<PAGE>
AS FILED WITH THE SEC ON _____________. REGISTRATION NO. 33-20000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM S-6
POST-EFFECTIVE AMENDMENT NO. 21
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)
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(800) 778-2255
(Address and telephone number of principal executive offices)
----------------------
THOMAS C. CASTANO
ASSISTANT SECRETARY
THE PRUDENTIAl INSURANCE COMPANY OF AMERICA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(Name and address of agent for service)
Copy to:
JEFFREY C. MARTIN
SHEA & GARDNER
1800 MASSACHUSETTs AVENUE, N.W.
WASHINGTON, D.C. 20036
----------------------
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, 1999 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. Introduction and Summary; Short-Term
Cancellation Right, or "Free Look";
Contract Forms; Premiums; Contract Date;
Allocation of Premiums; Transfers;
Contract Fees and Charges; How the
Contract Fund Changes with Investment
Experience; How a Contract's Death Benefit
Will Vary; Surrender of a Contract; Lapse
and Reinstatement; When Proceeds are Paid;
Other General Contract Provisions; Voting
Rights; Withdrawal of Excess Cash
Surrender Value; Increases in Face Amount;
Decreases in Face Amount; Riders; The
Prudential Series Fund, Inc.
11. Introduction and Summary; The Prudential
Variable Appreciable Account
12. Cover Page; Introduction and Summary; The
Prudential Series Fund, Inc.; Sale of the
Contract and Sales Commissions
13. Introduction and Summary; The Prudential
Series Fund, Inc.; Contract Fees and
Charges; Reduction of Charges for
Concurrent Sales to Several Individuals;
Sale of the Contract and Sales Commissions
14. Introduction and Summary; Requirements for
Issuance of a Contract
15. Introduction and Summary; Allocation of
Premiums; Transfers; Dollar Cost
Averaging; Fixed-Rate Option; General
Information about Prudential, The
Prudential Variable Appreciable Account,
and the Variable Investment Options
Available under the Account.
16. Introduction and Summary; Detailed
Information About the Contract
17. Surrender of a Contract; When Proceeds are
Paid
18. The Prudential Variable Appreciable
Account
19. Reports to Contract Owners
20. Not Applicable
21. Contract Loans
22. Not Applicable
23. Not Applicable
24. Other General Contract Provisions
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
------------------ --------
25. Introduction and Summary
26. Introduction and Summary; Contract Fees
and Charges
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. Introduction and Summary; The Prudential
Series Fund, Inc.; How the Contract Fund
Changes With Investment Experience; How a
Contract's Death Benefit Will Vary
45. Not Applicable
46. Introduction and Summary; The Prudential
Variable Appreciable Account; The
Prudential Series Fund, Inc.
47. The Prudential Variable Appreciable
Account; The Prudential Series Fund, Inc.
48. Not Applicable
49. Not Applicable
50. Not Applicable
51. Not Applicable
52. Substitution of Series Fund Shares
53. Tax Treatment of Contract Benefits
54. Not Applicable
55. Not Applicable
56. Not Applicable
57. Not Applicable
58. Not Applicable
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
------------------ --------
59. Financial Statements; Financial Statements
of The Prudential Variable Appreciable
Account; Consolidated Financial Statements
of The Prudential Insurance Company of
America and Subsidiaries
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
<PAGE>
PRUDENTIAL'S
VARIABLE APPRECIABLE LIFE(R)
INSURANCE
PROSPECTUS
THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
MAY 1, 1999
[LOGO] PRUDENTIAL
<PAGE>
PROSPECTUS
MAY 1, 1999
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
VARIABLE
APPRECIABLE
LIFE(R)
INSURANCE CONTRACTS
This prospectus describes two forms of a variable life insurance contract (the
"Contract") offered by The Prudential Insurance Company of America
("Prudential", "we" or "us") under the name Variable APPRECIABLE LIFE(R)
Insurance. The first form provides a death benefit that generally remains fixed
in an amount you, the Contract owner, choose and cash surrender values that vary
daily. The second form also provides cash surrender values that vary daily and a
death benefit that will also vary daily. Under both forms of the Contract, the
death benefit will never be less than the "face amount" of insurance you chose.
There is no guaranteed minimum cash surrender value.
You may choose to invest your Contract's premiums and its earnings in one or
more of the following ways:
. Invest in one or more of 15 available subaccounts of The Prudential Variable
Appreciable Account, each of which invests in a corresponding portfolio of The
Prudential Series Fund, Inc. (the "Series Fund"):
MONEY MARKET CONSERVATIVE Balanced EQUITY
DIVERSIFIED BOND FLEXIBLE Managed PRUDENTIAl JENNISON
GOVERNMENT INCOME HIGH YIELD BOND SMALL CAPITALIZATION STOCK
ZERO COUPON BOND 2000 STOCK INDEX GLOBAL
Zero COUPON Bond 2005 EQUITY INCOME NATURAL RESOURCES
. Invest in the FIXED-RATE OPTION, which pays a guaranteed interest rate.
Prudential will credit interest daily on any portion of the premium payment
that you have allocated to the fixed-rate option at rates periodically
declared by Prudential, in its sole discretion. Any such interest rate will
never be less than an effective annual rate of 4%.
. Invest in THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT (the "Real
Property Account"), described in a prospectus attached to this one.
You have considerable flexibility as to when and in what amounts you pay
premiums. However, it is to your advantage to pay a Scheduled Premium amount on
the dates due, which are at least once a year but may be more often.
This prospectus describes the Contract generally and The Prudential Variable
Appreciable Account. The attached prospectus for the Series Fund, and the Series
Fund's statement of additional information describe the investment objectives
and the risks of investing in the portfolios. Prudential may add additional
investment options in the future.
BEFORE YOU SIGN AN APPLICATION TO PURCHASE THIS LIFE INSURANCE CONTRACT, YOU
SHOULD CAREFULLY READ THIS PROSPECTUS. IF YOU DO PURCHASE THE CONTRACT, YOU
SHOULD RETAIN THIS PROSPECTUS, TOGETHER WITH THE CONTRACT, FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION ("SEC") MAINTAINS A WEB SITE
(HTTP://WWW.SEC.GOV) THAT CONTAINS MATERIAL INCORPORATED BY REFERENCE AND OTHER
INFORMATION REGARDING REGISTRANTS THAT FILE ELECTRONICALLY WITH THE SEC.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
criminal offense.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 Broad Street
Newark, New Jersey 07102-3777
Telephone: (800) 778-2255
APPRECIABLE LIFE IS A REGISTERED MARK OF PRUDENTIAL.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INTRODUCTION AND SUMMARY.............................................................................. 1
BRIEF DESCRIPTION OF THE CONTRACT.................................................................... 1
INVESTMENT OPTIONS: THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS...................................... 2
ADDITIONAL INVESTMENT OPTIONS........................................................................ 3
CHARGES.............................................................................................. 3
TYPES OF DEATH BENEFIT............................................................................... 4
PREMIUM PAYMENTS..................................................................................... 5
LAPSE AND GUARANTEE AGAINST LAPSE.................................................................... 5
REFUND............................................................................................... 6
GENERAL INFORMATION ABOUT PRUDENTIAL, THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT, AND THE VARIABLE
INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACT...................................................... 7
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA.......................................................... 7
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT.......................................................... 7
THE PRUDENTIAL SERIES FUND, INC...................................................................... 7
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT............................................... 8
THE FIXED-RATE OPTION................................................................................ 9
WHICH INVESTMENT OPTION SHOULD BE SELECTED?.......................................................... 9
DETAILED INFORMATION ABOUT THE CONTRACT............................................................... 10
REQUIREMENTS FOR ISSUANCE OF A CONTRACT.............................................................. 10
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"......................................................... 10
CONTRACT FORMS....................................................................................... 10
CONTRACT DATE........................................................................................ 11
PREMIUMS............................................................................................. 11
ALLOCATION OF PREMIUMS............................................................................... 12
TRANSFERS............................................................................................ 13
DOLLAR COST AVERAGING................................................................................ 13
CONTRACT FEES AND CHARGES............................................................................ 14
SURRENDER OR WITHDRAWAL CHARGES...................................................................... 17
TRANSACTION CHARGES.................................................................................. 18
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS..................................... 18
HOW THE CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE............................................. 18
HOW A CONTRACT'S DEATH BENEFIT WILL VARY............................................................. 19
INCREASES IN FACE AMOUNT............................................................................. 20
DECREASES IN FACE AMOUNT............................................................................. 21
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE............................................................ 22
SURRENDER OF A CONTRACT.............................................................................. 22
WHEN PROCEEDS ARE PAID............................................................................... 23
LIVING NEEDS BENEFIT................................................................................. 23
HYPOTHETICAL ILLUSTRATIONS OF DEATH BENEFITS AND CASH SURRENDER VALUES............................... 24
CONTRACT LOANS....................................................................................... 26
LAPSE AND REINSTATEMENT.............................................................................. 27
VOTING RIGHTS........................................................................................ 28
SUBSTITUTION OF SERIES FUND SHARES................................................................... 29
REPORTS TO CONTRACT OWNERS........................................................................... 29
TAX TREATMENT OF CONTRACT BENEFITS................................................................... 29
TAX-QUALIFIED PENSION PLANS.......................................................................... 31
RIDERS............................................................................................... 31
PARTICIPATION IN DIVISIBLE SURPLUS................................................................... 31
OTHER GENERAL CONTRACT PROVISIONS.................................................................... 31
PAYING PREMIUMS BY PAYROLL DEDUCTION................................................................. 32
UNISEX PREMIUMS AND BENEFITS......................................................................... 32
SALES TO PERSONS 14 YEARS OF AGE OR YOUNGER.......................................................... 32
EXCHANGE OF FIXED-DOLLAR CONTRACT TO VARIABLE CONTRACT............................................... 32
SALE OF THE CONTRACT AND SALES COMMISSIONS........................................................... 33
STATE REGULATION..................................................................................... 33
EXPERTS.............................................................................................. 33
</TABLE>
<PAGE>
<TABLE>
<S> <C>
LITIGATION........................................................................................... 33
YEAR 2000 COMPLIANCE................................................................................. 34
ADDITIONAL INFORMATION............................................................................... 35
FINANCIAL STATEMENTS................................................................................. 36
DIRECTORS AND OFFICERS OF PRUDENTIAL.................................................................. 37
FINANCIAL STATEMENTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT................................... A1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA AND SUBSIDIARIES................................................................... B1
</TABLE>
<PAGE>
INTRODUCTION AND SUMMARY
This Summary provides a brief overview of the more significant aspects of the
Contract. We provide further detail in the subsequent sections of this
prospectus and in the Contract. The Contract, including the application attached
to it, constitutes the entire agreement between you and Prudential and you
should retain these documents.
As you read this prospectus you should keep in mind that this is a variable life
insurance contract. Variable life insurance has significant investment aspects
and requires you to make investment decisions, and therefore it is also a
"security." Securities that are offered to the public must be registered with
the Securities and Exchange Commission. The prospectus that is a part of the
registration statement must be given to all prospective purchasers. A
substantial part of the premium pays for life insurance that will pay a benefit
to the beneficiary, in the event of the insured's death. This death benefit
generally far exceeds the total premium payments. Therefore, you should not
purchase this Contract unless the major reason for the purchase is to provide
life insurance protection. Because the Contract provides whole-life permanent
insurance, it also serves a second important objective. It may be expected to
provide an increasing cash surrender value that can be used during your
lifetime.
BRIEF DESCRIPTION OF THE CONTRACT
The Variable APPRECIABLE LIFE Insurance Contract (the "Contract") is issued and
sold by The Prudential Insurance Company of America ("Prudential", "we" or
"us"). The Contract is a form of flexible premium variable life insurance. It is
based on a Contract Fund, the value of which changes every business day. The
Contract Fund amount represents the value of your Contract on that day. On any
date it is equal to the sum of the amounts in all the subaccounts, the amount
invested under the fixed-rate option, the amount invested under the Real
Property Account, and the principal amount of any Contract debt. You will,
however, have to pay a surrender charge if you decide to surrender the Contract
during the first 10 Contract years.
A broad objective of the Contract is to provide benefits that will increase in
value if favorable investment results are achieved. Prudential has established
The Prudential Variable Appreciable Account (the "Account") under New Jersey law
as a separate investment account whose assets are segregated from all other
assets of Prudential. The Account is divided into 15 subaccounts, and you decide
which subaccount or subaccounts will hold the assets of your Contract Fund.
Whenever you pay a premium, Prudential first deducts certain charges and, except
for amounts allocated to the fixed-rate option and the Real Property Account,
puts the remainder C often called the "net premium" C into the Account. The
money in the Account, including your Contract Fund, is then invested in the
following way. The money allocated to each subaccount is immediately invested in
a corresponding portfolio of the Series Fund, a series mutual fund for which
Prudential is the investment adviser.
The Series Fund is an investment company registered under the Investment Company
Act of 1940.
1
<PAGE>
INVESTMENT OPTIONS: THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS
o MONEY MARKET PORTFOLIO: The investment objective is maximum current income
consistent with the stability of capital and the maintenance of liquidity.
The Portfolio invests in high quality short-term debt obligations that
mature in 13 months or less.
o DIVERSIFIED BOND PORTFOLIO: The investment objective is a high level of
income over a longer term while providing reasonable safety of capital. The
Portfolio invests primarily in higher grade debt obligations and high
quality money market investments.
o GOVERNMENT INCOME PORTFOLIO: The investment objective is a high level of
income over the longer term consistent with the preservation of capital.
The Portfolio invests primarily in U.S. Government securities, including
intermediate and long-term U.S. Treasury securities and debt obligations
issued by agencies or instrumentalities established by the U.S.
government.
o TWO ZERO COUPON BOND PORTFOLIOS - 2000 and 2005: The investment objective
of these two portfolios is the highest predictable compound investment for
a specific period of time, consistent with the safety of invested capital.
The Portfolio invests primarily in debt obligations of the U.S. Treasury
and corporations that have been issued without interest coupons or have
been stripped of their interest coupons, or have interest coupons that have
been stripped from the debt obligations.
o CONSERVATIVE BALANCED PORTFOLIO: The investment objective is a total
investment return consistent with a conservatively managed diversified
portfolio. The Portfolio invests in a mix of equity securities, debt
obligations and money market instruments.
o FLEXIBLE MANAGED PORTFOLIO: The investment objective is a total investment
return consistent with an aggressively managed diversified portfolio. The
Portfolio invests in a mix of equity securities, debt obligations and money
market instruments.
o HIGH YIELD BOND PORTFOLIO: The investment objective is a high total return.
The Portfolio invests primarily in high yield/high risk debt securities
.
o STOCK INDEX PORTFOLIO: The investment objective is investment results that
generally correspond to the performance of publicly-traded common stocks.
The Portfolio attempts to duplicate the price and yield performance of the
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500
Index").
o EQUITY INCOME PORTFOLIO: The investment objective is both current income
and capital appreciation. The Portfolio invests primarily in common stocks
and convertible securities that provide good prospects for returns above
those of the S&P 500 Index or the NYSE Composite Index.
o EQUITY PORTFOLIO: The investment objective is capital appreciation. The
Portfolio invests primarily in common stocks of major established
corporations as well as smaller companies that offer attractive prospects
of appreciation.
o PRUDENTIAL JENNISON PORTFOLIO: The investment objective is to achieve long-
term growth of capital. The Portfolio invests primarily in equity
securities of major established corporations that offer above-average
growth prospects.
2
<PAGE>
o SMALL CAPITALIZATION STOCK PORTFOLIO: The investment objective is long-term
growth of capital. The Portfolio invests primarily in equity securities of
publicly-traded companies with small market capitalization.
o GLOBAL PORTFOLIO: The investment objective is long-term growth of capital.
The Portfolio invests primarily in common stocks (and their equivalents) of
foreign and U.S. companies.
o NATURAL RESOURCES PORTFOLIO: The investment objective is long-term growth
of capital. The Portfolio invests primarily in common stocks and
convertible securities of natural resource companies and securities that
are related to the market value of some natural resource.
For further information about the Series Fund portfolios see THE PRUDENTIAL
SERIES FUND, INC., page 8.
ADDITIONAL INVESTMENT OPTIONS
The two additional options that are regulated differently from the other 15
because neither one is an investment company registered under the Investment
Company Act of 1940 are:
The FIXED-RATE option increases the portion of your Contract Fund allocated to
this option at a guaranteed rate of interest. Refer to THE FIXED-RATE OPTION on
page 9 for more information.
The REAL PROPERTY ACCOUNT invests in income-producing real property. It is
described in a separate prospectus that is attached to this one.
CHARGES
Prudential deducts certain charges from each premium payment and from the
amounts held in the designated investment options. In addition, Prudential makes
certain additional charges if a Contract lapses or is surrendered during the
first 10 Contract years. All these charges, which are largely designed to cover
insurance costs and risks as well as sales and administrative expenses, are
fully described under CONTRACT FEES AND CHARGES on page 14. In brief, and
subject to that fuller description, the following chart outlines the charges
which Prudential may make:
----------------------------------------------------------------------
PREMIUM PAYMENT
----------------------------------------------------------------------
----------------------------------------
o less charge for taxes attributable
to premiums
o less $2 processing fee
----------------------------------------
- ------------------------------------------------------------------------------
NET PREMIUM AMOUNT
To be invested in one or a combination of:
o The investment portfolios of the Series Fund
o The fixed-rate option
o The Real Property Account
- ------------------------------------------------------------------------------
3
<PAGE>
DAILY CHARGES
o We deduct management fees and expenses from the Series Fund and, if
applicable, from the Real Property Account assets.
o We deduct a daily mortality and expense risk charge equivalent to an annual
rate of up to 0.9% from the variable investment option (the subaccounts and
the Real Property Account) assets.
- ------------------------------------------------------------------------------
MONTHLY CHARGES
o We currently deduct a sales charge from the Contract Fund in the amount of
1/2 of 1% of the primary annual premium.
o We reduce the Contract Fund by a guaranteed minimum death benefit risk charge
of not more than $0.01 per $1,000 of the face amount of insurance.
o We reduce the Contract Fund by an administrative charge of up to $3 per
Contract and $0.03 per $1,000 of face amount of insurance.
o We deduct a charge for anticipated mortality. The maximum charge is based on
the Non-Smoker/Smoker 1980 CSO Tables.
o If the Contract includes riders, we deduct rider charges from the Contract
Fund.
o If the rating class of the insured results in an extra charge, we will deduct
that charge from the Contract Fund.
- ------------------------------------------------------------------------------
POSSIBLE ADDITIONAL CHARGES
o During the first 10 Contract years, we will assess a contingent deferred
sales charge if the Contract lapses or is surrendered. During the first five
years, the maximum contingent deferred sales charge is 50% of the first
year's primary annual premium. This charge is both subject to other important
limitations and reduced for Contracts that have been inforce for more than
five years.
o During the first 10 Contract years, we will assess a contingent deferred
administrative charge if the Contract lapses or is surrendered. During the
first five years, this charge equals $5 per $1,000 of face amount. It begins
to decline uniformly after the fifth Contract year so that it disappears on
the 10th Contract anniversary.
o We assess an administrative processing charge equal to the lesser of $15 or
2% for each withdrawal of excess cash surrender value.
- ------------------------------------------------------------------------------
TYPES OF DEATH BENEFIT
The death benefit is an important feature of the Contract. You may choose one of
the following two forms of the Contract. They each have a different death
benefit amount.
CONTRACT FORM A, LEVEL DEATH BENEFIT: The death benefit will generally be equal
to the face amount of insurance. It can never be less than this amount. However,
it is possible, after the Contract has been held for many years, that the
Contract Fund will become so large that Prudential C to meet certain
requirements of the Internal Revenue Code C will increase the death benefit.
4
<PAGE>
CONTRACT FORM B, VARIABLE DEATH BENEFIT: The death benefit will increase and
decrease as the amount of the Contract Fund varies with the investment
performance of the selected options. However, the death benefit under Form B, as
is true under Form A, will never be less than the initial face amount and it may
also be increased to satisfy Internal Revenue Code requirements.
Throughout this prospectus the word "Contract" refers to both Form A and B
unless specifically stated otherwise. Under both Form A and B Contracts there is
no guaranteed minimum cash surrender value. For more information, refer to HOW A
CONTRACT'S DEATH BENEFIT WILL VARY on page 19.
PREMIUM PAYMENTS
Your Contract sets forth a Scheduled Premium which is payable annually, semi-
annually, quarterly or monthly. Prudential guarantees that, if the Scheduled
Premiums are paid when due (or if missed premiums are paid later, with interest)
and there are no withdrawals, the Contract will not lapse because of unfavorable
investment experience. Your Contract may terminate if the Contract debt exceeds
what the cash surrender value would be if there was no Contract debt. Prudential
will notify you before the Contract is terminated and you may then repay all or
enough of the loan to keep the Contract inforce. See CONTRACT LOANS, page
26.
Your Scheduled Premium consists of two amounts:
o The initial amount is payable from the time you purchase your Contract
until the Contract anniversary immediately following your 65th birthday or
the Contract's seventh anniversary, whichever is later (the "Premium Change
Date");
o The guaranteed maximum amount payable after the Premium Change Date. See
PREMIUMS, page 11.
The payment of premiums in excess of Scheduled Premiums may cause the Contract
to become a Modified Endowment Contract for federal income tax purposes. See
PREMIUMS, page 11, and TAX TREATMENT OF CONTRACT BENEFITS, page 29.
LAPSE AND GUARANTEE AGAINST LAPSE
The Prudential Variable APPRECIABLE LIFE Insurance Contract is a form of life
insurance that provides much of the flexibility of variable universal life,
however, with two important distinctions:
o Prudential guarantees that if the Scheduled Premiums are paid when due, or
within the grace period (or missed premiums are paid later with interest),
the Contract will not lapse and at least the face amount of insurance will
be paid upon the death of the insured.
o If all premiums are not paid when due (or not made up later), the Contract
will still not lapse as long as the Contract Fund is higher than a stated
amount set forth in the Contract. This amount is called the "Tabular
Contract Fund", and it increases each year. In later years it becomes quite
high. The Contract lapses when the Contract Fund falls below this stated
amount, rather than when it drops to zero. This means that when a Variable
APPRECIABLE LIFE Contract lapses, it may still have considerable value and
you may have a substantial incentive to reinstate it. If you choose
otherwise, you may take, in one form or another, the cash surrender
value.
You can find more information on this topic in LAPSE AND REINSTATEMENT on
page 27.
5
<PAGE>
REFUND
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 10.
THE REPLACEMENT OF LIFE INSURANCE IS GENERALLY NOT IN YOUR BEST INTEREST. IN
MOST CASES, IF YOU REQUIRE ADDITIONAL COVERAGE, THE BENEFITS OF YOUR EXISTING
CONTRACT CAN BE PROTECTED BY PURCHASING ADDITIONAL INSURANCE OR A SUPPLEMENTAL
CONTRACT. IF YOU ARE CONSIDERING REPLACING A CONTRACT, YOU SHOULD COMPARE THE
BENEFITS AND COSTS OF SUPPLEMENTING YOUR EXISTING CONTRACT WITH THE BENEFITS AND
COSTS OF PURCHASING THE CONTRACT DESCRIBED IN THIS PROSPECTUS AND YOU SHOULD
CONSULT WITH A QUALIFIED TAX ADVISER.
THIS PROSPECTUS MAY ONLY BE OFFERED IN JURISDICTIONS IN WHICH THE OFFERING IS
LAWFUL. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN THE PROSPECTUS
AND STATEMENT OF ADDITIONAL INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC.,
AND IN THE PROSPECTUS FOR THE REAL PROPERTY ACCOUNT.
6
<PAGE>
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 is a mutual insurance company,
founded in 1875 under the laws of the State of New Jersey. Prudential is
currently considering reorganizing itself into a publicly traded stock company
through a process known as "demutualization." On February 10, 1998, the
Company's Board of Directors authorized management to take the preliminary steps
necessary to allow the Company to demutualize. On July 1, 1998, legislation was
enacted in New Jersey that would permit this conversion to occur and that
specified the process for conversion. Demutualization is a complex process
involving development of a plan of reorganization, adoption of a plan by the
Company's Board of Directors, a public hearing, voting by qualified
policyholders and regulatory approval, all of which could take two or more years
to complete. Prudential's management and Board of Directors have not yet
determined to demutualize and it is possible that, after careful review,
Prudential could decide not to go public.
The plan of reorganization, which hasn't been developed and approved, would
provide the criteria for determining eligibility and the methodology for
allocating shares or other consideration to those who would be eligible.
Generally, the amount of shares or other consideration eligible customers would
receive would be based on a number of factors, including the types, amounts and
issue years of the customer's policies. As a general rule, owners of Prudential-
issued insurance policies and annuity contracts would be eligible, while mutual
fund customers and customers of the Company's subsidiaries would not be. It has
not yet been determined whether any exceptions to that general rule will be made
with respect to policyholders and contract owners of Prudential's
subsidiaries.
Prudential is licensed to sell life insurance and annuities in the District of
Columbia, Guam, U. S. Virgin Islands, and in all states. These Contracts are not
offered in any state in which the necessary approvals have not yet been
obtained.
Prudential's consolidated financial statements begin on page B1 and should be
considered only as bearing upon Prudential's ability to meet its obligations
under the Contracts.
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
The Prudential Variable Appreciable Account (the "Account") was established on
August 11, 1987 under New Jersey law as a separate investment account. The
Account meets the definition of a "separate account" under 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.
The Account is a unit investment trust, which is a type of investment company.
It is registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940 ("1940 Act"). This does not involve any
supervision by the SEC of the management, investment policies, or practices of
the Account. For state law purposes, the Account is treated as a part or
division of Prudential.
Currently, you may invest in one or a combination of 15 available subaccounts
within the Account, each of which invests in a single corresponding portfolio of
the Series Fund. Prudential may add additional subaccounts in the future. The
page A1.
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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 adviser for the assets of each of the portfolios of
the Series Fund. Prudential's principal business address is 751 Broad Street,
Newark, New Jersey 07102-3777. Prudential has a Service Agreement with its
wholly-owned subsidiary, The Prudential Investment Corporation ("PIC"). The
Service Agreement provides that, subject to Prudential's supervision, PIC will
furnish investment advisory services in connection with the management of the
Series Fund. In addition, Prudential has entered into a Subadvisory Agreement
with its wholly-owned subsidiary, Jennison Associates LLC ("Jennison"), under
which Jennison provides investment advisory services for the Prudential Jennison
Portfolio. Further detail is provided in the prospectus and statement of
additional information for the Series Fund. Prudential, PIC, and Jennison are
registered as investment advisers under the 1940 Act.
As an investment adviser, Prudential charges the Series Fund a daily investment
management fee as compensation for its services. In addition to the investment
management fee, each portfolio incurs certain expenses, such as accounting and
custodian fees. See DEDUCTIONS FROM PORTFOLIOS, page 14.
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 that 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. 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, RESTRICTIONS, EXPENSES, INVESTMENT RISKS, AND ALL OTHER ASPECTS OF ITS
OPERATION IS CONTAINED IN THE ATTACHED PROSPECTUS FOR THE SERIES FUND AND IN ITS
STATEMENT OF ADDITIONAL INFORMATION, WHICH SHOULD BE READ IN CONJUNCTION WITH
THIS PROSPECTUS. THERE IS NO ASSURANCE THAT THE INVESTMENT OBJECTIVES OF THE
SERIES FUND WILL BE MET.
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
The Prudential Variable Contract Real Property Account (the "Real Property
Account") is a separate account of Prudential. Through a general partnership
formed by Prudential and two of its subsidiaries, this account invests primarily
in income-producing real property such as office buildings, shopping centers,
agricultural land, hotels, apartments or industrial properties. It also invests
in mortgage loans and other real estate-related investments, including sale-
leaseback transactions. It is not registered as an investment company under the
1940 Act and is therefore not subject to the same regulation as the Series Fund.
The objectives of the Real Property Account and the Partnership are to preserve
and protect capital, provide for compounding of income as a result of
reinvestment of cash flow from investments, and provide for increases over time
in the amount of such income through appreciation in asset value.
The Partnership has entered into an investment management agreement with
Prudential, under which Prudential selects the properties and other investments
held by the Partnership. Prudential charges the Partnership a daily fee for
investment management which amounts to 1.25% per year of the average daily gross
assets of the Partnership.
A full description of the Real Property Account, its management, policies,
restrictions, charges and expenses, investment risks, the Partnership's
investment objectives, and all other aspects of the Real Property Account's and
the Partnership's operations is contained in the attached prospectus for the
Real Property Account. It should be read together with this prospectus by any
Contract owner considering the real estate investment option. There is no
assurance that the investment objectives of the Real Property Account will be
met.
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THE FIXED-RATE OPTION
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED-RATE
OPTION UNDER THE CONTRACT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND THE GENERAL ACCOUNT HAS NOT BEEN REGISTERED AS AN INVESTMENT COMPANY
UNDER THE INVESTMENT COMPANY ACT OF 1940. ACCORDINGLY, INTERESTS IN THE FIXED-
RATE OPTION ARE NOT SUBJECT TO THE PROVISIONS OF THESE ACTS, AND PRUDENTIAL HAS
BEEN ADVISED THAT THE STAFF OF THE SEC HAS NOT REVIEWED THE DISCLOSURE IN THIS
PROSPECTUS RELATING TO THE FIXED-RATE OPTION. ANY INACCURATE OR MISLEADING
DISCLOSURE REGARDING THE FIXED-RATE OPTION MAY, HOWEVER, BE SUBJECT TO CERTAIN
GENERALLY APPLICABLE PROVISIONS OF FEDERAL SECURITIES LAWS.
You may choose to allocate, either initially or by transfer, all or part of your
Contract Fund to the fixed-rate option. This amount becomes part of Prudential's
general account. Prudential's general account consists of all assets owned by
Prudential other than those in the Account and in other separate accounts that
have been or may be established by Prudential. Subject to applicable law,
Prudential has sole discretion over the investment of the general account
assets. Contract owners do not share in the investment experience of those
assets. Instead, Prudential guarantees that the part of the Contract Fund
allocated to the fixed-rate option will accrue interest daily at an effective
annual rate that Prudential declares periodically. This rate may not be less
than an effective annual rate of 4%.
Currently, the following steps are taken for crediting interest rates: (1)
declared interest rates remain in effect from the date money is allocated to the
fixed-rate option until the Monthly date in the same month in the following
year; (2) 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. The term Monthly date means the day of each month that is the
same as the Contract Date. See CONTRACT DATE, page 11.
Prudential is not obligated to credit interest at a higher rate than 4%,
although we may do so. Different crediting rates may be declared for different
portions of the Contract Fund allocated to the fixed-rate option. At least
annually and on request, you will be advised of the interest rates that
currently apply to your Contract.
Transfers from the fixed-rate option are subject to strict limits. See
Transfers, page 13. The payment of any cash surrender value attributable to the
fixed-rate option may be delayed up to six months. See WHEN PROCEEDS ARE PAID,
page 23.
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 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. You may want even greater safety of principal and
may prefer the Money Market Portfolio or the fixed-rate option, recognizing that
the level of short-term rates may change rather rapidly. 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 the risks are greater with lower
quality bonds with normally higher yields. You may wish to divide your invested
premium among two or more of the portfolios. You may wish to obtain
diversification by relying on Prudential's judgment for an appropriate asset mix
by choosing the Conservative Balanced or Flexible Managed Portfolios. The Real
Property Account permits you to diversify your investment under the Contract to
include an interest in a pool of income-producing real property, and real estate
is often considered to be a hedge against inflation.
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Your choice should take into account your willingness to accept investment
risks, how your other assets are invested, and what investment results you may
experience in the future. You should consult your Prudential Representative from
time to time about the choices available to you under the Contract. Prudential
recommends against frequent transfers among the several options. Experience
generally indicates that "market timing" investing, particularly by non-
professional investors, is likely to prove unsuccessful.
DEATAILED INFORMATION ABOUT THE CONTRACT
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
Generally, the Contract may be issued on insureds below the age of 81. You may
apply for a minimum initial guaranteed death benefit of $75,000; however, higher
minimums apply to insureds over the age of 75. Insureds 14 years of age or less
may apply for a minimum initial guaranteed death benefit of $50,000, which will
increase by 50% at age 21. See SALES TO PERSONS 14 YEARS OF AGE OR YOUNGER, page
32. Before issuing any Contract, Prudential requires evidence of insurability,
which may include a medical examination. Non-Smokers who meet preferred
underwriting requirements are offered the most favorable premium rate.
Prudential charges a higher premium if an extra mortality risk is involved.
Certain classes of Contracts, for example a Contract issued in connection with a
tax-qualified pension plan, may be issued on a "guaranteed issue" basis and may
have a lower minimum initial death benefit than a Contract which is individually
underwritten. 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. You can request a refund
by mailing or delivering the Contract to the representative who sold it or to
the Home Office specified in the Contract. A Contract returned according to this
provision shall be deemed void from the beginning. You will then receive a
refund of all premium payments made, plus or minus any change due to investment
experience. However, if applicable law so requires and if you exercise your
short-term cancellation right, you will receive a refund of all premium payments
made, with no adjustment for investment experience.
CONTRACT FORMS
You may select either of two forms of the Contract. The Scheduled Premiums shown
in the Contract will be the same for a given insured, regardless of which
Contract Form is chosen. Contract Form A has a death benefit equal to the
initial face amount of insurance. The Form A Contract death benefit does not
vary with the investment performance of the investment options you selected,
unless the death benefit is increased to ensure that the Contract meets the
Internal Revenue Code's definition of life insurance. See HOW A CONTRACT'S DEATH
BENEFIT WILL VARY, page 19. The payment of greater than Scheduled Premiums and
favorable investment results of the investment options which you selected will
generally increase the cash surrender value. SEE HOW THE CONTRACT FUND CHANGES
WITH INVESTMENT EXPERIENCE, page 18.
Contract Form B also has an initial face amount of insurance but favorable
investment performance and payment of greater than Scheduled Premiums generally
result in an increase in the death benefit and, over time, in a lesser increase
in the cash surrender value than under the Form A Contract. See HOW THE CONTRACT
FUND CHANGES WITH INVESTMENT Experience, page 18 and How a Contract's Death
Benefit Will Vary, page 19. Unfavorable investment performance will result in
decreases in the death benefit (but never below the face amount stated in the
Contract) and in the cash surrender value.
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You should select the form that best meets your needs and objectives. All
permanent insurance provides both protection for beneficiaries in the event of
death and the opportunity to accumulate savings for possible use in later years.
Prudential's Variable Appreciable Life Contract provides more flexible
investment opportunities than do more conventional life insurance policies
because: (1) you decide how the assets held under the Contract will be invested;
(2) it permits considerable flexibility in determining the amount and timing of
premium payments; (3) it permits adjustment of the face amount of insurance
(subject, in the case of an increase, to evidence of insurability); and (4)
favorable investment returns result in an increase in Contract values. Contract
owners should choose Contract Form B if they prefer to have favorable investment
results and greater than Scheduled Premiums reflected in part in the form of an
increased death benefit. Contract owners should choose Contract Form A if they
are satisfied with the amount of their insurance coverage and wish to have
favorable investment results and additional premiums reflected to the maximum
extent in increasing cash surrender values.
In choosing a Contract form, you should also consider whether you intend to use
the withdrawal feature. Purchasers of Form A Contracts should note that an early
withdrawal may result in a portion of the surrender charge being deducted from
the Contract Fund. Furthermore, a purchaser of a minimum face amount Form A
Contract cannot make withdrawals unless the Contract's death benefit has been
increased to comply with the Internal Revenue Code's definition of life
insurance. Purchasers of Form B Contracts will not incur a surrender charge for
a withdrawal and are not precluded from making withdrawals if they purchase a
minimum face amount Contract. See WITHDRAWAL OF EXCESS CASH SURRENDER VALUE,
page 22. Withdrawal of part of the cash surrender value may have tax
consequences, see TAX TREATMENT OF CONTRACT BENEFITS, page 29.
CONTRACT DATE
When the first premium payment is paid with the application for a Contract, the
Contract Date will ordinarily be the later of the application date and the
medical examination date. If the first premium is not paid with the application,
the Contract Date will ordinarily be the date the first premium is paid and the
Contract is delivered. It may be advantageous for a Contract owner to have an
earlier Contract Date when that will result in Prudential using a lower issue
age in determining the Scheduled Premium amount. Prudential will permit a
Contract to be back-dated but only to a date not earlier than six months prior
to the date of the application. Prudential will require the payment of all
premiums that would have been due had the application date coincided with the
back-dated Contract Date. The 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, all Scheduled Premiums been received on their due dates,
and all Contract charges been made.
PREMIUMS
As explained earlier, the Contract will not lapse because of unfavorable
investment experience if you pay your Scheduled Premiums when due and take no
withdrawals or have no outstanding loans. If you pay premiums other than on a
monthly basis, you will receive a notice that a premium is due about three weeks
before each due date. If you pay premiums monthly, each year you will receive a
book with 12 coupons that will serve as a reminder. You may change the frequency
of premium payments with Prudential's consent.
You may elect to have monthly premiums paid automatically under the "Pru-Matic
Premium Plan" by pre-authorized transfers from a bank checking account. Some
Contract owners may also be eligible to have monthly premiums paid by pre-
authorized deductions from an employer's payroll.
Your Contract shows two Scheduled Premium amounts. The first or initial amount
is payable from the time you purchase your Contract until the Contract
anniversary immediately following your 65th birthday or the Contract's seventh
anniversary, whichever is later (the "Premium Change Date"). The second
Scheduled Premium Amount will be lower than the maximum amount stated in your
Contract if your Contract Fund, net of any excess premiums, on the Premium
Change Date is higher than it would have been had: (1) all Scheduled Premiums
been paid when due; (2) maximum contractual charges been deducted; and (3) only
a net rate of return of 4% been earned. We will tell you what your second
Scheduled Premium amount will be. For examples of what the second Scheduled
Premium might be, see Footnote 3 to the tables on pages T1 through T4.
A significant feature of this Contract is that it permits you to pay greater
than Scheduled Premiums. You may make unscheduled premium payments occasionally
or on a periodic basis. If you wish, you may select a higher contemplated
premium than the Scheduled Premium. Prudential will then bill you for the chosen
premium. In general,
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the regular payment of higher premiums will result in higher cash surrender
values and, at least under Form B, in higher death benefits. Conversely, a
Scheduled Premium does not need to be made if the Contract Fund is large enough
to enable the charges due under the Contract to be made without causing the
Contract to lapse. See Lapse and Reinstatement, page 24. The payment of premiums
in excess of Scheduled Premiums may cause the Contract to become a Modified
Endowment Contract for federal income tax purposes. If this happens, loans and
other distributions which would otherwise not be taxable events may be subject
to federal income taxation. See TAX TREATMENT OF CONTRACT BENEFITS, page 29.
