As filed with the SEC on ____________. Registration No. 33-61079
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
POST-EFFECTIVE AMENDMENT NO. 2 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
APPRECIABLE ACCOUNT
(Exact Name of Trust)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
PRUDENTIAL PLAZA
NEWARK, NEW JERSEY 07102-3777
(800) 445-4571
(Address and telephone number of principal executive offices)
------------
THOMAS C. CASTANO
ASSISTANT SECRETARY
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRUDENTIAL PLAZA
NEWARK, NEW JERSEY 07102-3777
(Name and address of agent for service)
Copy to:
JEFFREY C. MARTIN
SHEA & GARDNER
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036
------------
Prudential Survivorship Preferred Variable Appreciable Life Insurance
Contracts--The Registrant has registered an indefinite amount of securities
pursuant to Rule 24f-2 under the Investment Company Act of 1940. The Rule 24f-2
notice for fiscal year 1996 was filed on February 28, 1997.
It is proposed that this filing will become effective (check appropriate space):
|_| immediately upon filing pursuant to paragraph (b) of Rule 485
|X| on May 1, 1997 pursuant to paragraph (b) of Rule 485
-----------
(date)
|_| 60 days after filing pursuant to paragraph (a) of Rule 485
|_| on ___________ pursuant to paragraph (a) 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 Appreciable Account
6. The Prudential Variable Appreciable Account
7. Not Applicable
8. Not Applicable
9. Litigation
10. Brief Description of the Contract; Short-Term
Cancellation Right, or "Free Look"; Type of Insurance
Amount; Changing the Type of Insurance Amount;
Premiums; Contract Date; Allocation of Premiums;
Transfers; Charges and Expenses; How a Contract's
Cash Surrender Value Will Vary; How a Fixed Insurance
Amount Contract's Death Benefit Will Vary; How a
Variable Insurance Amount Contract's Death Benefit Will
Vary; Surrender of a Contract; Withdrawal of Excess
Cash Surrender Value; Decreases in Basic Insurance
Amount; Lapse and Reinstatement; When Proceeds are
Paid; Options on Lapse; Riders; Other General Contract
Provisions; Voting Rights; Substitution of Series Fund
Shares
11. Brief Description of the Contract; The Prudential
Variable Appreciable Account
12. Cover Page; Brief Description of the Contract; The
Prudential Series Fund, Inc.; Sale of the Contract and
Sales Commissions
13. Brief Description of the Contract; The Prudential Series
Fund, Inc.; Charges and Expenses; Sale of the Contract
and Sales Commissions; Reduction of Charges for
Concurrent Sales to Several Individuals
14. Brief Description of the Contract; Requirements for
Issuance of a Contract
15. Brief Description of the Contract; Allocation of
Premiums; Transfers; The Fixed-Rate Option
16. Brief Description of the Contract; Detailed Information
for Prospective Contract Owners
17. When Proceeds are Paid
18. The Prudential Variable Appreciable Account
19. Reports to Contract Owners
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
20. Not Applicable
21. Contract Loans
22. Not Applicable
23. Not Applicable
24. Other General Contract Provisions
25. The Prudential Insurance Company of America
26. Brief Description of the Contract; The Prudential Series
Fund, Inc.; Charges and Expenses
27. The Prudential Insurance Company of America; The
Prudential Series Fund, Inc.
28. The Prudential Insurance Company of America; Directors
and Officers
29. The Prudential Insurance Company of America
30. Not Applicable
31. Not Applicable
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. The Prudential Insurance Company of America
36. Not Applicable
37. Not Applicable
38. Sale of the Contract and Sales Commissions
39. Sale of the Contract and Sales Commissions
40. Not Applicable
41. Sale of the Contract and Sales Commissions
42. Not Applicable
43. Not Applicable
44. Brief Description of the Contract; The Prudential Series
Fund, Inc.; How a Contract's Cash Surrender Value Will
Vary; How a Fixed Insurance Amount Contract's Death
Benefit Will Vary; How a Variable Insurance Amount
Contract's Death Benefit Will Vary
45. Not Applicable
46. Brief Description of the Contract; The Prudential
Variable Appreciable Account; The Prudential Series
Fund, Inc.
47. The Prudential Variable Appreciable Account; The
Prudential Series Fund, Inc.
48. Not Applicable
49. Not Applicable
50. Not Applicable
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
- ------------------ --------
51. Not Applicable
52. Substitution of Series Fund Shares
53. Tax Treatment of Contract Benefits
54. Not Applicable
55. Not Applicable
56. Not Applicable
57. Not Applicable
58. Not Applicable
59. Financial Statements; Financial Statements of The
Prudential Variable Appreciable Account; Statutory
Financial Statements of The Prudential Insurance
Company of America
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
<PAGE>
PROSPECTUS
MAY 1, 1997
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
SURVIVORSHIP PREFERRED(R)
This prospectus describes a flexible premium survivorship variable universal
life insurance contract offered by The Prudential Insurance Company of America
under the name PRUDENTIAL SURVIVORSHIP PREFERRED(R) (the "Contract"). The
Contract provides life insurance coverage on two insureds with a death benefit
payable on the second death as long as the Contract is in force.
Purchasers have considerable flexibility as to when and in what amounts they pay
premiums. Subject to an initial premium, you can pay premium amounts as desired,
so long as sufficient money is in the Contract Fund to cover all charges. If
there is insufficient money in the Contract Fund, the Contract may lapse without
value.
There are two insurance amount types available. One type generally remains fixed
in the amount initially selected, the other will vary daily with the investment
performance of the investment options you select. For each type, there are two
premium levels which, if paid, provide death benefit guarantees.
A portion of the Contract's premiums and the earnings on those premiums will be
held in one or more of the following ways. They can be invested in one or more
of fifteen available subaccounts of The Prudential Variable Appreciable Account:
o MONEY MARKET
o DIVERSIFIED BOND
o GOVERNMENT INCOME
o ZERO COUPON BOND 2000
o ZERO COUPON BOND 2005
o CONSERVATIVE BALANCED
o FLEXIBLE MANAGED
o HIGH YIELD BOND
o STOCK INDEX
o EQUITY INCOME
o EQUITY
o PRUDENTIAL JENNISON
o SMALL CAPITALIZATION STOCK
o GLOBAL
o NATURAL RESOURCES
each of which invests in a corresponding portfolio of The Prudential Series
Fund, Inc. Or, they can be allocated to a FIXED-RATE OPTION. Other subaccounts
and portfolios may be added in the future. The attached prospectus for the
Series Fund, and the Series Fund's statement of additional information describe
the investment objectives of and the risks of investing in the portfolios.
Interest is credited daily upon any portion of the premium payment allocated to
the fixed-rate option at rates periodically declared by Prudential in its sole
discretion but never less than an effective annual rate of 4%. This prospectus
describes the Contract generally and The Prudential Variable Appreciable
Account.
THE REPLACEMENT OF LIFE INSURANCE IS GENERALLY NOT IN THE INTEREST OF THE
CUSTOMER. IN MOST CASES, WHEN A CUSTOMER REQUIRES ADDITIONAL COVERAGE, A NEW
POLICY SUPPLEMENTING THE EXISTING POLICY SHOULD BE REQUESTED, THEREBY PROTECTING
THE BENEFITS OF THE ORIGINAL POLICY. IF YOU ARE CONSIDERING REPLACING A POLICY,
YOU SHOULD COMPARE THE BENEFITS AND COSTS OF SUPPLEMENTING YOUR EXISTING POLICY
WITH THE BENEFITS AND COSTS OF PURCHASING THE CONTRACT DESCRIBED IN THIS
PROSPECTUS AND YOU SHOULD CONSULT WITH A QUALIFIED TAX ADVISOR.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE. IT IS ATTACHED TO
A CURRENT PROSPECTUS FOR THE PRUDENTIAL SERIES FUND, INC.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Prudential Plaza
Newark, New Jersey 07102-3777
Telephone: (800) 778-5510
*PRUDENTIAL SURVIVORSHIP PREFERRED is a registered mark of Prudential.
SVUL-1 Ed 5-97 Catalog # 64M631J
<PAGE>
PROSPECTUS CONTENTS
PAGE
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS ...................... 1
BRIEF DESCRIPTION OF THE CONTRACT .......................................... 2
GENERAL INFORMATION ABOUT PRUDENTIAL, THE PRUDENTIAL VARIABLE APPRECIABLE
ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS AVAILABLE UNDER THE
CONTRACT ............................................................. 5
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA ............................ 5
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT ............................ 5
THE PRUDENTIAL SERIES FUND, INC ........................................ 6
WHICH INVESTMENT OPTION SHOULD BE SELECTED? ............................ 7
DETAILED INFORMATION FOR PROSPECTIVE CONTRACT OWNERS ....................... 7
REQUIREMENTS FOR ISSUANCE OF A CONTRACT ................................ 7
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK" ........................... 7
TYPE OF INSURANCE AMOUNT ............................................... 8
CHANGING THE TYPE OF INSURANCE AMOUNT .................................. 10
PREMIUMS ............................................................... 10
DEATH BENEFIT GUARANTEE ................................................ 11
CONTRACT DATE .......................................................... 13
ALLOCATION OF PREMIUMS ................................................. 13
TRANSFERS .............................................................. 14
DOLLAR COST AVERAGING .................................................. 15
AUTO-REBALANCING ....................................................... 15
CHARGES AND EXPENSES ................................................... 15
HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY ........................ 19
HOW A FIXED INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY ........ 19
HOW A VARIABLE INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY ..... 20
PARTICIPATION IN DIVISIBLE SURPLUS ..................................... 21
SURRENDER OF A CONTRACT ................................................ 22
WITHDRAWALS ............................................................ 22
DECREASES IN BASIC INSURANCE AMOUNT .................................... 22
WHEN PROCEEDS ARE PAID ................................................. 23
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND
ACCUMULATED PREMIUMS ................................................. 23
CONTRACT LOANS ......................................................... 25
SALE OF THE CONTRACT AND SALES COMMISSIONS ............................. 26
TAX TREATMENT OF CONTRACT BENEFITS ..................................... 26
WITHHOLDING ............................................................ 28
LAPSE AND REINSTATEMENT ................................................ 29
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS .... 29
OTHER GENERAL CONTRACT PROVISIONS ...................................... 30
RIDERS ................................................................. 30
THE FIXED-RATE OPTION .................................................. 31
VOTING RIGHTS .......................................................... 32
SUBSTITUTION OF SERIES FUND SHARES ..................................... 33
REPORTS TO CONTRACT OWNERS ............................................. 33
STATE REGULATION ....................................................... 33
EXPERTS ................................................................ 33
LITIGATION ............................................................. 34
ADDITIONAL INFORMATION ................................................. 34
FINANCIAL STATEMENTS ................................................... 35
DIRECTORS AND OFFICERS OF PRUDENTIAL ....................................... 36
<PAGE>
PAGE
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT ........ A1
STATUTORY FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA ..................................................... B1
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FOR
THE PRUDENTIAL SERIES FUND, INC.
<PAGE>
DEFINITIONS OF SPECIAL TERMS
USED IN THIS PROSPECTUS
ACCUMULATED NET PAYMENTS--the actual premium payments you make accumulated at an
effective annual rate of 4% less any withdrawals you make accumulated at an
effective annual rate of 4%.
ATTAINED AGE--An insured's age on the Contract date plus the number of years
since then.
BASIC INSURANCE AMOUNT--The amount of life insurance as shown in the Contract.
Also known as the face amount.
CASH SURRENDER VALUE--The amount payable to the Contract owner upon surrender of
the Contract. It is equal to the Contract Fund minus any Contract debt.
CONTRACT--The Prudential Survivorship Preferred policy described in this
prospectus.
CONTRACT ANNIVERSARY--The same date as the Contract date in each later year.
CONTRACT DATE--The date the Contract is effective, as specified in the Contract.
CONTRACT DEBT--The principal amount of all outstanding loans plus any interest
accrued thereon.
CONTRACT FUND--The total amount credited to a specific Contract. On any date it
is equal to the sum of the amounts in all the subaccounts, the amount invested
under the fixed-rate option, and the principal amount of any Contract debt.
CONTRACT MONTH--A month that starts on the Monthly date.
CONTRACT OWNER--You. Unless a different owner is named in the application, the
owners of the Contract are the insureds jointly or the survivor of them. If the
Contract is owned jointly, the exercise of rights under the Contract must be
made by both jointly.
CONTRACT YEAR--A year that starts on the Contract date or on a Contract
anniversary.
DEATH BENEFIT--The amount payable to the beneficiary upon the second death of
two insureds.
FACE AMOUNT--See basic insurance amount.
FIXED-RATE OPTION--An investment option under which Prudential guarantees that
interest will be added to the amount invested at a rate declared periodically in
advance.
INSURANCE AMOUNT--the amount we will pay upon the second death of two insureds
before reduction by any Contract debt and amounts needed to pay charges through
the date of death.
ISSUE AGE--An insured's age as of the Contract date.
MONTHLY DATE--The Contract date and the same date in each subsequent month.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--Us, we, Prudential. The company
offering the Contract.
THE PRUDENTIAL SERIES FUND, INC. (THE "SERIES FUND")--A mutual fund with
separate portfolios, one or more of which may be chosen as an underlying
investment for the Contract.
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT (THE "ACCOUNT")--A separate account
of Prudential registered as a unit investment trust under the Investment Company
Act of 1940.
SUBACCOUNT--An investment division of the Account, the assets of which are
invested in the shares of the corresponding portfolio of the Series Fund.
VALUATION PERIOD--The period of time from one determination of the value of the
amount invested in a subaccount to the next. Such determinations are made when
the net asset values of the portfolios of the Series Fund are calculated, which
is generally at 4:15 p.m. New York City time on each day during which the New
York Stock Exchange is open.
WE-- The Prudential Insurance Company of America.
YOU--the owner[s] of the Contract.
1
<PAGE>
BRIEF DESCRIPTION OF THE CONTRACT
This section provides only an overview of the more significant provisions of the
Contract. It omits details which are provided in the rest of this prospectus.
The PRUDENTIAL SURVIVORSHIP PREFERRED Contract (referred to from now on as the
"Contract") is a flexible premium variable universal life insurance policy. It
is issued and sold by The Prudential Insurance Company of America
("Prudential"). The Contract provides life insurance coverage, with a death
benefit payable upon the second death of two insureds. A significant element of
the Contract is the Contract Fund, the amount of which changes every business
day. That amount represents the value of your Contract on that day.
A broad objective of the Contract is to provide benefits that will increase in
value if favorable investment results are achieved. Prudential has established a
separate account, like a separate division within the Company, called The
Prudential Variable Appreciable Account (from now on, the "Account"). You may
choose to have premiums, after the deduction of certain charges (described
below), invested into any one or more of the fifteen available subaccounts of
the Account.
The money allocated to each subaccount is immediately invested in a
corresponding portfolio of The Prudential Series Fund, Inc. (the "Series Fund"),
a series mutual fund for which Prudential is the investment advisor.
o The MONEY MARKET PORTFOLIO is invested in short-term debt obligations
similar to those purchased by money market funds.
o The DIVERSIFIED BOND PORTFOLIO is invested primarily in high quality
medium-term corporate and government debt securities.
o The GOVERNMENT INCOME PORTFOLIO is invested primarily in U.S. Government
Securities including intermediate and long-term U.S. Treasury securities
and debt obligations issued by agencies of or instrumentalities
established, sponsored or guaranteed by the U.S. Government.
o The two ZERO COUPON BOND PORTFOLIOS -- 2000 AND 2005 are invested
primarily in debt obligations of the United States Treasury and investment
grade corporations that have been issued without interest coupons or
stripped of their unmatured interest coupons, interest coupons that have
been stripped from such debt obligations, and receipts and certificates
for such stripped debt obligations and stripped coupons.
o The CONSERVATIVE BALANCED PORTFOLIO is invested in a mix of money market
instruments, fixed income securities, and common stocks, in proportions
believed by the investment manager to be appropriate for an investor who
desires diversification of investment who prefers a relatively lower risk
of loss and a correspondingly reduced chance of high appreciation.
o The FLEXIBLE MANAGED PORTFOLIO is invested in a mix of money market
instruments, fixed income securities, and common stocks, in proportions
believed by the investment manager to be appropriate for an investor
desiring diversification of investment who is willing to accept a
relatively high level of loss in an effort to achieve greater
appreciation.
o The HIGH YIELD BOND PORTFOLIO is invested primarily in high yield fixed
income securities of medium to lower quality, also known as high risk
bonds.
o The STOCK INDEX PORTFOLIO is invested in common stocks selected to
duplicate the price and yield performance of the Standard & Poor's 500
Composite Stock Price Index.
o The EQUITY INCOME PORTFOLIO is invested primarily in common stocks and
convertible securities that provide favorable prospects for investment
income returns above those of the Standard & Poor's 500 Stock Index or the
NYSE Composite Index.
o The EQUITY PORTFOLIO is invested primarily in common stocks.
2
<PAGE>
o The PRUDENTIAL JENNISON PORTFOLIO is invested primarily in equity
securities of established companies with above-average growth prospects.
o The SMALL CAPITALIZATION STOCK PORTFOLIO is invested primarily in equity
securities of publicly-traded companies with small market capitalization.
o The GLOBAL PORTFOLIO is invested in common stocks and common stock
equivalents (such as convertible debt securities) of foreign and domestic
issuers.
o The NATURAL RESOURCES PORTFOLIO is invested primarily in common stocks and
convertible securities of natural resource companies, and in securities
(typically debt securities or preferred stock) the terms of which are
related to the market value of a natural resource.
Further information about the Series Fund portfolios can be found under THE
PRUDENTIAL SERIES FUND, INC. on page 6 and in the attached prospectus for the
Series Fund.
You have an additional option which is regulated differently from the other 15
because it is not an investment company registered under the Investment Company
Act of 1940. This is a FIXED-RATE OPTION that increases the portion of your
Contract Fund allocated to this option at a guaranteed rate of interest.
Thus your Contract Fund value changes every day depending upon the change in the
value of the particular portfolios (or fixed-rate option) that you have selected
for the investment of your Contract Fund.
Although the selection of any of the subaccounts offers the possibility that
your Contract Fund value will increase if there is favorable investment
performance, you are subject to the risk that investment performance will be
unfavorable and that the value of your Contract Fund will decrease. The risk
will be different, depending upon which investment options you choose. See WHICH
INVESTMENT OPTION SHOULD BE SELECTED?, page 7. If you select the fixed-rate
option, you are credited with a declared rate or rates of interest but you
assume the risk that the rate may change, although it will never be lower than
an effective annual rate of 4%.
Prudential deducts certain charges from each premium payment and from the
amounts held in the designated investment options. These charges, which are
largely designed to cover insurance costs and risks as well as sales and
administrative expenses, are fully described under CHARGES AND EXPENSES, on page
15. In brief, and subject to that fuller description, the following diagram
outlines the maximum charges which may be made:
3
<PAGE>
-----------------------------------------------------------
DEDUCTIONS FROM PREMIUM PAYMENTS
o A charge of up to 7.5% is deducted for any taxes
attributable to premiums. In Oregon this is called a
premium based administrative charge.
o A charge for sales expenses is deducted (this charge
depends upon the Contract year and the amount paid
during that year and disappears after the twentieth
year).
-----------------------------------------------------------
- --------------------------------------------------------------------------------
DAILY CHARGES
o Management fees and expenses are deducted from the assets of the Series
Fund.
o A daily charge equivalent to an annual rate of up to 0.9% is deducted from
the assets of the variable investment options for mortality and expense
risks.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MONTHLY CHARGES
o The Contract Fund is reduced by a monthly administrative charge of up to
$7.50 per Contract and $0.07 per $1,000 of basic insurance amount in the
first Contract year; for Contract years after the first, the $0.07 per
$1,000 portion of the charge drops to $0.01 per $1,000 of basic insurance
amount.
o A cost of insurance ("COI") charge is deducted.
o The Contract Fund is reduced by a Death Benefit Guarantee risk charge of
up to $0.01 per $1,000 of the basic insurance amount.
o If the Contract includes riders, a deduction from the Contract Fund will
be made for charges applicable to those riders
o If the rating class of an insured results in an extra charge, that charge
will be deducted from the Contract Fund.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL CHARGES
o An administrative processing charge of up to $25 is made in connection
with any withdrawals.
o Although no such charge is currently being made, we reserve the right to
charge up to $25 for each decrease in basic insurance amount.
o An administrative processing charge of up to $25 will be made for each
transfer exceeding twelve in any Contract year.
- --------------------------------------------------------------------------------
There are two types of death benefit available. You may choose a Contract with a
fixed insurance amount under which the cash surrender value varies daily with
investment experience, and the basic insurance amount chosen by you at the
outset does not change. However, the Contract Fund may grow to a point where the
insurance amount may increase and vary with investment experience. If you choose
a Contract with a variable insurance amount, the cash surrender value and the
insurance amount both vary with investment experience. For either type of
insurance amount, as long as the Contract is in force, the insurance amount will
never be less than the basic insurance amount shown in your Contract.
See TYPE OF INSURANCE AMOUNT, page 8.
The Contract is a flexible premium contract - there are no scheduled premiums.
Except for the minimum initial premium, and subject to a minimum of $25 per
subsequent payment, the timing and amount of premium payments is discretionary
and the Contract will remain in force provided that the Contract Fund is
sufficient to cover the charges. However, if the premiums you pay on an
accumulated basis are high enough, and Contract debt does not exceed the
Contract Fund, Prudential guarantees that your Contract will not lapse even if
investment
4
<PAGE>
experience is very unfavorable and the Contract Fund drops below zero. There are
two guarantees available, one that lasts for the lifetime of the Contract and
another that lasts for a stated, reasonably lengthy period. The guarantee for
the life of the Contract requires higher premium payments. See PREMIUMS, page
10, DEATH BENEFIT GUARANTEE, page 11 and LAPSE AND REINSTATEMENT, page 29.
While you decide when to make premium payments and, subject to a $25 minimum, in
what amounts, we do offer and suggest regular billing of premiums. When applying
for the Contract, you should discuss with your Prudential representative if you
would like to be billed, how frequently and for what amount. See PREMIUMS, page
10.
For a limited time, a Contract may be returned for a refund in accordance with
the terms of its "free look" provision. See SHORT-TERM CANCELLATION RIGHT OR
"FREE LOOK," page 7.
This Summary provides only a brief overview of the more significant aspects of
the Contract. Further detail is provided in the subsequent sections of this
prospectus and in the Contract. The Contract, including the application attached
to it, constitutes the entire agreement between the owner and Prudential and
should be retained.
For the DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, see page 1.
GENERAL INFORMATION ABOUT PRUDENTIAL, THE
PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT, AND
THE VARIABLE INVESTMENT OPTIONS AVAILABLE
UNDER THE CONTRACT
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
The Prudential Insurance Company of America ("Prudential") is a mutual insurance
company, founded in 1875 under the laws of the State of New Jersey. We are
licensed to sell life insurance and annuities in the District of Columbia, Guam,
and in all states. These Contracts are not offered in any state in which the
necessary approvals have not yet been obtained.
Prudential's statutory financial statements begin on page B1 and should be
considered only as bearing upon Prudential's ability to meet its obligations
under the Contracts.
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
The Prudential Variable Appreciable Account (the "Account") was established on
August 11, 1987 under New Jersey law as a separate investment account. The
Account meets the definition of a "separate account" under the federal
securities laws. The Account holds assets that are segregated from all of
Prudential's other assets.
The obligations to Contract owners and beneficiaries arising under the Contract
are general corporate obligations of Prudential. Prudential is also the legal
owner of the assets in the Account. Prudential will maintain assets in the
Account with a total market value at least equal to the reserve and other
liabilities relating to the variable benefits attributable to the Account. These
assets may not be charged with liabilities which arise from any other business
Prudential conducts. In addition to these assets, the Account's assets may
include funds contributed by Prudential to commence operation of the Account and
may include accumulations of the charges Prudential makes against the Account.
From time to time these additional assets may be withdrawn by Prudential.
5
<PAGE>
The Account is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940 ("1940 Act") as a unit investment
trust, which is a type of investment company. This does not involve any
supervision by the SEC of the management or investment policies or practices of
the Account. For state law purposes, the Account is treated as a part or
division of Prudential. The Account's financial statements begin on page A1.
Currently, you may invest in one or a combination of fifteen available
subaccounts within the Account, each of which invests in a single corresponding
portfolio of The Prudential Series Fund, Inc. Additional subaccounts may be
added in the future.
THE PRUDENTIAL SERIES FUND, INC.
The Prudential Series Fund, Inc. (the "Series Fund") is registered under the
1940 Act as an open-end diversified management investment company. Its shares
are currently sold only to separate accounts of Prudential and certain
subsidiary insurers that offer variable life insurance and variable annuity
contracts. The Account will purchase and redeem shares from the Series Fund at
net asset value. Shares will be redeemed to the extent necessary for Prudential
to provide benefits under the Contract and to transfer assets from one
subaccount to another, as requested by Contract owners. Any dividend or capital
gain distribution received from a portfolio of the Series Fund will be
reinvested immediately at net asset value in shares of that portfolio and
retained as assets of the corresponding subaccount.
Prudential is the investment advisor for the assets of each of the portfolios of
the Series Fund. Prudential's principal business address is Prudential Plaza,
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 Capital Corporation ("Jennison"),
under which Jennison furnishes investment advisory services in connection with
the management of 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 advisors under the
Investment Advisers Act of 1940.
As an investment advisor, Prudential charges the Series Fund a daily investment
management fee as compensation for its services. See DEDUCTIONS FROM PORTFOLIOS,
page 17.
It is conceivable that in the future it may become disadvantageous for both
variable life insurance and variable annuity contract separate accounts to
invest in the same underlying mutual fund. Although neither the companies which
invest in the Series Fund, nor the Series Fund currently foresees any such
disadvantage, the Series Fund's Board of Directors intends to monitor events in
order to identify any material conflict between variable life insurance and
variable annuity contract owners and to determine what action, if any, should be
taken in response thereto. Material conflicts could result from such things as:
(1) changes in state insurance law; (2) changes in federal income tax law; (3)
changes in the investment management of any portfolio of the Series Fund; or (4)
differences between voting instructions given by variable life insurance and
variable annuity contract owners.
A FULL DESCRIPTION OF THE SERIES FUND, ITS INVESTMENT OBJECTIVES, MANAGEMENT,
POLICIES, AND RESTRICTIONS, ITS EXPENSES, THE RISKS ATTENDANT TO INVESTMENT
THEREIN--INCLUDING ANY RISKS ASSOCIATED WITH INVESTMENT IN THE HIGH YIELD BOND
PORTFOLIO, AND ALL OTHER ASPECTS OF ITS OPERATION IS CONTAINED IN THE ATTACHED
PROSPECTUS FOR THE SERIES FUND AND IN ITS STATEMENT OF
6
<PAGE>
ADDITIONAL INFORMATION, WHICH SHOULD BE READ IN CONJUNCTION WITH THIS
PROSPECTUS. THERE IS NO ASSURANCE THAT THE INVESTMENT OBJECTIVES WILL BE MET.
WHICH INVESTMENT OPTION SHOULD BE SELECTED?
Historically, for investments held over relatively long periods, the investment
performance of common stocks has generally been superior to that of short or
long-term debt securities, even though common stocks have been subject to much
more dramatic changes in value over short periods of time. Accordingly, the
Stock Index, Equity Income, Equity, Prudential Jennison, Small Capitalization
Stock, Global or Natural Resources Portfolios may be desirable options if you
are willing to accept such volatility in your Contract values. Each of these
equity portfolios involves somewhat different policies and investment risks.
You may prefer the somewhat greater protection against loss of principal (and
reduced chance of high total return) provided by the Government Income or
Diversified Bond Portfolios. There may be times when you desire even greater
safety of principal and may then prefer the Money Market Portfolio or the
fixed-rate option, recognizing that the level of short-term rates may change
rather rapidly. Money invested in a Zero Coupon Bond Portfolio and held to its
liquidation date will realize a predictable return, although the portfolio's
value may fluctuate significantly with changes in interest rates prior to its
liquidation date. If you are willing to take risks and possibly achieve a higher
total return, you may prefer the High Yield Bond Portfolio, recognizing that
with higher yielding, lower quality bonds the risks are greater. You may wish to
divide your invested premium among two or more of the portfolios. You may wish
to obtain diversification by relying on Prudential's judgment for an appropriate
asset mix by choosing the Conservative Balanced or Flexible Managed Portfolios.
You should make a choice that takes into account how willing you are to accept
investment risks, the manner in which your other assets are invested, and your
own predictions about what investment results are likely to be in the future.
Prudential does recommend AGAINST frequent transfers among the several
investment options as experience generally indicates that "market timing"
investing, particularly by non-professional investors, is likely to prove
unsuccessful.
DETAILED INFORMATION FOR
PROSPECTIVE CONTRACT OWNERS
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
The minimum basic insurance amount that can be applied for is $250,000. The
Contract may be issued on two insureds each between the ages of 20 and 85.
Before issuing any Contract, Prudential requires evidence of insurability on
each insured which may include a medical examination. Non-smokers are offered
the most favorable cost of insurance rates. A higher cost of insurance rate
and/or additional charge is charged if an extra mortality risk is involved.
