exceed related charges by Prudential.
B. Transaction Related Charges
There may be charges, if applicable, associated with
surrenders, partial withdrawals, loans, transfers and requests
for additional statements as follows:
o Surrenders and partial withdrawals-- Not to exceed the
lesser of $20 or 2% of the amount received.
o Loans-- Not to exceed $20 for each loan made.
o Transfers-- Not to exceed $20 for each transfer, after
the twelfth transfer, in a period of generally 12 months
depending on the provisions of the contract.
o Additional statement requests related to a Participant's
insurance-- Not to exceed $20 per statement.
C. Cost of Insurance Charges
Participant's contributions may be subject to certain
deductions prior to being invested in the Account. The
deductions are for (1) state premium taxes, (2) transaction
costs which are deducted from each premium payment to cover
premium collection and processing costs and (3) sales charges
which are deducted in order to compensate Prudential for the
cost of selling the contract. Contracts are also subject to
monthly charges to compensate Prudential for the portion of the
face amount of insurance applicable to the Participant. In
addition, monthly charges may also be deducted to compensate
Prudential for costs related to administering the contract and
for additional insurance benefits, if applicable.
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.
A9
<PAGE>
NOTE 7: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) for
the period July 1, 1998* through December 31, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
-------------------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------- --------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Participant Contributions: 23,681 45,583 137,804 87,843
Participant Redemptions: (1,009) (5,001) (10,681) (7,104)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
------------------- --------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Participant Contributions: 17,321 40,569 90,308 143,602
Participant Redemptions: (1,536) (3,564) (6,467) (14,222)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------------------- -------------------
<S> <C> <C>
Participant Contributions: 45,363 17,730
Participant Redemptions: (4,382) (1,471)
</TABLE>
* Commenced Operations
A10
<PAGE>
NOTE 8: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of
investments in the Series Fund or the non-Prudential administered
funds for the period July 1, 1998* through December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
--------------------------------------------------------------------------
PRUDENTIAL PRUDENTIAL PRUDENTIAL
MONEY FLEXIBLE STOCK PRUDENTIAL
MARKET MANAGED INDEX EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Purchases: $ 238,485 $ 441,301 $1,333,505 $ 837,735
Sales: $ (10,210) $ (48,234) $ (103,368) $ (66,378)
<CAPTION>
PORTFOLIOS (CONTINUED)
---------------------------------------------------------------------------
NEUBERGER &
BERMAN KEMPER DREYFUS
AMT LIMITED SERIES MFS SMALL
MATURITY BOND HIGH YIELD RESEARCH CAP
PORTFOLIO PORTFOLIO SERIES PORTFOLIO
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Purchases: $ 174,083 $ 387,952 $ 836,499 $1,296,655
Sales: $ (15,463) $ (33,022) $ (59,503) $ (124,887)
<CAPTION>
PORTFOLIOS (CONTINUED)
-----------------------------------------
FRANKLIN
FRANKLIN TEMPLETON
TEMPLETON DEVELOPING
INTERNATIONAL MARKETS
FUND FUND
-------------- ---------------
<S> <C> <C>
Purchases: $ 413,671 $ 157,961
Sales: $ (38,932) $ (13,115)
</TABLE>
* Commenced operations
A11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Participants of the
Prudential Variable Contract Account GI-2
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 (Prudential Money
Market Portfolio, Prudential Flexible Managed Portfolio, Prudential Stock Index
Portfolio, Prudential Equity Portfolio, Neuberger & Berman AMT Limited Maturity
Bond Portfolio, Kemper Series High Yield Portfolio, MFS Research Series, Dreyfus
Small Cap Portfolio, Franklin Templeton International Fund and Franklin
Templeton Developing Markets Fund) of the Prudential Variable Contact Account
GI-2 at December 31, 1998, and the results of each of their operations and the
changes in each of their net assets for the period July 1, 1998 through December
31, 1998, 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 audit. We conducted our audit 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 audit, which included
confirmation of fund shares owned at December 31, 1998, provides a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 26, 1999
A12
<PAGE>
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT ACCOUNTANTS
DECEMBER 31, 1998 AND 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 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 audits. 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.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
2
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1998 AND 1997 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1998: $76,997; 1997: $71,496) $ 80,158 $ 75,270
Held to maturity, at amortized cost (fair value, 1998: $17,906; 1997: $19,894) 16,848 18,700
Trading account assets, at fair value 8,888 6,347
Equity securities, available for sale, at fair value (cost, 1998: $2,583; 1997: $2,376) 2,759 2,810
Mortgage loans on real estate 16,495 16,004
Investment real estate 801 1,519
Policy loans 7,476 7,034
Securities purchased under agreements to resell 10,252 8,661
Cash collateral for borrowed securities 5,622 5,047
Other long-term investments 2,658 2,489
Short-term investments 9,781 12,106
--------- ---------
Total investments 161,738 155,987
Cash 1,943 1,859
Accrued investment income 1,795 1,909
Broker-dealer related receivables 10,142 8,442
Deferred policy acquisition costs 6,462 6,083
Other assets 15,721 11,452
Separate Account assets 81,621 73,839
--------- ---------
TOTAL ASSETS $ 279,422 $ 259,571
========= =========
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits $ 69,129 $ 67,367
Policyholders' account balances 30,974 33,246
Unpaid claims and claim adjustment expenses 3,860 4,864
Policyholders' dividends 1,444 1,269
Securities sold under agreements to repurchase 21,486 12,347
Cash collateral for loaned securities 7,132 14,117
Income taxes payable 785 500
Broker-dealer related payables 6,530 3,338
Securities sold but not yet purchased 5,771 3,648
Other liabilities 16,169 14,659
Short-term debt 10,082 6,774
Long-term debt 4,734 4,273
Separate Account liabilities 80,931 73,451
--------- ---------
Total liabilities 259,027 239,853
--------- ---------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 16)
EQUITY
Accumulated other comprehensive income 1,232 1,661
Retained earnings 19,163 18,057
--------- ---------
Total equity 20,395 19,718
--------- ---------
TOTAL LIABILITIES AND EQUITY $ 279,422 $ 259,571
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums $ 9,024 $ 9,005 $ 9,999
Policy charges and fee income 1,462 1,434 1,490
Net investment income 9,520 9,456 9,461
Realized investment gains, net 2,630 2,168 1,128
Commissions and other income 4,451 4,481 4,512
-------- -------- --------
Total revenues 27,087 26,544 26,590
-------- -------- --------
BENEFITS AND EXPENSES
Policyholders' benefits 9,976 10,076 11,094
Interest credited to policyholders' account balances 1,806 2,044 2,251
Dividends to policyholders 2,478 2,422 2,339
General and administrative expenses 9,720 8,992 8,956
Sales practices remedies 510 1,640 410
-------- -------- --------
Total benefits and expenses 24,490 25,174 25,050
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,597 1,370 1,540
-------- -------- --------
Income taxes
Current 1,185 101 556
Deferred (215) 306 (376)
-------- -------- --------
970 407 180
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 1,627 963 1,360
-------- -------- --------
DISCONTINUED OPERATIONS
Loss from Healthcare operations, net of taxes (298) (353) (282)
Loss on disposal of Healthcare operations, net of taxes (223) -- --
-------- -------- --------
Net loss from discontinued operations (521) (353) (282)
-------- -------- --------
NET INCOME $ 1,106 $ 610 $ 1,078
======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED OTHER COMPREHENSIVE INCOME
------------------------------------------------------
FOREIGN NET TOTAL
CURRENCY UNREALIZED PENSION ACCUMULATED OTHER
TRANSLATION INVESTMENT LIABILITY COMPREHENSIVE RETAINED TOTAL
ADJUSTMENTS GAINS ADJUSTMENT INCOME EARNINGS EQUITY
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ (24) $ 2,397 $ -- $ 2,373 $ 16,369 $ 18,742
Comprehensive income (loss):
Net income 1,078 1,078
Other comprehensive income (loss), net of tax:
Change in foreign currency translation
adjustments (32) (32) (32)
Change in net unrealized investment gains (1,261) (1,261) (1,261)
Additional pension liability adjustment (4) (4) (4)
--------
Other comprehensive income (loss) (1,297)
--------
Total comprehensive income (loss) (219)
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 (56) 1,136 (4) 1,076 17,447 18,523
Comprehensive income:
Net income 610 610
Other comprehensive income (loss), net of tax:
Change in foreign currency translation
adjustments (29) (29) (29)
Change in net unrealized investment gains 616 616 616
Additional pension liability adjustment (2) (2) (2)
--------
Other comprehensive income 585
--------
Total comprehensive income 1,195
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 (85) 1,752 (6) 1,661 18,057 19,718
Comprehensive income:
Net income 1,106 1,106
Other comprehensive income, net of tax:
Change in foreign currency translation
adjustments 54 54 54
Change in net unrealized investment gains (480) (480) (480)
Additional pension liability adjustment (3) (3) (3)
--------
Other comprehensive income (429)
--------
Total comprehensive income 677
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ (31) $ 1,272 $ (9) $ 1,232 $ 19,163 $ 20,395
=============================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,106 $ 610 $ 1,078
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net (2,660) (2,209) (1,138)
Policy charges and fee income (135) (258) (208)
Interest credited to policyholders' account balances 1,806 2,044 2,251
Depreciation and amortization 305 258 266
Loss (gain) on disposal of businesses 223 -- (116)
Change in:
Deferred policy acquisition costs (165) (142) (122)
Future policy benefits and other insurance liabilities 584 2,762 2,471
Securities purchased under agreements to resell (1,591) (3,314) (217)
Trading account assets (2,540) (1,825) (433)
Income taxes receivable/payable 594 (1,391) (937)
Cash collateral for borrowed securities (575) (2,631) (332)
Cash collateral for securities loaned (net) (6,985) 5,668 2,891
Broker-dealer related receivables/payables 1,495 (672) (607)
Securities sold but not yet purchased 2,122 1,633 251
Securities sold under agreements to repurchase 9,139 4,844 (490)
Other, net (5,168) 4,142 (1,334)
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES (2,445) 9,519 3,274
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale 123,151 123,550 123,368
Fixed maturities, held to maturity 4,466 4,042 4,268
Equity securities, available for sale 2,792 2,572 2,162
Mortgage loans on real estate 4,839 4,299 5,731
Investment real estate 1,364 1,842 615
Other long-term investments 1,848 5,081 3,203
Disposal of businesses -- -- 52
Payments for the purchase of:
Fixed maturities, available for sale (126,742) (129,854) (125,093)
Fixed maturities, held to maturity (2,244) (2,317) (2,844)
Equity securities, available for sale (2,547) (2,461) (2,384)
Mortgage loans on real estate (4,885) (3,363) (1,906)
Investment real estate (31) (241) (142)
Other long-term investments (1,415) (4,148) (2,060)
Short-term investments (net) 2,145 (2,848) (1,915)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES 2,741 (3,846) 3,055
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits 6,955 5,020 2,676
Policyholders' account withdrawals (11,111) (9,873) (8,099)
Net increase in short-term debt 2,422 305 583
Proceeds from the issuance of long-term debt 1,940 324 93
Repayments of long-term debt (418) (464) (1,306)
-------- -------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES (212) (4,688) (6,053)
-------- -------- --------
NET INCREASE IN CASH 84 985 276
CASH, BEGINNING OF YEAR 1,859 874 598
-------- -------- --------
CASH, END OF YEAR $ 1,943 $ 1,859 $ 874
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 163 $ 968 $ 793
-------- -------- --------
Interest paid $ 864 $ 708 $ 595
-------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
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 financial services throughout the
United States and several locations worldwide. The Company's businesses
provide a full range of insurance, investment, securities brokerage and
other financial products and services to both retail consumers and
institutions. Principal products and services provided include life
insurance, property and casualty insurance, annuities, mutual funds,
pension and retirement related investments and administration, asset
management, and securities brokerage.
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 stock company. On July 1, 1998,
legislation was enacted in New Jersey that would permit this conversion to
occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption
of a plan by the Company's Board of Directors, a public hearing, voting by
qualified voters and regulatory approval. There can be no assurance that
the Company will demutualize or, if it does so, when demutualization will
occur.
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 consolidated 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 a 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, "Accumulated other
comprehensive income."
TRADING ACCOUNT ASSETS AND SECURITIES SOLD BUT NOT YET PURCHASED are
carried at estimated fair value. Realized and unrealized gains and losses
on trading account assets and securities sold but not yet purchased are
included in "Commissions and other income."
EQUITY SECURITIES, available for sale, are comprised of common and
non-redeemable preferred stock and are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax, and the effects
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, "Accumulated other
comprehensive income."
8
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal
balances, net of unamortized discounts and allowance for losses. The
allowance for losses is based upon a loan specific review and, for
performing loans collectively evaluated, a portfolio review. The loan
specific review includes consideration of expected future cash flows
relative to outstanding balances. The portfolio review includes
consideration of the composition of the loan portfolio, current economic
conditions, past results, current trends, the estimated aggregate value of
the underlying collateral, and other relevant environmental factors.
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, identified in management's
specific review of probable loan losses, 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.
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 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 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. 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 and is reviewed for
impairment whenever events or circumstances indicate the carrying value may
not be recoverable. In reviewing recoverability, an impairment loss is
recognized for an other than temporary decline in value to the extent the
reduction in carrying values of investment real estate exceeds estimated
undiscounted future cash flows. Charges relating to real estate to be
disposed of and impairments of real estate held for investment are included
in "Realized investment gains, net." Depreciation on real estate is
computed using the straight-line method over the estimated lives of the
properties.
POLICY LOANS are carried at unpaid principal balances.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE are treated as financing arrangements and 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 or resold is monitored, and additional collateral is requested,
where appropriate, to protect against credit exposure.
SECURITIES BORROWED AND SECURITIES LOANED are treated as financing
arrangements and 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 because the debtor typically
has the right to redeem the collateral on short notice. Substantially all
of 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.
9
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities repurchase and resale agreements and securities borrowed and
loaned 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.
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.
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.
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." Decreases in the lower of
depreciated cost or fair value less selling costs of investment real estate
held for sale are recorded in "Realized investment gains, net."
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, for certain products, 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 "Accumulated
other comprehensive income."
For participating 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. The average rate of assumed investment yield in
estimating expected gross margins was 9.97%, 9.39%, and 8.39% for 1998,
1997 and 1996, respectively. Deferred policy acquisition costs related to
non-participatory term insurance are amortized over the expected life of
the contracts in proportion to the premium income.
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.
10
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For disability 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 Statements of Operations. Mortality, policy administration and
surrender charges on the accounts are included in "Policy charges and fee
income."
OTHER ASSETS AND OTHER LIABILITIES
Other assets consist primarily of prepaid benefit costs, reinsurance
recoverables, certain restricted assets, trade receivables and property and
equipment. Property and equipment are stated at cost less accumulated
depreciation. Depreciation is determined using the straight-line method
over the estimated useful lives of the related assets which generally range
from 3 to 40 years. Other liabilities consist primarily of trade payables
and reserves for sales practice remediation costs.
INSURANCE REVENUE AND EXPENSE RECOGNITION
Premiums from participating insurance policies are 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
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, 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.
11
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premiums, benefits and expenses are stated net of reinsurance ceded to
other companies. Estimated reinsurance receivables and the cost of
reinsurance are recognized over the life of the reinsured policies using
assumptions consistent with those used to account for the underlying
policies.
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. The effects of
translating the Statements of Financial Position of non-U.S. entities with
functional currencies other than the U.S. dollar are recorded, net of
related hedge gains and losses and income taxes, as "Other comprehensive
income," a separate component of equity.
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 from trading activities of the
Company's broker-dealer subsidiary.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose values are derived from
interest rates, foreign exchange rates, various financial indices, or the
value of securities or commodities. Derivative financial instruments can be
exchange-traded or contracted in the over-the-counter market and those used
by the Company include swaps, futures, forwards and options contracts. The
Company uses derivative financial instruments to hedge market risk from
changes in interest rates or foreign currency exchange rates, and to alter
interest rate or currency exposures arising from mismatches between assets
and liabilities. Additionally, derivatives are used in the broker-dealer
business and in a limited-purpose subsidiary for trading purposes.
To qualify as a hedge, derivatives must be designated as hedges for
existing assets, liabilities, firm commitments, or anticipated transactions
which are identified and probable to occur, and effective in reducing the
market risk to which the Company is exposed. The effectiveness of the
derivatives are evaluated at the inception of the hedge and throughout the
hedge period.
DERIVATIVES HELD FOR TRADING PURPOSES are used in the Company's securities
broker-dealer business and in a limited-purpose subsidiary to meet the
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. Trading derivative positions are
valued daily, generally by obtaining quoted market prices or through the
use of pricing models. Values are affected by changes in interest rates,
currency exchange rates, credit spreads, market volatility and liquidity.
The Company monitors these exposures through the use of various analytical
techniques.
Derivatives held for trading are recorded at fair value in "Trading account
assets," "Other liabilities" or "Receivables from/Payables to broker-dealer
clients" in the Consolidated Statements of Financial Position, and realized
and unrealized changes in fair value are included in "Commissions and other
income" of the Consolidated Statements of Operations in the periods in
which the changes occur. Cash flows from trading derivatives are reported
in the operating activities section of the Consolidated Statements of Cash
Flows.
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.
12
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
See Note 14 for a discussion of the accounting treatment of derivatives
that qualify as hedges. If the Company's use of other than trading
derivatives does not meet the criteria to apply hedge accounting, the
derivatives are recorded at fair value in "Other long-term investments" or
"Other liabilities" in the Consolidated Statements of Financial Position,
and changes in their fair value are recognized in earnings in "Realized
investment gains, net" without considering changes in the hedged assets or
liabilities. Cash flows from other than trading derivative assets and
liabilities are reported in the investing activities section in the
Consolidated Statements of Cash Flows.
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 life
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 that is expected 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 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
was 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 delayed the implementation of SFAS 125 for one year
for certain provisions, including repurchase agreements, dollar rolls,
securities lending and similar transactions. The Company adopted the
delayed provisions of SFAS 125 in 1998. The adoption of SFAS 125 did not
have a material impact on the Company's results of operations or financial
position.
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which was issued by the FASB in June 1997. This statement defines
comprehensive income 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 Statements of Financial Position. Application of this
statement did not change recognition or measurement of net income and,
therefore, did not affect the Company's financial position or results of
operations.
During 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which was issued by the
FASB in February 1998. This statement standardizes the disclosure
requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligations and fair
values of plan assets and eliminates certain disclosures. This statement is
limited to changes in reporting and presentation and does not change
recognition or measurement of pension or other postretirement benefit
plans. Therefore, its adoption did not affect the Company's financial
position or results of operations.
13
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On January 1, 1998, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP
97-3"). This statement provides guidance for determining when an insurance
company or other enterprise should recognize a liability for guaranty-fund
assessments as well as guidance for measuring the liability. The adoption
of SOP 97-3 did not have a material effect on the Company's financial
condition or results of operations. In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133 provides, if certain conditions are met, that a
derivative may be specifically designated as (1) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment (fair value hedge), (2) a hedge of the
exposure to variable cash flows of a forecasted transaction (cash flow
hedge), or (3) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign-currency-denominated forecasted
transaction (foreign currency hedge).
SFAS No. 133 does not apply to most traditional insurance contracts.
However, certain hybrid contracts that contain features which can affect
settlement amounts similarly to derivatives may require separate accounting
for the "host contract" and the underlying "embedded derivative"
provisions. The latter provisions would be accounted for as derivatives as
specified by the statement.
Under SFAS No. 133, the accounting for changes in fair value of a
derivative depends on its intended use and designation. For a fair value
hedge, the gain or loss is recognized in earnings in the period of change
together with the offsetting loss or gain on the hedged item. For a cash
flow hedge, the effective portion of the derivative's gain or loss is
initially reported as a component of other comprehensive income and
subsequently reclassified into earnings when the forecasted transaction
affects earnings. For a foreign currency hedge, the gain or loss is
reported in other comprehensive income as part of the foreign currency
translation adjustment. For all other derivatives not designated as hedging
instruments, the gain or loss is recognized in earnings in the period of
change. The Company is required to adopt this Statement no later than
January 1, 2000 and is currently assessing the effect of the new standard.
In October 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk," ("SOP 98-7"). This statement provides guidance on
how to account for insurance and reinsurance contracts that do not transfer
insurance risk. SOP 98-7 is effective for fiscal years beginning after June
15, 1999. The adoption of this statement is not expected to have a material
effect on the Company's financial position or results of operations.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to current
year presentation.
14
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS
In December 1998, the Company entered into a definitive agreement to sell
its HealthCare business to Aetna Inc. ("Aetna"). Included in this
transaction are the Company's managed medical care, point of service,
preferred provider organization and indemnity health lines, dental
business, as well as the Company's Administrative Services Only ("ASO")
businesses. The transaction was approved by the boards of directors of both
companies and is expected to be completed in the second quarter of 1999,
subject to review by federal antitrust authorities and approval by state
regulators, and other customary closing conditions. Proceeds from the sale
will consist of $500 million of cash and $500 million of Aetna three year
senior notes.
Loss from operations of discontinued businesses for 1998 includes results
through December 31, 1998 (the measurement date). The Statements of
Operations for 1997 and 1996 have been restated to conform with the 1998
presentation. Amounts within the footnotes have been adjusted, where noted,
to eliminate the impact of discontinued operations and to be consistent
with the presentation in the Consolidated Statements of Operations. The
following table presents the results of operations and the loss on the
disposal of the Company's HealthCare business, determined as of the
measurement date, which are included in "Discontinued Operations" in the
Consolidated Statements of Operations. Amounts for 1997 and 1996 include
revenues and expenses relating to a contract with the American Association
of Retired Persons for healthcare and similar coverages which was
terminated effective December 31, 1997.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(In Millions)
<S> <C> <C> <C>
Revenues $ 7,461 $ 10,305 $ 9,187
Policyholder benefits (6,064) (8,484) (7,711)
General and administrative expenses (1,822) (2,364) (1,921)
--------- --------- ---------
Loss before income taxes (425) (543) (445)
Income tax benefit 127 190 163
--------- --------- ---------
Loss from operations (298) (353) (282)
Loss on disposal, net of tax benefit of $131 (223) - -
--------- --------- ---------
Loss from discontinued operations, net of taxes $ (521) $ (353) $ (282)
========= ========= =========
</TABLE>
The loss on disposal includes anticipated operating losses to be incurred
by the HealthCare business subsequent to the measurement date through the
expected date of the sale, as well as estimates of other costs the Company
will incur in connection with the disposition of the HealthCare business.