If you choose to add a "rider" to your Contract that provides additional
benefits (see RIDERS, page 31), the Scheduled Premium may be increased. Some
riders provide additional term insurance in a stated amount that does not vary
with investment experience. One of these "term riders" also allows you to choose
different insurance amounts in different years. For these riders, you may choose
to pay a billed premium higher than your initial Scheduled Premium. Under some
circumstances, this could result in a higher cash surrender value and death
benefit than if the same premium had been paid under a Contract with the same
death benefit but without the rider. After several years, however, even if the
billed premiums are paid on time, the Contract could lose its guarantee against
lapse. It could also have lower cash surrender values after many more years.
You may choose a level premium option. In that case, the Scheduled Premium, (the
amount of which can be quoted by your Prudential representative), will be higher
and it will not increase at age 65 (or seven years after issue, if later). The
Contract will not lapse because of unfavorable investment experience if the
level Scheduled Premium is paid when due or within the grace period (or missed
premiums are paid later with interest) and there are no withdrawals.
Prudential will generally accept any premium payment of at least $25. Prudential
reserves the right to limit unscheduled premiums to a total of $10,000 in any
Contract year, and to refuse to accept premiums that would immediately result in
more than a dollar-for-dollar increase in the death benefit. See HOW A
CONTRACT'S DEATH BENEFIT WILL VARY, page 19. The flexibility of premium payments
provides Contract owners with different opportunities under the two Forms of the
Contract. Greater than scheduled payments under a Form A Contract increase the
Contract Fund. Greater than scheduled payments under a Form B Contract increase
both the Contract Fund and the death benefit. Generally, any future increases in
the Contract Fund will be less than under a Form A Contract because the monthly
mortality charges under the Form B Contract will be higher to compensate for the
higher amount of insurance. For all Contracts, the privilege of making large or
additional premium payments offers a way of investing amounts which accumulate
without current income taxation.
Unless you elect otherwise, your Contract will include a "waiver of premium"
provision under which Prudential will pay your Scheduled Premiums if you incur a
disability before age 60 that lasts over six months. If the disability begins
after you become 60 and before you are 65, premiums will be paid only until the
first Contract anniversary following your 65th birthday. The waiver of premium
provision does not apply if you become disabled after your 65th birthday.
ALLOCATION OF PREMIUMS
On the Contract Date, Prudential deducts a $2 processing charge and the charge
for taxes attributable to premiums from the initial premium, and the first
monthly charges are made. See CONTRACT FEES AND CHARGES, page 14. The remainder
of the initial premium will be allocated on the Contract Date among the
subaccounts, the fixed-rate option or the Real Property Account according to the
allocations you specified in the application form. The invested portion of any
part of the initial premium in excess of the Scheduled Premium is generally
placed in the selected investment options on the date of receipt at a Home
Office, but not earlier than the Contract Date. If Prudential receives the
initial premium prior to the Contract Date, there will be a period during which
it will not be invested. Each subsequent premium payment, after the deductions
from premiums, will be invested as of the end of the valuation period when
received at a Home Office in accordance with the allocation previously
designated. A valuation period is 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 4:15 p.m. Eastern time on each
day during which the New York Stock Exchange is open. 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. You may also change the way
in which subsequent premiums are allocated by telephoning a Home Office provided
you are enrolled to use the Telephone Transfer System. If any part of the
invested portion of a premium is allocated to a particular investment option,
that portion must be at least 10% on the date the allocation takes effect. All
percentage allocations must be in whole numbers. For example, 33% can be
selected but 33 1/3% cannot. Of course, the total allocation of all selected
investment options must equal 100%.
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TRANSFERS
If the Contract is not in default, or if the Contract is inforce as variable
reduced paid-up insurance (see LAPSE AND REINSTATEMENT, page 27), you may, up to
four times in each Contract year, transfer amounts from one subaccount to
another subaccount, to the fixed-rate option or to the Real Property Account.
Currently, you may make additional transfers with Prudential's consent. There is
no charge. All or a portion of the amount credited to a subaccount may be
transferred.
In addition, the total amount credited to a Contract held in the subaccounts or
the Real Property Account may be transferred to the fixed-rate option at any
time during the first two Contract years. If you wish to convert your variable
Contract to a fixed-benefit Contract in this manner, you must request a complete
transfer of funds to the fixed-rate option and also change your allocation
instructions regarding future premiums.
Transfers among subaccounts will take effect as of the end of the valuation
period (usually the business day) 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 your Contract is jointly
owned or if you elect not to have this privilege. Telephone transfers may not be
available on Contracts that are assigned (see ASSIGNMENT, page 31), depending on
the terms of the assignment. Prudential has adopted procedures designed to
ensure that requests by telephone are genuine. Prudential 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.
All the shares held by the Zero Coupon Bond subaccounts in the corresponding
portfolio of the Series Fund will be redeemed on the liquidation date of that
subaccount. 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]. A transfer that occurs
upon the liquidation date of a Zero Coupon Bond Subaccount will not be counted
as one of the four permissible transfers in a Contract year.
Transfers from the fixed-rate option to the subaccounts or the Real Property
Account are currently permitted once each Contract year and only during the 30-
day period beginning on the Contract anniversary. The maximum amount which may
be transferred out of the fixed-rate option each year is currently the greater
of: (a) 25% of the amount in the fixed-rate option, or (b) $2,000. Such transfer
requests received prior to the Contract anniversary will be effected on the
Contract anniversary. Transfer requests received within the 30-day period
beginning on the Contract anniversary will be effected as of the end of the
valuation period in which a proper transfer request is received at a Home
Office. Prudential may change these limits in the future. Transfers from the
Real Property Account are also subject to restrictions, and these restrictions
are described in the attached prospectus for that investment option.
The Contract was not designed for professional market timing organizations,
other organizations, or individuals using programmed, large, or frequent
transfers. A pattern of exchanges that coincides with a "market timing" strategy
may be disruptive to the subaccounts and will be discouraged. If such a pattern
were to be found, we may be required to modify the transfer procedures,
including but not limited to refusing transfer requests of an agent under a
power of attorney on behalf of more than one Contract owner.
DOLLAR COST AVERAGING
We offer a feature called Dollar Cost Averaging ("DCA"). If you wish, premiums
may be allocated to the portion of the Money Market Subaccount used for this
feature (the "DCA account"). Designated dollar amounts will be transferred
monthly from the DCA account to other investment options available under the
Contract, excluding the Money Market Subaccount and the fixed-rate option, but
including the Real Property Account. Automatic monthly transfers must be at
least 3% of the amount allocated to the DCA account (that is, if you designate
$5,000, the minimum monthly transfer is $150), with a minimum of $20 transferred
into any one investment option. These amounts are subject to change at
Prudential's discretion. The minimum transfer amount will only be recalculated
if the amount designated for transfer is increased.
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When you establish DCA at issue, you must allocate to the DCA account the
greater of $2,000 or 10% of the initial premium payment. When you establish DCA
after issue, you must allocate to the DCA account at least $2,000. These
minimums are subject to change at Prudential's discretion. After DCA has been
established and as long as the DCA account has a positive balance, you may
allocate or transfer amounts to the DCA account, generally subject to the
limitations on premium payments and transfers. In addition, if you pay premiums
on an annual or semi-annual basis, and you have already established DCA, your
premium allocation instructions may include an allocation of all or a portion of
all your premium payments to the DCA account.
Each automatic monthly transfer will take effect as of the end of the valuation
period on the Monthly Date, provided the New York Stock Exchange ("NYSE") is
open on that date. If the NYSE is not open on the Monthly Date, the transfer
will take effect as of the end of the valuation period on the next day that the
NYSE is open. If the Monthly Date does not occur in a particular month (e.g.,
February 30), the transfer will take effect as of the end of the valuation
period on the last day of the month that the NYSE is open. Automatic monthly
transfers will continue until the balance in the DCA account reaches zero, or
until the Contract owner gives notification of a change in allocation or
cancellation of the feature. If you have an outstanding premium allocation to
the DCA account, but your DCA option has previously been canceled, premiums
allocated to the DCA account will be allocated to the Money Market Subaccount.
Currently there is no charge for using the DCA feature.
CONTRACT FEES AND CHARGES
This section provides a more detailed description of each charge that is
described briefly in the chart on page 3.
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,
we reserve the right to increase each current charge, up to the maximum charge,
without giving any advance notice.
A Contract owner may add several "riders" to the Contract which provide
additional benefits and are charged for separately. The statement and
description of charges that follows assumes there are no riders to the Contract.
DEDUCTIONS FROM PREMIUMS
(a) We deduct a charge for taxes attributable to premiums from each premium
payment. That charge is currently made up of two parts. The first part is a
charge for state and local premium-based taxes. The tax rate varies from state
to state, generally ranging from 0.75% to 5% (in some instances may exceed 5%)
of the premium received by Prudential. The second part is a charge for federal
income taxes measured by premiums, and it is equal to 1.25% of the premium. We
believe 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 1998, 1997, and 1996, Prudential
deducted a total of approximately $35,946,000, $36,591,000, and $24,941,000,
respectively, in taxes attributable to premiums.
(b) We deduct a charge of $2 from each premium payment to cover the cost of
collecting and processing premiums. Thus, if you pay premiums annually, this
charge will be $2 per year. If you pay premiums monthly, the charge will be $24
per year. If you pay premiums more frequently, for example under a payroll
deduction plan with your employer, the charge may be more than $24 per year.
During 1998, 1997, and 1996, Prudential received a total of approximately
$18,557,000, $18,692,000, and $31,475,000, respectively, in processing
charges.
DEDUCTIONS FROM PORTFOLIOS
We deduct an investment advisory fee 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.
14
<PAGE>
The total expenses of each portfolio for the year ended December 31, 1998,
expressed as a percentage of the average assets during the year, are shown
below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
INVESTMENT OTHER EXPENSES TOTAL EXPENSES
PORTFOLIO ADVISORY (AFTER EXPENSE (AFTER EXPENSE
FEE REIMBURSEMENT)* REIMBURSEMENT)*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market 0.40% 0.01% 0.41%
Diversified Bond 0.40% 0.02% 0.42%
Government Income 0.40% 0.03% 0.43%
Zero Coupon Bond 2000 0.40% 0.00%* 0.40%*
Zero Coupon Bond 2005 0.40% 0.00%* 0.40%*
Conservative Balanced 0.55% 0.02% 0.57%
Flexible Managed 0.60% 0.01% 0.61%
High Yield Bond 0.55% 0.03%* 0.58%*
Stock Index 0.35% 0.02%* 0.37%*
Equity Income 0.40% 0.02%* 0.42%*
Equity 0.45% 0.02% 0.47%
Prudential Jennison 0.60% 0.03% 0.63%
Small Capitalization Stock 0.40% 0.07% 0.47%
Global 0.75% 0.11% 0.86%
Natural Resources 0.45% 0.04%* 0.49%*
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* For some of the portfolios, the actual expenses were higher than those shown
in the second and third columns. Prudential currently makes payments to the
following six subaccounts so that the portfolio expenses indirectly borne bya
Contract owner investing in: (1) the Zero Coupon Bond Portfolios will not
exceed the investment advisory fee; and (2) the High Yield Bond, Stock Index,
Equity Income, and Natural Resources Portfolios will not exceed the investment
advisory fee plus 0.1% of the average daily net assets of the Portfolio.
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 0.62% for the Zero Coupon Bond Portfolio 2000 and
0.61% for the Zero Coupon Bond Portfolio 2005 during 1998. No adjustment was
necessary for the High Yield Bond Portfolio, the Stock Index Portfolio, the
Equity Income Portfolio or the Natural Resources Portfolio during 1998.
Prudential intends to continue these adjustments in the future, although we
retain the right to discontinue them.
MONTHLY DEDUCTIONS FROM CONTRACT FUND
Prudential deducts the following monthly charges proportionately from the dollar
amounts held in each of the chosen investment option[s].
(a) An administrative charge of $3 plus $0.03 per $1,000 per month of face
amount of insurance is deducted each month. Thus, for a Contract with $75,000
face amount, the charge is $3 plus $2.25 for a total of $5.25. The charge is
intended to pay for processing claims, keeping records, and communicating with
Contract owners. The current charge for Contracts with face amounts greater than
$100,000 is lower. The $0.03 per $1,000 portion of the charge is reduced to
$0.01 per $1,000 for that part of the face amount that exceeds $100,000 and will
not exceed $12. During 1998, 1997, and 1996, Prudential received a total of
approximately $63,674,000, $63,019,000, and $61,196,000, respectively, in
monthly administrative charges.
(b) A mortality charge is deducted that is intended to be used to pay death
benefits. When an insured dies, the amount payable to the beneficiary is larger
than the Contract Fund and significantly larger if the insured dies in the early
years of a Contract. The mortality charges collected from all Contract owners
enables Prudential to pay the death benefit for the few insureds who die. We
determine the maximum mortality charge by multiplying the "net amount at risk"
under a Contract (the amount by which the Contract's death benefit exceeds the
Contract Fund) by a rate based upon the insured's current attained age and sex
(except where unisex rates apply) and the anticipated mortality for that class
of persons. The anticipated mortality is based upon mortality tables published
by The National Association of Insurance Commissioners called the Non-
Smoker/Smoker 1980 CSO Tables. Generally, Prudential's current mortality charge
is lower than the maximum for insureds 32 years of age and older. In addition,
for insureds of
15
<PAGE>
all ages, if a Contract has a face amount of at least $100,000, the insured
under the Contract has met strict underwriting requirements and qualifies for a
"select rating" basis for the particular risk classification, the current
mortality charges may be lower still.
Certain Contracts, for example Contracts issued in connection with tax-qualified
pension plans, may be issued on a "guaranteed issue" basis and may have current
mortality charges which are different from those mortality charges for Contracts
which are individually underwritten. These Contracts with different current
mortality charges may be offered to categories of individuals meeting
eligibility guidelines determined by Prudential.
(c) A sales charge, often called a "sales load", is deducted to pay part of the
costs of selling the Contracts, including commissions, advertising, and the
printing and distribution of prospectuses and sales literature. The charge is
equal to 0.5% of the "primary annual premium". The primary annual premium is
equal to the Scheduled Premium that would be payable if premiums were being paid
annually, less the two deductions from premiums (taxes attributable to premiums
and the $2 processing charge), and less the $3 part of the monthly deduction
described in (a) above. The sales load is charged whether the Contract owner is
paying premiums annually or more frequently. It is lower on Contracts issued on
insureds over 60 years of age. At present this sales charge is made only during
the first five Contract years. However, Prudential reserves the right to make
this charge in all Contract years. To summarize, for most Contracts, this charge
is somewhat less than 6% of the annual Scheduled Premium for each of the first
five Contract years and it may, but probably will not, continue to be charged
after that. During 1998, 1997, and 1996, Prudential received a total of
approximately $86,395,000, $95,201,000, and $104,023,000, in sales charges.
There is a second sales load, which will be charged only if a Contract lapses or
is surrendered before the end of the 10th Contract year. It is often described
as a contingent deferred sales load ("CDSL") and is described under SURRENDER OR
WITHDRAWAL CHARGES, page 17.
(d) A charge of $0.01 per $1,000 of face amount of insurance is made to
compensate us for the risk we assume by guaranteeing that, no matter how
unfavorable investment experience may be, the death benefit will never be less
than the guaranteed minimum death benefit, so long as Scheduled Premiums are
paid on or before the due date or during the grace period. This charge and the
administrative charge described in (a) above may be calculated together. During
1998, 1997, and 1996, Prudential received a total of approximately $13,470,000,
$13,673,000, and $13,527,000, respectively, for this risk charge.
(e) If a rider is added to the basic Contract, or if an insured is in a
substandard risk classification (for example, a person in a hazardous
occupation), we increase the Scheduled Premium and the additional charges will
be deducted monthly.
(f) A charge may be deducted to cover federal, state or local taxes (other than
"taxes attributable to premiums" described above) that are imposed upon the
operations of the Account. At present no such taxes are imposed and no charge is
made.
The earnings of the Account are taxed as part of the operations of Prudential.
No charge is being made currently to the Account for Company federal income
taxes. Prudential reviews the question of a charge to the Account for Company
federal income taxes periodically. We may make such a charge in future years for
any federal income taxes that would be attributable to the Contracts.
DAILY DEDUCTION FROM THE CONTRACT FUND
Each day we deduct a charge from the assets of each of the subaccounts and/or
the Real Property Account (the "variable investment options") in an amount
equivalent to an effective annual rate of 0.9%. For Contracts with face amounts
of $100,000 or more, the current charge is 0.6%. This charge is intended to
compensate us for assuming mortality and expense risks under the Contract. The
mortality risk assumed is that insureds may live for shorter periods of time
than we 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 1998, 1997, and 1996, Prudential received a total of approximately
$21,126,000, $18,891,000, and $14,434,000, respectively, in mortality and
expense risk charges. This charge is not assessed against amounts allocated to
the fixed-rate option.
16
<PAGE>
SURRENDER OR WITHDRAWAL CHARGES
(a) Prudential charges additional sales load, the contingent deferred sales load
("CDSL"), if the Contract lapses or is surrendered during the first 10 Contract
years, or if a withdrawal is made under a Form A Contract during that 10 year
period. No such charge is applicable to the death benefit, no matter when it may
become payable. Subject to the additional limitations described below, for
Contracts that lapse or are surrendered during the first five Contract years the
charge will be equal to 50% of the first year's primary annual premium. The
primary annual premium is equal to the Scheduled Premium that would be payable
if premiums were being paid annually, less the two deductions from premiums
(taxes attributable to premiums and the $2 processing charge), and less the $3
part of the monthly administrative charge. In the next five Contract years that
percentage is reduced uniformly on a daily basis until it reaches zero on the
10th Contract anniversary. Thus, for Contracts surrendered at the end of the
sixth year, the maximum deferred sales charge will be 40% of the first year's
primary annual premium, for Contracts surrendered at the end of year seven, the
maximum deferred sales charge will be 30% of the first year's primary annual
premium, and so forth.
The contingent deferred sales load is also subject to a further limit at older
issue ages (approximately above age 67) in order to comply with certain
requirements of state law. Specifically, the contingent deferred sales load for
such insureds is no more than $32.50 per $1,000 of face amount.
The sales load is subject to a further important limitation that may,
particularly for Contracts that lapse or are surrendered within the first five
or six years, result in a lower contingent deferred sales load than that
described above. (This limitation might also, under unusual circumstances, apply
to reduce the monthly sales load deductions described in item (c) under MONTHLY
DEDUCTIONS FROM CONTRACT FUND, page 15.)
The limitation is based on a Guideline Annual Premium ("GAP") that is associated
with every Contract. The GAP is an amount, generally larger than the gross
annual Scheduled Premium for the Contract, determined actuarially in accordance
with a definition set forth in a regulation of the Securities and Exchange
Commission. The maximum aggregate sales load that Prudential will charge (that
is, the sum of the monthly sales load deduction and the contingent deferred
sales charge) will not be more than 30% of the premiums actually paid until
those premiums total one GAP plus no more than 9% of the next premiums paid
until total premiums are equal to five GAPS, plus no more than 6% of all
subsequent premiums. If the sales charges described above would at any time
exceed this maximum amount then the charge, to the extent of any excess, will
not be made.
The following table shows the sales loads that would be paid by a 35 year old
man under a Form B Contract with $100,000 face amount of insurance, both through
the monthly deductions from the Contract Fund described above and upon the
surrender of the Contract. If the Contract is partially surrendered or the face
amount is decreased during the first 10 years, a proportionate amount of the
contingent deferred sales charge will be deducted from the Contract Fund.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
CUMULATIVE
SURRENDER, CUMULATIVE CUMULATIVE CONTINGENT TOTAL TOTAL SALES LOAD
LAST DAY OF SCHEDULED PREMIUMS SALES LOAD DEDUCTED DEFERRED SALES SALES LOAD AS PERCENTAGE OF
YEAR NO. PAID FROM CONTRACT FUND LOAD SCHEDULED
PREMIUMS PAID
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 $ 894.06 $ 49.56 $218.66 $268.22 30.00%
2 1,788.12 99.12 367.64 466.76 26.10%
3 2,682.18 148.68 398.55 547.23 20.40%
4 3,576.24 198.24 414.00 612.24 17.12%
5 4,470.30 247.80 414.00 661.80 14.80%
6 5,364.36 247.80 331.00 578.80 10.79%
7 6,258.42 247.80 248.00 495.80 7.92%
8 7,152.48 247.80 166.00 413.80 5.79%
9 8,046.54 247.80 83.00 330.80 4.11%
10 8,940.60 247.80 0.00 247.80 2.77%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
The percentages shown in the last column will not be appreciably different for
insureds of different ages.
(b) Prudential deducts an administrative charge of $5 per $1,000 of face amount
of insurance upon lapse or surrender to cover the cost of processing
applications, conducting medical examinations, determining insurability and the
insured's rating class, and establishing records. However, this charge is
reduced beginning on the Contract's fifth anniversary and declines daily at a
constant rate until it disappears entirely on the 10th Contract anniversary. If
the Contract is partially surrendered or the face amount is decreased during the
first 10 years, we will deduct a proportionate amount of the charge from the
Contract Fund. During 1998, 1997, and 1996, Prudential received a total of
approximately $8,569,000, $8,959,000, and $9,713,000, respectively, from
surrendered or lapsed Contracts.
TRANSACTION CHARGES
Prudential charges a fee for certain transactions. For example, if the face
amount of insurance is decreased or part of the cash surrender value is
withdrawn. The fee will generally be $15 or less. Currently, we waive the fee in
some instances. These fees are further described in this prospectus.
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS
Prudential may reduce the sales charges and/or other charges on individual
Contracts sold to members of a class of associated individuals, or to a trustee,
employer or other entity representing such a class, where it is expected that
such multiple sales will result in savings of sales or administrative expenses.
Prudential determines both the eligibility for such reduced charges, as well as
the amount of such reductions, by considering the following factors: (1) the
number of individuals; (2) the total amount of premium payments expected to be
received from these Contracts; (3) the nature of the association between these
individuals, and the expected persistency of the individual Contracts; (4) the
purpose for which the individual Contracts are purchased and whether that
purpose makes it likely that expenses will be reduced; and (5) any other
circumstances which Prudential believes to be relevant in determining whether
reduced sales or administrative expenses may be expected. Some of the reductions
in charges for these sales may be contractually guaranteed; other reductions may
be withdrawn or modified by Prudential on a uniform basis. Prudential's
reductions in charges for these sales will not be unfairly discriminatory to the
interests of any individual Contract owners.
HOW THE CONTRACT FUND CHANGES WITH INVESTEMENT EXPERIENCE
As explained earlier, after the 10th Contract year (and 10 years from an
increase in face amount), there will no longer be a surrender charge and, if
there is no Contract loan, the cash surrender value will be equal to the
Contract Fund. This section, therefore, also describes how the cash surrender
value of the Contract will change with investment experience.
On the Contract Date, the Contract Fund value is the initial premium less the
deductions from premiums and the first monthly deductions. See CONTRACT FEES AND
CHARGES, page 14. This amount is placed in the investment options you chose.
Thereafter the Contract Fund value changes daily, reflecting increases or
decreases in the value of the securities in which the assets of the subaccount
have been invested, the performance of the Real Property Account if that option
has been selected, and interest credited on any amounts allocated to the fixed-
rate option. It is also reduced by the daily asset charge for mortality and
expense risks assessed against the variable investment options. The Contract
Fund value also increases to reflect the receipt of additional premium payments
and is decreased by the monthly deductions.
A Contract's cash surrender value on any date will be the Contract Fund value
reduced by the withdrawal charges, if any, and by any Contract debt. Upon
request, Prudential will tell you the cash surrender value of your Contract. It
is possible, although highly unlikely, that the cash surrender value of a
Contract could decline to zero because of unfavorable investment performance,
even if you continue to pay Scheduled Premiums when due.
The tables on pages T1 through T4 of this prospectus illustrate what the death
benefit and cash surrender values would be for a representative Contract,
assuming uniform hypothetical investment results in the selected portfolio[s],
and also provide information about the aggregate premiums payable under the
Contract. The tables also show, if the level premium option has not been chosen,
the maximum Scheduled Premium that may be payable for the period after the
insured reaches the age of 65 for the illustrated Contract under each of the
assumed investment returns.
18
<PAGE>
HOW A CONTRACT'S DEATH BENEFIT WILL VARY
As explained earlier, there are two Forms of the Contract, Form A and Form B.
The death benefit under a Form B Contract varies with investment performance
while the death benefit under a Form A Contract does not, unless it must be
increased to satisfy tax requirements.
Under a Form A Contract, the guaranteed minimum death benefit is equal to the
face amount of insurance. However, should the death benefit become payable while
a Contract loan is outstanding, the debt will be deducted from the death
benefit. If the Contract is kept inforce for several years and if investment
performance is reasonably favorable, the Contract Fund value may grow to the
point where it is necessary to increase the death benefit in order for the
Contract to satisfy the Internal Revenue Code's definition of life insurance.
Thus, the death benefit under a Form A Contract will always be the greater of
(1) the guaranteed minimum death benefit; and (2) the Contract Fund divided by
the "net single premium" per $1 of death benefit at the insured's attained age
on that date. The latter provision ensures that the Contract will always have a
death benefit large enough to be treated as life insurance for tax purposes
under current law. The net single premium is used only in the calculation of the
death benefit, not for premium payment purposes. The following is a table of
illustrative net single premiums for $1 of death benefit under Contracts issued
on insureds in the preferred rating class.
- --------------------------------------------------------------------------------
INCREASE IN INSURANCE
MALE NET SINGLE AMOUNT PER $1
ATTAINED AGE PREMIUM INCREASE IN CONTRACT FUND
- --------------------------------------------------------------------------------
5 .09151 $10.93
25 .17000 $ 5.88
35 .23700 $ 4.22
55 .45209 $ 2.21
65 .59468 $ 1.68
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INCREASE IN INSURANCE
FEMALE NET SINGLE AMOUNT PER $1
ATTAINED AGE PREMIUM INCREASE IN CONTRACT FUND
5 .07919 $12.63
25 .15112 $ 6.62
35 .21127 $ 4.73
55 .40090 $ 2.49
65 .53639 $ 1.86
- --------------------------------------------------------------------------------
Whenever the death benefit is determined in this way, Prudential reserves the
right to limit unscheduled premiums to a total of $10,000 in any Contract year
and to refuse to accept premium payments that would immediately result in more
than a dollar-for-dollar increase in the death benefit.
Under a Form B Contract, the death benefit will vary with investment experience.
Assuming no withdrawals, the death benefit will be equal to the face amount of
insurance plus the amount (if any) by which the Contract Fund value exceeds the
applicable "Tabular Contract Fund Value" for the Contract (subject to an
exception described below under which the death benefit is higher). Each
Contract contains a table that sets forth the Tabular Contract Fund Value as of
the end of each of the first 20 years of the Contract. The Tabular Contract Fund
Value for each Contract year is an amount that is slightly less than the
Contract Fund value that would result as of the end of such year if: (1) you
paid only Scheduled Premiums; (2) you paid premiums when due; (3) your selected
investment options earned a net return at a uniform rate of 4% per year; (4) we
deducted full mortality charges based upon the 1980 CSO Table; (5) we deducted
the maximum sales load and expense charges; and (6) there was no Contract
debt.
19
<PAGE>
Thus, under a Form B Contract with no withdrawals, the death benefit will equal
the face amount if the Contract Fund equals the Tabular Contract Fund Value. If
the Contract Fund value is a given amount greater than the Tabular Contract Fund
Value, the death benefit will be the face amount plus that excess amount. This
may happen if: (1) investment results are greater than a 4% net return; (2)
payments are made that are more than the Scheduled Premiums; or (3) smaller than
maximum charges are assessed.
The death benefit under a Form B Contract will not fall below the initial face
amount stated in the Contract if, due to investment results less favorable than
a 4% net return, the Contract Fund value is less than the Tabular Contract Fund
Value. Any unfavorable investment experience must first be offset by favorable
performance or additional payments that bring the Contract Fund up to the
Tabular level before favorable investment results or additional payments will
increase the death benefit. Again, the death benefit will reflect a deduction
for the amount of any Contract debt. See CONTRACT LOANS, page 26.
As is the case under a Form A Contract, the Contract Fund of a Form B Contract
could grow to the point where it is necessary to increase the death benefit in
order to ensure that the Contract will satisfy the Internal Revenue Code's
definition of life insurance. Thus, the death benefit under a Form B Contract
will always be the greater of (1) the face amount plus the Contract Fund minus
the Tabular Contract Fund Value; (2) the guaranteed minimum death benefit; and
(3) the Contract Fund divided by the net single premium per $1 of death benefit
at the insured's attained age on that date.
You may also increase or decrease the face amount of your Contract, subject to
certain conditions. See INCREASES IN FACE AMOUNT, below and DECREASES IN FACE
AMOUNT, page 21.
INCREASES IN FACE AMOUNT
You may increase your amount of insurance by increasing the face amount of the
Contract (which is also the guaranteed minimum death benefit), subject to state
approval and underwriting requirements determined by Prudential. An increase in
face amount is similar to the purchase of a second Contract. It differs in the
following respects: (1) the minimum permissible increase is $25,000, while the
minimum for a new Contract is $75,000; (2) monthly fees are lower because only a
single $3 per month administrative charge is made rather than two; (3) a
combined premium payment results in deduction of a single $2 per premium
processing charge while separate premium payments for separate Contracts would
involve two charges; (4) the monthly expense charge of $0.03 per $1,000 of face
amount may be lower if the increase is to a face amount greater than $100,000;
and (5) the Contract will lapse as a unit, unlike the case if two separate
Contracts are purchased. These differences aside, the decision to increase face
amount is comparable to the purchase of a second Contract in that it involves a
commitment to higher Scheduled Premiums in exchange for greater insurance
benefits.
You may increase the face amount of your Contract no earlier than the first
anniversary of the Contract. The following conditions must be met: (1) you must
ask for the increase in writing on an appropriate form; (2) the amount of the
face amount increase must be at least $25,000; (3) the insured must supply
evidence of insurability for the increase satisfactory to Prudential; (4) if we
request, you must send in the Contract to be endorsed; (5) the Contract must not
be in default on the date the increase takes effect; (6) you must pay an
appropriate premium at the time of the increase; (7) Prudential has the right to
deny more than one increase in a Contract year; and (8) if between the Contract
Date and the date that your requested increase in face amount would take effect,
Prudential has changed any of the bases on which benefits and charges are
calculated for newly issued Contracts, then we have the right to deny the
increase. An increase in face amount resulting in a total face amount of at
least $100,000 may render the Contract eligible for a select rating if the
insured has met strict underwriting requirements and is a non-smoker.
Upon an increase in face amount, Prudential will recompute the Contract's
Scheduled Premiums, contingent deferred sales and administrative charges,
Tabular values, and monthly deductions from the Contract Fund. You may choose,
limited only by applicable state law, whether the recomputation will be made as
of the prior or next Contract anniversary. A payment will be required on the
date of increase. The amount of the payment will depend, in part, on which
Contract anniversary you select for the recomputation. Prudential will tell you
the amount of the required payment. It should also be noted that an increase in
face amount may cause the Contract to be classified as a Modified Endowment
Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 29. Therefore, before
increasing the face amount, you should consult with your Prudential
representative.
20
<PAGE>
If the increase is approved, the new insurance will take effect once Prudential
receives the proper forms, any medical evidence necessary to underwrite the
additional insurance, and any amount needed by the company.
We will supply you with pages which show the increased face amount, the
effective date of the increase, and the recomputed items described earlier. The
pages will also describe how the face amount increase affects various provisions
of the Contract. Including a statement that, for the amount of the increase in
face amount, the period stated in the INCONTESTABILITY and SUICIDE provisions
(see OTHER GENERAL CONTRACT PROVISIONS, page 31) will run from the effective
date of the increase.
In order to determine the sales load that will be charged after the increase and
upon any subsequent lapse or surrender, the Contract is treated like two
separate Contracts. A "base Contract" representing the Contract before the
increase and an "incremental Contract" representing the increase viewed as a
separate Contract. At the time of the increase, a certain portion of the
Contract Fund may be allocated to the incremental Contract as a prepayment of
premiums for purposes of the sales load limit. That portion is equal to the
Guideline Annual Premium ("GAP") of the incremental Contract divided by the GAP
of the entire Contract after the increase. Premium payments made after the
increase are also allocated between the base Contract and the incremental
Contract for purposes of the sales load limit. A portion of each premium payment
after the increase is allocated to the increase based on the GAP for the
incremental Contract divided by the GAP for the entire Contract. A monthly
deduction equal to 0.5% of the primary annual premium for each part of the
Contract (i.e., the base and incremental Contracts, respectively) will be made
until each part of the Contract has been inforce for five years, although
Prudential reserves the right to continue to make this deduction thereafter.
Similarly, the amount, if any, of sales charges upon lapse or surrender and the
application of the overall limitation upon sales load, as described in item (a)
under SURRENDER OR WITHDRAWAL CHARGES, page 17, will be determined as explained
in that section as if there were two Contracts rather than one. Moreover, the
contingent deferred administrative charge is also determined as if there were
two separate Contracts. Thus, an owner considering an increase in face amount
should be aware that such an increase will entail charges, including periodic
sales load deductions and contingent deferred sales and administrative charges,
comparable to the purchase of a new Contract.
Each Contract owner who elects to increase the face amount of his or her
Contract will be granted a "free-look" right which will apply only to the
increase in face amount, not the entire Contract. The right is comparable to the
right afforded to a purchaser of a new Contract. See SHORT-TERM CANCELLATION
RIGHT OR "FREE LOOK", page 10. The "free-look" right would have to be exercised
no later than 45 days after execution of the application for the increase or, if
later, within 10 days after either receipt of the Contract as increased or
receipt of the withdrawal right notice by the owner. Upon exercise of the "free-
look" right, you will receive a refund in the amount of the aggregate premiums
paid since the increase was requested and attributable to the increase, not the
base Contract, as determined pursuant to the proportional premium allocation
rule described earlier. There will be no adjustment for investment experience.
All charges deducted after the increase will be reduced to what they would have
been had no increase been effected. You may transfer the total amount
attributable to the increase in face amount from the subaccounts or the Real
Property Account to the fixed-rate option at any time within two years after the
increase in face amount.
DECREASES IN FACE AMOUNT
You may make a partial surrender of a Contract (see SURRENDER OF A CONTRACT,
page 22) or a partial withdrawal of excess cash surrender value (see WITHDRAWAL
OF EXCESS CASH SURRENDER VALUE, page 22). You also have the additional option of
decreasing the face amount (which is also the guaranteed minimum death benefit)
of your Contract without withdrawing any such surrender value. Contract owners
who conclude that, because of changed circumstances, the amount of insurance is
greater than needed will be able to decrease their amount of insurance
protection, and the monthly deductions for the cost of insurance, without
decreasing their current cash surrender value. The cash surrender value of the
Contract on the date of the decrease will not change, except that an
administrative processing fee of $15 may be deducted from that value (unless
that fee is separately paid at the time the decrease in face amount is
requested). Your Contract Fund value, however, will be reduced by deduction of a
proportionate part of the contingent deferred sales and administrative charges,
if any. Scheduled Premiums for the Contract will also be proportionately
reduced. Contracts with a reduced face amount will be amended to show the new
face amount, tabular values, Scheduled Premiums, monthly charges, and, if
applicable, the remaining contingent deferred sales and administrative
charges.
The minimum permissible decrease is $10,000. A decrease will not be permitted if
it causes the face amount of the Contract to drop below the minimum face amount
applicable to the Contract. See REQUIREMENTS FOR ISSUANCE OF A
21
<PAGE>
CONTRACT, page 10. A reduction will not 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 Contract is no longer eligible for the select
rating if the face amount is reduced below $100,000.
It is important to note, however, that if the face amount is decreased there is
a danger the Contract might be classified as a Modified Endowment Contract. See
TAX TREATMENT OF CONTRACT BENEFITS, page 29. Before requesting any decreases in
face amount, you should consult your Prudential representative.
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE
Under certain circumstances, you may withdraw a portion of the Contract's cash
surrender value without surrendering the Contract. The withdrawal amount is
limited by the requirement that the Contract Fund after withdrawal must not be
less than the tabular Contract Fund value. (A Table of Tabular Contract Fund
Values is included in the Contract; the values increase with each year the
Contract remains inforce.) Because the Contract Fund may be made up in part by
an outstanding Contract loan, there is a further limitation that the amount
withdrawn may not be larger than an amount sufficient to reduce the cash
surrender value to zero. The amount withdrawn must be at least $2,000 under a
Form A Contract (in which the death benefit is generally equal to the face-
amount of insurance) and at least $500 under a Form B Contract (in which the
death benefit varies daily). You may make no more than four withdrawals in each
Contract year, and there is an administrative processing fee for each withdrawal
equal to the lesser of $15 and 2% of the amount withdrawn. An amount withdrawn
may not be repaid except as a scheduled or unscheduled premium subject to the
applicable charges. Upon request, Prudential will tell you how much you may
withdraw. Withdrawal of part of the cash surrender value may have tax
consequences. SEE TAX TREATMENT OF CONTRACT BENEFITS, page 29. A temporary need
for funds may also be met by making a loan and you should consult your
Prudential representative about how best to meet your needs.
Under a Form A Contract, the face amount of insurance is reduced by no more than
the withdrawal amount. No partial withdrawal will be permitted under a Form A
Contract if it would result in a new face amount of less than the minimum face
amount applicable to the insured's Contract. See REQUIREMENTS FOR ISSUANCE OF a
CONTRACT, page 10. If the face amount is decreased, there is a danger that the
Contract might be classified as a Modified Endowment Contract. See TAX TREATMENt
OF CONTRACT BENEFITS, page 29. Before making any withdrawal which causes a
decrease in face amount, you should consult your Prudential representative.
Also, if a withdrawal under a Form A Contract is made before the end of the 10th
year, the Contract Fund may be reduced not only by the amount withdrawn but also
by a proportionate amount of any surrender charges that would be made if the
Contract were surrendered. The proportion is based on the percentage reduction
in face amount. Form A Contract owners who make a partial withdrawal will be
sent replacement Contract pages showing the new face amount, Scheduled Premiums,
maximum surrender charges, Tabular values, and monthly deductions.