These are the current underwriting requirements. We reserve the right to change
them on a non-discriminatory basis.
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"
Generally, you may return the Contract for a refund within 10 days after you
receive it, within 45 days after Part I of the application for insurance is
signed or within 10 days after Prudential mails or delivers a Notice of
Withdrawal Right, whichever is latest. Some states allow a longer period of time
during which a Contract may be returned for a refund. A refund can be requested
by mailing or delivering the Contract to the representative who sold it or to
the
7
<PAGE>
Home Office specified in the Contract. A Contract returned according to this
provision shall be deemed void from the beginning. You will then receive a
refund of all premium payments made, plus or minus any change due to investment
experience. However, if applicable law so requires, if you exercise your
short-term cancellation right, you will receive a refund of all premium payments
made, with no adjustment for investment experience.
TYPE OF INSURANCE AMOUNT
You may select either a fixed or a variable insurance amount. Generally, a
Contract with a fixed insurance amount has an insurance amount equal to the
basic insurance amount. The death benefit of this type does not vary with the
investment performance of the investment options selected by you, except in
certain circumstances. See HOW A FIXED INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT
WILL VARY, page 19. Favorable investment results of the variable investment
options to which the assets related to the Contract are allocated and payment of
additional premiums will generally result in increases in the cash surrender
value. See HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY, page 19.
A Contract with a variable insurance amount has an insurance amount which will
generally equal the basic insurance amount plus the Contract Fund. Since the
Contract Fund is a component of the insurance amount, favorable investment
performance and payment of additional premiums generally result in an increase
in the death benefit as well as in the cash surrender value. Over time, however,
the increase in the cash surrender value will be less than under a Contract with
a fixed insurance amount. This is because, given two Contracts with the same
basic insurance amount and equal Contract Funds, generally the cost of insurance
charge for a Contract with a variable insurance amount will be greater. See HOW
A CONTRACT'S CASH SURRENDER VALUE WILL VARY, page 19 and HOW A VARIABLE
INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY, page 20. Unfavorable
investment performance will result in decreases in the insurance amount and in
the cash surrender value. But, as long as the Contract is not in default and
there is no Contract debt, the death benefit may not fall below the basic
insurance amount stated in the Contract.
In choosing an insurance amount type, you should also consider whether you
intend to use the withdrawal feature. Purchasers of Contracts with a fixed
insurance amount should note that any withdrawal may result in a reduction of
the basic insurance amount. In addition, we will not allow you to make a
withdrawal that will decrease the insurance amount below the minimum basic
insurance amount. See WITHDRAWALS, page 22.
Here are two examples of how the death benefit and cash surrender values may
vary for Contracts with fixed and variable insurance amounts. The graphs are
based on the same assumptions as the illustrations shown on pages T-1 through
T-4. Specifically, a Contract with a basic insurance amount of $1,000,000 has
been issued on the lives of a 55 year old male and a 50 year old female, both
non-smokers, with no extra risks or substandard ratings, and no extra benefit
riders added to the Contract. The first chart assumes that the target premium
amount (see PREMIUMS, page 10) is paid on each Contract anniversary, no loans
are taken, current charges will continue for the indefinite future, and there is
a uniform gross annual rate of return of 8%. The second chart makes the same
assumptions, except that it assumes that the maximum charges permitted by the
Contract are made.
8
<PAGE>
[THE FOLLOWING TABLE WAS DEPICTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
CURRENT CONTRACTUAL CHARGES
FIXED INSURANCE AMT. VARIABLE INSURANCE AMT.
-------------------------------- ---------------------------------
CASH SURRENDER CASH SURRENDER
DEATH BENEFIT VALUE DEATH BENEFIT VALUE
END OF ------------- -------------- ------------- --------------
POLICY 8% GROSS 8% GROSS 8% GROSS 8% GROSS
YEAR (6.57% NET) (6.57% NET) (6.57% NET) (6.57% NET)
- ------ ----------- ----------- ----------- -----------
1 1000000 7474 1007474 7474
2 1000000 19183 1019182 19182
3 1000000 31628 1031625 31625
4 1000000 44850 1044841 44841
5 1000000 58891 1058872 58872
6 1000000 73793 1073756 73756
7 1000000 89601 1089534 89534
8 1000000 106360 1106244 106244
9 1000000 124116 1123925 123925
10 1000000 142916 1142615 142615
11 1000000 162812 1162350 162350
12 1000000 183852 1183163 183163
13 1000000 206091 1205082 205082
14 1000000 229582 1228134 228134
15 1000000 254383 1252336 252336
16 1000000 280554 1277700 277700
17 1000000 308160 1304229 304229
18 1000000 337272 1331919 331919
19 1000000 367967 1360750 360750
20 1000000 400326 1390680 390680
21 1000000 435411 1422611 422611
22 1000000 472421 1455537 455537
23 1000000 511476 1489325 489325
24 1000000 552723 1523800 523800
25 1037416 596216 1558731 558731
26 1090714 641597 1593834 593834
27 1136687 688901 1628767 628767
28 1188210 738019 1663120 663120
29 1261443 788402 1696397 696397
30 1278704 841253 1728027 728027
31 1343114 895409 1757365 757365
32 1379916 951666 1783715 783715
33 1433504 1009510 1806316 806316
34 1495914 1068510 1824375 824375
35 1536476 1129762 1837071 837071
36 1586747 1193043 1843572 843572
37 1647814 1257873 1843010 843010
38 1720465 1323435 1834497 834497
39 1755208 1393022 1817112 817112
40 1816755 1465125 1789916 789916
41 1879057 1540211 1751932 751932
42 1942646 1618872 1702155 702155
43 2022802 1699834 1639532 639532
44 2089162 1785608 1562969 562969
45 2158767 1877188 1471304 471304
46 2203441 1949948 1256245 256245
47 2266449 2060408 1131438 131438
48 2337620 2184691 0 0
49 2457114 2318032 0 0
50 2564781 2466136 0 0
[THE FOLLOWING TABLE WAS DEPICTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
MAXIMUM CONTRACTUAL CHARGES
FIXED INSURANCE AMT. VARIABLE INSURANCE AMT.
-------------------------------- ---------------------------------
CASH SURRENDER CASH SURRENDER
DEATH BENEFIT VALUE DEATH BENEFIT VALUE
END OF ------------- -------------- ------------- --------------
POLICY 8% GROSS 8% GROSS 8% GROSS 8% GROSS
YEAR (6.57% NET) (6.57% NET) (6.57% NET) (6.57% NET)
- ------ ----------- ----------- ----------- -----------
1 1000000 6934 1006934 6934
2 1000000 17886 1017883 17883
3 1000000 29454 1029445 29445
4 1000000 41658 1041633 41633
5 1000000 54513 1054459 54459
6 1000000 68035 1067929 67929
7 1000000 82236 1082046 82046
8 1000000 97127 1096807 96807
9 1000000 112717 1112202 112202
10 1000000 129005 1128207 128207
11 1000000 145985 1144784 144784
12 1000000 163639 1161874 161874
13 1000000 181936 1179392 179392
14 1000000 200825 1197215 197215
15 1000000 220249 1215198 215198
16 1000000 240142 1233163 233163
17 1000000 260433 1250906 250906
18 1000000 281045 1268185 268185
19 1000000 301894 1284722 284722
20 1000000 322878 1300178 300178
21 1000000 344856 1315109 315109
22 1000000 366771 1328096 328096
23 1000000 388435 1338513 338513
24 1000000 409633 1345618 345618
25 1000000 430129 1348567 348567
26 1000000 449672 1346421 346421
27 1000000 468014 1338181 338181
28 1000000 484889 1322771 322771
29 1000000 499999 1299024 299024
30 1000000 512982 1265649 265649
31 1000000 523358 1221173 221173
32 1000000 530487 1163914 163914
33 1000000 533512 1091974 91974
34 1000000 531326 1003356 3356
35 1000000 522466 0 0
36 1000000 504955 0 0
37 1000000 476027 0 0
38 1000000 431707 0 0
39 1000000 366121 0 0
40 1000000 270297 0 0
41 1000000 130277 0 0
42 0 0 0 0
43 0 0 0 0
44 0 0 0 0
45 0 0 0 0
46 0 0 0 0
47 0 0 0 0
48 0 0 0 0
49 0 0 0 0
50 0 0 0 0
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The way in which the cash surrender values and death benefits will change
depends significantly upon the investment results that are actually achieved.
CHANGING THE TYPE OF INSURANCE AMOUNT
Subject to Prudential's approval, you may change the type of insurance amount.
We will increase or decrease the basic insurance amount so that the death
benefit immediately after the change matches the death benefit immediately
before the change. There may be times when a change from one type of insurance
amount to the other may be desirable. You should consult your Prudential
representative from time to time about the choices available to you under the
Contract.
If you are changing your Contract's type of insurance amount from fixed to
variable, we will reduce the basic insurance amount by the amount in your
Contract Fund on the date the change takes place. The basic amount after the
change may not be lower than the minimum basic insurance amount applicable to
the Contract. If you are changing from a variable to a fixed insurance amount,
we will increase the basic insurance amount by the amount in your Contract Fund
on the date the change takes place. This is illustrated in the following chart.
---------------------------------------------------
CHANGING THE CHANGING THE
INSURANCE AMOUNT INSURANCE AMOUNT
FROM FROM
FIXED -> VARIABLE VARIABLE -> FIXED
- --------------------------------------------------------------------------------
BASIC INSURANCE
AMOUNT $300,000 -> $250,000 $300,000 -> $350,000
CONTRACT FUND $50,000 = $50,000 $50,000 = $50,000
DEATH BENEFIT* $300,000 = $300,000 $350,000 = $350,000
- --------------------------------------------------------------------------------
* assuming there is no Contract debt
- --------------------------------------------------------------------------------
To request a change, fill out an application for change which can be obtained
from your Prudential representative or any of our offices. If the change is
approved, we will recompute the Contract's charges and appropriate tables and
send you new Contract data pages. We may ask that you send us your Contract
before making the change.
PREMIUMS
The Contract is a flexible premium contract. The minimum initial premium is due
on or before the Contract date. Thereafter, you decide when you would like to
make premium payments and, subject to a $25 minimum, in what amounts. We reserve
the right to refuse to accept any payment that increases the insurance amount by
more than it increases the Contract Fund. See HOW A FIXED INSURANCE AMOUNT
CONTRACT'S DEATH BENEFIT WILL VARY, page 19 and HOW A VARIABLE INSURANCE AMOUNT
CONTRACT'S DEATH BENEFIT WILL VARY, page 20. There are circumstances under which
the payment of premiums in amounts that are too large may cause the Contract to
be characterized, under the Internal Revenue Code, as a Modified Endowment
Contract, which could be significantly disadvantageous. See TAX TREATMENT OF
CONTRACT BENEFITS, page 26.
Once the minimum initial premium payment is made, there are no required
premiums. However, there are several types of "premium" which may help you
understand how the Contract works.
10
<PAGE>
MINIMUM INITIAL PREMIUM -- the premium needed to start the Contract. There is no
insurance under this Contract unless the minimum initial premium is paid.
GUIDELINE PREMIUMS -- these are the premiums that, if paid at the beginning of
each Contract year, will keep the Contract in force during the lifetime of the
insureds regardless of investment performance, assuming no loans or withdrawals.
These guideline premiums will be higher for a Contract with a variable insurance
amount than for a Contract with a fixed insurance amount. For a Contract with no
riders or extra risk charges, these premiums will be level. If certain riders
are included, the guideline premium may increase each year. Payment of guideline
premiums at the beginning of each Contract year is one way to achieve the
Lifetime Death Benefit Guarantee Values shown on the Contract data pages. See
DEATH BENEFIT GUARANTEE, below. When you purchase a Contract, your Prudential
representative can tell you the amount[s] of the guideline premium.
TARGET PREMIUMS -- these are the premiums that, if paid at the beginning of each
Contract year, will keep the Contract in force during the Limited Death Benefit
Guarantee period assuming no loans or withdrawals. As is the case with the
guideline premium, for a Contract with no riders or extra risk charges, these
premiums will be level. If certain riders are included, the target premium may
increase each year. Payment of target premiums at the beginning of each Contract
year is one way to achieve the Limited Death Benefit Guarantee Values shown on
the Contract data pages. At the end of the Limited Death Benefit Guarantee
period, continuation of the Contract will depend on the Contract Fund having
sufficient money to cover all charges or meeting the conditions of the Lifetime
Death Benefit Guarantee. See DEATH BENEFIT GUARANTEE, below. When you purchase a
Contract, your Prudential representative can tell you the amount[s] of the
target premium.
TARGET LEVEL PREMIUM -- For any Contract this is generally the target premium
minus any premiums for single life riders or any premiums associated with
aviation, avocation, occupational or temporary extras. We use the target level
premium in calculating the sales load (as shown under ADJUSTMENTS TO PREMIUM
PAYMENTS on your Contract's data pages). See CHARGES AND EXPENSES, page 15 and
SALE OF THE CONTRACT AND SALES COMMISSIONS, page 26.
We can bill you for any amount you select annually, semi-annually, quarterly or
monthly. Because the Contract is a flexible premium contract, there are no
scheduled premium due dates. When you receive a premium notice, you are not
required to pay this amount. The Contract will remain in force if either the
Contract Fund is sufficient to pay all charges or if you have paid sufficient
premiums on an accumulated basis to meet the conditions of the Death Benefit
Guarantee and Contract debt is not equal to or greater than the Contract Fund.
You may also pay premiums automatically through pre-authorized transfers from a
bank checking account. If you elect to use this feature, you choose the
frequency (monthly, quarterly, semi-annually or annually) and the amount of
premiums paid.
When you apply for the Contract, you should discuss with your Prudential
representative how frequently you would like to be billed (if at all) and for
what amount.
DEATH BENEFIT GUARANTEE
Although you decide what premium amounts you wish to pay, payment of sufficient
premium, on an accumulated basis, will guarantee that your policy will not lapse
and a death benefit will be paid upon the second death of two insureds. This
will be true even if, because of unfavorable investment experience, your
Contract Fund value drops to zero. However, the guarantee is contingent upon
Contract debt never being equal to or greater than the Contract
11
<PAGE>
Fund. See CONTRACT LOANS, page 25. You should consider the importance of the
Death Benefit Guarantee to you when deciding on what amounts of premiums to pay
into the Contract.
For purposes of determining this guarantee, we calculate, and show in the
Contract data pages, two sets of amounts - the Lifetime Death Benefit Guarantee
Values and Limited Death Benefit Guarantee Values. These are not cash values
that you can realize by surrendering the Contract, nor are they death benefits
payable. They are values used solely to determine if a Death Benefit Guarantee
is in effect. The Lifetime Death Benefit Guarantee Values are shown for the
lifetime of the Contract. The Limited Death Benefit Guarantee Values are lower,
but only apply for the length of the Limited Death Benefit Guarantee period.
The length of the Limited Death Benefit Guarantee period is determined on a case
by case basis depending on things like the insureds' ages and extra rating
class, if any. The length of the Limited Death Benefit Guarantee period
applicable to your particular Contract is shown on the Contract data pages.
At the Contract date, and on each Monthly date, we calculate your Contract's
"Accumulated Net Payments" as of that date. Accumulated Net Payments equal the
premiums you paid, accumulated at an effective annual rate of 4%, less
withdrawals also accumulated at 4%.
At each Monthly date within the Limited Death Benefit Guarantee period, we will
compare your Accumulated Net Payments to the Limited Death Benefit Guarantee
Value as of that date. After the Limited Death Benefit Guarantee period, we will
compare your Accumulated Net Payments to the Lifetime Death Benefit Guarantee
Value as of that date. If your Accumulated Net Payments equal or exceed the
applicable (Lifetime or Limited) Death Benefit Guarantee Value and Contract debt
does not exceed the Contract Fund, then the Contract is kept in force,
regardless of the amount in the Contract Fund.
The Contract data pages show Lifetime Death Benefit Guarantee Values and Limited
Death Benefit Guarantee Values as of Contract anniversaries. Values for
non-anniversary Monthly dates will reflect the number of months elapsed between
Contract anniversaries.
Guideline and target premiums are premium levels that, if paid at the start of
each Contract year, correspond to the Lifetime and Limited Death Benefit
Guarantee Values, respectively (assuming no withdrawals or loans). See PREMIUMS,
page 10. They are one way of reaching the Death Benefit Guarantee Values; they
are certainly not the only way.
Here is a table of typical guideline and target premiums (to the nearest dollar)
along with corresponding Limited Death Benefit Guarantee periods. The examples
assume the insureds are a male and a female, both of the same age, both
non-smokers, with no extra risk or substandard ratings, and no extra benefit
riders added to the Contract.
12
<PAGE>
- --------------------------------------------------------------------------------
BASIC INSURANCE AMOUNT -- $250,000
ILLUSTRATIVE ANNUAL PREMIUMS
- --------------------------------------------------------------------------------
GUIDELINE PREMIUM TARGET PREMIUM
AGE OF TYPE OF CORRESPONDING TO CORRESPONDING TO THE
BOTH THE INSURANCE THE LIMITED DEATH BENEFIT
INSUREDS AMOUNT LIFETIME DEATH GUARANTEE VALUES AND
AT ISSUE CHOSEN BENEFIT GUARANTEE NUMBER OF YEARS OF
VALUES GUARANTEE
- --------------------------------------------------------------------------------
45 Fixed $3,713 $2,218 for 39 years
45 Variable $13,906 $2,218 for 37 years
55 Fixed $5,581 $3,601 for 29 years
55 Variable $20,349 $3,601 for 27 years
65 Fixed $9,618 $7,212 for 22 years
65 Variable $30,787 $7,212 for 20 years
- --------------------------------------------------------------------------------
The Death Benefit Guarantee allows considerable flexibility as to the timing of
premium payments. Your Prudential representative can supply sample illustrations
of various premium amount and frequency combinations that correspond to the
Death Benefit Guarantee Values.
You should consider carefully the value of maintaining the guarantee. It may be
preferable for you to pay generally higher premiums in all years, rather than
trying to make such payments on an as needed basis if the death benefit
guarantee is desired for lifetime protection. For example, if you pay only
enough premium to meet the Limited Death Benefit Guarantee Values, a substantial
amount may be required to meet the Lifetime Death Benefit Guarantee Values in
order to continue the guarantee at the end of the Limited Death Benefit
Guarantee period. In addition, it is possible that the payment required to
continue the guarantee after the Limited Death Benefit Guarantee period could
exceed the premium payments allowed to be paid without causing the Contract to
become a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS,
page 26.
CONTRACT DATE
When the first premium payment is paid with the application for a Contract, the
Contract date will ordinarily be the later of the date of the application or the
date of the medical examination. If the first premium is not paid with the
application, the Contract date will ordinarily be 2 or 3 days after the
application is approved by Prudential so that it will coincide with the date on
which the first premium is paid and the Contract is delivered. Under certain
circumstances, we may allow the Contract to be back-dated for the purpose of
lowering one or both insureds' issue age[s], but only to a date not earlier than
six months prior to the date of the application. This may be advantageous for
some Contract owners as a lower issue age may result in lower current charges.
For a Contract that is back-dated, the minimum initial premium will be treated
as if it were received on the back-dated Contract date and the current death
benefit and cash surrender value under the Contract will be equal to what they
would have been had the Contract been issued on the Contract date and had all
Contract charges been made.
ALLOCATION OF PREMIUMS
On the Contract date, the charge for sales expenses and the charge for taxes
attributable to premiums (in Oregon this is called a premium based
administrative charge) are deducted from
13
<PAGE>
the initial premium. The remainder of the initial premium will be allocated on
the Contract date among the subaccounts and/or the fixed-rate option according
to your desired allocation as specified in the application form and the first
monthly deductions are made. To the extent that the receipt of the first premium
precedes the Contract date, there will be a period during which the Contract
owner's initial premium will not be invested. See CHARGES AND EXPENSES, page 15.
The charge for sales expenses and the charge for taxes attributable to premiums
(in Oregon this is called a premium based administrative charge) also apply to
all subsequent premium payments (there is no charge for sales expenses after the
twentieth Contract year); the remainder will be invested as of the end of the
valuation period when received at a Home Office in accordance with the
allocation you previously designated. Provided the Contract is not in default,
you may change the way in which subsequent premiums are allocated by giving
written notice to a Home Office or by telephoning that Home Office, provided you
are enrolled to use the Telephone Transfer System. There is no charge for
reallocating future premiums. All percentage allocations must be in whole
numbers. For example, 33% can be selected but 331/3% cannot. Of course, the
total allocation to all selected investment options must equal 100%.
TRANSFERS
You may, up to twelve times in each Contract year, transfer amounts from one
subaccount to another subaccount or to the fixed-rate option without charge.
There is an administrative charge of up to $25 for each transfer made exceeding
twelve in any Contract year. All or a portion of the amount credited to a
subaccount may be transferred.
Transfers among subaccounts will take effect as of the end of the valuation
period in which a proper transfer request is received at a Home Office. The
request may be in terms of dollars, such as a request to transfer $10,000 from
one subaccount to another, or may be in terms of a percentage reallocation among
subaccounts. In the latter case, as with premium reallocations, the percentages
must be in whole numbers. You may transfer amounts by proper written notice to a
Home Office or by telephone, provided you are enrolled to use the Telephone
Transfer System. You will automatically be enrolled to use the Telephone
Transfer System unless the Contract is jointly owned or you elect not to have
this privilege. Telephone transfers may not be available on policies that are
assigned (see ASSIGNMENT, page 30), depending on the terms of the assignment.
We will use reasonable procedures, such as asking you to provide certain
personal information provided on your application for insurance, to confirm that
instructions given by telephone are genuine. We will not be held liable for
following telephone instructions that we reasonably believe to be genuine.
Prudential cannot guarantee that you will be able to get through to complete a
telephone transfer during peak periods such as periods of drastic economic or
market change.
On the liquidation date of a Zero Coupon Bond Subaccount, all the shares held by
it in the corresponding portfolio of the Series Fund will be redeemed and the
proceeds of the redemption applicable to each Contract will be transferred to
the Money Market Subaccount unless the Contract owner directs that it be
transferred to another investment option[s].
Only one transfer from the fixed rate option will be permitted during the
Contract year and the maximum amount which may be transferred out of the fixed
rate option each year is the greater of (a) 25% of the amount in the fixed rate
option; and (b) $2,000. These limits are
14
<PAGE>
subject to change in the future. We may waive these restrictions for limited
periods of time in a non-discriminatory way, (e.g., when interest rates are
declining).
DOLLAR COST AVERAGING
As an administrative practice, we are currently offering a feature called Dollar
Cost Averaging ("DCA"). Under this feature, either fixed dollar amounts or a
percentage of the amount designated for use under the DCA option will be
transferred periodically from the Money Market Subaccount into other investment
options available under the Contract, excluding the fixed-rate option. You may
choose to have periodic transfers made monthly, quarterly, semi-annually or
annually.
Each automatic transfer will take effect as of the end of the valuation period
on the date coinciding with the periodic timing you designated provided the New
York Stock Exchange is open on that date. If the New York Stock Exchange is not
open on that date, or if the date does not occur in that particular month, the
transfer will take effect as of the end of the valuation period which
immediately follows that date. Automatic transfers will continue until: (1) $50
or less remains of the amount designated for Dollar Cost Averaging, at which
time the remaining amount will be transferred; or (2) you give us notification
of a change in DCA allocation or cancellation of the feature. Currently, there
is no charge for using the Dollar Cost Averaging feature. We reserve the right
to change the requirements or discontinue the feature.
AUTO-REBALANCING
As an administrative practice, we are currently offering a feature called
Auto-Rebalancing. This feature allows you to automatically rebalance subaccount
assets at specified intervals based on percentage allocations that you choose.
For example, suppose your initial investment allocation of variable investment
options X and Y is split 40% and 60%, respectively. Then, due to investment
results, that split changes. You may instruct that those assets be rebalanced to
your original or different allocation percentages.
Auto-Rebalancing can be performed on a monthly, quarterly, semi-annual or annual
basis. Each rebalance will take effect as of the end of the valuation period on
the date coinciding with the periodic timing you designate provided the New York
Stock Exchange is open on that date. If the New York Stock Exchange is not open
on that date, or if the date does not occur in that particular month, the
transfer will take effect as of the end of the valuation period which
immediately follows that date. The fixed-rate option cannot participate in this
administrative procedure. Currently, a transfer that occurs under the
Auto-Rebalancing feature is not counted towards the twelve free transfers
permitted each Contract year. We reserve the right to change this practice,
modify the requirements or discontinue the feature.
CHARGES AND EXPENSES
The total amount invested at any time under the Contract (the "Contract Fund")
consists of the sum of the amount credited to the subaccounts, the amount
allocated to the fixed-rate option, and the principal amount of any Contract
loan plus the amount of interest credited to the Contract upon that loan. See
CONTRACT LOANS, page 25. Most charges, although not all, are made by reducing
the Contract Fund.
This section provides a detailed description of each charge that is described
briefly in the chart on page 4, and an explanation of the purpose of the charge.
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<PAGE>
In several instances we will use the terms "maximum charge" and "current
charge." The "maximum charge," in each instance, is the highest charge that
Prudential is entitled to make under the Contract. The "current charge" is the
lower amount that Prudential is now charging. However, if circumstances change,
Prudential reserves the right to increase each current charge, up to but to no
more than the maximum charge, without giving any advance notice.
DEDUCTIONS FROM PREMIUM PAYMENTS
(a) A charge of up to 7.5% is deducted from each premium for taxes
attributable to premiums (in Oregon this is called a premium based
administrative charge). For these purposes, "taxes attributable to
premiums" shall include any federal, state or local income, premium,
excise, business or any other type of tax (or component thereof) measured
by or based upon the amount of premium received by Prudential. That charge
is currently made up of two parts. The first part is in an amount based on
an average of state and local premium taxes. The current charge for this
first part is 2.5% of the premium. The second part is for federal income
taxes measured by premiums and it is currently equal to 1.25% of the
premium. Prudential believes that this charge is a reasonable estimate of
an increase in its federal income taxes resulting from a 1990 change in
the Internal Revenue Code. It is intended to recover this increased tax.
During 1996, Prudential deducted a total of approximately $223,950, in
taxes attributable to premiums.
(b) A charge for sales expenses will be deducted from premium payments made
during the first twenty Contract years. This charge, often called a sales
load, is deducted to compensate us for things like the costs Prudential
incurs in selling the Contracts, including commissions, advertising and
the printing and distribution of prospectuses and sales literature. The
charge is expressed as a percentage of premium. The charge is equal to 30%
of premiums paid in the first Contract year up to the amount of the target
level premium (see PREMIUMS, page 10) and 4% of premiums paid in excess of
the target level premium. For Contract years 2 through 20, the charge is
equal to 7.5% of the premiums paid in each Contract year up to the target
level premium and 4% of the premiums paid above the target level premium.
Generally, if the average age of the insureds is 59 years or more, these
charges may be reduced to comply with the requirements of certain
provisions of the Investment Company Act of 1940 and rules adopted by the
Securities and Exchange Commission. Depending upon state approval, this
charge may be reduced on a non-discriminatory basis in conjunction with
the exchange of a Prudential Survivorship Whole Life Contract for a
PRUDENTIAL SURVIVORSHIP PREFERRED Contract on or before June 30, 1997.
Paying less than the target level premium amount in the first Contract
year or paying more than the target level premium amount in any Contract
year could reduce your total sales load. For example, assume that a
Contract has a target level premium of $12,097.49 and the Contract owner
would like to pay ten target level premiums. If the Contract owner paid
$24,194.98 (two times the amount of the target level premium in every
other policy year up to the ninth year (i.e. in years 1, 3, 5, 7, 9), the
sales load charge would be $9,677.99. If however, the Contract owner paid
$12,097.49 in each of the first ten policy years, the total sales load
would be $11,795.04.
Attempting to structure the timing and amount of premium payments to
reduce the potential sales load may increase the risk that your Contract
will lapse without value. Delaying the payment of target premium amounts
to later years will adversely affect the Death Benefit Guarantee if the
accumulated premium payments do not reach the accumulated values shown
under your Contract's Limited Death Benefit Guarantee Values.
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<PAGE>
See DEATH BENEFIT GUARANTEE, page 11. In addition, there are circumstances
where payment of premiums that are too large may cause the Contract to be
characterized as a Modified Endowment Contract, which could be
significantly disadvantageous. See TAX TREATMENT OF CONTRACT BENEFITS,
page 26. During 1996, Prudential received a total of approximately
$1,177,209, in sales charges.
DEDUCTIONS FROM PORTFOLIOS
An investment advisory fee is deducted daily from each portfolio at a rate, on
an annualized basis, from 0.35% for the Stock Index Portfolio to 0.75% for the
Global Portfolio. The expenses incurred in conducting the investment operations
of the portfolios (such as custodian fees and preparation and distribution of
annual reports) are paid out of the portfolio's income.
These expenses also vary from portfolio to portfolio.