Actual amounts may differ from these estimates. These include costs
attributable to facilities closure and systems terminations, severance,
payments to Aetna related to the ASO business, and estimated payments in
connection with an agreement covering the fully insured medical and dental
business. The latter agreement provides for payments either to or from
Aetna in the event that medical loss ratios (i.e., incurred medical expense
divided by earned premiums) for covered businesses are either less
favorable or more favorable than levels specified in the agreement for the
years 1999 and 2000. The loss on disposition was reduced by the estimated
impact of expected modifications of certain pension and other
postretirement benefit plans in which employees of the HealthCare business
participate. This amount includes curtailment gains and the cost of
termination benefits. (See Note 9.)
15
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS (CONTINUED)
The following table presents the assets and liabilities pertaining to the
Company's HealthCare business at December 31, 1998 which are included in
the Company's Consolidated Statements of Financial Position.
(In Millions)
Cash and investments $ 1,652
Other assets 1,030
-------
Total assets 2,682
Future policy benefits 1,241
Other liabilities 1,105
-------
Total liabilities 2,346
-------
Net assets $ 336
=======
4. 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:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5,761 $ 580 $ 9 $ 6,332
Obligations of U.S. states and
their political subdivisions 2,672 204 1 2,875
Foreign government bonds 3,156 253 52 3,357
Corporate securities 57,373 2,545 553 59,365
Mortgage-backed securities 7,935 208 14 8,129
Other fixed maturities 100 - - 100
-----------------------------------------------------------
Total fixed maturities available for sale $ 76,997 $ 3,790 $ 629 $ 80,158
===========================================================
EQUITY SECURITIES AVAILABLE FOR SALE $ 2,583 $ 472 $ 296 $ 2,759
===========================================================
</TABLE>
16
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY (In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5 $ - $ - $ 5
Obligations of U.S. states and
their political subdivisions 62 2 1 63
Foreign government bonds 31 4 - 35
Corporate securities 16,699 1,096 49 17,746
Mortgage-backed securities 1 - - 1
Other fixed maturities 50 6 - 56
------------------------------------------------------------
Total fixed maturities held to maturity $ 16,848 $ 1,108 $ 50 $ 17,906
============================================================
<CAPTION>
1997
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE (In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 9,071 $ 671 $ - $ 9,742
Obligations of U.S. states and
their political subdivisions 1,529 152 - 1,681
Foreign government bonds 3,177 218 17 3,378
Corporate securities 50,043 2,611 144 52,510
Mortgage-backed securities 7,576 288 5 7,859
Other fixed maturities 100 - - 100
-----------------------------------------------------------
Total fixed maturities available for sale $ 71,496 $ 3,940 $ 166 $ 75,270
===========================================================
EQUITY SECURITIES AVAILABLE FOR SALE $ 2,376 $ 680 $ 246 $ 2,810
===========================================================
</TABLE>
17
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ----------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY
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
============================================================
</TABLE>
18
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1998, is shown below:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------- -----------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ -------------- ----------- ----------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
Due in one year or less $ 2,638 $ 2,644 $ 730 $ 736
Due after one year through five years 17,551 17,874 4,326 4,465
Due after five years through ten years 19,523 19,976 6,783 7,162
Due after ten years 29,350 31,535 5,008 5,542
Mortgage-backed securities 7,935 8,129 1 1
--------- ---------- -------- --------
Total $ 76,997 $ 80,158 $ 16,848 $ 17,906
========= ========== ======== ========
</TABLE>
Actual maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations.
Proceeds from the repayment of held to maturity fixed maturities during
1998, 1997 and 1996 were $4,466 million, $4,042 million and $4,268 million,
respectively. Gross gains of $135 million, $62 million and $78 million, and
gross losses of $2 million, $1 million and $7 million, were realized on
prepayment of held to maturity fixed maturities during 1998, 1997 and 1996,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1998,
1997 and 1996 were $119,096 million, $120,604 million and $121,910 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1998, 1997 and 1996 were $ 4,055 million, $2,946 million
and $1,458 million, respectively. Gross gains of $1,765 million, $1,310
million and $1,562 million and gross losses of $443 million, $639 million
and $1,026 million were realized on sales and prepayments of available for
sale fixed maturities during 1998, 1997 and 1996, respectively.
Writedowns for impairments of fixed maturities which were deemed to be
other than temporary were $96 million, $13 million and $54 million for the
years 1998, 1997 and 1996, respectively.
During the years ended December 31, 1998 and December 31, 1997, certain
securities classified as held to maturity 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 $73 million and $27 million, respectively with
gross unrealized investment losses of $.4 million and gross unrealized
investment gains of $.6 million included during the years ended December
31, 1998 and 1997, respectively, in "Accumulated other comprehensive
income" at the time of the transfer.
19
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans were collateralized by the following property
types at December 31:
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
(IN MILLIONS) OF TOTAL (IN MILLIONS) OF TOTAL
------------- ---------- ------------- ----------
1998 1997
------------------------ -------------------------
Office buildings $ 4,267 25.2% $ 4,692 28.5%
Retail stores 3,021 17.9% 3,078 18.7%
Residential properties 716 4.2% 891 5.4%
Apartment complexes 4,362 25.8% 3,551 21.6%
Industrial buildings 1,989 11.8% 1,958 11.9%
Agricultural properties 1,936 11.4% 1,666 10.1%
Other 631 3.7% 618 3.8%
-------- ----- -------- -----
Subtotal 16,922 100.0% 16,454 100.0%
===== =====
Allowance for losses (427) (450)
-------- --------
Net carrying value $ 16,495 $ 16,004
======== ========
The mortgage loans are geographically dispersed throughout the United
States and Canada with the largest concentrations in California (23.8%)
and New York (9.5%) at December 31, 1998. Included in the above balances
are mortgage loans receivable from affiliated joint ventures of $87 million
and $225 million at December 31, 1998 and 1997, respectively.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
1998 1997 1996
----- ----- -----
(In Millions)
Allowance for losses, beginning of year $ 450 $ 515 $ 862
Additions charged to operations - - -
Release of allowance for losses - (41) (247)
Charge-offs, net of recoveries (23) (24) (100)
----- ----- -----
Allowance for losses, end of year $ 427 $ 450 $ 515
===== ===== =====
The $41 million and $247 million reductions of the mortgage loan allowance
for losses in 1997 and 1996, respectively, are 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.
20
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
Impaired mortgage loans identified in management's specific review of
probable loan losses and related allowance for losses at December 31, are
as follows:
1998 1997
------- -------
(In Millions)
Impaired mortgage loans with allowance for losses $ 149 $ 330
Impaired mortgage loans with no allowance for losses 924 1,303
Allowance for losses (45) (97)
------- -------
Net carrying value of impaired mortgage loans $ 1,028 $ 1,536
======= =======
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 $1,329 million, $2,102 million and $2,842 million
during 1998, 1997 and 1996, respectively. Net investment income recognized
on these loans totaled $94 million, $140 million and $265 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
INVESTMENT REAL ESTATE
The Company's "Investment real estate" of $801 million and $1,519 million
at December 31, 1998 and 1997, respectively, is held through direct
ownership. Of the Company's real estate, $675 million and $1,490 million
consists of commercial and agricultural assets held for disposal at
December 31, 1998 and 1997, respectively. Impairment losses aggregated $8
million, $40 million and $38 million for the years ended December 31, 1998,
1997 and 1996, respectively, and are included in "Realized investment
gains, net."
RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets of $3,135 million and $2,783 million at December 31, 1998 and 1997,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $3,727
million and $2,352 million at December 31, 1998 and 1997, respectively,
were held in voluntary trusts. Of this amount, $3,131 million and $1,801
million at December 31, 1998 and 1997, respectively, related to the
multi-state policyholder settlement as described in Note 16. 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 $403 million and $632 million at December 31,
1998 and 1997, respectively, were maintained as compensating balances,
which do not legally restrict the use of the funds, or pledged as
collateral for bank loans and other financing agreements. Restricted cash
and securities of $2,366 million and $1,835 million at December 31, 1998
and 1997, respectively, were included in the consolidated financial
statements in "Other assets." 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 $2,658 million and $2,489
million as of December 31, 1998 and 1997, respectively, are comprised of
$1,007 million and $1,498 million in real estate related interests and
$1,651 million and $991 million of non-real estate related interests. The
Company's share of net income from such entities was $285 million, $411
million and $245 million for 1998, 1997 and 1996, respectively, and is
reported in "Net investment income."
21
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES
NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Fixed maturities - available for sale $ 5,366 $ 5,074 $ 4,871
Fixed maturities - held to maturity 1,406 1,622 1,793
Trading account assets 677 504 444
Equity securities - available for sale 54 52 81
Mortgage loans on real estate 1,525 1,555 1,690
Investment real estate 230 565 685
Policy loans 410 396 384
Securities purchased under agreements to resell 18 15 11
Receivables from broker-dealer clients 836 706 579
Short-term investments 725 697 702
Other investment income 415 520 559
-------- -------- --------
Gross investment income 11,662 11,706 11,799
Less investment expenses (2,035) (2,038) (2,130)
-------- -------- --------
Subtotal 9,627 9,668 9,669
Less amount relating to discontinued operations (107) (212) (208)
-------- -------- --------
Net investment income $ 9,520 $ 9,456 $ 9,461
======== ======== ========
</TABLE>
REALIZED INVESTMENT GAINS, NET, for the years ended December 31, were from
the following sources:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Fixed maturities $ 1,381 $ 684 $ 513
Mortgage loans on real estate 22 68 248
Investment real estate 642 700 76
Equity securities - available for sale 427 363 267
Other 188 394 34
-------- -------- --------
Subtotal 2,660 2,209 1,138
Less amounts related to discontinued operations (30) (41) (10)
-------- -------- --------
Realized investment gains, net $ 2,630 $ 2,168 $ 1,128
======== ======== ========
</TABLE>
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1998 included in fixed maturities available
for sale, mortgage loans on real estate and other long term investments
totaled $1 million, $23 million and $13 million, respectively.
22
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
NET UNREALIZED INVESTMENT GAINS
Net unrealized investment gains on securities available for sale are
included in the Consolidated Statements of Financial Position as a
component of "Accumulated other comprehensive income." Changes in these
amounts include reclassification adjustments to avoid double-counting in
"Comprehensive income," items that are included as part of "Net income" for
a period that also had been part of "Other comprehensive income" in earlier
periods. The amounts for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Millions)
<S> <C> <C> <C>
Net unrealized investment gains, beginning of year $ 1,752 $ 1,136 $ 2,397
Changes in net unrealized investment gains attributable to:
Investments:
Net unrealized investment gains (losses) on investments arising
during the period 522 1,706 (1,281)
Reclassification adjustment for gains included in net income (1,087) (631) (471)
------- ------- -------
Change in net unrealized investment gains, net of adjustments (565) 1,075 (1,752)
Impact of net unrealized investment gains on:
Future policy benefits 23 (360) 318
Deferred policy acquisition costs 62 (99) 173
------- ------- -------
Change in net unrealized investment gains (480) 616 (1,261)
------- ------- -------
Net unrealized investment gains, end of year $ 1,272 $ 1,752 $ 1,136
======= ======= =======
</TABLE>
Unrealized gains (losses) on investments arising during the periods
reported in the above table are net of income tax expense (benefit) of $282
million, $961 million and $(647) million for the years ended December 31,
1998, 1997 and 1996, respectively.
Reclassification adjustments reported in the above table for the years
ended December 31, 1998, 1997 and 1996 are net of income tax expense of
$588 million, $355 million and $238 million, respectively.
The future policy benefits reported in the above table are net of income
tax expense (benefit) of $15 million, $(203) million and $161 million for
the years ended December 31, 1998, 1997 and 1996, respectively.
Deferred policy acquisition costs in the above tables for the years ended
December 31, 1998, 1997 and 1996 are net of income tax expense (benefit) of
$36 million, $(55) million and $88 million, respectively.
23
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. 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:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Millions)
<S> <C> <C> <C>
Balance, beginning of year $ 6,083 $ 6,095 $ 5,892
Capitalization of commissions, sales and issue expenses 1,313 1,409 1,260
Amortization (1,139) (1,176) (1,261)
Change in unrealized investment gains 77 (154) 261
Foreign currency translation 128 (91) (57)
------- ------- -------
Balance, end of year $ 6,462 $ 6,083 $ 6,095
======= ======= =======
</TABLE>
6. POLICYHOLDERS' LIABILITIES
FUTURE POLICY BENEFITS at December 31, are as follows:
1998 1997
------- -------
(In Millions)
Life insurance $48,927 $46,765
Annuities 15,360 15,469
Other contract liabilities 4,842 5,133
------- -------
Future policy benefits $69,129 $67,367
======= =======
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.
24
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (CONTINUED)
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- --------------------------- ------------------------- ------------------------- ------------------------
<S> <C> <C> <C>
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 3.5% 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
Table with certain payments
modifications based on historical
experience
Other contract liabilities - 5.3% to 7.0% Present value of
expected future
payments
based on historical
experience
</TABLE>
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 and to recover any unamortized
acquisition costs. A premium deficiency reserve has been recorded for the
group single premium annuity business, which consists of limited-payment,
long duration, traditional and non-participating annuities. A liability of
$1,780 million and $1,645 million is included in "Future policy benefits"
with respect to this deficiency for the years ended December 31, 1998 and
1997, respectively.
POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In Millions)
<S> <C> <C>
Individual annuities $ 4,997 $ 5,695
Group annuities and guaranteed investment contracts 16,770 19,053
Interest-sensitive life contracts 3,566 3,258
Dividend accumulations and other 5,641 5,240
------- --------
Policyholders' account balances $30,974 $ 33,246
======= ========
</TABLE>
Policyholders' account balances for interest-sensitive life and
investment-type contracts represent an accumulation of gross premium
payments plus credited interest less withdrawals, expenses and mortality
charges.
25
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (Continued)
Certain contract provisions that determine the policyholder account
balances are as follows:
<TABLE>
<CAPTION>
WITHDRAWAL/
PRODUCT INTEREST RATE SURRENDER CHARGES
--------------------------------- ------------- -----------------------------------
<S> <C> <C>
Individual annuities 3.0% to 6.6% 0% to 8% for up to 8 years
Group annuities 5.0% to 13.4% Contractually limited or subject
to market value adjustment
Guaranteed investment contracts 3.9% to 15.4% Subject to market value withdrawal
payout status 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 and other 3.0% to 4.5% --
</TABLE>
26
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (Continued)
Unpaid Claims and Claim Adjustment Expenses. The following table provides
a reconciliation of the activity in the liability for unpaid claims and
claim adjustment expenses for property and casualty and accident and
health insurance at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- -----------------------
ACCIDENT PROPERTY ACCIDENT PROPERTY ACCIDENT PROPERTY
AND HEALTH AND CASUALTY AND HEALTH AND CASUALTY AND HEALTH AND CASUALTY
---------- ------------ ---------- ------------ ---------- -------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 $ 1,908 $ 2,956 $ 1,990 $ 3,076 $ 2,033 $ 3,053
Less reinsurance recoverables 810 535 10 553 15 557
------- ------- ------- ------- ------- -------
Net balance at January 1 1,098 2,421 1,980 2,523 2,018 2,496
------- ------- ------- ------- ------- -------
Incurred related to:
Current year 6,127 1,354 8,348 1,525 8,391 1,760
Prior years 7 (194) 102 (91) (66) (25)
------- ------- ------- ------- ------- -------
Total incurred 6,134 1,160 8,450 1,434 8,325 1,735
------- ------- ------- ------- ------- -------
Paid related to:
Current year 5,289 717 6,676 739 6,589 908
Prior years 851 681 1,854 797 1,774 800
------- ------- ------- ------- ------- -------
Total paid 6,140 1,398 8,530 1,536 8,363 1,708
------- ------- ------- ------- ------- -------
Net balance at December 31 1,092 2,183 1,900 2,421 1,980 2,523
Plus reinsurance recoverables 52 533 8 535 10 553
------- ------- ------- ------- ------- -------
Balance at December 31 $ 1,144 $ 2,716 $ 1,908 $ 2,956 $ 1,990 $ 3,076
======= ======= ======= ======= ======= =======
</TABLE>
The Accident and Health balance at December 31 includes amounts
attributable to the Company's discontinued HealthCare business: 1998 -
$1,082; 1997 - $1,757 and 1996 - $1,750.
In 1998 and 1997, the changes in provision for claims and claim adjustment
expenses for property and casualty related to prior years are primarily
driven by lower than anticipated losses for the Voluntary Auto line of
business.
The changes in provision for claims and claim adjustment expense for
accident and health related to prior years are primarily due to such
factors as changes in claim cost trends and an accelerated decline in the
indemnity health business.
The unpaid claims and claim adjustment expenses presented above consist 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 Consolidated
Statement of Operations periodically as the estimates are revised.
Accident and health unpaid claims liabilities for 1998, 1997 and 1996
included above are discounted using interest rates ranging from 3.0%
to 6.0%.
27
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. REINSURANCE
The Company participates in reinsurance in order to provide greater
diversification of business, provide additional capacity for future growth
and limit the maximum net loss potential arising from large risks. Life
reinsurance is accomplished through various plans of reinsurance,
primarily yearly renewable term and coinsurance. Property-casualty
reinsurance is placed on both a pro-rata and excess of loss basis.
Reinsurance ceded arrangements do not discharge the Company or the
insurance subsidiaries as the primary insurer. Ceded balances would
represent a liability to the Company in the event the reinsurers were
unable to meet their obligations to the Company under the terms of the
reinsurance agreements. The Company periodically reviews the financial
condition of its reinsurers and amounts recoverable therefrom, recording
an allowance when necessary for uncollectible reinsurance.
Reinsurance amounts included in the Consolidated Statements of Operations,
excluding HealthCare, for the years ended December 31, were as follows:
1998 1997 1996
------- ------ -------
(In Millions)
Direct Premiums $9,615 $9,679 $10,690
Reinsurance Assumed 65 42 13
Reinsurance Ceded (656) (716) (704)
------ ------ -------
Premiums $9,024 $9,005 $ 9,999
====== ====== =======
Policyholders' benefits ceded $ 519 $ 530 $ 571
====== ====== =======
Reinsurance recoverables, included in "Other assets" in the Company's
Consolidated Statements of Financial Position, at December 31, were as
follows:
1998 1997
------ ------
(In Millions)
Life insurance $ 620 $ 685
Property-casualty 564 554
Other reinsurance 92 65
------ ------
$1,276 $1,304
====== ======
28
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT
Debt consists of the following at December 31:
SHORT-TERM DEBT
1998 1997
------- ------
(In Millions)
Commercial paper $ 7,057 $4,268
Notes payable 2,164 2,151
Current portion of long-term debt 861 355
------- ------
Total short-term debt $10,082 $6,774
======= ======
The weighted average interest rate on outstanding short-term debt was
approximately 5.4% and 6.0% at December 31, 1998 and 1997, 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
<TABLE>
<CAPTION>
DESCRIPTION MATURITY DATES RATE 1998 1997
- ----------- -------------- ---- ----- ----
(In Millions)
<S> <C> <C> <C> <C>
Floating rate notes ("FRN") 1999 - 2005 4.04-14.00%(a) $ 729 $ 324
Long term notes 1999 - 2023 5.5% - 12% 1,318 910
Zero coupon notes 1999 8.6% (b) 364 334
Canadian dollar notes - 7.0% - 9.125% - 117
Japanese yen notes 1999 - 2000 0.5% - 4.6% 160 178
Swiss francs notes - 3.875% - 120
Canadian dollar FRN 2003 5.25%-5.89% 96 96
Surplus notes 2003 - 2025 6.875% - 8.3% 987 986
Senior notes 1999 - 2006 6.375% 393 -
Commercial paper backed by long-term
credit agreements 1,500 1,500
Other notes payable 1999 - 2017 4% - 7.5% 48 63
------- -------
Subtotal 5,595 4,628
Less: current portion of long-term debt (861) (355)
------- -------
Total long-term debt $ 4,734 $ 4,273
======= =======
</TABLE>
(a) The Company issued an S&P 500 index linked note of $29 million in September
of 1997. The interest rate on the note is based on the appreciation of the
S&P 500 index, with a contractual cap of 14%. At December 31, 1998, this
rate was 14%. Excluding this note, floating rate note interest rates were
between 4.04% - 5.50%.
(b) The rate shown for zero coupon notes represents a level yield to maturity.
29
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
Payment of interest and principal on the surplus notes issued after 1993,
of which $686 million were outstanding at December 31, 1998, 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, 1998,
are as follows: $862 million in 1999, $560 million in 2000, $327 million
in 2001, $1,816 million in 2002, $458 million in 2003 and $1,575 million
thereafter.
At December 31, 1998, the Company had $9,853 million in lines of credit
from numerous financial institutions of which $8,330 million were unused.
These lines of credit generally have terms ranging from one to five years.
Interest expense for short-term and long-term debt is $920 million,
$743 million and $618 million for the years ended December 31, 1998, 1997
and 1996, respectively.
9. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT PLANS
The Company has funded non-contributory defined benefit pension plans
which cover substantially all of its employees. The Company also has
several non-funded non-contributory defined benefit plans covering
certain executives. 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.
The Company provides certain life insurance and health care benefits
("Other postretirement benefits") for its retired employees, their
beneficiaries and covered dependents. The healthcare plan is
contributory; the life insurance plan is non-contributory. Substantially
all of the Company's employees may become eligible to receive benefits if
they retire after age 55 with at least 10 years of service or under
certain circumstances after age 50 with at least 20 years of continuous
service. These benefits are funded as considered necessary by Company
management.
The Company has elected to amortize its transition obligation for other
postretirement benefits over 20 years.