Under a Form B Contract, the cash surrender value and Contract Fund value are
reduced by the amount of the withdrawal, and the death benefit is reduced
accordingly. Neither the face amount of insurance nor the amount of Scheduled
Premiums will be changed due to a withdrawal of excess cash surrender value
under a Form B Contract. No surrender charges will be assessed for a withdrawal
under a Form B Contract.
Withdrawal of part of the cash surrender value increases the risk that the
Contract Fund may be insufficient to provide Contract benefits. If such a
withdrawal is followed by unfavorable investment experience, the Contract may
lapse even if Scheduled Premiums continue to be paid when due. This is because,
for purposes of determining whether a lapse has occurred, Prudential treats
withdrawals as a return of premium.
SURRENDER OF A CONTRACT
You may surrender a Contract, in whole or in part, for its cash surrender value
while the insured is living. A partial surrender involves splitting the Contract
into two Contracts. One Contract is surrendered for its cash surrender value;
the other is continued inforce on the same terms as the original Contract except
that premiums will be based on the new face amount. You will be given a new
Contract document. The cash surrender value and the guaranteed minimum death
benefit of the new Contract will be proportionately reduced based upon the
reduction in the face amount of insurance. The new Contract must have a face
amount of insurance at least equal to the minimum face amount applicable to the
insured. Otherwise a partial surrender is not permitted. See REQUIREMENTS FOR
ISSUANCE OF A CONTRACT, page 10.
22
<PAGE>
To surrender a Contract, in whole or in part, you must deliver or mail it,
together with a written request in a form that meets Prudential's needs, to a
Home Office. The cash surrender value of a surrendered or partially surrendered
Contract (taking into account the deferred sales and administrative charges, if
any) will be determined as of the end of the valuation period in which such a
request is received in a Home Office. Surrender of all or part of a Contract may
have tax consequences. SEE TAX TREATMENT OF CONTRACT BENEFITS, page 29.
WHEN PROCEEDS ARE PAID
Prudential will generally pay any death benefit, cash surrender value, loan
proceeds or withdrawal within seven days after all the documents required for
such a payment are received at a Home Office. Other than the death benefit,
which is determined as of the date of death, the amount will be determined as of
the end of the valuation period in which the necessary documents are received at
a Home Office. However, Prudential may delay payment of proceeds from the
subaccount[s] and the variable portion of the death benefit due under the
Contract if the sale 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, and with respect to a Contract inforce as fixed reduced paid-up
insurance, Prudential expects to pay the cash surrender value promptly upon
request. However, Prudential has the right to delay payment of such cash
surrender value for up to six months (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).
LIVING NEEDS BENEFIT
You may elect to add the LIVING NEEDS BENEFIT/SM/ to your Contract at issue. The
benefit may vary by state. There is no charge for adding the benefit to the
Contract. However, an administrative charge (not to exceed $150) will be made at
the time the LIVING NEEDS BENEFIT is paid.
Subject to state regulatory approval, the LIVING NEEDS BENEFIT allows you to
elect to receive an accelerated payment of all or part of the Contract's death
benefit, adjusted to reflect current value, at a time when certain special needs
exist. The adjusted death benefit will always be less than the death benefit,
but will generally be greater than the Contract's cash surrender value. One or
both of the following options may be available. A Prudential representative
should be consulted as to whether additional options may be available.
TERMINAL ILLNESS OPTION. This option is available if the insured is diagnosed as
terminally ill with a life expectancy of six months or less. When satisfactory
evidence is provided, Prudential will provide an accelerated payment of the
portion of the death benefit selected by the Contract owner as a LIVING NEEDS
BENEFIT. The Contract owner may (1) elect to receive the benefit in a single sum
or (2) receive equal monthly payments for six months. If the insured dies before
all the payments have been made, the present value of the remaining payments
will be paid to the beneficiary designated in the LIVING NEEDS BENEFIT claim
form in a single sum.
NURSING HOME OPTION. This option is available after the insured has been
confined to an eligible nursing home for six months or more. When satisfactory
evidence is provided, including certification by a licensed physician, that the
insured is expected to remain in the nursing home until death, Prudential will
provide an accelerated payment of the portion of the death benefit selected by
the Contract owner as a LIVING NEEDS BENEFIT. The Contract owner may (1) elect
to receive the benefit in a single sum or (2) receive equal monthly payments for
a specified number of years (not more than 10 nor less than two), depending upon
the age of the insured. If the insured dies before all of the payments have been
made, the present value of the remaining payments will be paid to the
beneficiary designated in the LIVING NEEDS BENEFIT claim form in a single
sum.
All or part of the Contract's death benefit may be accelerated under the LIVING
NEEDS BENEFIT. If the benefit is only partially accelerated, a death benefit of
at least $25,000 must remain under the Contract. Prudential reserves the right
to determine the minimum amount that may be accelerated.
No benefit will be payable if the Contract owner is required to elect it in
order to meet the claims of creditors or to obtain a government benefit.
Prudential can furnish details about the amount of LIVING NEEDS BENEFIT that is
available to an eligible Contract owner, and the adjusted premium payments that
would be in effect if less than the entire death benefit is accelerated.
23
<PAGE>
You should consider whether adding this settlement option is appropriate in your
given situation. Adding the LIVING NEEDS BENEFIT to the Contract has no adverse
consequences; however, electing to use it could. With the exception of certain
business-related policies, the LIVING NEEDS BENEFIT is excluded from income if
the insured is terminally ill or chronically ill as defined in the tax law
(although the exclusion in the latter case may be limited). You should consult a
qualified tax adviser before electing to receive this benefit. Receipt of a
LIVING NEEDS BENEFIT payment may also affect your eligibility for certain
government benefits or entitlements.
HYOTHETICAL ILLUSTRATIONS OF DEATH AND CASH SURRENDER VALUE
The following four tables show how a Contract's 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 which
are described below. All four tables assume the following:
o a Contract with a face amount of $100,000 bought on or after December 31,
1998 by a 35 year old male, select, non-smoker, with no extra risks or
substandard ratings, and no extra benefit riders added to the Contract.
o the Scheduled Premium of $894.06 is paid on each Contract anniversary, the
deduction for taxes attributable to premiums is 3.25% and no loans are
taken.
o 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 or the Real Property
Account.
The tables are not applicable to Contracts issued on a guaranteed issue basis or
to Contracts where the risk classification is on a multiple life basis.
The first table (page T1) assumes a Form A Contract has been purchased and the
second table (page T2) assumes a Form B Contract has been purchased. Both assume
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 it is
assumed that the maximum contractual charges have been made from the beginning.
See CONTRACT FEES AND CHARGES, page 14.
Under the Form B Contract, the death benefit changes to reflect investment
returns. Under the Form A Contract, the death benefit increases only if the
Contract Fund becomes large enough that an increase in death benefit is
necessary for the Contract to satisfy the Internal Revenue Code's definition of
life insurance. See CONTRACT FORMS, PAGE 10.
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 with the average value of the Contract Fund
uniformly 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%. Actual returns will fluctuate from year to
year. In addition, death benefits and cash surrender values would be different
from those shown if investment returns averaged 0%, 4%, 8% and 12% but
fluctuated from those averages throughout the years. Nevertheless, these
assumptions help show how the Contract values change with investment
experience.
The first column in the following four tables (pages T1 through T4) shows the
Contract year. The second column, to provide context, shows what the aggregate
amount would be if the Scheduled Premiums had been invested to earn interest,
after taxes, at 4% compounded annually. The next four columns show the death
benefit payable in each of the years shown for the four different assumed
investment returns. The last four columns show the cash surrender value payable
in each of the years shown for the four different assumed investment returns.
The cash surrender values in the first 10 years reflect the surrender charges
that would be deducted if the Contract were surrendered in those years.
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 investment income and capital
gains and losses, realized or unrealized, of the portfolios before any reduction
is made for investment advisory fees or other Series Fund expenses. The net
return reflects average total annual expenses of the 15 portfolios of 0.50%, and
the daily deduction from the Contract Fund of 0.6% per year for the tables based
on current charges and 0.9% per year for the tables based upon maximum charges.
For Contracts with face amounts of less than $100,000, the current charge is
0.9% per year. Thus, assuming maximum charges, gross investment returns of 0%,
4%, 8% and 12% are the equivalent of net investment returns of -1.40%, 2.60%,
6.60% and 10.60%, respectively. The actual fees and expenses of the portfolios
associated with a particular Contract may be
24
<PAGE>
more or less than 0.50% and will depend on which subaccounts are selected. 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.
If you are considering the purchase of a variable life insurance contract from
another insurance company, you should not rely upon these tables for comparison
purposes. A comparison between two tables, each showing values for a 35 year old
man, may be useful for a 35 year old man but would be inaccurate if made for
insureds of other ages or sex. Your Prudential representative can provide you
with a hypothetical illustration for a person of your own age, sex, and rating
class.
25
<PAGE>
ILLUSTRATIONS
-------------
VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$100,000 GUARANTEED DEATH BENEFIT
$894.06 MINIMUM INITIAL SCHEDULED PREMIUM (1) (3)
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
---------------------------------------------------- --------------------------------------------------
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 (3) (-1.10% Net) (2.90% Net) (6.90% Net) (10.90% Net) (-1.10% Net) (2.90% Net) (6.90% Net)(10.90% Net)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 930 $100,000 $100,000 $100,000 $100,000 $ 0 $ 0 $ 0 $ 0
2 $ 1,897 $100,000 $100,000 $100,000 $100,000 $ 319 $ 399 $ 482 $ 568
3 $ 2,903 $100,000 $100,000 $100,000 $100,000 $ 835 $ 991 $ 1,157 $ 1,332
4 $ 3,948 $100,000 $100,000 $100,000 $100,000 $ 1,338 $ 1,595 $ 1,874 $ 2,176
5 $ 5,036 $100,000 $100,000 $100,000 $100,000 $ 1,827 $ 2,208 $ 2,633 $ 3,108
6 $ 6,167 $100,000 $100,000 $100,000 $100,000 $ 2,556 $ 3,087 $ 3,696 $ 4,394
7 $ 7,344 $100,000 $100,000 $100,000 $100,000 $ 3,276 $ 3,984 $ 4,818 $ 5,799
8 $ 8,568 $100,000 $100,000 $100,000 $100,000 $ 3,978 $ 4,889 $ 5,993 $ 7,327
9 $ 9,840 $100,000 $100,000 $100,000 $100,000 $ 4,665 $ 5,806 $ 7,227 $ 8,993
10 $ 11,164 $100,000 $100,000 $100,000 $100,000 $ 5,335 $ 6,735 $ 8,525 $ 10,813
15 $ 18,618 $100,000 $100,000 $100,000 $100,000 $ 7,525 $10,635 $ 15,216 $ 21,979
20 $ 27,688 $100,000 $100,000 $100,000 $100,000 $ 9,668 $15,229 $ 24,709 $ 40,980
25 $ 38,723 $100,000 $100,000 $100,000 $139,226 $11,193 $20,095 $ 37,709 $ 72,634
30 (Age 65) $ 52,149 $100,000 $100,000 $100,000 $207,827 $11,133 $24,340 $ 55,078 $123,591
35 $ 81,168 $100,000 $100,000 $118,221 $307,787 $27,722 $39,992 $ 78,929 $205,491
40 $116,474 $100,000 $100,000 $149,788 $455,660 $41,918 $57,004 $110,380 $335,780
45 $159,429 $100,000 $100,000 $189,232 $676,785 $52,984 $76,020 $150,907 $539,716
</TABLE>
(1) If premiums are paid more frequently than annually, the initial payments
would be $456.85 semi-annually, $231.52 quarterly or $78.55 monthly. The
ultimate payments would be $2,411.37 semi-annually, $1,218.60 quarterly or
$410.34 monthly. The death benefits and cash surrender values would be
slightly different for a Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
(3) For a hypothetical gross investment return of 0%, the second Scheduled
Premium will be $4,726.61. For a gross return of 4%, the second Scheduled
Premium will be $3,145.86. For a gross return of 8%, the second Scheduled
Premium will be $894.06. For a gross return of 12%, the second Scheduled
Premium will be $894.06. The premiums accumulated at 4% interest in column
2 are those payable if the gross investment return is 4%. For an
explanation of why the scheduled premium may increase on the premium change
date, see Premiums.
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 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 APPRECIABLE LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$100,000 GUARANTEED DEATH BENEFIT
$894.06 MINIMUM INITIAL SCHEDULED PREMIUM (1) (3)
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
---------------------------------------------------- --------------------------------------------------
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 (3) (-1.10% Net) (2.90% Net) (6.90% Net) (10.90% Net) (-1.10% Net) (2.90% Net) (6.90% Net) (10.90% Net)
------ ------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 930 $100,000 $100,019 $100,048 $100,076 $ 0 $ 0 $ 0 $ 0
2 $ 1,897 $100,000 $100,036 $100,119 $100,204 $ 271 $ 351 $ 434 $ 520
3 $ 2,903 $100,000 $100,049 $100,215 $100,390 $ 790 $ 947 $ 1,112 $ 1,288
4 $ 3,948 $100,000 $100,062 $100,341 $100,644 $ 1,312 $ 1,569 $ 1,848 $ 2,151
5 $ 5,036 $100,000 $100,073 $100,499 $100,973 $ 1,836 $ 2,217 $ 2,643 $ 3,117
6 $ 6,167 $100,000 $100,133 $100,742 $101,440 $ 2,577 $ 3,108 $ 3,717 $ 4,415
7 $ 7,344 $100,000 $100,193 $101,026 $102,006 $ 3,301 $ 4,009 $ 4,842 $ 5,822
8 $ 8,568 $100,000 $100,255 $101,356 $102,687 $ 4,009 $ 4,920 $ 6,021 $ 7,352
9 $ 9,840 $100,000 $100,317 $101,734 $103,494 $ 4,699 $ 5,840 $ 7,257 $ 9,017
10 $ 11,164 $100,000 $100,383 $102,166 $104,444 $ 5,372 $ 6,771 $ 8,554 $ 10,832
15 $ 18,618 $100,000 $100,859 $105,392 $112,068 $ 7,596 $10,698 $ 15,231 $ 21,907
20 $ 27,688 $100,000 $102,228 $111,546 $127,475 $ 9,749 $15,292 $ 24,610 $ 40,539
25 $ 38,723 $100,000 $104,812 $121,899 $155,963 $11,272 $20,082 $ 37,169 $ 71,233
30 (Age 65) $ 52,149 $100,000 $109,029 $137,961 $205,808 $11,211 $24,029 $ 52,961 $120,808
35 $ 83,439 $100,000 $110,739 $142,989 $301,028 $27,779 $41,040 $ 73,290 $200,978
40 $121,507 $100,000 $114,173 $155,014 $445,813 $41,925 $59,000 $ 99,841 $328,524
45 $167,824 $100,000 $119,779 $176,715 $662,304 $52,956 $77,306 $134,242 $528,167
</TABLE>
(1) If premiums are paid more frequently than annually, the initial payments
would be $456.85 semi-annually, $231.52 quarterly or $78.55 monthly. The
ultimate payments would be $2,411.37 semi-annually, $1,218.60 quarterly or
$410.34 monthly. The death benefits and cash surrender values would be
slightly different for a Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
(3) For a hypothetical gross investment return of 0%, the second Scheduled
Premium will be $4,726.61. For a gross return of 4%, the second Scheduled
Premium will be $3,549. For a gross return of 8%, the second Scheduled
Premium will be $894.06. For a gross return of 12%, the second Scheduled
Premium will be $894.06. The premiums accumulated at 4% interest in column
2 are those payable if the gross investment return is 4%. For an
explanation of why the scheduled premium may increase on the premium change
date, see Premiums.
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 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 APPRECIABLE LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$100,000 GUARANTEED DEATH BENEFIT
$894.06 MINIMUM INITIAL SCHEDULED PREMIUM (1) (3)
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
---------------------------------------------------- ---------------------------------------------------
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 (3) (-1.40% Net) (2.60% Net) (6.60% Net) (10.60% Net) (-1.40% Net) (2.60% Net) (6.60% Net) (10.60% Net)
------ ------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 930 $100,000 $100,000 $100,000 $100,000 $ 0 $ 0 $ 0 $ 0
2 $ 1,897 $100,000 $100,000 $100,000 $100,000 $ 268 $ 347 $ 428 $ 511
3 $ 2,903 $100,000 $100,000 $100,000 $100,000 $ 752 $ 904 $ 1,064 $ 1,234
4 $ 3,948 $100,000 $100,000 $100,000 $100,000 $1,218 $ 1,465 $ 1,734 $ 2,026
5 $ 5,036 $100,000 $100,000 $100,000 $100,000 $1,663 $ 2,028 $ 2,437 $ 2,892
6 $ 6,167 $100,000 $100,000 $100,000 $100,000 $2,294 $ 2,799 $ 3,379 $ 4,045
7 $ 7,344 $100,000 $100,000 $100,000 $100,000 $2,909 $ 3,576 $ 4,365 $ 5,294
8 $ 8,568 $100,000 $100,000 $100,000 $100,000 $3,501 $ 4,351 $ 5,385 $ 6,639
9 $ 9,840 $100,000 $100,000 $100,000 $100,000 $4,069 $ 5,124 $ 6,445 $ 8,092
10 $ 11,164 $100,000 $100,000 $100,000 $100,000 $4,611 $ 5,893 $ 7,543 $ 9,661
15 $ 18,618 $100,000 $100,000 $100,000 $100,000 $5,949 $ 8,668 $ 12,727 $ 18,785
20 $ 27,688 $100,000 $100,000 $100,000 $100,000 $6,239 $10,851 $ 18,949 $ 33,166
25 $ 38,723 $100,000 $100,000 $100,000 $107,833 $4,748 $11,588 $ 26,030 $ 56,256
30 (Age 65) $ 52,149 $100,000 $100,000 $100,000 $154,778 $ 180 $ 9,342 $ 33,579 $ 92,043
35 $ 90,072 $100,000 $100,000 $100,000 $216,991 $8,275 $21,746 $ 52,497 $144,872
40 $136,211 $100,000 $100,000 $106,885 $302,424 $8,685 $30,660 $ 78,764 $222,860
45 $192,347 $100,000 $100,000 $139,752 $419,104 $ 0 $31,658 $111,448 $334,223
</TABLE>
(1) If premiums are paid more frequently than annually, the payments would be
$456.85 semi-annually, $231.52 quarterly or $78.55 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
(3) For a hypothetical gross investment return of 0%, the premium after age 65
will be $4,726.61; for a gross return of 4% the premium after age 65 will
be $4,726.61; for a gross return of 8% the premium after age 65 will be
$2,904.39; for a gross return of 12% the premium after age 65 will be
$894.06. The premiums accumulated at 4% interest in column 2 are those
payable if the gross investment return is 4%. For an explanation of why the
scheduled premium may increase on the premium change date, see Premiums.
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 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 APPRECIABLE LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$100,000 GUARANTEED DEATH BENEFIT
$894.06 MINIMUM INITIAL SCHEDULED PREMIUM (1) (3)
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (2) Cash Surrender Value (2)
---------------------------------------------------- --------------------------------------------------
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 (3) (-1.40% Net) (2.60% Net) (6.60% Net) (10.60% Net) (-1.40% Net) (2.60% Net) (6.60% Net)(10.60% Net)
------ -------------- ------------ ----------- ----------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 930 $100,000 $100,000 $100,020 $100,048 $ 0 $ 0 $ 0 $ 0
2 $ 1,897 $100,000 $100,000 $100,057 $100,140 $ 213 $ 291 $ 372 $ 455
3 $ 2,903 $100,000 $100,000 $100,110 $100,279 $ 696 $ 847 $ 1,007 $ 1,177
4 $ 3,948 $100,000 $100,000 $100,184 $100,474 $1,177 $ 1,423 $ 1,691 $ 1,981
5 $ 5,036 $100,000 $100,000 $100,278 $100,731 $1,653 $ 2,017 $ 2,422 $ 2,875
6 $ 6,167 $100,000 $100,000 $100,395 $101,057 $2,291 $ 2,794 $ 3,370 $ 4,032
7 $ 7,344 $100,000 $100,000 $100,536 $101,458 $2,906 $ 3,570 $ 4,352 $ 5,274
8 $ 8,568 $100,000 $100,000 $100,704 $101,946 $3,498 $ 4,344 $ 5,369 $ 6,611
9 $ 9,840 $100,000 $100,000 $100,900 $102,529 $4,066 $ 5,117 $ 6,423 $ 8,052
10 $ 11,164 $100,000 $100,000 $101,127 $103,218 $4,608 $ 5,884 $ 7,515 $ 9,606
15 $ 18,618 $100,000 $100,000 $102,793 $108,695 $5,946 $ 8,657 $ 12,632 $ 18,534
20 $ 27,688 $100,000 $100,000 $105,582 $119,119 $6,236 $10,839 $ 18,646 $ 32,183
25 $ 38,723 $100,000 $100,000 $109,839 $137,507 $4,745 $11,573 $ 25,109 $ 52,777
30 (Age 65) $ 52,149 $100,000 $100,000 $115,885 $168,442 $ 177 $ 9,324 $ 30,885 $ 83,442
35 $ 90,072 $100,000 $100,000 $120,799 $199,680 $8,272 $21,723 $ 51,100 $129,981
40 $136,211 $100,000 $100,000 $129,975 $273,325 $8,682 $30,627 $ 74,802 $201,416
45 $192,347 $100,000 $100,000 $144,958 $380,717 $ 0 $31,603 $102,485 $303,611
</TABLE>
(1) If premiums are paid more frequently than annually, the payments would be
$456.85 semi-annually, $231.52 quarterly or $78.55 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
(3) For a hypothetical gross investment return of 0%, the premium after age 65
will be $4,726.61; for a gross return of 4% the premium after age 65 will
be $4,726.61; for a gross return of 8% the premium after age 65 will be
$3,880.79; for a gross return of 12% the premium after age 65 will be
$1,082.28. The premiums accumulated at 4% interest in column 2 are those
payable if the gross investment return is 4%. For an explanation of why the
scheduled premium may increase on the premium change date, see Premiums.
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 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>
CONTRACT LOANS
You may borrow from Prudential up to the "loan value" of the Contract, using the
Contract as the only security for the loan. The loan value is equal to (1) 90%
of an amount equal to the portion of the Contract Fund value attributable to the
variable investment options and to any prior loan[s] supported by the variable
investment options, minus the portion of any charges attributable to variable
investment options that would be payable upon an immediate surrender; plus (2)
100% of an amount equal to the portion of the Contract Fund value attributable
to the fixed-rate option and to any prior loan[s] supported by the fixed-rate
option, minus the portion of any charges attributable to the fixed-rate option
that would be payable upon an immediate surrender. The minimum amount that may
be borrowed at any one time is $200 unless the proceeds are used to pay premiums
on the Contract.
If you request a loan you may choose one of two interest rates. You may elect to
have interest charges accrued daily at a fixed effective annual rate of 5.5%.
Alternatively, you may elect a variable interest rate that changes from time to
time. You may switch from the fixed to variable interest loan provision, or
vice-versa, with Prudential's consent.
If you elect the variable loan interest rate provision, interest charged on any
loan will accrue daily at an annual rate Prudential determines at the start of
each Contract year (instead of at the fixed 5.5% rate). This interest rate will
not exceed the greatest of (1) the "Published Monthly Average" for the calendar
month ending two months before the calendar month of the Contract anniversary;
(2) 5%; or (3) the rate permitted by law in the state of issue of the Contract.
The "Published Monthly Average" means Moody's Corporate Bond Yield Average C
Monthly Average Corporates, as published by Moody's Investors Service, Inc. or
any successor to that service, or if that average is no longer published, a
substantially similar average established by the insurance regulator where the
Contract is issued. For example, the Published Monthly Average in 1998 ranged
from 6.72% to 7.00%.
Interest payments on any loan are due at the end of each Contract year. If
interest is not paid when due, it is added to the principal amount of the loan.
The "Contract debt" is the amount of all outstanding loans plus any interest
accrued but not yet due. If at any time the Contract debt exceeds what the cash
surrender value would be if there were no Contract debt, Prudential will notify
you of its intent to terminate the Contract in 61 days, within which time you
may repay all or enough of the loan to reduce it to below the cash surrender
value and thus keep the Contract inforce. If you fail to keep the Contract
inforce, the amount of unpaid Contract debt will be treated as a distribution
which may be taxable. See LAPSE AND REINSTATEMENT, page 27, and TAX TREATMENT OF
CONTRACT BENEFITS, page 29.
When a loan is made, an amount equal to the loan proceeds (the "loan amount") is
transferred out of the subaccounts and the Real Property Account (collectively,
the "variable investment options"), and/or the fixed-rate option to Prudential's
general account. The investment options will normally be reduced proportionally
based on their balances at the time the loan is made. The loan amount is treated
as part of the Contract Fund. While a fixed-rate (5.5%) loan is outstanding, the
loan amount will be credited with the daily equivalent of an annual return of 4%
rather than with the actual rate of return of the variable options or the fixed-
rate option. While a loan made pursuant to the variable loan interest rate
provision is outstanding, the loan amount will be credited with the daily
equivalent of a rate that is 1% less than the loan interest rate for the
Contract year. If a loan remains outstanding at a time Prudential fixes a new
rate, the new interest rate will apply. When the loan is repaid, the repayment
is made to the investment options. The loan repayment is first divided between
the variable options as a group and the fixed-rate option in the same
proportions used for the transfer at the time the loan was made. The portion of
the loan repayment allocated to the variable options as a group is divided among
those options proportionately based on their balances at the time of loan
repayment. The portion of the loan repayment allocated to the fixed-rate option
will be credited with the lesser of the current rate applicable to new premium
payments and the current rate applicable to the portion of the fixed-rate option
from which the loan was made.
Choosing the variable rate option may mean a higher outlay of cash when interest
payments are made or when the loan is repaid, but it may also result in a
greater increase in the Contract Fund value.
A loan will not affect the amount of the premiums due. 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 death benefit or the
cash surrender value. Loans from Modified Endowment Contracts may be treated for
tax purposes as distributions of income. See TAX TREATMENT OF CONTRACT BENEFITS,
page 29.
A loan will have an effect on a Contract's cash surrender value and may have an
effect on the death benefit, even if the loan is fully repaid, because the
investment results of the selected investment options will apply only to the
amount
26
<PAGE>
remaining invested under those options. The longer the loan is outstanding, the
greater the effect is likely to be. The effect could be favorable or
unfavorable. If investment results are greater than the rate being credited on
the loan balance while the loan is outstanding, values under the Contract will
not increase as rapidly as they would have if no loan had been made. If
investment results are below that rate, Contract values will be higher than they
would have been had no loan been made. A loan that is repaid will not have any
effect upon the guaranteed minimum death benefit.
Consider, for example, a Contract issued on a 35 year old male, as illustrated
in the table on page T1, with an 8% gross investment return. Assume a $2,500
fixed-rate (5.5%) loan was made under this Contract at the end of Contract year
eight and repaid at the end of Contract year 10 and loan interest was paid when
due. Upon repayment, the cash surrender value would be $8,372.58. This amount is
lower than the cash surrender value shown on that page for the end of Contract
year 10 because the loan amount was credited with the 4% assumed rate of return
rather than the 6.89% net return for the designated subaccount[s] resulting from
the 8% gross return in the underlying Series Fund.
LAPSE AND REINSTATEMENT
As explained earlier, if Scheduled Premiums are paid on or before each due date,
or within the grace period after each due date, and there are no withdrawals or
outstanding loans, a Contract will remain inforce even if the investment results
of that Contract's variable investment option[s] have been so unfavorable that
the Contract Fund has decreased to zero or less.
In addition, even if a Scheduled Premium is not paid, the Contract will remain
inforce as long as the Contract Fund on any Monthly Date is equal to or greater
than the Tabular Contract Fund Value on the following Monthly Date. (A Table of
Tabular Contract Fund Values is included in the Contract; the values increase
with each year the Contract remains inforce.) This could occur because of such
factors as favorable investment experience, deduction of current rather than
maximum charges, or the previous payment of greater than Scheduled Premiums.
However, if a Scheduled Premium is not paid, and the Contract Fund is
insufficient to keep the Contract inforce, the Contract will go into default.
Should this happen, Prudential will send the Contract owner a notice of default
setting forth the payment necessary to keep the Contract inforce on a premium
paying basis. This payment must be received at a Home Office within the 61 day
kggrace period after the notice of default is mailed or the Contract will lapse.
A Contract that lapses with an outstanding Contract loan may have tax
consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 29.
Neither transfers nor reallocations of premium payments may be made if a
Contract is in default.
A Contract that has lapsed may be reinstated within five years after the date of
default unless the Contract has been surrendered for its cash surrender value.
To reinstate a lapsed Contract, Prudential requires renewed evidence of
insurability, and submission of certain payments due under the Contract.
If your Contract does lapse, it will still provide some benefits. You can
receive the cash surrender value by making a request of Prudential prior to the
end of the 61 day grace period. You may also choose one of the three forms of
insurance described below for which no further premiums are payable.
FIXED EXTENDED TERM INSURANCE. The amount of insurance that would have been paid
on the date of default will continue for a stated period of time. You will be
told in writing how long that will be. The insurance amount will not change.
There will be a diminishing cash surrender value but no loan value. Extended
term insurance is not available to insureds in high risk classifications or
under Contracts issued in connection with tax-qualified pension plans.
FIXED REDUCED PAID-UP INSURANCE. This insurance continues for the lifetime of
the insured but at an insurance amount that is lower than that provided by fixed
extended term insurance. It will increase in amount only if dividends are paid
and it will decrease only if you take a Contract loan. Upon request, we will
tell you what the amount of insurance will be. Fixed paid-up insurance has a
cash surrender value and a loan value both of which will gradually increase in
value. It is possible for this Contract to be classified as a Modified Endowment
Contract if this option is exercised. See TAX TREATMENT OF CONTRACT BENEFITS,
page 29.
27
<PAGE>
VARIABLE REDUCED PAID-UP INSURANCE. This is similar to fixed paid-up insurance
and will initially be in the same amount. The Contract Fund will continue to
vary to reflect the experience of the selected investment options. There will be
a new guaranteed minimum death benefit. Loans will be available subject to the
same rules that apply to premium-paying Contracts.
Variable paid-up insurance is not available to insureds in high risk rating
classes or if the new guaranteed amount is less than $5,000. It is possible for
this Contract to be classified as a Modified Endowment Contract if this option
is exercised. See TAX TREATMENT OF CONTRACT BENEFITS, page 29.
WHAT HAPPENS IF NO REQUEST IS MADE? Except in the two situations described
below, if no request is made the "automatic option" will be fixed extended term
insurance. If fixed extended term insurance is not available to the insured,
then fixed reduced paid-up insurance will be provided. However, if variable
reduced paid-up insurance is available and the amount is at least as great as
the amount of fixed extended term insurance, then the automatic option will be
variable reduced paid-up insurance. This could occur if the Contract lapses and
there is a Contract debt outstanding.
VOTING RIGHTS
As explained earlier, all of the assets held in the subaccounts 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 vote the
shares of the Series Fund in accordance with voting instructions received from
Contract owners at any regular and special shareholders meetings. 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
indirectly owned by Prudential, will be voted in the same proportion as shares
in the respective portfolios for which instructions are received.
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.
The number of shares in a portfolio for which you may give instructions is
determined by dividing the portion of your Contract Fund attributable to the
portfolio, by the value of one share of the portfolio. 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.
Prudential may, if required by state insurance regulations, disregard voting
instructions if they would require shares to be voted so as to cause a change in
the sub-classification or investment objectives of one or more of 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
adviser 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.
All Prudential Contract and policy owners share the right to vote in elections
for members of the Board of Directors of Prudential.
28
<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 any such substitution.
REPORTS TO CONTRACTS OWNERS
Once each Contract year (except where the Contract is inforce as fixed extended
term insurance or fixed reduced paid-up insurance), Prudential will send you a
statement that provides certain information pertinent to your own Contract. The
statement shows all transactions during the year that affected the value of your
Contract Fund, including monthly changes attributable to investment experience.
The statement will also show the current death benefit, cash surrender value,
and loan values of your Contract. On request, you will be sent a current
statement in a form similar to that of the annual statement described above, but
Prudential may limit the number of such requests or impose a reasonable charge
if such requests are made too frequently.
You will also receive, usually at the end of February, an annual report of the
operations of the Series Fund. That report will list the investments held in
each portfolio and include audited financial statements for the Series Fund. A
semi-annual report with similar unaudited information will be sent to you,
usually at the end of August.
TAX TREATMENT OF CONTRACT BENEFITS
This summary provides general information on the federal income tax treatment of
the Contract. It is not a complete statement of what the federal income taxes
will be in all circumstances. It is based on current law and interpretations,
which may change. It does not cover state taxes or other taxes. It is not
intended as tax advice. You should consult your own qualified tax adviser for
complete information and advice.
TREATMENT AS LIFE INSURANCE. The Contract must meet certain requirements to
qualify as life insurance for tax purposes. These requirements include certain
definitional tests and rules for diversification of the Contract's investments.
For further information on the diversification requirements, see TAXATION OF THE
FUND in the statement of additional information for the Series Fund.
We believe we have taken adequate steps to insure that the Contract qualifies as
life insurance for tax purposes. Generally speaking, this means that:
o you will not be taxed on the growth of the funds in the Contract,
unless you receive a distribution from the Contract,
o the Contract's death benefit will be tax free to your beneficiary.
Although we believe that the Contract should qualify as life insurance for tax
purposes, there are some uncertainties, particularly because the Secretary of
Treasury has not yet issued permanent regulations that bear on this question.
Accordingly, we reserve the right to make changes -- which will be applied
uniformly to all Contract owners after advance written notice -- that we deem
necessary to insure that the Contract will qualify as life insurance.
PRE-DEATH DISTRIBUTIONS. The tax treatment of any distribution you receive
before the insured's death depends on whether the Contract is classified as a
Modified Endowment Contract.
CONTRACTS NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
o If you surrender the Contract or allow it to lapse, you will
be taxed on the amount you receive in excess of the premiums
you paid less the untaxed portion of any prior withdrawals.
For this purpose, you will be treated as receiving any portion
of the cash surrender value used to repay Contract debt. The
tax consequences of a surrender may differ if you take the
proceeds under an income payment settlement option.
29
<PAGE>
o Generally, you will be taxed on a withdrawal to the extent the
amount you receive exceeds the premiums you paid for the
Contract less the untaxed portion of any prior withdrawals.
However, under some limited circumstances, in the first 15
Contract years, all or a portion of a withdrawal may be taxed
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.
o Extra premiums for optional benefits and riders generally do
not count in computing the premiums paid for the Contract for
the purposes of determining whether a withdrawal is
taxable.
o Loans you take against the Contract are ordinarily treated as
debt and are not considered distributions subject to tax.
MODIFIED ENDOWMENT CONTRACTS.
o The rules change if the Contract is classified as a Modified
Endowment Contract. The Contract could be classified as a
Modified Endowment Contract if premiums substantially in
excess of scheduled premiums are paid or a decrease in the
face amount of insurance is made (or a rider removed). The
addition of a rider or an increase in the face amount of
insurance may also cause the Contract to be classified as a
Modified Endowment Contract. You should first consult a
qualified tax adviser and your Prudential representative if
you are contemplating any of these steps.
o If the Contract is classified as a Modified Endowment
Contract, then amounts you receive under the Contract before
the insured's death, including loans and withdrawals, are
included in income to the extent that the Contract Fund before
surrender charges exceeds the premiums paid for the Contract
increased by the amount of any loans previously included in
income and reduced by any untaxed amounts previously received
other than the amount of any loans excludible from income. An
assignment of a Modified Endowment Contract is taxable in the
same way. These rules also apply to pre-death distributions,
including loans, made during the two-year period before the
time that the Contract became a Modified Endowment
Contract.
o Any taxable income on pre-death distributions (including full
surrenders) is subject to a penalty of 10 percent unless the
amount is received on or after age 59 1/2, on account of your
becoming disabled or as a life annuity. It is presently
unclear how the penalty tax provisions apply to Contracts
owned by businesses.
o All Modified Endowment Contracts issued by us to you during
the same calendar year are treated as a single Contract for
purposes of applying these rules.
WITHHOLDING. You must affirmatively elect that no taxes be withheld from a pre-
death distribution. Otherwise, the taxable portion of any amounts you receive
will be subject to withholding. You are not permitted to elect out of
withholding if you do not provide a social security number or other taxpayer
identification number. You may be subject to penalties under the estimated tax
payment rules if your withholding and estimated tax payments are insufficient to
cover the tax due.
OTHER TAX CONSIDERATIONS. If you transfer or assign the Contract to someone
else, there may be gift, estate and/or income tax consequences. If you transfer
the Contract to a person two or more generations younger than you (or designate
such a younger person as a beneficiary), there may be Generation Skipping
Transfer tax consequences. Deductions for interest paid or accrued on Contract
debt or on other loans that are incurred or continued to purchase or carry the
Contract may be denied. Your individual situation or that of your beneficiary
will determine the federal estate taxes and the state and local estate,
inheritance and other taxes due if you or the insured dies.
BUSINESS-OWNED LIFE INSURANCE. If a business, rather than an individual, is the
owner of the Contract, there are some additional rules. Business Contract owners
generally cannot deduct premium payments. Business Contract owners generally
cannot take tax deductions for interest on Contract debt 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 these loans is limited to a prescribed interest rate and a maximum aggregate
loan amount of $50,000 per key insured person. The corporate alternative minimum
tax also applies to business-owned life
30
<PAGE>
insurance. This is an indirect tax on additions to the Contract Fund or death
benefits received under business-owned life insurance policies.
TAX-QUALIFIED PENSION PLANS
You may acquire the Contract to fund a retirement plan that qualifies for tax
favored treatment under the Internal Revenue Code. We will issue such a Contract
with a minimum face amount of $10,000, and with increases and decreases in face
amount in minimum increments of $10,000. The monthly charge for anticipated
mortality costs and the scheduled premiums will be the same for male and female
insureds of a particular age and underwriting classification. We will give
illustrations showing premiums and charges if you wish to fund a tax-qualified
pension plan. Only certain riders are available for a Contract issued in
connection with a tax-qualified pension plan. Fixed reduced paid-up insurance
and payment of the cash surrender value are the only options on lapse available
for a Contract issued in connection with a tax-qualified pension plan. See LAPSE
AND REINSTATEMENT, page 27. Finally, a Contract issued in connection with a tax-
qualified pension plan may not invest in the Real Property Account.
You should consult a qualified tax advisor before purchasing a Contract in
connection with a tax-qualified pension plan.