The total expenses of each portfolio for the year 1996 expressed as a percentage
of the average assets during the year are shown below:
- --------------------------------------------------------------------------------
INVESTMENT OTHER EXPENSES TOTAL EXPENSES
PORTFOLIO ADVISORY (after expense (after expense
FEE reimbursement)* reimbursement)*
- --------------------------------------------------------------------------------
MONEY MARKET 0.40% 0.04% 0.44%
DIVERSIFIED BOND 0.40% 0.05% 0.45%
GOVERNMENT INCOME 0.40% 0.06% 0.46%
ZERO COUPON BOND 2000 0.40% 0.0%* 0.40%*
ZERO COUPON BOND 2005 0.40% 0.0%* 0.40%*
CONSERVATIVE BALANCED 0.55% 0.04% 0.59%
FLEXIBLE MANAGED 0.60% 0.04% 0.64%
HIGH YIELD BOND 0.55% 0.08% 0.63%
STOCK INDEX 0.35% 0.05% 0.40%
EQUITY INCOME 0.40% 0.05% 0.45%
EQUITY 0.45% 0.05% 0.50%
PRUDENTIAL JENNISON 0.60% 0.06% 0.66%
SMALL CAPITALIZATION STOCK 0.40% 0.16% 0.56%
GLOBAL 0.75% 0.17% 0.92%
NATURAL RESOURCES 0.45% 0.07% 0.52%
- --------------------------------------------------------------------------------
* FOR SOME OF THE PORTFOLIOS, THE ACTUAL EXPENSES WERE HIGHER THAN THOSE
SHOWN IN THE SECOND AND THIRD COLUMNS. PRUDENTIAL, ON A NON-GUARANTEED
BASIS, MAKES DAILY ADJUSTMENTS THAT WILL OFFSET THE EFFECT ON CONTRACT
OWNERS OF SOME OF THESE EXPENSES TO ENSURE THAT THE PORTFOLIO EXPENSES
INDIRECTLY BORNE BY A CONTRACT OWNER INVESTING IN THE ZERO COUPON BOND
PORTFOLIOS WILL NOT EXCEED THE INVESTMENT MANAGEMENT FEE. WITHOUT SUCH
ADJUSTMENTS THE PORTFOLIO EXPENSES INDIRECTLY BORNE BY A CONTRACT OWNER,
EXPRESSED AS A PERCENTAGE OF THE AVERAGE DAILY NET ASSETS BY PORTFOLIO,
WOULD HAVE BEEN 0.52% FOR THE ZERO COUPON BOND 2000 AND 0.53% FOR THE ZERO
COUPON BOND 2005 PORTFOLIOS DURING 1996. PRUDENTIAL DOES NOT INTEND TO
DISCONTINUE THESE ADJUSTMENTS IN THE FUTURE, ALTHOUGH IT RETAINS THE RIGHT
TO DO SO.
DAILY DEDUCTION FROM THE CONTRACT FUND
Each day a charge is deducted from the assets of each of the subaccounts (the
"variable investment options") in an amount equivalent to an effective annual
rate of 0.9%. This charge is intended to compensate Prudential for assuming
mortality and expense risks under the
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Contract. The mortality risk assumed is that the insureds may live for shorter
periods of time than Prudential estimated when it determined what mortality
charge to make. The expense risk assumed is that expenses incurred in issuing
and administering the Contract will be greater than Prudential estimated in
fixing its administrative charges. During 1996, Prudential received a total of
approximately $11,562, in mortality and expense risk charges. This charge is not
assessed against amounts allocated to the fixed-rate option.
MONTHLY DEDUCTIONS FROM CONTRACT FUND
The following monthly charges are deducted proportionately from the dollar
amounts held in each of the chosen investment option[s].
a) An administrative charge based on the basic insurance amount is deducted.
The charge is intended to compensate us for things like processing claims,
keeping records and communicating with Contract owners. In the first year,
this charge consists of $5 per Contract plus $0.07 per $1,000 of basic
insurance amount. In all subsequent years, this charge will be $5 per
Contract. Prudential reserves the right, however, to increase these
charges to $7.50 per Contract plus $0.07 per $1,000 of basic insurance
amount in the first Contract year and $7.50 per Contract plus $0.01 per
$1,000 of basic insurance amount in later years.
For example, a Contract with a basic insurance amount of $250,000 would
currently have a charge equal to $5 plus $17.50 for a total of $22.50 per
month for the first Contract year and $5 per month in all later years. The
maximum charge for this same Contract would be $7.50 plus $17.50 for a
total of $25 per month during the first Contract year. In later years, the
maximum charge would be $7.50 plus $2.50 for a total of $10 per month.
During 1996, Prudential received a total of approximately $176,462, in
monthly administrative charges.
b) A cost of insurance ("COI") charge is deducted. Upon the second death of
two insureds, the amount payable to the beneficiary (assuming there is no
Contract debt) is larger than the Contract Fund-- significantly larger if
both insureds died in the early years of the Contract. The cost of
insurance charges collected from all Contract owners enables Prudential to
pay this larger death benefit. The maximum COI charge is determined by
multiplying the "net amount at risk" under a Contract (the amount by which
the Contract's insurance amount exceeds the Contract Fund) by maximum COI
rates. The maximum COI rates are based upon both insureds' current
attained age, sex, smoking status, and extra rating class, if any.
For current COI charges, we use rates that are generally lower than the
maximum if both insureds are 36 years of age or older.
c) A charge of $0.01 per $1,000 of basic insurance amount is made to
compensate Prudential for the risk we assume by providing the Death
Benefit Guarantee feature. See DEATH BENEFIT GUARANTEE, page 11. During
1996, Prudential received a total of approximately $24,457, for this risk
charge.
d) You may add one or more of several riders to the Contract. Some riders are
charged for separately. If you add such a rider to the basic Contract,
additional charges will be deducted.
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<PAGE>
e) If an insured is in a substandard risk classification (for example, a
person in a hazardous occupation), additional charges will be deducted.
TRANSACTION CHARGES
(a) An administrative processing charge of $10 is made in connection with each
withdrawal. We reserve the right to increase this charge up to $25 for
each withdrawal.
b) No administrative processing charge is currently being made in connection
with a decrease in basic insurance amount. We reserve the right to make
such a charge in an amount of up to $25 for each decrease.
(c) An administrative processing charge of up to $25 will be made for each
transfer exceeding 12 in any Contract year.
HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY
You may surrender the Contract for its net cash value. The Contract's cash
surrender value on any date will be the Contract Fund, defined under CHARGES AND
EXPENSES on page 15, reduced by any Contract debt. See CONTRACT LOANS, page 25.
The Contract Fund value changes daily, reflecting increases or decreases in the
value of the Series Fund portfolios in which the assets of the subaccount[s]
have been invested, interest credited on any amounts allocated to the fixed-rate
option, interest credited on any loan, and by the daily asset charge for
mortality and expense risks assessed against the variable investment options.
The Contract Fund value also changes to reflect the receipt of premium payments
and the monthly deductions described under CHARGES AND EXPENSES, page 15. Upon
request, Prudential will tell you the cash surrender value of your Contract. It
is possible for the cash surrender value of a Contract to decline to zero
because of unfavorable investment performance.
The tables on pages T1 through T4 of this prospectus illustrate approximately
what the cash surrender values would be for representative Contracts paying
target premium amounts (see PREMIUMS, page 10), assuming hypothetical uniform
investment results in the Series Fund portfolios. Two of the tables assume
current charges will be made throughout the lifetime of the Contract and two
tables assume maximum charges will be made. See ILLUSTRATIONS OF CASH SURRENDER
VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS, page 23.
HOW A FIXED INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY
As noted above, there are two types of the Contract, a fixed insurance amount
and a variable insurance amount. The death benefit under a Contract with a
variable insurance amount varies with investment performance while the death
benefit under a Contract with a fixed insurance amount does not, unless it must
be increased to comply with the Internal Revenue Code's definition of life
insurance.
Under a Contract with a fixed insurance amount, the death benefit is equal to
the basic insurance amount, reduced by any Contract debt. See CONTRACT LOANS,
page 25. If the Contract is kept in force for several years, depending on how
much premium you pay, and/or if investment performance is reasonably favorable,
the Contract Fund may grow to the point where Prudential will increase the
insurance amount in order to ensure that the Contract will satisfy the Internal
Revenue Code's definition of life insurance. Thus, assuming no Contract debt,
the death benefit under a Contract with a fixed insurance amount will always be
the greater of: (1) the basic insurance amount; and (2) the Contract Fund before
the deduction of
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<PAGE>
any monthly charges due on that date, multiplied by the attained age factor that
applies. A listing of attained age factors can be found on the data pages of
your Contract. The latter provision ensures that the Contract will always have
an insurance amount large enough to be treated as life insurance for tax
purposes under current law.
The following table illustrates at different ages how the attained age factor
affects the death benefit for different Contract Fund amounts. The table assumes
a $1,000,000 fixed insurance amount Contract was issued when the younger insured
was age 35 and there is no Contract debt.
Fixed Insurance Amount
- --------------------------------------------------------------------------------
IF THEN
- --------------------------------------------------------------------------------
THE CONTRACT
THE AND THE THE FUND AND THE
YOUNGER CONTRACT ATTAINED MULTIPLIED BY DEATH
INSURED IS FUND IS AGE FACTOR THE ATTAINED BENEFIT IS
AGE IS AGE FACTOR IS
- --------------------------------------------------------------------------------
40 $100,000 5.7 570,000 $1,000,000
40 $200,000 5.7 1,140,000 $1,140,000*
40 $300,000 5.7 1,710,000 $1,710,000*
- --------------------------------------------------------------------------------
60 $300,000 2.8 840,000 $1,000,000
60 $400,000 2.8 1,120,000 $1,120,000*
60 $600,000 2.8 1,680,000 $1,680,000*
- --------------------------------------------------------------------------------
80 $600,000 1.5 900,000 $1,000,000
80 $700,000 1.5 1,050,000 $1,050,000*
80 $800,000 1.5 1,200,000 $1,200,000*
- --------------------------------------------------------------------------------
* Note that the death benefit has been increased to comply with the Internal
Revenue Code's definition of life insurance. At this point, any additional
premium payment will increase the insurance amount by more than it increases
the Contract Fund.
- --------------------------------------------------------------------------------
This means, for example, that if the younger insured has reached the age of 60,
and the Contract Fund is $400,000, the death benefit will be $1,120,000, even
though the original basic insurance amount was $1,000,000. In this situation,
for every $1 increase in the Contract Fund, the insurance amount (and therefore
the death benefit) will be increased by $2.80. We reserve the right to refuse to
accept any premium payment that increases the insurance amount by more than it
increases the Contract Fund. If we exercise this right, it may in certain
situations result in the loss of the death benefit guarantee.
HOW A VARIABLE INSURANCE AMOUNT CONTRACT'S DEATH BENEFIT WILL VARY
Under a Contract with a variable insurance amount, while the Contract is in
force, the death benefit will never be less than the basic insurance amount
reduced by any Contract debt, but will also vary, immediately after it is
issued, with the investment results of the selected investment options. The
insurance amount may be further increased to ensure that the Contract will
satisfy the Internal Revenue Code's definition of life insurance. Thus, assuming
no Contract debt, the death benefit will always be the greater of: (1) the basic
insurance
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<PAGE>
amount plus the Contract Fund; and (2) the Contract Fund before the deduction of
any monthly charges due on that date, multiplied by the attained age factor that
applies. A listing of attained age factors can be found on the data pages of
your Contract. The latter provision ensures that the Contract will always have
an insurance amount large enough to be treated as life insurance for tax
purposes under current law.
The following table illustrates various attained age factors and Contract Funds
and the corresponding death benefits. The table assumes a $1,000,000 variable
insurance amount Contract was issued when the younger insured was age 35 and
there is no Contract debt.
Variable Insurance Amount
- --------------------------------------------------------------------------------
IF THEN
- --------------------------------------------------------------------------------
THE CONTRACT
THE AND THE THE FUND AND THE
YOUNGER CONTRACT ATTAINED MULTIPLIED BY DEATH
INSURED IS FUND IS AGE FACTOR THE ATTAINED BENEFIT IS
AGE IS AGE FACTOR IS
- --------------------------------------------------------------------------------
40 $100,000 5.7 570,000 $1,100,000
40 $200,000 5.7 1,140,000 $1,200,000
40 $300,000 5.7 1,710,000 $1,710,000*
- --------------------------------------------------------------------------------
60 $300,000 2.8 840,000 $1,300,000
60 $400,000 2.8 1,120,000 $1,400,000
60 $600,000 2.8 1,680,000 $1,680,000*
- --------------------------------------------------------------------------------
80 $600,000 1.5 900,000 $1,600,000
80 $700,000 1.5 1,050,000 $1,700,000
80 $800,000 1.5 1,200,000 $1,800,000
- --------------------------------------------------------------------------------
* Note that the death benefit has been increased to comply with the Internal
Revenue Code's definition of life insurance. At this point, any additional
premium payment will increase the insurance amount by more than it increases
the Contract Fund.
- --------------------------------------------------------------------------------
This means, for example, that if the younger insured has reached the age of 60,
and the Contract Fund is $600,000, the death benefit will be $1,680,000, even
though the original basic insurance amount was $1,000,000. In this situation,
for every $1 increase in the Contract Fund, the insurance amount (and therefore
the death benefit) will be increased by $2.80. We reserve the right to refuse to
accept any premium payment that increases the insurance amount by more than it
increases the Contract Fund. If we exercise this right, it may in certain
situations result in the loss of the death benefit guarantee.
PARTICIPATION IN DIVISIBLE SURPLUS
The Contract is eligible to be credited with part of Prudential's divisible
surplus attributable to the Contracts ("dividends"), as determined annually by
Prudential's Board of Directors. However, we do not expect to pay any dividends
to Contract owners of the Contracts while they remain in force because favorable
investment performance will be reflected in Contract values and because we
intend, if experience indicates that current charges will be greater than needed
to cover expenses, to reduce those charges further so that there will be no
source of distributable surplus attributable to these Contracts.
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SURRENDER OF A CONTRACT
A Contract may be surrendered for its cash surrender value while one or both of
the insureds is living. To surrender a Contract, you must deliver or mail it,
together with a written request in a form that meets our needs, to a Home
Office. The cash surrender value of a surrendered Contract will be determined as
of the end of the valuation period in which such a request is received in the
Home Office. Surrender of a Contract may have tax consequences. See TAX
TREATMENT OF CONTRACT BENEFITS, page 26.
WITHDRAWALS
Under certain circumstances, you may withdraw a portion of the Contract's cash
surrender value without surrendering the Contract. The amount that you may
withdraw is limited by the requirement that the cash surrender value after the
withdrawal may not be zero or less than zero after deducting the next monthly
charges. The amount withdrawn must be at least $500. There is an administrative
processing fee for each withdrawal equal to $10. Prudential, however, reserves
the right to increase this charge up to $25. An amount withdrawn may not be
repaid except as a premium subject to the applicable charges. Upon request, we
will tell you how much you may withdraw. Withdrawal of the cash surrender value
may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
Whenever a withdrawal is made, the insurance amount and therefore the death
benefit payable will immediately be reduced by at least the amount of the
withdrawal. For a Contract with a variable insurance amount, this will not
change the basic insurance amount. However, under a Contract with a fixed
insurance amount, the resulting reduction in insurance amount usually requires a
reduction in the basic insurance amount. No withdrawal will be permitted under a
Contract with a fixed insurance amount if it would result in a basic insurance
amount of less than the minimum basic insurance amount. It is important to note,
however, that if the insurance amount is decreased at any time during the life
of the Contract, there is a possibility that the Contract might be classified as
a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
Before making any withdrawal which causes a decrease in insurance amount, you
should consult with your Prudential representative.
When a withdrawal is made, the Contract Fund is reduced by the sum of the cash
withdrawn and the fee for the withdrawal. An amount equal to the reduction in
the Contract Fund will be withdrawn proportionally from the investment options
unless you direct otherwise.
Withdrawal of the cash surrender value increases the risk that the Contract Fund
may be insufficient to provide for benefits under the Contract. If such a
withdrawal is followed by unfavorable investment experience, the Contract may go
into default. Withdrawals may also affect whether a Contract is kept in force
under the Death Benefit Guarantee. This is because, for purposes of determining
whether a lapse has occurred, Prudential treats withdrawals as a return of
premium. Therefore, withdrawals decrease the accumulated net payments. See DEATH
BENEFIT GUARANTEE, page 11.
DECREASES IN BASIC INSURANCE AMOUNT
As explained earlier, you may make a withdrawal (see WITHDRAWALS, above). You
also have the additional option of decreasing the basic insurance amount of your
Contract without withdrawing any cash surrender value. Contract owners who
conclude that, because of changed circumstances, the amount of insurance is
greater than needed will thus be able to decrease their amount of insurance
protection, and the monthly deductions for the cost of insurance, without
decreasing their current cash surrender value. The cash surrender value of the
Contract on the date of the decrease will not change, except that an
administrative
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<PAGE>
processing fee of up to $25 may be deducted. If we ask you to, you must send us
your Contract to be endorsed. The Contract will be amended to show the new basic
insurance amount, charges, values in the appropriate tables and the effective
date of the decrease.
The minimum permissible decrease for your Contract is shown under CONTRACT
LIMITATIONS in the data pages of your Contract. The basic insurance amount after
the decrease may not be lower than the minimum basic insurance amount. No
reduction will be permitted if it would cause the Contract to fail to qualify as
"life insurance" for purposes of Section 7702 of the Internal Revenue Code. A
decrease will not take effect if at least one insured is not living on the
effective date.
It is important to note, however, that if the basic insurance amount is
decreased at any time during the life of the Contract, there is a possibility
that the Contract might be classified as a Modified Endowment Contract. See TAX
TREATMENT OF CONTRACT BENEFITS, page 26. Before requesting any decrease in basic
insurance amount, you should consult with your Prudential representative.
WHEN PROCEEDS ARE PAID
Prudential will generally pay any death benefit, cash surrender value, loan
proceeds or withdrawal within 7 days after receipt at a Home Office of all the
documents required for such a payment. Other than the death benefit, which is
determined as of the date of the second death, the amount will be determined as
of the end of the valuation period in which the necessary documents are received
at a Home Office. However, Prudential may delay payment of proceeds from the
subaccount[s] and the variable portion of the death benefit due under the
Contract if the disposal or valuation of the Account's assets is not reasonably
practicable because the New York Stock Exchange is closed for other than a
regular holiday or weekend, trading is restricted by the SEC or the SEC declares
that an emergency exists.
With respect to the amount of any cash surrender value allocated to the
fixed-rate option, Prudential expects to pay the cash surrender value promptly
upon request. However, Prudential has the right to delay payment of such cash
surrender value for up to 6 months (or a shorter period if required by
applicable law). Prudential will pay interest of at least 3% a year if it delays
such a payment for more than 30 days (or a shorter period if required by
applicable law).
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS
The four tables that follow show how the death benefit and cash surrender values
change with the investment experience of the Account. They are "hypothetical"
because they are based, in part, upon several assumptions, each of which is
described below. All four tables assume, first, that a Contract with a basic
insurance amount of $1,000,000 has been bought by a 55 year old male and a 50
year old female, both non-smokers, with no extra risks or substandard ratings,
and no extra benefit riders added to the Contract. It is assumed that the target
premium amount (see PREMIUMS, page 10) is paid on each Contract anniversary and
that no loans are taken. The first table (page T1) assumes that a fixed
insurance amount Contract has been purchased and the second table (page T2)
assumes that a variable insurance amount Contract has been purchased. Both
assume that the current charges will continue for the indefinite future. The
third and fourth tables (pages T3 and T4) are based upon the same assumptions
except that it is assumed that the maximum contractual charges have been made
from the beginning. See CHARGES AND EXPENSES, page 15.
23
<PAGE>
Another assumption is that the Contract Fund has been invested in equal amounts
in each of the 15 available portfolios of the Series Fund and no portion of the
Contract Fund has been allocated to the fixed-rate option. Finally, there are
four assumptions, shown separately, about the average investment performance of
the portfolios. The first is that there will be a uniform 0% gross rate of
return, that is, that the average value of the Contract Fund will uniformly be
adversely affected by very unfavorable investment performance. The other three
assumptions are that investment performance will be at a uniform gross annual
rate of 4%, 8% and 12%. These, of course, are unrealistic assumptions since
actual returns will fluctuate from year to year. Nevertheless, these assumptions
help show how the Contract values will change with investment experience.
The first column in the following tables shows the Contract year. The second
column, to provide context, shows what the aggregate amount would be if the
premiums had been invested in a savings account paying 4% compounded interest.
Of course, if that were done, there would be no life insurance protection. The
next four columns show the death benefit payable in each of the years shown for
the four different assumed investment returns. Note that a gross return (as well
as the net return) is shown at the top of each column. The gross return
represents the combined effect of income and capital appreciation of the
portfolios before any reduction is made for investment advisory fees or other
Series Fund expenses. The net return reflects an average total annual expenses
of the 15 portfolios of 0.53%, and the daily deduction from the Contract Fund of
0.9% per year. Thus, gross returns of 0%, 4%, 8% and 12% are the equivalent of
net returns of -1.43%, 2.57%, 6.57% and 10.57% respectively. The death benefits
and cash surrender values shown reflect the deduction of all expenses and
charges both from the Series Fund and under the Contract.
Note that under the variable insurance amount Contract the death benefit changes
to reflect investment returns, while under the fixed insurance amount Contract
the death benefit increases only if the Contract Fund becomes sufficiently large
that an increase in the death benefit is necessary in order to ensure that the
Contract will satisfy the Internal Revenue Code's definition of life insurance.
See TYPE OF INSURANCE AMOUNT, page 8.
Following these illustrations are two pages (pages T5 and T6) showing internal
rates of return (commonly referred to as IRRs) associated with the cash values
and death benefits shown on the preceding four pages. IRRs are often employed by
insurance companies to provide some indication of the rate of return that may be
thought of as earned upon your "investment" in the Contract (the aggregate
premiums paid) if the Contract were surrendered or if the insureds were to die.
The IRR on the death benefit is equivalent to an interest rate (after taxes) at
which an amount equal to the premiums illustrated on the preceding pages could
have been invested to arrive at the death benefit of the Contract. The IRR on
the cash surrender value is equivalent to an interest rate (after taxes) at
which an amount equal to the illustrated premiums could have been invested to
arrive at the cash surrender value of the Contract. The IRRs on page T5 are
based on the Contract values shown on pages T1 and T2. The IRRs on page T6 are
based on the Contract values shown on pages T3 and T4.
If you are considering the purchase of a variable life insurance contract from
another insurance company, you should not rely upon these tables for comparison
purposes. A comparison between two tables, each showing values for a 55 year old
man and a 50 year old woman, may be useful for a 55 year old man and a 50 year
old woman but would be inaccurate if made for insureds of other ages or sex.
Your Prudential representative can provide you with a hypothetical illustration
for your own age, sex, and rating class. You can obtain an illustration using
premium amounts and payment patterns that you wish to follow. You may use
assumed gross returns different than those shown in the tables, although
currently they may not be higher than 10%.
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<PAGE>
ILLUSTRATIONS
-------------
VARIABLE SURVIVORSHIP CONTRACT
FIXED INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT (1) CASH SURRENDER VALUE (1)
------------------------------------------------------ -----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ------------------------------------------------------ -----------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET) (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET)
- ------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 12,581 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 6,877 $ 7,175 $ 7,474 $ 7,773
2 $ 25,666 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 17,147 $ 18,153 $ 19,183 $ 20,237
3 $ 39,274 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 27,238 $ 29,380 $ 31,628 $ 33,985
4 $ 53,426 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 37,145 $ 40,855 $ 44,850 $ 49,145
5 $ 68,145 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 46,862 $ 52,577 $ 58,891 $ 65,858
6 $ 83,452 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 56,380 $ 64,538 $ 73,793 $ 84,275
7 $ 99,372 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 65,689 $ 76,734 $ 89,601 $ 104,567
8 $ 115,928 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 74,775 $ 89,154 $ 106,360 $ 126,917
9 $ 133,146 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 83,623 $101,787 $ 124,116 $ 151,529
10 $ 151,054 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $ 92,217 $114,618 $ 142,916 $ 178,627
15 $ 251,925 $1,000,000 $1,000,000 $1,000,000 $ 1,000,000 $130,524 $181,034 $ 254,383 $ 361,123
20 $ 374,650 $1,000,000 $1,000,000 $1,000,000 $ 1,330,583 $157,527 $248,053 $ 400,326 $ 655,460
25 $ 523,963 $1,000,000 $1,000,000 $1,037,416 $ 1,952,796 $168,145 $312,336 $ 596,216 $ 1,122,297
30 $ 705,626 $1,000,000 $1,000,000 $1,278,704 $ 2,777,609 $134,129 $350,480 $ 841,253 $ 1,827,374
35 $ 926,647 $ 0(2) $1,000,000 $1,536,476 $ 3,879,020 $ 0(2) $320,874 $1,129,762 $ 2,852,220
40 $1,195,553 $ 0 $1,000,000 $1,816,755 $ 5,359,657 $ 0 $130,390 $1,465,125 $ 4,322,304
45 $1,522,718 $ 0 $ 0(2) $2,158,767 $ 7,474,942 $ 0 $ 0(2) $1,877,188 $ 6,499,950
50 $1,920,764 $ 0 $ 0 $2,564,781 $10,464,513 $ 0 $ 0 $2,466,136 $10,062,031
</TABLE>
(1) ASSUMES NO CONTRACT LOAN HAS BEEN MADE.
(2) BASED ON A GROSS RETURN OF 0% THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 35.
BASED ON A GROSS RETURN OF 4% THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 42.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T1
<PAGE>
VARIABLE SURVIVORSHIP CONTRACT
VARIABLE INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT (1) CASH SURRENDER VALUE (1)
------------------------------------------------------ -----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ------------------------------------------------------ -----------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET) (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET)
- ------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 12,581 $1,006,877 $1,007,175 $1,007,474 $ 1,007,772 $ 6,877 $ 7,175 $ 7,474 $ 7,772
2 $ 25,666 $1,017,146 $1,018,152 $1,019,182 $ 1,020,236 $ 17,146 $ 18,152 $ 19,182 $ 20,236
3 $ 39,274 $1,027,235 $1,029,377 $1,031,625 $ 1,033,982 $ 27,235 $ 29,377 $ 31,625 $ 33,982
4 $ 53,426 $1,037,139 $1,040,848 $1,044,841 $ 1,049,136 $ 37,139 $ 40,848 $ 44,841 $ 49,136
5 $ 68,145 $1,046,848 $1,052,560 $1,058,872 $ 1,065,836 $ 46,848 $ 52,560 $ 58,872 $ 65,836
6 $ 83,452 $1,056,353 $1,064,506 $1,073,756 $ 1,084,232 $ 56,353 $ 64,506 $ 73,756 $ 84,232
7 $ 99,372 $1,065,641 $1,076,677 $1,089,534 $ 1,104,486 $ 65,641 $ 76,677 $ 89,534 $ 104,486
8 $ 115,928 $1,074,697 $1,089,058 $1,106,244 $ 1,126,775 $ 74,697 $ 89,058 $ 106,244 $ 126,775
9 $ 133,146 $1,083,502 $1,101,634 $1,123,925 $ 1,151,291 $ 83,502 $101,634 $ 123,925 $ 151,291
10 $ 151,054 $1,092,034 $1,114,383 $1,142,615 $ 1,178,242 $ 92,034 $114,383 $ 142,615 $ 178,242
15 $ 251,925 $1,129,550 $1,179,627 $1,252,336 $ 1,358,132 $129,550 $179,627 $ 252,336 $ 358,132
20 $ 374,650 $1,154,007 $1,242,273 $1,390,680 $ 1,641,814 $154,007 $242,273 $ 390,680 $ 641,814
25 $ 523,963 $1,157,933 $1,292,976 $1,558,731 $ 2,086,722 $157,933 $292,976 $ 558,731 $1,086,722
30 $ 705,626 $1,109,844 $1,293,999 $1,728,027 $ 2,754,825 $109,844 $293,999 $ 728,027 $1,754,825
35 $ 926,647 $ 0(2) $1,182,049 $1,837,071 $ 3,724,412 $ 0(2) $182,049 $ 837,071 $2,724,412
40 $1,195,553 $ 0 $ 0(2) $1,789,916 $ 5,111,724 $ 0 $ 0(2) $ 789,916 $4,111,724
45 $1,522,718 $ 0 $ 0 $1,471,304 $ 7,132,746 $ 0 $ 0 $ 471,304 $6,132,746
50 $1,920,764 $ 0 $ 0 $ 0(2) $10,041,256 $ 0 $ 0 $ 0(2) $9,041,256
</TABLE>
(1) ASSUMES NO CONTRACT LOAN HAS BEEN MADE.
(2) BASED ON A GROSS RETURN OF 0% THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 35.
BASED ON A GROSS RETURN OF 4% THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 39.