30
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Prepaid and accrued benefit 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, is summarized below:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- ------------------------
1998 1997 1998 1997
-------- ------- ------- -------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at the beginning of period $(5,557) $(5,148) $(2,128) $(2,002)
Service cost (159) (127) (35) (38)
Interest cost (397) (376) (142) (149)
Plan participants' contributions - - ( 6) (4)
Amendments (58) - - 31
Actuarial losses (600) (334) (31) (84)
Transfer to third party - 32 - -
Contractual termination benefits (30) (63) - -
Benefits paid 485 460 128 117
Foreign currency changes 7 (1) 1 1
------- ------- ------- -------
Benefit obligation at end of period $(6,309) $(5,557) $(2,213) $(2,128)
======= ======= ======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of period $ 8,489 $ 7,306 $ 1,354 $ 1,313
Actual return on plan assets 445 1,693 146 120
Transfer to third party (4) (32) - -
Contribution from pension plan - - 31 25
Employer contributions 25 16 13 9
Plan participants' contributions - - 6 4
Withdrawal under IRS Section 420 (36) (35) - -
Benefits paid (485) (460) (128) (117)
Foreign currency changes (7) 1 - -
------- ------- ------- -------
Fair value of plan assets at end of period $ 8,427 $ 8,489 $ 1,422 $ 1,354
======= ======= ======= =======
FUNDED STATUS:
Funded status at end of period $ 2,118 $ 2,932 $ (791) $ (774)
Unrecognized transition (asset) liability (554) (661) 660 707
Unrecognized prior service cost 335 327 - -
Unrecognized actuarial net gain (813) (1,644) (353) (364)
Effects of 4th quarter activity (9) (63) 2 33
------- ------- ------- -------
Net amount recognized $ 1,077 $ 891 $ (482) $ (398)
======= ======= ======= =======
AMOUNTS RECOGNIZED IN THE STATEMENTS OF FINANCIAL
POSITION CONSIST OF:
Prepaid benefit cost $ 1,348 $ 1,150 $ - $ -
Accrued benefit liability (287) (270) (482) (398)
Intangible asset 7 5 - -
Accumulated other comprehensive income 9 6 - -
-------- -------- -------- ---------
Net amount recognized $ 1,077 $ 891 $ (482) $ (398)
======== ======== ======== =========
</TABLE>
31
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $384 million, $284 million and
$0, respectively, as of September 30, 1998 and $319 million, $226 million
and $ 0, respectively, as of September 30, 1997.
The effects of fourth quarter activity are summarized as follows:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- -----------------------
1998 1997 1998 1997
------ ------- ------ ------
(In Millions)
<S> <C> <C> <C> <C>
Effect of IRS Section 420 transfer $ - $ (36) $ - $ -
Contractual termination benefits (14) (30) - -
Contribution from pension plan - - - 31
Employer contributions 5 3 2 2
----- ------- ------ ------
Effects of 4th quarter activity $ (9) $ (63) $ 2 $ 33
====== ======= ====== ======
</TABLE>
Pension plan assets consist primarily of equity securities, bonds, real estate
and short-term investments, of which $5,926 million and $6,022 million are
included in Separate Account assets and liabilities at September 30, 1998 and
1997, respectively.
Other postretirement plan assets 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 $1,018
million and $1,044 million of Company insurance policies and contracts at
September 30, 1998 and 1997, 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 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, 1998 that their employment had been
terminated. Costs related to these amendments are reflected below in contractual
termination benefits.
32
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic benefit cost included in "General and administrative expenses"
in the Company's Consolidated Statements of Operations for the years ended
December 31, includes the following components:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------- ------------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------- ------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFITS COSTS:
Service cost $ 159 $ 127 $ 140 $ 35 $ 38 $ 45
Interest cost 397 376 354 142 149 157
Expected return on plan assets (674) (617) (594) (119) (87) (93)
Amortization of transition amount (106) (106) (107) 47 50 53
Amortization of prior service cost 45 42 26 - - -
Amortization of actuarial net (gain) loss 1 - - (13) (13) (3)
Curtailment gain (loss) 5 - - - - (9)
Contractual termination benefits 14 30 63 - - -
------- ------- ------- ------- ------- ------
Net periodic (benefit) cost $ (159) $ (148) $ (118) $ 92 $ 137 $ 150
======= ======= ======= ======= ======= ======
</TABLE>
The assumptions at September 30, used by the Company to calculate the benefit
obligations as of that date and to determine the benefit cost in the subsequent
year are as follows:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------ ----------------------------------------
1998 1997 1996 1998 1997 1996
------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate 6.50% 7.25% 7.75% 6.50% 7.25% 7.75%
Rate of increase in compensation levels 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Expected return on plan assets 9.50% 9.50% 9.50% 9.00% 9.00% 9.00%
Health care cost trend rates - - - 7.80-11.00% 8.20-11.80% 8.50-12.50%
Ultimate health care cost trend rate
after gradual decrease until 2006 - - - 5.00% 5.00% 5.00%
</TABLE>
33
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage point
increase and decrease in assumed health care cost trend rates would have
the following effects:
OTHER
POSTRETIREMENT BENEFITS
-----------------------
1998
------
(In Millions)
ONE PERCENTAGE POINT INCREASE
Effect on total service and interest costs $ 24
Effect on postretirement benefit obligation (226)
ONE PERCENTAGE POINT DECREASE
Effect on total service and interest costs $ (19)
Effect on postretirement benefit obligation 187
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, 1998 and 1997
was $135 million and $144 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 3% of annual salary,
resulting in $54 million, $63 million and $57 million of expenses included in
"General and administrative expenses" for 1998, 1997 and 1996, respectively.
DISCONTINUED OPERATIONS
In connection with the disposal of the Company's HealthCare business, as more
fully discussed in Note 3, the loss on disposal was reduced by an estimated
curtailment gain of $30 million.
34
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
1998 1997 1996
------ ------ ------
(In Millions)
Current tax expense (benefit):
U.S. $ 983 $ (14) $ 400
State and local 54 51 108
Foreign 148 64 48
------ ------ ------
Total $1,185 $ 101 $ 556
====== ====== ======
Deferred tax expense (benefit):
U.S. $ (193) $ 269 $ (428)
State and local (6) 4 (2)
Foreign (16) 33 54
------ ------ ------
Total $ (215) $ 306 $ (376)
====== ====== ======
Total income tax expense $ 970 $ 407 $ 180
====== ====== ======
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 continuing operations before income taxes for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Expected federal income tax expense $ 908 $ 480 $ 539
Equity tax (benefit) 75 (65) (365)
State and local income taxes 31 37 69
Tax-exempt interest and dividend received deduction (46) (67) (67)
Other
2 22 4
------ ------ ------
Total income tax expense $ 970 $ 407 $ 180
====== ====== ======
</TABLE>
35
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
1998 1997
------- -------
(In Millions)
Deferred tax assets
Insurance reserves $ 1,584 $ 1,482
Policyholder dividends 265 250
Net operating loss carryforwards 260 80
Litigation related reserves 104 178
Employee benefits 63 42
Other 134 287
------- -------
Deferred tax assets before valuation allowance 2,410 2,319
Valuation allowance (13) (18)
------- -------
Deferred tax assets after valuation allowance 2,397 2,301
------- -------
Deferred tax liabilities
Investments 1,414 1,867
Deferred policy acquisition costs 1,436 1,525
Depreciation 64 36
------- -------
Deferred tax liabilities 2,914 3,428
------- -------
Net deferred tax liability $ 517 $ 1,127
======= =======
Management believes that based on its historical pattern of taxable income, the
Company will produce sufficient income in the future to realize its 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, 1998 and 1997,
respectively, the Company had federal life net operating loss carryforwards of
$540 million and $1,200 million, which expire by 2012. At December 31, 1998 and
1997, respectively, the Company had state non-life operating loss carryforwards
for tax purposes approximating $1,059 million and $800 million, which expire by
2018.
The Internal Revenue Service (the "Service") has completed all examinations of
the consolidated federal income tax returns through 1989. The Service has
examined the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments. Management, however, 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.
36
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. STATUTORY EQUITY AND INCOME
Applicable insurance department regulations require that the Company
prepare statutory financial statements in accordance with statutory
accounting practices prescribed or permitted by the New Jersey Department
of Banking and Insurance. Statutory accounting practices primarily differ
from GAAP by charging policy acquisition costs to expense as incurred,
establishing future policy benefits reserves using different actuarial
assumptions, not providing for deferred taxes, and valuing securities on a
different basis. The Company's statutory net income, as filed with the New
Jersey Department of Banking and Insurance was $1,247 million, $1,471
million and $1,402 million for the years 1998, 1997 and 1996,
respectively. Statutory capital and surplus, as filed, at December 31,
1998 and 1997 was $8,536 million and $9,242 million, respectively.
12. 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, 1998, future minimum lease payments under non-cancelable
operating leases are estimated as follows:
(In Millions)
1999 $ 295
2000 263
2001 231
2002 198
2003 157
Remaining years after 2003 753
-------
Total $ 1,897
=======
Amounts presented in the table above include operating leases relating to
the Company's HealthCare business. See Note 3 for a discussion of the
pending sale of this business. Amounts applicable to the HealthCare
business are $65 million in 1999, $58 million in 2000, $52 million in
2001, $45 million in 2002, $34 million in 2003 and $89 million thereafter.
Rental expense incurred for the years ended December 31, 1998, 1997 and
1996 was approximately $320 million, $352 million and $343 million,
respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated 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
estimated fair values (for all other financial instruments presented in
the table, the carrying value approximates estimated fair value).
37
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FIXED MATURITIES AND EQUITY SECURITIES
Estimated 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 fair value of
certain non-performing private placement securities is based on amounts
estimated by management.
MORTGAGE LOANS ON REAL ESTATE
The estimated 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 loans, the
estimated 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 estimated 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
Estimated fair values of policyholders' account balances are derived by
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. For interest sensitive life
contracts, fair value approximates carrying value.
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.
38
<PAGE>
- -------------------------------------------------------------------------------
13. 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:
<TABLE>
<CAPTION>
1998 1997
----------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Other than trading:
Fixed maturities:
Available for sale $ 80,158 $ 80,158 $ 75,270 $ 75,270
Held to maturity 16,848 17,906 18,700 19,894
Equity securities 2,759 2,759 2,810 2,810
Mortgage loans on real estate 16,495 17,265 16,004 16,703
Policy loans 7,476 8,037 7,034 7,201
Securities purchased under agreements to resell 1,737 1,737 - -
Short-term investments 9,781 9,781 12,106 12,106
Cash 1,943 1,943 1,859 1,859
Restricted Assets 2,366 2,366 1,835 1,835
Separate Account assets 81,621 81,621 73,839 73,839
Derivative financial instruments 132 135 93 92
Trading:
Trading account assets $ 8,888 $ 8,888 $ 6,347 $ 6,347
Broker-dealer related receivables 10,142 10,142 8,442 8,442
Derivative financial instruments 765 765 910 910
Securities purchased under agreements to resell 8,515 8,515 8,661 8,661
Cash collateral for borrowed securities 5,622 5,622 5,047 5,047
FINANCIAL LIABILITIES:
Other than trading:
Policyholders' account balances $ 30,974 $ 31,940 $ 33,246 $ 34,201
Securities sold under agreements to repurchase 7,085 7,085 85 85
Cash collateral for loaned securities 2,450 2,450 9,647 9,647
Short-term and long-term debt 14,816 15,084 11,047 11,131
Securities sold but not yet purchased 2,215 2,215 - -
Separate Account liabilities 80,931 80,931 73,451 73,451
Derivative financial instruments 390 391 100 99
Trading:
Broker-dealer related payables $ 6,530 $ 6,530 $ 3,338 $ 3,338
Derivative financial instruments 725 725 1,019 1,019
Securities sold under agreements to repurchase 14,401 14,401 12,262 12,262
Cash collateral for loaned securities 4,682 4,682 4,470 4,470
Securities sold but not yet purchased 3,556 3,556 3,648 3,648
</TABLE>
39
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
INTEREST RATE SWAPS
The Company uses interest rate swaps to reduce market risks from changes in
interest rates and to alter interest rate exposures arising from mismatches
between assets and liabilities. Under interest rates swaps, the Company
agrees with other parties to exchange, at specified intervals the difference
between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Generally, no cash is
exchanged at the outset of the contract and no principal payments are made
by either party. Cash is paid or received based on the terms of the swap.
These transactions are entered into pursuant to master agreements that
provide for a single net payment to be made by one counterparty at each due
date. 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.
If swap agreements meet the criteria for hedge accounting, net interest
receipts or payments are accrued and recognized over the life of the swap
agreements as an adjustment to interest income or expense of the hedged
item. Any unrealized gains or losses are not recognized until the hedged
item is sold or matures. Gains or losses on early termination of interest
rate swaps are deferred and amortized over the remaining period originally
covered by the swaps. If the criteria for hedge accounting are not met, the
swap agreements are accounted for at market value with changes in fair value
reported in current period earnings.
FUTURES AND OPTIONS
The Company uses exchange-traded Treasury futures and options to reduce
market risks from changes in interest rates, to alter mismatches between the
duration of assets in a portfolio and the duration of liabilities supported
by those assets, and to hedge against changes in the value of securities it
owns or anticipates acquiring. The Company enters into exchange-traded
futures and options with regulated futures commissions merchants who are
members of a trading exchange. The fair value of futures and options is
based on market quotes for transactions with similar terms.
Under exchange-traded futures, the Company agrees to purchase a specified
number of contracts with other parties and to post variation margin on a
daily basis in an amount equal to the difference in the daily market values
of those contracts. Futures are typically used to hedge duration mismatches
between assets and liabilities by replicating Treasury performance. Treasury
futures move substantially in value as interest rates change and can be used
to either modify or hedge existing interest rate risk. This strategy
protects against the risk that cash flow requirements may necessitate
liquidation of investments at unfavorable prices resulting from increases in
interest rates. This strategy can be a more cost effective way of
temporarily reducing the Company's exposure to a market decline than selling
fixed income securities and purchasing a similar portfolio when such a
decline is believed to be over.
If futures meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing
financial instruments are amortized as a yield adjustment over the remaining
lives of the hedged item. Futures that do not qualify as hedges are carried
at fair value with changes in value reported in current period earnings. The
gains and losses associated with anticipatory transactions are not material.
40
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
When the Company anticipates a significant decline in the stock market
which will correspondingly affect its diversified portfolio, it may
purchase put index options where the basket of securities in the index is
appropriate to provide a hedge against a decrease in the value of the
equity portfolio or a portion thereof. This strategy effects an orderly
sale of hedged securities. When the Company has large cash flows which it
has allocated for investment in equity securities, it may purchase call
index options as a temporary hedge against an increase in the price of the
securities it intends to purchase. This hedge permits such investment
transactions to be executed with the least possible adverse market impact.
Option premium paid or received is reported as an asset or liability and
amortized into income over the life of the option. If options meet the
criteria for hedge accounting, changes in their fair value are deferred
and recognized as an adjustment to the hedged item. Deferred gains or
losses from the hedges for interest-bearing financial instruments are
recognized as an adjustment to interest income or expense of the hedged
item. If the options do not meet the criteria for hedge accounting, they
are fair valued, with changes in fair value reported in current period
earnings.
CURRENCY DERIVATIVES
The Company uses currency derivatives, including exchange-traded currency
futures and options, currency forwards and currency swaps to reduce market
risks from changes in currency values of investments denominated in
foreign currencies that the Company either holds or intends to acquire and
to alter the currency exposures arising from mismatches between such
foreign currencies and the U.S. Dollar.
Under currency forwards, the Company agrees with other parties upon
delivery of a specified amount of specified currency at a specified future
date. Typically, the price is agreed upon at the time of the contract and
payment for such a contract is made at the specified future date. Under
currency swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between one currency and another at a
forward exchange rate and calculated by reference to an agreed principal
amount. Generally, the principal amount of each currency is exchanged at
the beginning and termination of the currency swap by each party. These
transactions are entered into pursuant to master agreements that provide
for a single net payment to be made by one counterparty for payments made
in the same currency at each due date.
If currency derivatives are effective as hedges of foreign currency
translation and transaction exposures, gains or losses are recorded in
"Accumulated other comprehensive income." If currency derivatives do not
meet hedge accounting criteria, gains or losses from those derivatives are
recognized in current period earnings.
The tables below summarize the Company's outstanding positions by
derivative instrument types as of December 31, 1998 and 1997. 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.
41
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1998
(In Millions)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------- ------------------------- -------------------------
ESTIMATED ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 4,564 $ 309 $ 2,200 $ 96 $ 6,764 $ 405
Liabilities 4,734 274 3,065 349 7,799 623
Forwards:
Assets 45,651 282 1,004 14 46,655 296
Liabilities 39,153 280 2,039 37 41,192 317
Futures:
Assets 3,272 61 1,786 23 5,058 84
Liabilities 4,371 47 531 5 4,902 52
Options:
Assets 8,310 113 130 2 8,440 115
Liabilities 6,388 124 213 - 6,601 124
-------- -------- -------- ------- -------- --------
Total:
Assets $ 61,797 $ 765 $ 5,120 $ 135 $ 66,917 $ 900
======== ======== ======== ======= ======== ========
Liabilities $ 54,646 $ 725 $ 5,848 $ 391 $ 60,494 $ 1,116
======== ======== ======== ======= ======== ========
</TABLE>
42
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(In Millions)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
-------------------------- ------------------------- --------------------------
ESTIMATED ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ----------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 5,798 $ 316 $ 1,446 $ 67 $ 7,244 $ 383
Liabilities 5,439 418 1,197 70 6,636 488
Forwards:
Assets 29,947 438 1,171 25 31,118 463
Liabilities 29,985 461 687 8 30,672 469
Futures:
Assets 4,103 51 46 - 4,149 51
Liabilities 3,064 50 3,320 21 6,384 71
Options:
Assets 6,893 105 239 - 7,132 105
Liabilities 3,946 90 224 - 4,170 90
------- ------- ------- ------ ------- -------
Total:
Assets $46,741 $ 910 $ 2,902 $ 92 $49,643 $ 1,002
======= ======= ======= ====== ======= =======
Liabilities $42,434 $ 1,019 $ 5,428 $ 99 $47,862 $ 1,118
======= ======= ======= ====== ======= =======
</TABLE>
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. At December
31, 1998 and 1997 approximately 97% and 95%, respectively, 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, 1998, 1997 and 1996
relating to forwards, futures and swaps were $67 million, $(5) million and $(13)
million; $59 million, $37 million and $(13) million; and $42 million, $32
million and $(11) 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, 1998 and 1997 were $1,165 million and $1,015
million, respectively, and for derivatives in a liability position were $1,140
million and $1,166 million, respectively. Of those derivatives held for trading
purposes at December 31, 1998, 63% of the notional amount consisted of interest
rate derivatives, 32% consisted of foreign currency derivatives, and 5%
consisted of equity and commodity derivatives. Of those derivatives held for
purposes other than trading at December 31, 1998, 60% of notional consisted of
interest rate derivatives, 31% consisted of foreign currency derivatives, and 9%
consisted of equity and commodity derivatives.
43
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. 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
underfunded portion of commitments to fund investments in private placement
securities, and unused credit card and home equity lines. In connection
with the Company's commercial banking business, loan commitments for credit
cards and home equity lines of credit include agreements to lend up to
specified limits to customers. It is anticipated that commitment amounts
will only be partially drawn down based on overall customer usage patterns,
and, therefore, do not necessarily represent future cash requirements. The
Company evaluates each credit decision on such commitments at least
annually and has the ability to cancel or suspend such lines at its option.
The total available lines of credit card and home equity commitments were
$3.0 billion of which $2.2 billion remains available at December 31, 1998.
Also in connection with the Company's investment banking activities, the
Company enters into agreements with mortgage originators and others to
provide financing on both a secured and unsecured basis. Aggregate
financing commitments on a secured basis approximate $6.1 billion of which
$3.3 billion remains available at December 31, 1998. Unsecured commitments
approximate $65.0 million, the majority of which is outstanding at December
31, 1998.
Other commitments substantially include commitments to purchase and sell
mortgage loans and the underfunded portion of commitments to fund
investments in private placement securities. These mortgage loans and
private commitments were $2.5 billion of which $1.8 billion remain
available at December 31, 1998. Additionally, mortgage loans sold with
recourse were $0.5 billion at December 31, 1998.
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. At December 31,
1998 these were immaterial.
15. DIVESTITURE
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."
16. CONTINGENCIES AND LITIGATION
STOP-LOSS REINSURANCE 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. The Company
has guaranteed
44
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
Gibraltar's obligations arising under the stop-loss agreement subject to a
limit of $375 million. Through December 31, 1998, Gibraltar has incurred
$375 million in losses under the stop-loss agreement, including $90 million
in 1998. Gibraltar has paid $197 million to Pru Re under the stop-loss
agreement.
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
The Company has reviewed its obligations under certain managed care
arrangements for possible failure to comply with contractual and regulatory
requirements. It is the opinion of management that adequate reserves have
been established to provide for appropriate reimbursements to customers.
REINSURANCE AND PARTICIPATION AGREEMENT
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. In November 1998,
the Rehabilitation Court approved the sale of MBLLAC's individual life
insurance and individual group annuity business to affiliates of SunAmerica
Inc. Upon the end of the rehabilitation period, expected during 1999, the
agreement will terminate.
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.
Two putative class actions and approximately 320 individual actions were
pending against the Company in the United States as of January 31, 1999
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. 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 these cases seek substantial
damages while others seek unspecified compensatory, punitive and treble
damages. The Company intends to defend these cases vigorously.
45
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
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. 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 and that the
Company's efforts to prevent such practices were not sufficiently
effective. Based on the findings, the Task Force recommended, and the
Company agreed to, various changes to its sales and business practices
controls, and 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 U.S. District
Court for the District of 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 U.S. District Court 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 was affirmed by the U.S. Court of Appeals for the Third Circuit
in July 1998 although the issue of class counsel's fees was sent back to
the U.S. District Court for review. The Supreme Court denied certiorari in
January 1999, thereby making final the approval of the class action
settlement.
While the approval of the class action settlement is now final, the Company
remains subject to oversight and review by insurance regulators and other
regulatory authorities with respect to its sales practices and the conduct
of the remediation program. The releases granted by the state insurance
regulators pursuant to the individual state settlement agreements do not
become final until the remediation program has been completed without any
material changes to which those regulators have not agreed. The U.S.
District Court has also retained jurisdiction as to all matters relating to
the administration, consummation, enforcement and interpretation of the
class action settlement.
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 in
46
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
October 1996, 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.
In January 1997 the U.S. District Court sanctioned and fined the Company
$1 million for failure to properly implement procedures for its employees
to retain documents in violation of the Courts' order that required the
parties to preserve all documents relevant to the class action and
remediation program. The Court ordered the Company to implement a document
retention policy and directed that an independent expert be engaged to
investigate the extent of document destruction and its impact on the
remediation program.
In response to the class notices, the owners of approximately 503,000
policies indicated an interest in a Basic Claim Relief remedy. Management
believes that costs associated with providing Basic Claim Relief will not
be material to the Company's financial position or results of operations.