RIDERS
Contract owners may be able to obtain additional fixed benefits which may
increase the Scheduled Premium. If they do cause an increase in the Scheduled
Premium, they will be charged for by making monthly deductions from the Contract
Fund. These optional insurance benefits will be described in what is known as a
"rider" to the Contract. One rider pays an additional amount if the insured dies
in an accident. Another waives certain premiums if the insured is disabled
within the meaning of the provision (or, in the case of a Contract issued on an
insured under the age of 15, if the applicant dies or becomes disabled within
the meaning of the provision). Others pay an additional amount if the insured
dies within a stated number of years after issue; similar benefits may be
available if the insured's spouse or child should die. The amounts of these
benefits are fully guaranteed at issue; they do not depend on the performance of
the Account, although they will no longer be available if the Contract lapses.
Certain restrictions may apply; they are clearly described in the applicable
rider.
Under other riders, which provide a fixed amount of term insurance in exchange
for increasing total scheduled annual premiums, the amount payable upon death of
the insured may be substantially increased for a given total initial annual
premium. The rider may be appropriate for Contract owners who reasonably expect
their incomes to increase regularly so that they will be able to afford the
increasing scheduled annual premiums or who may be willing to rely upon their
future Contract Fund values to prevent the Contract from lapsing in later years.
Any Prudential representative authorized to sell the Contract can explain these
extra benefits further. Samples of the provisions are available from Prudential
upon written request.
PARTICIPATION IN DIVISIBLE SURPLUS
The Contract is eligible to be credited part of Prudential's divisible surplus
attributable to the Contracts, as determined by Prudential's Board of Directors.
That determination is made every year, with respect to the insurance contracts
issued by Prudential. However, Prudential does not expect to credit any
dividends upon these Contracts because favorable investment performance will be
reflected in Contract values and because Prudential intends, if experience
indicates that current charges will be greater than needed to cover expenses, to
reduce those charges further so that there will be no source of distributable
surplus attributable to these Contracts.
OTHER GENERAL CONTRACT PROVISIONS
ASSIGNMENT. This Contract may not be assigned if the assignment would violate
any federal, state, or local law or regulation. 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 it will not be obligated to comply with any assignment unless it
has received a copy at a Home Office.
BENEFICIARY. You designate and name your beneficiary in the application.
Thereafter, you may change the beneficiary, provided it is in accordance with
the terms of the Contract. Should the insured die with no surviving beneficiary,
the insured's estate will become the beneficiary.
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<PAGE>
INCONTESTABILITY. We will not contest the Contract after it has been inforce
during the insured's lifetime for two years from the issue date except when any
change is made in the Contract that requires Prudential's approval and would
increase our liability. We will not contest such change after it has been in
effect for two years during the lifetime of the insured.
MISSTATEMENT OF AGE OR SEX. If the insured's stated age or sex (except where
unisex rates apply) or both are incorrect in the Contract, Prudential will
adjust the death benefits payable, as required by law, to reflect the correct
age and sex. Any death benefit will be based on what the most recent charge for
mortality would have provided at the correct age and sex.
SETTLEMENT OPTIONS. The Contract grants to most owners, or to the beneficiary, a
variety of optional ways of receiving Contract proceeds, other than in a lump
sum. Any Prudential representative authorized to sell this Contract can explain
these options upon request.
SUICIDE EXCLUSION. Generally, if the insured, whether sane or insane, dies by
suicide within two years from the Contract Date, Prudential will pay no more
under the Contract than the sum of the premiums paid. If the insured, whether
sane or insane, dies by suicide within two years from the effective date of an
increase in the face amount of insurance, Prudential will pay, with respect to
the amount of the increase, no more than the sum of the Scheduled Premiums
attributable to the increase.
PAYING PREMIUMS BY PAYROLL DEDUCTION
In addition to the annual, semi-annual, quarterly and monthly premium payment
modes, a payroll budget method of paying premiums may also be available under
certain Contracts. The employer generally deducts the necessary amounts from
employee paychecks and sends premium payments to Prudential monthly. Some
Contracts sold using the payroll budget method may be eligible for a guaranteed
issue program under which the initial minimum death benefit is $25,000 and the
Contracts are based on unisex mortality tables. Any Prudential representative
authorized to sell this Contract can provide further details concerning the
payroll budget method of paying premiums.
UNISEX PREMUIMS AND BENEFITS
The Contract generally uses mortality tables that distinguish between males and
females. Thus, premiums and benefits differ under Contracts issued on males and
females of the same age. However, in those states that have adopted regulations
prohibiting sex-distinct insurance rates, premiums and cost of insurance charges
will be based on a blended unisex rate, whether the insured is male or female.
In addition, employers and employee organizations considering purchase of a
Contract should consult their legal advisers to determine whether purchase of a
Contract based on sex-distinct actuarial tables is consistent with Title VII of
the Civil Rights Act of 1964 or other applicable law. Prudential may offer the
Contract with unisex mortality rates to employers and employee
organizations.
SALES TO PERSONS 14 YEARS OF AGE OR YOUNGER
Both Form A and Form B Contracts covering insureds of 14 years of age or less
contain a special provision providing that the face amount of insurance will
automatically be increased on the Contract anniversary after the insured's 21st
birthday to 150% of the initial face amount, so long as the Contract is not then
in default. The death benefit will also usually increase, at the same time, by
the same dollar amount. In certain circumstances, however, it may increase by a
smaller amount. See HOW A CONTRACT'S DEATH BENEFIT WILL VARY, page 19. This
increase in death benefit will also generally increase the net amount at risk
under the Contract, thus increasing the mortality charge deducted each month
from amounts invested under the Contract. See item (b) under MONTHLY DEDUCTIONS
FROM CONTRACT FUND, page 15. The automatic increase in the face amount of
insurance may affect the level of future premium payments you can make without
causing the Contract to be classified as a Modified Endowment Contract. A
Contract owner should consult his or her Prudential representative before making
unscheduled premium payments.
EXCHANGE OF FIXED-DOLLAR CONTRACT TO VARIABLE CONTRACT
Prudential may, on a non-discriminatory basis, permit the owner of an
APPRECIABLE LIFE insurance policy issued by Prudential (an APPRECIABLE LIFE
policy is a general account, universal life type policy with guaranteed minimum
values) to exchange his or her policy for a comparable Variable APPRECIABLE LIFE
Contract with the same Contract Date, Scheduled Premiums, and Contract Fund. No
charge will be made for the exchange. There is no new "free
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look" right when an APPRECIABLE LIFE insurance policy owner elects to exchange
his or her policy for a comparable Variable APPRECIABLE LIFE Contract.
SALE OF THE CONTRACT AND SALES COMMISSIONS
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
Prudential, acts as the principal underwriter of the Contract. Prusec, organized
in 1971 under New Jersey law, is registered as a broker and dealer under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. Prusec's principal business address is 751 Broad
Street, Newark, New Jersey 07102-3777. The Contract is sold by registered
representatives of Prusec who are also authorized by state insurance departments
to do so. The Contract may also be sold through other broker-dealers authorized
by Prusec and applicable law to do so. Registered representatives of such other
broker-dealers may be paid on a different basis than described below. Where the
insured is less than 60 years of age, the representative will generally receive
a commission of no more than: (1) 50% of the Scheduled Premiums for the first
year; (2) 6% of the Scheduled Premiums for the second through 10th years; and
(3) 2% of the Scheduled Premiums thereafter. For insureds over 59 years of age,
the commission will be lower. The representative may be required to return all
or part of the first year commission if the Contract is not continued through
the second year. Representatives with less than three years of service may be
paid on a different basis. Representatives who meet certain productivity,
profitability, and persistency standards with regard to the sale of the Contract
will be eligible for additional compensation.
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 of Prudential as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998 and the financial
statements of the Account as of December 31, 1998 and for each of the three
years in the period then ended included in this prospectus have been so included
in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting. PricewaterhouseCoopers LLP's principal business address is 1177
Avenue of the Americas, New York, New York 10036.
Actuarial matters included in this prospectus have been examined by Pamela A.
Schiz, FSA, MAAA, Actuarial Director of Prudential, whose opinion is filed as an
exhibit to the registration statement.
LITIGATION
On October 28, 1996, Prudential entered into a Stipulation of Settlement in a
multidistrict proceeding involving allegations of various claims relating to
Prudential's life insurance sales practices. (In re Prudential Insurance Company
of America Sales Practices Litigation, D.N.J., MDL No. 1061, Master Docket No.
95-4704 (AMW)). On March 7, 1997, the United States District Court for the
District of New Jersey approved the Stipulation of Settlement as fair,
reasonable and adequate, and later issued a Final Order and Judgement in the
consolidated class actions before the court, 962 F. Supp. 450 (March 17, 1997,
as amended April 14, 1997). The Court's Final Order and Judgement approving the
class Settlement was appealed to the United States Court of Appeals for the
Third Circuit, which upheld the district court's approval of the Stipulation of
Settlement on July 23, 1998. The Supreme Court denied certiorari in January
1999, thereby making final the approval of the class action settlement.
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Pursuant to the Settlement, Prudential agreed to provide and has been
implementing an Alternative Dispute Resolution ("ADR") process for class members
who believe they were misled concerning the sale or performance of their life
insurance Contracts. As of December 31, 1998, based on an analysis of claims
actually remedied, a sample of claims still to be remedied, and estimates of
additional liabilities associated with the ADR program, management estimated the
cost, before taxes, of remedying policyholder claims in the ADR process to be
approximately $2.56 billion. While management believes these to be reasonable
estimates based on available information, the ultimate amount of the total cost
of remedied policyholder claims and other related costs is dependent on complex
and varying factors, including the relief options still to be chosen by
claimants, the dollar value of those options, and the number and type of claims
that may successfully be appealed.
In addition, a number of actions have been filed against Prudential by
policyholders who have excluded themselves from the Settlement; Prudential
anticipates that additional suits may be filed by other policyholders.
Also, on July 9, 1996, a Multi-State Life Insurance Task Force comprised of
insurance regulators from 29 states and the District of Columbia, released a
report on Prudential's activities. As of February 24, 1997, Prudential had
entered into consent orders or agreements with all 50 states and the District of
Columbia to implement a remediation plan, whose terms closely parallel the
Settlement approved in the MDL proceeding, and agreed to a series of payments
allocated to all 50 states and the District of Columbia amounting to a total of
approximately $65 million. These agreements are now being implemented through
Prudential's implementation of the class Settlement.
Prudential's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted with precision. It is
possible that the results of operations or the cash flow of the company, in
particular quarterly or annual periods, could be materially affected by an
ultimate unfavorable outcome of the matters specifically discussed above.
Management believes, however, that the ultimate resolution of all such matters,
after consideration of applicable reserves, should not have a material adverse
effect on Prudential's financial position.
YEAR 2000 COMPLIANCE
The services provided to you as a purchaser of a Variable Appreciable Life
Insurance Contract depend on the smooth functioning of numerous computer
systems. Many computer systems in use today are programmed to recognize only the
last two digits of a date as the year. As a result, any systems using this kind
of programming can not distinguish a date using "00" and may treat it as "1900"
instead of "2000." This problem may impact computer systems that store business
information, but it could also affect other equipment used in our business like
telephone, fax machines and elevators. If this problem is not corrected, the
"Year 2000" issue could affect the accuracy and integrity of business records.
Prudential's regular business operations could be interrupted as well as those
of other companies that deal with us.
In addition, the operations of the mutual funds associated with the Variable
Appreciable Life Insurance Contract could experience problems resulting from the
Year 2000 issue. Please refer to the respective mutual fund's prospectus for
information regarding their approach to Year 2000 concerns. The following
describes Prudential's effort to address Year 2000 concerns.
To address this potential problem Prudential organized its Year 2000 efforts
around the following three areas:
o Business Systems - Computer programs directly used to support our business;
----------------
o Infrastructure - Computers and other business equipment like telephones
--------------
and fax machines; and
o Business Partners - Year 2000 readiness of essential business
-----------------
partners.
Busines Systems. The business systems component includes a wide range of
- ---------------
computer programs that directly support Prudential's business operations
including systems for: insurance product processing, securities trading,
personnel record keeping and general accounting systems. All business systems
were analyzed to determine whether each computer program with a Year 2000
problem should be retired, replaced or renovated. The majority of this work has
been completed. A few remaining programs are currently being tested and
completion of this process is expected by June 1999.
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Infrastructure. As with business applications, we established a specific
- --------------
methodology and process for addressing infrastructure issues. The infrastructure
effort includes mainframe computer system hardware and operating system
software, mid-range systems and servers, telecommunications equipment and
systems, buildings and facilities systems, personal computers, and vendor
hardware and software. Other than desktop systems, substantially all other
infrastructure systems have been tested. Presently a small number of midrange
computers, and building and facility systems are still in the testing phase. We
expect to have the infrastructure implementation process completed by
June 1999.
Business Partners. Prudential recognizes the importance of determining the Year
- -----------------
2000 readiness of external business relationships especially those that involve
electronic data transfer products and services, and products that impact our
essential business processes. Prudential first classified each business partner
as "highly critical" or "less critical" to our business and then began to
develop risk assessment and contingency plans to address the potential that a
business partner could experience a Year 2000 failure. All highly critical
business partner relationships have been assessed and contingency planning is
completed. Risk assessment and contingency planning continues for less critical
business partners, and the target completion date for these relationships is
June 1999.
Prudential believes that the Business Systems, Infrastructure and Business
Partners components of the Year 2000 project are substantially on schedule. A
small number of the projects may not meet their targeted completion date.
However, Prudential expects that these projects will be completed by
September,mid 1999. If there are any delays, they should not have a significant
impact on the timing of the project as a whole.
THE COST OF YEAR 2000 READINESS
Prudential is funding the Year 2000 program from internal operating budgets, and
estimates that its total costs to address the Year 2000 issue will total
approximately $220 million. Because these expenses were part of the operating
budget, they did not impact the management of Variable Appreciable Life
Insurance Contracts. During the course of the Year 2000 program, some optional
computer projects have been delayed, but these delays have not had any material
effect on Variable Appreciable Life Insurance Contracts.
YEAR 2000 RISKS AND CONTINGENCY PLANNING
Prudential believes that it is well positioned to lessen the impact of the Year
2000 problem. However, given the nature of this issue, we can not be 100%
certain that we are completely prepared, particularly because we can not be
certain of Year 2000 readiness of third parties. As a result, we are unable to
determine at this time whether the consequences of Year 2000 failures may have a
material adverse effect on the results of Prudential's operations, liquidity or
financial condition. In the worst case, it is possible that a Year 2000
technology failure, whether internal or external, could have a material impact
on Prudential's results of operations, liquidity, or financial position. If
Prudential is unable to address the Year 2000 problem, we may have difficulty in
responding to your incoming phone calls, calculating your unit values or
processing withdrawals and purchase payments. It is also possible that the
mutual funds associated with the Variable Appreciable Life Insurance Contract
will be unable to value their securities, in turn creating difficulties in
purchasing or selling shares of the respective mutual fund and calculating
corresponding unit asset values. The objective of Prudential's Year 2000 program
has been to reduce these risks as much as possible.
Most of the operations of the Variable Appreciable Life Insurance Contract
involve such a large number of individual transactions that they can only be
handled with the help of computers. As a result, our current contingency plans
include responses to the failure of specific business programs or infrastructure
components. However, our contingency responses are now being reviewed and we
expect to finalize them by June, 1999 to ensure that they are workable under the
special conditions of a Year 2000 failure. Prudential believes that with the
completion of its Year 2000 program as scheduled, the possibility of significant
interruptions of normal operations will be reduced.
ADDITIONAL INFORMATION
Prudential has filed a registration statement with the SEC under the Securities
Act of 1933, relating to the offering described in this prospectus. This
prospectus does not include all of the information set forth in the registration
statement. Certain portions have been omitted pursuant to the rules and
regulations of the SEC. The omitted information may, however, be obtained from
the SEC's principal office in Washington, D.C., upon payment of a prescribed
fee.
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Further information may also be obtained from Prudential. Its address and
telephone number are on the inside front cover of this prospectus.
FINANCIAL STATEMENTS
The financial statements of the Account should be distinguished from the
consolidated financial statements of Prudential and subsidiaries, which should
be considered only as bearing upon the ability of Prudential to meet its
obligations under the Contracts.
36
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DIRECTORS AND OFFICERS OF PRUDENTIAL
DIRECTORS OF PRUDENTIAL
FRANKLIN E. AGNEW--Director since 1994 (current term expires April, 2000).
Member, Committee on Finance & Dividends; Member, Finance Committee; Member,
Corporate Governance Committee. Business consultant since 1986. Senior Vice
President, H.J. Heinz from 1971 to 1986. Mr. Agnew is also a director of Bausch
& Lomb, Inc. John Wiley & Sons, Inc. and Erie Plastics Corporation. Age 64.
Address: 600 Grant Street, Suite 660, Pittsburgh, PA 15219.
FREDERICK K. BECKER--Director since 1994 (current term expires April, 2005).
Member, Auditing Committee, Member, Committee on Business Ethics; Member,
Corporate Governance Committee. President, Wilentz Goldman and Spitzer, P.A.
(law firm) since 1989, with firm since 1960. Age 63. Address: 90 Woodbridge
Center Drive, Woodbridge, NJ 07095.
GILBERT F. CASELLAS--Director since 1998 (current term expires April, 2003).
Member, Compensation Committee. President, The Swarthmore Group, Inc. since
1999. Partner, McConnell Valdes, LLP in 1998. Chairman, U.S. Equal Employment
Opportunity Commission from 1994 to 1998. Age 46. Address: 1646 West Chester
Pike, Suite 3, West Chester, PA 19382. 717 Pennsylvania Avenue, NW, Suite 625,
Washington, DC 20006.
JAMES G. CULLEN--Director since 1994 (current term expires April, 2001). Member,
Compensation Committee; Member, Committee on Business Ethics. President & Chief
Operating Officer, Telecom Group, Bell Atlantic Corporation, since
19987. President & Chief Executive Officer, Telecom Group, Bell Atlantic
Corporation, from 1997 to 1998. Vice Chairman, Bell Atlantic Corporation from
1995 to 1997. President, Bell Atlantic Corporation from 1993 to 1995. Mr. Cullen
is also a director of Bell Atlantic Corporation and Johnson & Johnson. Age 56.
Address: 1310 North Court House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS--Director since 1989 (current term expires April, 2001).
Member Committee on Business Ethics; Member, Compensation Committee. Independent
Health Care Advisor since 1997. National and International Health Care Advisor,
Ernst & Young, LLP from 1985 to 1997. Dr. Davis is also a director of Beckman
Coulter Instruments, Inc., Merck & Co., Inc., Minimed Incorporated, and Beverley
Enterprises. Age 67. Address: 751 Broad Street, 23rd Floor, Newark,
NJ 07102.
ROGER A. ENRICO--Director since 1994 (current term expires April, 2002). Member,
Committees on Nominations & Corporate Governance; Member, Compensation
Committee. Chairman and Chief Executive Officer, PepsiCo, Inc. since 1996. Mr.
Enrico originally Originally joinedwith PepsiCo, Inc. in 1971. Mr. Enrico is
also a director of A.H. Belo Corporation and Dayton Hudson Corporation. Age 54.
Address: 700 Anderson Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR--Director since 1995 (current term expires April, 2003).
Member, Investment Committee; Member, Committee on Finance & Dividends.
Retired since 1995. Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr.
Gilmour originally joined Ford in 1960. Mr. Gilmour is also a director of
Whirlpool Corporation, MeidiaOne Group, Inc., AP Automotive Systems,
Inc., The Dow Chemical Company and DTE Energy Company. Age 64. Address: 751
Broad Street, 23rd Floor, Newark, NJ 07102.
WILLIAM H. GRAY, III--Director since 1991 (current term expires April, 2000).
Chairman, Committees on Nominations & Corporate Governance. Member, Executive
Committee; Member, Committee on Business Ethics. President and Chief Executive
Officer, The College Fund/UNCF since 1991. Mr. Gray served in Congress from 1979
to 1991. Mr. Gray is also a director of Chase Manhattan Corporation, Municipal
Bond Investors Assurance Corporation, Rockwell International Corporation, Union-
Pacific Corporation, Warner-Lambert Company, CBS Corporation and Electronic Data
Systems. Age 57. Address: 8260 Willow Oaks Corp. Drive, Fairfax, VA 22031-
4511.
JON F. HANSON--Director since 1991 (current term expires April, 2003). Member,
Investment Committee; Member, Committee on Business Ethics. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of James E. Hanson
Management Company, Neumann Distributors, Inc., Fleet Trust and Investment
Services Company, N.A., United Water Resources, Orange & Rockland Utilities,
Inc., and Consolidated Delivery and Logistics. Age 62. Address: 235 Moore
Street, Suite 200, Hackensack, NJ 07601.
GLEN H. HINER, JR.--Director since 1997 (current term expires April, 2001).
Member, Compensation Committee. Chairman and Chief Executive Officer, Owens
Corning since 1991. Senior Vice President and Group Executive, Plastics Group,
General Electric Company from 1983 to 1991. Mr. Hiner is also a director of
Dana Corporation and Owens Corning. Age 64. Address: One Owens Corning Parkway,
Toledo, OH 43659.
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CONSTANCE J. HORNER--Director since 1994 (current term expires April, 2002).
Member, Auditing Committee; Member, Committees on Nominations & Corporate
Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is
also a director of Foster Wheeler Corporation, Ingersoll-Rand Company
and Pfizer, Inc. Age 56. Address: 1775 Massachusetts Ave., N.W. Washington,
D.C. 20036-2188.
GAYNOR N. KELLEY--Director since 1997 (current term expires April, 2001).
Member, Auditing Committee. Retired since 1996. Chairman and Chief Executive
Officer, The Perkins Elmer Corporation from 1990 to 1996. Mr. Kelley is also a
director of Hercules Incorporated, and Alliant Techsystems. Age 67. Address: 751
Broad Street, 23rd Floor, Newark, NJ 07102-3777.
BURTON G. MALKIEL--Director since 1978 (current term expires April, 2002).
Chairman, Investment Finance Committee; Member, Executive Committee; Member,
Committee on Finance & Dividends. Professor of Economics, Princeton University,
since 1988. Dr. Malkiel is also a director of Banco Bilbao Vizcaya, Baker
Fentress & Company, The Jeffrey Company, The Southern New England
Telecommunications Company, and Vanguard Group, Inc. Age 66. Address: Princeton
University, 110 Fisher Hall, Prospect Avenue, Princeton, NJ 08544-1021.
ARTHUR F. RYAN--Chairman of the Board, President and Chief Executive Officer of
Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
BankCorp. from 1990 to 1994, with Chase since 1972. Age 56. Address: 751 Broad
Street, Newark, NJ 07102.
IDA F.S. SCHMERTZ--Director since 1997 (current term expires April, 2004).
Member, Audit CommitteeFinance Committee. Principal, Investment Strategies
International since 1994. Age 64. Address: 751 Broad Street, 23rd Floor,
Newark, NJ 07102.
CHARLES R. SITTER--Director since 1995 (current term expires April, 2003).
Member, Committee on Finance & Dividend; Member, Investment Committee.
Retired since 1996. President, Exxon Corporation from 1993 to
1996. Mr. Sitter began his career with Exxon in 1957. Age 68. Address: 5959 Las
Colinas Boulevard, Irving, TX 75039-2298.
DONALD L. STAHELI--Director since 1995 (current term expires April, 2003).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1996.
Chairman and Chief Executive Officer, Continental Grain Company from 1994 to
1997. President and Chief Executive Officer, Continental Grain Company from 1988
to 1994. Mr. Staheli is also director of Bankers Trust Company and Continental
Grain Company. Age 67. Address: 39 Locust Street, Suite 204, New Canaan, CT
06840.
RICHARD M. THOMSON--Director since 1976 (current term expires April, 2000).
Chairman, Executive Committee; Chairman, Compensation Committee. Retired since
1998. Chairman of the Board, The Toronto-Dominion Bank from 1997 to 1998.
Chairman and Chief Executive Officer from 1978 to 1997. Mr. Thomson is also a
director of CGC, Inc., INCO, Limited, S.C. Johnson & Son, Inc., The Thomson
Corporation, Canadian Occidental Petroleum, Ltd., The Toronto-Dominion Bank and
Ontario Hydro. Age 64. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto,
Ontario, M5K 1A2, Canada.
JAMES A. UNRUH--Director since 1996 (current term expires April, 2000). Member,
Committees on Nominations & Corporate Governance; Member, Investment Committee.
Retired since 1997. Chairman and Chief Executive Officer, Unisys Corporation,
from 1990 to 1997. Mr. Unruh is also a director of Ameritech Corporation and
Moss Micro. Age 57. Address: 751 Broad Street, Newark, NJ 07102-3777.
P. ROY VAGELOS, M.D.--Director since 1989 (current term expires April, 2001).
Chairman, Auditing Committee; Member, Executive Committee; Member, Committees on
Nominations & Corporate Governance. Chairman, Regeneron Pharmaceuticals since
1995. Chairman, Advanced Medicines, Inc. since 1997. Chairman, and Chief
Executive Officer and President, Merck & Co., Inc. from 1986 to 1995, Dr.
Vagelos originally joined Merck in 1975. Dr. Vagelos is also a director of The
Estee Lauder Companies, Inc. and PepsiCo., Inc. Age 69. Address: One Crossroads
Drive, Building A, 3rd Floor, Bedminster, NJ 07921.
STANLEY C. VAN NESS--Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Executive Committee; Member,
Auditing Committee. Partner, Herbert, Van Ness, Cayci & Goodell (law firm) since
1998. Counselor at Law, Picco Herbert Kennedy (law firm) from 1990 to 1998. Mr.
Van Ness is also a director of Jersey Central Power & Light Company. Age 64.
Address: 22 Chambers Street, Princeton, NJ 08542.
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PAUL A. VOLCKER--Director since 1988 (current term expires April, 2000).
Chairman, Committee on Finance & Dividends; Member, Executive Committee; Member,
Committee on Nominations & Corporate Governance. Consultant since 1997.
Chairman, James D. Wolfensohn & Co., Inc. from 1988 to 1996; Chief Executive
Officer, James D. Wolfensohn, Inc. from 1995 to 1996. Mr. Volcker is also a
director of Nestle, S.A., and Bankers Trust New York Corporation as well as a
Director of the Board of Overseers of TIAA-CREF. Age 71, Address: 610 Fifth
Avenue, Suite 420, New York, NY 10020.
JOSEPH H. WILLIAMS--Director since 1994 (current term expires April, 2002).
Member, Committee on Finance & Dividends; Member, Investment Auditing Committee.
Director, The Williams Companies since 1979. Chairman & Chief Executive Officer,
The Williams Companies from 1979 to 1993. Mr. Williams is also a director of The
Orvis Company, and MTC Investors, LLC., and AEA Investors, Inc.. Age 65.
Address: One Williams Center, Tulsa, OK 74102.
PRINCIPAL OFFICERS
ARTHUR F. RYAN--Chairman of the Board, President and Chief Executive Officer
since 1994; prior to 1994, President and Chief Operating Officer, Chase
Manhattan Corporation. Age 56.
MICHAEL CAULFIELD--Executive Vice President, Financial Management since 1998;
Chief Executive Officer, Prudential Investments from 1995 to 1998; Chief
Executive Officer, Money Management Group in 1995; prior to 1995, President,
Prudential Preferred Financial Services. Age 52.
MICHELE S. DARLING--Executive Vice President, Human Resources since 1997; prior
to 1997, Executive Vice President, Canadian Imperial Bank of Commerce. Age
45.
ROBERT C. GOLDEN--Executive Vice President, Corporate Operations and Systems
since 1997; prior to 1997, Executive Vice President, Prudential Securities,. Age
53.
MARK B. GRIER--Executive Vice President, Corporate Governance, since 1998;
Executive Vice President, Financial Management from 1997 to 1998;
Chief Financial Officer from 1995 to 1997; prior to 1995, Executive Vice
President, Chase Manhattan Corporation. Age 46.
JEAN D. HAMILTON--Executive Vice President, Institutional, since 1998;
President, Diversified Group since 1995 to 1998; prior to 1995, President,
Prudential Capital Group. Age 52.
RODGER A. LAWSON--Executive Vice President, International Investments & Global
Marketing, since 1998; Executive Vice President, Marketing and Planning from
since 1996 to 1998;; President and CEO, Van Eck Global, from 1994 to 1996; prior
to 1994, President and CEO, Global Private Banking, Bankers Trust Company. Age
52.
KIYOFUMI SAKAGUCHI--Executive Vice President, International Insurance, since
1998; President, International Insurance Group from 1995 to 1998;
prior to 1995, Chairman and CEO, The Prudential Life Insurance Co., Ltd. Age
56.
JOHN V. SCICUTELLA--Executive Vice President, Individual Financial Services,
since 1998; Chief Executive Officer, Individual Insurance Group from 1997 to
1998; Executive Vice President Operations and Systems from 1995 to 1997;
prior to 1995, Executive Vice President, Chase Manhattan Corporation. Age
49.
JOHN R. STRANGFELD--Executive Vice President, Global Asset Management, since
1998; Chief Executive Officer, Private Asset Management Group (PAMG) from 1996
to 1998; President, PAMG, from 1996 to 1998; prior to 1996, Senior
Managing Director. Age 45.
JAMES J. AVERY, JR.--Senior Vice President & Chief Actuary, Individual Insurance
Group since 1997; President Prudential Select from 1996 to 1997; prior to 1995,
Executive Vice President and Chief Operating Officer, Chief Financial Officer,
Prudential Select. Age 47.
MARTIN A. BERKOWITZ--Senior Vice President, Financial Management, since 1998;
Senior Vice President and Comptroller since from 1995 to 1998; prior to 1995,
Senior Vice President and CFO, Prudential Investment Corporation. Age 50.
WILLIAM M. BETHKE--Senior Vice President and Chief Investment Officer since
1997; prior to 1997, President, Capital Management Group Age 51.
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ANNE E. BOSSI--Senior Vice President, Institutional, since 1998; President,
Group Life & Disability 1997 to 1998; President, Group Life Insurance 1995 to
1997; prior to 1995, President, Northeastern Group Operations. Age 47
RICHARD J. CARBONE--Senior Vice President and Chief Financial Officer since
1997. Controller, Salomon Brothers from 1995 to 1997; prior to 1995, Controller,
Bankers Trust. Age 51.
THOMAS J. CARROLL-- Senior Vice President and Chief Auditor since 1998. Managing
Director, Bankers Trust Company from 1996 to 1998; prior to 1996, Global Chief
Auditor and Managing Director, Credit Suisse First Boston. Age 57.
THOMAS W. CRAWFORD--Senior Vice President, Individual Financial Services, since
1998; President and Chief Executive Officer, Prudential Property & Casualty
Company from 1996 to 1998; Vice President, Prudential Property &
Casualty Company in 1996; prior to 1996, President & CEO, Southern Heritage
Insurance Company. Age 55.
WILLIAM D. FRIEL--Senior Vice President and Chief Information Officer since
1996; prior to 1996, Chief Executive Officer, Prudential Service Company. Age
60.
MICHAEL J. HINES--Senior Vice President, Marketing and Communications, since
1999; 1996 to 1998 Vice President, Marketing and Communications. Age 47.
RONALD P. JOELSON--Senior Vice President, Financial Management, since 1999.
Senior Vice President, Guaranteed Products from 1996 to 1999; Vice President,
Guaranteed Investments during 1996; pprior to 1996, Managing Director,
Retirement Services. Age 40.
IRA J. KLEINMAN--Senior Executive Vice President, International Insurance, since
1997; prior to 1997, Chief Marketing & Product Development Officer. Age 51.
KATHLEEN KRALL--Senior Vice President, Individual Financial Services, since
1999; Vice President, Individual Financial Services from 1996 to 1999; Vice
President, Operations and Systems from 1995 to 1996; prior to 1995 Vice
President, Chase Manhattan Bank. Age 41.
JOYCE R. LEIBOWITZ--Senior Vice President, Management Internal Controls, since
1999; Vice President, Management Internal Controls from 1995 to 1999; prior to
1995 Integrated Control Officer. Age 51.
JOHN M. LIFTIN--Senior Vice President and General Counsel since 1998; Self-
employed from 1997 to 1998; prior to 1997 Senior Vice President and General
Counsel, Kidder & Peabody Group, Inc. Age 55.
NEIL A. McGUINNESS--Senior Vice President, Individual Financial Services, since
1996; Director, Putnam Investments, in 1996; prior to 1996, President, Fidelity
Investment Employer Services Company. Age 52.
PRISCILLA A. MYERS--Senior Vice President, Demutualization, since 1998; Senior
Vice President and Auditor from 1995 to 1998; prior to 1995, Vice President
and Auditor. Age 48.
I. EDWARD PRICE--Senior Vice President, Individual Financial Services, since
1996; Senior Vice President and Actuary from 1995 to 1996; prior to 1995, Chief
Executive Officer, Prudential International Insurance. Age 56.
ROBERT J. SULLIVAN--Senior Vice President, Individual Financial Services, since
1997; prior to 1997, Managing Director, Fidelity Investments. Age 60.
SUSAN J. BLOUNT--Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 41.
C. EDWARD CHAPLIN--Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
ANTHONY S. PISZEL--Vice President and Controller since 1998; Vice President,
Enterprise Financial Management from 1997 to 1998; prior to 1997, Chief
Financial Officer, Individual Insurance Group. Age 44.
Prudential officers are elected annually.
40
<PAGE>
PRUDENTIAL'S
VARIABLE APPRECIABLE LIFE (R)
INSURANCE
VARIABLE APPRECIABLE LIFE(R) is issued by The Prudential Insurance Company of
America and offered through Pruco Securities Corporation, a subsidiary of
Prudential, both located at 751 Broad Street, Newark, NJ 07102-3777. APPRECIABLE
LIFE is a registered mark of Prudential.
[LOGO] PRUDENTIAL
The Prudential Insurance Company of America
751 Broad Street, Newark, NJ 07102-3777
Telephone 800 778-2255
PVAL-1 Ed. 5/99 CAT# 646960S
41
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1998
SUBACCOUNTS
----------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in The Prudential Series Fund, Inc.
Portfolios at net asset value [Note 3] ..... $ 112,731,079 $ 147,114,992 $1,516,736,886 $1,460,736,333 $1,126,162,749
-------------- -------------- -------------- -------------- --------------
Net Assets ................................... $ 112,731,079 $ 147,114,992 $1,516,736,886 $1,460,736,333 $1,126,162,749
============== ============== ============== ============== ==============
NET ASSETS, representing:
Equity of contract owners .................... $ 112,731,079 $ 147,114,992 $1,516,736,886 $1,460,736,333 $1,126,162,749
-------------- -------------- -------------- -------------- --------------
$ 112,731,079 $ 147,114,992 $1,516,736,886 $1,460,736,333 $1,126,162,749
============== ============== ============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
</TABLE>
A1
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
--------------------------------------------------------------------------------------------------------------------
ZERO COUPON HIGH ZERO COUPON
BOND YIELD STOCK EQUITY NATURAL GOVERNMENT BOND
2000 BOND INDEX INCOME RESOURCES GLOBAL INCOME 2005
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 19,961,108 $ 92,745,342 $845,861,223 $454,271,316 $100,784,964 $142,307,176 $ 82,088,176 $ 27,213,641
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 19,961,108 $ 92,745,342 $845,861,223 $454,271,316 $100,784,964 $142,307,176 $ 82,088,176 $ 27,213,641
============ ============ ============ ============ ============ ============ ============ ============
$ 19,961,108 $ 92,745,342 $845,861,223 $454,271,316 $100,784,964 $142,307,176 $ 82,088,176 $ 27,213,641
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 19,961,108 $ 92,745,342 $845,861,223 $454,271,316 $100,784,964 $142,307,176 $ 82,088,176 $ 27,213,641
============ ============ ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
</TABLE>
A2
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1998
SUBACCOUNTS
-------------------------------
SMALL
PRUDENTIAL CAPITALIZATION
JENNISON STOCK
PORTFOLIO PORTFOLIO
-------------- --------------
<S> <C> <C>
ASSETS
Investment in The Prudential Series Fund, Inc. .