BASED ON A GROSS RETURN OF 8% THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 48.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T2
<PAGE>
VARIABLE SURVIVORSHIP CONTRACT
FIXED INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT (1) CASH SURRENDER VALUE (1)
------------------------------------------------------ -----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ------------------------------------------------------ -----------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET) (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET)
- ------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 12,581 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 6,376 $ 6,655 $ 6,934 $ 7,214
2 $ 25,666 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 15,977 $ 16,920 $ 17,886 $ 18,874
3 $ 39,274 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 25,342 $ 27,349 $ 29,454 $ 31,663
4 $ 53,426 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 34,453 $ 37,922 $ 41,658 $ 45,676
5 $ 68,145 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 43,286 $ 48,618 $ 54,513 $ 61,020
6 $ 83,452 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 51,818 $ 59,413 $ 68,035 $ 77,806
7 $ 99,372 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 60,019 $ 70,275 $ 82,236 $ 96,159
8 $ 115,928 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 67,857 $ 81,172 $ 97,127 $ 116,213
9 $ 133,146 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 75,294 $ 92,063 $112,717 $ 138,116
10 $ 151,054 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $ 82,284 $102,898 $129,005 $ 162,025
15 $ 251,925 $1,000,000 $1,000,000 $1,000,000 $1,000,000 $107,935 $153,493 $220,249 $ 318,110
20 $ 374,650 $1,000,000 $1,000,000 $1,000,000 $1,133,204 $106,371 $185,759 $322,878 $ 558,229
25 $ 523,963 $1,000,000 $1,000,000 $1,000,000 $1,580,366 $ 51,569 $173,183 $430,129 $ 908,257
30 $ 705,626 $1,000,000 $1,000,000 $1,000,000 $2,075,570 $ 0 $ 29,987 $512,982 $1,365,506
35 $ 926,647 $ 0(2) $ 0(2) $1,000,000 $2,623,752 $ 0(2) $ 0(2) $522,466 $1,929,229
40 $1,195,553 $ 0 $ 0 $1,000,000 $3,245,899 $ 0 $ 0 $270,297 $2,617,661
45 $1,522,718 $ 0 $ 0 $ 0(2) $4,028,616 $ 0 $ 0 $ 0(2) $3,503,145
50 $1,920,764 $ 0 $ 0 $ 0 $5,009,257 $ 0 $ 0 $ 0 $4,816,593
</TABLE>
(1) ASSUMES NO CONTRACT LOAN HAS BEEN MADE.
(2) BASED ON A GROSS RETURN OF 0% THE CONTRACT FUND WOULD GO TO ZERO IN YEAR 27,
BUT BECAUSE THE TARGET PREMIUM IS BEING PAID, THE CONTRACT IS KEPT INFORCE
THROUGH THE LIMITED DEATH BENEFIT GUARANTEE PERIOD OF 32 YEARS. THE CONTRACT
WOULD BE IN DEFAULT AT THE BEGINNING OF YEAR 33. BASED ON A GROSS RETURN OF
4% THE CONTRACT FUND WOULD GO TO ZERO IN YEAR 31, BUT BECAUSE THE TARGET
PREMIUM IS BEING PAID, THE CONTRACT IS KEPT INFORCE THROUGH THE LIMITED
DEATH BENEFIT GUARANTEE PERIOD OF 32 YEARS. THE CONTRACT WOULD BE IN DEFAULT
AT THE BEGINNING OF YEAR 33. BASED ON A GROSS RETURN OF 8% THE CONTRACT
WOULD GO INTO DEFAULT IN POLICY YEAR 42.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T3
<PAGE>
VARIABLE SURVIVORSHIP CONTRACT
VARIABLE INSURANCE AMOUNT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
DEATH BENEFIT (1) CASH SURRENDER VALUE (1)
------------------------------------------------------ -----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ACCUMULATED ------------------------------------------------------ -----------------------------------------------------
POLICY AT 4% INTEREST 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR PER YEAR (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET) (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET)
- ------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 12,581 $1,006,376 $1,006,655 $1,006,934 $1,007,213 $ 6,376 $ 6,655 $ 6,934 $ 7,213
2 $ 25,666 $1,015,975 $1,016,918 $1,017,883 $1,018,872 $ 15,975 $ 16,918 $ 17,883 $ 18,872
3 $ 39,274 $1,025,335 $1,027,340 $1,029,445 $1,031,653 $ 25,335 $ 27,340 $ 29,445 $ 31,653
4 $ 53,426 $1,034,433 $1,037,899 $1,041,633 $1,045,649 $ 34,433 $ 37,899 $ 41,633 $ 45,649
5 $ 68,145 $1,043,244 $1,048,571 $1,054,459 $1,060,958 $ 43,244 $ 48,571 $ 54,459 $ 60,958
6 $ 83,452 $1,051,739 $1,059,322 $1,067,929 $1,077,683 $ 51,739 $ 59,322 $ 67,929 $ 77,683
7 $ 99,372 $1,059,885 $1,070,116 $1,082,046 $1,095,934 $ 59,885 $ 70,116 $ 82,046 $ 95,934
8 $ 115,928 $1,067,643 $1,080,910 $1,096,807 $1,115,823 $ 67,643 $ 80,910 $ 96,807 $ 115,823
9 $ 133,146 $1,074,967 $1,091,652 $1,112,202 $1,137,472 $ 74,967 $ 91,652 $112,202 $ 137,472
10 $ 151,054 $1,081,802 $1,102,277 $1,128,207 $1,161,000 $ 81,802 $102,277 $128,207 $ 161,000
15 $ 251,925 $1,105,592 $1,150,061 $1,215,198 $1,310,659 $105,592 $150,061 $215,198 $ 310,659
20 $ 374,650 $1,098,733 $1,172,628 $1,300,178 $1,520,239 $ 98,733 $172,628 $300,178 $ 520,239
25 $ 523,963 $1,034,810 $1,135,476 $1,348,567 $1,792,113 $ 34,810 $135,476 $348,567 $ 792,113
30 $ 705,626 $1,000,000(2) $1,000,000(2) $1,265,649 $2,078,253 $ 0(2) $ 0(2) $265,649 $1,078,253
35 $ 926,647 $ 0 $ 0 $ 0(2) $2,272,080 $ 0 $ 0 $ 0(2) $1,272,080
40 $1,195,553 $ 0 $ 0 $ 0 $2,168,575 $ 0 $ 0 $ 0 $1,168,575
45 $1,522,718 $ 0 $ 0 $ 0 $1,376,838 $ 0 $ 0 $ 0 $ 376,838
50 $1,920,764 $ 0 $ 0 $ 0 $ 0(2) $ 0 $ 0 $ 0 $ 0(2)
</TABLE>
(1) ASSUMES NO CONTRACT LOAN HAS BEEN MADE.
(2) BASED ON A GROSS RETURN OF 0% THE CONTRACT FUND WOULD GO TO ZERO IN YEAR 27,
BUT BECAUSE THE TARGET PREMIUM IS BEING PAID, THE CONTRACT IS KEPT INFORCE
THROUGH THE LIMITED DEATH BENEFIT GUARANTEE PERIOD OF 30 YEARS. THE CONTRACT
WOULD BE IN DEFAULT AT THE BEGINNING OF YEAR 31. BASED ON A GROSS RETURN OF
4% THE CONTRACT FUND WOULD GO TO ZERO IN YEAR 30, BUT BECAUSE THE TARGET
PREMIUM IS BEING PAID, THE CONTRACT IS KEPT INFORCE THROUGH THE LIMITED
DEATH BENEFIT GUARANTEE PERIOD OF 30 YEARS. THE CONTRACT WOULD BE IN DEFAULT
AT THE BEGINNING OF YEAR 31. BASED ON A GROSS RETURN OF 8% THE CONTRACT
WOULD GO INTO DEFAULT IN POLICY YEAR 35. BASED ON A GROSS RETURN OF 12% THE
CONTRACT WOULD GO INTO DEFAULT IN POLICY YEAR 47.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T4
<PAGE>
INTERNAL RATES OF RETURN
------------------------
VARIABLE SURVIVORSHIP CONTRACT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
FIXED INSURANCE AMOUNT
<TABLE>
<CAPTION>
INTERNAL RATES OF RETURN ON DEATH (1) INTERNAL RATES OF RETURN ON SURRENDER (1)
---------------------------------------------------- ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ---------------------------------------------------- ----------------------------------------------------
POLICY 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET) (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET)
- ------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 114.17% 114.17% 114.17% 114.17% -8.39% -4.64% -0.90% 2.84%
10 37.02% 37.02% 37.02% 37.02% -5.01% -0.99% 3.00% 6.97%
15 19.51% 19.51% 19.51% 19.51% -4.25% -0.03% 4.11% 8.20%
20 12.19% 12.19% 12.19% 14.45% -4.30% 0.23% 4.58% 8.76%
25 8.29% 8.29% 8.52% 12.47% -4.89% 0.24% 4.88% 9.03%
30 5.92% 5.92% 7.23% 11.19% -7.55% -0.23% 4.98% 9.08%
35 (2) 4.36% 6.32% 10.30% (2) -1.61% 4.92% 9.01%
40 3.26% 5.65% 9.66% -8.25% 4.81% 8.89%
45 (2) 5.21% 9.23% (2) 4.73% 8.79%
50 4.89% 8.92% 4.77% 8.81%
</TABLE>
(2) BASED ON A GROSS RETURN OF 0%, THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 35.
BASED ON A GROSS RETURN OF 4%, THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 42.
VARIABLE INSURANCE AMOUNT
<TABLE>
<CAPTION>
INTERNAL RATES OF RETURN ON DEATH (1) INTERNAL RATES OF RETURN ON SURRENDER (1)
---------------------------------------------------- ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ---------------------------------------------------- ----------------------------------------------------
POLICY 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET) (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET)
- ------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 116.49% 116.77% 117.08% 117.41% -8.40% -4.65% -0.91% 2.83%
10 38.58% 38.94% 39.39% 39.93% -5.05% -1.03% 2.97% 6.94%
15 20.83% 21.30% 21.95% 22.83% -4.35% -0.13% 4.01% 8.10%
20 13.33% 13.91% 14.80% 16.10% -4.54% 0.01% 4.36% 8.58%
25 9.22% 9.92% 11.08% 12.88% -5.47% -0.25% 4.44% 8.82%
30 6.48% 7.29% 8.79% 11.15% -9.47% -1.40% 4.17% 8.87%
35 (2) 5.13% 7.11% 10.13% (2) -5.39% 3.51% 8.81%
40 (2) 5.60% 9.49% (2) 2.25% 8.70%
45 3.87% 9.08% -0.64% 8.61%
50 (2) 8.81% (2) 8.52%
</TABLE>
(1) ASSUMES NO CONTRACT LOAN HAS BEEN MADE.
(2) BASED ON A GROSS RETURN OF 0%, THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 35.
BASED ON A GROSS RETURN OF 4%, THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 39.
BASED ON A GROSS RETURN OF 8%, THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 48.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T5
<PAGE>
INTERNAL RATES OF RETURN
------------------------
VARIABLE SURVIVORSHIP CONTRACT
MALE PREFERRED ISSUE AGE 55
FEMALE PREFERRED ISSUE AGE 50
$ 1,000,000 DEATH BENEFIT
$ 12,097.49 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
FIXED INSURANCE AMOUNT
<TABLE>
<CAPTION>
INTERNAL RATES OF RETURN ON DEATH (1) INTERNAL RATES OF RETURN ON SURRENDER (1)
---------------------------------------------------- ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ---------------------------------------------------- ----------------------------------------------------
POLICY 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET) (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET)
- ------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 114.17% 114.17% 114.17% 114.17% -10.96% -7.20% -3.45% 0.29%
10 37.02% 37.02% 37.02% 37.02% -7.15% -2.97% 1.16% 5.24%
15 19.51% 19.51% 19.51% 19.51% -6.83% -2.13% 2.38% 6.74%
20 12.19% 12.19% 12.19% 13.18% -8.71% -2.60% 2.67% 7.42%
25 8.29% 8.29% 8.29% 11.17% -18.92% -4.63% 2.61% 7.67%
30 5.92% 5.92% 5.92% 9.73% 0.00% -28.75% 2.14% 7.58%
35 (2) (2) 4.36% 8.65% (2) (2) 1.13% 7.32%
40 3.26% 7.84% -3.12% 7.04%
45 (2) 7.27% (2) 6.82%
50 6.85% 6.74%
</TABLE>
(2) BASED ON A GROSS RETURN OF 0%, THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 33.
BASED ON A GROSS RETURN OF 4%, THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 33.
BASED ON A GROSS RETURN OF 8%, THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 42.
VARIABLE INSURANCE AMOUNT
<TABLE>
<CAPTION>
INTERNAL RATES OF RETURN ON DEATH (1) INTERNAL RATES OF RETURN ON SURRENDER (1)
---------------------------------------------------- ----------------------------------------------------
ASSUMING HYPOTHETICAL GROSS (AND NET) ASSUMING HYPOTHETICAL GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF ---------------------------------------------------- ----------------------------------------------------
POLICY 0% GROSS 4% GROSS 8% GROSS 12% GROSS 0% GROSS 4% GROSS 8% GROSS 12% GROSS
YEAR (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET) (-1.43% NET) (2.57% NET) (6.57% NET) (10.57% NET)
- ------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 116.32% 116.58% 116.86% 117.18% -10.99% -7.23% -3.48% 0.25%
10 38.41% 38.75% 39.16% 39.67% -7.27% -3.08% 1.05% 5.13%
15 20.60% 21.03% 21.63% 22.45% -7.14% -2.42% 2.10% 6.46%
20 12.94% 13.46% 14.27% 15.50% -9.61% -3.35% 2.01% 6.83%
25 8.51% 9.10% 10.18% 11.95% -25.78% -6.94% 1.07% 6.78%
30 5.92% 5.92% 7.18% 9.73% 0.00% 0.00% -2.10% 6.33%
35 (2) (2) (2) 8.03% (2) (2) (2) 5.47%
40 6.33% 3.90%
45 3.63% -1.70%
50 (2) (2)
</TABLE>
(1) ASSUMES NO CONTRACT LOAN HAS BEEN MADE.
(2) BASED ON A GROSS RETURN OF 0%, THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 31.
BASED ON A GROSS RETURN OF 4%, THE CONTRACT WOULD GO INTO DEFAULT
IN POLICY YEAR 31.
BASED ON A GROSS RETURN OF 8%, THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 35.
BASED ON A GROSS RETURN OF 12%, THE CONTRACT WOULD GO INTO DEFAULT IN POLICY
YEAR 47.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATES OF
INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 4%, 8%,
AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES
FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY THE PRUDENTIAL
OR THE SERIES FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
T6
<PAGE>
CONTRACT LOANS
You may borrow from Prudential an amount up to the current "loan value" of your
Contract less any existing Contract debt using the Contract as the only security
for the loan. The loan value at any time will equal 100% of the fixed-rate
option and 90% of the variable subaccounts provided the Contract is not in
default. A Contract in default has no loan value.
Interest charged on a loan accrues daily. Interest is due on each Contract
anniversary or when the loan is paid back, whichever comes first. If interest is
not paid when due, it becomes part of the loan and we will charge interest on
it, too. Except in the case of preferred loans, we charge interest at an
effective annual rate of 5%.
A portion of any amount you borrow on or after the tenth Contract anniversary
may be considered a preferred loan. The maximum preferred loan amount is the
total amount you may borrow minus the total net premiums paid (net premiums
equal premiums paid less total withdrawals, if any). If the net premium amount
is less than zero, we will, for purposes of this calculation, consider is to be
zero. Only new loans borrowed after the tenth Contract anniversary may be
considered preferred loans; standard loans will not automatically be converted
into preferred loans. Preferred loans are charged interest at an effective
annual rate of 4.5%.
The term "Contract debt" means the amount of all outstanding loans plus any
interest accrued but not yet due. If at any time the Contract debt equals or
exceeds the Contract Fund, the Contract will go into default. We will notify you
of a 61-day grace period, within which time you may repay all or enough of the
loan to obtain a positive cash surrender value and thus keep the Contract in
force for a limited time. If the Contract debt equals or exceeds the Contract
Fund and you fail to keep the Contract in force, the amount of unpaid Contract
debt will be treated as a distribution which may be taxable. See TAX TREATMENT
OF CONTRACT BENEFITS, page 26 and LAPSE AND REINSTATEMENT, page 29.
When a loan is made, an amount equal to the loan proceeds will be transferred
out of the Account and/or the fixed-rate option, as applicable. Unless you ask
us to take the loan amount from specific investment options and we agree, the
reduction will be made in the same proportions as the value in each subaccount
and the fixed-rate option bears to the total value of the Contract. While a loan
is outstanding, the amount that was so transferred will continue to be treated
as part of the Contract Fund. It will be credited with an effective annual rate
of return of 4%. Therefore, the net cost of a standard loan is 1% and the net
cost of a preferred loan is 1/2%.
As long as Contract debt does not equal or exceed the Contract Fund, a loan will
not affect the Death Benefit Guarantee. Should the death benefit become payable
while a loan is outstanding, or should the Contract be surrendered, any Contract
debt will be deducted from the insurance amount or Contract Fund to calculate
the death benefit or the cash surrender value, as applicable. Loans from
Modified Endowment Contracts may be treated for tax purposes as distributions of
income. See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
As stated above, any Contract debt will directly reduce a Contract's cash
surrender value and will be subtracted from the insurance amount to determine
the death benefit payable. In addition, even if the loan is fully repaid, it may
have an effect on future death benefits, because the investment results of the
selected investment options will apply only to the amount remaining invested
under those options. The longer the loan is outstanding, the greater the effect
is likely to be. The effect could be favorable or unfavorable. If investment
results are greater than the rate being credited upon the amount of the loan
while the loan is
25
<PAGE>
outstanding, values under the Contract will not increase as rapidly as they
would have if no loan had been made. If investment results are below that rate,
Contract values will be higher than they would have been had no loan been made.
When you repay all or part of a loan, we will increase the portion of the
Contract Fund in the investment options by the amount of the loan you repay
using the investment allocation of your most recent premium payment, plus
interest credits accrued on the loan since the last transaction date. We will
not increase the portion of the Contract Fund allocated to the investment
options by loan interest that is paid before we make it part of the loan. We
reserve the right to change the manner in which we allocate loan repayments.
SALE OF THE CONTRACT AND SALES COMMISSIONS
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
Prudential, acts as the principal underwriter of the Contract. Prusec, organized
in 1971 under New Jersey law, is registered as a broker and dealer under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. Prusec's principal business address is 213 Washington
Street, Newark, New Jersey 07102-2992. The Contract is sold by registered
representatives of Prusec who are also authorized by state insurance departments
to do so. The Contract may also be sold through other broker-dealers authorized
by Prusec and applicable law to do so. Registered representatives of such other
broker-dealers may be paid on a different basis than described below. Generally,
representatives will receive a commission of no more than 50% of the premiums
received in the first year on premiums up to the target level premium (see
PREMIUMS, page 10), no more than 4% commission on premiums received in the first
year in excess of the target level premium, no more than 4% of premiums received
in years two through ten, and no more than 2% of premiums received thereafter.
Representatives with less than 4 years of service may receive compensation on a
different basis. Representatives who meet certain productivity or persistency
standards may be eligible for additional compensation.
TAX TREATMENT OF CONTRACT BENEFITS
Each prospective purchaser is urged to consult a qualified tax advisor. The
following discussion is not intended as tax advice, and it is not a complete
statement of what the effect of federal income taxes will be under all
circumstances. Rather, it provides information about how Prudential believes the
tax laws apply in the most commonly occurring circumstances. There is no
guarantee, however, that the current federal income tax laws and regulations or
interpretations will not change.
TREATMENT AS LIFE INSURANCE. The Contract will be treated as "life insurance,"
as long as it satisfies certain definitional tests set forth in Sections 7702 of
the Internal Revenue Code (the "Code") and as long as the underlying investments
for the Contract satisfy diversification requirements under Section 817(h) of
the Code. (For further detail on diversification requirements, see DIVIDENDS,
DISTRIBUTIONS, AND TAXES in the attached prospectus for the Series Fund.)
Prudential believes that it has taken adequate steps to cause the Contract to be
treated as life insurance for tax purposes. This means that (1) except as noted
below, the Contract owner should not be taxed on any part of the Contract Fund,
including additions attributable to interest, dividends or appreciation until
amounts are distributed under the Contract; and (2) the death benefit should be
excludible from the gross income of the beneficiary under Section 101(a) of the
Code.
26
<PAGE>
However, Section 7702 of the Code which defines life insurance for tax purposes
gives the Secretary of the Treasury authority to prescribe regulations to carry
out the purposes of the Section. In this regard, proposed regulations governing
mortality charges were issued in 1991. The mortality charges assumed for risks
under the Contract do not comply with the proposed regulations. In this regard,
the proposed regulations preclude the assumption of the industry's standard
mortality table for survivorship life insurance policies and do not provide for
the use of the substandard mortality risk assumptions used for the Contract.
Consequently, if such regulations were finalized in their current form, the
Contract may not qualify as life insurance for federal tax purposes or may be
classified as a Modified Endowment Contract. None of these proposed regulations
has yet been finalized. Additional regulations under Section 7702 may also be
promulgated in the future. Moreover, in connection with the issuance of
temporary regulations under Section 817(h), the Treasury Department announced
that such regulations do not provide guidance concerning the extent to which
Contract owners may direct their investments to particular divisions of a
separate account. Such guidance will be included in regulations or rulings under
Section 817(d) relating to the definition of a variable contract.
Prudential intends to comply with final regulations or rulings issued under
sections 7702 and 817. Therefore, it reserves the right to make such changes as
it deems necessary to assure that the Contract continues to qualify as life
insurance for tax purposes. Any such changes will apply uniformly to affected
Contract owners and will be made only after advance written notice to affected
Contract owners.
PRE-DEATH DISTRIBUTIONS. The taxation of pre-death distributions depends on
whether the Contract is classified as a Modified Endowment Contract. The
following discussion first deals with distributions under Contracts not so
classified, and then with Modified Endowment Contracts.
1. A surrender or lapse of the Contract may have tax consequences. Upon
surrender, the owner will not be taxed on the cash surrender value
except for the amount, if any, that exceeds the gross premiums paid
less the untaxed portion of any prior withdrawals. The amount of any
unpaid Contract debt will, upon surrender or lapse, be added to the
cash surrender value and treated, for this purpose, as if it had
been received. Any loss incurred upon surrender is generally not
deductible. The tax consequences of a surrender may differ if the
proceeds are received under any income payment settlement option.
A withdrawal generally is not taxable unless it exceeds total
premiums paid to the date of withdrawal less the untaxed portion of
any prior withdrawals. However, under certain limited circumstances,
in the first 15 Contract years all or a portion of a withdrawal may
be taxable if the Contract Fund exceeds the total premiums paid less
the untaxed portions of any prior withdrawals, even if total
withdrawals do not exceed total premiums paid to date.
Extra premiums for optional benefits and riders generally do not
count in computing gross premiums paid, which in turn determines the
extent to which a withdrawal might be taxed.
Loans received under the Contract will ordinarily be treated as
indebtedness of the owner and will not be considered to be
distributions subject to tax. However, there is some risk the
Internal Revenue Service might assert the preferred loan should be
treated as a distribution for tax purposes because of the relatively
low differential
27
<PAGE>
between the loan interest rate and Contract's crediting rate. Were
the Internal Revenue Service to take this position, Prudential would
take reasonable steps to avoid this result, including modifying the
Contract's loan provisions.
2. Some of the above rules are changed if the Contract is classified as
a Modified Endowment Contract under Section 7702A of the Code. It is
possible for this Contract to be classified as a Modified Endowment
Contract under at least two circumstances: premiums in excess of the
7-pay premiums allowed under Section 7702A are paid or a decrease in
the insurance amount is made (or a rider removed). Moreover, the
addition of a rider or the increase in the basic insurance amount
after the Contract date may have an impact on the Contract's status
as a Modified Endowment Contract. Contract owners contemplating any
of these steps, particularly a withdrawal that would reduce the
basic insurance amount, should first consult a qualified tax advisor
and their Prudential representative.
If the Contract is classified as a Modified Endowment Contract, then
pre-death distributions, including loans, assignment and pledges are
includible in income to the extent that the Contract Fund exceeds
the gross premiums paid for the Contract increased by the amount of
any loans previously includible in income and reduced by any untaxed
amounts previously received other than the amount of any loans
excludible from income. These rules may also apply to pre-death
distributions, including loans, made during the two year period
prior to the Contract becoming a Modified Endowment Contract.
In addition, pre-death distributions from such Contracts (including
full surrenders) will be subject to a penalty of 10 per cent of the
amount includible in income unless the amount is distributed on or
after age 59 1/2, on account of the taxpayer's disability or as a
life annuity. It is presently unclear how the penalty tax provisions
apply to Contracts owned by nonnatural persons such as corporations.
Under certain circumstances, multiple Modified Endowment Contracts
issued during any calendar year will be treated as a single contract
for purposes of applying the above rules.
WITHHOLDING
The taxable portion of any amounts received under the Contract will be subject
to withholding to meet federal income tax obligations, if the Contract owner
fails to elect that no taxes be withheld or in certain other circumstances.
Prudential will provide the Contract owner with forms and instructions
concerning the right to elect that no taxes be withheld from the taxable portion
of any payment. All recipients may be subject to penalties under the estimated
tax payment rules if withholding and estimated tax payments are not sufficient.
Contract owners who do not provide a social security number or other taxpayer
identification number will not be permitted to elect out of withholding. Special
withholding rules apply to payments to non-resident aliens.
OTHER TAX CONSIDERATIONS. Transfer of the Contract to a new owner or assignment
of the Contract may have tax consequences depending on the circumstances. In the
case of a transfer of the Contract for valuable consideration, the death benefit
may be subject to federal income taxes under section 101(a)(2) of the Code. In
addition, a transfer of the Contract to or the designation of a beneficiary who
is either 37 1/2 years younger than the Contract owner or a grandchild of the
Contract owner may have Generation Skipping Transfer tax consequences under
Section 2601 of the Code.
28
<PAGE>
In certain circumstances, deductions for interest paid or accrued on Contract
debt or on other loans that are incurred or continued to purchase or carry the
Contract may be denied under sections 163 of the Code as personal interest or
under section 264 of the Code. Contract owners should consult a tax advisor
regarding the application of these provisions to their circumstances.
Business-owned life insurance is subject to additional rules. Section 264(a)(1)
of the Code generally precludes business Contract owners from deducting premium
payments. The recently enacted Health Insurance Portability and Accountability
Act of 1996 generally disallows tax deductions for interest on Contract debt on
a business-owned insurance policy effective (with certain transitional rules)
for interest paid or accrued after October 13, 1995. An exception permits the
deduction of interest on policy loans on Contracts for up to 20 key persons. The
interest deduction for Contract debt on such loans is limited to a prescribed
interest rate and a maximum aggregate loan amount of $50,000 per key insured
person. The Code also imposes an indirect tax upon additions to the Contract
Fund or the receipt of death benefits under business-owned life insurance
policies under certain circumstances by way of the corporate alternative minimum
tax.
The individual situation of each Contract owner or beneficiary will determine
the federal estate taxes and the state and local estate, inheritance and other
taxes due if the owner or insured dies.
LAPSE AND REINSTATEMENT
On each Monthly date, we will determine the value of the Contract Fund. If the
Contract Fund is zero or less, the Contract is in default unless it remains in
force under the Death Benefit Guarantee. See DEATH BENEFIT GUARANTEE, page 11.
If the Contract debt ever grows to be equal to or more than the Contract Fund,
the Contract will be in default. Should this happen, Prudential will send you a
notice of default setting forth the payment which we estimate will keep the
Contract in force for three months from the date of default. This payment must
be received at a Home Office within the 61-day grace period after the notice of
default is mailed or the Contract will end and have no value. A Contract that
lapses and ends without value with an outstanding Contract loan may have tax
consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
A Contract that ended in default may be reinstated within 5 years after the date
of default if the following conditions are met: (1) both insureds are alive or
if one insured is alive and the Contract ended without value after the death of
the other insured; (2) you must provide renewed evidence of insurability on any
insured who was living when the Contract went into default; and (3) submission
of certain payments sufficient to bring the Contract up to date and cover all
charges and deductions for the next three months. The date of reinstatement will
be the beginning of the Contract month that coincides with the or next follows
the date we approve your request. All required charges will be deducted from
your payment and the balance will be placed into your Contract Fund.
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND
BENEFITS
The Contract generally employs mortality tables that distinguish between males
and females. Thus, premiums and benefits under Contracts issued on males and
females of the same age will generally differ. However, in those states that
have adopted regulations prohibiting sex-distinct insurance rates, premiums and
cost of insurance charges will be based on male rates whether the insureds are
male or female. In addition, employers and employee
29
<PAGE>
organizations considering purchase of a Contract should consult their legal
advisors to determine whether purchase of a Contract based on sex-distinct
actuarial tables is consistent with Title VII of the Civil Rights Act of 1964 or
other applicable law. Prudential may offer the Contract with male mortality
rates to such prospective purchasers.