The owners of approximately 1.16 million policies responded to the class
notices by indicating an intent to file an ADR claim. All policyholders
who responded were provided an ADR claim form for completion and
submission. The ADR process generally requires that individual claim forms
and files be reviewed by the Company and by one or more independent claim
evaluators. Approximately 649,000 claim forms were completed and returned
and approximately 591,000 decision letters had been mailed to claimants as
of January 31, 1999. In many instances, claimants have the right to
"appeal" the Company's decision to an independent reviewer. Management
believes that the bulk of such appeals will be resolved in 1999.
In 1996, the Company recorded in its Consolidated Statement of Operations
the cost of $410 million as a guaranteed minimum remediation expense
pursuant to the settlement agreement. Management had no better information
available at that time upon which to make a reasonable estimate of losses
associated with the settlement. In 1997, based on additional information
derived from claim sampling techniques, the terms of the settlement and
the number of claim forms received, management 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 was funded in a settlement trust. Management
expressly noted that additional cost items were anticipated that could not
be fully evaluated at that time.
In 1998, based on estimates derived from an analysis of claims actually
remedied (including interest), a sample of claims still to be remedied, an
estimate of additional liability associated with the results of the
investigation by the independent expert regarding the impact of document
destruction on the ADR program, and an estimate of additional liabilities
associated with a claimant's right to "appeal" the Company's decision,
management increased the estimated liability for the cost of ADR remedies
by $.51 billion before taxes to a total of $2.56 billion before taxes, all
of which has been funded in a settlement trust as discussed in Note 4. The
Company has also recorded from 1996 through 1998 additional charges to
reflect ongoing administrative costs related to the ADR program,
regulatory fines, penalties and related payments, litigation costs and
settlements, and other fees and expenses associated with the resolution of
sales practices issues. While management believes the foregoing provisions
are reasonable estimates based on information currently available, the
ultimate amount of the total cost of remedied policyholder claims and
other related costs is dependent on complex and varying factors, including
the relief options still to be chosen by claimants, the dollar value of
those options, and the number and type of claims that may successfully be
appealed.
47
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted with precision. 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 the matters specifically discussed
above. Management believes, however, that the ultimate resolution of all
such matters, after consideration of applicable reserves, should not have a
material adverse effect on the Company's financial position.
******
48
<PAGE>
SUPPLEMENT DATED MAY 1, 1999
TO PROSPECTUS DATED MAY 1, 1999
FOR GROUP VARIABLE UNIVERSAL LIFE INSURANCE
SPECIAL FEATURES OF THE GROUP CONTRACT FOR
DAIMLERCHRYSLER CORPORATION
THIS DOCUMENT IS A SUPPLEMENT TO THE PROSPECTUS DATED MAY 1, 1999 (THE
"PROSPECTUS") FOR THE GROUP VARIABLE UNIVERSAL LIFE INSURANCE CONTRACT AND
CERTIFICATES THAT PRUDENTIAL OFFERS TO YOU. THIS SUPPLEMENT IS NOT A COMPLETE
PROSPECTUS, AND MUST BE ACCOMPANIED BY THE PROSPECTUS. THE PROSPECTUS DESCRIBES
THE INSURANCE FEATURES AND CERTAIN OTHER ASPECTS OF THE DAIMLERCHRYSLER
CORPORATION GROUP CONTRACT AND CERTIFICATES. IN THIS SUPPLEMENT, WE LIST THE 16
FUNDS THAT ARE AVAILABLE TO YOU UNDER THE DAIMLERCHRYSLER CORPORATION GROUP
CONTRACT AND CERTIFICATES.
Special terms that we use are defined in the prospectus. See the DEFINITIONS OF
SPECIAL TERMS section of the prospectus. You must read the prospectus and this
supplement together to fully understand how Group Variable Universal Life
Insurance works.
ELIGIBILITY AND ENROLLMENT
WHO IS ELIGIBLE FOR COVERAGE?
Eligible Group Members for the Group Variable Universal Life Insurance are:
o Salaried EMPLOYEES of DaimlerChrysler Corporation and certain subsidiaries
who work full-time on a regular basis.
o Part-time EMPLOYEES of DaimlerChrysler Corporation and certain subsidiaries
who are officially classified by DaimlerChrysler as "reduced hour" or "job
share" employees.
o SPOUSES of eligible employees who are younger than 65 when they enroll,
provided they are not confined for medical treatment at home or elsewhere.
Spouses who are also employees of DaimlerChrysler may not be covered
both as an employee and a spouse. If, after the death of a spouse, we
become aware that a spouse enrolled as both an employee and a spouse,
we will pay a death benefit as though the spouse were an employee. We
will return the premiums that were paid as a spouse, and we will
retain any investment gain or loss.
GL.99.598
<PAGE>
See the APPLICANT OWNER PROVISION section of the prospectus to learn about
how a spouse may apply for coverage on the life of the employee.
We refer to each person who buys coverage as a "Participant." When we use the
terms "you" or "your," we mean a Participant.
In addition, CHILDREN of eligible employees are eligible for dependent term life
coverage from age 14 days to 19 years (or, if an unmarried student, to age 25).
Eligible children include legally adopted children, stepchildren and foster
children who live with the employee and depend on the employee wholly for
support.
o Before a child can become covered, the employee or the spouse must be
covered for the Group Variable Universal Life Insurance. The child
will not be eligible if he or she is confined for medical care or
treatment at home or elsewhere.
o When a child reaches age 19 (or, if an unmarried student, age 25), he
or she may continue coverage if he or she is not physically or
mentally capable of self-support. The employee must give Prudential
evidence of the incapacity within 31 days after coverage would end.
o Children who are also employees of DaimlerChrysler may not be covered
both as an employee and a dependent. And, if both parents are
employees of DaimlerChrysler, a child may be covered by only one
parent.
IS THERE A LIMITED ENROLLMENT PERIOD?
No, an eligible employee or spouse may enroll at any time during the year. But,
if the person applies for coverage more than 31 days after first becoming
eligible, Prudential will ask for evidence of the Covered Person's good health
before that person can become covered.
COVERAGE INFORMATION
HOW MUCH COVERAGE MAY A PARTICIPANT BUY?
A Participant who is an employee may choose from one of eight Face Amounts. The
choices range from a minimum Face Amount of $10,000 to a Face Amount equal to
five times annual base salary up to a maximum of $3,000,000. (When a Face Amount
is based on salary, we round the Face Amount to the next higher multiple of
$1,000 if it's not already an even multiple of $1,000.)
A Participant who is a spouse may choose from one of these four Face Amounts:
$100,000, $75,000, $50,000 and $25,000. The Face Amount may not be more than
three times the employee's annual base salary.
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<PAGE>
HOW MUCH TERM LIFE COVERAGE MAY A PARTICIPANT BUY FOR A DEPENDENT CHILD?
A Participant may choose from one of these five amounts of term life insurance
for each eligible child: $20,000, $15,000, $10,000, $5,000 and $1,000.
WHEN MUST I GIVE EVIDENCE OF GOOD HEALTH?
FOR A CURRENT PARTICIPANT WHO IS AN EMPLOYEE: You must give evidence of good
health if you increase your Face Amount.
FOR A NEWLY HIRED ELIGIBLE GROUP MEMBER: You must give evidence of good health
if you enroll for a Face Amount that is more than $1,500,000. If you enroll more
than 31 days after you first become eligible, you must give evidence of good
health to enroll for any Face Amount.
FOR A NEW DEPENDENT SPOUSE OR CHILD: A spouse must give evidence of good health
to enroll for a Face Amount that is more than $1,500,000. If the spouse enrolls
more than 31 days after he or she is first eligible, he or she must give
evidence of good health to enroll for any Face Amount. A spouse is first
eligible on the date of marriage to the employee.
You may enroll a dependent child without giving evidence of good health if you
enroll the child within 45 days after the child first becomes eligible. A child
first becomes eligible at 14 days old. In addition, a child is eligible on
adoption or on the date a court decree makes the child your dependent providing
the child is at least 14 days old.
You will need to give evidence of good health if you decline coverage for a
spouse or child and later decide to enroll, or if you want to increase the
coverage amount.
CAN I INCREASE MY COVERAGE AMOUNT?
Yes. You may increase your Face Amount of Insurance at any time but you must
give evidence of good health.
WILL MY COVERAGE AMOUNT EVER DECREASE?
Yes. At age 70, your Face Amount will reduce to 60% of your Face Amount before
age 70. At age 75, it will reduce to 40% of your Face Amount before age 70. And,
at age 80, it will reduce to 25% of your Face Amount before age 70. It will
never be less than $10,000.
See the CHANGES IN FACE AMOUNT and TAX TREATMENT OF CERTIFICATE BENEFITS
sections of the prospectus.
3
<PAGE>
DOES MY CERTIFICATE INCLUDE AN ACCELERATED DEATH BENEFIT PROVISION?
Yes. A Participant can elect to receive an early payment of part of the Death
Benefit when diagnosed as being terminally ill. A Participant who is an employee
may elect up to 50% of the Death Benefit, subject to a maximum of $250,000. A
Participant who is a spouse may elect up to 50%, subject to a maximum of
$50,000. "Terminally ill" means the Participant has a life expectancy of 6
months or less.
AM I ENTITLED TO ADDITIONAL BENEFITS?
Yes. You are eligible for the Accelerated Death Benefit and Dependent Life
Benefits, as stated earlier.
DOES THE COVERAGE HAVE EXCLUSIONS?
Yes. As stated in the prospectus, Group Variable Universal Life Insurance has a
suicide exclusion. See the SUICIDE EXCLUSION section of the prospectus.
WHAT ARE THE TERMS OF A POLICY LOAN?
AMOUNT AVAILABLE FOR BORROWING: You may borrow up to the Loan Value of your
Certificate Fund. The Loan Value is 90% of your Certificate Fund minus any
existing loan (and its accrued interest), outstanding charges, and the amount of
the next month's charges. We will take an amount equal to the loan out of each
of your investment options on a pro-rata basis unless you tell us to take it
only from selected investment options. The minimum loan amount is $200.
INTEREST RATE: The net cost of the loan is equal to an annual rate of 2%.
See the LOANS section of the prospectus for more details.
PREMIUMS
HOW DO I PAY PREMIUMS?
For active employees and their dependents, DaimlerChrysler will send routine
premium payments to Prudential by payroll deduction. DaimlerChrysler will send
the premiums monthly. Retirees, employees on an approved leave of absence, and
employees who elect portability will be billed directly by Prudential and will
submit their premium payments directly to Prudential.
4
<PAGE>
HOW MUCH MONEY CAN I CONTRIBUTE TO MY INVESTMENT OPTIONS?
You can contribute, subject to annual and lifetime limits set by the Internal
Revenue Service, any dollar amount. The minimum investment option contribution
is $10. See the TAX TREATMENT OF CERTIFICATE BENEFITS section of the prospectus.
MAY I MAKE ADDITIONAL PREMIUM PAYMENTS?
Yes. You may make lump sum payments at any time. The minimum lump sum payment is
$100. The maximum is subject to annual and lifetime limits set by the Internal
Revenue Service. See the TAX TREATMENT OF CERTIFICATE BENEFITS section of the
prospectus.
INVESTMENT OPTIONS
WHAT INVESTMENT OPTIONS ARE AVAILABLE?
THE FUNDS
Set out below is a list of each available Fund, its investment objective,
investment management fees and other expenses, and its investment
advisor/investment manager. Some Funds also provide information about their
principal strategies.
Certain Funds have adopted distribution plans pursuant to the federal securities
laws, and under those plans, the Fund may make payments to Prudential and/or its
affiliates for certain marketing efforts.
FUND NAMES AND OBJECTIVES
THE PRUDENTIAL SERIES FUND, INC.
The portfolios of the Series Fund in which the Separate Account may currently
invest and their investment objectives and principal strategies are as follows:
DIVERSIFIED BOND PORTFOLIO: The investment objective is a high level of income
over a longer term while providing reasonable safety of capital. The Portfolio
invests primarily in higher grade debt obligations and high quality money market
investments.
EQUITY PORTFOLIO: The investment objective is capital appreciation. The
Portfolio invests primarily in common stocks of major established corporations
as well as smaller companies that offer attractive prospects of appreciation.
EQUITY INCOME PORTFOLIO: The investment objective is both current income and
capital appreciation. The Portfolio invests primarily in common stocks and
convertible securities that provide good prospects for returns above those of
the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500 Index") or
the NYSE Composite Index.
5
<PAGE>
FLEXIBLE MANAGED PORTFOLIO: The investment objective is a total investment
return consistent with an aggressively managed diversified portfolio. The
Portfolio invests in a mix of equity securities, debt obligations and money
market instruments.
GLOBAL PORTFOLIO: The investment objective is long-term growth of capital. The
Portfolio invests primarily in common stocks (and their equivalents) of foreign
and U.S. companies.
MONEY MARKET PORTFOLIO: The investment objective is maximum current income
consistent with the stability of capital and the maintenance of liquidity. The
Portfolio invests in high quality short-term debt obligations that mature in 13
months or less.
PRUDENTIAL JENNISON PORTFOLIO: The investment objective is to achieve long-term
growth of capital. The Portfolio invests primarily in equity securities of major
established corporations that offer above-average growth prospects.
STOCK INDEX PORTFOLIO: The investment objective is investment results that
generally correspond to the performance of publicly-traded common stocks. The
Portfolio attempts to duplicate the price and yield performance of the Standard
& Poor's 500 Composite Stock Price Index (the "S&P 500 Index").
ALLIANCE CAPITAL
The portfolio of the Alliance Variable Products Series Fund, Inc. in which the
Separate Account may currently invest and its investment objective are as
follows:
PREMIER GROWTH PORTFOLIO: Seeks growth of capital rather than current income. In
pursuing its investment objective, the Premier Growth Portfolio will employ
aggressive investment policies. Since investments will be made based upon their
potential for capital appreciation, current income will be incidental to the
objective of capital growth. This portfolio is not intended for investors whose
principal objective is assured income or preservation of capital.
DREYFUS CORPORATION FUNDS
The portfolio of the Dreyfus Variable Investment Fund in which the Separate
Account may currently invest and its investment objective are as follows:
DISCIPLINED STOCK PORTFOLIO: Seeks to provide investment results that are
greater than the total return performance of publicly-traded common stocks in
the aggregate, as represented by the Standard & Poor's 500 Composite Stock
Index. This portfolio will use quantitative statistical modeling techniques to
construct a portfolio in an attempt to achieve its investment objective, without
assuming undue risk relative to the broad stock market.
FRANKLIN TEMPLETON
The Class 2 portfolio of the Templeton Variable Products Series Fund in which
the Separate Account may currently invest and its investment objective are as
follows:
6
<PAGE>
TEMPLETON INTERNATIONAL FUND: The fund's investment goal is long-term capital
growth. Under normal market conditions, the fund will invest at least 65% of its
total assets in the equity securities of companies located outside the U.S.,
including emerging markets.
KEMPER VARIABLE SERIES
The portfolio of Kemper Variable Series in which the Separate Account may
currently invest (the "Kemper Series") and its investment objective are as
follows:
HIGH YIELD PORTFOLIO: Seeks to provide a high level of current income by
investing in lower rated fixed-income securities.
MFS(R) VARIABLE INSURANCE TRUST(sm)
The portfolios of the MFS Variable Insurance Trust in which the Separate Account
may currently invest and their investment objectives are as follows:
MFS EMERGING GROWTH SERIES: Seeks to provide long-term growth of capital.
MFS RESEARCH SERIES: Seeks to provide long-term growth of capital and future
income.
T. ROWE PRICE VARIABLE FUNDS
The portfolios of the T. Rowe Price Equity Series, Inc. in which the Separate
Account may currently invest and their investment objectives are as follows:
MID-CAP GROWTH PORTFOLIO: Seeks to provide long-term capital appreciation by
investing primarily in a diversified portfolio of common stocks of medium-sized
(mid-cap) companies whose earnings T. Rowe Price expects to grow at a faster
rate than the average company. Mid-cap companies are defined as those with a
market capitalization within the range of companies in the S&P 400 Mid-Cap
Index.
NEW AMERICA GROWTH PORTFOLIO: Seeks to provide long-term growth of capital by
investing primarily in common stocks of U.S. growth companies operating in
service industries. The portfolio invests in stocks that range from large to
small service companies expected by the fund's investment adviser to show
superior earnings growth and that are above-average performers in their fields.
7
<PAGE>
<TABLE>
FUND FEES AND EXPENSES
<CAPTION>
===============================================================================================
FUNDS INVESTMENT OTHER TOTAL FUND
MANAGEMENT FEE 12B-1 EXPENSES ANNUAL EXPENSES
FEES (AFTER EXPENSE
REIMBURSEMENTS) (1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND, INC.
Diversified Bond Portfolio (2) 0.40% - 0.02% 0.42%
Equity Portfolio (2) 0.45% - 0.02% 0.47%
Equity Income Portfolio (2) 0.40% - 0.02% 0.42%
Flexible Managed Portfolio (2) 0.60% - 0.01% 0.61%
Global Portfolio (2) 0.75% - 0.11% 0.86%
Money Market Portfolio (2) 0.40% - 0.01% 0.41%
Prudential Jennison Portfolio (2) 0.60% - 0.03% 0.63%
Stock Index Portfolio (2) 0.35% - 0.02% 0.37%
- -----------------------------------------------------------------------------------------------
ALLIANCE VARIABLE PRODUCTS SERIES
FUND, INC.
Premier Growth Portfolio (3) 0.97% - 0.09% 1.06%
- -----------------------------------------------------------------------------------------------
DREYFUS FUNDS
Disciplined Stock Portfolio 0.75% - 0.13% 0.88%
- -----------------------------------------------------------------------------------------------
FRANKLIN(R) TEMPLETON(R):
TEMPLETON VARIABLE PRODUCTS SERIES
FUND (CLASS 2 SHARES)
Templeton International Fund (4) 0.69% 0.25% 0.17% 1.11%
- -----------------------------------------------------------------------------------------------
KEMPER VARIABLE SERIES
High Yield Portfolio 0.60% - 0.05% 0.65%
- -----------------------------------------------------------------------------------------------
MFS(R) VARIABLE INSURANCE TRUST(K)
MFS Emerging Growth Series (5) 0.75% - 0.10% 0.85%
MFS Research Series (5) 0.75% - 0.11% 0.86%
- -----------------------------------------------------------------------------------------------
T. ROWE PRICE VARIABLE FUNDS
Mid-Cap Growth Portfolio (6) 0.85% - 0.00% 0.85%
New America Growth Portfolio (6) 0.85% - 0.00% 0.85%
===============================================================================================
</TABLE>
(1) Some, but not all, of the Funds have expense reimbursement or fee waiver
arrangements. Without these arrangements, Total Fund Annual Expenses would
have been higher. More information appears in the footnotes that accompany
the Funds that have expense reimbursement or fee waiver arrangements.
8
<PAGE>
(2) With respect to the Prudential Series Fund, Inc. portfolios, except for the
Global Portfolio, Prudential reimburses a portfolio when its ordinary
operating expenses, excluding taxes, interest, and brokerage commissions
exceed 0.75% of the portfolio's average daily net assets. The amounts
listed for the portfolios under Other Expenses are based on amounts
incurred in the last fiscal year.
(3) Total Fund Annual Expenses for the Alliance Variable Products Series Fund
are stated net of expenses waived or reimbursed. The expenses of the
following Portfolio, before expense reimbursements, would be: Premier
Growth Portfolio: investment management fee 1.00%, other expenses 0.09% and
total fund annual expenses 1.09%.
(4) Class 2 of the Templeton Variable Products Series Templeton International
Fund has a distribution plan or "Rule 12b-1 Plan" which is described in the
Templeton Variable Products Series Fund's prospectus. Expenses may vary.
(5) Each series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series with
its custodian and dividend disbursing agent. Each series may enter into
other such arrangements and directed brokerage arrangements, which would
also have the effect of reducing the series' expenses. Expenses do not take
into account these expense reductions, and are therefore higher than the
actual expenses of the series.
(6) The investment management fee for the Mid-Cap Growth Portfolio and the New
America Growth Portfolio in the T. Rowe Price Variable Funds includes the
ordinary expenses of operating the Portfolios. Fees and expenses are for
the year ended December 31, 1998.
FUND ADVISERS
Prudential is the investment adviser of each of the portfolios of the Prudential
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"), which
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 provides investment advisory services for the Prudential Jennison
Portfolio. Further detail is provided in the prospectus and statement of
additional information for the Series Fund. Prudential, PIC and Jennison are
registered as investment advisers under the Investment Advisers Act of 1940.
Alliance Capital Management L.P. ("Alliance") is the investment adviser to the
Alliance Variable Products Series Fund, Inc. Alliance's principal business
address is 1345 Avenue of the Americas, New York, New York 10105. The principal
underwriter of the funds is Alliance Fund Distributors, Inc., a subsidiary of
Alliance, located at 1345 Avenue of the Americas, New York, New York 10105.
9
<PAGE>
The Dreyfus Corporation ("Dreyfus") is the investment adviser to the Dreyfus
Funds. Dreyfus' principal business address is 200 Park Avenue, New York, New
York 10166. The principal underwriter of the portfolios and funds is Premier
Mutual Fund Services, Inc., located at 60 State Street, Boston, Massachusetts
02109.
Templeton Investment Counsel, Inc. ("TICI") serves as the investment manager for
the Templeton Variable Products Series (Class 2 Shares) International Fund. TICI
is a Florida corporation with offices at Broward Financial Centre, Fort
Lauderdale, Florida 33394-3091. The Investment Manager for the Developing
Markets Fund is Templeton Asset Management Ltd., a Singapore corporation with
offices at 7 Temasek Blvd., #38-03, Suntec Tower One, Singapore 038987. The
principal underwriter of the Funds is Franklin Templeton Distributors, Inc., 100
Fountain Parkway, St. Petersburg, Florida 33716-1205.
The asset manager of the Kemper Variable Series is Scudder Kemper Investments,
Inc. ("Scudder Kemper"). Scudder Kemper's principal business address is Two
International Place, Boston, Massachusetts 02110-4103.
The investment adviser for the MFS(R) Variable Insurance Trust(sm) is
Massachusetts Financial Services Company ("MFS"). MFS' principal business
address is 500 Boylston Street, Boston, Massachusetts 02116. The principal
underwriter of the series is MFS Fund Distributors, Inc.
located at 500 Boylston Street, Boston, Massachusetts 02116.