Portfolios at net asset value [Note 3] ....... $ 203,957,589 $ 100,578,460
-------------- --------------
Net Assets .................................. $ 203,957,589 $ 100,578,460
============== ==============
NET ASSETS, representing:
Equity of contract owners ................... $ 203,957,589 $ 100,578,460
-------------- --------------
$ 203,957,589 $ 100,578,460
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
A3
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
SUBACCOUNTS
----------------------------------------------------------------------------------
MONEY MARKET DIVERSIFIED BOND
PORTFOLIO PORTFOLIO
----------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income ............................ $ 5,267,889 $ 5,094,912 $ 4,689,159 $ 8,588,103 $ 9,043,537 $ 7,158,122
------------ ------------ ------------ ------------ ------------ -----------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk [Note 5A] 702,791 661,235 630,761 977,226 866,520 769,815
Reimbursement for excess expenses [Note 5D] 0 0 0 0 0 0
------------ ------------ ------------ ------------ ------------ -----------
NET EXPENSES ................................. 702,791 661,235 630,761 977,226 866,520 769,815
------------ ------------ ------------ ------------ ------------ -----------
NET INVESTMENT INCOME (LOSS) ................. 4,565,098 4,433,677 4,058,398 7,610,877 8,177,017 6,388,307
------------ ------------ ------------ ------------ ------------ -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received ....... 0 0 0 492,608 1,452,476 0
Realized gain (loss) on shares redeemed .... 0 0 0 107,984 107,543 19,658
Net change in unrealized gain (loss) on
investments .............................. 0 0 0 242,854 (702,474) (2,104,541)
------------ ------------ ------------ ------------ ------------ -----------
NET GAIN (LOSS) ON INVESTMENTS ............... 0 0 0 843,446 857,545 (2,084,883)
------------ ------------ ------------ ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS .................. $ 4,565,098 $ 4,433,677 $ 4,058,398 $ 8,454,323 $ 9,034,562 $ 4,303,424
============ ============ ============ ============ ============ ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
</TABLE>
A4
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
EQUITY FLEXIBLE MANAGED CONSERVATIVE BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------- ---------------------------------------- ----------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 27,312,284 $ 28,870,327 $ 23,448,572 $ 46,336,137 $ 38,256,221 $ 32,750,578 $ 46,034,230 $ 45,612,319 $ 35,574,962
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
10,647,094 8,895,624 6,600,231 10,109,863 8,970,935 7,402,644 7,958,450 7,210,074 6,248,856
0 0 0 0 0 0 0 0 0
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
10,647,094 8,895,624 6,600,231 10,109,863 8,970,935 7,402,644 7,958,450 7,210,074 6,248,856
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
16,665,190 19,974,703 16,848,341 36,226,274 29,285,286 25,347,934 38,075,780 38,402,245 29,326,106
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
165,422,738 73,183,544 92,436,486 147,043,667 201,042,079 106,224,518 65,867,708 110,154,176 55,843,548
14,951,173 7,311,176 755,380 2,295,592 3,097,268 487,657 1,526,727 2,680,112 627,498
(78,932,919) 158,043,072 41,805,447 (58,722,618) (37,001,732) (5,082,172) 6,236,915 (36,006,094) 10,273,250
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
101,440,992 238,537,792 134,997,313 90,616,641 167,137,615 101,630,003 73,631,350 76,828,194 66,744,296
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$118,106,182 $258,512,495 $151,845,654 $126,842,915 $196,422,901 $126,977,937 $111,707,130 $115,230,439 $ 96,070,402
============ ============ ============ ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
</TABLE>
A5
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
SUBACCOUNTS
----------------------------------------------------------------------------------
ZERO COUPON BOND 2000 HIGH YIELD BOND
PORTFOLIO PORTFOLIO
----------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income............................. $ 990,142 $ 1,012,102 $ 835,394 $ 9,308,036 $ 8,213,223 $ 7,376,933
------------ ------------ ------------ ------------ ------------ -----------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk [Note 5A]. 144,233 141,029 143,233 697,446 618,514 532,324
Reimbursement for excess expenses [Note 5D]. (44,243) (53,201) (23,005) 0 0 0
------------ ------------ ------------ ------------ ------------ -----------
NET EXPENSES.................................. 99,990 87,828 120,228 697,446 618,514 532,324
------------ ------------ ------------ ------------ ------------ -----------
NET INVESTMENT INCOME (LOSS).................. 890,152 924,274 715,166 8,610,590 7,594,709 6,844,609
------------ ------------ ------------ ------------ ------------ -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received........ 267,168 804,923 0 0 0 0
Realized gain (loss) on shares redeemed..... 60,617 46,554 27,409 (243,731) 311,580 20,787
Net change in unrealized gain (loss) on
investments.................................... 153,354 (497,282) (556,648) (11,461,047) 2,620,272 581,780
------------ ------------ ------------ ------------ ------------ -----------
NET GAIN (LOSS) ON INVESTMENTS................ 481,139 354,195 (529,239) (11,704,778) 2,931,852 602,567
------------ ------------ ------------ ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.................... $ 1,371,291 $ 1,278,469 $ 185,927 $ (3,094,188) $ 10,526,561 $7,447,176
============ ============ ============ ============ ============ ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
</TABLE>
A6
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
STOCK INDEX EQUITY INCOME NATURAL RESOURCES
PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------- ---------------------------------------- ----------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9,059,895 $ 8,102,242 $ 6,724,618 $ 12,342,267 $ 9,608,504 $ 9,118,093 $ 975,725 $ 757,192 $ 877,698
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
5,175,364 3,790,129 2,544,825 3,262,956 2,532,105 1,767,583 851,287 1,079,034 909,008
0 0 0 0 0 0 0 0 (16,487)
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
5,175,364 3,790,129 2,544,825 3,262,956 2,532,105 1,767,583 851,287 1,079,034 892,521
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
3,884,531 4,312,113 4,179,793 9,079,311 7,076,399 7,350,510 124,438 (321,842) (14,823)
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
12,847,130 17,197,911 4,749,836 27,501,162 39,390,070 9,133,917 6,263,457 16,426,552 17,021,108
6,237,945 6,786,808 263,052 (99,580) 3,982,449 171,030 (1,250,821) 1,240,093 341,761
153,992,331 113,415,557 61,075,735 (52,611,025) 59,248,683 32,816,172 (26,817,989) (35,487,893) 13,941,557
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
173,077,406 137,400,276 66,088,623 (25,209,443) 102,621,202 42,121,119 (21,805,353) (17,821,248) 31,304,426
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$176,961,937 $141,712,389 $ 70,268,416 $(16,130,132) $109,697,601 $ 49,471,629 $(21,680,915) $(18,143,090) $ 31,289,603
============ ============ ============ ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
</TABLE>
A7
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
SUBACCOUNTS
----------------------------------------------------------------------------------
GLOBAL GOVERNMENT INCOME
PORTFOLIO PORTFOLIO
----------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income............................ $ 1,738,704 $ 1,281,804 $ 1,778,642 $ 4,520,286 $ 4,704,795 $ 4,676,803
------------ ------------ ------------ ------------ ------------ -----------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk [Note 5A] 843,008 686,676 446,499 560,752 515,147 519,382
Reimbursement for excess expenses [Note 5D] 0 0 0 0 0 0
------------ ------------ ------------ ------------ ------------ -----------
NET EXPENSES................................. 843,008 686,676 446,499 560,752 515,147 519,382
------------ ------------ ------------ ------------ ------------ -----------
NET INVESTMENT INCOME (LOSS)................. 895,696 595,128 1,332,143 3,959,534 4,189,648 4,157,421
------------ ------------ ------------ ------------ ------------ -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received....... 5,918,263 5,120,114 1,298,584 0 0 0
Realized gain (loss) on shares redeemed.... 1,375,609 309,311 16,670 289,366 44,975 22,685
Net change in unrealized gain (loss) on
investments.............................. 18,668,316 (917,843) 9,125,406 1,952,252 1,925,166 (3,090,993)
------------ ------------ ------------ ------------ ------------ -----------
NET GAIN (LOSS) ON INVESTMENTS................ 25,962,188 4,511,582 10,440,660 2,241,618 1,970,141 (3,068,308)
------------ ------------ ------------ ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................... $ 26,857,884 $ 5,106,710 $ 11,772,803 $ 6,201,152 $ 6,159,789 $ 1,089,113
============ ============ ============ ============ ============ ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
</TABLE>
A8
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
ZERO COUPON BOND 2005 PRUDENTIAL JENNISON SMALL CAPITALIZATION STOCK
PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------- ---------------------------------------- ---------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1,296,279 $ 1,246,707 $ 1,123,279 $ 298,391 $ 157,623 $ 64,455 $ 528,189 $ 330,650 $ 153,825
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
174,202 152,442 147,863 933,952 439,584 149,932 578,299 320,322 100,546
(55,172) (73,169) (27,318) 0 0 0 0 0 0
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
119,030 79,273 120,545 933,952 439,584 149,932 578,299 320,322 100,546
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1,177,249 1,167,434 1,002,734 (635,561) (281,961) (85,477) (50,110) 10,328 53,279
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
29,253 489,749 246,221 2,902,977 5,052,341 0 5,935,686 4,897,323 489,855
164,197 71,812 290 453,639 525,215 0 (102,881) 46,921 (7,039)
1,406,685 526,125 (1,505,763) 42,669,927 10,743,964 3,012,624 (7,230,189) 5,112,289 2,049,209
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1,600,135 1,087,686 (1,259,252) 46,026,543 16,321,520 3,012,624 (1,397,384) 10,056,533 2,532,025
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 2,777,384 $ 2,255,120 $ (256,518) $ 45,390,982 $ 16,039,559 $ 2,927,147 $ (1,447,494) $ 10,066,861 $2,585,304
============ ============ ============ ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
</TABLE>
A9
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1998, 1997 and 1996
SUBACCOUNTS
----------------------------------------------------------------------------------
MONEY DIVERSIFIED
MARKET BOND
PORTFOLIO PORTFOLIO
----------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss)............... $ 4,565,098 $ 4,433,677 $ 4,058,398 $ 7,610,877 $ 8,177,017 $ 6,388,307
Capital gains distributions received....... 0 0 0 492,608 1,452,476 0
Realized gain (loss) on shares redeemed.... 0 0 0 107,984 107,543 19,658
Net change in unrealized gain (loss) on
investments.............................. 0 0 0 242,854 (702,474) (2,104,541)
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.................. 4,565,098 4,433,677 4,058,398 8,454,323 9,034,562 4,303,424
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[Note 7]................................... 14,916,149 (6,936,043) 768,830 9,523,399 3,856,643 10,268,006
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RETAINED IN THE ACCOUNT
[Note 8]................................... (1,854,444) (147,721) 1,422,930 15,863 (196,475) (142,209)
------------ ------------ ------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS...... 17,626,803 (2,650,087) 6,250,158 17,993,585 12,694,730 14,429,221
NET ASSETS
Beginning of year.......................... 95,104,276 97,754,363 91,504,205 129,121,407 116,426,677 101,997,456
------------ ------------ ------------ ------------ ------------ ------------
End of year................................ $112,731,079 $ 95,104,276 $ 97,754,363 $147,114,992 $129,121,407 $116,426,677
============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
</TABLE>
A10
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------
FLEXIBLE
EQUITY MANAGED
PORTFOLIO PORTFOLIO
- --------------------------------------------------- ----------------------------------------------------
1998 1997 1996 1998 1997 1996
- --------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 16,665,190 $ 19,974,703 $ 16,848,341 $ 36,226,274 $ 29,285,286 $ 25,347,934
165,422,738 73,183,544 92,436,486 147,043,667 201,042,079 106,224,518
14,951,173 7,311,176 755,380 2,295,592 3,097,268 487,657
(78,932,919) 158,043,072 41,805,447 (58,722,618) (37,001,732) (5,082,172)
- --------------- --------------- --------------- --------------- --------------- ---------------
118,106,182 258,512,495 151,845,654 126,842,915 196,422,901 126,977,937
- --------------- --------------- --------------- --------------- --------------- ---------------
25,056,926 55,194,557 116,044,081 (15,176,695) 15,507,613 57,031,152
- --------------- --------------- --------------- --------------- --------------- ---------------
(134,891) (1,730,961) (2,717,850) (115,363) (332,076) (1,594,508)
- --------------- --------------- --------------- --------------- --------------- ---------------
143,028,217 311,976,091 265,171,885 111,550,857 211,598,438 182,414,581
1,373,708,669 1,061,732,578 796,560,693 1,349,185,476 1,137,587,038 955,172,457
- --------------- --------------- --------------- --------------- --------------- ---------------
$ 1,516,736,886 $ 1,373,708,669 $ 1,061,732,578 $ 1,460,736,333 $ 1,349,185,476 $ 1,137,587,038
=============== =============== =============== =============== =============== ===============
<CAPTION>
CONSERVATIVE
BALANCED
PORTFOLIO
- -----------------------------------------------------
1998 1997 1996
- --------------- --------------- ---------------
<C> <C> <C>
$ 38,075,780 $ 38,402,245 $ 29,326,106
65,867,708 110,154,176 55,843,548
1,526,727 2,680,112 627,498
6,236,915 (36,006,094) 10,273,250
- --------------- --------------- ---------------
111,707,130 115,230,439 96,070,402
- --------------- --------------- ---------------
(13,835,007) (5,484,215) 36,970,919
- --------------- --------------- ---------------
(57,837) 98,440 (1,143,063)
- --------------- --------------- ---------------
97,814,286 109,844,664 131,898,258
1,028,348,463 918,503,799 786,605,541
- --------------- --------------- ---------------
$ 1,126,162,749 $ 1,028,348,463 $ 918,503,799
=============== =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
</TABLE>
A11
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1998, 1997 and 1996
SUBACCOUNTS
----------------------------------------------------------------------------------
ZERO COUPON HIGH YIELD
BOND 2000 BOND
PORTFOLIO PORTFOLIO
----------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss)................ $ 890,152 $ 924,274 $ 715,166 $ 8,610,590 $ 7,594,709 $ 6,844,609
Capital gains distributions received........ 267,168 804,923 0 0 0 0
Realized gain (loss) on shares redeemed..... 60,617 46,554 27,409 (243,731) 311,580 20,787
Net change in unrealized gain (loss) on
investments............................... 153,354 (497,282) (556,648) (11,461,047) 2,620,272 581,780
------------ ------------ ------------ ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................... 1,371,291 1,278,469 185,927 (3,094,188) 10,526,561 7,447,176
------------ ------------ ------------ ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[Note 7].................................... (1,283,829) (1,405,154) (613,550) 4,214,068 374,682 5,326,899
------------ ------------ ------------ ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RETAINED IN THE ACCOUNT [Note 8]............ (8,240) (63,959) 33,778 (42,474) (110,168) 52,425
------------ ------------ ------------ ------------ ------------ -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS....... 79,222 (190,644) (393,845) 1,077,406 10,791,075 12,826,500
NET ASSETS
Beginning of year........................... 19,881,886 20,072,530 20,466,375 91,667,936 80,876,861 68,050,361
------------ ------------ ------------ ------------ ------------ -----------
End of year................................. $ 19,961,108 $ 19,881,886 $ 20,072,530 $ 92,745,342 $ 91,667,936 $80,876,861
============ ============ ============ ============ ============ ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
</TABLE>
A12
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------
STOCK EQUITY NATURAL
INDEX INCOME RESOURCES
PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------- ---------------------------------------- ---------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 3,884,531 $ 4,312,113 $ 4,179,793 $ 9,079,311 $ 7,076,399 $ 7,350,510 $ 124,438 $ (321,842) $ (14,823)
12,847,130 17,197,911 4,749,836 27,501,162 39,390,070 9,133,917 6,263,457 16,426,552 17,021,108
6,237,946 6,786,808 263,052 (99,580) 3,982,449 171,030 (1,250,821) 1,240,093 341,761
153,992,330 113,415,557 61,075,735 (52,611,025) 59,248,683 32,816,172 (26,817,989) (35,487,893) 13,941,557
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
176,961,937 141,712,389 70,268,416 (16,130,132) 109,697,601 49,471,629 (21,680,915) (18,143,090) 31,289,603
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
46,615,330 58,525,779 55,125,681 29,232,315 36,671,034 23,125,635 (8,089,480) 2,933,126 13,900,701
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
111,800 (910,143) 82,144 139,884 (393,762) (711,051) (97,825) (148,013) (277,180)
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
223,689,067 199,328,025 125,476,241 13,242,067 145,974,873 71,886,213 (29,868,220) (15,357,977) 44,913,124
622,172,156 422,844,131 297,367,890 441,029,249 295,054,376 223,168,163 130,653,184 146,011,161 101,098,037
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$845,861,223 $622,172,156 $422,844,131 $454,271,316 $441,029,249 $295,054,376 $100,784,964 $130,653,184 $146,011,161
============ ============ ============ ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
</TABLE>
A13
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1998, 1997 and 1996
SUBACCOUNTS
----------------------------------------------------------------------------------
GOVERNMENT
GLOBAL INCOME
PORTFOLIO PORTFOLIO
----------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss)................ $ 895,696 $ 595,128 $ 1,332,143 $ 3,959,534 $ 4,189,648 $ 4,157,421
Capital gains distributions received........ 5,918,263 5,120,114 1,298,584 0 0 0
Realized gain (loss) on shares redeemed..... 1,375,609 309,311 16,670 289,366 44,975 22,685
Net change in unrealized gain (loss) on
investments............................... 18,668,316 (917,843) 9,125,406 1,952,252 1,925,166 (3,090,993)
------------ ------------ ------------ ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................... 26,857,884 5,106,710 11,772,803 6,201,152 6,159,789 1,089,113
------------ ------------ ------------ ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS [Note 7]...... 7,049,239 17,556,139 24,827,377 1,634,315 (4,821,038) (1,166,024)
------------ ------------ ------------ ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RETAINED IN THE ACCOUNT [Note 8]............ (110,095) (317,463) (137,878) (9,785) (923,259) 788,406
------------ ------------ ------------ ------------ ------------ -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS....... 33,797,028 22,345,386 36,462,302 7,825,682 415,492 711,495
NET ASSETS
Beginning of year.......................... 108,510,148 86,164,762 49,702,460 74,262,494 73,847,002 73,135,507
------------ ------------ ------------ ------------ ------------ -----------
End of year................................ $142,307,176 $108,510,148 $ 86,164,762 $ 82,088,176 $ 74,262,494 $73,847,002
============ ============ ============ ============ ============ ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
</TABLE>
A14
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------
ZERO COUPON PRUDENTIAL SMALL CAPITALIZATION
BOND 2005 JENNISON STOCK
PORTFOLIO PORTFOLIO PORTFOLIO
----------------------------------------- ---------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1,177,249 $ 1,167,434 $ 1,002,734 $ (635,561) $ (281,961) $ (85,477) $ (50,110) $ 10,328 $ 53,279
29,253 489,749 246,221 2,902,977 5,052,341 0 5,935,686 4,897,323 489,855
164,197 71,812 290 453,639 525,215 0 (102,881) 46,921 (7,039)
1,406,685 526,125 (1,505,763) 42,669,927 10,743,964 3,012,624 (7,230,189) 5,112,289 2,049,209
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
2,777,384 2,255,120 (256,518) 45,390,982 16,039,559 2,927,147 (1,447,494) 10,066,861 2,585,304
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1,198,605 (1,177,300) 1,428,479 67,125,943 34,918,336 30,275,275 26,760,022 37,146,522 20,015,548
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(11,329) (648,770) 484,066 9,553 (773,643) 385,656 (201,407) (151,200) (22,002)
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
3,964,660 429,050 1,656,027 112,526,478 50,184,252 33,588,078 25,111,121 47,062,183 22,578,850
23,248,981 22,819,931 21,163,904 91,431,111 41,246,859 7,658,781 75,467,339 28,405,156 5,826,306
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 27,213,641 $ 23,248,981 $ 22,819,931 $203,957,589 $ 91,431,111 $ 41,246,859 $100,578,460 $ 75,467,339 $ 28,405,156
============ ============ ============ ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A16 THROUGH A23
</TABLE>
A15
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
December 31, 1998
NOTE 1: GENERAL
The Prudential Variable Appreciable Account (the "Account") of The
Prudential Insurance Company of America ("Prudential") was established
on August 11, 1987 by a resolution of Prudential's Board of Directors
in conformity with insurance laws of the State of New Jersey. The
assets of the Account are segregated from Prudential's other assets.
Proceeds from the purchases of Prudential Variable Appreciable Life
("PVAL") and Prudential Survivorship Preferred ("SVUL") contracts are
invested in the Account.
The Account is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust. There are fifteen subaccounts
within the Account available to PVAL and SVUL contract owners, 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.
A16
<PAGE>
NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS
The net asset value per share (rounded) for each portfolio of the
Series Fund, the number of shares of each portfolio held by the
subaccounts and the aggregate cost of investments in such shares at
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
----------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Number of shares: 11,273,108 13,300,129 51,177,484 88,204,668 74,676,455
Net asset value per share (rounded): $ 10.00 $ 11.06 $ 29.64 $ 16.56 $ 15.08
Cost: $ 112,731,079 $ 145,740,364 $1,245,561,920 $1,470,353,555 $1,105,257,789
<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: 1,567,216 12,867,179 22,412,857 22,676,693 8,410,339
Net asset value per share (rounded): $ 12.74 $ 7.21 $ 37.74 $ 20.03 $ 11.98
Cost: $ 19,800,887 $ 102,198,960 $ 432,406,040 $ 398,053,240 $ 131,521,429
<CAPTION>
PORTFOLIOS (CONTINUED)
----------------------------------------------------------------------------------
ZERO
COUPON SMALL
GOVERNMENT BOND PRUDENTIAL CAPITALIZATION
GLOBAL INCOME 2005 JENNISON STOCK
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Number of shares: 6,726,280 6,915,245 2,024,737 8,531,342 6,837,133
Net asset value per share (rounded): $ 21.16 $ 11.87 $ 13.44 $ 23.91 $ 14.71
Cost: $ 112,640,398 $ 78,556,515 $ 24,500,695 $ 147,249,669 $ 100,465,342
</TABLE>
NOTE 4: CONTRACT OWNER UNIT INFORMATION
Outstanding contract owner units, unit values and total value of
contract owner equity at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding (PVAL) 43,275,555 40,203,520 196,836,394 266,548,472 215,680,064
Unit Value (PVAL) ..................... $ 1.66471 $ 2.31632 $ 4.66450 $ 3.37370 $ 2.83251
-------------- -------------- -------------- -------------- --------------
Contract Owner Equity (PVAL) .......... $ 72,041,250 $ 93,124,216 $ 918,143,358 $ 899,254,580 $ 610,915,939
-------------- -------------- -------------- -------------- --------------
Contract Owner Units Outstanding
(PVAL $100,000+ face) ............... 18,469,132 23,157,212 130,171,874 170,317,986 186,242,003
Unit Value (PVAL $100,000+ face) ...... $ 1.61689 $ 2.24914 $ 4.53028 $ 3.27632 $ 2.75065
-------------- -------------- -------------- -------------- --------------
Contract Owner Equity (PVAL
$100,000+ face) ..................... $ 29,862,556 $ 52,083,812 $ 589,715,035 $ 558,016,223 $ 512,286,566
-------------- -------------- -------------- -------------- --------------
Contract Owner Units Outstanding (SVUL) 9,533,065 1,604,230 5,533,875 2,370,679 2,109,337
Unit Value (SVUL) ..................... $ 1.13576 $ 1.18871 $ 1.60439 $ 1.46183 $1.40340
-------------- -------------- -------------- -------------- --------------
Contract Owner Equity (SVUL) .......... $ 10,827,273 $ 1,906,964 $ 8,878,493 $ 3,465,530 $ 2,960,244
-------------- -------------- -------------- -------------- --------------
TOTAL CONTRACT OWNER EQUITY ........... $ 112,731,079 $ 147,114,992 $1,516,736,886 $1,460,736,333 $1,126,162,749
============== ============== ============== ============== ==============
</TABLE>
A17
<PAGE>
NOTE 4: CONTRACT OWNER UNIT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------
ZERO COUPON HIGH YIELD STOCK EQUITY NATURAL
BOND 2000 BOND INDEX INCOME RESOURCES
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding (PVAL) 4,582,436 23,784,077 93,930,360 75,321,133 27,332,575
Unit Value (PVAL) ..................... $ 2.59938 $ 2.30936 $ 5.63518 $ 4.05205 $ 2.18644
-------------- -------------- -------------- -------------- --------------
Contract Owner Equity (PVAL) .......... $ 11,911,491 $ 54,925,995 $ 529,314,487 $ 305,204,997 $ 59,761,036
-------------- -------------- -------------- -------------- --------------
Contract Owner Units Outstanding
(PVAL $100,000+ face) ............... 3,189,268 15,884,568 56,008,717 36,620,899 19,225,267
Unit Value (PVAL $100,000+ face) ...... $ 2.52397 $ 2.24346 $ 5.47186 $ 3.93413 $ 2.12355
-------------- -------------- -------------- -------------- --------------
Contract Owner Equity (PVAL
$100,000+ face) ..................... $ 8,049,617 $ 35,636,392 $ 306,471,859 $ 144,071,378 $ 40,825,817
-------------- -------------- -------------- -------------- --------------
Contract Owner Units Outstanding (SVUL) -- 1,831,645 4,821,807 3,091,081 215,207
Unit Value (SVUL) ..................... -- $ 1.19180 $ 2.08944 $ 1.61592 $ 0.92056
-------------- -------------- -------------- -------------- --------------
Contract Owner Equity (SVUL) .......... -- $ 2,182,955 $ 10,074,877 $ 4,994,941 $ 198,111
-------------- -------------- -------------- -------------- --------------
TOTAL CONTRACT OWNER EQUITY ........... $ 19,961,108 $ 92,745,342 $ 845,861,223 $ 454,271,316 $ 100,784,964
============== ============== ============== ============== ==============
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------
SMALL
GOVERNMENT ZERO COUPON PRUDENTIAL CAPITALIZATION
GLOBAL INCOME BOND 2005 JENNISON STOCK
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding (PVAL) 59,733,321 23,503,402 7,001,022 57,301,215 42,365,015
Unit Value (PVAL) ..................... $ 1.75630 $ 2.14801 $ 2.65130 $ 2.54336 $ 1.74567
-------------- -------------- -------------- -------------- --------------
Contract Owner Equity (PVAL) .......... $ 104,909,632 $ 50,485,543 $ 18,561,809 $ 145,737,617 $ 73,955,335
-------------- -------------- -------------- -------------- --------------
Contract Owner Units Outstanding
(PVAL $100,000+ face) ............... 18,348,364 14,941,197 3,336,001 20,322,932 11,948,496
Unit Value (PVAL $100,000+ face) ...... $ 1.73223 $ 2.08688 $ 2.57596 $ 2.51579 $ 1.72646
-------------- -------------- -------------- -------------- --------------
Contract Owner Equity (PVAL
$100,000+ face) ..................... $ 31,783,586 $ 31,180,485 $ 8,593,405 $ 51,128,228 $ 20,628,601
-------------- -------------- -------------- -------------- --------------
Contract Owner Units Outstanding (SVUL) 3,609,961 352,577 47,480 3,235,344 3,942.469
Unit Value (SVUL) ..................... $ 1.55513 $ 1.19732 $ 1.23056 $ 2.19196 $ 1.52050
-------------- -------------- -------------- -------------- --------------
Contract Owner Equity (SVUL) .......... $ 5,613,958 $ 422,148 $ 58,427 $ 7,091,744 $ 5,994,524
-------------- -------------- -------------- -------------- --------------
TOTAL CONTRACT OWNER EQUITY ........... $ 142,307,176 $ 82,088,176 $ 27,213,641 203,957,589 $ 100,578,460
============= ============== ============== ============== --------------
</TABLE>
NOTE 5: CHARGES AND EXPENSES
A. Mortality Risk and Expense Risk Charges
The mortality risk and expense risk charges, at an effective annual
rate of 0.90%, is applied daily against the net assets representing
equity of PVAL contract owners held in each subaccount. For contract
owners investing in PVAL with face amounts of $100,000 or more the
annual rate is 0.60%. For contract owners investing in SVUL the
annual rate is 0.90%. Mortality risk is that contract owners may not
live as long as estimated and expense risk is that the cost of
issuing and administering the policies may exceed related charges by
Prudential.
B. Deferred Sales Charge
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.
A18
<PAGE>
NOTE 5: CHARGES AND EXPENSES (CONTINUED)
C. Partial Withdrawal Charge
A charge is imposed by Prudential on partial withdrawals of the cash
surrender value. A charge equal to the lesser of $25 or 2% for SVUL
and PVUL and $15 or 2% for PVAL will be made in connection with each
partial withdrawal of the cash surrender value of a contract.
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.
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 the
portfolio of each of the Zero Coupon Bond Portfolios.
E. Cost of Insurance Charges
Contract owners contributions are subject to certain deductions
prior to being invested in the Account. The deductions are for (1)
transaction costs which are deducted from each premium payment for
PVAL and PVUL, to cover premium collection and processing costs; (2)
state premium taxes; (3) sales charges which are deducted in order
to compensate Prudential for the cost of selling the contract.
Contracts are also subject to monthly charges for the costs of
administering the contract and to compensate Prudential for the
guaranteed minimum death benefit risk.
NOTE 6: TAXES
Prudential is taxed as a "life insurance company" as defined by the
Internal Revenue Code and the results of operations of the Account form
a part of Prudential's consolidated federal tax return. Under current
federal law, no federal income taxes are payable by the Account. As
such, no provision for tax liability has been recorded in these
financial statements.
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
The following amounts represent contract owner activity components for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------
MONEY MARKET DIVERSIFIED BOND
PORTFOLIO PORTFOLIO
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Contract Owner Net Payments ........................ $ 37,611,988 $ 43,029,352 $ 26,569,268 $ 27,918,752
Policy Loans ....................................... (2,736,768) (2,616,136) (3,179,538) (2,676,866)
Policy Loan Repayment and Interest ................. 1,950,095 1,685,370 1,591,062 1,259,455
Surrenders, Withdrawals and Death Benefits ......... (9,187,944) (11,469,314) (7,722,756) (7,179,534)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Options ............................ (4,007,277) (27,263,357) 3,018,103 (3,556,460)
Administrative and Other Charges ................... (8,713,945) (10,301,958) (10,752,740) (11,908,704)
------------ ------------ ------------ ------------
Net Increase (Decrease) in Net Assets Resulting from
Premium Payments and Other Operating Transfers ... $ 14,916,149 $ (6,936,043) $ 9,523,399 $ 3,856,643
============ ============ ============ ============
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------
EQUITY FLEXIBLE MANAGED
PORTFOLIO PORTFOLIO
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Contract Owner Net Payments ........................ $285,120,763 $293,586,658 $206,491,305 $230,098,301
Policy Loans ....................................... (45,013,313) (36,815,052) (34,928,110) (29,768,329)
Policy Loan Repayment and Interest ................. 21,138,295 15,156,086 17,294,994 13,061,811
Surrenders, Withdrawals and Death Benefits ......... (97,071,175) (79,836,234) (79,498,303) (69,955,243)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Options ............................ (7,299,784) 281,061 (18,229,089) (12,348,231)
Administrative and Other Charges ................... (131,817,860) (137,177,962) (106,307,492) (115,580,696)
------------ ------------ ------------ ------------
Net Increase (Decrease) in Net Assets Resulting from
Premium Payments and Other Operating Transfers ... $ 25,056,926 $ 55,194,557 $(15,176,695) $ 15,507,613
============ ============ ============ ============
</TABLE>
A19
<PAGE>
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------
CONSERVATIVE BALANCED ZERO COUPON BOND 2000
PORTFOLIO PORTFOLIO
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Contract Owner Net Payments ........................ $ 172,963,578 $ 193,920,159 $ 3,242,362 $ 4,066,622
Policy Loans ....................................... (24,402,529) (21,017,180) (644,425) (515,179)
Policy Loan Repayment and Interest ................. 13,921,518 10,130,000 360,153 224,553
Surrenders, Withdrawals and Death Benefits ......... (68,346,109) (68,407,322) (1,526,453) (1,236,692)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Options ............................ (16,607,607) (19,240,097) (1,096,463) (1,986,651)
Administrative and Other Charges ................... (91,363,858) (100,869,775) (1,619,003) (1,957,807)
------------- ------------- ------------- -------------
Net Increase (Decrease) in Net Assets Resulting from
Premium Payments and Other Operating Transfers ... $ (13,835,007) $ (5,484,215) $ (1,283,829) $ (1,405,154)
============= ============= ============= =============
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------
HIGH YIELD BOND STOCK INDEX
PORTFOLIO PORTFOLIO
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Contract Owner Net Payments ........................ $ 20,544,444 $ 19,451,504 $ 139,848,176 $ 126,688,004
Policy Loans ....................................... (2,652,877) (2,378,667) (21,632,900) (15,814,797)
Policy Loan Repayment and Interest ................. 1,492,709 1,433,405 8,895,587 5,919,148
Surrenders, Withdrawals and Death Benefits ......... (7,617,762) (6,747,487) (40,266,311) (32,499,126)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Options ............................ 945,487 (2,355,030) 22,168,188 30,361,425
Administrative and Other Charges ................... (8,497,933) (9,029,043) (62,397,410) (56,128,875)
------------- ------------- ------------- -------------
Net Increase (Decrease) in Net Assets Resulting from
Premium Payments and Other Operating Transfers ... $ 4,214,068 $ 374,682 $ 46,615,330 $ 58,525,779
============= ============= ============= =============
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------
EQUITY INCOME NATURAL RESOURCES
PORTFOLIO PORTFOLIO
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Contract Owner Net Payments ........................ $ 95,299,141 $ 79,016,436 $ 29,732,123 $ 35,927,519
Policy Loans ....................................... (12,921,751) (9,558,454) (3,757,335) (4,989,959)
Policy Loan Repayment and Interest ................. 5,682,713 3,893,428 2,389,809 2,524,073
Surrenders, Withdrawals and Death Benefits ......... (27,141,623) (21,564,128) (9,543,364) (10,791,367)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Options ............................ 9,043,514 21,482,832 (15,621,028) (3,663,884)
Administrative and Other Charges ................... (40,729,679) (36,599,080) (11,289,685) (16,073,256)
------------- ------------- ------------- -------------
Net Increase (Decrease) in Net Assets Resulting from
Premium Payments and Other Operating Transfers ... $ 29,232,315 $ 36,671,034 $ (8,089,480) $ 2,933,126
============= ============= ============= =============
</TABLE>
A20
<PAGE>
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------
GLOBAL GOVERNMENT INCOME
PORTFOLIO PORTFOLIO
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Contract Owner Net Payments ........................ $ 35,377,261 $ 34,211,689 $ 13,880,043 $ 15,732,416
Policy Loans ....................................... (3,157,015) (2,628,076) (1,989,148) (1,668,544)
Policy Loan Repayment and Interest ................. 1,774,955 1,262,980 898,042 767,258
Surrenders, Withdrawals and Death Benefits ......... (8,032,750) (7,075,480) (5,652,510) (5,308,280)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Options ............................ (6,124,691) 4,870,997 1,151,981 (6,634,816)
Administrative and Other Charges ................... (12,788,521) (13,085,971) (6,654,093) (7,709,072)
------------- ------------- ------------- -------------
Net Increase (Decrease) in Net Assets Resulting from
Premium Payments and Other Operating Transfers ... $ 7,049,239 $ 17,556,139 $ 1,634,315 $ (4,821,038)
============= ============= ============= =============
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------
ZERO COUPON BOND 2005 PRUDENTIAL JENNISON
PORTFOLIO PORTFOLIO
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Contract Owner Net Payments ........................ $ 4,711,062 $ 5,574,118 $ 57,263,567 $ 34,294,641
Policy Loans ....................................... (669,881) (467,791) (4,014,420) (1,732,453)
Policy Loan Repayment and Interest ................. 324,154 216,018 1,563,575 744,576
Surrenders, Withdrawals and Death Benefits ......... (1,903,102) (1,546,854) (7,435,590) (3,227,110)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Options ............................ 1,015,999 (2,416,503) 39,232,682 16,630,147
Administrative and Other Charges ................... (2,279,627) (2,536,288) (19,483,871) (11,791,465)
------------- ------------- ------------- -------------
Net Increase (Decrease) in Net Assets Resulting from
Premium Payments and Other Operating Transfers ... $ 1,198,605 $ (1,177,300) $ 67,125,943 $ 34,918,336
============= ============= ============= =============
<CAPTION>
SUBACCOUNTS (CONTINUED)
----------------------------
SMALL CAPITALIZATION STOCK
PORTFOLIO
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Contract Owner Net Payments......................... $36,924,377 $24,433,471
Policy Loans........................................ (2,138,180) (1,222,173)
Policy Loan Repayment and Interest.................. 1,083,949 675,140
Surrenders, Withdrawals and Death Benefits.......... (4,861,386) (2,326,066)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Options............................. 7,146,825 23,570,817
Administrative and Other Charges.................... (11,395,563) (7,984,667)
----------- -----------
Net Increase (Decrease) in Net Assets Resulting from
Premium Payments and Other Operating Transfers ... $26,760,022 $37,146,522
=========== ===========
</TABLE>
NOTE 8: NET INCREASE (DECREASE) IN NET ASSETS RETAINED IN THE ACCOUNT
The increase (decrease) in net assets retained in the account
represents the net contributions (withdrawals) of Prudential to (from)
the Account. Effective October 13, 1998 Prudential no longer maintains
a position in the account. Previously, Prudential maintained a position
in the Account for liquidity purposes including unit purchases and
redemptions, fund share transactions and expense processing.
A21
<PAGE>
NOTE 9: UNIT ACTIVITY
Transactions in units (including transfers among subaccounts) for the
years ended December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------------------
MONEY DIVERSIFIED
MARKET BOND EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------- -------------------------- --------------------------
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 69,014,332 65,667,687 19,897,577 16,213,787 81,572,816 92,473,729
Contract Owner Redemptions: (57,752,616) (69,425,851) (15,092,779) (14,250,810) (74,174,443) (76,628,697)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------------------------
FLEXIBLE CONSERVATIVE ZERO COUPON
MANAGED BALANCED BOND 2000
PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------- -------------------------- ------------------------
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 76,938,185 93,973,164 78,380,210 93,048,913 1,980,913 1,934,757
Contract Owner Redemptions: (81,055,189) (87,813,519) (82,911,926) (94,880,956) (2,493,753) (2,549,332)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------------------------
HIGH YIELD STOCK
BOND INDEX EQUITY INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------- -------------------------- -------------------------
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 19,318,322 17,186,033 45,264,098 50,408,149 34,330,488 34,569,866
Contract Owner Redemptions: (16,933,871) (16,878,090) (34,390,053) (34,222,528) (26,544,454) (24,004,754)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------------------------
NATURAL GOVERNMENT
RESOURCES GLOBAL INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------- -------------------------- -------------------------
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 15,093,093 18,586,440 32,534,226 37,198,997 12,383,025 10,260,445
Contract Owner Redemptions: (18,219,964) (17,455,643) (27,960,335) (24,567,571) (11,507,261) (12,866,478)
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------------
SMALL
CAPITALIZATION
ZERO COUPON BOND 2005 PRUDENTIAL JENNISON STOCK
PORTFOLIO PORTFOLIO PORTFOLIO
------------------------- -------------------------- -------------------------
1998 1997 1998 1997 1998 1997
---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 3,651,972 2,986,424 53,654,104 36,782,725 38,172,591 38,237,386
Contract Owner Redemptions: (3,174,685) (3,539,701) (22,113,796) (16,099,947) (22,883,043) (15,077,042)
</TABLE>
A22
<PAGE>
NOTE 10: PURCHASES AND SALES OF INVESTMENTS
The aggregate costs of purchases and proceeds from sales of investments
in the Series Fund for the year ended December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
PORTFOLIOS
---------------------------------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE
MARKET BOND EQUITY MANAGED BALANCED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Purchases ......... $ 57,177,894 $ 15,015,417 $ 72,079,382 $ 16,973,713 $ 11,684,173
Sales ............. $(44,818,980) $ (6,242,732) $(55,820,468) $(40,983,032) $(32,494,317)
<CAPTION>
PORTFOLIOS (CONTINUED)
----------------------------------------------------------------------------------------
ZERO COUPON HIGH YIELD STOCK EQUITY NATURAL
BOND 2000 BOND INDEX INCOME RESOURCES
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Purchases ......... $ 1,220,018 $ 19,316,751 $ 67,429,443 $ 43,196,936 $ 2,582,880
Sales ............. $ (2,582,019) $(15,842,603) $(25,048,171) $(16,697,526) $(11,602,393)
<CAPTION>
PORTFOLIOS (CONTINUED)
-----------------------------------------------------------------------------------------
SMALL
GOVERNMENT ZERO COUPON PRUDENTIAL CAPITALIZATION
GLOBAL INCOME BOND 2005 JENNISON STOCK
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Purchases ......... $ 16,771,209 $ 8,068,432 $ 2,927,654 $ 69,593,982 $ 34,436,602
Sales ............. $(10,675,075) $ (6,975,097) $ (1,818,752) $ (3,377,329) $ (8,456,285)
</TABLE>
NOTE 11: RELATED PARTY TRANSACTIONS
Prudential has purchased multiple PVAL contracts insuring the lives of
certain employees. Prudential is the owner and beneficiary of the
contracts. There were no net premium payments for the year ended
December 31, 1998. Equity of contract owners in the Flexible Managed
subaccount at December 31, 1998 includes approximately $259.7 million
owned by Prudential.