OTHER GENERAL CONTRACT PROVISIONS
ASSIGNMENT. This Contract may not be assigned if such assignment would violate
any federal, state or local law or regulation prohibiting sex distinct rates for
insurance. Generally, the Contract may not be assigned to an employee benefit
plan or program without Prudential's consent. Prudential assumes no
responsibility for the validity or sufficiency of any assignment, and we will
not be obligated to comply with any assignment unless we received a copy at one
of our Home Offices.
BENEFICIARY. The beneficiary is designated and named in the application by the
Contract owner. Thereafter, you may change the beneficiary, provided it is in
accordance with the terms of the Contract. Should the second insured to die do
so with no surviving beneficiary, that insured's estate will become the
beneficiary, unless someone other than the insureds owned the Contract. In that
case, we will make the Contract owner or the Contract owner's estate the
beneficiary.
INCONTESTABILITY. After the Contract has been in force during the lifetime of
both insureds for 2 years from the Contract date or, with respect to any change
in the Contract that requires Prudential's approval and could increase its
liability, after the change has been in effect during at least one insured's
lifetime for 2 years from the effective date of the change, assuming enough
premium has been paid to cover the required charges, Prudential will not contest
its liability under the Contract in accordance with its terms.
MISSTATEMENT OF AGE OR SEX. If an insured's stated age or sex or both are
incorrect in the Contract, Prudential will adjust each benefit and any amount to
be paid, as required by law, to reflect the correct age and sex. Any such
benefit will be based on what the most recent deductions from the Contract Fund
would have provided at that insured's correct age and sex.
SETTLEMENT OPTIONS. The Contract grants to most owners, or to the beneficiary, a
variety of optional ways of receiving Contract proceeds, other than in a lump
sum. Any Prudential representative authorized to sell this Contract can explain
these options upon request.
SIMULTANEOUS DEATH. If both insureds die while the Contract is in force and we
find there is lack of sufficient evidence that they died other than
simultaneously, we will assume that the older insured died first.
SUICIDE EXCLUSION. Generally, if either insured, whether sane or insane, dies by
suicide within 2 years from the Contract date, the Contract will end and
Prudential will return the premiums paid, less any Contract debt, and less any
withdrawals. If there is a surviving insured, Prudential will make a new
contract available to that insured. The amount of coverage, issue age, contract
date, and underwriting classification will be the same as when this Contract was
issued.
RIDERS
Contract owners may be able to obtain extra fixed benefits which may require an
additional premium. These optional insurance benefits will be described in what
is known as a "rider"
30
<PAGE>
to the Contract. Charges applicable to the riders will be deducted from the
Contract Fund on each Monthly date.
One rider gives insureds the option to exchange the Contract for two new life
insurance contracts, one on the life of each insured, in the event of a divorce
or if certain changes in tax law occur. Exercise of this option may give rise to
taxable income. Another pays an additional amount if both insureds die within a
specified number of years. Another pays an additional amount if a specified
insured dies within a stated number of years. If the two insureds are not family
members (i.e. husband/wife or parent/child), charges for these single life
riders will be treated as pre-death distributions from the Contract. See TAX
TREATMENT OF CONTRACT BENEFITS, page 26. Certain restrictions may apply; they
are clearly described in the applicable rider. Any Prudential representative
authorized to sell the Contract can explain these extra benefits further.
Samples of the provisions are available from Prudential upon written request.
THE FIXED-RATE OPTION
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED-RATE
OPTION UNDER THE CONTRACT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND THE GENERAL ACCOUNT HAS NOT BEEN REGISTERED AS AN INVESTMENT COMPANY
UNDER THE INVESTMENT COMPANY ACT OF 1940. ACCORDINGLY, INTERESTS IN THE
FIXED-RATE OPTION ARE NOT SUBJECT TO THE PROVISIONS OF THESE ACTS, AND
PRUDENTIAL HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE
COMMISSION HAS NOT REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE
FIXED-RATE OPTION. DISCLOSURE REGARDING THE FIXED-RATE OPTION MAY, HOWEVER, BE
SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF FEDERAL SECURITIES LAWS
RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
As explained earlier, you may elect to allocate, either initially or by
transfer, all or part of the amount credited under the Contract to a fixed-rate
option, and the amount so allocated or transferred becomes part of Prudential's
general assets. Sometimes this is referred to as Prudential's general account,
which consists of all assets owned by Prudential other than those in the Account
and in other separate accounts that have been or may be established by
Prudential. Subject to applicable law, Prudential has sole discretion over the
investment of the assets of the general account, and Contract owners do not
share in the investment experience of those assets. Instead, Prudential
guarantees that the part of the Contract Fund allocated to the fixed-rate option
will accrue interest daily at an effective annual rate that Prudential declares
periodically, but not less than an effective annual rate of 4%. Currently,
declared interest rates remain in effect from the date money is allocated to the
fixed-rate option until the first day of the same month in the following year.
At that time a new crediting rate will be declared that will remain in effect
for one year. Thereafter, a new crediting rate will be declared each year and
will remain in effect for the calendar year. Prudential reserves the right to
change this practice. Prudential is not obligated to credit interest at a higher
rate than an effective annual rate of 4%, although in our sole discretion we may
do so. Different crediting rates may be declared for different portions of the
Contract Fund allocated to the fixed-rate option. On request, you will be
advised of the interest rates that currently apply to your Contract.
Transfers from the fixed-rate option may be subject to strict limits. (See
TRANSFERS, page 14). The payment of any cash surrender value attributable to the
fixed-rate option may be delayed up to 6 months (see WHEN PROCEEDS ARE PAID,
page 23).
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<PAGE>
VOTING RIGHTS
As stated above, all of the assets held in the subaccounts of the Account will
be invested in shares of the corresponding portfolios of the Series Fund.
Prudential is the legal owner of those shares and as such has the right to vote
on any matter voted on at Series Fund shareholders meetings. However, Prudential
will, as required by law, vote the shares of the Series Fund at any regular and
special shareholders meetings it is required to hold in accordance with voting
instructions received from Contract owners. The Series Fund will not hold annual
shareholders meetings when not required to do so under Maryland law or the
Investment Company Act of 1940. Series Fund shares for which no timely
instructions from Contract owners are received, and any shares attributable to
general account investments of Prudential will be voted in the same proportion
as shares in the respective portfolios for which instructions are received.
Should the applicable federal securities laws or regulations, or their current
interpretation, change so as to permit Prudential to vote shares of the Series
Fund in its own right, it may elect to do so.
Matters on which Contract owners may give voting instructions include the
following: (1) election of the Board of Directors of the Series Fund; (2)
ratification of the independent accountant of the Series Fund; (3) approval of
the investment advisory agreement for a portfolio of the Series Fund
corresponding to the Contract owner's selected subaccount[s]; (4) any change in
the fundamental investment policy of a portfolio corresponding to the Contract
owner's selected subaccount[s]; and (5) any other matter requiring a vote of the
shareholders of the Series Fund. With respect to approval of the investment
advisory agreement or any change in a portfolio's fundamental investment policy,
Contract owners participating in such portfolios will vote separately on the
matter, pursuant to the requirements of Rule 18f-2 under the 1940 Act.
The number of Series Fund shares for which instructions may be given by a
Contract owner is determined by dividing the portion of the value of the
Contract derived from participation in a subaccount, by the value of one share
in the corresponding portfolio of the Series Fund. The number of votes for which
each Contract owner may give Prudential instructions will be determined as of
the record date chosen by the Board of Directors of the Series Fund. Prudential
will furnish Contract owners with proper forms and proxies to enable them to
give these instructions. Prudential reserves the right to modify the manner in
which the weight to be given voting instructions is calculated where such a
change is necessary to comply with current federal regulations or
interpretations of those regulations.
Prudential may, if required by state insurance regulations, disregard voting
instructions if such instructions would require shares to be voted so as to
cause a change in the sub-classification or investment objectives of one or more
of the Series Fund's portfolios, or to approve or disapprove an investment
advisory contract for the Series Fund. In addition, Prudential itself may
disregard voting instructions that would require changes in the investment
policy or investment advisor of one or more of the Series Fund's portfolios,
provided that Prudential reasonably disapproves such changes in accordance with
applicable federal regulations. If Prudential does disregard voting
instructions, it will advise Contract owners of that action and its reasons for
such action in the next annual or semi-annual report to Contract owners.
Contract owners also share with the owners of all Prudential Contracts and
policies the right to vote in elections for members of the Board of Directors of
Prudential.
32
<PAGE>
SUBSTITUTION OF SERIES FUND SHARES
Although Prudential believes it to be unlikely, it is possible that in the
judgment of its management, one or more of the portfolios of the Series Fund may
become unsuitable for investment by Contract owners because of investment policy
changes, tax law changes, or the unavailability of shares for investment. In
that event, Prudential may seek to substitute the shares of another portfolio or
of an entirely different mutual fund. Before this can be done, the approval of
the SEC, and possibly one or more state insurance departments, may be required.
Contract owners will be notified of such substitution.
REPORTS TO CONTRACT OWNERS
Once each year you will be sent a statement that provides certain information
pertinent to your own Contract. This statement will detail values and
transactions made and specific Contract data that apply only to your particular
Contract. Currently we intend to provide three quarterly reports (in addition to
the year-end statement) which provide abbreviated information pertinent to your
own Contract.
You will also be sent annual and semi-annual reports of the Series Fund showing
the financial condition of the portfolios and the investments held in each.
STATE REGULATION
Prudential is subject to regulation and supervision by the Department of
Insurance of the State of New Jersey, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
Prudential is required to submit annual statements of its operations, including
financial statements, to the insurance departments of the various jurisdictions
in which it does business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, Prudential is required
to file with New Jersey and other jurisdictions a separate statement with
respect to the operations of all its variable contract accounts, in a form
promulgated by the National Association of Insurance Commissioners.
EXPERTS
The financial statements included in this prospectus for the year ended December
31, 1996, have been audited by Price Waterhouse LLP, independent accountants, as
stated in their reports appearing herein, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing. Price Waterhouse LLP's principal business address is 1177 Avenue of
the Americas, New York, New York 10036.
The financial statements included in this prospectus for the years ended
December 31, 1995 and December 31, 1994 have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein, and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing. Deloitte & Touche LLP's principal business
address is Two Hilton Court, Parsippany, New Jersey 07054-0319.
On March 12, 1996, Deloitte & Touche LLP was dismissed as the independent
accountants of Prudential. There have been no disagreements with Deloitte &
Touche LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or
33
<PAGE>
procedure which, if not resolved to the satisfaction of the accountant, would
have caused them to make reference to the matter in their reports.
Actuarial matters included in this prospectus have been examined by Andy
Mirchuk, 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.
Pursuant to the Settlement, Prudential has agreed to provide an alternative
dispute resolution process for class members who believe they were misled
concerning the sale or performance of their life insurance policies. The
Settlement also provides certain no-fault relief. The ultimate cost of the
Settlement will depend on a variety of factors, including the number of
policyowners who participate in the Settlement, the number of policyowners who
are afforded relief and the remediation option they select. The administrative
costs of implementing the Settlement are also subject to a number of complex
uncertainties. In light of the uncertainties attendant to these and other
factors, it is difficult at this time to estimate the ultimate cost of the
Settlement to Prudential.
In addition, a number of actions have been filed against Prudential by
policyowners who have excluded themselves from the settlement; Prudential
anticipates that additional suits may be filed by other policyowners.
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.
Litigation is subject to many uncertainties, and given the complexity and scope
of these suits, their outcome cannot be predicted.
Accordingly, management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of all pending
litigation. It is possible that the results of operations or the cash flow of
Prudential, in particular quarterly or annual periods could be materially
affected by an ultimate unfavorable outcome of certain pending litigation and
regulatory matters. Management believes, however, that the ultimate outcome of
all pending litigation and regulatory matters referred to above should not have
a material adverse effect on Prudential's financial position.
ADDITIONAL INFORMATION
A registration statement has been filed with the SEC under the Securities Act of
1933, relating to the offering described in this prospectus. This prospectus
does not include all of the
34
<PAGE>
information set forth in the registration statement. Certain portions have been
omitted pursuant to the rules and regulations of the SEC. The omitted
information may, however, be obtained from the SEC's principal office in
Washington, D.C., upon payment of a prescribed fee.
Further information may also be obtained from Prudential's office. The address
and telephone number are set forth on the cover of this prospectus.
FINANCIAL STATEMENTS
The statutory financial statements of Prudential included herein should be
distinguished from the financial statements of the Account, and should be
considered only as bearing upon the ability of Prudential to meet its
obligations under the Contracts.
35
<PAGE>
DIRECTORS AND OFFICERS OF PRUDENTIAL
The directors and certain officers of Prudential, listed with their principal
occupations during the past 5 years, are shown below.
DIRECTORS OF PRUDENTIAL
FRANKLIN E. AGNEW. Director. -- Business Consultant. Address: USX Tower, Suite
660, 600 Grant Street, Pittsburgh, PA 15219.
FREDERIC K. BECKER, Director. -- President, Wilentz, Goldman, and Spitzer (law
firm). Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
JAMES G. CULLEN, Director.--Vice Chairman, Bell Atlantic Corporation since 1995;
1993 to 1995: President, Bell Atlantic Corporation; Prior to 1993: President,
New Jersey Bell. Address: 1310 North Court House Road, 11th floor, Alexandria,
VA 22201.
CAROLYNE K. DAVIS, Director.--National and International Health Care Advisor,
Ernst & Young LLP. Address: 1225 Connecticut Avenue, NW, Washington, DC 20036.
ROGER A. ENRICO, Director.--Chairman and Chief Executive Officer, Pepsico Inc.
since 1996; Vice Chairman, Pepsico, Inc., from 1993 to 1996; Chairman and Chief
Executive Officer, Pepsi Co. Worldwide Food, from 1991 to 1993. Address: 14841
North Dallas Parkway, Dallas, TX 75240.
ALLAN D. GILMOUR, Director.--Former Vice Chairman, Ford Motor Company. Address:
Prudential Plaza, Newark, NJ 07102-3777.
WILLIAM H. GRAY, III, Director.--President and Chief Executive Officer, The
College Fund/UNCF. Address: 8260 Willow Oaks Corporate Drive, Fairfax, VA 22031.
JON F. HANSON, Director.--Chairman, Hampshire Management Company. Address: 235
Moore Street, Suite 200, Hackensack, NJ 07601.
GLEN H. HINER, JR., Director.--Chairman and Chief Executive Officer, Owens
Corning. Address: One Owens Corning Parkway, Toledo, OH 43659.
CONSTANCE J. HORNER, Director.--Guest Scholar, The Brookings Institution since
1993; 1991 to 1992: Assistant to the President and Director of Presidential
Personnel, U.S. Government. Address: 1775 Massachusetts Avenue, N.W.,
Washington, DC 20036-2188.
GAYNOR N. KELLEY, Director.--Retired Chairman and Chief Executive Officer, The
Perkin Elmer Corporation. Address: 751 Broad Street, Newark, NJ 07102-3777.
BURTON G. MALKIEL, Director.--Professor, Princeton University. Address:
Princeton University, 110 Fisher Hall, Prospect Avenue, Princeton, NJ
08544-1021.
ARTHUR F. RYAN, Chairman of the Board, President, and Chief Executive Officer.
- -- Chairman, President, and Chief Executive Officer, Prudential since 1994;
Prior to 1994, President and Chief Operating Officer, Chase Manhattan
Corporation. Address: 751 Broad Street, Newark, NJ 07102- 3777.
IDA F. S. SCHMERTZ, Director.--Principal, Investment Strategies International
since 1994; Prior to 1994: Senior Vice President of Corporate Affairs, American
Express Company. Address: 90 Riverside Dr., New York, NY 10024.
CHARLES R. SITTER, Director.--Former President, Exxon Corporation. Address: 5959
Las Colinas Boulevard, Irving, TX 75039-2298.
DONALD L. STAHELI, Director.--Chairman and Chief Executive Officer, Continental
Grain Company since 1995; Prior to 1995: President and Chief Executive Officer,
Continental Grain Company. Address: 277 Park Avenue, New York, NY 10172.
RICHARD M. THOMSON, Director.--Chairman and Chief Executive Officer, The
Toronto-Dominion Bank. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto,
Ontario, M5K 1A2, Canada.
36
<PAGE>
JAMES A. UNRUH, Director.--Chairman and Chief Executive Officer, Unisys
Corporation. Address: P.O. Box 500, Blue Bell, PA 19424-0001.
P. ROY VAGELOS, M.D., Director.--Former Chairman and Chief Executive Officer,
Merck & Co., Inc. Address: One Crossroads Drive, Bedminster, NJ 07921.
STANLEY C. VAN NESS, Director.--Attorney, Picco Herbert Kennedy (law firm).
Address: One State Street Square, Suite 1000, Trenton, NJ 08607-1388.
PAUL A. VOLCKER, Director.--Business Consultant since 1996; Prior to 1996:
Chairman, Wolfensohn & Co., Inc. Address: 599 Lexington Avenue, New York, NY
10022.
JOSEPH H. WILLIAMS, Director.--Director, The Williams Companies since 1994;
Prior to 1994: Chairman and Chief Executive Officer, The Williams Companies.
Address: One Williams Center, Tulsa, OK 74172.
OTHER EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
MARTIN A. BERKOWITZ, Senior Vice President and Comptroller.--Senior Vice
President and Chief Financial Officer of Prudential Investment Company.
SUSAN L. BLOUNT, Vice President and Secretary.--Vice President and Secretary of
Prudential since 1995; Prior to 1995: Assistant General Counsel for Prudential
Residential Services Company.
C. EDWARD CHAPLIN, Vice President and Treasurer.--Vice President and Treasurer
of Prudential since 1995; 1993 to 1995: Managing Director and Assistant
Treasurer of Prudential; 1992 to 1993: Vice President and Assistant Treasurer,
Banking and Cash Management for Prudential.
MARK B. GRIER, Chief Financial Officer.--Chief Financial Officer of Prudential
since 1995; Prior to 1995: Executive Vice President and Head of Global Markets,
Chase Manhattan Corporation.
37
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc. Portfolios at net asset value [Note
3]............................................ $ 97,754,363 $ 116,426,677 $1,061,732,578 $1,137,587,038 $ 918,503,799
-------------- -------------- -------------- -------------- --------------
NET ASSETS, representing:
Equity of Contract owners....................... $ 95,829,772 $ 116,230,392 $1,060,371,790 $1,137,482,708 $ 918,784,473
Equity of The Prudential Insurance Company of
America....................................... 1,924,591 196,285 1,360,788 104,330 (280,674)
-------------- -------------- -------------- -------------- --------------
$ 97,754,363 $ 116,426,677 $1,061,732,578 $1,137,587,038 $ 918,503,799
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 4,689,159 $ 7,158,122 $ 23,448,572 $ 32,750,578 $ 35,574,962
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 4A]..... 630,761 769,815 6,600,231 7,402,644 6,248,856
Reimbursement for excess expenses [Note 4D]..... 0 0 0 0 0
-------------- -------------- -------------- -------------- --------------
NET EXPENSES...................................... 630,761 769,815 6,600,231 7,402,644 6,248,856
-------------- -------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS)...................... 4,058,398 6,388,307 16,848,341 25,347,934 29,326,106
-------------- -------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 0 0 92,436,486 106,224,518 55,843,548
Realized gain (loss) on shares redeemed
[average cost basis].......................... 0 19,658 755,380 487,657 627,498
Net unrealized gain (loss) on investments....... 0 (2,104,541) 41,805,447 (5,082,172) 10,273,250
-------------- -------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... 0 (2,084,883) 134,997,313 101,630,003 66,744,296
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 4,058,398 $ 4,303,424 $ 151,845,654 $ 126,977,937 $ 96,070,402
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A1
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------
ZERO
COUPON HIGH
BOND YIELD STOCK EQUITY NATURAL
2000 BOND INDEX INCOME RESOURCES
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc. Portfolios at net asset value [Note
3] $ 20,072,530 $ 80,876,861 $ 422,844,131 $ 295,054,376 $ 146,011,161
-------------- -------------- -------------- -------------- --------------
NET ASSETS, representing:
Equity of Contract owners $ 20,017,682 $ 80,728,287 $ 422,066,809 $ 294,742,410 $ 145,962,740
Equity of The Prudential Insurance Company of
America 54,848 148,574 777,322 311,966 48,421
-------------- -------------- -------------- -------------- --------------
$ 20,072,530 $ 80,876,861 $ 422,844,131 $ 295,054,376 $ 146,011,161
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
<CAPTION>
ZERO
COUPON
GOVERNMENT BOND
GLOBAL INCOME 2005
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc. Portfolios at net asset value [Note
3] $ 86,164,762 $ 73,847,002 $ 22,819,931
-------------- -------------- --------------
NET ASSETS, representing:
Equity of Contract owners $ 85,828,091 $ 72,963,000 $ 22,175,214
Equity of The Prudential Insurance Company of
America 336,671 884,002 644,717
-------------- -------------- --------------
$ 86,164,762 $ 73,847,002 $ 22,819,931
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------
ZERO
COUPON HIGH
BOND YIELD STOCK EQUITY
2000 BOND INDEX INCOME
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received $ 835,394 $ 7,376,933 $ 6,724,618 $ 9,118,093
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 4A] 143,233 532,324 2,544,825 1,767,583
Reimbursement for excess expenses [Note 4D] (23,005) 0 0 0
-------------- -------------- -------------- --------------
NET EXPENSES 120,228 532,324 2,544,825 1,767,583
-------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS) 715,166 6,844,609 4,179,793 7,350,510
-------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received 0 0 4,749,836 9,133,917
Realized gain (loss) on shares redeemed
[average cost basis] 27,409 20,787 263,052 171,030
Net unrealized gain (loss) on investments (556,648) 581,780 61,075,735 32,816,172
-------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS (529,239) 602,567 66,088,623 42,121,119
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 185,927 $ 7,447,176 $ 70,268,416 $ 49,471,629
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
<CAPTION>
ZERO
COUPON
NATURAL GOVERNMENT BOND
RESOURCES GLOBAL INCOME 2005
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend distributions received $ 877,698 $ 1,778,642 $ 4,676,803 $ 1,123,279
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 4A] 909,008 446,499 519,382 147,863
Reimbursement for excess expenses [Note 4D] (16,487) 0 0 (27,318)
-------------- -------------- -------------- --------------
NET EXPENSES 892,521 446,499 519,382 120,545
-------------- -------------- -------------- --------------
NET INVESTMENT INCOME (LOSS) (14,823) 1,332,143 4,157,421 1,002,734
-------------- -------------- -------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received 17,021,108 1,298,584 0 246,221
Realized gain (loss) on shares redeemed
[average cost basis] 341,761 16,670 22,685 290
Net unrealized gain (loss) on investments 13,941,557 9,125,406 (3,090,993) (1,505,763)
-------------- -------------- -------------- --------------
NET GAIN (LOSS) ON INVESTMENTS 31,304,426 10,440,660 (3,068,308) (1,259,252)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 31,289,603 $ 11,772,803 $ 1,089,113 $ (256,518)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A2
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------
SMALL
PRUDENTIAL CAPITALIZATION
JENNISON STOCK
-------------- --------------
<S> <C> <C>
ASSETS
Investment in shares of The Prudential Series
Fund, Inc. Portfolios at net asset value [Note
3]............................................ $ 41,246,859 $ 28,405,156
-------------- --------------
NET ASSETS, representing:
Equity of Contract owners....................... $ 40,599,027 $ 28,186,629
Equity of The Prudential Insurance Company of
America....................................... 647,832 218,527
-------------- --------------
$ 41,246,859 $ 28,405,156
-------------- --------------
-------------- --------------
</TABLE>
STATEMENTS OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------
SMALL
PRUDENTIAL CAPITALIZATION
JENNISON STOCK
-------------- --------------
<S> <C> <C>
INVESTMENT INCOME
Dividend distributions received................. $ 64,455 $ 153,825
EXPENSES
Charges to Contract owners for assuming
mortality risk and expense risk [Note 4A]..... 149,932 100,546
Reimbursement for excess expenses [Note 4D]..... 0 0
-------------- --------------
NET EXPENSES...................................... 149,932 100,546
-------------- --------------
NET INVESTMENT INCOME (LOSS)...................... (85,477) 53,279
-------------- --------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............ 0 489,855
Realized gain (loss) on shares redeemed
[average cost basis].......................... 0 (7,039)
Net unrealized gain (loss) on investments....... 3,012,624 2,049,209
-------------- --------------
NET GAIN (LOSS) ON INVESTMENTS.................... 3,012,624 2,532,025
-------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS....................... $ 2,927,147 $ 2,585,304
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A3
<PAGE>
(This page intentionally left blank.)