The investment manager for the T. Rowe Price Variable Funds is T. Rowe Price
Associates, Inc. ("T. Rowe Price"). T. Rowe Price's principal business address
is 100 East Pratt Street, Baltimore, Maryland 21202. T. Rowe Price Investment
Services, Inc. serves as the principal underwriter of the portfolios.
Your enrollment kit gives more information about the past performance of each
investment option.
You may also allocate money to the Fixed Account, which earns interest at a rate
determined annually and guaranteed not to be less than 4%.
CHANGES IN PERSONAL STATUS
IS THERE A DISABILITY PROVISION UNDER MY CERTIFICATE?
No. But you may continue your GVUL Coverage while on Disability Leave of Absence
that is approved by DaimlerChrysler. Prudential will bill you directly for
premium payments, and will charge a fee of $3 per bill.
CAN I CONTINUE COVERAGE WHEN I RETIRE?
Yes. Prudential will bill you directly for premium payments, and will charge a
fee of $3 per bill.
10
<PAGE>
CAN I CONTINUE COVERAGE IF I LEAVE THE COMPANY FOR REASONS OTHER THAN
RETIREMENT?
You may continue coverage on a Portable basis if you leave DaimlerChrysler for
any reason. A spouse may also continue coverage on a Portable basis. Rates for
Portable coverage are higher than rates for coverage as an active employee.
Prudential will bill you directly for premium payments and will charge a fee of
$3 per bill.
DOES MY COVERAGE END AT A CERTAIN AGE?
Yes. Your coverage will end at age 100. See the HOW PRUDENTIAL ISSUES
CERTIFICATES section of the prospectus to see what options you have when your
coverage ends.
WHAT HAPPENS IF THE GROUP CONTRACT IS TERMINATED?
Either DaimlerChrysler or Prudential may end the Group Contract. Prudential can
end the Group Contract only under the conditions described in the prospectus.
If the Group Contract ends, the effect on Participants depends on whether or not
DaimlerChrysler replaces the Group Contract with another life insurance contract
that allows for the accumulation of cash value. Generally, here is what will
happen:
o If DaimlerChrysler DOES replace the Group Contract with another life
insurance contract that allows for the accumulation of cash value,
Prudential will terminate your Certificate. We will also transfer the Cash
Surrender Value of your Certificate directly to that new contract, unless
you elect to receive the Cash Surrender Value of your Certificate.
o If DaimlerChrysler DOES NOT replace the Group Contract with another life
insurance contract that allows for the accumulation of cash value, you will
have these options: convert to an individual life insurance policy; use
your Certificate Fund to buy paid-up life insurance; or elect to receive
the Cash Surrender Value of your Certificate.
See the OPTIONS ON TERMINATION OF COVERAGE section of the prospectus.
CHARGES AND EXPENSES
WHAT ARE THE CHARGES?
The current charges under the DaimlerChrysler Group Contract are as follows:
11
<PAGE>
1. CHARGES FOR TAXES ON PREMIUM PAYMENTS. Prudential deducts a charge of 1.92%
from each premium payment. This charge is to compensate Prudential for
incurring state and local premium taxes (currently 1.57%) and for the impact
of the federal deferred acquisition cost tax (currently 0.35%).
2. DAILY CHARGES FOR MORTALITY AND EXPENSE RISKS. Prudential deducts this charge
from the assets of the Subaccount(s) that correspond to the Fund(s) you
select. This charge is to compensate Prudential for assuming mortality and
expense risks.
For DaimlerChrysler, the current daily charge for mortality and expense risks
is equivalent to an effective annual rate of 0.45%.
3. DAILY CHARGES FOR INVESTMENT MANAGEMENT FEES AND EXPENSES. Each of the
underlying mutual funds deducts investment management fees and expenses.
These fees are described earlier in this supplement.
4. MONTHLY CHARGES. Prudential deducts a monthly charge for the cost of
insurance and a monthly charge of $1 for administrative expenses from your
Certificate Fund.
5. POSSIBLE ADDITIONAL CHARGES. Prudential will not charge for the first 12
transfers you make between investment options in a Certificate Year. But, if
you make more than 12 transfers in a Certificate Year, Prudential will charge
$20 per transfer. Prudential does not currently charge for other
transactions, but reserves the right to do so in the future, as explained in
the prospectus.
See the CHARGES AND EXPENSES section of the prospectus for more details.
WHEN MAY CHARGES CHANGE?
The prospectus lists the MAXIMUM CHARGES that we may charge under the
DaimlerChrysler Group Contract. Under no circumstances will we exceed these
charges. Within these maximums, we may vary the amount or level of charges. In
general, we will not change these amounts more often than once a year. We will
give you a new prospectus each year that shows any new charges. If we change the
charges during a year, we will send you a notice of the change.
ILLUSTRATION OF DEATH BENEFITS AND CASH SURRENDER VALUES
On the next several pages, we show you two examples of how the Death Benefit and
the Cash Surrender Value of your Certificate can change as a result of the
performance of the investment options you select. The examples are not our
prediction of how value will grow. They are hypothetical examples and are just
intended to show you how a Certificate works.
12
<PAGE>
We call these examples "ILLUSTRATIONS." The illustrations are based on several
ASSUMPTIONS about the age of the Participant, the amount of insurance, and the
rules of the DaimlerChrysler Group Contract.
ASSUMPTIONS WE USED FOR BOTH ILLUSTRATIONS
Here's what we assumed about the Certificate in both illustrations:
o The Participant was 40 years old when he or she bought the Group Variable
Universal Life Insurance Certificate.
o The Face Amount of insurance under the Certificate is $100,000.
o The Participant makes a $100 premium payment on the first day of each
month, for a total of $1200 over the course of each year.
ILLUSTRATION #1
In Illustration #1, we assumed that the CURRENT CHARGES Prudential deducts would
stay the same as long as the Certificate remains in effect. Accordingly, we
assumed the following charges:
o The charge deducted from each premium payment for taxes on premium payments
is 1.92%.
o Prudential deducts no sales charge from premium payments.
o Prudential deducts no processing charge from premium payments.
o Each month, Prudential deducts a $1 charge for administrative expenses.
o Prudential deducts a charge equal to an annual rate of 0.45% for mortality
and expense risks.
o Prudential deducts the current cost of insurance charge under the
DaimlerChrysler Group Contract.
o Prudential does not deduct a surrender charge.
ILLUSTRATION #2
In Illustration #2, we changed our assumptions about the charges Prudential will
deduct from the Certificate. Instead of current charges, we assumed that the
MAXIMUM CHARGES permitted under the Group Contract would be made.
13
<PAGE>
Here's what we assumed:
o The charge deducted from each premium payment for taxes on premium payments
is 1.92%. (Since Prudential would increase this charge only if a state
increases its tax charge to us, we left this charge at the current level.)
o Prudential deducts a sales charge equal to 3.5% from each premium payment.
o Prudential deducts a processing charge of $2 from each premium payment.
o Each month, Prudential deducts a $6 charge for administrative expenses.
o Prudential deducts a charge equal to an annual rate of 0.90% for mortality
and expense risks.
o The Participant has cost of insurance charges equal to the maximum rates.
(The maximum rates that Prudential can charge are 100% of the 1980
Commissioner's Standard Ordinary Mortality Table [Male], Age Last Birthday
(the "1980 CSO")).
o Prudential deducts a charge upon surrender equal to the lesser of $20 or 2%
of the amount surrendered.
ASSUMPTIONS ABOUT HOW THE CERTIFICATE FUND WAS INVESTED
We assumed that the Certificate Fund was invested in equal amounts in each of
the 16 Funds available under the Group Contract.
Each illustration shows three different assumptions about the investment
performance - or "investment return" - of the Funds. The three different
assumptions are:
o gross annual rate of return is 0%
o gross annual rate of return is 4.5%
o gross annual rate of return is 9%
These are only assumptions to show how the Death Benefit and Cash Surrender
Value change depending on the investment return. Actual investment return will
depend on the investment options you select and will vary from year to year.
WALKING THROUGH THE ILLUSTRATIONS
Here's what to look for in the illustrations:
o The first column shows the CERTIFICATE YEAR.
14
<PAGE>
o The second column gives you some CONTEXT FOR COMPARING the investment
return under the Certificate to the return you might expect from a savings
account. It shows the amount you would accumulate if you invested the same
premiums in a savings account paying a 4% effective annual rate. (Of
course, unlike the Certificate, a savings account does not offer life
insurance protection.)
o The next three columns show what the DEATH BENEFIT would be for each of the
four investment return assumptions (0%, 4.5% and 9%).
o The last three columns show what the CASH SURRENDER VALUE would be for each
of the four investment return assumptions (0%, 4.5% and 9%).
You should note that:
o Both "gross" and "net" investment returns are shown.
o "Gross" investment return reflects the combined effect of both income on
the investment and capital gains. It is the amount of return before
Prudential takes out any of its charges and before any Fund investment
management fees and other expenses are taken out.
o "Net" investment return is the amount of the investment return after
Prudential takes out its charges and after Fund investment management fees
and other expenses are taken out. Since Illustration #1 and Illustration #2
use different assumptions about charges, the "net" investment returns for
each illustration are different. For some of the Funds, the Fund's
investment advisor or other entity is absorbing certain of the Fund's
expenses. In deriving net investment return, we used those reduced Fund
expenses.
- Fund investment management fees and other expenses were assumed to
equal 0.71% per year, which was the average Fund expense in 1998.
- For Illustration #1, Prudential's mortality and expense risk charges
are 0.45% per year. (In Illustration #1, we assumed that Prudential's
current charges are in effect.) So, including both Fund expenses and
the mortality and expense risk charges, gross returns of 0%, 4.5% and
9% become net returns of -1.16%, 3.34% and 7.84%.
- For Illustration #2, Prudential's mortality and expense risk charges
are 0.90% per year. (In Illustration #2, we assumed that Prudential's
maximum charges are in effect.) So, including both Fund expenses and
the mortality and expense risk charges, gross returns of 0%, 4.5% and
9% become net returns of -1.61%, 2.89% and 7.39%.
o The Death Benefits and Cash Surrender Values are shown with all of
Prudential's charges and Fund investment management fees and other expenses
taken out.
o We assumed no loans or partial withdrawals were taken.
o Neither illustration reflects Dividends or Experience Credits.
15
<PAGE>
IF YOU ASK, PRUDENTIAL WILL GIVE YOU A SIMILAR ILLUSTRATION FOR A CERTIFICATE
THAT SHOWS YOUR AGE, RISK CLASS, PROPOSED FACE AMOUNT OF INSURANCE, AND PROPOSED
PREMIUM PAYMENTS. WE REFER TO THIS AS A "PERSONALIZED ILLUSTRATION."
WE SHOW THESE RATES OF INVESTMENT RETURN ONLY TO HELP YOU UNDERSTAND HOW THE
CERTIFICATE WORKS. YOU SHOULD NOT ASSUME THAT THE INVESTMENT RATES OF RETURN ARE
ACTUAL RATES OF RETURN. YOU SHOULD ALSO NOT ASSUME THAT THESE RATES ARE EXAMPLES
OF PAST OR FUTURE INVESTMENT PERFORMANCE. NEITHER PRUDENTIAL NOR THE FUNDS CAN
TELL YOU WHETHER THESE RATES OF INVESTMENT RETURN CAN ACTUALLY BE ACHIEVED.
THE ACTUAL RATES OF INVESTMENT RETURN FOR YOUR CERTIFICATE WILL DEPEND ON HOW
THE INVESTMENT OPTIONS THAT YOU CHOOSE PERFORM. YOU MAY EARN MORE OR LESS THAN
WHAT IS SHOWN IN THE ILLUSTRATION.
THE DEATH BENEFITS AND CASH SURRENDER VALUES WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATE OF RETURN FOR A CERTIFICATE YEAR VARIED ABOVE OR BELOW THE
AVERAGE, HYPOTHETICAL RATES OF 0%, 4.5% AND 9%.
16
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #1
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 40
ASSUME PAYMENT OF $100 MONTHLY PREMIUMS FOR ALL YEARS
USING CURRENT EXPENSE CHARGES AND CURRENT NON-SMOKER COST OF INSURANCE CHARGES
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------- -----------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums ---------------------------------------- -----------------------------------------
Certificate Accumulated 0% Gross 4.5% Gross 9% Gross 0% Gross 4.5% Gross 9% Gross
Year at 4% per year (-1.16%) Net (3.34% Net) (7.84% Net) (-1.16%) Net (3.34% Net) (7.84% Net)
---------- ----------- ------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $1,226 $101,064 $101,090 $101,116 $1,064 $1,090 $1,116
2 2,501 102,116 102,217 102,319 2,116 2,217 2,319
3 3,827 103,156 103,381 103,617 3,156 3,381 3,617
4 5,206 104,184 104,585 105,017 4,184 4,585 5,017
5 6,640 105,199 105,828 106,526 5,199 5,828 6,526
6 8,131 106,145 107,053 108,093 6,145 7,053 8,093
7 9,682 107,079 108,319 109,782 7,079 8,319 9,782
8 11,295 108,003 109,627 111,603 8,003 9,627 11,603
9 12,973 108,916 110,979 113,568 8,916 10,979 13,568
10 14,718 109,819 112,376 115,686 9,819 12,376 15,686
15 24,546 113,376 119,197 128,041 13,376 19,197 28,041
20 36,503 115,646 126,019 144,698 15,646 26,019 44,698
25 51,051 116,874 133,034 167,845 16,874 33,034 67,845
30 68,751 114,317 137,139 196,943 14,317 37,139 96,943
35 90,286 73,335 103,577 201,173 13,335 43,577 141,173
40 116,486 52,499 91,267 257,844 (2) 12,499 51,267 203,808 (2)
(1) Assumes no loan or partial withdrawal has been made.
(2) As illustrated, the certificate's Death Benefit has been increased in order to satisfy the Definition of Life Insurance.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4.5%, AND 9% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #2
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 40
ASSUME PAYMENT OF $100 MONTHLY PREMIUMS FOR ALL YEARS
USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1)
----------------------------------------- ------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums ----------------------------------------- ------------------------------------------
Certificate Accumulated 0% Gross 4.5% Gross 9% Gross 0% Gross 4.5% Gross 9% Gross
Year at 4% per year (-1.61%) Net (2.89% Net) (7.39% Net) (-1.61%) Net (2.89% Net) (7.39% Net)
----------- ----------- ----------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $1,226 $100,721 $100,739 $100,756 $706 $724 $741
2 2,501 101,404 101,472 101,541 1,384 1,452 1,521
3 3,827 102,046 102,196 102,352 2,026 2,176 2,332
4 5,206 102,648 102,909 103,191 2,628 2,889 3,171
5 6,640 103,206 103,608 104,056 3,186 3,588 4,036
6 8,131 103,718 104,290 104,948 3,698 4,270 4,928
7 9,682 104,184 104,953 105,865 4,164 4,933 5,845
8 11,295 104,602 105,593 106,807 4,582 5,573 6,787
9 12,973 104,969 106,207 107,773 4,949 6,187 7,753
10 14,718 105,283 106,790 108,761 5,263 6,770 8,741
15 24,546 0 (2) 108,932 113,786 0 (2) 8,912 13,766
20 36,503 0 108,889 118,168 0 8,869 18,148
25 51,051 0 104,983 120,145 0 4,963 20,125
30 68,751 0 0 (2) 116,016 0 0 (2) 15,996
35 90,286 0 0 71,096 0 0 11,076
40 116,486 0 0 42,922 0 0 2,902
(1) Assumes no loan or partial withdrawal has been made.
(2) Based on the interest rate and charges illustrated, the premiums paid are insufficient to keep the certificate in force. The
certificate would lapse under this scenario.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4.5%, AND 9% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
18
<PAGE>
WHEN ARE CHARGES DEDUCTED?
We calculate and deduct the charges monthly from your Certificate Fund,
depending upon whether you make routine premium payments by automatic payroll
deduction or directly to Prudential. We take the charges from each investment
option in the same proportions that your Certificate Fund is invested.
IF YOU MAKE ROUTINE PREMIUM PAYMENTS BY AUTOMATIC PAYROLL DEDUCTION, we
generally will deduct the monthly Certificate Fund charges once per month, on
the Monthly Deduction Date. The Monthly Deduction Date will coincide with the
date DaimlerChrysler forwards the payroll deductions to us. We expect the
Monthly Deduction Date to be near the first of the month.
DaimlerChrysler intends to forward automatic payroll deduction premium payments
by the beginning of each month. But, even if DaimlerChrysler has not transferred
the payroll deductions to us by the 45th day after the first day of any month,
we will nevertheless deduct the month's Certificate Fund charges on the next
Business Day following that 45th day.
If you make routine premium payments directly to Prudential, we will deduct the
full monthly Certificate Fund charges on the first Business Day of each month.
WHAT ARE THE OTHER PRIMARY FEATURES OF THE PLAN?
The prospectus describes the standard features of the DaimlerChrysler Group
Contract, including:
o the free-look period
o transfers between investment options
o dollar cost averaging
o more details on how loans work
o how you can change future premium allocations among investment options
o how paid-up coverage may be available
o how your insurance could end (known as "lapsing")
o reinstatement of your coverage
o contestability rules
o tax treatment of Certificate benefits
o definitions of special terms
19
<PAGE>
o the Death Benefit
o withdrawals
Please refer to the prospectus for information on these and other features of
the DaimlerChrysler Group Contract. Your Enrollment Kit also explains key
features of your plan.
WHOM DO I CONTACT TO MAKE A TRANSACTION?
You may contact the Prudential Customer Service Center at 1-800-354-6903 to
obtain the proper forms.
WHAT ARE MY CANCELLATION RIGHTS?
You may return a Certificate for a refund within 10 days after you receive it.
These 10 days are known as the "free look" period. You can ask for a refund by
mailing the Certificate back to Prudential. During the first 20 days after the
Certificate Date, your premium payments are held in the Fixed Account.
See the A "FREE LOOK" PERIOD section of the prospectus for more details.
WHOM DO I CONTACT TO ANSWER MY OTHER QUESTIONS?
You may contact Prudential's Customer Service Center at 1-800-354-6903.
20
<PAGE>
SUPPLEMENT DATED MAY 1, 1999
TO PROSPECTUS DATED MAY 1, 1999
FOR GROUP VARIABLE UNIVERSAL LIFE INSURANCE
SPECIAL FEATURES OF THE GROUP CONTRACT FOR
KPMG
THIS DOCUMENT IS A SUPPLEMENT TO THE PROSPECTUS DATED MAY 1, 1999 (THE
"PROSPECTUS") FOR THE GROUP VARIABLE UNIVERSAL LIFE INSURANCE CONTRACT AND
CERTIFICATES THAT PRUDENTIAL OFFERS TO YOU. THIS SUPPLEMENT IS NOT A COMPLETE
PROSPECTUS, AND MUST BE ACCOMPANIED BY THE PROSPECTUS. THE PROSPECTUS DESCRIBES
THE INSURANCE FEATURES AND CERTAIN OTHER ASPECTS OF THE KPMG GROUP CONTRACT AND
CERTIFICATES. IN THIS SUPPLEMENT, WE LIST THE 12 FUNDS THAT ARE AVAILABLE TO YOU
UNDER THE KPMG GROUP CONTRACT AND CERTIFICATES.
Special terms that we use are defined in the prospectus. See the DEFINITIONS OF
SPECIAL TERMS section of the prospectus. You must read the prospectus and this
supplement together to fully understand how Group Variable Universal Life
Insurance works.
ELIGIBILITY AND ENROLLMENT
WHO IS ELIGIBLE FOR COVERAGE?
Eligible Group Members for the Group Variable Universal Life Insurance are:
o All regular full-time active partners of KPMG and Subsidiaries or one of
its affiliated companies.
o Former partners who retire on or after April 5, 1999.
o Former partners who terminate employment after April 5, 1999 and elect to
continue coverage on a Portable basis.
o Any KPMG partner who retired before April 5, 1999 but actively participated
in the Cash Accumulation Account under the Group Flex Life Program on April
4, 1999 and elected to convert to the GVUL plan effective April 5, 1999.
We refer to each person who buys coverage as a "Participant." When we use the
terms "you" or "your," we mean a Participant.
GL.99.599
<PAGE>
COVERAGE INFORMATION
HOW MUCH COVERAGE MAY AN ELIGIBLE PARTNER BUY?
An eligible Partner will be automatically covered for a Face Amount of 6 times
annual earnings (less incentive compensation), rounded to the nearest $100,000,
up to a maximum of $2,500,000. You may elect to limit the maximum amount of
coverage (but no less than $1,500,000), although any such amount must be rounded
to the nearest $100,000.
In addition, an eligible Partner may choose to enroll for a Supplemental amount
of coverage that will increase their Face Amount by one of the following:
o $500,000
o $1,000,000
o $1,500,000
We require evidence of good health for all amounts of Supplemental coverage.
ARE DEPENDENTS ELIGIBLE FOR COVERAGE?
No. Dependents are not covered under the KPMG Group Contract.
WHEN MUST I GIVE EVIDENCE OF GOOD HEALTH?
FOR CURRENT PARTNERS: If you choose to apply for Supplemental coverage, you will
have to furnish evidence of good health. In addition, if you elect to limit your
coverage to an amount less than 6 times your annual earnings (excluding
incentive compensation) and you later wish to increase your coverage for any
amount up to your allowable limit, you will need to furnish satisfactory
evidence of good health for the requested increased amount of coverage.
ARE INCREASES IN COVERAGE AVAILABLE?
We may increase your coverage amounts (excluding Supplemental coverage) on each
October 1st based on your annual earnings (less incentive compensation). We do
not require evidence of good health for these increases.
WILL MY COVERAGE AMOUNT EVER DECREASE?
Your coverage amount will decrease only if you voluntarily choose to reduce it.
The minimum that you can reduce it to is $1,500,000. But, if you decrease
coverage and later seek additional coverage, we will require evidence of good
health.
2
<PAGE>
See the TAX TREATMENT OF CERTIFICATE BENEFITS section of the prospectus. You
should also get advice from a tax advisor.
DOES MY CERTIFICATE INCLUDE AN ACCELERATED DEATH BENEFIT PROVISION?
Yes. A Participant can elect to receive an early payment of part of the Death
Benefit when diagnosed as being terminally ill. You may elect up to 50% of the
Death Benefit, subject to a maximum of $250,000. "Terminally ill" means the
Participant has a life expectancy of 6 months or less.
AM I ENTITLED TO ADDITIONAL BENEFITS?