A23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of the Variable Appreciable Life Subaccounts of the
Prudential Variable Appreciable Account
and the Board of Directors of
The Prudential Insurance Company of America
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of the subaccounts (Money Market
Portfolio, Diversified Bond Portfolio, Equity Portfolio, Flexible Managed
Portfolio, Conservative Balanced Portfolio, Zero Coupon Bond 2000 Portfolio,
High Yield Bond Portfolio, Stock Index Portfolio, Equity Income Portfolio,
Natural Resources Portfolio, Global Portfolio, Government Income Portfolio, Zero
Coupon Bond 2005 Portfolio, Prudential Jennison Portfolio and Small
Capitalization Stock Portfolio) of the Variable Appreciable Life Subaccounts of
the Prudential Variable Appreciable Account at December 31, 1998, the results of
each of their operations and the changes in each of their net assets for each of
the three years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of The
Prudential Insurance Company of America's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of shares owned at December 31, 1998,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 19, 1999
A24
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT ACCOUNTANTS
DECEMBER 31, 1998 AND 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Policyholders of
The Prudential Insurance Company of America
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in equity and
of cash flows present fairly, in all material respects, the financial position
of The Prudential Insurance Company of America and its subsidiaries at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
2
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1998 AND 1997 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1998: $76,997; 1997: $71,496) $ 80,158 $ 75,270
Held to maturity, at amortized cost (fair value, 1998: $17,906; 1997: $19,894) 16,848 18,700
Trading account assets, at fair value 8,888 6,347
Equity securities, available for sale, at fair value (cost, 1998: $2,583; 1997: $2,376) 2,759 2,810
Mortgage loans on real estate 16,495 16,004
Investment real estate 801 1,519
Policy loans 7,476 7,034
Securities purchased under agreements to resell 10,252 8,661
Cash collateral for borrowed securities 5,622 5,047
Other long-term investments 2,658 2,489
Short-term investments 9,781 12,106
--------- ---------
Total investments 161,738 155,987
Cash 1,943 1,859
Accrued investment income 1,795 1,909
Broker-dealer related receivables 10,142 8,442
Deferred policy acquisition costs 6,462 6,083
Other assets 15,721 11,452
Separate Account assets 81,621 73,839
--------- ---------
TOTAL ASSETS $ 279,422 $ 259,571
========= =========
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits $ 69,129 $ 67,367
Policyholders' account balances 30,974 33,246
Unpaid claims and claim adjustment expenses 3,860 4,864
Policyholders' dividends 1,444 1,269
Securities sold under agreements to repurchase 21,486 12,347
Cash collateral for loaned securities 7,132 14,117
Income taxes payable 785 500
Broker-dealer related payables 6,530 3,338
Securities sold but not yet purchased 5,771 3,648
Other liabilities 16,169 14,659
Short-term debt 10,082 6,774
Long-term debt 4,734 4,273
Separate Account liabilities 80,931 73,451
--------- ---------
Total liabilities 259,027 239,853
--------- ---------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 16)
EQUITY
Accumulated other comprehensive income 1,232 1,661
Retained earnings 19,163 18,057
--------- ---------
Total equity 20,395 19,718
--------- ---------
TOTAL LIABILITIES AND EQUITY $ 279,422 $ 259,571
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums $ 9,024 $ 9,005 $ 9,999
Policy charges and fee income 1,462 1,434 1,490
Net investment income 9,520 9,456 9,461
Realized investment gains, net 2,630 2,168 1,128
Commissions and other income 4,451 4,481 4,512
-------- -------- --------
Total revenues 27,087 26,544 26,590
-------- -------- --------
BENEFITS AND EXPENSES
Policyholders' benefits 9,976 10,076 11,094
Interest credited to policyholders' account balances 1,806 2,044 2,251
Dividends to policyholders 2,478 2,422 2,339
General and administrative expenses 9,720 8,992 8,956
Sales practices remedies 510 1,640 410
-------- -------- --------
Total benefits and expenses 24,490 25,174 25,050
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,597 1,370 1,540
-------- -------- --------
Income taxes
Current 1,185 101 556
Deferred (215) 306 (376)
-------- -------- --------
970 407 180
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 1,627 963 1,360
-------- -------- --------
DISCONTINUED OPERATIONS
Loss from Healthcare operations, net of taxes (298) (353) (282)
Loss on disposal of Healthcare operations, net of taxes (223) -- --
-------- -------- --------
Net loss from discontinued operations (521) (353) (282)
-------- -------- --------
NET INCOME $ 1,106 $ 610 $ 1,078
======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED OTHER COMPREHENSIVE INCOME
------------------------------------------------------
FOREIGN NET TOTAL
CURRENCY UNREALIZED PENSION ACCUMULATED OTHER
TRANSLATION INVESTMENT LIABILITY COMPREHENSIVE RETAINED TOTAL
ADJUSTMENTS GAINS ADJUSTMENT INCOME EARNINGS EQUITY
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ (24) $ 2,397 $ -- $ 2,373 $ 16,369 $ 18,742
Comprehensive income (loss):
Net income 1,078 1,078
Other comprehensive income (loss), net of tax:
Change in foreign currency translation
adjustments (32) (32) (32)
Change in net unrealized investment gains (1,261) (1,261) (1,261)
Additional pension liability adjustment (4) (4) (4)
--------
Other comprehensive income (loss) (1,297)
--------
Total comprehensive income (loss) (219)
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 (56) 1,136 (4) 1,076 17,447 18,523
Comprehensive income:
Net income 610 610
Other comprehensive income (loss), net of tax:
Change in foreign currency translation
adjustments (29) (29) (29)
Change in net unrealized investment gains 616 616 616
Additional pension liability adjustment (2) (2) (2)
--------
Other comprehensive income 585
--------
Total comprehensive income 1,195
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 (85) 1,752 (6) 1,661 18,057 19,718
Comprehensive income:
Net income 1,106 1,106
Other comprehensive income, net of tax:
Change in foreign currency translation
adjustments 54 54 54
Change in net unrealized investment gains (480) (480) (480)
Additional pension liability adjustment (3) (3) (3)
--------
Other comprehensive income (429)
--------
Total comprehensive income 677
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ (31) $ 1,272 $ (9) $ 1,232 $ 19,163 $ 20,395
=============================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,106 $ 610 $ 1,078
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net (2,660) (2,209) (1,138)
Policy charges and fee income (135) (258) (208)
Interest credited to policyholders' account balances 1,806 2,044 2,251
Depreciation and amortization 305 258 266
Loss (gain) on disposal of businesses 223 -- (116)
Change in:
Deferred policy acquisition costs (165) (142) (122)
Future policy benefits and other insurance liabilities 584 2,762 2,471
Securities purchased under agreements to resell (1,591) (3,314) (217)
Trading account assets (2,540) (1,825) (433)
Income taxes receivable/payable 594 (1,391) (937)
Cash collateral for borrowed securities (575) (2,631) (332)
Cash collateral for securities loaned (net) (6,985) 5,668 2,891
Broker-dealer related receivables/payables 1,495 (672) (607)
Securities sold but not yet purchased 2,122 1,633 251
Securities sold under agreements to repurchase 9,139 4,844 (490)
Other, net (5,168) 4,142 (1,334)
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES (2,445) 9,519 3,274
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale 123,151 123,550 123,368
Fixed maturities, held to maturity 4,466 4,042 4,268
Equity securities, available for sale 2,792 2,572 2,162
Mortgage loans on real estate 4,839 4,299 5,731
Investment real estate 1,364 1,842 615
Other long-term investments 1,848 5,081 3,203
Disposal of businesses -- -- 52
Payments for the purchase of:
Fixed maturities, available for sale (126,742) (129,854) (125,093)
Fixed maturities, held to maturity (2,244) (2,317) (2,844)
Equity securities, available for sale (2,547) (2,461) (2,384)
Mortgage loans on real estate (4,885) (3,363) (1,906)
Investment real estate (31) (241) (142)
Other long-term investments (1,415) (4,148) (2,060)
Short-term investments (net) 2,145 (2,848) (1,915)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES 2,741 (3,846) 3,055
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits 6,955 5,020 2,676
Policyholders' account withdrawals (11,111) (9,873) (8,099)
Net increase in short-term debt 2,422 305 583
Proceeds from the issuance of long-term debt 1,940 324 93
Repayments of long-term debt (418) (464) (1,306)
-------- -------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES (212) (4,688) (6,053)
-------- -------- --------
NET INCREASE IN CASH 84 985 276
CASH, BEGINNING OF YEAR 1,859 874 598
-------- -------- --------
CASH, END OF YEAR $ 1,943 $ 1,859 $ 874
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 163 $ 968 $ 793
-------- -------- --------
Interest paid $ 864 $ 708 $ 595
-------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS
The Prudential Insurance Company of America and its subsidiaries
(collectively, "the Company") provide financial services throughout the
United States and several locations worldwide. The Company's businesses
provide a full range of insurance, investment, securities brokerage and
other financial products and services to both retail consumers and
institutions. Principal products and services provided include life
insurance, property and casualty insurance, annuities, mutual funds,
pension and retirement related investments and administration, asset
management, and securities brokerage.
DEMUTUALIZATION
On February 10, 1998, the Company's Board of Directors authorized
management to take the preliminary steps necessary to allow the Company to
demutualize and become a publicly traded stock company. On July 1, 1998,
legislation was enacted in New Jersey that would permit this conversion to
occur and that specified the process for conversion. Demutualization is a
complex process involving development of a plan of reorganization, adoption
of a plan by the Company's Board of Directors, a public hearing, voting by
qualified voters and regulatory approval. There can be no assurance that
the Company will demutualize or, if it does so, when demutualization will
occur.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The
Prudential Insurance Company of America, a mutual life insurance company,
and its consolidated subsidiaries, and those partnerships and joint
ventures in which the Company has a controlling interest. The consolidated
financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). All significant intercompany
balances and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the period. Actual results could
differ from those estimates.
INVESTMENTS
FIXED MATURITIES classified as "available for sale" are carried at
estimated fair value. Fixed maturities that the Company has both the
positive intent and ability to hold to maturity are stated at amortized
cost and classified as "held to maturity." The amortized cost of fixed
maturities are written down to estimated fair value when a decline in value
is considered to be other than temporary. Unrealized gains and losses on
fixed maturities "available for sale," net of income tax, the effect on
deferred policy acquisition costs and participating annuity contracts that
would result from the realization of unrealized gains and losses, are
included in a separate component of equity, "Accumulated other
comprehensive income."
TRADING ACCOUNT ASSETS AND SECURITIES SOLD BUT NOT YET PURCHASED are
carried at estimated fair value. Realized and unrealized gains and losses
on trading account assets and securities sold but not yet purchased are
included in "Commissions and other income."
EQUITY SECURITIES, available for sale, are comprised of common and
non-redeemable preferred stock and are carried at estimated fair value. The
associated unrealized gains and losses, net of income tax, and the effects
on deferred policy acquisition costs and participating annuity contracts
that would result from the realization of unrealized gains and losses are
included in a separate component of equity, "Accumulated other
comprehensive income."
8
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal
balances, net of unamortized discounts and allowance for losses. The
allowance for losses is based upon a loan specific review and, for
performing loans collectively evaluated, a portfolio review. The loan
specific review includes consideration of expected future cash flows
relative to outstanding balances. The portfolio review includes
consideration of the composition of the loan portfolio, current economic
conditions, past results, current trends, the estimated aggregate value of
the underlying collateral, and other relevant environmental factors.
Impaired loans are identified by management as loans in which a probability
exists that all amounts due according to the contractual terms of the loan
agreement will not be collected. Impaired loans, identified in management's
specific review of probable loan losses, are measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate, or the fair value of the collateral if the loan is
collateral dependent.
Interest received on impaired loans, including loans that were previously
modified in a troubled debt restructuring, is either applied against the
principal or reported as revenue, according to management's judgment as to
the collectibility of principal. Management discontinues the accrual of
interest on impaired loans after the loans are 90 days delinquent as to
principal or interest, or earlier when management has serious doubts about
collectibility. When a loan is recognized as impaired, any accrued but
unpaid interest previously recorded on such loan is reversed against
interest income of the current period. Generally, a loan is restored to
accrual status only after all delinquent interest and principal are brought
current and, in the case of loans where interest has been interrupted for a
substantial period, a regular payment performance has been established.
INVESTMENT REAL ESTATE to be disposed of is carried at the lower of
depreciated cost or fair value less selling costs and is not depreciated
once classified as such. Real estate which the Company has the intent to
hold for the production of income, is carried at depreciated cost less any
write-downs to fair value for impairment losses and is reviewed for
impairment whenever events or circumstances indicate the carrying value may
not be recoverable. In reviewing recoverability, an impairment loss is
recognized for an other than temporary decline in value to the extent the
reduction in carrying values of investment real estate exceeds estimated
undiscounted future cash flows. Charges relating to real estate to be
disposed of and impairments of real estate held for investment are included
in "Realized investment gains, net." Depreciation on real estate is
computed using the straight-line method over the estimated lives of the
properties.
POLICY LOANS are carried at unpaid principal balances.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE are treated as financing arrangements and are
carried at the amounts at which the securities will be subsequently resold
or reacquired, including accrued interest, as specified in the respective
agreements. The Company's policy is to take possession of securities
purchased under agreements to resell. The market value of securities to be
repurchased or resold is monitored, and additional collateral is requested,
where appropriate, to protect against credit exposure.
SECURITIES BORROWED AND SECURITIES LOANED are treated as financing
arrangements and are recorded at the amount of cash advanced or received.
With respect to securities loaned, the Company obtains collateral in an
amount equal to 102% and 105% of the fair value of the domestic and foreign
securities, respectively. The Company monitors the market value of
securities borrowed and loaned on a daily basis with additional collateral
obtained as necessary. Non-cash collateral received is not reflected in the
consolidated statements of financial position because the debtor typically
has the right to redeem the collateral on short notice. Substantially all
of the Company's securities borrowed contracts are with other brokers and
dealers, commercial banks and institutional clients. Substantially all of
the Company's securities loaned are with large brokerage firms.
9
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities repurchase and resale agreements and securities borrowed and
loaned transactions are used to generate net investment income and
facilitate trading activity. These instruments are short-term in nature
(usually 30 days or less) and are collateralized principally by U.S.
Government and mortgage-backed securities. The carrying amounts of these
instruments approximate fair value because of the relatively short period
of time between the origination of the instruments and their expected
realization.
OTHER LONG-TERM INVESTMENTS primarily represent the Company's investments
in joint ventures and partnerships in which the Company does not have
control and derivatives held for purposes other than trading. Joint venture
and partnership investments are recorded using the equity method of
accounting, reduced for other than temporary declines in value.
SHORT-TERM INVESTMENTS, including highly liquid debt instruments purchased
with an original maturity of twelve months or less, are carried at
amortized cost, which approximates fair value.
REALIZED INVESTMENT GAINS, NET are computed using the specific
identification method. Costs of fixed maturities and equity securities are
adjusted for impairments considered to be other than temporary. Allowances
for losses on mortgage loans on real estate are netted against asset
categories to which they apply and provisions for losses on investments are
included in "Realized investment gains, net." Decreases in the lower of
depreciated cost or fair value less selling costs of investment real estate
held for sale are recorded in "Realized investment gains, net."
CASH
Cash includes cash on hand, amounts due from banks, and money market
instruments.
DEFERRED POLICY ACQUISITION COSTS
The costs which vary with and that are related primarily to the production
of new insurance business are deferred to the extent such costs are deemed
recoverable from future profits. Such costs include certain commissions,
costs of policy issuance and underwriting, and certain variable field
office expenses. Deferred policy acquisition costs are subject to
recoverability testing at the time of policy issue and loss recognition
testing at the end of each accounting period. Deferred policy acquisition
costs, for certain products, are adjusted for the impact of unrealized
gains or losses on investments as if these gains or losses had been
realized, with corresponding credits or charges included in "Accumulated
other comprehensive income."
For participating life insurance, deferred policy acquisition costs are
amortized over the expected life of the contracts (up to 45 years) in
proportion to estimated gross margins based on historical and anticipated
future experience, which is updated periodically. The effect of changes in
estimated gross margins is reflected in earnings in the period they are
revised. Policy acquisition costs related to interest-sensitive products
and certain investment-type products are deferred and amortized over the
expected life of the contracts (periods ranging from 15 to 30 years) in
proportion to estimated gross profits arising principally from investment
results, mortality and expense margins and surrender charges based on
historical and anticipated future experience, updated periodically. The
effect of revisions to estimated gross profits on unamortized deferred
acquisition costs is reflected in earnings in the period such estimated
gross profits are revised. The average rate of assumed investment yield in
estimating expected gross margins was 9.97%, 9.39%, and 8.39% for 1998,
1997 and 1996, respectively. Deferred policy acquisition costs related to
non-participatory term insurance are amortized over the expected life of
the contracts in proportion to the premium income.
For property and casualty contracts, deferred policy acquisition costs are
amortized over the period in which related premiums are earned. Future
investment income is considered in determining the recoverability of
deferred policy acquisition costs.
10
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For disability insurance, group life insurance and most group annuities,
acquisition costs are expensed as incurred.
POLICYHOLDERS' DIVIDENDS
The amount of the dividends to be paid to policyholders is determined
annually by the Company's Board of Directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity, persistency and expense experience for the year and judgment as
to the appropriate level of statutory surplus to be retained by the
Company.
SEPARATE ACCOUNT ASSETS AND LIABILITIES
Separate Account assets and liabilities are reported at estimated fair
value and represent segregated funds which are invested for certain
policyholders, pension fund and other customers. The assets consist of
common stocks, fixed maturities, real estate related securities, real
estate mortgage loans and short term investments. The assets of each
account are legally segregated and are not subject to claims that arise out
of any other business of the Company. Investment risks associated with
market value changes are generally borne by the customers, except to the
extent of minimum guarantees made by the Company with respect to certain
accounts. The investment income and gains or losses for separate accounts
generally accrue to the policyholders and are not included in the
Consolidated Statements of Operations. Mortality, policy administration and
surrender charges on the accounts are included in "Policy charges and fee
income."
OTHER ASSETS AND OTHER LIABILITIES
Other assets consist primarily of prepaid benefit costs, reinsurance
recoverables, certain restricted assets, trade receivables and property and
equipment. Property and equipment are stated at cost less accumulated
depreciation. Depreciation is determined using the straight-line method
over the estimated useful lives of the related assets which generally range
from 3 to 40 years. Other liabilities consist primarily of trade payables
and reserves for sales practice remediation costs.
INSURANCE REVENUE AND EXPENSE RECOGNITION
Premiums from participating insurance policies are recognized when due.
Benefits are recorded as an expense when they are incurred. A liability for
future policy benefits is recorded using the net level premium method.
Premiums from non-participating group annuities with life contingencies are
recognized when due. For single premium immediate annuities and structured
settlements, premiums are recognized when due with any excess profit
deferred and recognized in a constant relationship to insurance in-force
or, for annuities, the amount of expected future benefit payments.
Amounts received as payment for interest sensitive investment contracts,
deferred annuities and participating group annuities are reported as
deposits to "Policyholders' account balances." Revenues from these
contracts are reflected in "Policy charges and fee income" and consist
primarily of fees assessed during the period against the policyholders'
account balances for mortality charges, policy administration charges,
surrender charges and interest earned from the investment of these account
balances. Benefits and expenses for these products include claims in excess
of related account balances, expenses of contract administration, interest
credited and amortization of deferred policy acquisition costs.
For disability insurance, group life insurance, and property and casualty
insurance, premiums are recognized over the period to which the premiums
relate in proportion to the amount of insurance protection provided. Claim
and claim adjustment expenses are recognized when incurred.
11
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premiums, benefits and expenses are stated net of reinsurance ceded to
other companies. Estimated reinsurance receivables and the cost of
reinsurance are recognized over the life of the reinsured policies using
assumptions consistent with those used to account for the underlying
policies.
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Assets and liabilities of foreign operations and subsidiaries reported in
other than U.S. dollars are translated at the exchange rate in effect at
the end of the period. Revenues, benefits and other expenses are translated
at the average rate prevailing during the period. The effects of
translating the Statements of Financial Position of non-U.S. entities with
functional currencies other than the U.S. dollar are recorded, net of
related hedge gains and losses and income taxes, as "Other comprehensive
income," a separate component of equity.
COMMISSIONS AND OTHER INCOME
Commissions and other income principally includes securities and
commodities commission revenues, asset management fees, investment banking
revenue and realized and unrealized gains from trading activities of the
Company's broker-dealer subsidiary.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose values are derived from
interest rates, foreign exchange rates, various financial indices, or the
value of securities or commodities. Derivative financial instruments can be
exchange-traded or contracted in the over-the-counter market and those used
by the Company include swaps, futures, forwards and options contracts. The
Company uses derivative financial instruments to hedge market risk from
changes in interest rates or foreign currency exchange rates, and to alter
interest rate or currency exposures arising from mismatches between assets
and liabilities. Additionally, derivatives are used in the broker-dealer
business and in a limited-purpose subsidiary for trading purposes.
To qualify as a hedge, derivatives must be designated as hedges for
existing assets, liabilities, firm commitments, or anticipated transactions
which are identified and probable to occur, and effective in reducing the
market risk to which the Company is exposed. The effectiveness of the
derivatives are evaluated at the inception of the hedge and throughout the
hedge period.
DERIVATIVES HELD FOR TRADING PURPOSES are used in the Company's securities
broker-dealer business and in a limited-purpose subsidiary to meet the
needs of its customers by structuring transactions that allow customers to
manage their exposure to interest rates, foreign exchange rates, indices or
prices of securities and commodities. Trading derivative positions are
valued daily, generally by obtaining quoted market prices or through the
use of pricing models. Values are affected by changes in interest rates,
currency exchange rates, credit spreads, market volatility and liquidity.
The Company monitors these exposures through the use of various analytical
techniques.
Derivatives held for trading are recorded at fair value in "Trading account
assets," "Other liabilities" or "Receivables from/Payables to broker-dealer
clients" in the Consolidated Statements of Financial Position, and realized
and unrealized changes in fair value are included in "Commissions and other
income" of the Consolidated Statements of Operations in the periods in
which the changes occur. Cash flows from trading derivatives are reported
in the operating activities section of the Consolidated Statements of Cash
Flows.
DERIVATIVES HELD FOR PURPOSES OTHER THAN TRADING are primarily used to
hedge or reduce exposure to interest rate and foreign currency risks
associated with assets held or expected to be purchased or sold, and
liabilities incurred or expected to be incurred. Additionally, other than
trading derivatives are used to change the characteristics of the Company's
asset/liability mix consistent with the Company's risk management
activities.
12
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
See Note 14 for a discussion of the accounting treatment of derivatives
that qualify as hedges. If the Company's use of other than trading
derivatives does not meet the criteria to apply hedge accounting, the
derivatives are recorded at fair value in "Other long-term investments" or
"Other liabilities" in the Consolidated Statements of Financial Position,
and changes in their fair value are recognized in earnings in "Realized
investment gains, net" without considering changes in the hedged assets or
liabilities. Cash flows from other than trading derivative assets and
liabilities are reported in the investing activities section in the
Consolidated Statements of Cash Flows.
INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal
income tax return. The Internal Revenue Code (the "Code") limits the amount
of non-life insurance losses that may offset life insurance company taxable
income. The Code also imposes an "equity tax" on mutual life insurance
companies which, in effect, imputes an additional tax to the Company based
on a formula that calculates the difference between stock and mutual life
insurance companies' earnings. Income taxes include an estimate for changes
in the total equity tax to be paid for current and prior years.
Subsidiaries operating outside the United States are taxed under applicable
foreign statutes.
Deferred income taxes are generally recognized, based on enacted rates,
when assets and liabilities have different values for financial statement
and tax reporting purposes. A valuation allowance is recorded to reduce a
deferred tax asset to that portion that is expected to be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS 125"). The statement provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities and provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. SFAS 125 became effective January 1, 1997 and
was applied prospectively. Subsequent to June 1996, FASB issued SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of SFAS 125"
("SFAS 127"). SFAS 127 delayed the implementation of SFAS 125 for one year
for certain provisions, including repurchase agreements, dollar rolls,
securities lending and similar transactions. The Company adopted the
delayed provisions of SFAS 125 in 1998. The adoption of SFAS 125 did not
have a material impact on the Company's results of operations or financial
position.
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which was issued by the FASB in June 1997. This statement defines
comprehensive income and establishes standards for reporting and displaying
comprehensive income and its components in financial statements. The
statement requires that the Company classify items of other comprehensive
income by their nature and display the accumulated balance of other
comprehensive income separately from retained earnings in the equity
section of the Statements of Financial Position. Application of this
statement did not change recognition or measurement of net income and,
therefore, did not affect the Company's financial position or results of
operations.
During 1998, the Company adopted SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which was issued by the
FASB in February 1998. This statement standardizes the disclosure
requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligations and fair
values of plan assets and eliminates certain disclosures. This statement is
limited to changes in reporting and presentation and does not change
recognition or measurement of pension or other postretirement benefit
plans. Therefore, its adoption did not affect the Company's financial
position or results of operations.
13
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On January 1, 1998, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP
97-3"). This statement provides guidance for determining when an insurance
company or other enterprise should recognize a liability for guaranty-fund
assessments as well as guidance for measuring the liability. The adoption
of SOP 97-3 did not have a material effect on the Company's financial
condition or results of operations. In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133 provides, if certain conditions are met, that a
derivative may be specifically designated as (1) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment (fair value hedge), (2) a hedge of the
exposure to variable cash flows of a forecasted transaction (cash flow
hedge), or (3) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an
available-for-sale security or a foreign-currency-denominated forecasted
transaction (foreign currency hedge).
SFAS No. 133 does not apply to most traditional insurance contracts.
However, certain hybrid contracts that contain features which can affect
settlement amounts similarly to derivatives may require separate accounting
for the "host contract" and the underlying "embedded derivative"
provisions. The latter provisions would be accounted for as derivatives as
specified by the statement.
Under SFAS No. 133, the accounting for changes in fair value of a
derivative depends on its intended use and designation. For a fair value
hedge, the gain or loss is recognized in earnings in the period of change
together with the offsetting loss or gain on the hedged item. For a cash
flow hedge, the effective portion of the derivative's gain or loss is
initially reported as a component of other comprehensive income and
subsequently reclassified into earnings when the forecasted transaction
affects earnings. For a foreign currency hedge, the gain or loss is
reported in other comprehensive income as part of the foreign currency
translation adjustment. For all other derivatives not designated as hedging
instruments, the gain or loss is recognized in earnings in the period of
change. The Company is required to adopt this Statement no later than
January 1, 2000 and is currently assessing the effect of the new standard.
In October 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk," ("SOP 98-7"). This statement provides guidance on
how to account for insurance and reinsurance contracts that do not transfer
insurance risk. SOP 98-7 is effective for fiscal years beginning after June
15, 1999. The adoption of this statement is not expected to have a material
effect on the Company's financial position or results of operations.
RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to current
year presentation.
14
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS
In December 1998, the Company entered into a definitive agreement to sell
its HealthCare business to Aetna Inc. ("Aetna"). Included in this
transaction are the Company's managed medical care, point of service,
preferred provider organization and indemnity health lines, dental
business, as well as the Company's Administrative Services Only ("ASO")
businesses. The transaction was approved by the boards of directors of both
companies and is expected to be completed in the second quarter of 1999,
subject to review by federal antitrust authorities and approval by state
regulators, and other customary closing conditions. Proceeds from the sale
will consist of $500 million of cash and $500 million of Aetna three year
senior notes.
Loss from operations of discontinued businesses for 1998 includes results
through December 31, 1998 (the measurement date). The Statements of
Operations for 1997 and 1996 have been restated to conform with the 1998
presentation. Amounts within the footnotes have been adjusted, where noted,
to eliminate the impact of discontinued operations and to be consistent
with the presentation in the Consolidated Statements of Operations. The
following table presents the results of operations and the loss on the
disposal of the Company's HealthCare business, determined as of the
measurement date, which are included in "Discontinued Operations" in the
Consolidated Statements of Operations. Amounts for 1997 and 1996 include
revenues and expenses relating to a contract with the American Association
of Retired Persons for healthcare and similar coverages which was
terminated effective December 31, 1997.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(In Millions)
<S> <C> <C> <C>
Revenues $ 7,461 $ 10,305 $ 9,187
Policyholder benefits (6,064) (8,484) (7,711)
General and administrative expenses (1,822) (2,364) (1,921)
--------- --------- ---------
Loss before income taxes (425) (543) (445)
Income tax benefit 127 190 163
--------- --------- ---------
Loss from operations (298) (353) (282)
Loss on disposal, net of tax benefit of $131 (223) - -
--------- --------- ---------
Loss from discontinued operations, net of taxes $ (521) $ (353) $ (282)
========= ========= =========
</TABLE>
The loss on disposal includes anticipated operating losses to be incurred
by the HealthCare business subsequent to the measurement date through the
expected date of the sale, as well as estimates of other costs the Company
will incur in connection with the disposition of the HealthCare business.
Actual amounts may differ from these estimates. These include costs
attributable to facilities closure and systems terminations, severance,
payments to Aetna related to the ASO business, and estimated payments in
connection with an agreement covering the fully insured medical and dental
business. The latter agreement provides for payments either to or from
Aetna in the event that medical loss ratios (i.e., incurred medical expense
divided by earned premiums) for covered businesses are either less
favorable or more favorable than levels specified in the agreement for the
years 1999 and 2000. The loss on disposition was reduced by the estimated
impact of expected modifications of certain pension and other
postretirement benefit plans in which employees of the HealthCare business
participate. This amount includes curtailment gains and the cost of
termination benefits. (See Note 9.)
15
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS (CONTINUED)
The following table presents the assets and liabilities pertaining to the
Company's HealthCare business at December 31, 1998 which are included in
the Company's Consolidated Statements of Financial Position.
(In Millions)
Cash and investments $ 1,652
Other assets 1,030
-------
Total assets 2,682
Future policy benefits 1,241
Other liabilities 1,105
-------
Total liabilities 2,346
-------
Net assets $ 336
=======
4. INVESTMENTS
FIXED MATURITIES AND EQUITY SECURITIES
The following tables provide additional information relating to fixed
maturities and equity securities (excluding trading account assets) as of
December 31:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5,761 $ 580 $ 9 $ 6,332
Obligations of U.S. states and
their political subdivisions 2,672 204 1 2,875
Foreign government bonds 3,156 253 52 3,357
Corporate securities 57,373 2,545 553 59,365
Mortgage-backed securities 7,935 208 14 8,129
Other fixed maturities 100 - - 100
-----------------------------------------------------------
Total fixed maturities available for sale $ 76,997 $ 3,790 $ 629 $ 80,158
===========================================================
EQUITY SECURITIES AVAILABLE FOR SALE $ 2,583 $ 472 $ 296 $ 2,759
===========================================================
</TABLE>
16
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY (In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 5 $ - $ - $ 5
Obligations of U.S. states and
their political subdivisions 62 2 1 63
Foreign government bonds 31 4 - 35
Corporate securities 16,699 1,096 49 17,746
Mortgage-backed securities 1 - - 1
Other fixed maturities 50 6 - 56
------------------------------------------------------------
Total fixed maturities held to maturity $ 16,848 $ 1,108 $ 50 $ 17,906
============================================================
<CAPTION>
1997
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE (In Millions)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 9,071 $ 671 $ - $ 9,742
Obligations of U.S. states and
their political subdivisions 1,529 152 - 1,681
Foreign government bonds 3,177 218 17 3,378
Corporate securities 50,043 2,611 144 52,510
Mortgage-backed securities 7,576 288 5 7,859
Other fixed maturities 100 - - 100
-----------------------------------------------------------
Total fixed maturities available for sale $ 71,496 $ 3,940 $ 166 $ 75,270
===========================================================
EQUITY SECURITIES AVAILABLE FOR SALE $ 2,376 $ 680 $ 246 $ 2,810
===========================================================
</TABLE>
17
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ----------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FIXED MATURITIES HELD TO MATURITY
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 88 $ - $ - $ 88
Obligations of U.S. states and
their political subdivisions 152 4 1 155
Foreign government bonds 33 5 - 38
Corporate securities 18,282 1,212 34 19,460
Mortgage-backed securities 1 - - 1
Other fixed maturities 144 8 - 152
------------------------------------------------------------
Total fixed maturities held to maturity $ 18,700 $ 1,229 $ 35 $ 19,894
============================================================
</TABLE>
18
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities by
contractual maturities at December 31, 1998, is shown below:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------- -----------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ -------------- ----------- ----------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
Due in one year or less $ 2,638 $ 2,644 $ 730 $ 736
Due after one year through five years 17,551 17,874 4,326 4,465
Due after five years through ten years 19,523 19,976 6,783 7,162
Due after ten years 29,350 31,535 5,008 5,542
Mortgage-backed securities 7,935 8,129 1 1
--------- ---------- -------- --------
Total $ 76,997 $ 80,158 $ 16,848 $ 17,906
========= ========== ======== ========
</TABLE>
Actual maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations.
Proceeds from the repayment of held to maturity fixed maturities during
1998, 1997 and 1996 were $4,466 million, $4,042 million and $4,268 million,
respectively. Gross gains of $135 million, $62 million and $78 million, and
gross losses of $2 million, $1 million and $7 million, were realized on
prepayment of held to maturity fixed maturities during 1998, 1997 and 1996,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1998,
1997 and 1996 were $119,096 million, $120,604 million and $121,910 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1998, 1997 and 1996 were $ 4,055 million, $2,946 million
and $1,458 million, respectively. Gross gains of $1,765 million, $1,310
million and $1,562 million and gross losses of $443 million, $639 million
and $1,026 million were realized on sales and prepayments of available for
sale fixed maturities during 1998, 1997 and 1996, respectively.
Writedowns for impairments of fixed maturities which were deemed to be
other than temporary were $96 million, $13 million and $54 million for the
years 1998, 1997 and 1996, respectively.
During the years ended December 31, 1998 and December 31, 1997, certain
securities classified as held to maturity were transferred to the available
for sale portfolio. These actions were taken as a result of a significant
deterioration in credit worthiness. The aggregate amortized cost of the
securities transferred was $73 million and $27 million, respectively with
gross unrealized investment losses of $.4 million and gross unrealized
investment gains of $.6 million included during the years ended December
31, 1998 and 1997, respectively, in "Accumulated other comprehensive
income" at the time of the transfer.
19
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans were collateralized by the following property
types at December 31:
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
(IN MILLIONS) OF TOTAL (IN MILLIONS) OF TOTAL
------------- ---------- ------------- ----------
1998 1997
------------------------ -------------------------
Office buildings $ 4,267 25.2% $ 4,692 28.5%
Retail stores 3,021 17.9% 3,078 18.7%
Residential properties 716 4.2% 891 5.4%
Apartment complexes 4,362 25.8% 3,551 21.6%
Industrial buildings 1,989 11.8% 1,958 11.9%
Agricultural properties 1,936 11.4% 1,666 10.1%
Other 631 3.7% 618 3.8%
-------- ----- -------- -----
Subtotal 16,922 100.0% 16,454 100.0%
===== =====
Allowance for losses (427) (450)
-------- --------
Net carrying value $ 16,495 $ 16,004
======== ========
The mortgage loans are geographically dispersed throughout the United
States and Canada with the largest concentrations in California (23.8%)
and New York (9.5%) at December 31, 1998. Included in the above balances
are mortgage loans receivable from affiliated joint ventures of $87 million
and $225 million at December 31, 1998 and 1997, respectively.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
1998 1997 1996
----- ----- -----
(In Millions)
Allowance for losses, beginning of year $ 450 $ 515 $ 862
Additions charged to operations - - -
Release of allowance for losses - (41) (247)
Charge-offs, net of recoveries (23) (24) (100)
----- ----- -----
Allowance for losses, end of year $ 427 $ 450 $ 515
===== ===== =====
The $41 million and $247 million reductions of the mortgage loan allowance
for losses in 1997 and 1996, respectively, are primarily attributable to
the improved economic climate, changes in the nature and mix of borrowers
and underlying collateral and a significant decrease in impaired loans.
20
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
Impaired mortgage loans identified in management's specific review of
probable loan losses and related allowance for losses at December 31, are
as follows:
1998 1997
------- -------
(In Millions)
Impaired mortgage loans with allowance for losses $ 149 $ 330
Impaired mortgage loans with no allowance for losses 924 1,303
Allowance for losses (45) (97)
------- -------
Net carrying value of impaired mortgage loans $ 1,028 $ 1,536
======= =======
Impaired mortgage loans with no provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. The average recorded investment in impaired loans before
allowance for losses was $1,329 million, $2,102 million and $2,842 million
during 1998, 1997 and 1996, respectively. Net investment income recognized
on these loans totaled $94 million, $140 million and $265 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
INVESTMENT REAL ESTATE
The Company's "Investment real estate" of $801 million and $1,519 million
at December 31, 1998 and 1997, respectively, is held through direct
ownership. Of the Company's real estate, $675 million and $1,490 million
consists of commercial and agricultural assets held for disposal at
December 31, 1998 and 1997, respectively. Impairment losses aggregated $8
million, $40 million and $38 million for the years ended December 31, 1998,
1997 and 1996, respectively, and are included in "Realized investment
gains, net."
RESTRICTED ASSETS AND SPECIAL DEPOSITS
Assets of $3,135 million and $2,783 million at December 31, 1998 and 1997,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $3,727
million and $2,352 million at December 31, 1998 and 1997, respectively,
were held in voluntary trusts. Of this amount, $3,131 million and $1,801
million at December 31, 1998 and 1997, respectively, related to the
multi-state policyholder settlement as described in Note 16. The remainder
relates to trusts established to fund guaranteed dividends to certain
policyholders. The terms of these trusts provide that the assets are to be
used for payment of the designated settlement and dividend benefits, as the
case may be. Assets valued at $403 million and $632 million at December 31,
1998 and 1997, respectively, were maintained as compensating balances,
which do not legally restrict the use of the funds, or pledged as
collateral for bank loans and other financing agreements. Restricted cash
and securities of $2,366 million and $1,835 million at December 31, 1998
and 1997, respectively, were included in the consolidated financial
statements in "Other assets." The restricted cash represents funds
deposited by clients and funds accruing to clients as a result of trades or
contracts.