A4
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
MONEY DIVERSIFIED
MARKET BOND
---------------------------------------------- ----------------------------------------------
1996 1995 1994 1996 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss).....$ 4,058,398 $ 4,217,643 $ 2,402,301 $ 6,388,307 $ 5,652,448 $ 4,226,871
Capital gains distributions
received....................... 0 0 0 0 222,002 158,594
Realized gain (loss) on shares
redeemed
[average cost basis]........... 0 0 0 19,658 30,407 4,403
Net unrealized gain (loss) on
investments.................... 0 0 0 (2,104,541) 10,042,691 (7,162,380)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 4,058,398 4,217,643 2,402,301 4,303,424 15,947,548 (2,772,512)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... 768,830 8,955,240 6,444,757 10,268,006 9,712,345 11,829,119
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7]......................... 1,422,930 161,461 (213,654) (142,209) 143,151 (532,267)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS........................... 6,250,158 13,334,344 8,633,404 14,429,221 25,803,044 8,524,340
NET ASSETS:
Beginning of year................ 91,504,205 78,169,861 69,536,457 101,997,456 76,194,412 67,670,072
-------------- -------------- -------------- -------------- -------------- --------------
End of year......................$ 97,754,363 $ 91,504,205 $ 78,169,861 $ 116,426,677 $ 101,997,456 $ 76,194,412
-------------- -------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A5
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------
FLEXIBLE
EQUITY MANAGED
---------------------------------------------- --------------
1996 1995 1994 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ 16,848,341 $ 9,985,776 $ 7,323,925 $ 25,347,934
Capital gains distributions
received 92,436,486 27,318,049 19,666,506 106,224,518
Realized gain (loss) on shares
redeemed
[average cost basis] 755,380 11,957 86,672 487,657
Net unrealized gain (loss) on
investments 41,805,447 129,700,617 (18,362,891) (5,082,172)
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS 151,845,654 167,016,399 8,714,212 126,977,937
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS 116,044,081 130,026,767 123,951,671 57,031,152
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7] (2,717,850) (595,673) 452,486 (1,594,508)
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 265,171,885 296,447,493 133,118,369 182,414,581
NET ASSETS:
Beginning of year 796,560,693 500,113,200 366,994,831 955,172,457
-------------- -------------- -------------- --------------
End of year $1,061,732,578 $ 796,560,693 $ 500,113,200 $1,137,587,038
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
<CAPTION>
CONSERVATIVE
BALANCED
----------------------------------------------
1995 1994 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ 21,550,235 $ 14,060,998 $ 29,326,106 $ 25,291,477 $ 16,966,301
Capital gains distributions
received 39,426,921 18,931,168 55,843,548 26,552,510 6,635,310
Realized gain (loss) on shares
redeemed
[average cost basis] 56,509 0 627,498 97,662 31,649
Net unrealized gain (loss) on
investments 110,261,394 (56,779,739) 10,273,250 55,648,508 (33,092,575)
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS 171,295,059 (23,787,573) 96,070,402 107,590,157 (9,459,315)
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS 86,936,282 142,298,237 36,970,919 44,932,925 127,164,401
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7] (2,895,506) (55,717) (1,143,063) (3,421,660) (1,173,893)
-------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 255,335,835 118,454,947 131,898,258 149,101,422 116,531,193
NET ASSETS:
Beginning of year 699,836,622 581,381,675 786,605,541 637,504,119 520,972,926
-------------- -------------- -------------- -------------- --------------
End of year $ 955,172,457 $ 699,836,622 $ 918,503,799 $ 786,605,541 $ 637,504,119
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A6
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
ZERO COUPON HIGH
BOND YIELD
2000 BOND
---------------------------------------------- ----------------------------------------------
1996 1995 1994 1996 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss)..... $ 715,166 $ 720,396 $ 1,032,410 $ 6,844,609 $ 6,151,112 $ 4,958,854
Capital gains distributions
received....................... 0 759,176 31,655 0 0 38
Realized gain (loss) on shares
redeemed
[average cost basis]........... 27,409 16,969 1,031 20,787 (58,578) 5,625
Net unrealized gain (loss) on
investments.................... (556,648) 1,982,145 (2,416,751) 581,780 3,163,738 (6,827,471)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS........ 185,927 3,478,686 (1,351,655) 7,447,176 9,256,272 (1,862,954)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS.... (613,550) 846,650 900,334 5,326,899 4,374,480 9,774,435
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7]......................... 33,778 (645,588) 409,426 52,425 (119,164) (576,511)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS........................... (393,845) 3,679,748 (41,895) 12,826,500 13,511,588 7,334,970
NET ASSETS:
Beginning of year................ 20,466,375 16,786,627 16,828,522 68,050,361 54,538,773 47,203,803
-------------- -------------- -------------- -------------- -------------- --------------
End of year...................... $ 20,072,530 $ 20,466,375 $ 16,786,627 $ 80,876,861 $ 68,050,361 $ 54,538,773
-------------- -------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A7
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------
STOCK EQUITY
INDEX INCOME
---------------------------------------------- --------------
1996 1995 1994 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ 4,179,793 $ 3,665,394 $ 3,181,988 $ 7,350,510
Capital gains distributions
received 4,749,836 2,097,393 267,733 9,133,917
Realized gain (loss) on shares
redeemed
[average cost basis] 263,052 293,916 58,302 171,030
Net unrealized gain (loss) on
investments 61,075,735 66,716,563 (2,856,319) 32,816,172
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS 70,268,416 72,773,266 651,704 49,471,629
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS 55,125,681 33,935,158 26,983,569 23,125,635
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7] 82,144 (100,558) (298,727) (711,051)
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 125,476,241 106,607,866 27,336,546 71,886,213
NET ASSETS:
Beginning of year 297,367,890 190,760,024 163,423,478 223,168,163
-------------- -------------- -------------- --------------
End of year $ 422,844,131 $ 297,367,890 $ 190,760,024 $ 295,054,376
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
<CAPTION>
NATURAL
RESOURCES
----------------------------------------------
1995 1994 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ 6,301,712 $ 4,108,092 $ (14,823) $ 515,411 $ 203,463
Capital gains distributions
received 9,279,251 7,633,088 17,021,108 4,578,307 1,375,424
Realized gain (loss) on shares
redeemed
[average cost basis] 46,601 34,607 341,761 68,144 22,045
Net unrealized gain (loss) on
investments 18,945,636 (11,478,198) 13,941,557 14,973,181 (5,314,192)
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS 34,573,200 297,589 31,289,603 20,135,043 (3,713,260)
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS 38,554,244 51,018,498 13,900,701 9,214,757 22,317,372
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7] (646,585) (376,490) (277,180) (398,931) (47,480)
-------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 72,480,859 50,939,597 44,913,124 28,950,869 18,556,632
NET ASSETS:
Beginning of year 150,687,304 99,747,707 101,098,037 72,147,168 53,590,536
-------------- -------------- -------------- -------------- --------------
End of year $ 223,168,163 $ 150,687,304 $ 146,011,161 $ 101,098,037 $ 72,147,168
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A8
<PAGE>
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------------------
GOVERNMENT
GLOBAL* INCOME
---------------------------------------------- ----------------------------------------------
1996 1995 1994 1996 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss).... $ 1,332,143 $ 454,049 $ (11,478) $ 4,157,421 $ 3,989,499 $ 3,587,433
Capital gains distributions
received...................... 1,298,584 915,804 5,622 0 0 0
Realized gain (loss) on shares
redeemed
[average cost basis].......... 16,670 4,998 0 22,685 (8,599) (74,828)
Net unrealized gain (loss) on
investments................... 9,125,406 4,212,026 (1,421,127) (3,090,993) 7,403,233 (7,299,824)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS....... 11,772,803 5,586,877 (1,426,983) 1,089,113 11,384,133 (3,787,219)
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS... 24,827,377 16,098,541 29,174,840 (1,166,024) 481,705 4,183,444
-------------- -------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7]........................ (137,878) (1,921,654) 2,190,839 788,406 (293,673) (467,937)
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS.......................... 36,462,302 19,763,764 29,938,696 711,495 11,572,165 (71,712)
NET ASSETS:
Beginning of year............... 49,702,460 29,938,696 0 73,135,507 61,563,342 61,635,054
-------------- -------------- -------------- -------------- -------------- --------------
End of year..................... $ 86,164,762 $ 49,702,460 $ 29,938,696 $ 73,847,002 $ 73,135,507 $ 61,563,342
-------------- -------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- -------------- --------------
*Commenced
Business
on 5/1/94
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A9
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------
ZERO COUPON
BOND PRUDENTIAL**
2005 JENNISON
---------------------------------------------- --------------
1996 1995 1994 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ 1,002,734 $ 838,006 $ 782,620 $ (85,477)
Capital gains distributions
received 246,221 425,717 3,474 0
Realized gain (loss) on shares
redeemed
[average cost basis] 290 0 (2,913) 0
Net unrealized gain (loss) on
investments (1,505,763) 3,328,939 (2,073,481) 3,012,624
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS (256,518) 4,592,662 (1,290,300) 2,927,147
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS 1,428,479 2,469,936 3,624,370 30,275,275
-------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7] 484,066 7,956 (146,182) 385,656
-------------- -------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 1,656,027 7,070,554 2,187,888 33,588,078
NET ASSETS:
Beginning of year 21,163,904 14,093,350 11,905,462 7,658,781
-------------- -------------- -------------- --------------
End of year $ 22,819,931 $ 21,163,904 $ 14,093,350 $ 41,246,859
-------------- -------------- --------------
-------------- -------------- --------------
--------------
--------------
**Commenced
Business
on 5/1/95
<CAPTION>
SMALL
CAPITALIZATION**
STOCK
------------------------------
1995 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income (loss) $ (11,994) $ 53,279 $ 6,422
Capital gains distributions
received 0 489,855 47,413
Realized gain (loss) on shares
redeemed
[average cost basis] 0 (7,039) 0
Net unrealized gain (loss) on
investments 281,405 2,049,209 181,809
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM OPERATIONS 269,411 2,585,304 235,644
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS 7,175,027 20,015,548 5,360,329
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET
ASSETS
RESULTING FROM EQUITY TRANSFERS
[NOTE 7] 214,343 (22,002) 230,333
-------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 7,658,781 22,578,850 5,826,306
NET ASSETS:
Beginning of year 0 5,826,306 0
-------------- -------------- --------------
End of year $ 7,658,781 $ 28,405,156 $ 5,826,306
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A15.
A10
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
FOR THE YEAR ENDED DECEMBER 31, 1996
NOTE 1: GENERAL
The Prudential Variable Appreciable Account (the "Account") of The Prudential
Insurance Company of America ("Prudential") was established on August 11, 1987
by a resolution of Prudential's Board of Directors in conformity with insurance
laws of the State of New Jersey. The assets of the Account are segregated from
Prudential's other assets. Currently Prudential Variable Appreciable Life (PVAL)
and Prudential Survivorship Preferred (SVUL) Contracts invest in the Account.
The Account is registered under the Investment Company Act of 1940, as amended,
as a unit investment trust. There are fifteen subaccounts within the Account,
each of which invests only in a corresponding portfolio of The Prudential Series
Fund, Inc. (the "Series Fund"). The Series Fund is a diversified open-end
management investment company, and is managed by Prudential.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements are prepared in conformity with generally
accepted accounting principles (GAAP). The preparation of the financial
statements, in conformity with GAAP, requires management to make estimates and
assumptions that affect the reported amounts and disclosures. Actual results
could differ from those estimates.
Investments--The investments in shares of the Series Fund are stated at the net
asset value of the respective portfolio.
Security Transactions--Realized gains and losses on security transactions are
reported on an average cost basis. Purchase and sale transactions are recorded
as of the trade date of the security being purchased or sold.
Distributions Received--Dividend and capital gain distributions received are
reinvested in additional shares of the Series Fund and are recorded on the
ex-dividend date.
Equity of Prudential Life Insurance Company of America--Prudential maintains a
position in the Account for the purpose of administering activity in the
Account. The activity includes unit transactions, fund share transaction, and
expense processing. Prudential monitors the balance daily and transfers funds
based upon anticipated activity. At times, Prudential may owe an amount to the
Account, which is reflected in Prudential's equity as a negative balance. The
position does not have an effect on the Contract owner's account or the related
unit value.
A11
<PAGE>
NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS
The net asset value per share for each portfolio of the Series Fund, the number
of shares of each portfolio held by the subaccounts of the Account and the
aggregate cost of investments in such shares at December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
PORTFOLIOS
-------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Number of shares: 9,775,436 10,521,659 39,374,630 63,953,829 59,193,160
Net asset value
per share: $ 10.0000 $ 11.06543 $ 26.96489 $ 17.78763 $ 15.51706
Cost: $ 97,754,363 $ 114,592,428 $ 869,667,765 $ 1,051,479,910 $ 867,829,661
<CAPTION>
PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------------
ZERO
COUPON HIGH
BOND YIELD STOCK EQUITY NATURAL
2000 BOND INDEX INCOME RESOURCES
------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Number of shares: 1,553,971 10,279,881 17,807,930 15,940,424 7,387,206
Net asset value
per share: $ 12.91693 $ 7.86749 $ 23.74471 $ 18.50982 $ 19.76541
Cost: $ 19,568,381 $ 81,489,704 $ 276,796,836 $ 245,473,957 $ 114,441,743
<CAPTION>
PORTFOLIOS (CONTINUED)
-------------------------------------------------------------------------------
ZERO
COUPON SMALL
GOVERNMENT BOND PRUDENTIAL CAPITALIZATION
GLOBAL INCOME 2005 JENNISON STOCK
------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Number of shares: 4,825,875 6,581,090 1,862,198 2,879,726 2,059,558
Net asset value
per share: $ 17.85474 $ 11.22109 $ 12.25430 $ 14.32319 $ 13.79187
Cost: $ 74,248,457 $ 74,192,758 $ 22,039,796 $ 37,952,830 $ 26,174,138
</TABLE>
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding Contract owner units, unit values and total Contract owner equity
for the year ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
---------------------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Contract Owner
Units Outstanding
(PVAL):.......... 20,056,038.673 22,704,270.329 125,708,228.822 170,578,041.832 191,537,546.348
Unit value
(PVAL):......... $ 1.48140 $ 1.96816 $ 3.38380 $ 2.56528 $ 2.20934
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity
(PVAL):......... $ 29,711,016 $ 44,685,637 $ 425,371,505 $ 437,580,439 $ 423,171,563
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Units
Outstanding
(PVAL $100,000+
face):.......... 43,335,963.712 35,477,635.783 183,134,501.442 266,455,295.837 219,052,666.063
Unit value (PVAL
$100,000+
face):.......... $ 1.51614 $ 2.01468 $ 3.46333 $ 2.62570 $ 2.26154
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity (PVAL
$100,000+
face):.......... $ 65,703,388 $ 71,476,083 $ 634,255,213 $ 699,631,670 $ 495,396,366
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Units
Outstanding
(SVUL):......... 398,970.245 66,018.689 621,738.271 236,429.835 192,082.432
Unit value
(SVUL):......... $ 1.04110 $ 1.04019 $ 1.19837 $ 1.14452 $ 1.12735
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity
(SVUL):......... $ 415,368 $ 68,672 $ 745,072 $ 270,599 $ 216,544
----------------- ----------------- ----------------- ----------------- -----------------
TOTAL CONTRACT
OWNER EQUITY:... $ 95,829,772 $ 116,230,392 $ 1,060,371,790 $ 1,137,482,708 $ 918,784,473
----------------- ----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
A12
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
---------------------------------------------------------------------------------------------
ZERO HIGH
COUPON BOND YIELD STOCK EQUITY NATURAL
2000 BOND INDEX INCOME RESOURCES
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Contract Owner
Units Outstanding
(PVAL):.......... 3,660,585.720 15,387,903.704 51,026,977.087 32,505,484.983 19,894,002.086
Unit value
(PVAL):......... $ 2.21829 $ 2.05571 $ 3.26565 $ 3.00354 $ 2.94988
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity
(PVAL):......... $ 8,120,240 $ 31,633,068 $ 166,636,248 $ 97,631,524 $ 58,684,918
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Units
Outstanding
(PVAL $100,000+
face):.......... 5,239,201.945 23,074,678.840 76,187,047.686 64,028,857.775 28,893,658.632
Unit value (PVAL
$100,000+
face):.......... $ 2.27085 $ 2.10376 $ 3.34316 $ 3.07507 $ 3.01942
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity (PVAL
$100,000+
face):.......... $ 11,897,442 $ 48,543,586 $ 254,705,490 $ 196,893,220 $ 87,242,091
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Units
Outstanding
(SVUL):......... N/A 505,102.997 581,484.963 176,423.502 27,944.197
Unit value
(SVUL):......... N/A $ 1.09212 $ 1.24693 $ 1.23377 $ 1.27865
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity
(SVUL):......... N/A $ 551,633 $ 725,071 $ 217,666 $ 35,731
----------------- ----------------- ----------------- ----------------- -----------------
TOTAL CONTRACT
OWNER EQUITY:... $ 20,017,682 $ 80,728,287 $ 422,066,809 $ 294,742,410 $ 145,962,740
----------------- ----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- ----------------- -----------------
<CAPTION>
SUBACCOUNTS (CONTINUED)
---------------------------------------------------------------------------------------------
ZERO SMALL
GOVERNMENT COUPON BOND PRUDENTIAL CAPITALIZATION
GLOBAL INCOME 2005 JENNISON STOCK
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Contract Owner
Units Outstanding
(PVAL):.......... 14,777,544.603 16,407,557.842 3,427,063.251 6,773,439.848 3,759,138.927
Unit value
(PVAL):......... $ 1.31795 $ 1.77603 $ 2.08804 $ 1.41447 $ 1.41503
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity
(PVAL):......... $ 19,476,065 $ 29,140,315 $ 7,155,845 $ 9,580,827 $ 5,319,294
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Units
Outstanding
(PVAL $100,000+
face):.......... 49,638,503.339 24,092,277.326 7,027,780.240 21,504,423.254 15,751,841.033
Unit value (PVAL
$100,000+
face):.......... $ 1.32837 $ 1.81715 $ 2.13621 $ 1.42160 $ 1.42227
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity (PVAL
$100,000+
face):.......... $ 65,938,299 $ 43,779,282 $ 15,012,815 $ 30,570,688 $ 22,403,371
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Units
Outstanding
(SVUL):......... 349,659.305 42,594.932 6,571.354 363,119.018 372,329.523
Unit value
(SVUL):......... $ 1.18323 $ 1.01897 $ 0.99738 $ 1.23241 $ 1.24611
----------------- ----------------- ----------------- ----------------- -----------------
Contract Owner
Equity
(SVUL):......... $ 413,727 $ 43,403 $ 6,554 $ 447,512 $ 463,964
----------------- ----------------- ----------------- ----------------- -----------------
TOTAL CONTRACT
OWNER EQUITY:... $ 85,828,091 $ 72,963,000 $ 22,175,214 $ 40,599,027 $ 28,186,629
----------------- ----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
A13
<PAGE>
NOTE 5: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges at an effective annual rate of
0.90% may be applied daily against the net assets representing equity of
PVAL Contract owners held in each subaccount. For Contract owners investing
in PVAL with face amounts of $100,000 or more the annual rate is 0.60%. For
Contract owners investing in SVUL the annual rate is 0.90%.
Mortality risk is that Contract holders may not live as long as estimated
and expense risk is that the cost of issuing and administering the policies
may exceed the estimated expenses. For 1996, the amount of these charges
paid to Prudential was $14,434,420 for PVAL Contracts, $14,467,520 for PVAL
Contracts with face amounts of $100,000 or more and $11,561 for SVUL
Contracts.
B. Deferred Sales Charge
Subsequent to Contract owner redemption, a deferred sales charge is imposed
upon surrenders of certain variable life insurance Contracts to compensate
Prudential for sales and other marketing expenses. The amount of any sales
charge will depend on the number of years that have elapsed since the
Contract was issued. No sales charge will be imposed after the tenth year of
the Contract. No sales charge will be imposed on death benefits. For 1996,
the amount of these charges was $9,647,647.
C. Partial Withdrawal Charge
A charge is imposed by Prudential on partial withdrawals of the cash
surrender value. For 1996, the amount of these charges was $3,327,939.
D. Expense Reimbursement
PVAL Contracts are reimbursed by Prudential, on a non-guaranteed basis, for
expenses incurred by the Series Fund in excess of the effective rate of
0.40% for all Zero Coupon Bond Portfolios, 0.45% for the Stock Index
Portfolio, 0.50% for the Equity Income Portfolio, 0.55% for the Natural
Resources Portfolio, and 0.65% for the High Yield Bond Portfolio of the
average daily net assets of these portfolios. For 1996, the amount of these
reimbursements totaled $66,808.
SVUL Contracts are reimbursed by Prudential, on a non-guaranteed basis, for
expenses incurred by the Series Fund in excess of the effective rate of
0.40% of the average daily net assets of these portfolio of each of the Zero
Coupon Bond Portfolios. For 1996, the amount of these reimbursements totaled
$1.
E. Cost of Insurance Charges
Contract holders contributions are applied to the account net of the
following charges: transaction costs, premium taxes, and sales charges,
monthly administration charges, and death benefit risk charges prior to the
investment in the Account. During 1996, Prudential received a total of
$31,272,838, $25,108,207, $104,984,845, $60,980,190, and $13,514,144,
respectively, for these charges.
NOTE 6: TAXES
Prudential is taxed as a "life insurance company" under the Internal Revenue
Code and the operations of the Account form a part of and are taxed with those
of Prudential. Under current federal law, no federal income taxes are payable by
the Account. As such, no provision for tax liability has been recorded.
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS
The increase (decrease) in net assets resulting from equity transfers represents
the net contributions (withdrawals) of Prudential to (from) the Account.
A14
<PAGE>
NOTE 8: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments in the
Series Fund, Inc. were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
--------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
-------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
For the year
ended December
31, 1996
Purchases..... $ 23,234,000 $ 10,499,000 $ 110,220,000 $ 51,960,000 $ 36,639,000
Sales......... $ (21,673,000) $ (1,256,000) $ (3,494,000) $ (3,926,000) $ (7,060,000)
<CAPTION>
PORTFOLIOS (CONTINUED)
--------------------------------------------------------------------------------
ZERO
COUPON HIGH
BOND YIELD STOCK EQUITY NATURAL
2000 BOND INDEX INCOME RESOURCES
-------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
For the year
ended December
31, 1996
Purchases..... $ 144,000 $ 6,063,000 $ 53,532,000 $ 22,154,000 $ 14,071,000
Sales......... $ (844,000) $ (1,216,000) $ (869,000) $ (1,507,000) $ (1,340,000)
<CAPTION>
PORTFOLIOS (CONTINUED)
--------------------------------------------------------------------------------
ZERO
COUPON SMALL
GOVERNMENT BOND PRUDENTIAL CAPITALIZATION
GLOBAL INCOME 2005 JENNISON STOCK
-------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
For the year
ended December
31, 1996
Purchases..... $ 24,498,000 $ 1,525,000 $ 1,827,000 $ 30,511,000 $ 20,824,000
Sales......... $ (255,000) $ (2,422,000) $ (35,000) $ 0 $ (931,000)
</TABLE>
NOTE 9: RELATED PARTY TRANSACTIONS
The Prudential has purchased multiple Variable Appreciable Life insurance
contracts insuring the lives of certain employees. The Prudential is the owner
and beneficiary of the Contracts. There were no net premium payments for the
year ended December 31, 1996. Equity of Contract owners in that subaccount at
December 31, 1996 includes approximately $210.2 million owned by the Prudential.
A15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of
Prudential Variable Appreciable Account
and the Board of Directors of
The Prudential Insurance Company of America
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of Money Market Subaccount,
Diversified Bond Subaccount, Equity Subaccount, Flexible Managed Subaccount,
Conservative Balanced Subaccount, Zero Coupon Bond 2000 Subaccount, High Yield
Bond Subaccount, Stock Index Subaccount, Equity Income Subaccount, Natural
Resources Subaccount, Global Subaccount, Government Income Subaccount, Zero
Coupon Bond 2005 Subaccount, Prudential Jennison Subaccount and Small
Capitalization Stock Subaccount of Prudential Variable Appreciable Account at
December 31, 1996, and the results of each of their operations and the changes
in each of their net assets for the year then ended, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of The Prudential Insurance Company of America's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of shares owned in The
Prudential Series Fund, Inc. at December 31, 1996, provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
New York, New York
March 31, 1997
A16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Contract Owners of
The Prudential Variable Appreciable
Account and the Board of Directors
of the Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying statements of changes in net assets of The
Prudential Variable Appreciable Account of The Prudential Insurance Company of
America (comprising, respectively, the Money Market, Diversified Bond, Equity,
Flexible Managed, Conservative Balanced, Zero Coupon Bond 2000, High Yield Bond,
Stock Index, Equity Income, Natural Resources, Global, Government Income, Zero
Coupon Bond 2005, Prudential Jennison, and Small Capitalization Stock
subaccounts) for the periods presented for each of the two years ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the changes in net assets of each of the respective subaccounts
constituting The Prudential Variable Appreciable Account for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
February 15, 1996
A17
<PAGE>
Prudential Company
Financial Module
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND SURPLUS (STATUTORY BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
1996 1995
-------- --------
(In Millions)
<S> <C> <C>
ASSETS
Bonds ............................................................................ $ 75,006 $ 77,494
Preferred stock .................................................................. 239 396
Common stock ..................................................................... 7,076 6,133
Mortgage loans on real estate .................................................... 17,039 20,280
Real estate ...................................................................... 2,094 2,488
Policy loans and premium notes ................................................... 6,023 6,208
Cash and short-term investments .................................................. 5,982 4,803
Other invested assets ............................................................ 2,591 3,304
-------- --------
TOTAL CASH AND INVESTED ASSETS ................................................... 116,050 121,106
Premiums due and deferred ........................................................ 1,925 1,917
Accrued investment income ........................................................ 1,640 1,688
Other assets ..................................................................... 1,208 1,120
Assets held in separate accounts ................................................. 57,797 53,903
-------- --------
TOTAL ASSETS ..................................................................... $178,620 $179,734
======== ========
LIABILITIES AND SURPLUS
LIABILITIES
Policy liabilities and insurance reserves:
Future policy benefits and claims ............................................ $ 87,582 $ 93,346
Unearned premiums ............................................................ 619 624
Policy dividends ............................................................. 1,878 1,893
Policyholder account balances ................................................ 7,968 7,966
Notes payable and other borrowings ............................................... 763 807
Asset valuation reserve .......................................................... 2,682 2,705
Federal income tax payable ....................................................... 729 1,278
Other liabilities ................................................................ 9,588 9,191
Liabilities related to separate accounts ......................................... 57,436 53,256
-------- --------
TOTAL LIABILITIES ................................................................ 169,245 171,066
-------- --------
CONTINGENCIES (NOTE 11)
SURPLUS
Capital notes .................................................................... 985 984
Special surplus fund ............................................................. 1,268 1,274
Unassigned surplus ............................................................... 7,122 6,410
-------- --------
TOTAL SURPLUS .................................................................... 9,375 8,668
-------- --------
TOTAL LIABILITIES AND SURPLUS .................................................... $178,620 $179,734
======== ========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
STATEMENTS OF OPERATIONS AND CHANGES IN SURPLUS (STATUTORY BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
(In Millions)
<S> <C> <C> <C>
REVENUE
Premiums and annuity considerations .................................... $ 20,674 $ 21,088 $ 23,612
Net investment income .................................................. 8,677 8,637 7,387
Other income ........................................................... 571 363 367
-------- -------- --------
TOTAL REVENUE .......................................................... 29,922 30,088 31,366
-------- -------- --------
BENEFITS AND EXPENSES
Death benefits ......................................................... 2,943 2,858 2,798
Annuity benefits ....................................................... 3,582 3,495 3,354
Disability benefits .................................................... 5,630 5,765 5,201
Other benefits ......................................................... 806 853 845
Surrender benefits and fund withdrawals ................................ 11,844 12,538 11,714
Net (decrease) increase in reserves .................................... (1,572) (2,178) 1,251
Commissions ............................................................ 477 535 610
Other expenses ......................................................... 2,690 2,650 3,727
-------- -------- --------
TOTAL BENEFITS AND EXPENSES ............................................ 26,400 26,516 29,500
-------- -------- --------
Operating income before dividends and income taxes ..................... 3,522 3,572 1,866
Dividends to policyholders ............................................. 2,526 2,464 2,290
-------- -------- --------
Operating income (loss) before income taxes ............................ 996 1,108 (424)
Income tax provision ................................................... 51 590 453
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS .......................................... 945 518 (877)
NET REALIZED CAPITAL GAINS (LOSSES) .................................... 457 (183) (24)
-------- -------- --------
NET INCOME (LOSS) ..................................................... $ 1,402 $ 335 $ (901)
======== ======== ========
SURPLUS
SURPLUS, BEGINNING OF YEAR ............................................. 8,668 7,449 8,004
Net income (loss) ...................................................... 1,402 335 (901)
Change in net unrealized capital gains (losses) ........................ 191 661 (51)
Change in non-admitted assets .......................................... (206) 717 82
Change in asset valuation reserve ...................................... 11 (694) 653
Other changes, net ..................................................... (691) 200 (338)
-------- -------- --------
SURPLUS, END OF YEAR ................................................... $ 9,375 $ 8,668 $ 7,449
======== ======== ========
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS
- 1 -
<PAGE>
<TABLE>
<CAPTION>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS (STATUTORY BASIS)
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
--------- --------- ---------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums and annuity considerations ...................................... $ 20,669 $ 21,030 $ 23,635
Net investment income .................................................... 8,629 8,511 7,261
Other income received .................................................... 599 479 502
Separate account transfers ............................................... 1,183 1,002 (494)
Benefits and claims paid ................................................. (24,952) (25,524) (24,403)
Policyholders' dividends paid ............................................ (2,453) (2,393) (2,594)
Federal income taxes (paid) received ..................................... (230) (847) 179
Other operating expenses ................................................. (4,224) (3,738) (3,636)
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ...................... (779) (1,480) 450
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold, matured, or repaid
Bonds ............................................................... 119,195 93,178 80,668
Stocks .............................................................. 4,328 2,985 4,263
Mortgage loans on real estate ....................................... 3,140 4,997 4,205
Real estate ......................................................... 537 573 935
Net gains (losses) on cash and short-term investments ............... 13 (9) (5)
Miscellaneous proceeds .............................................. 2,128 3,707 2,671
Payments for investments acquired
Bonds ............................................................... (118,009) (101,018) (81,677)
Stocks .............................................................. (6,029) (2,199) (2,312)
Mortgage loans on real estate ....................................... (1,841) (2,810) (3,282)
Real estate ......................................................... (120) (425) (194)
Miscellaneous applications .......................................... (718) (1,213) (1,275)
Net (tax) benefit on capital gains and losses ............................ (622) 107 (275)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ...................... 2,002 (2,127) 3,722
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments of) proceeds from borrowed money ......................... (44) 123 1
Net proceeds from the issuance of capital notes .......................... 0 686 0
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ..................... (44) 809 1
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS ............... 1,179 (2,798) 4,173
Cash and short-term investments, beginning of year ....................... 4,803 7,601 3,428
--------- --------- ---------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR ............................. $ 5,982 $ 4,803 $ 7,601
========= ========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest payments of $253 million, $144 million and $85 million were made during
1996, 1995 and 1994, respectively.
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS
- 2 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ACCOUNTING POLICIES AND PRINCIPLES
A. Business and basis of presentation - The statutory financial
statements include the accounts of The Prudential Insurance Company of
America ("the Company"), a mutual life insurance company. The
activities of the Company include a broad range of financial services,
including life and health insurance, asset management, and investment
advisory services.
These financial statements were prepared on an unconsolidated
statutory basis of accounting, which differs from the 1995 and 1994
financial statements prepared for general distribution on a
consolidated statutory basis of accounting, both of which differ from
generally accepted accounting principles ("GAAP"). The financial
statements for 1995 and 1994 have been restated on an unconsolidated
statutory basis of accounting adopted in 1996 for purposes of general
distribution. Certain reclassifications have been made to the 1995 and
1994 financial statement amounts to conform to the 1996 presentation.
The Company, domiciled in the State of New Jersey, prepares its
statutory financial statements in accordance with accounting practices
prescribed or permitted by the New Jersey Department of Banking and
Insurance ("the Department"). Prescribed statutory accounting
practices include publications of the National Association of
Insurance Commissioners ("NAIC"), state laws, regulations, and general
administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The financial
statements are substantially the same as those included in the
Statutory Annual Statement except for certain reclassifications and
adjustments. These financial statements differ from those filed with
the Department in that changes to estimated income and premium taxes
applicable to prior periods, which are recorded as direct charges or
credits to surplus in the Annual Statement, have been included in the
"Income tax provision" and "Other expenses" in the Statements of
Operations and Changes in Surplus. This item has the net effect of
increasing (decreasing) net income by $396 million, ($143) million and
$6 million in 1996, 1995 and 1994, respectively.