Yes. You are eligible for the Accelerated Death Benefit described above and for
the Extended Death Protection During Total Disability described later in this
supplement.
IS THERE A SUICIDE EXCLUSION?
No. The KPMG Group Contract does not include a Suicide Exclusion.
WHAT ARE THE TERMS OF A POLICY LOAN?
AMOUNT AVAILABLE FOR BORROWING: You may borrow up to the Loan Value of your
Certificate Fund (that is, your investment options). The Loan Value is 90% of
your Certificate Fund minus any existing loan (and its accrued interest),
outstanding charges, and the amount of the next month's charges. We will take an
amount equal to the loan out of each of your investment options on a pro-rata
basis unless you tell us to take it only from selected investment options.
The minimum loan amount is $200.
INTEREST RATE: The net cost of the loan is equal to an annual rate of 2%.
See the LOANS section of the prospectus for more details.
PREMIUMS
HOW DO I PAY PREMIUMS?
KPMG will send routine premium payments to Prudential on a monthly basis. KPMG
will also send partner-elected lump sum premium deposits to Prudential in July
and November of each year.
3
<PAGE>
Prudential will bill directly retirees, partners on an approved leave of
absence, and partners who elect to continue portable coverage. They will send
premium payments directly to Prudential.
MAY I MAKE ADDITIONAL PREMIUM PAYMENTS?
Yes. You may make lump sum payments at any time. The minimum lump sum payment is
$100. The maximum is subject to annual and lifetime limits set by the Internal
Revenue Service. See the TAX TREATMENT OF CERTIFICATE BENEFITS section of the
prospectus.
INVESTMENT OPTIONS
WHAT INVESTMENT OPTIONS ARE AVAILABLE?
THE FUNDS
Set out below is a list of each available Fund, its investment objective,
investment management fees and other expenses, and its investment
advisor/investment manager. Some Funds also provide information about their
principal strategies.
Certain Funds have adopted distribution plans pursuant to the federal securities
laws, and under those plans, the Fund may make payments to Prudential and/or its
affiliates for certain marketing efforts.
FUND NAMES AND OBJECTIVES
THE PRUDENTIAL SERIES FUND, INC.
The portfolios of the Series Fund in which the Separate Account may currently
invest and their investment objectives and principal strategies are as follows:
GLOBAL PORTFOLIO: The investment objective is long-term growth of capital. The
Portfolio invests primarily in common stocks (and their equivalents) of foreign
and U.S. companies.
HIGH YIELD BOND PORTFOLIO: The investment objective is a high total return. The
Portfolio invests primarily in high yield/high risk debt securities.
MONEY MARKET PORTFOLIO: The investment objective is maximum current income
consistent with the stability of capital and the maintenance of liquidity. The
Portfolio invests in high quality short-term debt obligations that mature in 13
months or less.
PRUDENTIAL JENNISON PORTFOLIO: The investment objective is to achieve long-term
growth of capital. The Portfolio invests primarily in equity securities of major
established corporations that offer above-average growth prospects.
SMALL CAPITALIZATION STOCK PORTFOLIO: The investment objective is long-term
growth of capital. The Portfolio invests primarily in equity securities of
publicly-traded companies with small market capitalization.
4
<PAGE>
STOCK INDEX PORTFOLIO: The investment objective is investment results that
generally correspond to the performance of publicly-traded common stocks. The
Portfolio attempts to duplicate the price and yield performance of the Standard
& Poor's 500 Composite Stock Price Index (the "S&P 500 Index").
JANUS ASPEN SERIES
The portfolio of the Janus Aspen Series in which the Separate Account may
currently invest and its investment objective are as follows:
WORLDWIDE GROWTH PORTFOLIO: The investment objective of this Portfolio is
long-term growth of capital in a manner consistent with the preservation of
capital. It is a diversified portfolio that pursues its objective primarily
through investments in common stocks of foreign and domestic issuers.
MFS(R) VARIABLE INSURANCE TRUST(sm)
The portfolio of the MFS Variable Insurance Trust in which the Separate Account
may currently invest and its investment objective are as follows:
MFS BOND SERIES: Seeks primarily to provide as high a level of current income as
is believed consistent with prudent investment risk and secondarily to protect
shareholders' capital.
NEUBERGER BERMAN MANAGEMENT INC. ("NBMI")
The portfolio of the Neuberger Berman Advisers Management Trust ("AMT") in which
the Separate Account may currently invest and its investment objective are as
follows:
AMT PARTNERS PORTFOLIO: Seeks growth of capital. To pursue this goal, the
portfolio invests mainly in common stocks of mid- to large-capitalization
companies. The portfolio seeks to reduce risk by diversifying among many
companies and industries. The managers look for well-managed companies whose
stock prices are believed to be undervalued.
T. ROWE PRICE VARIABLE FUNDS
The portfolios of the T. Rowe Price Equity Series, Inc. in which the Separate
Account may currently invest and their investment objectives are as follows:
EQUITY INCOME PORTFOLIO: Seeks to provide substantial dividend income as well as
long-term growth of capital by investing primarily in the common stocks of
established companies paying above-average dividends, with favorable prospects
for both increasing dividends and capital appreciation.
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<PAGE>
NEW AMERICA GROWTH PORTFOLIO: Seeks to provide long-term growth of capital by
investing primarily in common stocks of U.S. growth companies operating in
service industries. The portfolio invests in stocks that range from large to
small service companies expected by the fund's investment adviser to show
superior earnings growth and that are above-average performers in their fields.
WARBURG PINCUS PORTFOLIOS
The portfolio of Warburg Pincus Trust II in which the Separate Account may
currently invest and its investment objective are as follows:
GLOBAL FIXED INCOME PORTFOLIO: The goal of the Portfolio is total return
consistent with prudent management, consisting of a combination of interest
income, currency gains and capital appreciation. To achieve this goal, the
Portfolio: invests in U.S. and foreign fixed-income securities denominated in
various currencies; favors investment-grade securities, but may diversify credit
quality in pursuit of its goal; and makes investment decisions based on
fundamental market factors, currency trends and credit quality.
6
<PAGE>
FUND FEES AND EXPENSES
================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT OTHER (AFTER EXPENSE
FEE EXPENSES REIMBURSEMENTS) (1)
- ----------------------------------------------- ---------- ---------------------
THE PRUDENTIAL SERIES FUND, INC.
Global Portfolio (2) 0.75% 0.11% 0.86%
High Yield Bond Portfolio (2) 0.55% 0.03% 0.58%
Money Market Portfolio (2) 0.40% 0.01% 0.41%
Prudential Jennison Portfolio (2) 0.60% 0.03% 0.63%
Small Capitalization Stock
Portfolio (2) 0.40% 0.07% 0.47%
Stock Index Portfolio (2) 0.35% 0.02% 0.37%
- ----------------------------------------------- ---------- ---------------------
JANUS ASPEN SERIES
Worldwide Growth Portfolio (3) 0.65% 0.07% 0.72%
- ----------------------------------------------- ---------- ---------------------
MFS(R)VARIABLE INSURANCE TRUST(sm)
MFS Bond Series (4) (5) 0.60% 0.42% 1.02%
- ----------------------------------------------- ---------- ---------------------
NEUBERGER BERMAN ADVISORS
MANAGEMENT TRUST ("AMT") (6)
AMT Partners Portfolio 0.78% 0.06% 0.84%
- ----------------------------------------------- ---------- ---------------------
T. ROWE PRICE VARIABLE FUNDS
Equity Income Portfolio (7) 0.85% 0.00% 0.85%
New America Growth Portfolio (7) 0.85% 0.00% 0.85%
- ----------------------------------------------- ---------- ---------------------
WARBURG PINCUS TRUST II
Global Fixed Income Portfolio (8) 0.48% 0.51% 0.99%
=============================================== ========== =====================
(1) Some, but not all, of the Funds have expense reimbursement or fee waiver
arrangements. Without these arrangements, Total Fund Annual Expenses would
have been higher. More information appears in the footnotes that accompany
the Funds that have expense reimbursement or fee waiver arrangements.
(2) With respect to the Prudential Series Fund, Inc. portfolios, except for the
Global Portfolio, Prudential reimburses a portfolio when its ordinary
operating expenses, excluding taxes, interest, and brokerage commissions
exceed 0.75% of the portfolio's average daily net assets. The amounts
listed for the portfolios under Other Expenses are based on amounts
incurred in the last fiscal year.
7
<PAGE>
(3) All expenses are stated with contractual waivers and fee reductions by
Janus Capital. Fee reductions for the Worldwide Growth 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. Janus Capital has agreed to continue the other
waivers and fee reductions until at least the next annual renewal of the
advisory agreement. Without such waivers and fee reductions, the Total Fund
Annual Expenses would have been: 0.74% for Worldwide Growth Portfolio.
(4) Each series in the MFS(R) Variable Insurance Trust(sm) has an expense
offset arrangement which reduces the series' custodian fee based upon the
amount of cash maintained by the series with its custodian and dividend
disbursing agent. Each series may enter into other such arrangements and
directed brokerage arrangements, which would also have the effect of
reducing the series' expenses. Expenses do not take into account these
expense reductions, and are therefore higher than the actual expenses of
the series.
(5) MFS has agreed to bear expenses for this series, subject to reimbursement
by this series, such that the series' "Other Expenses" shall not exceed the
following percentage of the average daily net assets of the series during
the current fiscal year: 0.40% for the Bond Series. The payments made by
MFS on behalf of the series under this arrangement are subject to
reimbursement by the series to MFS, which will be accomplished by the
payment of an expense reimbursement fee by the series to MFS computed and
paid monthly at a percentage of the series' average daily net assets for
its then current fiscal year, with a limitation that immediately after such
payment the series' "Other Expenses" will not exceed the percentage set
forth above. The obligation of MFS to bear a series' "Other Expenses"
pursuant to this arrangement and the series' obligation to pay the
reimbursement fee to MFS, terminates on the earlier of the date on which
payments made by the series equal the prior payment of such reimbursable
expenses by MFS or December 31, 2004. Without such waivers and fee
reductions, the Total Fund Annual Expenses would have been: 1.23% for Bond
Series Portfolio.
(6) Neuberger Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in a
corresponding series ("Series") of Advisers Managers Trust. The figures
reported under "Investment Management/ Administration Fees" include the
aggregate of the administration fees paid by the Portfolio and the
management fees paid by the corresponding Series. Similarly, the figures
reported under "Other Expenses" include all other expenses of the Portfolio
and its corresponding Series.
(7) The investment management fee for all portfolios in the T. Rowe Price
Variable Funds includes the ordinary expenses of operating the Portfolios.
Fees and expenses are for the year ended December 31, 1998.
8
<PAGE>
(8) Absent the waiver of fees and reimbursement of expenses by the Warburg
Pincus Trust II investment adviser and co-administrator, investment
management fees would have equaled 1%, other expenses would have equaled
2.99% and total portfolio annual expenses would have equaled 3.99% for the
Global Fixed Income Portfolio based on actual fees and expenses for the
fiscal year ended December 31, 1998. Fee waivers and expense reimbursements
or credits may be discontinued at any time.
FUND ADVISERS
Prudential is the investment adviser of each of the portfolios of the Prudential
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"), which
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 provides investment advisory services for the Prudential Jennison
Portfolio. Further detail is provided in the prospectus and statement of
additional information for the Series Fund. Prudential, PIC and Jennison are
registered as investment advisers under the Investment Advisers Act of 1940.
Janus Capital Corporation ("Janus Capital") serves as the investment adviser and
principal underwriter to Janus Aspen Series Worldwide Growth Portfolio. Janus
Capital's principal business address is 100 Fillmore Street, Denver, Colorado
80206-4928.
The investment adviser for the MFS(R) Variable Insurance Trust(sm) series is
Massachusetts Financial Services Company ("MFS"). MFS' principal business
address is 500 Boylston Street, Boston, Massachusetts 02116. The principal
underwriter of the series is MFS Fund Distributors, Inc.
located at 500 Boylston Street, Boston, Massachusetts 02116.
Neuberger Berman Management Inc. ("NBMI") serves as the investment manager of
the Neuberger Berman Advisers Management Trust Partners Portfolio. NBMI's
principal business address is 605 Third Avenue, New York, New York 10158-0180.
The investment manager for the T. Rowe Price Variable Funds is T. Rowe Price
Associates, Inc. ("T. Rowe Price"). T. Rowe Price's principal business address
is 100 East Pratt Street, Baltimore, Maryland 21202. T. Rowe Price Investment
Services, Inc. serves as the principal underwriter of the portfolios.
The investment adviser for the Warburg Pincus Trust II is Warburg Pincus Asset
Management, Inc. ("Warburg"). Warburg's principal business address is 466
Lexington Avenue, New York, New York 10017-3147. The principal underwriter of
the portfolios is Counsellors Securities, Inc., a Warburg subsidiary, located at
466 Lexington Avenue, New York, New York 10017-
3147.
Please refer to your Enrollment Kit for further information on the Funds' past
performance.
9
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You may also allocate funds to our Fixed Account, which earns interest at a rate
determined annually but guaranteed not to be less than 4%. As discussed in the
prospectus, during the first 20 days following the Certificate Date, we will
direct your premium payments to the Fixed Account.
CHANGES IN PERSONAL STATUS
WHAT HAPPENS IF I BECOME DISABLED?
If you become totally disabled prior to age 57 and are unable to pay premiums,
you will continue to have insurance coverage equal to the Face Amount of your
Certificate until you reach age 62, as long as you remain totally disabled.
CAN I CONTINUE COVERAGE WHEN I RETIRE?
You may continue your GVUL coverage when you retire. Your rates for coverage
will depend upon your age. We will bill you for premium payments plus a direct
bill charge of $3 per bill. Your Supplemental coverage ends at termination of
employment, but may be converted to an individual policy.
CAN I CONTINUE COVERAGE IF I LEAVE THE COMPANY FOR REASONS OTHER THAN
RETIREMENT?
In addition to continuing coverage if you retire, you may continue coverage if
you leave KPMG for any other reason. We refer to this as Portable coverage. Your
rates for Portable coverage will depend upon your age based on the Plan's
experience until the second policy anniversary after you leave the employment of
KPMG. After that, you will be charged rates for coverage based on the experience
of a Prudential portability pool. These rates will be higher than your active
rates. We will bill you for premium payments plus a direct bill charge of $3 per
bill. If the KPMG Group Contract terminates, you may nonetheless continue your
Portable coverage.
Your Supplemental coverage ends at termination of employment. Supplemental
coverage may be converted to an individual policy.
DOES MY COVERAGE END AT A CERTAIN AGE?
Yes. Your coverage will end at age 100. See the HOW PRUDENTIAL ISSUES
CERTIFICATES section of the prospectus to see what options you have when your
coverage ends.
WHAT HAPPENS IF THE GROUP CONTRACT IS TERMINATED?
Either KPMG or Prudential may terminate the KPMG Group Contract, although
Prudential will only do so under certain conditions described in the prospectus.
If the KPMG Group Contract is
10
<PAGE>
terminated, KPMG may replace it with another life insurance contract that, like
the KPMG Group Contract, permits you to accumulate cash value. In that case, you
will have the option of (i) transferring the value of your investment options
less any loans, accrued interest, and outstanding charges to the new contract;
or (ii) receiving that same amount in a lump sum payment.
If KPMG does not replace the KPMG Group Contract with a life insurance contract
that permits you to accumulate cash value, then you will have the option of
converting to a cash value individual life insurance policy, electing a paid-up
life insurance policy in which no future premiums would be paid, or receiving a
lump sum payment as previously described.
See the OPTIONS ON TERMINATION OF COVERAGE section of the prospectus.
CHARGES AND EXPENSES
WHAT ARE THE CHARGES?
The current charges under the KPMG Group Contract are as follows:
1. CHARGES FOR TAXES ON PREMIUM PAYMENTS. Prudential deducts a charge of 1.92%
from each premium payment. This charge is to compensate Prudential for
incurring state and local premium taxes (currently 1.57%) and for the impact
of the federal deferred acquisition cost tax (currently 0.35%).
2. DAILY CHARGES FOR MORTALITY AND EXPENSE RISKS. Prudential deducts this charge
from the assets of the Subaccount(s) that correspond to the Fund(s) you
select. This charge is to compensate Prudential for assuming mortality and
expense risks.
For KPMG, the current daily charge for mortality and expense risks is
equivalent to an effective annual rate of 0.45%.
3. DAILY CHARGES FOR INVESTMENT MANAGEMENT FEES AND EXPENSES. Each of the
underlying mutual funds deducts investment management fees and expenses. They
are described in THE FUNDS section of the prospectus.
4. MONTHLY CHARGES. Prudential deducts a monthly charge for the cost of
insurance. We describe the calculation of this charge of the prospectus.
5. POSSIBLE ADDITIONAL CHARGES. Prudential will not charge for the first 12
transfers you make between investment options in a Certificate Year. But, if
you make more than 12 transfers in a Certificate Year, Prudential will charge
$20 per transfer. Also, while you will receive a statement detailing activity
under your Certificate on a quarterly basis, such reports can be requested at
any time for an additional fee. Prudential does not currently charge for
other transactions, but reserves the right to do so in the future, as
explained in the prospectus.
See the CHARGES AND EXPENSES section of the prospectus for more details.
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<PAGE>
WHEN MAY CHARGES CHANGE?
The prospectus lists the MAXIMUM charges that we may charge under the KPMG Group
Contract. Under no circumstances will we exceed these charges. Within these
maximums, we may vary the amount or level of charges. In general, we will not
change these amounts more often than once a year. We will give you a new
prospectus each year that shows any new charges. If we change the charges during
a year, we will send you a notice of the change.
ILLUSTRATION OF DEATH BENEFITS AND CASH SURRENDER VALUES
On the next several pages, we show you two examples of how the Death Benefit and
the Cash Surrender Value of your Certificate can change as a result of the
performance of the investment options you select. The examples are not our
prediction of how value will grow. They are hypothetical examples and are just
intended to show you how a Certificate works.
We call these examples "ILLUSTRATIONS." The illustrations are based on several
ASSUMPTIONS about the age of the Participant, the amount of insurance, and the
rules of the KPMG Group Contract.
ASSUMPTIONS WE USED FOR BOTH ILLUSTRATIONS
Here's what we assumed about the Certificate in both illustrations:
o The Participant was 40 years old when he or she bought the Group Variable
Universal Life Insurance Certificate.
o The Face Amount of insurance under the Certificate is $1,000,000.
o The Participant paid a premium each year equal to $5,000 plus the current
cost of insurance plus the current expenses.
ILLUSTRATION #1
In Illustration #1, we assumed that the CURRENT charges Prudential deducts would
stay the same as long as the Certificate remains in effect. Accordingly, we
assumed the following charges:
o The charge deducted from each premium payment for taxes on premium
payments is 1.92%.
o Prudential deducts no sales charge from premium payments.
o Prudential deducts no processing charge from premium payments.
o Each month, Prudential deducts no charge for administrative expenses.
12
<PAGE>
o Prudential deducts a charge equal to an annual rate of 0.45% for mortality
and expense risks.
o Prudential deducts the current cost of insurance charge under the KPMG
Group Contract.
o Prudential does not deduct a surrender charge.
ILLUSTRATION #2
In Illustration #2, we changed our assumptions about the charges Prudential will
deduct from the Certificate. Instead of current charges, we assumed that the
MAXIMUM CHARGES permitted under the Group Contract would be made.
Here's what we assumed:
o The charge deducted from each premium payment for taxes on premium
payments is 1.92%. (Since Prudential would increase this charge only if a
state increases its tax charge to us, we left this charge at the current
level.)
o Prudential deducts a sales charge equal to 3.5% from each premium payment.
o Prudential deducts a processing charge of $2 from each premium payment.
o Each month, Prudential deducts a $6 charge for administrative expenses.
o Prudential deducts a charge equal to an annual rate of 0.90% for mortality
and expense risks.
o The Participant has cost of insurance charges equal to the maximum rates.
(The maximum rates that Prudential can charge are 150% of the 1980
Commissioner's Standard Ordinary Mortality Table [Male], Age Last Birthday
(the "1980 CSO")).
o Prudential deducts no surrender charge.
ASSUMPTIONS ABOUT HOW THE CERTIFICATE FUND WAS INVESTED
We assumed that the Certificate Fund was invested in equal amounts in each of
the 12 Funds available under the Group Contract.
Each illustration shows four different assumptions about the investment
performance - or "investment return" - of the Funds. The four different
assumptions are:
o gross annual rate of return is 0%
o gross annual rate of return is 4.5%
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<PAGE>
o gross annual rate of return is 9%
These are only assumptions to show how the Death Benefit and Cash Surrender
Value change depending on the investment return. Actual investment return will
depend on the investment options you select and will vary from year to year.
WALKING THROUGH THE ILLUSTRATIONS
Here's what to look for in the illustrations:
o The first column shows the Certificate Year.
o The second column gives you some context for comparing the investment
return under the Certificate to the return you might expect from a savings
account. It shows the amount you would accumulate if you invested the same
premiums in a savings account paying a 4% effective annual rate. (Of
course, unlike the Certificate, a savings account does not offer life
insurance protection.)
o The next three columns show what the Death Benefit would be for each of
the four investment return assumptions (0%, 4.5% and 9%).
o The last three columns show what the Cash Surrender Value would be for
each ofh the four investment return assumptions (0%, 4.5% and 9%).
You should note that:
o Both "gross" and "net" investment returns are shown.
o "Gross" investment return reflects the combined effect of both income on
the investment and capital gains. It is the amount of return before
Prudential takes out any of its charges and before any Fund investment
management fees and other expenses are taken out.
o "Net" investment return is the amount of the investment return after
Prudential takes out its charges and after Fund investment management fees
and other expenses are taken out. Since Illustration #1 and Illustration
#2 use different assumptions about charges, the "net" investment returns
for each illustration are different. For some of the Funds, the Fund's
investment advisor or other entity is absorbing certain of the Fund's
expenses. In deriving net investment return, we used those reduced Fund
expenses.
- Fund investment management fees and other expenses were assumed to
equal 0.72% per year, which was the average Fund expense in 1998.
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<PAGE>
- For Illustration #1, Prudential's mortality and expense risk charges
are 0.45% per year. (In Illustration #1, we assumed that
Prudential's current charges are in effect.) So, including both Fund
expenses and the mortality and expense risk charges, gross returns
of 0%, 4.5% and 9% become net returns of -1.17%, 3.33% and 7.83%.