OTHER LONG-TERM INVESTMENTS
The Company's "Other long-term investments" of $2,658 million and $2,489
million as of December 31, 1998 and 1997, respectively, are comprised of
$1,007 million and $1,498 million in real estate related interests and
$1,651 million and $991 million of non-real estate related interests. The
Company's share of net income from such entities was $285 million, $411
million and $245 million for 1998, 1997 and 1996, respectively, and is
reported in "Net investment income."
21
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES
NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Fixed maturities - available for sale $ 5,366 $ 5,074 $ 4,871
Fixed maturities - held to maturity 1,406 1,622 1,793
Trading account assets 677 504 444
Equity securities - available for sale 54 52 81
Mortgage loans on real estate 1,525 1,555 1,690
Investment real estate 230 565 685
Policy loans 410 396 384
Securities purchased under agreements to resell 18 15 11
Receivables from broker-dealer clients 836 706 579
Short-term investments 725 697 702
Other investment income 415 520 559
-------- -------- --------
Gross investment income 11,662 11,706 11,799
Less investment expenses (2,035) (2,038) (2,130)
-------- -------- --------
Subtotal 9,627 9,668 9,669
Less amount relating to discontinued operations (107) (212) (208)
-------- -------- --------
Net investment income $ 9,520 $ 9,456 $ 9,461
======== ======== ========
</TABLE>
REALIZED INVESTMENT GAINS, NET, for the years ended December 31, were from
the following sources:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Fixed maturities $ 1,381 $ 684 $ 513
Mortgage loans on real estate 22 68 248
Investment real estate 642 700 76
Equity securities - available for sale 427 363 267
Other 188 394 34
-------- -------- --------
Subtotal 2,660 2,209 1,138
Less amounts related to discontinued operations (30) (41) (10)
-------- -------- --------
Realized investment gains, net $ 2,630 $ 2,168 $ 1,128
======== ======== ========
</TABLE>
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1998 included in fixed maturities available
for sale, mortgage loans on real estate and other long term investments
totaled $1 million, $23 million and $13 million, respectively.
22
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS (CONTINUED)
NET UNREALIZED INVESTMENT GAINS
Net unrealized investment gains on securities available for sale are
included in the Consolidated Statements of Financial Position as a
component of "Accumulated other comprehensive income." Changes in these
amounts include reclassification adjustments to avoid double-counting in
"Comprehensive income," items that are included as part of "Net income" for
a period that also had been part of "Other comprehensive income" in earlier
periods. The amounts for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Millions)
<S> <C> <C> <C>
Net unrealized investment gains, beginning of year $ 1,752 $ 1,136 $ 2,397
Changes in net unrealized investment gains attributable to:
Investments:
Net unrealized investment gains (losses) on investments arising
during the period 522 1,706 (1,281)
Reclassification adjustment for gains included in net income (1,087) (631) (471)
------- ------- -------
Change in net unrealized investment gains, net of adjustments (565) 1,075 (1,752)
Impact of net unrealized investment gains on:
Future policy benefits 23 (360) 318
Deferred policy acquisition costs 62 (99) 173
------- ------- -------
Change in net unrealized investment gains (480) 616 (1,261)
------- ------- -------
Net unrealized investment gains, end of year $ 1,272 $ 1,752 $ 1,136
======= ======= =======
</TABLE>
Unrealized gains (losses) on investments arising during the periods
reported in the above table are net of income tax expense (benefit) of $282
million, $961 million and $(647) million for the years ended December 31,
1998, 1997 and 1996, respectively.
Reclassification adjustments reported in the above table for the years
ended December 31, 1998, 1997 and 1996 are net of income tax expense of
$588 million, $355 million and $238 million, respectively.
The future policy benefits reported in the above table are net of income
tax expense (benefit) of $15 million, $(203) million and $161 million for
the years ended December 31, 1998, 1997 and 1996, respectively.
Deferred policy acquisition costs in the above tables for the years ended
December 31, 1998, 1997 and 1996 are net of income tax expense (benefit) of
$36 million, $(55) million and $88 million, respectively.
23
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Millions)
<S> <C> <C> <C>
Balance, beginning of year $ 6,083 $ 6,095 $ 5,892
Capitalization of commissions, sales and issue expenses 1,313 1,409 1,260
Amortization (1,139) (1,176) (1,261)
Change in unrealized investment gains 77 (154) 261
Foreign currency translation 128 (91) (57)
------- ------- -------
Balance, end of year $ 6,462 $ 6,083 $ 6,095
======= ======= =======
</TABLE>
6. POLICYHOLDERS' LIABILITIES
FUTURE POLICY BENEFITS at December 31, are as follows:
1998 1997
------- -------
(In Millions)
Life insurance $48,927 $46,765
Annuities 15,360 15,469
Other contract liabilities 4,842 5,133
------- -------
Future policy benefits $69,129 $67,367
======= =======
Life insurance liabilities include reserves for death and endowment policy
benefits, terminal dividends, premium deficiency reserves, and certain
health benefits. Annuity liabilities include reserves for immediate
annuities and non-participating group annuities. Other contract liabilities
primarily consist of unearned premium and benefit reserves for group health
products.
24
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (CONTINUED)
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- --------------------------- ------------------------- ------------------------- ------------------------
<S> <C> <C> <C>
Life insurance Generally rates 2.5% to 7.5% Net level premium
guaranteed in calculating based on non-forfeiture
cash surrender values interest rate
Individual immediate 1983 Individual 3.5% to 11.25% Present value of
annuities Annuity Mortality expected future payments
Table with certain based on historical
modifications experience
Group annuities in 1950 Group 3.75% to 17.35% Present value of
payout status Annuity Mortality expected future
Table with certain payments
modifications based on historical
experience
Other contract liabilities - 5.3% to 7.0% Present value of
expected future
payments
based on historical
experience
</TABLE>
For the above categories, premium deficiency reserves are established, if
necessary, when the liability for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for
expected future policy benefits and expenses and to recover any unamortized
acquisition costs. A premium deficiency reserve has been recorded for the
group single premium annuity business, which consists of limited-payment,
long duration, traditional and non-participating annuities. A liability of
$1,780 million and $1,645 million is included in "Future policy benefits"
with respect to this deficiency for the years ended December 31, 1998 and
1997, respectively.
POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In Millions)
<S> <C> <C>
Individual annuities $ 4,997 $ 5,695
Group annuities and guaranteed investment contracts 16,770 19,053
Interest-sensitive life contracts 3,566 3,258
Dividend accumulations and other 5,641 5,240
------- --------
Policyholders' account balances $30,974 $ 33,246
======= ========
</TABLE>
Policyholders' account balances for interest-sensitive life and
investment-type contracts represent an accumulation of gross premium
payments plus credited interest less withdrawals, expenses and mortality
charges.
25
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (Continued)
Certain contract provisions that determine the policyholder account
balances are as follows:
<TABLE>
<CAPTION>
WITHDRAWAL/
PRODUCT INTEREST RATE SURRENDER CHARGES
--------------------------------- ------------- -----------------------------------
<S> <C> <C>
Individual annuities 3.0% to 6.6% 0% to 8% for up to 8 years
Group annuities 5.0% to 13.4% Contractually limited or subject
to market value adjustment
Guaranteed investment contracts 3.9% to 15.4% Subject to market value withdrawal
payout status provisions for any funds withdrawn
other than for benefit responsive
and contractual payments
Interest-sensitive life contracts 4.0% to 6.5% Various up to 10 years
Dividend accumulations and other 3.0% to 4.5% --
</TABLE>
26
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (Continued)
Unpaid Claims and Claim Adjustment Expenses. The following table provides
a reconciliation of the activity in the liability for unpaid claims and
claim adjustment expenses for property and casualty and accident and
health insurance at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- -----------------------
ACCIDENT PROPERTY ACCIDENT PROPERTY ACCIDENT PROPERTY
AND HEALTH AND CASUALTY AND HEALTH AND CASUALTY AND HEALTH AND CASUALTY
---------- ------------ ---------- ------------ ---------- -------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 $ 1,908 $ 2,956 $ 1,990 $ 3,076 $ 2,033 $ 3,053
Less reinsurance recoverables 810 535 10 553 15 557
------- ------- ------- ------- ------- -------
Net balance at January 1 1,098 2,421 1,980 2,523 2,018 2,496
------- ------- ------- ------- ------- -------
Incurred related to:
Current year 6,127 1,354 8,348 1,525 8,391 1,760
Prior years 7 (194) 102 (91) (66) (25)
------- ------- ------- ------- ------- -------
Total incurred 6,134 1,160 8,450 1,434 8,325 1,735
------- ------- ------- ------- ------- -------
Paid related to:
Current year 5,289 717 6,676 739 6,589 908
Prior years 851 681 1,854 797 1,774 800
------- ------- ------- ------- ------- -------
Total paid 6,140 1,398 8,530 1,536 8,363 1,708
------- ------- ------- ------- ------- -------
Net balance at December 31 1,092 2,183 1,900 2,421 1,980 2,523
Plus reinsurance recoverables 52 533 8 535 10 553
------- ------- ------- ------- ------- -------
Balance at December 31 $ 1,144 $ 2,716 $ 1,908 $ 2,956 $ 1,990 $ 3,076
======= ======= ======= ======= ======= =======
</TABLE>
The Accident and Health balance at December 31 includes amounts
attributable to the Company's discontinued HealthCare business: 1998 -
$1,082; 1997 - $1,757 and 1996 - $1,750.
In 1998 and 1997, the changes in provision for claims and claim adjustment
expenses for property and casualty related to prior years are primarily
driven by lower than anticipated losses for the Voluntary Auto line of
business.
The changes in provision for claims and claim adjustment expense for
accident and health related to prior years are primarily due to such
factors as changes in claim cost trends and an accelerated decline in the
indemnity health business.
The unpaid claims and claim adjustment expenses presented above consist of
unpaid claim liabilities which include estimates for liabilities
associated with reported claims and for incurred but not reported claims
based, in part, on the Company's experience. Changes in the estimated cost
to settle unpaid claims are charged or credited to the Consolidated
Statement of Operations periodically as the estimates are revised.
Accident and health unpaid claims liabilities for 1998, 1997 and 1996
included above are discounted using interest rates ranging from 3.0%
to 6.0%.
27
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. REINSURANCE
The Company participates in reinsurance in order to provide greater
diversification of business, provide additional capacity for future growth
and limit the maximum net loss potential arising from large risks. Life
reinsurance is accomplished through various plans of reinsurance,
primarily yearly renewable term and coinsurance. Property-casualty
reinsurance is placed on both a pro-rata and excess of loss basis.
Reinsurance ceded arrangements do not discharge the Company or the
insurance subsidiaries as the primary insurer. Ceded balances would
represent a liability to the Company in the event the reinsurers were
unable to meet their obligations to the Company under the terms of the
reinsurance agreements. The Company periodically reviews the financial
condition of its reinsurers and amounts recoverable therefrom, recording
an allowance when necessary for uncollectible reinsurance.
Reinsurance amounts included in the Consolidated Statements of Operations,
excluding HealthCare, for the years ended December 31, were as follows:
1998 1997 1996
------- ------ -------
(In Millions)
Direct Premiums $9,615 $9,679 $10,690
Reinsurance Assumed 65 42 13
Reinsurance Ceded (656) (716) (704)
------ ------ -------
Premiums $9,024 $9,005 $ 9,999
====== ====== =======
Policyholders' benefits ceded $ 519 $ 530 $ 571
====== ====== =======
Reinsurance recoverables, included in "Other assets" in the Company's
Consolidated Statements of Financial Position, at December 31, were as
follows:
1998 1997
------ ------
(In Millions)
Life insurance $ 620 $ 685
Property-casualty 564 554
Other reinsurance 92 65
------ ------
$1,276 $1,304
====== ======
28
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT
Debt consists of the following at December 31:
SHORT-TERM DEBT
1998 1997
------- ------
(In Millions)
Commercial paper $ 7,057 $4,268
Notes payable 2,164 2,151
Current portion of long-term debt 861 355
------- ------
Total short-term debt $10,082 $6,774
======= ======
The weighted average interest rate on outstanding short-term debt was
approximately 5.4% and 6.0% at December 31, 1998 and 1997, respectively.
The Company issues commercial paper primarily to manage operating cash flows and
existing commitments, meet working capital needs and take advantage of current
investment opportunities. Commercial paper borrowings are supported by various
lines of credit.
LONG-TERM DEBT
<TABLE>
<CAPTION>
DESCRIPTION MATURITY DATES RATE 1998 1997
- ----------- -------------- ---- ----- ----
(In Millions)
<S> <C> <C> <C> <C>
Floating rate notes ("FRN") 1999 - 2005 4.04-14.00%(a) $ 729 $ 324
Long term notes 1999 - 2023 5.5% - 12% 1,318 910
Zero coupon notes 1999 8.6% (b) 364 334
Canadian dollar notes - 7.0% - 9.125% - 117
Japanese yen notes 1999 - 2000 0.5% - 4.6% 160 178
Swiss francs notes - 3.875% - 120
Canadian dollar FRN 2003 5.25%-5.89% 96 96
Surplus notes 2003 - 2025 6.875% - 8.3% 987 986
Senior notes 1999 - 2006 6.375% 393 -
Commercial paper backed by long-term
credit agreements 1,500 1,500
Other notes payable 1999 - 2017 4% - 7.5% 48 63
------- -------
Subtotal 5,595 4,628
Less: current portion of long-term debt (861) (355)
------- -------
Total long-term debt $ 4,734 $ 4,273
======= =======
</TABLE>
(a) The Company issued an S&P 500 index linked note of $29 million in September
of 1997. The interest rate on the note is based on the appreciation of the
S&P 500 index, with a contractual cap of 14%. At December 31, 1998, this
rate was 14%. Excluding this note, floating rate note interest rates were
between 4.04% - 5.50%.
(b) The rate shown for zero coupon notes represents a level yield to maturity.
29
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
Payment of interest and principal on the surplus notes issued after 1993,
of which $686 million were outstanding at December 31, 1998, may be made
only with the prior approval of the Commissioner of Insurance of the State
of New Jersey.
In order to modify exposure to interest rate and currency exchange rate
movements, the Company utilizes derivative instruments, primarily interest
rate swaps, in conjunction with some of its debt issues. The effect of
these derivative instruments is included in the calculation of the
interest expense on the associated debt, and as a result, the effective
interest rates on the debt may differ from the rates reflected in the
tables above. Floating rates are determined by formulas and may be subject
to certain minimum or maximum rates.
Scheduled principal repayments of long-term debt as of December 31, 1998,
are as follows: $862 million in 1999, $560 million in 2000, $327 million
in 2001, $1,816 million in 2002, $458 million in 2003 and $1,575 million
thereafter.
At December 31, 1998, the Company had $9,853 million in lines of credit
from numerous financial institutions of which $8,330 million were unused.
These lines of credit generally have terms ranging from one to five years.
Interest expense for short-term and long-term debt is $920 million,
$743 million and $618 million for the years ended December 31, 1998, 1997
and 1996, respectively.
9. EMPLOYEE BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT PLANS
The Company has funded non-contributory defined benefit pension plans
which cover substantially all of its employees. The Company also has
several non-funded non-contributory defined benefit plans covering
certain executives. Benefits are generally based on career average
earnings and credited length of service. The Company's funding policy is
to contribute annually an amount necessary to satisfy the Internal
Revenue Service contribution guidelines.
The Company provides certain life insurance and health care benefits
("Other postretirement benefits") for its retired employees, their
beneficiaries and covered dependents. The healthcare plan is
contributory; the life insurance plan is non-contributory. Substantially
all of the Company's employees may become eligible to receive benefits if
they retire after age 55 with at least 10 years of service or under
certain circumstances after age 50 with at least 20 years of continuous
service. These benefits are funded as considered necessary by Company
management.
The Company has elected to amortize its transition obligation for other
postretirement benefits over 20 years.
30
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Prepaid and accrued benefit costs are included in "Other assets" and
"Other liabilities", respectively, in the Company's Consolidated
Statements of Financial Position. The status of these plans as of
September 30, adjusted for fourth quarter activity, is summarized below:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- ------------------------
1998 1997 1998 1997
-------- ------- ------- -------
(In Millions) (In Millions)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at the beginning of period $(5,557) $(5,148) $(2,128) $(2,002)
Service cost (159) (127) (35) (38)
Interest cost (397) (376) (142) (149)
Plan participants' contributions - - ( 6) (4)
Amendments (58) - - 31
Actuarial losses (600) (334) (31) (84)
Transfer to third party - 32 - -
Contractual termination benefits (30) (63) - -
Benefits paid 485 460 128 117
Foreign currency changes 7 (1) 1 1
------- ------- ------- -------
Benefit obligation at end of period $(6,309) $(5,557) $(2,213) $(2,128)
======= ======= ======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of period $ 8,489 $ 7,306 $ 1,354 $ 1,313
Actual return on plan assets 445 1,693 146 120
Transfer to third party (4) (32) - -
Contribution from pension plan - - 31 25
Employer contributions 25 16 13 9
Plan participants' contributions - - 6 4
Withdrawal under IRS Section 420 (36) (35) - -
Benefits paid (485) (460) (128) (117)
Foreign currency changes (7) 1 - -
------- ------- ------- -------
Fair value of plan assets at end of period $ 8,427 $ 8,489 $ 1,422 $ 1,354
======= ======= ======= =======
FUNDED STATUS:
Funded status at end of period $ 2,118 $ 2,932 $ (791) $ (774)
Unrecognized transition (asset) liability (554) (661) 660 707
Unrecognized prior service cost 335 327 - -
Unrecognized actuarial net gain (813) (1,644) (353) (364)
Effects of 4th quarter activity (9) (63) 2 33
------- ------- ------- -------
Net amount recognized $ 1,077 $ 891 $ (482) $ (398)
======= ======= ======= =======
AMOUNTS RECOGNIZED IN THE STATEMENTS OF FINANCIAL
POSITION CONSIST OF:
Prepaid benefit cost $ 1,348 $ 1,150 $ - $ -
Accrued benefit liability (287) (270) (482) (398)
Intangible asset 7 5 - -
Accumulated other comprehensive income 9 6 - -
-------- -------- -------- ---------
Net amount recognized $ 1,077 $ 891 $ (482) $ (398)
======== ======== ======== =========
</TABLE>
31
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $384 million, $284 million and
$0, respectively, as of September 30, 1998 and $319 million, $226 million
and $ 0, respectively, as of September 30, 1997.
The effects of fourth quarter activity are summarized as follows:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- -----------------------
1998 1997 1998 1997
------ ------- ------ ------
(In Millions)
<S> <C> <C> <C> <C>
Effect of IRS Section 420 transfer $ - $ (36) $ - $ -
Contractual termination benefits (14) (30) - -
Contribution from pension plan - - - 31
Employer contributions 5 3 2 2
----- ------- ------ ------
Effects of 4th quarter activity $ (9) $ (63) $ 2 $ 33
====== ======= ====== ======
</TABLE>
Pension plan assets consist primarily of equity securities, bonds, real estate
and short-term investments, of which $5,926 million and $6,022 million are
included in Separate Account assets and liabilities at September 30, 1998 and
1997, respectively.
Other postretirement plan assets consist of group and individual variable life
insurance policies, group life and health contracts, common stocks, U.S.
government securities and short-term investments. Plan assets include $1,018
million and $1,044 million of Company insurance policies and contracts at
September 30, 1998 and 1997, respectively.
Effective December 31, 1996, The Prudential Securities Incorporated Cash Balance
Plan (the "PSI Plan") was merged into The Retirement System for United States
Employees and Special Agents of The Prudential Insurance Company of America (the
"Prudential Plan"). The name of the merged plan is The Prudential Merged
Retirement Plan ("Merged Retirement Plan"). All of the assets of the Merged
Retirement Plan are available to pay benefits to participants and their
beneficiaries who are covered by the Merged Retirement Plan. The merger of the
plans had no effect on the December 31, 1996 results of operations.
During 1996, the Prudential Plan was amended to provide cost of living
adjustments for retirees. The effect of this plan amendment increased benefit
obligations and unrecognized prior service cost by $170 million at September 30,
1996. In addition, the Prudential Plan was amended to provide contractual
termination benefits to certain plan participants who were notified between
September 15, 1996 and December 31, 1998 that their employment had been
terminated. Costs related to these amendments are reflected below in contractual
termination benefits.
32
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic benefit cost included in "General and administrative expenses"
in the Company's Consolidated Statements of Operations for the years ended
December 31, includes the following components:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------- ------------------------------------
1998 1997 1996 1998 1997 1996
----------------------------------- ------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFITS COSTS:
Service cost $ 159 $ 127 $ 140 $ 35 $ 38 $ 45
Interest cost 397 376 354 142 149 157
Expected return on plan assets (674) (617) (594) (119) (87) (93)
Amortization of transition amount (106) (106) (107) 47 50 53
Amortization of prior service cost 45 42 26 - - -
Amortization of actuarial net (gain) loss 1 - - (13) (13) (3)
Curtailment gain (loss) 5 - - - - (9)
Contractual termination benefits 14 30 63 - - -
------- ------- ------- ------- ------- ------
Net periodic (benefit) cost $ (159) $ (148) $ (118) $ 92 $ 137 $ 150
======= ======= ======= ======= ======= ======
</TABLE>
The assumptions at September 30, used by the Company to calculate the benefit
obligations as of that date and to determine the benefit cost in the subsequent
year are as follows:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------ ----------------------------------------
1998 1997 1996 1998 1997 1996
------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate 6.50% 7.25% 7.75% 6.50% 7.25% 7.75%
Rate of increase in compensation levels 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Expected return on plan assets 9.50% 9.50% 9.50% 9.00% 9.00% 9.00%
Health care cost trend rates - - - 7.80-11.00% 8.20-11.80% 8.50-12.50%
Ultimate health care cost trend rate
after gradual decrease until 2006 - - - 5.00% 5.00% 5.00%
</TABLE>
33
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage point
increase and decrease in assumed health care cost trend rates would have
the following effects:
OTHER
POSTRETIREMENT BENEFITS
-----------------------
1998
------
(In Millions)
ONE PERCENTAGE POINT INCREASE
Effect on total service and interest costs $ 24
Effect on postretirement benefit obligation (226)
ONE PERCENTAGE POINT DECREASE
Effect on total service and interest costs $ (19)
Effect on postretirement benefit obligation 187
POSTEMPLOYMENT BENEFITS
The Company accrues postemployment benefits primarily for life and health
benefits provided to former or inactive employees who are not retirees. The
net accumulated liability for these benefits at December 31, 1998 and 1997
was $135 million and $144 million, respectively, and is included in "Other
liabilities."
OTHER EMPLOYEE BENEFITS
The Company sponsors voluntary savings plans for employees (401(k) plans).
The plans provide for salary reduction contributions by employees and
matching contributions by the Company of up to 3% of annual salary,
resulting in $54 million, $63 million and $57 million of expenses included in
"General and administrative expenses" for 1998, 1997 and 1996, respectively.
DISCONTINUED OPERATIONS
In connection with the disposal of the Company's HealthCare business, as more
fully discussed in Note 3, the loss on disposal was reduced by an estimated
curtailment gain of $30 million.
34
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES
The components of income tax expense for the years ended December 31, were
as follows:
1998 1997 1996
------ ------ ------
(In Millions)
Current tax expense (benefit):
U.S. $ 983 $ (14) $ 400
State and local 54 51 108
Foreign 148 64 48
------ ------ ------
Total $1,185 $ 101 $ 556
====== ====== ======
Deferred tax expense (benefit):
U.S. $ (193) $ 269 $ (428)
State and local (6) 4 (2)
Foreign (16) 33 54
------ ------ ------
Total $ (215) $ 306 $ (376)
====== ====== ======
Total income tax expense $ 970 $ 407 $ 180
====== ====== ======
The Company's income tax expense for the years ended December 31, differs from
the amount computed by applying the expected federal income tax rate of 35% to
income from continuing operations before income taxes for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In Millions)
<S> <C> <C> <C>
Expected federal income tax expense $ 908 $ 480 $ 539
Equity tax (benefit) 75 (65) (365)
State and local income taxes 31 37 69
Tax-exempt interest and dividend received deduction (46) (67) (67)
Other
2 22 4
------ ------ ------
Total income tax expense $ 970 $ 407 $ 180
====== ====== ======
</TABLE>
35
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
1998 1997
------- -------
(In Millions)
Deferred tax assets
Insurance reserves $ 1,584 $ 1,482
Policyholder dividends 265 250
Net operating loss carryforwards 260 80
Litigation related reserves 104 178
Employee benefits 63 42
Other 134 287
------- -------
Deferred tax assets before valuation allowance 2,410 2,319
Valuation allowance (13) (18)
------- -------
Deferred tax assets after valuation allowance 2,397 2,301
------- -------
Deferred tax liabilities
Investments 1,414 1,867
Deferred policy acquisition costs 1,436 1,525
Depreciation 64 36
------- -------
Deferred tax liabilities 2,914 3,428
------- -------
Net deferred tax liability $ 517 $ 1,127
======= =======
Management believes that based on its historical pattern of taxable income, the
Company will produce sufficient income in the future to realize its deferred tax
asset after valuation allowance. Adjustments to the valuation allowance will be
made if there is a change in management's assessment of the amount of the
deferred tax asset that is realizable. At December 31, 1998 and 1997,
respectively, the Company had federal life net operating loss carryforwards of
$540 million and $1,200 million, which expire by 2012. At December 31, 1998 and
1997, respectively, the Company had state non-life operating loss carryforwards
for tax purposes approximating $1,059 million and $800 million, which expire by
2018.
The Internal Revenue Service (the "Service") has completed all examinations of
the consolidated federal income tax returns through 1989. The Service has
examined the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments. Management, however, believes
there are adequate defenses against, or sufficient reserves to provide for such
adjustments. The Service has begun their examination of the years 1993 through
1995.
36
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. STATUTORY EQUITY AND INCOME
Applicable insurance department regulations require that the Company
prepare statutory financial statements in accordance with statutory
accounting practices prescribed or permitted by the New Jersey Department
of Banking and Insurance. Statutory accounting practices primarily differ
from GAAP by charging policy acquisition costs to expense as incurred,
establishing future policy benefits reserves using different actuarial
assumptions, not providing for deferred taxes, and valuing securities on a
different basis. The Company's statutory net income, as filed with the New
Jersey Department of Banking and Insurance was $1,247 million, $1,471
million and $1,402 million for the years 1998, 1997 and 1996,
respectively. Statutory capital and surplus, as filed, at December 31,
1998 and 1997 was $8,536 million and $9,242 million, respectively.
12. OPERATING LEASES
The Company and its subsidiaries occupy leased office space in many
locations under various long-term leases and have entered into numerous
leases covering the long-term use of computers and other equipment. At
December 31, 1998, future minimum lease payments under non-cancelable
operating leases are estimated as follows:
(In Millions)
1999 $ 295
2000 263
2001 231
2002 198
2003 157
Remaining years after 2003 753
-------
Total $ 1,897
=======
Amounts presented in the table above include operating leases relating to
the Company's HealthCare business. See Note 3 for a discussion of the
pending sale of this business. Amounts applicable to the HealthCare
business are $65 million in 1999, $58 million in 2000, $52 million in
2001, $45 million in 2002, $34 million in 2003 and $89 million thereafter.
Rental expense incurred for the years ended December 31, 1998, 1997 and
1996 was approximately $320 million, $352 million and $343 million,
respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values presented below have been determined using
available information and valuation methodologies. Considerable judgment
is applied in interpreting data to develop the estimates of fair value.
Accordingly, such estimates presented may not be realized in a current
market exchange. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair values.
The following methods and assumptions were used in calculating the
estimated fair values (for all other financial instruments presented in
the table, the carrying value approximates estimated fair value).
37
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FIXED MATURITIES AND EQUITY SECURITIES
Estimated fair values for fixed maturities and equity securities, other
than private placement securities, are based on quoted market prices or
estimates from independent pricing services. Fair values for private
placement securities are estimated using a discounted cash flow model
which considers the current market spreads between the U.S. Treasury yield
curve and corporate bond yield curve, adjusted for the type of issue, its
current credit quality and its remaining average life. The fair value of
certain non-performing private placement securities is based on amounts
estimated by management.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of the mortgage loan portfolio is primarily based
upon the present value of the scheduled future cash flows discounted at
the appropriate U.S. Treasury rate, adjusted for the current market spread
for a similar quality mortgage. For certain non-performing loans, the
estimated fair value is based upon the present value of expected future
cash flows discounted at the appropriate U.S. Treasury rate adjusted for
current market spread for a similar quality mortgage.
POLICY LOANS
The estimated fair value of policy loans is calculated using a discounted
cash flow model based upon current U.S. Treasury rates and historical loan
repayments.
DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of swap agreements is estimated based on the present value
of future cash flows under the agreements discounted at the applicable
zero coupon U.S. Treasury rate and swap spread. The fair value of
forwards, futures and options is estimated based on market quotes for a
transaction with similar terms. The estimated fair value of loan
commitments is derived by comparing the contractual stream of fees with
such fee streams adjusted to reflect current market rates that would be
applicable to instruments of similar type, maturity, and credit standing.
POLICYHOLDERS' ACCOUNT BALANCES
Estimated fair values of policyholders' account balances are derived by
using discounted projected cash flows, based on interest rates being
offered for similar contracts, with maturities consistent with those
remaining for the contracts being valued. For interest sensitive life
contracts, fair value approximates carrying value.
DEBT
The estimated fair value of short-term and long-term debt is derived by
using discount rates based on the borrowing rates currently available to
the Company for debt with similar terms and remaining maturities.
38
<PAGE>
- -------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table discloses the carrying amounts and estimated fair
values of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
1998 1997
----------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(In Millions)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Other than trading:
Fixed maturities:
Available for sale $ 80,158 $ 80,158 $ 75,270 $ 75,270
Held to maturity 16,848 17,906 18,700 19,894
Equity securities 2,759 2,759 2,810 2,810
Mortgage loans on real estate 16,495 17,265 16,004 16,703
Policy loans 7,476 8,037 7,034 7,201
Securities purchased under agreements to resell 1,737 1,737 - -
Short-term investments 9,781 9,781 12,106 12,106
Cash 1,943 1,943 1,859 1,859
Restricted Assets 2,366 2,366 1,835 1,835
Separate Account assets 81,621 81,621 73,839 73,839
Derivative financial instruments 132 135 93 92
Trading:
Trading account assets $ 8,888 $ 8,888 $ 6,347 $ 6,347
Broker-dealer related receivables 10,142 10,142 8,442 8,442
Derivative financial instruments 765 765 910 910
Securities purchased under agreements to resell 8,515 8,515 8,661 8,661
Cash collateral for borrowed securities 5,622 5,622 5,047 5,047
FINANCIAL LIABILITIES:
Other than trading:
Policyholders' account balances $ 30,974 $ 31,940 $ 33,246 $ 34,201
Securities sold under agreements to repurchase 7,085 7,085 85 85
Cash collateral for loaned securities 2,450 2,450 9,647 9,647
Short-term and long-term debt 14,816 15,084 11,047 11,131
Securities sold but not yet purchased 2,215 2,215 - -
Separate Account liabilities 80,931 80,931 73,451 73,451
Derivative financial instruments 390 391 100 99
Trading:
Broker-dealer related payables $ 6,530 $ 6,530 $ 3,338 $ 3,338
Derivative financial instruments 725 725 1,019 1,019
Securities sold under agreements to repurchase 14,401 14,401 12,262 12,262
Cash collateral for loaned securities 4,682 4,682 4,470 4,470
Securities sold but not yet purchased 3,556 3,556 3,648 3,648
</TABLE>
39
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
INTEREST RATE SWAPS
The Company uses interest rate swaps to reduce market risks from changes in
interest rates and to alter interest rate exposures arising from mismatches
between assets and liabilities. Under interest rates swaps, the Company
agrees with other parties to exchange, at specified intervals the difference
between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Generally, no cash is
exchanged at the outset of the contract and no principal payments are made
by either party. Cash is paid or received based on the terms of the swap.
These transactions are entered into pursuant to master agreements that
provide for a single net payment to be made by one counterparty at each due
date. The fair value of swap agreements is estimated based on the present
value of future cash flows under the agreements, discounted at the
applicable zero coupon U.S. Treasury rate and swap spread.
If swap agreements meet the criteria for hedge accounting, net interest
receipts or payments are accrued and recognized over the life of the swap
agreements as an adjustment to interest income or expense of the hedged
item. Any unrealized gains or losses are not recognized until the hedged
item is sold or matures. Gains or losses on early termination of interest
rate swaps are deferred and amortized over the remaining period originally
covered by the swaps. If the criteria for hedge accounting are not met, the
swap agreements are accounted for at market value with changes in fair value
reported in current period earnings.
FUTURES AND OPTIONS
The Company uses exchange-traded Treasury futures and options to reduce
market risks from changes in interest rates, to alter mismatches between the
duration of assets in a portfolio and the duration of liabilities supported
by those assets, and to hedge against changes in the value of securities it
owns or anticipates acquiring. The Company enters into exchange-traded
futures and options with regulated futures commissions merchants who are
members of a trading exchange. The fair value of futures and options is
based on market quotes for transactions with similar terms.
Under exchange-traded futures, the Company agrees to purchase a specified
number of contracts with other parties and to post variation margin on a
daily basis in an amount equal to the difference in the daily market values
of those contracts. Futures are typically used to hedge duration mismatches
between assets and liabilities by replicating Treasury performance. Treasury
futures move substantially in value as interest rates change and can be used
to either modify or hedge existing interest rate risk. This strategy
protects against the risk that cash flow requirements may necessitate
liquidation of investments at unfavorable prices resulting from increases in
interest rates. This strategy can be a more cost effective way of
temporarily reducing the Company's exposure to a market decline than selling
fixed income securities and purchasing a similar portfolio when such a
decline is believed to be over.
If futures meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing
financial instruments are amortized as a yield adjustment over the remaining
lives of the hedged item. Futures that do not qualify as hedges are carried
at fair value with changes in value reported in current period earnings. The
gains and losses associated with anticipatory transactions are not material.
40
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
When the Company anticipates a significant decline in the stock market
which will correspondingly affect its diversified portfolio, it may
purchase put index options where the basket of securities in the index is
appropriate to provide a hedge against a decrease in the value of the
equity portfolio or a portion thereof. This strategy effects an orderly
sale of hedged securities. When the Company has large cash flows which it
has allocated for investment in equity securities, it may purchase call
index options as a temporary hedge against an increase in the price of the
securities it intends to purchase. This hedge permits such investment
transactions to be executed with the least possible adverse market impact.
Option premium paid or received is reported as an asset or liability and
amortized into income over the life of the option. If options meet the
criteria for hedge accounting, changes in their fair value are deferred
and recognized as an adjustment to the hedged item. Deferred gains or
losses from the hedges for interest-bearing financial instruments are
recognized as an adjustment to interest income or expense of the hedged
item. If the options do not meet the criteria for hedge accounting, they
are fair valued, with changes in fair value reported in current period
earnings.
CURRENCY DERIVATIVES
The Company uses currency derivatives, including exchange-traded currency
futures and options, currency forwards and currency swaps to reduce market
risks from changes in currency values of investments denominated in
foreign currencies that the Company either holds or intends to acquire and
to alter the currency exposures arising from mismatches between such
foreign currencies and the U.S. Dollar.
Under currency forwards, the Company agrees with other parties upon
delivery of a specified amount of specified currency at a specified future
date. Typically, the price is agreed upon at the time of the contract and
payment for such a contract is made at the specified future date. Under
currency swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between one currency and another at a
forward exchange rate and calculated by reference to an agreed principal
amount. Generally, the principal amount of each currency is exchanged at
the beginning and termination of the currency swap by each party. These
transactions are entered into pursuant to master agreements that provide
for a single net payment to be made by one counterparty for payments made
in the same currency at each due date.
If currency derivatives are effective as hedges of foreign currency
translation and transaction exposures, gains or losses are recorded in
"Accumulated other comprehensive income." If currency derivatives do not
meet hedge accounting criteria, gains or losses from those derivatives are
recognized in current period earnings.
The tables below summarize the Company's outstanding positions by
derivative instrument types as of December 31, 1998 and 1997. The amounts
presented are classified as either trading or other than trading, based on
management's intent at the time of contract inception and throughout the
life of the contract. The table includes the estimated fair values of
outstanding derivative positions only and does not include the changes in
fair values of associated financial and non-financial assets and
liabilities, which generally offset derivative notional amounts. The fair
value amounts presented also do not reflect the netting of amounts
pursuant to right of setoff, qualifying master netting agreements with
counterparties or collateral arrangements.
41
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1998
(In Millions)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
------------------------- ------------------------- -------------------------
ESTIMATED ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 4,564 $ 309 $ 2,200 $ 96 $ 6,764 $ 405
Liabilities 4,734 274 3,065 349 7,799 623
Forwards:
Assets 45,651 282 1,004 14 46,655 296
Liabilities 39,153 280 2,039 37 41,192 317
Futures:
Assets 3,272 61 1,786 23 5,058 84
Liabilities 4,371 47 531 5 4,902 52
Options:
Assets 8,310 113 130 2 8,440 115
Liabilities 6,388 124 213 - 6,601 124
-------- -------- -------- ------- -------- --------
Total:
Assets $ 61,797 $ 765 $ 5,120 $ 135 $ 66,917 $ 900
======== ======== ======== ======= ======== ========
Liabilities $ 54,646 $ 725 $ 5,848 $ 391 $ 60,494 $ 1,116
======== ======== ======== ======= ======== ========
</TABLE>
42
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
DECEMBER 31, 1997
(In Millions)
<TABLE>
<CAPTION>
TRADING OTHER THAN TRADING TOTAL
-------------------------- ------------------------- --------------------------
ESTIMATED ESTIMATED ESTIMATED
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
-------- ----------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Swaps:
Assets $ 5,798 $ 316 $ 1,446 $ 67 $ 7,244 $ 383
Liabilities 5,439 418 1,197 70 6,636 488
Forwards:
Assets 29,947 438 1,171 25 31,118 463
Liabilities 29,985 461 687 8 30,672 469
Futures:
Assets 4,103 51 46 - 4,149 51
Liabilities 3,064 50 3,320 21 6,384 71
Options:
Assets 6,893 105 239 - 7,132 105
Liabilities 3,946 90 224 - 4,170 90
------- ------- ------- ------ ------- -------
Total:
Assets $46,741 $ 910 $ 2,902 $ 92 $49,643 $ 1,002
======= ======= ======= ====== ======= =======
Liabilities $42,434 $ 1,019 $ 5,428 $ 99 $47,862 $ 1,118
======= ======= ======= ====== ======= =======
</TABLE>
CREDIT RISK
The current credit exposure of the Company's derivative contracts is limited to
the fair value at the reporting date. Credit risk is managed by entering into
transactions with creditworthy counterparties and obtaining collateral where
appropriate and customary. The Company also attempts to minimize its exposure to
credit risk through the use of various credit monitoring techniques. At December
31, 1998 and 1997 approximately 97% and 95%, respectively, of the net credit
exposure for the Company from derivative contracts is with investment-grade
counterparties.