Pursuant to the Financial Accounting Standards Board Interpretation
No. 40 "Applicability of Generally Accepted Accounting Principles to
Mutual Life Insurance and Other Enterprises," as amended, which is
effective for 1996 financial statements, statutory accounting
practices ("SAP") are no longer considered GAAP for mutual life
insurance companies. SAP differs from GAAP primarily as follows:
(a) the Commissioner's Reserve Valuation Method ("CRVM") is used for the
majority of individual insurance reserves under SAP, whereas for
individual insurance, policyholder liabilities are generally
established using the net level premium method under GAAP. Policy
assumptions used in the estimation of policyholder liabilities are
generally prescribed under SAP, but are based upon actual company
experience under GAAP;
(b) for investment-type contracts that do not contain mortality or
morbidity risk and universal life-type contracts, cash receipts are
recorded as premiums and reserves are established using prescribed
reserving methods under SAP. Under GAAP, premium from investment-type
and universal life-type contracts are generally recognized as
deposits. Revenues from these contracts represent amounts assessed
against policyholders and are reported in the period of assessment;
(c) policy acquisition costs are expensed when incurred under SAP rather
than being deferred and charged against earnings over the periods
covered by the related policies;
(d) deferred income taxes are not recorded for the tax effect of temporary
differences between book and tax basis of assets and liabilities under
SAP;
(e) certain "non-admitted assets" must be excluded under SAP through a
charge against surplus, e.g. fixed assets, prepaid pensions and
impaired investments;
(f) investments in the common stock of the Company's wholly-owned
subsidiaries are accounted for using the equity method under SAP
rather than consolidated;
(g) bonds are carried at amortized cost under SAP rather than categorized
as "held to maturity", "available for sale", or "trading". Under GAAP,
bonds classified as "available for sale" and "trading" are carried at
market value;
(h) certain reclassifications would be required with respect to the
balance sheet and statement of cash flows under SAP;
(i) the Asset Valuation Reserve ("AVR") and Interest Maintenance Reserve
("IMR") are required for life insurance companies under SAP.
The following is a summary of accounting practices permitted by the
state of New Jersey and reflected in these financial statements:
o Prescribed statutory accounting practices require Department
approval of each and every interest payment at the time of
payment in order to classify the Company's Capital Notes as a
component of surplus. Otherwise, such notes are required to be
classified as a liability. Interest payments on $300 million in
Capital Notes issued in 1993 are pre-approved by the Department,
and permitted to be classified in surplus.
o The Company sells synthetic guaranteed interest contracts
("GICs") containing minimum investment related guarantees on
qualified pension plan assets. The assets are owned by the
trustees of such plans, who invest the assets
- 3 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
under the terms of investment guidelines agreed to with the
Company. The investment related guarantees may include a minimum
rate of return on the underlying assets and/or a guarantee of
liquidity to meet plan cash flow requirements. The Company, with
the approval of the Department, reports both the plan liabilities
associated with the synthetic GICs and the trust assets
supporting this potential liability. In addition, the Company
files detailed schedules of trust assets and related statements
with the Department. Currently, prescribed statutory accounting
practices do not address accounting for synthetic GICs.
o The Company establishes guaranty fund liabilities for the
insolvencies of certain life insurance companies. The liabilities
are established net of estimated premium tax credits and federal
income tax. Prescribed statutory accounting practices do not
address the establishment of liabilities for guaranty fund
assessments.
B. Divestiture - On July 31, 1996, Prudential sold a substantial portion
of its Canadian Branch business to the London Life Insurance Company
("London Life"). The transaction was structured as an assumption
reinsurance transaction, whereby London Life assumed total liabilities
of the Canadian Branch equal to $3,146 million as well as a related
amount of total assets equal to $3,040 million. A net gain of $138
million was recorded for this transaction.
C. Use of estimates - The preparation of financial statements in
conformity with SAP 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 revenue and expenses
during the reported period. Actual results could differ from those
estimates.
D. Investments - Bonds, which consist of long-term bonds, are stated
primarily at amortized cost.
Preferred stock is generally valued at amortized cost.
Common Stock is carried at fair value. Investments in subsidiaries,
which are included in "Common stock", are accounted for using the
equity method. The subsidiaries' change in net assets, excluding
capital contributions and distributions, is included in "Net
investment income." The subsidiaries are engaged principally in the
businesses of life and health insurance, property and casualty
insurance, group health care, securities brokerage, asset management,
investment advisory services, retail banking and real estate and
brokerage.
Mortgage loans on real estate are stated primarily at unpaid principal
balances.
Real estate, except for real estate acquired in satisfaction of debt,
is carried at cost less accumulated straight-line depreciation,
encumbrances and permanent impairments in value. Properties acquired
in satisfaction of debt are valued at lower of depreciated cost or
fair value less disposition costs.
Policy loans and premium notes are stated at unpaid principal
balances.
Cash includes cash on hand, amounts due from banks and money market
instruments. Short term investments, including highly liquid debt
instruments purchased with an original maturity of twelve months or
less, are stated at amortized cost, which approximates fair value.
Other invested assets primarily include the Company's investment in
joint ventures and other forms of partnerships. These investments are
accounted for using the equity method where the Company has the
ability to exercise significant influence over the operating and
financial policies of the entity. The cost method is used for all
other assets.
Derivatives used in asset/liability risk management activities, which
support life and health insurance and annuity contracts, are recorded
at either fair value or statement value, depending upon the underlying
instrument, with unrealized gains and losses recorded in "Change in
net unrealized capital gains (losses)." Upon termination of
derivatives, the interest-related gains and losses are amortized
through the IMR.
E. Separate accounts - These assets and liabilities, reported at
estimated fair value, represent segregated funds invested for pension
and other clients. Investment risks associated with fair value changes
are generally borne by the clients, except to the extent of minimum
guarantees made by the Company with respect to certain accounts.
F. Revenue recognition of insurance income and related expenses - Life
premiums are recognized as income over the premium paying period of
the related policies. Annuity considerations are recognized as revenue
when received. Health premiums are earned ratably over the terms of
the related insurance and reinsurance contracts or policies. Expenses
incurred in connection with acquiring new insurance business,
including such acquisition costs as sales commissions, are charged to
operations as incurred.
- 4 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
G. Policyholder dividends - Substantially all of the policies issued by
the Company are participating. The amount of 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, and expense experience for
the year and judgment as to the appropriate level of statutory surplus
to be retained by the Company. Dividends declared by the Board of
Directors which have not been paid are included in "Policy dividends".
2. POLICY LIABILITIES AND INSURANCE RESERVES
A. For life insurance and annuities, future policy benefits and claims
include estimates of benefits and associated settlement expenses on
reported claims and those which are incurred but not reported.
Activity in the liability for unpaid claims and claim adjustment
expenses for accident and health business, which is included in
"Future policy benefits and claims", is as follows:
1996 1995 1994
------- ------- -------
(In Millions)
Balance at January 1 $ 2,636 $ 2,440 $ 2,416
Less reinsurance recoverables 15 23 15
------- ------- -------
Net balance at January 1 2,621 2,417 2,401
------- ------- -------
Incurred related to:
Current year 5,734 5,759 5,398
Prior years (87) 42 (87)
------- ------- -------
Total incurred 5,647 5,801 5,311
------- ------- -------
Paid related to:
Current year 4,135 4,028 3,856
Prior years 1,467 1,569 1,439
------- ------- -------
Total paid 5,602 5,597 5,295
------- ------- -------
Net balance at December 31 2,666 2,621 2,417
Plus reinsurance recoverables 10 15 23
------- ------- -------
Balance at December 31 $ 2,676 $ 2,636 $ 2,440
======= ======= =======
As a result of changes in reserve estimates for insured events of
prior years, the provision for claims and claim adjustment expenses
changed by ($87) million and $42 million in 1996 and 1995,
respectively, due to changes in claim cost trends and changed by ($87)
million in 1994 because of faster-than-expected shrinkage in the
indemnity health business.
B. Reserves for individual life insurance are calculated using various
methods, interest rates and mortality tables, which produce reserves
that meet the aggregate requirements of state laws and regulations.
Approximately 39% of individual life insurance reserves are determined
using the net level premium method, or by using the greater of the net
level premium reserve or the policy cash value. About 52% of
individual life insurance reserves are calculated according to CRVM
or methods which compare CRVM to policy cash values. The remaining
reserves include universal life reserves which are equal to the
greater of the policyholder account value less the unamortized expense
allowance and the policy cash value, or are for supplementary benefits
whose reserves are calculated using methods, interest rates and tables
appropriate for the benefit provided.
For group life insurance, about 56% of the reserves are associated
with extended death benefits. These reserves are primarily calculated
using modified group tables at various interest rates. The remainder
are unearned premium reserves (calculated using the 1960
Commissioner's Standard Group Table), reserves for group life fund
accumulations and other miscellaneous reserves.
Reserves for deferred individual annuity contracts are determined
using the Commissioner's Annuity Reserve Valuation Method. These
account for 72% of the individual annuity reserves. The remaining
reserves are equal to the present value of future payments with the
annuity mortality table and interest rates based on the date of issue
or maturity as appropriate.
Reserves for other deposit funds or other liabilities with life
contingencies reflect the contract deposit account or experience
accumulation for the contract and any purchased annuity reserves.
Accident and health reserves represent the present value of the future
potential payments, adjusted for contingencies and interest. The
remaining material reserves for active life reserves and unearned
premiums are valued using the preliminary term method, gross premium
valuation method, or a pro rata portion of gross premiums. Reserves
are also held for amounts not yet due on hospital benefits and other
coverages.
- 5 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The reserve for guaranteed interest contracts, deposit funds and other
liabilities without life contingencies equal either the present value
of future payments discounted at the guaranteed rate or the fund
value.
Policyholders, at their discretion, may withdraw funds from their
annuity policies. At December 31, 1996 and 1995, approximately 55% of
total annuity actuarial reserves and deposit liabilities of $92,536
million and $95,092 million, respectively, were not subject to
discretionary withdrawal.
3. INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal income
tax return. The Internal Revenue Code (the "Code") taxes the Company on its
operating income after dividends to policyholders. In calculating this tax,
the Code requires the capitalization and amortization of policy acquisition
expenses.
The Code also imposes an "equity tax" on mutual life insurance companies
which, in effect, imposes an additional amount of taxable income to the
Company. "Income tax provision" includes an estimate for the total equity tax
to be paid with respect to the year. Income from sources outside the United
States is taxed under applicable foreign statutes.
The Internal Revenue Service (the "Service") has completed an examination of
the consolidated federal income tax return through 1989. The Service is
examining the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments. However, management believes
there are adequate defenses against, or sufficient reserves to provide for,
such adjustments.
4. INVESTED ASSETS
A. Bonds and stocks - The Company invests in both investment grade and
non-investment grade public and private bonds. The Securities
Valuation Office of the NAIC rates the bonds held by insurers for
regulatory purposes and classifies investments into six categories
ranging from highest quality bonds to those in or near default. The
lowest three NAIC categories represent primarily high-yield securities
and are defined by the NAIC as including any security with a public
agency rating equivalent to B+ or B1 or less. Securities in these
lowest three categories approximated 2.8% and 1.0%, of the Company's
bonds at December 31, 1996, 1995, respectively.
The following tables provide additional information relating to bonds
and preferred stock as of December 31:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE
------- ------- ------ -------
Bonds (In Millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 9,504 $ 353 $ 74 $ 9,783
Obligations of U.S. states and their
political subdivisions 206 7 6 207
Foreign government bonds 2,420 133 11 2,542
Corporate securities 57,282 2,625 323 59,584
Mortgage-backed securities 5,594 131 15 5,710
------- ------- ------- -------
Total $75,006 $ 3,249 $ 429 $77,826
======= ======= ======= =======
Preferred Stock
Redeemable $ 142 $ 3 $ 6 $ 139
Non-redeemable 97 23 0 120
------- ------- ------- -------
Total $ 239 $ 26 $ 6 $ 259
======= ======= ======= =======
</TABLE>
- 6 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1995
--------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE
------- ------- ------- -------
Bonds (In Millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $15,715 $ 1,392 $ 1 $17,106
Obligations of U.S. states and their
political subdivisions 214 22 1 235
Foreign government bonds 3,196 260 1 3,455
Corporate securities 54,411 4,609 97 58,923
Mortgage-backed securities 3,958 241 8 4,191
------- ------- ------- -------
Total $77,494 $ 6,524 $ 108 $83,910
======= ======= ======= =======
Preferred Stock
Redeemable $ 304 $ 16 $ 4 $ 316
Non-redeemable 92 2 0 94
------- ------- ------- -------
Total $ 396 $ 18 $ 4 $ 410
======= ======= ======= =======
</TABLE>
The carrying amount and estimated fair value of bonds at December 31,
1996, categorized by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because borrowers
may prepay obligations with or without call or prepayment penalties.
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(In Millions)
Due in one year or less $ 1,999 $ 2,012
Due after one year through five years 19,125 19,445
Due after five years through ten years 19,406 20,081
Due after ten years 28,882 30,578
------- -------
69,412 72,116
------- -------
Mortgage-backed securities 5,594 5,710
------- -------
Total $75,006 $77,826
======= =======
Proceeds from the sale and maturity of bonds during 1996, 1995 and
1994 were $119,195 million, $93,178 million and $80,668 million,
respectively. Gross gains of $1,516 million, $1,913 million and $618
million and gross losses of $988 million, $782 million and $1,841
million were realized on such sales during 1996, 1995 and 1994,
respectively. Realized gains and losses are determined using the
specific identification method.
B. Mortgage loans on real estate - Mortgage loans on real estate at
December 31 are as follows:
1996 1995
------------------ ------------------
CARRYING PERCENT CARRYING PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
(In Millions)
Commercial and agricultural loans:
In good standing $15,546 91.3% $17,649 87.0%
In good standing
with structured terms 809 4.7% 966 4.8%
Past due 90 days or more 229 1.3% 144 0.7%
In process of foreclosure 68 0.4% 157 0.8%
Residential loans 387 2.3% 1,364 6.7%
------- ----- ------- -----
Total $17,039 100.0% $20,280 100.0%
======= ===== ======= =====
At December 31, 1996, the Company's mortgage loans on real estate were
collateralized by the following property types: office buildings
(34%), retail stores (22%), residential properties (2%), apartment
complexes (18%), industrial buildings (11%), agricultural properties
(9%) and other commercial properties (4%). The maximum percentage of
any one loan to the value of collateral at the time of the loan,
exclusive of insured, guaranteed, purchase money mortgages or
mortgages supported by high credit leases is 80%. The mortgage loans
are geographically dispersed throughout the United States and
- 7 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Canada with the largest concentrations in California (26%) and New
York (8%). Included in these balances are mortgage loans with
affiliated joint ventures of $560 million and $653 million at December
31, 1996 and 1995, respectively.
C. Real estate - Real estate at December 31 was as follows:
1996 1995
------ ------
(In Millions)
Investment real estate $1,201 $1,484
Properties occupied by the Company 525 533
Properties acquired in
satisfaction of debt 368 471
------ ------
Total $2,094 $2,488
====== ======
Accumulated depreciation on real estate was $808 million and $853
million at December 31, 1996 and 1995, respectively.
D. Other invested assets - Other invested assets of $2,591 million and
and $3,304 million as of December 31, 1996 and 1995, respectively,
principally include the Company's net equity in joint ventures and
other forms of partnerships. The Company's share of net income from
other invested assets was $283 million, $240 million and $348 million
for 1996, 1995 and 1994, respectively.
E. Investment in subsidiaries - Included in "Common stock" is the
Company's investment in subsidiaries of $4,610 million and $4,328
million at December 31, 1996 and 1995, respectively. Included in "Net
investment income" for 1996, 1995 and 1994 is $370 million, $143
million and $(936) million, respectively, attributable to
undistributed income (loss) of subsidiaries.
In October 1995, the Company completed the sale of Prudential
Reinsurance Holdings, Inc., through an initial public offering of
common stock. As a result of the sale, an after-tax gain of $72
million was recorded in 1995.
In March 1995, the Company announced its intention to sell its
mortgage banking unit. On January 26, 1996, the Company entered into a
definitive agreement to sell substantially all the assets of
Prudential Home Mortgage Company, Inc. ("PHMC") and it also
liquidated certain mortgage-backed securities and extended warehouse
loans. In 1995, PHMC recorded an after-tax loss of $98 million which
includes operating gains and losses, asset write downs, and other
costs directly related to the sale. The Company continues to have
discussions with prospective buyers for the sale of the remaining
assets.
F. Net unrealized capital gains (losses) - Changes in net unrealized
capital gains (losses), which result principally from changes in the
differences between cost and carrying amounts of invested assets, were
$191 million and $661 million for the years ended December 31, 1996
and 1995, respectively, and are reflected in "Unassigned surplus."
G. Asset valuation reserve and interest maintenance reserve - These
reserves are required for life insurance companies under NAIC
requirements. The AVR is calculated based on a statutory formula and
is designed to mitigate the effect of valuation and credit-related
losses on unassigned surplus. The IMR captures realized capital gains
and losses, net of tax, resulting from changes in the general level of
interest rates. These gains and losses are amortized into net
investment income utilizing grouped amortization schedules over the
expected remaining life of the investments sold. At December 31, 1996,
AVR is comprised of 68% for bonds, stocks, and short-term investments;
17% for mortgage loans on real estate; and 15% for real estate and
other invested assets. The IMR balance at December 31, 1996 and 1995
was $1,365 million and $1,163 million, respectively, and is recorded
in "Other liabilities". During 1996, 1995 and 1994, $327 million, $766
million and ($910) million, respectively, of net realized capital
gains (losses) were deferred and $126 million, $82 million and $102
million, respectively, was amortized and included in income.
H. Restricted assets and special deposits - Assets in the amounts of $941
million and $5,072 million at December 31, 1996 and 1995,
respectively, were on deposit with governmental authorities or
trustees as required by law. Assets valued at $2,994 million and
$3,121 million at December 31, 1996 and 1995, respectively, were
maintained as compensating balances or pledged as collateral for bank
loans and other financing agreements. Letter stock or other securities
restricted as to sale amounted to $720 million in 1996 and $354
million in 1995.
I. Loan backed and structured securities - A retrospective method is
employed to recalculate the values of the loan backed and structured
securities holdings with the exception of interest only bonds. Each
acquisition lot was reviewed to recalculate the effective yield. The
recalculated effective yield was used to derive a book value as if the
new yield were applied at the time of acquisition. Outstanding
principal
- 8 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
factors from the time of acquisition to adjustment date were used to
calculate the prepayment history for all applicable securities.
Conditional prepayment rates, computed with life to date factor
histories and weighted average maturities, were used to affect the
calculation of projected payments for pass through, interest only and
principal only security types. Interest only bond adjustments are
developed on a prospective basis with adjustments made for permanent
impairments if needed.
J. Securities lending is a program whereby the Company loans securities
to third parties, primarily major brokerage firms. As of December 31,
1996 and 1995, the estimated fair values of loaned securities were
$6,362 million and $5,939 million respectively. Company and NAIC
policies require a minimum of 102% and 105% of the fair value of the
domestic and foreign loaned securities, respectively, to be separately
maintained as collateral for the loans. Cash collateral received is
invested in short-term investments. The offsetting collateral
liability as of December 31, 1996 and 1995 is $4,813 million and
$3,625 million, respectively. Non-cash collateral is not reflected in
the Statements of Admitted Assets, Liabilities and Surplus.
5. EMPLOYEE BENEFIT PLANS
A. Pension plans - The Company has several defined benefit pension plans,
which cover substantially all of its employees. Benefits are generally
based on career average earnings and credited length of service. The
Company's funding policy for U.S. plans is to contribute annually the
amount necessary to satisfy the Internal Revenue Service contribution
guidelines.
Employee pension benefit plan status is as follows:
1996 1995
------- -------
(In Millions)
Actuarial present value of benefit obligation:
Vested benefit obligation $(3,878) $(3,270)
======= =======
Accumulated benefit obligation $(4,174) $(3,572)
======= =======
Projected benefit obligation $(4,989) $(4,330)
Plan assets at fair value 7,326 6,688
------- -------
Plan assets in excess of projected
benefit obligation 2,337 2,358
Unrecognized transition amount (769) (904)
Unrecognized prior service cost 356 199
Unrecognized net gain (916) (753)
------- -------
Prepaid pension cost $ 1,008 $ 900
======= =======
Plan assets consist primarily of equity securities, bonds, real estate
and short-term investments, of which $5,668 million and $4,788 million
are included in separate account assets and liabilities at December
31, 1996 and 1995, respectively.
The components of the net periodic pension benefit for 1996, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In Millions)
<S> <C> <C> <C>
Service cost $ 119 $ 110 $ 141
Interest cost 336 371 293
Actual return on assets (720) (1,249) 62
Net amortization and deferral 57 604 (633)
Net curtailment gains and special termination benefits 63 0 156
------ ------ ------
Net periodic pension benefit $ (145) $ (164) $ 19
====== ====== ======
</TABLE>
The net increase to surplus relating to the Company's pension plans is
$37 million, $30 million and $0 million in 1996, 1995 and 1994,
respectively, which considers the changes in the non-admitted prepaid
pension asset of $108 million, $134 million and ($19) million,
respectively.
The accounting assumptions used by the Company were:
AS OF SEPTEMBER 30,
------------------------
1996 1995 1994
------ ------ ------
Discount rate 7.75% 7.50% 8.50%
Rate of increase in compensation levels 4.50% 4.50% 5.50%
Expected long-term rate of return on assets 9.50% 9.00% 9.00%
The Company maintains non-qualified supplemental retirement plans
providing benefits that may not be paid from the Company's two
qualified plans since qualified plans have limits imposed by Section
415 and 401(a)(17) of the Code. One of these plans also provides
certain participants with a subsidized early retirement benefit.
- 9 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
B. Postretirement benefits - The Company provides certain life insurance
and health care benefits for its retired employees. Substantially all
of the Company's employees may become eligible to receive these
benefits if they retire after age 55 with at least 10 years of
service.
Postretirement benefits are accounted for in accordance with
prescribed NAIC policy. The Company has elected to amortize its
transition obligation over 20 years. During 1996, 1995 and 1994,
funding of its postretirement benefit obligations totaled $35 million,
$47 million and $31 million, respectively.
The postretirement benefit plan status is as follows:
SEPTEMBER 30,
------------------
1996 1995
---- ----
(In Millions)
Accumulated postretirement benefit obligation for:
Retirees $(1,418) $(1,465)
Fully eligible active plan participants (35) (103)
Plan assets at fair value 1,341 1,309
------- -------
Funded status (112) (259)
Unrecognized transition amount 355 378
Unrecognized net gain (177) (19)
------- -------
Prepaid postretirement benefit cost $ 66 $ 100
======= =======
Plan assets consist of group and individual variable life insurance
policies, group life and health contracts and short-term investments,
of which $1,003 million and $990 million are included in the separate
account assets and liabilities at December 31, 1996 and 1995,
respectively.
Net periodic postretirement benefit cost for 1996, 1995 and 1994
includes the following components:
1996 1995 1994
----- ----- -----
(In Millions)
Service cost $ 24 $ 30 $ 36
Interest cost 115 117 107
Actual return on plan assets (104) (144) (98)
Amortization of transition obligation 22 22 23
Other 12 49 52
----- ----- -----
Net periodic postretirement benefit cost $ 69 $ 74 $ 120
===== ===== =====
The net reduction to surplus relating to the Company's postretirement
benefit plans is $35 million, $46 million, and $30 million in 1996,
1995 and 1994, respectively, which considers the changes in the
prepaid postretirement benefit cost of $34 million, $28 million and
$90 million in 1996 , 1995 and 1994, respectively.
The assumptions used for the postretirement benefit plan were:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.75% 7.50% 8.50%
Expected long-term rate of return on plan assets 9.00% 8.00% 9.00%
Rate of increase in compensation levels 4.50% 4.50% 5.50%
Health care cost trend rates 8.50-12.50% 8.90-13.30% 9.10-13.90%
Ultimate health care cost trend rate at 2006 5.00% 5.00% 6.00%
</TABLE>
A 1% increase in health care cost trend rates would increase the
September 30, 1996 accumulated postretirement benefit obligation and
service/interest costs by $115 million and $12 million, respectively.
C. Postemployment benefits - The Company accrues for 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, 1996 and 1995 was $99 million and
$96 million, respectively.
- 10 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings consisted of the following at December
31:
Short-term: 1996 1995
---- ----
(In Millions)
Notes payable to affiliate $ 99 $ 0
Current portion of long term
notes payable 11 128
---- ----
$110 $128
Long-Term: 1996 1995
---- ----
8.173% note due 2002 $249 $249
7.501% note due 1999 248 248
5.0819% note due 2004 56 66
12.00% note due 1999 0 16
Secured demand note
due 1998 100 100
---- ----
653 679
---- ----
Total principal repayments and accrued interest $763 $807
==== ====
Scheduled principal repayments as of December 31, 1996, are as
follows: $110 million in 1997, $100 million in 1998, $239 million in
1999, $0 in 2000, $0 in 2001 and $294 million thereafter.
7. SURPLUS
A. Capital notes - The Company issues Capital Notes that are subordinate
in right of payment to policy claims, prior claims and senior
indebtedness. A summary of the outstanding Capital Notes as of
December 31, 1996 is as follows:
PRINCIPAL CARRYING INTEREST MATURITY
ISSUE DATE (PAR) AMOUNT RATE DATE
- ---------- --------- -------- -------- --------
(In Millions)
April 28, 1993 $ 300 $ 299 6.875% April 15, 2003
July 1, 1995 350 340 8.300% July 1, 2025
July 1, 1995 250 246 7.650% July 1, 2007
July 15, 1995 100 100 8.100% July 15, 2015
------- -----
Total $ 1,000 $ 985
======= =====
B. Special surplus fund - In accordance with the requirements of various
states, a special surplus fund has been established for contingency
reserves of $1,268 million and $1,274 million as of December 31, 1996
and 1995, respectively.
C. Non-admitted assets - Non-admitted assets were $1,367 million and
$1,167 million as of December 31, 1996 and 1995, respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented below have been determined using available
information and reasonable valuation methodologies. Considerable judgment
is applied in interpreting data to develop the estimates of fair value.
Accordingly, such estimates presented may not be realized in a current
market exchange. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair values.
The following methods and assumptions were used in calculating the fair
values. (For all other financial instruments, the carrying value is a
reasonable estimate of fair value.)
Bonds and preferred stock - Fair values for bonds and preferred stock,
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 provided by state regulatory
authorities.
Common stock - Fair value of unaffiliated common stock is based on
quoted market prices, where available, or prices provided by state
regulatory authorities.
- 11 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Mortgage loans on real estate - The fair value of residential
mortgages is based on recent market trades or quotes, adjusted where
necessary for differences in risk characteristics. The fair value of
the commercial mortgage and agricultural loan portfolio is primarily
based upon the present value of the scheduled cash flows discounted at
the appropriate U.S. Treasury rate, adjusted for the current market
spread for a similar quality mortgage. For certain non-performing and
other loans, fair value is based upon the value of the underlying
collateral.
Policy loans and premium notes - The estimated fair value of policy
loans is calculated using a discounted cash flow model based upon
current U.S. Treasury rates and historical loan repayments.
Derivative financial instruments - The fair value of swap agreements
is estimated based on the present value of future cash flows under the
agreements discounted at the applicable zero coupon U.S. Treasury rate
and swap spread. The fair value of forwards, futures and options is
estimated based on market quotes for a transaction with similar terms.
The fair value of loan commitments is derived by comparing the
contractual future 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.
Investment-type insurance contract liabilities - Fair values for the
Company's investment-type insurance contract liabilities are estimated
using a discounted cash flow model, based on interest rates currently
being offered for similar contracts. Carrying amounts are included in
"Future policy benefits and claims."
Notes payable and other borrowings - The estimated fair value of notes
payable is derived using discount rates based on the borrowing rates
currently available to the Company for debt with similar terms and
remaining maturities.
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
(In Millions)
FINANCIAL ASSETS:
<S> <C> <C> <C> <C>
Bonds $75,006 $77,826 $77,494 $83,910
Preferred stock 239 259 396 410
Common stock * 2,466 2,466 1,805 1,805
Mortgage loans on real estate 17,039 17,364 20,280 20,839
Policy loans and premium notes 6,023 5,942 6,208 6,452
Short-term investments 5,817 5,817 4,633 4,633
Cash 165 165 170 170
Assets held in separate accounts 57,797 57,797 53,903 53,903
Derivative financial instruments 9 16 15 64
FINANCIAL LIABILITIES:
Investment-type insurance
contracts 30,194 30,328 34,799 35,720
Notes payable and other borrowings 763 794 807 829
Liabilities related to separate accounts 57,436 57,436 53,256 53,256
Derivative financial instruments 60 63 94 108
</TABLE>
* Excludes investments in subsidiaries of $4,610 million and $4,328 million
at December 31, 1996 and 1995, respectively.
- 12 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
9. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
A. Derivative financial instruments - Derivatives include swaps,
forwards, futures, options and fixed-rate loan commitments subject to
market risk, all of which are used by the Company in the normal course
of business in activities other than trading. The Company does not
issue or hold derivatives for trading purposes. This classification is
based on management's intent at the time of contract inception and
throughout the life of the contract. The Company uses derivatives
primarily for asset/liability risk management and to reduce exposure
to interest rate, currency and other market risks. Of those
derivatives held at December 31,1996, 35% of the notional amounts
consisted of interest rate derivatives and 65% consisted of foreign
currency derivatives.