- For Illustration #2, Prudential's mortality and expense risk charges
are 0.90% per year. (In Illustration #2, we assumed that
Prudential's maximum charges are in effect.) So, including both Fund
expenses and the mortality and expense risk charges, gross returns
of 0%, 4.5% and 9% become net returns of -1.62%, 2.88% and 7.38%.
o The Death Benefits and Cash Surrender Values are shown with all of
Prudential's charges and Fund investment management fees and other
expenses taken out.
o We assumed no loans or partial withdrawals were taken.
o Neither illustration reflects Dividends or Experience Credits.
IF YOU ASK, PRUDENTIAL WILL GIVE YOU A SIMILAR ILLUSTRATION FOR A CERTIFICATE
THAT SHOWS YOUR AGE, RISK CLASS, PROPOSED FACE AMOUNT OF INSURANCE, AND PROPOSED
PREMIUM PAYMENTS. WE REFER TO THIS AS A "PERSONALIZED ILLUSTRATION."
WE SHOW THESE RATES OF INVESTMENT RETURN ONLY TO HELP YOU UNDERSTAND HOW THE
CERTIFICATE WORKS. YOU SHOULD NOT ASSUME THAT THE INVESTMENT RATES OF RETURN ARE
ACTUAL RATES OF RETURN. YOU SHOULD ALSO NOT ASSUME THAT THESE RATES ARE EXAMPLES
OF PAST OR FUTURE INVESTMENT PERFORMANCE. NEITHER PRUDENTIAL NOR THE FUNDS CAN
TELL YOU WHETHER THESE RATES OF INVESTMENT RETURN CAN ACTUALLY BE ACHIEVED.
THE ACTUAL RATES OF INVESTMENT RETURN FOR YOUR CERTIFICATE WILL DEPEND ON HOW
THE INVESTMENT OPTIONS THAT YOU CHOOSE PERFORM. YOU MAY EARN MORE OR LESS THAN
WHAT IS SHOWN IN THE ILLUSTRATION.
THE DEATH BENEFITS AND CASH SURRENDER VALUES WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATE OF RETURN FOR A CERTIFICATE YEAR VARIED ABOVE OR BELOW THE
AVERAGE, HYPOTHETICAL RATES OF 0%, 4.5% AND 9%.
15
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #1
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $1,000,000
ISSUE AGE 40
ASSUME ANNUAL CONTRIBUTION OF $5,000 PLUS CURRENT COST OF INSURANCE AND CURRENT EXPENSES FOR ALL YEARS
USING CURRENT EXPENSE CHARGES AND CURRENT UNISMOKER COST OF INSURANCE CHARGES
Death Benefit (1) Cash Surrender Value (1)
----------------------------------------- -----------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums ----------------------------------------- -----------------------------------------
Certificate Accumulated 0% Gross 4.5% Gross 9% Gross 0% Gross 4.5% Gross 9% Gross
Year at 4% per year (-1.17%) Net (3.33% Net) (7.83% Net) (-1.17%) Net (3.33% Net) (7.83% Net)
-------- ------------ ------------ ------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $7,007 $1,004,838 $1,005,093 $1,005,350 $4,838 $5,093 $5,350
2 14,294 1,009,618 1,010,357 1,011,119 9,618 10,357 11,119
3 21,873 1,014,343 1,015,795 1,017,339 14,343 15,795 17,339
4 29,754 1,019,013 1,021,414 1,024,047 19,013 21,414 24,047
5 37,951 1,023,628 1,027,221 1,031,280 23,628 27,221 31,280
6 46,476 1,028,189 1,033,221 1,039,079 28,189 33,221 39,079
7 55,342 1,032,697 1,039,421 1,047,489 32,697 39,421 47,489
8 64,563 1,037,152 1,045,827 1,056,557 37,152 45,827 56,557
9 74,152 1,041,555 1,052,446 1,066,336 41,555 52,446 66,336
10 84,125 1,045,906 1,059,286 1,076,880 45,906 59,286 76,880
15 140,302 1,066,911 1,097,058 1,143,355 66,911 97,058 143,355
20 208,651 1,086,715 1,141,551 1,240,263 86,715 141,551 240,263
25 291,807 1,105,388 1,193,963 1,381,536 105,388 193,963 381,536
30 392,979 1,122,993 1,255,703 1,587,483 122,993 255,703 587,483
35 516,070 1,139,593 1,328,430 1,887,712 139,593 328,430 887,712
40 665,830 1,155,243 1,414,099 2,325,387 155,243 414,099 1,325,387
(1) Assumes no loan or partial withdrawal has been made.
- - The illustrated Face Amount includes only Basis and Excess Coverage. The illustrated Face Amount does not include any
Supplemental Coverage.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4.5%, AND 9% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #2
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $1,000,000
ISSUE AGE 40
ASSUME ANNUAL CONTRIBUTION OF $5,000 PLUS CURRENT COST OF INSURANCE AND CURRENT EXPENSES FOR ALL YEARS
USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1)
----------------------------------------- --------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums ----------------------------------------- --------------------------------------------
Certificate Accumulated 0% Gross 4.5% Gross 9% Gross 0% Gross 4.5% Gross 9% Gross
Year at 4% per year (-1.62%) Net (2.88% Net) (7.38% Net) (-1.62%) Net (2.88% Net) (7.38% Net)
-------- ------------- ----------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $7,007 $1,001,509 $1,001,679 $1,001,850 $1,509 $1,679 $1,850
2 14,294 1,002,592 1,002,995 1,003,416 2,592 2,995 3,416
3 21,873 1,003,226 1,003,907 1,004,645 3,226 3,907 4,645
4 29,754 1,003,382 1,004,365 1,005,474 3,382 4,365 5,474
5 37,951 1,003,030 1,004,319 1,005,834 3,030 4,319 5,834
6 46,476 1,002,141 1,003,716 1,005,651 2,141 3,716 5,651
7 55,342 1,000,694 1,002,509 1,004,855 694 2,509 4,855
8 64,563 0 (2) 1,000,643 1,003,361 0 (2) 643 3,361
9 74,152 0 0 (2) 1,001,062 0 0 (2) 1,062
10 84,125 0 0 0 (2) 0 0 0 (2)
15 140,302 0 0 0 0 0 0
20 208,651 0 0 0 0 0 0
25 291,807 0 0 0 0 0 0
30 392,979 0 0 0 0 0 0
35 516,070 0 0 0 0 0 0
40 665,830 0 0 0 0 0 0
(1) Assumes no loan or partial withdrawal has been made.
(2) Based on the interest rate and charges illustrated, the premiums paid are insufficient to keep the certificate in force. The
certificate would lapse under this scenario.
- - The illustrated Face Amount includes only Basis and Excess Coverage. The illustrated Face Amount does not include any
Supplemental Coverage.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4.5%, AND 9% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
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<PAGE>
WHEN ARE CHARGES DEDUCTED?
We calculate and deduct the charges monthly from your Certificate Fund,
depending upon whether you make routine premium payments to KPMG or directly to
Prudential. We take the charges from each investment option in the same
proportions that your Certificate Fund is invested.
IF YOU MAKE ROUTINE PREMIUM PAYMENTS THROUGH KPMG, we generally will deduct the
monthly Certificate Fund charges once per month, on the Monthly Deduction Date.
The Monthly Deduction Date will coincide with the date KPMG forwards premium
payments to us. We expect the Monthly Deduction Date to be near the first of the
month.
KPMG intends to forward premium payments by the beginning of each month. But,
even if KPMG has not transferred premium payments to us by the 45th day after
the first day of any month, we will nevertheless deduct the month's Certificate
Fund charges on the next Business Day following that 45th day.
IF YOU MAKE ROUTINE PREMIUM PAYMENTS DIRECTLY TO PRUDENTIAL, we will deduct the
full monthly Certificate Fund charges on the first Business Day of each Month.
WHAT ARE THE OTHER PRIMARY FEATURES OF THE PLAN?
The prospectus describes the standard features of the KPMG Group Contract,
including:
o the "free-look" period
o transfers between investment options
o dollar cost averaging
o more details on how loans work
o how you can change future premium allocations among investment options
o how paid-up coverage may be available
o how your insurance could end (known as "lapsing")
o reinstatement of your coverage
o contestability rules
o tax treatment of Certificate benefits
o definitions of special terms
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<PAGE>
o the Death benefit
o withdrawals
Please refer to the prospectus for information on these and other features of
the KPMG Group Contract. Your Enrollment Kit also explains key features of your
plan.
WHOM DO I CONTACT TO MAKE A TRANSACTION?
You may contact the Prudential Customer Service Center at 1-800-562-9874 to
obtain the proper forms.
WHAT ARE MY CANCELLATION RIGHTS?
You may return a Certificate for a refund within 10 days after you receive it.
These 10 days are known as the "free-look" period. You can ask for a refund by
mailing the Certificate back to Prudential. During the first 20 days after the
Certificate Date, your premium payments are held in the Fixed Account.
See the A "FREE-LOOK" PERIOD section of the prospectus for more details.
WHOM DO I CONTACT TO ANSWER MY OTHER QUESTIONS?
You may contact Prudential's Customer Service Center at 1-800-562-9874.
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SUPPLEMENT DATED MAY 1, 1999
TO PROSPECTUS DATED MAY 1, 1999
FOR GROUP VARIABLE UNIVERSAL LIFE INSURANCE
THIS DOCUMENT IS A SUPPLEMENT TO THE PROSPECTUS DATED MAY 1, 1999 (THE
"PROSPECTUS") FOR THE GROUP VARIABLE UNIVERSAL LIFE INSURANCE CONTRACT AND
CERTIFICATES THAT PRUDENTIAL OFFERS TO YOU. THIS SUPPLEMENT IS NOT A COMPLETE
PROSPECTUS, AND MUST BE ACCOMPANIED BY THE PROSPECTUS.
THE FUNDS
Set out below is a list of each available Fund, its investment objective,
investment management fees and other expenses, and its investment
advisor/investment manager. Some Funds also provide information about their
principal strategies.
Certain Funds have adopted distribution plans pursuant to the federal securities
laws, and under those plans, the Fund may make payments to Prudential and/or its
affiliates for certain marketing efforts.
FUND NAMES AND OBJECTIVES
THE PRUDENTIAL SERIES FUND, INC.
The portfolios of the Series Fund in which you may currently invest and their
investment objectives and principal strategies are as follows:
DIVERSIFIED BOND PORTFOLIO: The investment objective is a high level of income
over a longer term while providing reasonable safety of capital. The Portfolio
invests primarily in higher grade debt obligations and high quality money market
investments.
EQUITY PORTFOLIO: The investment objective is capital appreciation. The
Portfolio invests primarily in common stocks of major established corporations
as well as smaller companies that offer attractive prospects of appreciation.
EQUITY INCOME PORTFOLIO: The investment objective is both current income and
capital appreciation. The Portfolio invests primarily in common stocks and
convertible securities that provide good prospects for returns above those of
the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500 Index") or
the NYSE Composite Index.
FLEXIBLE MANAGED PORTFOLIO: The investment objective is a total investment
return consistent with an aggressively managed diversified portfolio. The
Portfolio invests in a mix of equity securities, debt obligations and money
market instruments.
GL.99.596
<PAGE>
GLOBAL PORTFOLIO: The investment objective is long-term growth of capital. The
Portfolio invests primarily in common stocks (and their equivalents) of foreign
and U.S. companies.
MONEY MARKET PORTFOLIO: The investment objective is maximum current income
consistent with the stability of capital and the maintenance of liquidity. The
Portfolio invests in high quality short-term debt obligations that mature in 13
months or less.
PRUDENTIAL JENNISON PORTFOLIO: The investment objective is to achieve long-term
growth of capital. The Portfolio invests primarily in equity securities of major
established corporations that offer above-average growth prospects.
STOCK INDEX PORTFOLIO: The investment objective is investment results that
generally correspond to the performance of publicly-traded common stocks. The
Portfolio attempts to duplicate the price and yield performance of the Standard
& Poor's 500 Composite Stock Price Index (the "S&P 500 Index").
FRANKLIN TEMPLETON
The Class 2 portfolio of the Templeton Variable Products Series Fund in which
you may currently invest and its investment objective are as follows:
TEMPLETON INTERNATIONAL FUND: The fund's investment goal is long-term capital
growth. Under normal market conditions, the fund will invest at least 65% of its
total assets in the equity securities of companies located outside the U.S.,
including emerging markets.
KEMPER VARIABLE SERIES
The portfolio of Kemper Variable Series in which you may currently invest (the
"Kemper Series") and its investment objective are as follows:
HIGH YIELD PORTFOLIO: Seeks to provide a high level of current income by
investing in lower rated fixed-income securities.
JANUS ASPEN SERIES
The portfolios of the Janus Aspen Series in which you may currently invest and
their investment objectives are as follows:
GROWTH PORTFOLIO: The investment objective of this Portfolio is long-term growth
of capital in a manner consistent with the preservation of capital. It is a
diversified portfolio that pursues its objective by investing in common stocks
of issuers of any size. This Portfolio generally invests in larger, more
established issuers.
INTERNATIONAL GROWTH PORTFOLIO: The investment objective of this Portfolio is
long-term growth of capital. It is a diversified portfolio that pursues its
objective primarily through investments in common stocks of issuers located
outside the United States.
2
<PAGE>
LAZARD RETIREMENT SERIES, INC.
The portfolio of the Lazard Retirement Series, Inc. in which you may currently
invest and its investment objective are as follows:
LAZARD RETIREMENT SMALL CAP PORTFOLIO: Seeks long-term capital appreciation by
investing primarily in equity securities, principally common stocks, of
relatively small U.S. companies in the range of the Russell 2000 Index that the
Investment Manager believes are undervalued based on their earnings, cash flow
or asset values.
MFS(R) VARIABLE INSURANCE TRUST(SM)
The portfolio of the MFS Variable Insurance Trust in which you may currently
invest and its investment objective are as follows:
MFS RESEARCH SERIES: Seeks to provide long-term growth of capital and future
income.
T. ROWE PRICE VARIABLE FUNDS
The portfolios of the T. Rowe Price Equity Series, Inc., in which you may
currently invest and their investment objectives are as follows:
EQUITY INCOME PORTFOLIO: Seeks to provide substantial dividend income as well as
long-term growth of capital by investing primarily in the common stocks of
established companies paying above-average dividends, with favorable prospects
for both increasing dividends and capital appreciation.
NEW AMERICA GROWTH PORTFOLIO: Seeks to provide long-term growth of capital by
investing primarily in common stocks of U.S. growth companies operating in
service industries. The portfolio invests in stocks that range from large to
small service companies expected by the fund's investment adviser to show
superior earnings growth and that are above-average performers in their fields.
3
<PAGE>
FUND FEES AND EXPENSES
================================================================================
TOTAL FUND
INVESTMENT ANNUAL EXPENSES
FUNDS MANAGEMENT 12B-1 OTHER (AFTER EXPENSE
FEE FEES EXPENSES REIMBURSEMENTS)(1)
- --------------------------------------------------------------------------------
THE PRUDENTIAL SERIES FUND, INC.
Diversified Bond Portfolio (2) 0.40% - 0.02% 0.42%
Equity Portfolio (2) 0.45% - 0.02% 0.47%
Equity Income Portfolio (2) 0.40% - 0.02% 0.42%
Flexible Managed Portfolio (2) 0.60% - 0.01% 0.61%
Global Portfolio (2) 0.75% - 0.11% 0.86%
Money Market Portfolio (2) 0.40% - 0.01% 0.41%
Prudential Jennison Portfolio (2) 0.60% - 0.03% 0.63%
Stock Index Portfolio (2) 0.35% - 0.02% 0.37%
FRANKLIN(R) TEMPLETON(R):
TEMPLETON VARIABLE PRODUCTS
SERIES FUND (CLASS 2 SHARES)
Templeton International Fund (3) 0.69% 0.25% 0.17% 1.11%
JANUS ASPEN SERIES
Growth Portfolio (4) 0.65% - 0.03% 0.68%
International Growth Portfolio (4) 0.66% - 0.20% 0.86%
KEMPER VARIABLE SERIES
High Yield Portfolio 0.60% - 0.05% 0.65%
LAZARD RETIREMENT SERIES, INC.
Small Cap Portfolio (5) 0.75% 0.25% 0.25% 1.25%
MFS(R) VARIABLE INSURANCE TRUST(SM)
MFS Research Series (6) 0.75% - 0.11% 0.86%
T. ROWE PRICE VARIABLE FUNDS
Equity Income Portfolio (7) 0.85% - 0.00% 0.85%
New America Growth Portfolio (7) 0.85% - 0.00% 0.85%
================================================================================
(1) Some, but not all, of the Funds have expense reimbursement or fee waiver
arrangements. Without these arrangements, Total Fund Annual Expenses would
have been higher. More information appears in the footnotes that accompany
the Funds that have expense reimbursement or fee waiver arrangements.
4
<PAGE>
(2) With respect to the Prudential Series Fund, Inc. portfolios, except for the
Global Portfolio, Prudential reimburses a portfolio when its ordinary
operating expenses, excluding taxes, interest, and brokerage commissions
exceed 0.75% of the portfolio's average daily net assets. The amounts listed
for the portfolios under Other Expenses are based on amounts incurred in the
last fiscal year.
(3) Class 2 of the Templeton Variable Product Series Templeton International
Fund has a distribution plan or "Rule 12b-1 Plan" which is described in the
Fund's prospectus.
Expenses may vary.
(4) All expenses are stated with contractual waivers and fee reductions by Janus
Capital. Fee reductions for the Growth and International Growth Portfolios
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. Janus Capital has agreed to continue
the other waivers and fee reductions until at least the next annual renewal
of the advisory agreement. Without such waivers and fee reductions, the
Total Fund Annual Expenses would have been: 0.75% for Growth and 0.95% for
International Growth Portfolios.
(5) Lazard Asset Management, the Fund's Investment Manager, agrees to reimburse
the Small Cap Portfolio through December 31, 1999 to the extent Total Fund
Annual Expenses exceed 1.25% of the Portfolio's average daily net assets.
Absent such an agreement with the Investment Manager, the actual Total Fund
Annual Expenses for the year ended December 31, 1998 would have been 16.20%
for the Small Cap Portfolio.
(6) Each MFS(R) Variable Insurance Trust(sm) series has an expense offset
arrangement which reduces the series' custodian fee based upon the amount of
cash maintained by the series with its custodian and dividend disbursing
agent. Each series may enter into other such arrangements and directed
brokerage arrangements, which would also have the effect of reducing the
series' expenses. Expenses do not take into account these expense
reductions, and are therefore higher than the actual expenses of the series.
(7) The investment management fee for the Equity Income Portfolio and the New
America Growth Portfolio in the T. Rowe Price Variable Funds includes the
ordinary expenses of operating the Portfolios. Fees and expenses are for the
year ended December 31, 1998.
FUND ADVISERS
Prudential is the investment adviser 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"), which 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 provides
investment advisory services for the Prudential
5
<PAGE>
Jennison Portfolio. Further detail is provided in the prospectus and statement
of additional information for the Series Fund. Prudential, PIC and Jennison are
registered as investment advisers under the Investment Advisers Act of 1940.
Templeton Investment Counsel, Inc. ("TICI") serves as the investment manager for
the Templeton Variable Products Series (Class 2 Shares) International Fund. TICI
is a Florida corporation with offices at Broward Financial Centre, Fort
Lauderdale, Florida 33394-3091. The principal underwriter of the Fund is
Franklin Templeton Distributors, Inc., 100 Fountain Parkway, St. Petersburg,
Florida 33716-1205.
The asset manager of the Kemper Variable Series is Scudder Kemper Investments,
Inc. ("Scudder Kemper"). Scudder Kemper's principal business address is Two
International Place, Boston, Massachusetts 02110-4103.
Janus Capital Corporation ("Janus Capital") serves as the investment adviser and
principal underwriter to the Janus Aspen Series. Janus Capital's principal
business address is 100 Fillmore Street, Denver, Colorado 80206-4928.
Lazard Asset Management is a division of Lazard Freres & Co. LLC ("Lazard
Freres"), a New York limited liability company, serves as the investment manager
and principal underwriter to the Lazard Retirement Series, Inc. Lazard Freres'
principal business address is 30 Rockefeller Plaza, New York, New York 10112.
The investment adviser for the MFS(R) Variable Insurance Trust(sm) is
Massachusetts Financial Services Company ("MFS"). MFS' principal business
address is 500 Boylston Street, Boston, Massachusetts 02116. The principal
underwriter of the series is MFS Fund Distributors, Inc.
located at 500 Boylston Street, Boston, Massachusetts 02116.
The investment manager for T. Rowe Price Variable Funds is T. Rowe Price
Associates, Inc. ("T. Rowe Price"). T. Rowe Price's principal business address
is 100 East Pratt Street, Baltimore, Maryland 21202. T. Rowe Price Investment
Services, Inc. serves as the principal underwriter of the portfolios.
CERTAIN FUNDS HAVE INVESTMENT OBJECTIVES AND POLICIES CLOSELY RESEMBLING THOSE
OF MUTUAL FUNDS WITHIN THE SAME COMPLEX THAT ARE SOLD DIRECTLY TO INDIVIDUAL
INVESTORS. DESPITE SUCH SIMILARITIES, THERE CAN BE NO ASSURANCE THAT THE
INVESTMENT PERFORMANCE OF ANY SUCH FUND WILL RESEMBLE THAT OF ITS RETAIL FUND
COUNTERPART.
YOU WILL RECEIVE A PROSPECTUS FOR EACH AVAILABLE FUND. THAT PROSPECTUS WILL
DESCRIBE THE FUND, ITS INVESTMENT OBJECTIVE AND STRATEGIES, ITS RISKS, AND ITS
MANAGEMENT FEES AND OTHER EXPENSES. YOU SHOULD READ THE FUND PROSPECTUSES
TOGETHER WITH THIS PROSPECTUS AND SUPPLEMENT. AS WITH ALL MUTUAL FUNDS, A FUND
MAY NOT MEET ITS INVESTMENT OBJECTIVE. SUBJECT TO APPLICABLE LAW, PRUDENTIAL MAY
STOP OFFERING ONE OR MORE FUNDS OR MAY SUBSTITUTE A DIFFERENT MUTUAL FUND FOR
ANY FUND.
EACH FUND HAS PROVIDED PRUDENTIAL WITH INFORMATION ABOUT ITS MANAGEMENT FEES AND
OTHER EXPENSES. EXCEPT FOR THE SERIES FUND, PRUDENTIAL HAS NOT VERIFIED THAT
INFORMATION INDEPENDENTLY.