The tables below summarize the Company's outstanding positions on a
gross basis before netting pursuant to rights of offset, qualifying
master netting agreements with counterparties or collateral
arrangements at December 31:
<TABLE>
<CAPTION>
DERIVATIVE FINANCIAL INSTRUMENTS
1996 1995
---- ----
(In Millions)
CARRYING ESTIMATED CARRYING ESTIMATED
NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
-------- ------ ---------- -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 159 $ 1 $ 6 $ 418 $ (1) $ 32
Liabilities 479 50 53 371 76 79
Forwards:
Assets 453 8 8 235 13 17
Liabilities 980 9 9 1,074 13 13
Futures:
Assets 0 0 0 683 5 5
Liabilities 399 1 1 864 5 7
Options:
Assets 175 0 0 195 0 0
Liabilities 0 0 0 3 0 0
Loan Commitments:
Assets 164 0 2 122 (2) 10
Liabilities 9 0 0 532 0 9
------ ------ ------ ------ ------ ------
Total:
Assets $ 951 $ 9 $ 16 $1,653 $ 15 $ 64
====== ====== ====== ====== ====== ======
Liabilities $1,867 $ 60 $ 63 $2,844 $ 94 $ 108
====== ====== ====== ====== ====== ======
</TABLE>
B. 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 and letters of credit. Commitments include variable rate
commitments to purchase and sell mortgage loans and the unfunded
portion of commitments to fund investments in private placement
securities. The Company also provides financial guarantees incidental
to other transactions and letters of credit that guarantee the
performance of customers to third parties. These credit-related
financial instruments have off-balance sheet credit risk because only
their origination fees, if any, and accruals for probable losses, if
any, are recognized until the obligation under the instrument is
fulfilled or expires. These instruments can extend for several years
and expirations are not concentrated in any period. The Company seeks
to control credit risk associated with these instruments by limiting
credit, maintaining collateral where customary and appropriate, and
performing other monitoring procedures.
The notional amount of these instruments, which represents the
Company's maximum exposure to credit loss from other parties'
non-performance, was $785 million and $1,254 million at December 31,
1996 and 1995, respectively. Because many of these amounts expire
without being advanced in whole or in part, the notional amounts do
not represent future cash flows.
The estimated fair value of these instruments, which represents the
Company's current exposure to credit loss from other parties'
non-performance, was $8 million and $56 million at December 31, 1996
and 1995, respectively.
10. RELATED PARTY TRANSACTIONS
A. Service agreements - The Company has entered into service agreements
with various subsidiaries. Under these agreements, the Company
furnishes services of officers and employees and provides supplies,
use of equipment, office space, and makes payment to
- 13 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
third parties for general expenses, state and local taxes. The
agreements obligate the subsidiaries to reimburse the Company for the
approximate cost of providing such services. The amounts receivable
from subsidiaries, reported in "Other assets" at December 31, 1996 and
1995, were $490 million and $509 million, respectively. The
subsidiaries also furnish similar services to the Company in
connection with such agreements. The amount payable to subsidiaries,
reported in "Other liabilities" at December 31, 1996 was $87 million.
There was no outstanding balance at December 31, 1995.
Certain of the Company's group health care subsidiaries provide health
insurance to certain employees of the Company. Enrollment contract
costs reported in "Other expenses" were $126 million, $111 million and
$104 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company purchases corporate owned life insurance policies from one
of its life insurance subsidiaries for certain employees. The premium
charged for these policies reported in "Other expenses" was $3
million, $12 million and $12 million for the years ended December 31,
1996, 1995 and 1994, respectively. The cash value associated with
these policies was $118 million and $102 million at December 31,
1996 and 1995, respectively.
Certain of the Company's subsidiaries perform services for the Company
in connection with the Company's obligations under investment advisory
or subadvisory agreements. The costs incurred in connection with
performing such services, primarily reported in "Other expenses," were
$145 million, $327 million and $342 million for the years ended
December 31, 1996, 1995 and 1994, respectively. The Company also
provides these services to subsidiaries in connection with such
agreements. The investment advisory fees received from affiliates by
the Company, reported in "Other income" were $161 million, $92 million
and $110 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company borrows short-term funds from Prudential Funding
Corporation ("Funding"), a wholly owned subsidiary. The interest
expense for these borrowings was $131 million, $66 million and $21
million for the years ended December 31, 1996, 1995 and 1994,
respectively. The outstanding balance at December 31, 1996 was $99
million. There was no outstanding balance at December 31, 1995.
B. Net worth maintenance agreement - The Company has entered into a
support agreement with Funding under which it agrees to maintain
Funding's tangible net worth, including subordinated debt, at not less
than $1.00. As of December 31, 1996, the tangible net worth of Funding
was $44 million. Since the inception of the agreement, no support
payments have been required.
11. CONTINGENCIES
The Company is reviewing its obligations under certain managed care
arrangements for possible failure to comply with contractual and regulatory
requirements. It is the opinion of management that appropriate reserves
have been established in accordance with applicable accounting standards to
provide for appropriate reimbursements to customers.
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.
Twenty-six purported class actions and over 280 individual actions are
pending against the Company on behalf of those persons who purchased life
insurance policies allegedly because of deceptive sales practices engaged
in by the Company and its insurance agents in violation of state and
federal laws. The Company anticipates additional suits may be filed by
individuals who opted out of the class action settlement described below.
The sales practices alleged to have occurred are contrary to Company
policy. Some of these cases seek very substantial damages while others seek
unspecified compensatory, punitive and treble damages. The Company intends
to defend these cases vigorously.
A Multi-State Life Insurance Task Force (the "Task Force"), comprised of
insurance regulators from 29 states and the District of Columbia, was
created to conduct a review of sales and marketing practices throughout the
life insurance industry. As the largest life insurance company in the
United States, the Company was the initial focus of the Task Force
examination. On July 9, 1996, the Task Force released its report on the
Company's activities. In it, the Task Force found that some sales of life
insurance policies made by the Company were improper. The report criticizes
the Company's training, oversight, discipline and compliance programs
related to insurance sales. Based on these findings, the Task Force
recommended, and the Company agreed to, a series of fines allocated to all
50 states and the District of Columbia amounting to a total of $35 million.
In addition, the Task Force recommended a remediation program pursuant to
which the Company would offer relief to policyowners who purchased 10.7
million whole life insurance policies in the United States from the Company
from 1982 through 1995. In subsequent negotiations with several states, the
Company agreed to pay additional amounts aggregating approximately $30
million by way of fine, reimbursement of investigation expenses and costs
associated with outreach to residents of Florida and California.
On October 28, 1996, the Company entered into a Stipulation of Settlement
with attorneys for the plaintiffs in the class actions consolidated in a
Multi-District Litigation involving alleged improprieties in connection
with the Company's sale of whole life
- 14 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
insurance policies from 1982 through 1995. Pursuant to the proposed
settlement, the Company has agreed to provide certain enhancements and
changes to the remediation program previously accepted by the Multi-State
Task Force, including some additional remedies. In addition, the Company
agreed that a minimum cost of $410 million (which was recorded in the
Statement of Operations and Changes in Surplus) would be incurred in
providing remedies to policyowners under the program, and agreed to certain
other payments and guarantees. Under the terms of the guarantees, the
Company has agreed that the average cost per remedy will not be less than
$2,364 for up to 330,000 claims remedied. For claims remedied in excess of
330,000, the Company has not guaranteed an average cost per remedy. The
Company has also agreed to provide additional compensation to be
distributed by formula that will range in an aggregate amount from $50
million to $300 million depending on the total number of claims remedied.
The Company cannot predict how many claims ultimately will be remedied. The
Company has also recorded in the Statement of Operations and Changes in
Surplus, its estimate of the minimum administrative costs related to the
remediation program. As of March 5, 1997, all 50 states and the District of
Columbia have directed the Company to offer a remediation plan based on the
program accepted by the Task Force and containing many of the enhancements
of the class action settlement.
Also on October 28, 1996, the U.S. District Court of the District of New
Jersey, in which the Multi-District Litigation is pending, conditionally
certified a class for settlement purposes and scheduled a hearing on the
fairness, reasonableness and adequacy of the proposed settlement. This
hearing was held on February 24, 1997. On March 7, 1997, the Court
rendered its decision approving the settlement. The owners of approximately
23,000 policies have taken steps to exclude themselves from the class
action and are not bound by the settlement.
To date, the Company has mailed packages to 8.5 million policyowners
eligible for the remediation program, informing policyowners in all 50
states and the District of Columbia of their rights under the program. The
deadline for electing to participate in the Alternative Dispute Resolution
Process ("ADR") or Basic Claim Relief is June 1, 1997. Policyowners who
believe that they were misled can file a claim through the ADR.
Policyowners who do not believe they were misled, or who do not wish to
file a claim under the ADR, may choose from several options available under
Basic Claim Relief, such as preferred rate premium loans, or the purchase
of enhanced annuities, mutual fund shares or life insurance policies.
It is not possible on any reliable basis to estimate how many policyowners
will participate in the settlement. The cost of the settlement is dependent
upon complex and varying factors, including the number of policyowners that
participate in the settlement, the relief options chosen and the ultimate
dollar value of the settlement. The administrative costs to the Company of
remediation of policyowner claims are also subject to a number of complex
uncertainties in addition to the unknown quantity and cost of policyowner
claims. In light of the uncertainties attendant to these and other factors,
management is unable to make a reasonable estimate of the ultimate cost of
the remediation program to the Company.
A purported class action was brought against the Company and certain
subsidiaries alleging common law fraud, negligent misrepresentation and
violations of the New Jersey RICO statute arising out of the plaintiffs'
purchase of certain subordinated mortgage pass-through securities and
seeking compensatory and punitive damages and injunctive relief. The
Company will deny the substantive allegations of the complaint in its
answer and will vigorously defend the suit. The case is at a preliminary
stage, and management is not now in a position to predict the outcome or
effect of the litigation.
Litigation is subject to many uncertainties, and given the complexity and
scope of these suits, their outcome cannot be predicted. It is also not
possible to predict the likely results of any regulatory inquiries or their
effect on litigation which might be initiated in response to widespread
media coverage of these matters. Accordingly, management is unable to make
a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of all pending litigation and the regulatory
inquiries. It is possible that the results of operations or the cash flow
of the Company, in particular quarterly or annual periods, could be
materially affected by an ultimate unfavorable outcome of certain pending
litigation and regulatory matters. Management believes, however, that the
ultimate outcome of all pending litigation and regulatory matters referred
to above should not have a material adverse effect on the Company's
financial position, after consideration of applicable reserves.
In 1993, Prudential Securities, Inc. ("PSI"), a subsidiary of Prudential,
entered into an agreement with the Securities and Exchange Commission, the
National Association of Securities Dealers, Inc., and state securities
commissions whereby PSI agreed to pay $330 million into a settlement fund
to pay eligible claims on certain limited partnership matters. Under this
agreement, if partnership matter claims exceed the established settlement
fund, PSI is obligated to pay such additional claims. The agreement also
required PSI to take measures to enhance the adequacy of its sales
practices compliance controls.
In October 1994, the United States Attorney for the Southern District of
New York (the "U.S. Attorney") filed a complaint against PSI in connection
with its sale of certain limited partnerships. Simultaneously, PSI entered
into an agreement to comply with certain conditions for a period of three
years, and to pay an additional $330 million into the settlement fund. At
the end of the three year period, assuming PSI has fully complied with the
terms of the agreement, the U.S. Attorney will institute no further action.
In the opinion of management, PSI is in compliance with all provisions of
the aforementioned agreements.
- 15 -
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO STATUTORY FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Company has entered into a reinsurance agreement with The Prudential
Life Insurance Company, Ltd., a wholly owned subsidiary, under which it has
agreed to reinsure certain individual life insurance policies through a
yearly renewable term contract. The reinsurance assumed premiums and
reserves for 1996 were $27 million and $17 million, respectively.
The Company as a result of the sale of Prudential Reinsurance Inc. (a PRUCO
Inc. subsidiary), agreed to guarantee up to $775 million of Gibraltar
Casualty Company (a Prudential subsidiary) obligations with respect to a
Stop Loss Agreement and PRUCO Inc.'s (a Prudential subsidiary) payment
obligations under an Indemnity Agreement, subject to maximum aggregate
payments of $400 million. The maximum aggregate payments under the
Prudential Guarantee of the Gibraltar Casualty Company obligations will be
reduced in certain circumstances to take account of payments made and
collateral provided in respect of the guaranteed obligations. The Stop Loss
Agreement is intended to mitigate the impact on Prudential Reinsurance Inc.
of adverse development of loss reserves, as of June 30, 1995, of up to $375
million of the first $400 million of adverse development. The Company has
recorded a loss reserve of $175 million as of December 31, 1996.
Gibraltar Casualty Company and other property and casualty insurance
subsidiaries receive 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 unpaid claim reserves
for these losses, management considered the available information and
established these reserves in accordance with applicable accounting
standards. 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.
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
contractholders 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.
******
- 16 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
We have audited the accompanying statement of admitted assets, liabilities and
surplus (statutory basis) of The Prudential Insurance Company of America as of
December 31, 1996, and the related statements of operations and changes in
surplus (statutory basis), and of cash flows (statutory basis) for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As described in Note 1, these financial statements were prepared in conformity
with accounting practices prescribed or permitted by the New Jersey Department
of Insurance, which practices differ from generally accepted accounting
principles. The effects on the financial statements of the variances between the
statutory basis of accounting and generally accepted accounting principles,
although not reasonably determinable, are presumed to be material.
In our opinion, because of the effects of the matters referred to in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of The Prudential Insurance Company of America at December
31, 1996, and the results of its operations and its cash flows for the year then
ended.
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the admitted assets, liabilities and surplus of The
Prudential Insurance Company of America at December 31, 1996, and the results of
its operations and its cash flows for the year then ended, on the basis of
accounting described in Note 1.
/s/ PRICE WATERHOUSE, LLP
New York, New York
March 10, 1997
- 17 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Prudential Insurance Company of America
Newark, New Jersey
We have audited the accompanying statement of admitted assets, liabilities and
surplus--statutory basis of The Prudential Insurance Company of America as of
December 31, 1995, and the related statements of operations and changes in
surplus--statutory basis, and cash flows--statutory basis for each of the two
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our report dated March 1, 1996, we expressed an opinion that the 1995 and
1994 financial statements, prepared using accounting practices prescribed and
permitted by the New Jersey Department of Insurance, presented fairly, in all
material respects, the financial position of The Prudential Insurance Company of
America as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles. As described in Note 1 to these financial statements,
pursuant to the pronouncements of the Financial Accounting Standards Board, the
1995 and 1994 financial statements of The Prudential Insurance Company of
America, prepared using accounting practices prescribed or permitted by
insurance regulators (statutory financial statements) are no longer considered
presentations in conformity with generally accepted accounting principles. The
effects on the financial statements of the differences between the statutory
basis of accounting and generally accepted accounting principles are material
and are also described in Note 1. Accordingly, our present opinion on the
presentation of the 1995 and 1994 financial statements in accordance with
generally accepted accounting principles, as presented herein, is different from
that expressed in our previous report.
In our opinion, because of the effects of the matter discussed in the third
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the admitted assets,
liabilities and surplus of the Company as of December 31, 1995, and its
operations, changes in surplus and its cash flows for each of the two years in
the period ended December 31, 1995.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities and surplus
of The Prudential Insurance Company of America as of December 31, 1995, and the
results of its operations, changes in surplus and its cash flows for each of the
two years in the period then ended, on the basis of accounting described in Note
1.
Also, as described in Note 1 to the financial statements, these financial
statements were prepared on an unconsolidated statutory basis of accounting,
which differs from the 1995 and 1994 financial statements prepared for general
distribution on a consolidated statutory basis of accounting, both of which
differ from generally accepted accounting principles. The financial statements
for 1995 and 1994 have been restated on an unconsolidated statutory basis of
accounting adopted in 1996 for purposes of general distribution. Further, these
financial statements differ from the previously issued unconsolidated statutory
financial statements because certain permitted financial statement presentation
practices are no longer being used.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 1, 1996, except for Note 1A,
as to which the date is March 10, 1997
- 18 -
<PAGE>
PRUDENTIAL SURVIVORSHIP PREFERRED(R)
INSURANCE CONTRACTS
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
Prudential Plaza
Newark, New Jersey 07102-3777
Telephone: (800) 778-5510
<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 represents that the fees and charges
deducted under the Survivorship Preferred Variable Appreciable 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 the depositor.
UNDERTAKING WITH RESPECT TO INDEMNIFICATION
Prudential Directors' and Officers' Liability and Corporation Reimbursement
Insurance program, purchased by Prudential from Aetna Casualty & Surety Company,
CNA Insurance Companies, Lloyds of London, Great American Insurance Company,
Reliance Insurance Company, Corporate Officers & Directors Assurance Ltd.,
A.C.E. Insurance Company, Ltd., XL Insurance Company, Ltd., and Zurich-American
Insurance Company, provides reimbursement for "Loss" (as defined in the
policies) which the Company pays as indemnification to its directors or officers
resulting from any claim for any actual or alleged act, error, misstatement,
misleading statement, omission, or breach of duty by persons in the discharge of
their duties in their capacities as directors or officers of Prudential, any of
its subsidiaries, or certain investment companies affiliated with Prudential.
Coverage is also provided to the individual directors or officers for such Loss,
for which they shall not be indemnified. Loss essentially is the legal liability
on claims against a director or officer, including adjudicated damages,
settlements and reasonable and necessary legal fees and expenses incurred in
defense of adjudicatory proceedings and appeals therefrom. Loss does not include
punitive or exemplary damages or the multiplied portion of any multiplied damage
award, criminal or civil fines or penalties imposed by law, taxes or wages, or
matters which are uninsurable under the law pursuant to which the policies are
construed.
There are a number of exclusions from coverage. Among the matters excluded are
Losses arising as the result of (1) claims brought about or contributed to by
the criminal, dishonest or fraudulent acts or omissions or the willful violation
of any law by a director or officer, (2) claims based on or attributable to
directors or officers gaining personal profit or advantage to which they were
not legally entitled, and (3) claims arising from actual or alleged performance
of, or failure to perform, services as, or in any capacity similar to, an
investment adviser, investment banker, underwriter, broker or dealer, as those
terms are defined in the Securities Act of 1933, the Securities Exchange Act of
1934, the Investment Advisers Act of 1940, the Investment Company Act of 1940,
any rules or regulations thereunder, or any similar federal, state or local
statute, rule or regulation.
The limit of coverage under the program for both individual and corporate
reimbursement coverage is $150,000,000. The retention for corporate
reimbursement coverage is $10,000,000 per loss.
The relevant provisions of New Jersey law permitting or requiring
indemnification, New Jersey being the state of organization of Prudential, can
be found in Section 14A:3-5 of the New Jersey Statutes Annotated. The text of
Prudential's by-law 26, which relates to indemnification of officers and
directors, is incorporated by reference to Exhibit 1.A.(6)(b) of Post-Effective
Amendment No. 1 to the Registration Statement, filed April 25, 1996.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-1
<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.
The prospectus consisting of 82 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. Deloitte & Touche LLP
2. Price Waterhouse LLP
3. Clifford E. Kirsch, Esq.
4. Andy Mirchuk, FSA, MAAA
The following exhibits:
1. The following exhibits correspond to those required by paragraph A
of the instructions as to exhibits in Form N-8B-2:
A. (1) Resolution of Board of Directors of The Prudential
Insurance Company of America establishing The Prudential
Variable Appreciable Account. (Note 2)
(2) Not Applicable.
(3) Distributing Contracts:
(a) Distribution Agreement between Pruco Securities
Corporation and The Prudential Insurance Company
of America. (Note 3)
(b) Proposed form of Agreement between Pruco
Securities Corporation and independent brokers
with respect to the Sale of the Contracts. (Note
3)
(c) Schedules of Sales Commissions. (Note 4)
(4) Not Applicable.
(5) Survivorship Preferred Variable Appreciable Life
Insurance Contract: (Note 3)
(6) (a) Charter of The Prudential Insurance Company of
America, as amended November 14, 1995. (Note 7)
(b) By-laws of The Prudential Insurance Company of
America, as amended April 8, 1997. (Note 8)
(7) Not Applicable.
(8) Not Applicable.
(9) Not Applicable.
(10) (a) Application Form. (Note 6)
(b) Supplement to the Application. (Note 3)
(11) Form of Notice of Withdrawal Right. (Note 3)
(12) Memorandum describing Prudential's issuance, transfer,
and redemption procedures for the Contracts pursuant to
Rule 6e-3(T)(b)(12)(iii) and method of computing
adjustments in payments and cash surrender values upon
conversion to fixed-benefit policies pursuant to Rule
6e-3(T)(b)(13)(v)(B). (Note 3)
(13) Available Contract Riders and Endorsements:
(a) Option to Exchange for Separate Contracts. (Note
3)
(b) Rider for Term Insurance Benefit on Life of Second
Insured to Die. (Note 3)
(c) Rider for Term Insurance Benefit. (Note 3)
2. See Exhibit 1.A.(4).
II-2
<PAGE>
3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality
of the securities being registered. (Note 1)
4. None.
5. Not Applicable.
6. Opinion and Consent of Andy Mirchuk, FSA, MAAA, as to actuarial
matters pertaining to the securities being registered. (Note 1)
7. Powers of Attorney:
(a) F. Agnew, F. Becker, M. Berkowitz, J.Cullen
C. Davis, R. Enrico, A. Gilmour, W. Gray, III, M. Grier
J. Hanson, C. Horner, B. Malkiel, A. Ryan, C. Sitter
D. Staheli, R. Thomson, J. Unruh, P. Vagelos
S. Van Ness, P. Volcker, J. Williams (Note 5)
(b) G. Hiner (Note 8)
27. Financial Data Schedule. (Note 1)
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Post-Effective Amendment No. 15 to Form
S-6, Registration No. 33- 20000, filed May 1, 1995.
(Note 3) Incorporated by reference to Registrant's Form S-6, filed July 17,
1995.
(Note 4) Incorporated by reference to Pre-Effective Amendment No. 1 to this
Registration Statement, filed December 26, 1995.
(Note 5) Incorporated by reference to Pre-Effective Amendment No. 1 to Form
S-6 Registration No. 333-01031, filed August 22, 1996 on behalf of
The Prudential Variable Contract Account GI-2.
(Note 6) Incorporated by reference to Form S-6, Registration No. 333-07451,
filed July 2, 1996 on behalf of the Pruco Life Variable Appreciable
Account.
(Note 7) 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 8) Incorporated by reference to Post-Effective Amendment No. 12 to Form
N-4, Registration No. 33-25434, filed on or about April 25, 1997 on
behalf of The Prudential Individual Variable Contract Account.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant, The
Prudential Variable Appreciable Account, 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 most recent Effective Amendment to the Registration
Statement pursuant to Rule 485(b)(1) and has duly caused this Registration
Statement to be signed on its behalf by the undersigned thereunto duly
authorized, and its seal hereunto affixed and attested, all in the city of
Newark and the State of New Jersey, on this 25th day of April, 1997.
(Seal) THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
(Registrant)
By: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Depositor)
Attest: /s/ Thomas C. Castano By: /s/ Esther H. Milnes
----------------------------- --------------------------------
Thomas C. Castano Esther H. Milnes
Assistant Secretary Vice President and Actuary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 2 to the Registration Statement has been signed below by the
following persons in the capacities indicated on this 25th day of April, 1997.
SIGNATURE AND TITLE
-------------------
/s/ *
- -------------------------------------
Arthur F. Ryan
Chairman of the Board, President, and
Chief Executive Officer
/s/ *
- -------------------------------------
Martin A. Berkowitz
Senior Vice President and Comptroller
/s/ *
- -------------------------------------
Mark B. Grier
Principal Financial Officer
/s/ * *By: /s/ Thomas C. Castano
- ------------------------------------- -----------------------------------
Franklin E. Agnew Thomas C. Castano
Director (Attorney-in-Fact)
/s/ *
- -------------------------------------
Frederic K. Becker
Director
/s/ *
- -------------------------------------
James G. Cullen
Director
/s/ *
- -------------------------------------
Carolyne K. Davis
Director
/s/ *
- -------------------------------------
Roger A. Enrico
Director
/s/*
- -------------------------------------
Allan D. Gilmour
Director
II-4
<PAGE>
/s/ *
- -------------------------------------
William H. Gray, III
Director
/s/ *
- -------------------------------------
Jon F. Hanson
Director
/s/*
- -------------------------------------
Glen H. Hiner, Jr.
Director
/s/ *
- -------------------------------------
Constance J. Horner
Director
- -------------------------------------
Gaynor N. Kelley
Director
/s/ * *By: /s/ Thomas C. Castano
- ------------------------------------- -----------------------------------
Burton G. Malkiel Thomas C. Castano
Director (Attorney-in-Fact)
- -------------------------------------
Ida F. S. Schmertz
Director
/s/*
- -------------------------------------
Charles R. Sitter
Director
/s/*
- -------------------------------------
Donald L. Staheli
Director
/s/ *
- -------------------------------------
Richard M. Thomson
Director
/s/ *
- -------------------------------------
James A. Unruh
Director
/s/ *
- -------------------------------------
P. Roy Vagelos, M.D.
Director
/s/ *
- -------------------------------------
Stanley C. Van Ness
Director
/s/ *
- -------------------------------------
Paul A. Volcker
Director
/s/ *
- -------------------------------------
Joseph H. Williams
Director
II-5
<PAGE>
EXHIBIT INDEX
Consent of Deloitte & Touche LLP, independent auditors. Page II-7
Consent of Price Waterhouse LLP, independent accountants. Page II-8
3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the Page II-9
legality of the securities being registered.
6. Opinion and Consent of Andy Mirchuk, FSA, MAAA, as to Page II-10
actuarial matters pertaining to the securities being
registered.
27. Financial Data Schedule. Page II-11
II-6
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 2 to Registration
Statement No. 33-61079 on Form S-6 of The Prudential Variable Appreciable
Account of The Prudential Insurance Company of America of our report dated
February 15, 1996, relating to the financial statements of The Prudential
Variable Appreciable Account, and of our report dated March 1, 1996 except for
Note 1A, as to which the date is March 10, 1997 relating to the statutory
financial statements of The Prudential Insurance Company of America appearing in
the Prospectus, which is part of such Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
April 25, 1997
II-7
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 2 to the registration statement on Form S-6 (the
"Registration Statement") of our report dated March 31, 1997, relating to the
financial statements of Prudential Variable Appreciable Account, which appears
in such Prospectus.
We also consent to the use in the Prospectus constituting part of this
Registration Statement of our report dated March 10, 1997, relating to the
statutory financial statements of Prudential Insurance Company of America, which
appears in such Prospectus.
We also consent to the reference to us under the heading "Experts" in the
Prospectus.
/s/ PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
April 24, 1997
II-8
Exhibit 3
April 25, 1997
The Prudential Insurance Company
of America
Prudential Plaza
Newark, New Jersey 07102-3777
Gentlemen:
In my capacity as Chief Counsel, Variable Products, Law Department of The
Prudential Insurance Company of America, I have reviewed the establishment on
August 11, 1987 of The Prudential Variable Appreciable Account (the "Account")
by the Finance Committee of the Board of Directors of The Prudential Insurance
Company of America ("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 am responsible for oversight
of the preparation and review of the Registration Statements on Form S-6, as
amended, filed by Prudential with the Securities and Exchange Commission
(Registration No. 33-20000, Registration No. 33-25372 and Registration No.
33-61079) under the Securities Act of 1933 for the registration of certain
variable appreciable life insurance contracts 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 variable
appreciable life insurance contracts is not chargeable with
liabilities arising out of any other business Prudential may
conduct.
4. The variable appreciable life insurance contracts 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-9
Exhibit 6
April 25, 1997
The Prudential Insurance Company Of America
Prudential Plaza
Newark, New Jersey 07102-3277
Gentlemen:
This opinion is furnished in connection with the registration by The Prudential
Insurance Company of America of Prudential Survivorship Preferred Variable
Appreciable Life Insurance Contract ("Contract") under the Securities Act of
1933. The prospectus included in the Post-Effective Amendment No. 2 to
Registration No. 33-61079 on Form S-6 describes the Contract. I have reviewed
the Contract 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 "Illustrations of Cash Surrender
Values, Death Benefits, and Accumulated Premiums", based on the
assumptions stated in the illustrations are consistent with the provisions
of the Contract. The rate structure of the Contract has not been designed
so as to make the relationship between premiums and benefits, as shown in
the illustrations, appear more favorable to the prospective purchaser of a
Contract issued on a male age 55 and a female age 50, than to prospective
purchasers of Contracts of different combinations of age, sex, or smoking
status.
2. The graphs included in the section of the prospectus entitled "Type of
Insurance Amount", based on the assumptions stated in the illustrations,
are consistent with the provisions of the Contract.
3. The examples shown in the section of the prospectus entitled "Changing the
Type of Insurance Amount" are consistent with the provisions of the
Contract.
4. The charts included in the sections of the prospectus "How a Fixed
Insurance Amount Contract's Death Benefit Will Vary" and "How a Fixed
Insurance Amount Contract's Death Benefit Will Vary" are consistent with
the provisions of the Contract.
5. The deduction in an amount equal to 1.25% of each premium is a reasonable
charge 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 project 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/
- --------------------------
Andy Mirchuk, FSA, MAAA
Vice President and Assistant Actuary
The Prudential Insurance Company of America
II-10
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