6
<PAGE>
ILLUSTRATIONS OF DEATH BENEFITS AND CASH SURRENDER VALUES
On the next several pages, we show you two examples of how the Death Benefit and
the Cash Surrender Value of your Certificate can change as a result of the
performance of the investment options you select. The examples are not our
prediction of how value will grow. They are hypothetical examples and are just
intended to show you how a Certificate works.
We call these examples "ILLUSTRATIONS." The illustrations are based on several
ASSUMPTIONS about the age of the Participant, the amount of insurance, and the
rules of your Group Contract.
ASSUMPTIONS WE USED FOR BOTH ILLUSTRATIONS
Here's what we assumed about the Certificate in both illustrations:
o The Participant was 40 years old when he or she bought the Group Variable
Universal Life Insurance Certificate.
o The Face Amount of insurance under the Certificate is $100,000.
o The Participant paid a premium of $1,200 when the Certificate was first
issued. He or she pays the same premium amount each year on the Certificate
Anniversary.
ILLUSTRATION #1
In Illustration #1, we assumed that the CURRENT CHARGES Prudential deducts would
stay the same as long as the Certificate remains in effect. Accordingly, we
assumed the following charges:
o The charge deducted from each premium payment for taxes on premium payments
is 2.6%.
o Prudential deducts no sales charge from premium payments.
o Prudential deducts no processing charge from premium payments.
o Each month, Prudential deducts a $3 charge for administrative expenses.
o Prudential deducts a charge equal to an annual rate of 0.45% for mortality
and expense risks.
o Prudential does not deduct a surrender charge.
o The Participant has current standardized cost of insurance charges from the
following table, which is excerpted from Table I under Section 79 of the
Internal Revenue Code:
7
<PAGE>
MONTHLY CURRENT COST
OF INSURANCE RATES
AGE RATE PER THOUSAND
DOLLARS OF
INSURANCE
-------- ---------
40 to 44 $0.17
45 to 49 $0.29
50 to 54 $0.48
55 to 59 $0.75
60 to 64 $1.17
65 to 69 $2.10
70 to 79 $3.76
ILLUSTRATION #2
In Illustration #2, we changed our assumptions about the charges Prudential will
deduct from the Certificate. Instead of current charges, we assumed that the
MAXIMUM CHARGES permitted under the Group Contract would be made.
Here's what we assumed:
o The charge deducted from each premium payment for taxes on premium payments
is 2.6%. (Since Prudential would increase this charge only if a state
increases its tax charge to us, we left this charge at the current level.)
o Prudential deducts a sales charge equal to 3.5% from each premium payment.
o Prudential deducts a processing charge of $2 from each premium payment.
o Each month, Prudential deducts a $6 charge for administrative expenses.
o Prudential deducts a charge equal to an annual rate of 0.90% for mortality
and expense risks.
o The Participant has cost of insurance charges equal to the maximum rates.
(The maximum rates that Prudential can charge are 150% of the 1980
Commissioner's Standard Ordinary Mortality Table [Male], Age Last Birthday
(the "1980 CSO")).
o Prudential deducts a charge upon surrender equal to the lesser of $20 or 2%
of the amount surrendered.
8
<PAGE>
ASSUMPTIONS ABOUT HOW THE CERTIFICATE FUND WAS INVESTED
We assumed that the Certificate Fund was invested in equal amounts in each of
the 16 Funds available under the Group Contract.
Each illustration shows three different assumptions about the investment
performance - or "investment return" - of the Funds. The three different
assumptions are:
o gross annual rate of return is 0%
o gross annual rate of return is 4.5%
o gross annual rate of return is 9%
These are only assumptions to show how the Death Benefit and Cash Surrender
Value change depending on the investment return. Actual investment return will
depend on the investment options you select and will vary from year to year.
WALKING THROUGH THE ILLUSTRATIONS
Here's what to look for in the illustrations:
o The first column shows the Certificate Year.
o The second column gives you some context for comparing the investment
return under the Certificate to the return you might expect from a savings
account. It shows the amount you would accumulate if you invested the same
premiums in a savings account paying a 4% effective annual rate. (Of
course, unlike the Certificate, a savings account does not offer life
insurance protection.)
o The next three columns show what the Death Benefit would be for each of the
four investment return assumptions (0%, 4.5% and 9%).
o The last three columns show what the Cash Surrender Value would be for each
of the four investment return assumptions (0%, 4.5% and 9%).
You should note that:
o Both "gross" and "net" investment returns are shown.
o "Gross" investment return reflects the combined effect of both income on
the investment and capital gains. It is the amount of return before
Prudential takes out any of its charges and before any Fund investment
management fees and other expenses are taken out.
9
<PAGE>
o "Net" investment return is the amount of the investment return after
Prudential takes out its charges and after Fund investment management fees
and other expenses are taken out. Since Illustration #1 and Illustration #2
use different assumptions about charges, the "net" investment returns for
each illustration are different. For some of the Funds, the Fund's
investment advisor or other entity is absorbing certain of the Fund's
expenses. In deriving net investment return, we used those reduced Fund
expenses.
- Fund investment management fees and other expenses were assumed to
equal 0.71% per year, which was the average Fund expense in 1998.
- For Illustration #1, Prudential's mortality and expense risk charges
are 0.45% per year. (In Illustration #1, we assumed that Prudential's
current charges are in effect.) So, including both Fund expenses and
the mortality and expense risk charges, gross returns of 0%, 4.5% and
9% become net returns of -1.16%, 3.34% and 7.84%.
- For Illustration #2, Prudential's mortality and expense risk charges
are 0.90% per year. (In Illustration #2, we assumed that Prudential's
maximum charges are in effect.) So, including both Fund expenses and
the mortality and expense risk charges, gross returns of 0%, 4.5% and
9% become net returns of -1.61%, 2.89% and 7.39%.
o The Death Benefits and Cash Surrender Values are shown with all of
Prudential's charges and Fund investment management fees and other expenses
taken out.
o We assumed no loans or partial withdrawals were taken.
o Neither illustration reflects Dividends or Experience Credits.
IF YOU ASK, PRUDENTIAL WILL GIVE YOU A SIMILAR ILLUSTRATION FOR A CERTIFICATE
THAT SHOWS YOUR AGE, RISK CLASS, PROPOSED FACE AMOUNT OF INSURANCE, AND PROPOSED
PREMIUM PAYMENTS. WE REFER TO THIS AS A "PERSONALIZED ILLUSTRATION."
WE SHOW THESE RATES OF INVESTMENT RETURN ONLY TO HELP YOU UNDERSTAND HOW THE
CERTIFICATE WORKS. YOU SHOULD NOT ASSUME THAT THE INVESTMENT RATES OF RETURN ARE
ACTUAL RATES OF RETURN. YOU SHOULD ALSO NOT ASSUME THAT THESE RATES ARE EXAMPLES
OF PAST OR FUTURE INVESTMENT PERFORMANCE. NEITHER PRUDENTIAL NOR THE FUNDS CAN
TELL YOU WHETHER THESE RATES OF INVESTMENT RETURN CAN ACTUALLY BE ACHIEVED.
THE ACTUAL RATES OF INVESTMENT RETURN FOR YOUR CERTIFICATE WILL DEPEND ON HOW
THE INVESTMENT OPTIONS THAT YOU CHOOSE PERFORM. YOU MAY EARN MORE OR LESS THAN
WHAT IS SHOWN IN THE ILLUSTRATION.
THE DEATH BENEFITS AND CASH SURRENDER VALUES WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATE OF RETURN FOR A CERTIFICATE YEAR VARIED ABOVE OR BELOW THE
AVERAGE, HYPOTHETICAL RATES OF 0%, 4.5% AND 9%.
10
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #1
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 40
ASSUME PAYMENT OF $1,200 ANNUAL PREMIUMS FOR ALL YEARS
USING CURRENT EXPENSE CHARGES
Death Benefit (1) Cash Surrender Value (1)
------------------------------------------- --------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums ------------------------------------------- --------------------------------------------
Certificate Accumulated 0% Gross 4.5% Gross 9% Gross 0% Gross 4.5% Gross 9% Gross
Year at 4% per year (-1.16%) Net (3.34% Net) (7.84% Net) (-1.16%) Net (3.34% Net) (7.84% Net)
-------- -------------- ------------ ------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $1,248 $100,917 $100,964 $101,010 $917 $964 $1,010
2 2,546 101,823 101,959 102,100 1,823 1,959 2,100
3 3,896 102,718 102,988 103,275 2,718 2,988 3,275
4 5,300 103,604 104,051 104,542 3,604 4,051 4,542
5 6,760 104,479 105,150 105,908 4,479 5,150 5,908
6 8,278 105,200 106,139 107,232 5,200 6,139 7,232
7 9,857 105,914 107,161 108,659 5,914 7,161 8,659
8 11,499 106,619 108,217 110,199 6,619 8,217 10,199
9 13,207 107,316 109,309 111,858 7,316 9,309 11,858
10 14,984 108,004 110,437 113,648 8,004 10,437 13,648
15 24,989 110,224 115,426 123,548 10,224 15,426 23,548
20 37,163 110,744 119,543 136,011 10,744 19,543 36,011
25 51,974 108,788 121,653 151,118 8,788 21,653 51,118
30 69,994 0 (2) 118,066 166,351 0 (2) 18,066 66,351
35 91,918 0 102,999 176,429 0 2,999 76,429
40 118,592 0 0 (2) 191,128 0 0 (2) 91,128
(1) Assumes no loan or partial withdrawal has been made.
(2) Based on the interest rate and charges illustrated, the premiums paid are insufficient to keep the certificate in force. The
certificate would lapse under this scenario.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4.5%, AND 9% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
T1
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATION #2
GROUP VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
SPECIFIED FACE AMOUNT: $100,000
ISSUE AGE 40
ASSUME PAYMENT OF $1,200 ANNUAL PREMIUMS FOR ALL YEARS
USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1)
------------------------------------------- --------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of Premiums ------------------------------------------- --------------------------------------------
Certificate Accumulated 0% Gross 4.5% Gross 9% Gross 0% Gross 4.5% Gross 9% Gross
Year at 4% per year (-1.61%) Net (2.89% Net) (7.39% Net) (-1.61%) Net (2.89% Net) (7.39% Net)
------- ------------ ------------ ----------- ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $1,248 $100,566 $100,603 $100,641 $555 $591 $628
2 2,546 101,084 101,184 101,288 1,064 1,164 1,268
3 3,896 101,549 101,736 101,936 1,529 1,716 1,916
4 5,300 101,959 102,256 102,584 1,939 2,236 2,564
5 6,760 102,314 102,740 103,226 2,294 2,720 3,206
6 8,278 102,607 103,181 103,859 2,587 3,161 3,839
7 9,857 102,838 103,577 104,478 2,818 3,557 4,458
8 11,499 103,006 103,921 105,079 2,986 3,901 5,059
9 13,207 103,104 104,209 105,656 3,084 4,189 5,636
10 14,984 103,129 104,431 106,200 3,109 4,411 6,180
15 24,989 101,818 104,091 107,908 1,798 4,071 7,888
20 37,163 0 (2) 0 (2) 106,152 0 (2) 0 (2) 6,132
25 51,974 0 0 0 (2) 0 0 0 (2)
30 69,994 0 0 0 0 0 0
35 91,918 0 0 0 0 0 0
40 118,592 0 0 0 0 0 0
(1) Assumes no loan or partial withdrawal has been made.
(2) Based on the interest rate and charges illustrated, the premiums paid are insufficient to keep the certificate in force. The
certificate would lapse under this scenario.
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, FEDERAL AND
STATE INCOME TAXES, AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CERTIFICATE WOULD BE DIFFERENT FROM
THOSE SHOWN IF THE ACTUAL RATE OF RETURN AVERAGED 0%, 4.5%, AND 9% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE 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 OVER ANY PERIOD OF TIME.
</TABLE>
T2
<PAGE>
PART II
OTHER INFORMATION
<PAGE>
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 ("Prudential") represents that the
fees and charges deducted under the Group 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.
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 (8)(ii) of Post-Effective Amendment No. 12 to Form N-4,
Registration No. 33-25434, filed April 30, 1997, on behalf of the Prudential
Individual Variable Contract Account.
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
<PAGE>
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.
Version 1 of the prospectus consisting of 171 pages; version 2 of the prospectus
consisting of 168 pages; version 3 of the prospectus consisting of 132 pages;
version 4 of the prospectus consisting of 126 pages; version 5 of the prospectus
consisting of 20 pages; version 6 of the prospectus consisting of 19 pages; and
version 7 of the prospectus consisting of 12 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, independent accountants.
2. Clifford E. Kirsch, Esq.
3. Stuart L. Liebeskind, FSA, MAAA.
The following exhibits:
1. The following exhibits correspond to those required by paragraph A
of the instructions as to exhibits in Form N-8B-2:
A. (1) Resolutions of Board of Directors of The Prudential
Insurance Company of America:
(a) Resolution establishing The Prudential Variable
Contract Account GI-2. (Note 2)
(b) Amendment to the Resolution proposing investment in
unaffiliated mutual funds for the Prudential Variable
Contract Account GI-2. (Note 6)
(2) Not Applicable.
(3) Distribution Contracts:
(a) Distribution Agreement between Prudential Investment
Management Services LLC and The Prudential Insurance
Company of America. (Note 7)
(b) Proposed form of Agreement between Prudential
Investment Management Services LLC and independent
brokers with respect to the Sale of the Group Contracts
and Certificates. (Note 6)
(c) Schedule of Sales Commissions. (Note 6)
(d) Representative Fund Participation Agreements. (Note 8)
(4) Not Applicable.
(5) (a) Group Contract. (Note 7)
(b) Individual Certificate. (Note 7)
II-2
<PAGE>
(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 April 8, 1997. (Note 4)
(7) Not Applicable.
(8) Not Applicable.
(9) Not Applicable.
(10) (a) Application Form for Group Contract. (Note 2)
(b) Enrollment Form for Certificate. (Note 6)
(c) Form of Investment Division Allocation Supplement.
(Note 6)
2. Opinion and Consent of Thom Jackson, Esq. as to the legality of the
securities being registered. (Note 1)
3. None.
4. Not Applicable.
5. Not Applicable.
6. Opinion and Consent of Stuart L. Liebeskind, FSA, MAAA, as to
actuarial matters pertaining to the securities being registered.
(Note 1)
7. Powers of Attorney. (Note 9)
8. Memorandum describing Prudential's issuance, transfer, and
redemption procedures for the Certificates pursuant to Rule
6e-3(T)(b)(12)(iii) (Note 5)
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Registrant's Form S-6, filed February 16,
1996.
(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.
(Note 4) Incorporated by reference to Post-Effective Amendment No. 12 to Form
N-4, Registration No. 33-25434, filed April 30, 1997, on behalf of The
Prudential Individual Variable Contract Account.
(Note 5) Incorporated by reference to Pre-Effective Amendment No. 1 to this
Registration Statement, filed August 22, 1996.
(Note 6) Incorporated by reference to Pre-Effective Amendment No. 2 to this
Registration Statement, filed January 27, 1997.
(Note 7) Incorporated by reference to Pre-Effective Amendment No. 3 to this
Registration Statement, filed April 29, 1997.
(Note 8) Incorporated by reference to Post-Effective Amendment No. 1 to this
Registration Statement, filed May 14, 1997.
(Note 9) 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, and to
Post-Effective Amendment No. 4 for Form N-4, Registration No.
333-23271, filed February 23, 1999, on behalf of The Prudential
Discovery Select Group Variable Contract Account.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant, The
Prudential Variable Contract Account GI-2, certifies that this Amendment is
filed solely for one or more of the purposes specified in Rule 485(b)(1) under
the Securities Act of 1933 and that no material event requiring disclosure in
the prospectus, other than one listed in Rule 485(b)(1), has occurred since the
effective date of the Registrant's most recent post-effective amendment and has
caused this Registration Statement to be signed on its behalf by the undersigned
hereunto duly authorized, and its seal hereunto affixed and attested, all in the
city of Newark and the State of New Jersey, on this 30th day of April, 1999.
(Seal) THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT GI-2
(Registrant)
By: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Depositor)
Attest: /s/ Karen David-Chilowicz
------------------------------
Karen David-Chilowicz
Director, Prudential Group Life Insurance
By: /s/ Stuart L. Liebeskind
------------------------------
Stuart L. Liebeskind, FSA, MAAA
Vice President and Assistant Actuary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 4 to the Registration Statement has been signed below by the
following persons in the capacities indicated on this 30th day of April, 1999.
SIGNATURE AND TITLE
-------------------
/s/ *
- --------------------------------------
Arthur F. Ryan
Chairman of the Board, President and
Chief Executive Officer
/s/ *
- --------------------------------------
Anthony S. Piszel
Vice President and Controller
(Chief Accounting Officer)
/s/ *
- --------------------------------------
Richard J. Carbone
Senior Vice President and
Principal Financial Officer
/s/ * *By: /s/ C. Christopher Sprague
- -------------------------------------- --------------------------------
Franklin E. Agnew C. Christopher Sprague
Director (Attorney-in-Fact)
/s/ *
- --------------------------------------
Frederick K. Becker
Director
/s/ *
- --------------------------------------
Gilbert F. Casellas
Director
/s/ *
- --------------------------------------
James G. Cullen
Director
II-4
<PAGE>
/s/ *
- --------------------------------------
Carolyne K. Davis
Director
/s/ *
- --------------------------------------
Roger A. Enrico
Director
/s/ *
- --------------------------------------
Allan D. Gilmour
Director
/s/ *
- --------------------------------------
William H. Gray, III
Director
/s/ *
- --------------------------------------
Jon F. Hanson
Director
/s/ *
- --------------------------------------
Glen H. Hiner, Jr.
Director
/s/ * *By: /s/ C. Christopher Sprague
- -------------------------------------- -----------------------------
Constance J. Horner C. Christopher Sprague
Director (Attorney-in-Fact)
/s/ *
- --------------------------------------
Gaynor N. Kelley
Director
/s/ *
- --------------------------------------
Burton G. Malkiel
Director
/s/ *
- --------------------------------------
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-5
<PAGE>
EXHIBIT INDEX
Consent of PricewaterhouseCoopers LLP, independent Page II-6
accountants
3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the Page II-7
legality of the security registered
6. Opinion and Consent of Stuart L. Liebeskind, FSA, MAA Page II-8
as to actuarial matining to the securities being registered.
<PAGE>
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 4 to the registration statement on Form S-6 (the
"Registration Statement") of our report dated March 26, 1999, relating to the
financial statements of the Prudential Variable Contract Account GI-2, which
appears in such Prospectus.
We also consent to the use in the Prospectus constituting part of this
Registration Statement of our report dated February 26, 1999, relating to the
consolidated financial statements of The Prudential Insurance Company of America
and its subsidiaries, which appears in such Prospectus.
We also consent to the reference to us under the heading "Experts" in the
Prospectus.
PricewaterhouseCoopers LLP
New York, New York
April 23, 1999
II-6
April 27, 1999
The Prudential Insurance company of America
Prudential Plaza
Newark, NJ 07102-3777
Ladies and Gentlemen:
In my capacity as Chief Counsel, Variable Products, Law Department of The
Prudential Insurance Company of American ("Prudential"), I have reviewed the
establishment on June 14, 1988 of The Prudential Variable Contact Account - GI-2
(the "Account") by the Board of Directors of Prudential as a separate account
for assets applicable to certain variable life insurance contracts, pursuant to
the provisions of Section 17B:28-7 of the Revised Statutes of New Jersey. I have
also reviewed the resolution dated December 10, 1996 of the Finance Committee of
the Board of Directors of Prudential expanding the investment options in which
the Account may invest. I am responsible for oversight of the preparation and
review of the Registration Statement on Form S-6, as amended, filed by
Prudential with the U.S. Securities and Exchange Commission (Registration No.
333 01031) under the Securities Act of 1933 for the registration of certain
group variable universal life insurance contracts and certificates thereunder
issued with respect to the Account.
I am of the following opinion:
1. Prudential is a corporation duly organized under the laws of the
State of New Jersey and is a validly existing corporation.
2. The Account has been duly created and is validly existing as a
separate account pursuant to the aforesaid provisions of New
Jersey law.
3. The portion of the assets held in the Account equal to the
reserve and other liabilities for variable benefits under the
group variable universal life insurance contracts and the
certificates thereunder is not chargeable with liabilities
arising out of any other business Prudential may conduct.
4. The group variable universal life insurance contracts and the
certificates thereunder are legal and binding obligations of
Prudential, in accordance with their terms.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as I judged to be necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/
Clifford E. Kirsch
II-7
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
290 West Mt. Pleasant Avenue, Livingston NJ 07039
Tel 973 548-6360 Fax 973 548-6350
[email protected]
The Prudential Insurance
Company of America
Prudential Plaza
Newark, NJ 07102-3777
To The Prudential:
This opinion is furnished in connection with the registration by The Prudential
Insurance Company of America of certain Group Variable Universal Life insurance
contracts and certificates ("Contracts") under the Securities Act of 1933. I
have reviewed the Contract form and I have participated in the preparation and
review of the Registration Statement and Exhibits thereto. In my opinion:
(1) The illustrations of cash surrender values and death benefits included in
the section of the prospectus entitled "Hypothetical Illustrations of Death
Benefits and Cash Surrender Values based on the assumptions stated in this
section, are consistent with the provisions of the respective forms of the
Contracts. The rate structure of the Contracts has not been designed so as
to make the relationship between premiums and benefits, as shown in the
illustrations, appear more favorable to a prospective purchaser of a
Contract issued on an individual age 40, than to prospective purchasers of
a Contract for other ages.
(2) The deduction from premium payments for federal taxes in an amount equal to
.35% of each premium is a reasonable charge for these contracts in relation
to the additional income tax burden imposed upon The Prudential Insurance
Company of America as the result of the enactment of Section 848 of the
Internal Revenue Code. In reaching that conclusion a number of factors were
taken into account that, in my opinion, were appropriate and which resulted
in a projected after-tax rate of return that is a reasonable rate to use in
discounting the tax benefit of the deductions allowed in Section 848 in
taxable years subsequent to the year in which the premiums are received.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to my name under the heading "Experts" in the
prospectus.
Very truly yours,
/s/
Stuart L. Liebeskind, FSA, MAAA
Vice President and Actuary
The Prudential Insurance Company of America
Dated 4/29/99
II-8