Net trading revenues for the years ended December 31, 1998, 1997 and 1996
relating to forwards, futures and swaps were $67 million, $(5) million and $(13)
million; $59 million, $37 million and $(13) million; and $42 million, $32
million and $(11) million, respectively. Net trading revenues for options were
not material. Average fair values for trading derivatives in an asset position
during the years ended December 31, 1998 and 1997 were $1,165 million and $1,015
million, respectively, and for derivatives in a liability position were $1,140
million and $1,166 million, respectively. Of those derivatives held for trading
purposes at December 31, 1998, 63% of the notional amount consisted of interest
rate derivatives, 32% consisted of foreign currency derivatives, and 5%
consisted of equity and commodity derivatives. Of those derivatives held for
purposes other than trading at December 31, 1998, 60% of notional consisted of
interest rate derivatives, 31% consisted of foreign currency derivatives, and 9%
consisted of equity and commodity derivatives.
43
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED)
OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
During the normal course of its business, the Company utilizes financial
instruments with off-balance sheet credit risk such as commitments,
financial guarantees, loans sold with recourse and letters of credit.
Commitments include commitments to purchase and sell mortgage loans, the
underfunded portion of commitments to fund investments in private placement
securities, and unused credit card and home equity lines. In connection
with the Company's commercial banking business, loan commitments for credit
cards and home equity lines of credit include agreements to lend up to
specified limits to customers. It is anticipated that commitment amounts
will only be partially drawn down based on overall customer usage patterns,
and, therefore, do not necessarily represent future cash requirements. The
Company evaluates each credit decision on such commitments at least
annually and has the ability to cancel or suspend such lines at its option.
The total available lines of credit card and home equity commitments were
$3.0 billion of which $2.2 billion remains available at December 31, 1998.
Also in connection with the Company's investment banking activities, the
Company enters into agreements with mortgage originators and others to
provide financing on both a secured and unsecured basis. Aggregate
financing commitments on a secured basis approximate $6.1 billion of which
$3.3 billion remains available at December 31, 1998. Unsecured commitments
approximate $65.0 million, the majority of which is outstanding at December
31, 1998.
Other commitments substantially include commitments to purchase and sell
mortgage loans and the underfunded portion of commitments to fund
investments in private placement securities. These mortgage loans and
private commitments were $2.5 billion of which $1.8 billion remain
available at December 31, 1998. Additionally, mortgage loans sold with
recourse were $0.5 billion at December 31, 1998.
The Company also provides financial guarantees incidental to other
transactions and letters of credit that guarantee the performance of
customers to third parties. These credit-related financial instruments have
off-balance sheet credit risk because only their origination fees, if any,
and accruals for probable losses, if any, are recognized until the
obligation under the instrument is fulfilled or expires. These instruments
can extend for several years and expirations are not concentrated in any
period. The Company seeks to control credit risk associated with these
instruments by limiting credit, maintaining collateral where customary and
appropriate, and performing other monitoring procedures. At December 31,
1998 these were immaterial.
15. DIVESTITURE
On July 31, 1996, the Company sold a substantial portion of its Canadian
Branch business to the London Life Insurance Company ("London Life"). This
transaction was structured as a reinsurance transaction whereby London Life
assumed total liabilities of the Canadian Branch equal to $3,291 million as
well as a related amount of assets equal to $3,205 million. This transfer
resulted in a reduction of policy liabilities of $3,257 million and a
corresponding reduction in invested assets. The Company recognized an
after-tax gain in 1996 of $116 million as a result of this transaction,
recorded in "Realized investment gains, net."
16. CONTINGENCIES AND LITIGATION
STOP-LOSS REINSURANCE AGREEMENT
In connection with the sale in 1995 of its wholly-owned subsidiary
Prudential Reinsurance Company ("Pru Re"), the Company's subsidiary,
Gibraltar Casualty Insurance Company ("Gibraltar") entered into a stop-loss
reinsurance agreement with Pru Re whereby Gibraltar has reinsured up to
$375 million of the first $400 million of aggregate adverse loss
development on reserves recorded by Pru Re at June 30, 1995. The Company
has guaranteed
44
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
Gibraltar's obligations arising under the stop-loss agreement subject to a
limit of $375 million. Through December 31, 1998, Gibraltar has incurred
$375 million in losses under the stop-loss agreement, including $90 million
in 1998. Gibraltar has paid $197 million to Pru Re under the stop-loss
agreement.
ENVIRONMENTAL AND ASBESTOS-RELATED CLAIMS
Certain of the Company's subsidiaries received claims under expired
contracts which assert alleged injuries and/or damages relating to or
resulting from toxic torts, toxic waste and other hazardous substances. The
liabilities for such claims cannot be estimated by traditional reserving
techniques. As a result of judicial decisions and legislative actions, the
coverage afforded under these contracts may be expanded beyond their
original terms. Extensive litigation between insurers and insureds over
these issues continues and the outcome is not predictable. In establishing
the liability for unpaid claims for these losses, management considered the
available information. However, given the expansion of coverage and
liability by the courts and legislatures in the past, and potential for
other unfavorable trends in the future, the ultimate cost of these claims
could increase from the levels currently established.
MANAGED CARE REIMBURSEMENT
The Company has reviewed its obligations under certain managed care
arrangements for possible failure to comply with contractual and regulatory
requirements. It is the opinion of management that adequate reserves have
been established to provide for appropriate reimbursements to customers.
REINSURANCE AND PARTICIPATION AGREEMENT
The Company and a number of other insurers ("the Consortium") entered into
a Reinsurance and Participation Agreement (the "Agreement") with MBL Life
Assurance Corporation ("MBLLAC") and others, under which the Company and
the other insurers agreed to reinsure certain payments to be made to
contract holders by MBLLAC in connection with the plan of rehabilitation of
Mutual Benefit Life Insurance Company. Under the agreement, the Consortium,
subject to certain terms and conditions, will indemnify MBLLAC for the
ultimate net loss sustained by MBLLAC on each contract subject to the
Agreement. The ultimate net loss represents the amount by which the
aggregate required payments exceed the fair market value of the assets
supporting the covered contracts at the time such payments are due. The
Company's share of any net loss is 30.55%. The Company has determined that
it does not expect to make any payments to MBLLAC under the agreement. The
Company concluded this after testing a wide range of potentially adverse
scenarios during the rehabilitation period for MBLLAC. In November 1998,
the Rehabilitation Court approved the sale of MBLLAC's individual life
insurance and individual group annuity business to affiliates of SunAmerica
Inc. Upon the end of the rehabilitation period, expected during 1999, the
agreement will terminate.
LITIGATION
Various lawsuits against the Company have arisen in the course of the
Company's business. In certain of these matters, large and/or indeterminate
amounts are sought.
Two putative class actions and approximately 320 individual actions were
pending against the Company in the United States as of January 31, 1999
brought on behalf of those persons who purchased life insurance policies
allegedly because of deceptive sales practices engaged in by the Company
and its insurance agents in violation of state and federal laws. Additional
suits may be filed by individuals who opted out of the class action
settlement described below. The sales practices alleged to have occurred
are contrary to Company policy. Some of these cases seek substantial
damages while others seek unspecified compensatory, punitive and treble
damages. The Company intends to defend these cases vigorously.
45
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
A Multi-State Life Insurance Task Force (the "Task Force"), comprised of
insurance regulators from 29 states and the District of Columbia, was
formed in April 1995 to conduct a review of sales and marketing practices
throughout the life insurance industry. The Company was the initial focus
of the Task Force examination. On July 9, 1996, the Task Force released its
report on the Company's activities. The Task Force found that some sales of
life insurance policies by the Company had been improper and that the
Company's efforts to prevent such practices were not sufficiently
effective. Based on the findings, the Task Force recommended, and the
Company agreed to, various changes to its sales and business practices
controls, and a series of fines allocated to all 50 states and the District
of Columbia. In addition, the Task Force recommended a remediation program
pursuant to which the Company would offer relief to the policyowners who
were misled when they purchased permanent life insurance policies in the
United States from 1982 to 1995.
On October 28, 1996, the Company entered into a Stipulation of Settlement
with attorneys for the plaintiffs in the consolidated class action lawsuit
pending in a Multi-District Litigation proceeding in the U.S. District
Court for the District of New Jersey. The class action suit involved
alleged improprieties in connection with the Company's sale, servicing and
operation of permanent life insurance policies from 1982 through 1995.
Pursuant to the settlement, the Company agreed to provide certain
enhancements and changes to the remediation program previously accepted by
the Task Force, including some additional remedies. In addition, the
Company agreed that it would incur a minimum cost of $410 million in
providing remedies to policyowners under the program and, in specified
circumstances, agreed to make certain other payments and guarantees. Under
the terms of the settlement, the Company agreed to a minimum average cost
per remedy of $2,364 for up to 330,000 claims remedied and also agreed to
provide additional compensation to be determined by formula that will range
in aggregate amount from $50 million to $300 million depending on the total
number of claims remedied. At the end of the remediation program's claim
evaluation process, the Court will determine how the additional
compensation will be distributed.
The terms of the remediation program described above were enhanced again in
February 1997 pursuant to agreements reached with several states that had
not previously accepted the terms of the program. These changes were
incorporated as amendments to the above-described Stipulation of Settlement
and related settlement documents, and the amended Stipulation of Settlement
was approved as fair to class members by the U.S. District Court in March
1997. By that point in time, the Company had entered into agreements with
all 50 states and the District of Columbia pursuant to which each
jurisdiction had accepted the remediation plan and the Company had agreed
to pay approximately $65 million in fines, penalties and related payments.
The decision of the U.S. District Court to certify a class in the
above-described litigation for settlement purposes only and to approve the
class action settlement as described in the amended Stipulation of
Settlement was affirmed by the U.S. Court of Appeals for the Third Circuit
in July 1998 although the issue of class counsel's fees was sent back to
the U.S. District Court for review. The Supreme Court denied certiorari in
January 1999, thereby making final the approval of the class action
settlement.
While the approval of the class action settlement is now final, the Company
remains subject to oversight and review by insurance regulators and other
regulatory authorities with respect to its sales practices and the conduct
of the remediation program. The releases granted by the state insurance
regulators pursuant to the individual state settlement agreements do not
become final until the remediation program has been completed without any
material changes to which those regulators have not agreed. The U.S.
District Court has also retained jurisdiction as to all matters relating to
the administration, consummation, enforcement and interpretation of the
class action settlement.
Pursuant to the state agreements and the amended Stipulation of Settlement,
as approved by the U.S. District Court, the Company initiated its
remediation program in 1997. The Company mailed packages and provided broad
class notice to the owners of approximately 10.7 million policies eligible
to participate in the remediation program in
46
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
October 1996, informing them of their rights. Owners of approximately
21,800 policies elected to be excluded from the class action settlement. Of
those eligible to participate in the settlement, policyowners who believed
they were misled were invited to file a claim through an Alternative
Dispute Resolution ("ADR") process. The ADR process was established to
enable the Company to discharge its liability to the affected policyowners.
Policyowners who did not wish to file a claim in the ADR process were
permitted to choose from options available under Basic Claim Relief, such
as preferred rate premium loans, or annuities, mutual fund shares or life
insurance policies that the Company will enhance.
In January 1997 the U.S. District Court sanctioned and fined the Company
$1 million for failure to properly implement procedures for its employees
to retain documents in violation of the Courts' order that required the
parties to preserve all documents relevant to the class action and
remediation program. The Court ordered the Company to implement a document
retention policy and directed that an independent expert be engaged to
investigate the extent of document destruction and its impact on the
remediation program.
In response to the class notices, the owners of approximately 503,000
policies indicated an interest in a Basic Claim Relief remedy. Management
believes that costs associated with providing Basic Claim Relief will not
be material to the Company's financial position or results of operations.
The owners of approximately 1.16 million policies responded to the class
notices by indicating an intent to file an ADR claim. All policyholders
who responded were provided an ADR claim form for completion and
submission. The ADR process generally requires that individual claim forms
and files be reviewed by the Company and by one or more independent claim
evaluators. Approximately 649,000 claim forms were completed and returned
and approximately 591,000 decision letters had been mailed to claimants as
of January 31, 1999. In many instances, claimants have the right to
"appeal" the Company's decision to an independent reviewer. Management
believes that the bulk of such appeals will be resolved in 1999.
In 1996, the Company recorded in its Consolidated Statement of Operations
the cost of $410 million as a guaranteed minimum remediation expense
pursuant to the settlement agreement. Management had no better information
available at that time upon which to make a reasonable estimate of losses
associated with the settlement. In 1997, based on additional information
derived from claim sampling techniques, the terms of the settlement and
the number of claim forms received, management increased the estimated
liability for the cost of remedying policyholder claims in the ADR process
by $1.64 billion before taxes to approximately $2.05 billion before taxes,
of which $1.80 billion was funded in a settlement trust. Management
expressly noted that additional cost items were anticipated that could not
be fully evaluated at that time.
In 1998, based on estimates derived from an analysis of claims actually
remedied (including interest), a sample of claims still to be remedied, an
estimate of additional liability associated with the results of the
investigation by the independent expert regarding the impact of document
destruction on the ADR program, and an estimate of additional liabilities
associated with a claimant's right to "appeal" the Company's decision,
management increased the estimated liability for the cost of ADR remedies
by $.51 billion before taxes to a total of $2.56 billion before taxes, all
of which has been funded in a settlement trust as discussed in Note 4. The
Company has also recorded from 1996 through 1998 additional charges to
reflect ongoing administrative costs related to the ADR program,
regulatory fines, penalties and related payments, litigation costs and
settlements, and other fees and expenses associated with the resolution of
sales practices issues. While management believes the foregoing provisions
are reasonable estimates based on information currently available, the
ultimate amount of the total cost of remedied policyholder claims and
other related costs is dependent on complex and varying factors, including
the relief options still to be chosen by claimants, the dollar value of
those options, and the number and type of claims that may successfully be
appealed.
47
<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. CONTINGENCIES AND LITIGATION (CONTINUED)
The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted with precision. It
is possible that the results of operations or the cash flow of the Company,
in particular quarterly or annual periods, could be materially affected by
an ultimate unfavorable outcome of the matters specifically discussed
above. Management believes, however, that the ultimate resolution of all
such matters, after consideration of applicable reserves, should not have a
material adverse effect on the Company's financial position.
******
48
<PAGE>
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 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 Prudential.
UNDERTAKING WITH RESPECT TO INDEMNIFICATION
The Registrant, in conjunction with certain affiliates, maintains insurance on
behalf of any person who is or was a trustee, director, officer, employee, or
agent of the Registrant, or who is or was serving at the request of the
Registrant as a trustee, director, officer, employee or agent of such other
affiliated trust or corporation, against any liability asserted against and
incurred by him or her arising out of his or her position with such trust or
corporation.
New Jersey, being the state of organization of Prudential Insurance Company of
America ("Prudential"), permits entities organized under its jurisdiction to
indemnify directors and officers with certain limitations. The relevant
provisions of New Jersey law permitting indemnification can be found in Section
14A:3-5 of the New Jersey Statutes Annotated. The text of Prudential's By-law
27, which relates to indemnification of officers and directors, is incorporated
by reference to Exhibit 6(b) of Form S-6, Registration No. 333-64957, filed
September 30, 1998 on behalf of The Prudential Variable Appreciable Account.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-1
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
- -------------------------------------------------------------------------
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of 120 pages.
The undertaking to file reports.
The representation with respect to charges.
The undertaking with respect to indemnification.
The signatures.
Written consents of the following persons:
1. PricewaterhouseCoopers LLP, independent accountants.
2. Clifford E. Kirsch, Esq.
3. Pamela A. Schiz, 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 4)
(2) Not Applicable.
(3) Distributing Contracts:
(a) Distribution Agreement between Pruco Securities Corporation
and The Prudential Insurance Company of America. (Note 5)
(b) Proposed form of Agreement between Pruco Securities
Corporation and independent brokers with respect to the Sale
of the Contracts. (Note 4)
(c) Schedules of Sales Commissions. (Note 5)
(4) Not Applicable.
(5) Variable Appreciable Life Insurance Contracts: (Note 5)
(a) With fixed death benefit for use in New Jersey and domicile
approval states.
(b) With variable death benefit for use in New Jersey and domicile
approval states.
(c) With fixed death benefit for use in non-domicile approval
states.
(d) With variable death benefit for use in non-domicile approval
states.
(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 May 12, 1998. (Note 8)
(7) Not Applicable.
(8) Not Applicable.
(9) Not Applicable.
(10) (a) Application Form. (Note 1)
(b) Supplement to the Application for Variable Appreciable Life
Insurance Contract. (Note 5)
(11) Form of Notice of Withdrawal Right. (Note 5)
(12) Memorandum describing Prudential's issuance, transfer, and
redemption procedures for the Contracts pursuant to Rule 6e-
3(T)(b)(12)(iii) and method of computing adjustments in payments
and cash surrender values upon conversion to fixed-benefit policies
pursuant to Rule 6e-3(T)(b)(13)(v)(B). (Note 5)
(13) Available Contract Riders and Endorsements:
(a) Rider for Insured's Waiver of Premium Benefit. (Note 5)
(b) Rider for Applicant's Waiver of Premium Benefit. (Note 5)
(c) Rider for Insured's Accidental Death Benefit. (Note 5)
(d) Rider for Level Term Insurance Benefit on Life of Insured.
(Note 5)
(e) Rider for Decreasing Term Insurance Benefit on Life of
Insured. (Note 6)
II-2
<PAGE>
(f) Rider for Interim Term Insurance Benefit. (Note 5)
(g) Rider for Option to Purchase Additional Insurance on Life of
Insured. (Note 5)
(h) Rider for Decreasing Term Insurance Benefit on Life of Insured
Spouse. (Note 6)
(i) Rider for Level Term Insurance Benefit on Dependent Children.
(Note 5)
(j) Rider for Level Term Insurance Benefit on Dependent Children--
from Term Conversions. (Note 5)
(k) Rider for Level Term Insurance Benefit on Dependent Children--
from Term Conversions or Attained Age Change. (Note 5)
(l) Endorsement defining Insured Spouse. (Note 5)
(m) Rider covering lack of Evidence of Insurability on a Child.
(Note 5)
(n) Rider modifying Waiver of Premium Benefit. (Note 5)
(o) Rider to terminate a Supplementary Benefit. (Note 5)
(p) Rider providing for election of Variable Reduced Paid-up
Insurance. (Note 5)
(q) Rider to provide for exclusion of Aviation Risk. (Note 5)
(r) Rider to provide for exclusion of Military Aviation Risk.
(Note 5)
(s) Rider to provide for exclusion for War Risk. (Note 5)
(t) Rider to provide for Reduced Paid-up Insurance. (Note 5)
(u) Rider providing for Option to Exchange Policy. (Note 5)
(v) Endorsement defining Ownership and Control of the Contract.
(Note 5)
(w) Rider providing for Modification of Incontestability and
Suicide Provisions. (Note 5)
(x) Endorsement issued in connection with Non-Smoker Qualified
Contracts. (Note 5)
(y) Endorsement issued in connection with Smoker Qualified
Contracts. (Note 5)
(z) Home Office Endorsement. (Note 5)
(aa) Endorsement showing Basis of Computation for Non-Smoker
Contracts. (Note 5)
(bb) Endorsement showing Basis of Computation for Smoker Contracts.
(Note 5)
(cc) Rider for Term Insurance Benefit on Life of Insured--
Decreasing Amount After Three Years. (Note 5)
(dd) Rider for Renewable Term Insurance Benefit on Life of Insured.
(Note 5)
(ee) Rider for Level Term Insurance Benefit on Life of Insured
Spouse. (Note 5)
(ff) Living Needs Benefit Rider
(i) for use in Florida. (Note 5)
(ii) for use in all approved jurisdictions except Florida
and New York. (Note 5)
(iii) for use in New York. (Note 5)
(gg) Rider for Renewable Term Insurance Benefit on Life of Insured
Spouse. (Note 5)
(hh) Rider for Level Term Insurance Benefit on Life of Insured--
Premium Increases Annually. (Note 5)
(ii) Rider for Term Insurance Benefit on Life of Insured--
Decreasing Amount. (Note 5)
(jj) Rider for a Level Premium Option. (Note 5)
(kk) Payment of Unscheduled Premium Benefit (Note 5)
(ll) Rider for Scheduled Term Insurance Benefit on Life of Insured.
(Note 5)
(mm) Endorsement altering the Assignment provision. (Note 2)
(nn) Rider for Non-Convertible Term Insurance Benefit on Life of
Insured Spouse.
(Note 6)
(oo) Rider for Convertible Term Insurance Benefit on Life of
Insured Spouse. (Note 6)
(pp) Rider for Level Term Insurance Benefit on Life of Insured--
Premium Increases Annually (Note 6)
(qq) Rider for Non-Convertible Term Insurance Benefit on Life of
Insured. (Note 6)
(rr) Rider for Convertible Term Insurance Benefit on Life of
Insured. (Note 6)
2. See Exhibit 1.A.(5).
3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality of the
securities being registered. (Note 1)
4. None.
5. Not Applicable.
6. Opinion and Consent of Pamela A. Schiz, FSA, MAAA, as to actuarial matters
pertaining to the securities being registered. (Note 1)
II-3
<PAGE>
7. Powers of Attorney.
(a) F. Agnew, F. Becker, J.Cullen,
C. Davis, R. Enrico, A. Gilmour,
W. Gray, III, J. Hanson, G. Hiner, C. Horner,
G. Kelley, B. Malkiel, A. Ryan, I. Schmertz,
C. Sitter, D. Staheli, R. Thomson, J. Unruh,
P. Vagelos, S. Van Ness, P. Volcker, J. Williams (Note 3)
(b) G. Casellas (Note 8)
(c) R. Carbone (Note 9)
(d) A. Piszel (Note 10)
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Post-Effective Amendment No. 14 to this
Registration Statement, filed February 15, 1995.
(Note 3) Incorporated by reference to Post-Effective Amendment No. 10 to Form
S-1, Registration No. 33-20083, filed April 9, 1998 on behalf of The
Prudential Variable Contract Real Property Account.
(Note 4) Incorporated by reference to Post-Effective Amendment No. 15 to this
Registration Statement filed May 1, 1995.
(Note 5) Incorporated by reference to Post-Effective Amendment No. 19 to this
Registration Statement, filed April 28, 1997.
(Note 6) Incorporated by reference to Post-Effective Amendment No. 18 to this
Registration Statement, filed December 26, 1996.
(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 Form S-6, Registration No. 333-64957,
filed September 30, 1998 on behalf of The Prudential Variable
Appreciable Account.
(Note 9) Incorporated by reference to Post-Effective Amendment No. 3 to Form N-
4, Registration No. 333- 23271, filed October 16, 1998 on behalf of
The Prudential Discovery Select Group Variable Contract Account.
(Note 10) Incorporated by reference to Post-Effective Amendment No. 4 to Form N-
4, Registration No. 333- 23271, filed February 23, 1999 on behalf of
The Prudential Discovery Select Group Variable Contract Account.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
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 Post-Effective Amendment to the Registration
Statement which included a prospectus, and has 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 12th day of April, 1999.
(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. 21 to the Registration Statement has been signed below by the
following persons in the capacities indicated on this 12th day of April, 1999.
SIGNATURE AND TITLE
-------------------
/s/ *
- -----------------------------------
Arthur F. Ryan
Chairman of the Board, President,
and Chief Executive Officer
/s/ *
- -----------------------------------
Anthony S. Piszel
Vice President and Controller
/s/ *
- -----------------------------------
Richard J. Carbone
Chief Financial Officer
/s/ * *By: /s/ Thomas C. Castano
- ----------------------------------- --------------------------------
Franklin E. Agnew Thomas C. Castano
Director (Attorney-in-Fact)
/s/ *
- ----------------------------------
Frederic K. Becker
Director
/s/ *
- ----------------------------------
Gilbert F. Casellas
Director
/s/ *
- ----------------------------------
James G. Cullen
Director
/s/ *
- ----------------------------------
Carolyne K. Davis
Director
/s/ *
- ----------------------------------
Roger A. Enrico
Director
II-5
<PAGE>
/s/*
- ---------------------------------
Allan D. Gilmour
Director
/s/ *
- ---------------------------------
William H. Gray, III
Director
/s/ *
- ---------------------------------
Jon F. Hanson
Director
/s/ *
- ---------------------------------
Glen H. Hiner, Jr.
Director
/s/ *
- ---------------------------------
Constance J. Horner
Director
/s/ *
- ---------------------------------
Gaynor N. Kelley
Director
/s/ * *By: /s/ Thomas C. Castano
- --------------------------------- ---------------------------------------
Burton G. Malkiel Thomas C. Castano
Director (Attorney-in-Fact)
/s/*
- ---------------------------------
Ida F. S. Schmertz
Director
/s/*
- ---------------------------------
Charles R. Sitter
Director
/s/*
- ---------------------------------
Donald L. Staheli
Director
/s/ *
- ---------------------------------
Richard M. Thomson
Director
/s/ *
- ---------------------------------
James A. Unruh
Director
/s/ *
- ---------------------------------
P. Roy Vagelos, M.D.
Director
/s/ *
- ---------------------------------
Stanley C. Van Ness
Director
/s/ *
- ---------------------------------
Paul A. Volcker
Director
/s/ *
- ---------------------------------
Joseph H. Williams
Director
II-6
<PAGE>
EXHIBIT INDEX
Consent of PricewaterhouseCoopers LLP, independent Page II-8
accountants.
1.A.(10)(a) Application Form. Page II-9
3. Opinion and Consent of Clifford E. Kirsch, Esq. as Page II-16
to the legality of the securities being registered.
6. Opinion and Consent of Pamela A. Schiz, FSA, MAAA, Page II-17
as to actuarial matters pertaining to the securities
being registered.
II-7
<PAGE>
<TABLE>
EXHIBIT 1.A.(10(a)
- -----------------------------------------------------------------------------------------------------------------------------------
THE PRUDENTIAL [GRAPHIC]
<S> <C>
APPLICATION FOR LIFE INSURANCE
OR POLICY CHANGE
| | The Prudential Insurance Company of America
|_| Pruco Life Insurance Company
Policy No. ______________________________________________ A Subsidiary of The Prudential Insurance Company of America
|_| Check here if policy change. Corporate Offices, Newark, New Jersey
- -----------------------------------------------------------------------------------------------------------------------------------
Name of primary proposed Insured (or current Insured, if policy change) (first, initial, last)
PART 1
- ------------------------------------------------------------------------------------------------------------------------------------
A. PERSONAL INFORMATION (Primary Proposed Insured)
1. Social Security No. -- 2. Sex: | | Male |_| Female
3. Marital Status: |_| Single | | Married |_| Widowed |_| Separated |_| Divorced
4. Date of Birth: Mo. 6 Day 15 Yr. 61 5. Age 35 6. State of Birth (Country if not U.S.) (Name of State)
7. Billing Address (City, State and Zip) :
-------------------------------------------------------------------------------------
123 Main St., Any City, Any State
--------------------------------------------------------------------------------------------------------------------------------
8. Home Address (if different): -------------------------------------------------------------------------------------------------
9. Home telephone number ( ) - 10. Business telephone number --
11. Current Employer ABC Company
- -------------------------------------------------------------------------------------------------------------------
B. ALL OTHER PROPOSED INSUREDS (Include Applicant for Applicant's Waiver of Premium Benefit)
Name Relationship to Sex Date of Age State of Total Life Insurance
primary proposed Birth Birth (country in all companies
Insured (mo., day, yr.) if not U.S.)
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
C. COVERAGE INFORMATION
1. Plan of Insurance ________________________________________________________________ 2. Initial Amount $ 25,000
If AL/VAL or applicable to the product, check one: |_| Level Death Benefit |_| Variable Death Benefit
3. SUPPLEMENTARY BENEFITS AND RIDERS (Please indicate amount where applicable)
|_| Waiver of Premium |_| Accidental Death Benefit $
|_| Living Needs Benefit |_| Option to Purchase Additional Insurance $
|_| Applicant's Waiver of Premium |_| Option to Purchase Paid Up Life Insurance Additions
|_| Automatic Premium Loan (include details in special request)
OTHER RIDERS AND BENEFITS: (Please indicate amount where applicabLe) --------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
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D. BENEFICIARIES/OWNERSHIP (If Trust, provide name of trust, trustee and date of trust.)
1. Beneficiary: Name Relationship to primary proposed Insured Age
Primary (Class 1) ------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Contingent (Class 2) --------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
2. Is the owner other than the primary proposed Insured? |_| Yes || No
If yes: Name: ---------------------------------------------------------------------------------------------------------------
Address ---------------------------------------------------------------------------------------------------------------
---------------------------------- Owner's date of birth -------------------------------------------------------------------
ORD 96200-96
</TABLE>
II-9
<PAGE>
<TABLE>
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<S> <C>
E. PAYMENT DETAILS
1. Within the last 12 months, has any proposed Insured had a heart attack, stroke or cancer other than of the skin? |_| Yes || No
2. Is a medical examination required on: Primary Proposed Insured? |_| Yes || No Second Proposed Insured? |_| Yes || No
3. Premium Payment Mode: (collect full modal premium)
|_| Pru-matic |_| Annual |_| Semi-annual |_| Quarterly ||Monthly |_| Payroll Budget |_| Gov't Allotment
4. Amount paid with this application $ . |_| None (Must be "None" if E1 is answered Yes, except Gibraltar
products.)
5. Date premium collected 2-1-96
- -------------------------------------------------------------------------------------------------------------------
F. REPLACEMENT
For any proposed Insured, would this insurance replace or cause a change in any existing insurance or
annuity in any company? |_| Yes || No
(If yes, give insurance company, plan, amount and policy number(s). Enclose all required state replacement forms.)
- -------------------------------------------------------------------------------------------------------------------
G. SPECIAL REQUESTS
- -------------------------------------------------------------------------------------------------------------------
H. BACKGROUND ON PROPOSED INSUREDS
1. Total Life Insurance on the primary proposed insured in effect Check here if None ||.
2. What are the primary proposed Insured's occupation and duties? ---------------------------------------------------------
Manager & Administrative duties
3. Has any proposed Insured participated in the following activities within the last 2 years (or does anyone plan to do so in the
future):
a. operated or had any duties aboard an aircraft, glider, balloon, or like device? |_| Yes || No
If yes, complete Aviation Questionnaire.
b. hazardous sports, such as auto, motorcycle, snowmobile or powerboat competitions/exhibitions;
scuba diving; mountain climbing; parachuting; sky diving or any other such sport or hobby? |_| Yes || No
If yes, complete Avocation Questionnaire.
For any questions answered yes below, give the details in 8.
4. Is any proposed Insured applying for or requesting reinstatement or policy change (s) of any other life or health
insurance policy ? If yes, give insurance company, policy plan and amount. |_| Yes || No
5. Has any proposed Insured been convicted of, or currently charged with, the commission of any
criminal offense, other than the violation of motor vehicle law within the last 5 years? |_| Yes || No
6. a. Primary Proposed Insured driver's license number and state of issue:
-- (Name of State)
---------------------------------------------------------------------------------------------------------------------------
b. Has any proposed Insured in the last 3 years:
1. had a driver's license denied, suspended or revoked? |_| Yes || No
2. been convicted of or cited for:
(a) 3 or more moving violations? |_| Yes || No
(b) driving under the influence of alcohol or drugs? |_| Yes || No
3. been involved as a driver in 2 or more auto accidents? _| Yes || No
If yes, give details including type of violation, accident or reason for denial, suspension or revocation.
7. Does any proposed Insured plan to live or travel outside the United States or Canada within the next 12 months? |_| Yes ||No
If yes, give countries, purpose and duration of trip.
8. Details of yes answers for questions 4-7. Give question no., proposed Insured's name and full details
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
I. CHANGES MADE BY THE COMPANY (Not applicable in New Mexico and West Virginia)
- -------------------------------------------------------------------------------------------------------------------
ORD 96200-96
</TABLE>
II-10
<PAGE>
- ------------------------------------------------------------------------------
ANY PERSON WHO KNOWINGLY GIVES FALSE OR DECEPTIVE INFORMATION, WHEN COMPLETING
THIS APPLICATION, FOR THE PURPOSE OF DEFRAUDING THE COMPANY COULD BE FOUND
GUILTY OF INSURANCE FRAUD.
- -------------------------------------------------------------------------------
On this page the words "I" and "my" refer to the primary proposed Insured and
applicant, if different. The words "the Company" refer to the company checked on
page 1 of this application. If a policy change, "I" and "my" refer to Insured or
Owner, if other than Insured.
TERMS AND CONDITIONS
No new coverage requested in this application starts on any proposed Insured
until all required initial medical examinations agreed to are completed, even if
an amount has been paid to the Company.
When the Company gives a Limited Insurance Agreement form dated on the same date
shown below, coverage will start as written in that Agreement. Otherwise,
coverage will start on the contract date, provided:
. The Company issues a contract and I accept it; and
. the first premium is paid in full while all proposed Insureds' health
remains as stated in the application.
If the Company enters any change in section I, I approve the change by accepting
the contract, unless the law requires written consent to changes. Then, a change
can be made only if I approve it in writing. No agent can make or change a
contract, or waive any of the Company's rights or requirements.
The beneficiary named in the application (or in the contract if requesting a
policy change) is for insurance payable in either of the following cases:
. at the death of the primary Insured; and
. at the death of an Insured child after the death of the primary
Insured if there is no Insured spouse.
If this is a policy change and no beneficiary has been named in the application,
the beneficiary for any insurance payable will be carried over from the contract
that is being changed.
The owner of the contract is the primary proposed Insured or applicant if other
than the primary proposed Insured unless a different owner is named in the
application. If this is a policy change, the ownership arrangement will be
carried over from the contract that is being changed unless a different owner is
named in the application. This is subject to any provisions for the automatic
transfer of ownership stated in the contract. If joint owners are named,
ownership will be with the right of survivorship unless otherwise specified.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
SIGNATURES
By signing below:
. I certify that to the best of my knowledge and belief the statements in
this application are complete, true and correctly recorded.
. I understand that new coverage could be invalidated if any information in
the application is materially misrepresented.
. I confirm that if I have requested the Living Needs Benefit, I have read
the disclosures in the brochure (ORD 87246).
. I agree to the Terms and Conditions shown above and on the Important Notice
About Your Application, which I have received and read.
Signed at: on
____________________________________________________________________
(City/State) Date (month/day/year)
Signature of primary proposed Insured, if age 8 or over X______________________
or current Insured, if policy change
Signature of Applicant, if different than primary proposed Insured X__________
or if a policy change, Signature of Owner, if different than Insured
If applicant is a firm or corporation, give that company's name and have an
officer sign below.
Signature and title of Officer of firm or corporation X_______________________
Signature of Beneficiary, if policy change and rights are limited X___________
Signature of Witness (Licensed Writing Representative must witness)X__________
- ------------------------------------------------------------------------------
Licensed Writing Representative's Certification: Do you have any information,
other than what is stated in this application, that indicates that any proposed
Insured may replace or change any current insurance or annuity in any company?
[ ] YES [ ] NO
Witness (Licensed Writing Representative must witness) X_______________________
- -------------------------------------------------------------------------------
ORD 96200-96
</TABLE>
II-11
<PAGE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------------------
PART 2 - MEDICAL INFORMATION
- -------------------------------------------------------------------------------------------------------------------
SECTION A - TO BE COMPLETED FOR ALL CATEGORY II CHANGES AND PLANS OTHER THAN GIBRALTAR
1. Doctor Information:
-------------------
A. Primary Proposed Insured
Physician last consulted:____________________ Primary Physician: ________________________
Date Last seen:_______________________________ Date last seen: ___________________________
Reason:_______________________________________ Reason:____________________________________
Address and Phone no.:________________________ Address and Phone no.:_____________________
B. Second Proposed Insured or AWP Applicant
Physician last consulted:____________________ Primary Physician:_________________________
Date last seen:______________________________ Date last seen:____________________________
Reason:______________________________________ Reason:____________________________________
Address and Phone no.:_______________________ Address and Phone no.:_____________________
_____________________________________________ ___________________________________________
2. Build: Height Weight
-------
a. Primary Proposed Insured _______ _______
b. Second Proposed Insured or AWP Applicant _______ _______
3. Has either the primary proposed Insured or second proposed Insured, if proposed for coverage, ever used
tobacco or other nicotine products? |_| Yes || No
If yes, give date last used: Cigarettes Any other nicotine product such as cigar, pipe, smokeless
(Mo/Yr) tobacco, nicotine gum or nicotine patch (mo/yr)
Primary Proposed Insured __________________________ _________________________________________________________
Second Proposed Insured __________________________ _________________________________________________________
4. Has anyone proposed for coverage had:
a. chest pain, or any disorder of the heart or blood vessels? |_| Yes || No
b. high blood pressure? |_| Yes || No
c. cancer, tumor, leukemia, melanoma, or lymphoma? |_| Yes || No
d. diabetes or high blood sugar? |_| Yes || No
e. mental or psychiatric illness? |_| Yes || No
f. sexually transmitted disease, AIDS or AIDS related condition, or a positive HIV related test? |_| Yes || No
g. asthma or an disorder of the lungs? || Yes |_| No
h. any disorder of the brain or the nervous system? |_| Yes || No
i. hepatitis or any disorder of the liver, stomach or intestines? |_| Yes || No
j. any disorder of the kidney or urinary tract? |_| Yes || No
5. Other than above, is anyone proposed for coverage currently taking prescription medication? |_| Yes || No
6. Other than above has anyone proposed for coverage:
a. been a patient in a hospital or other medical facility? |_| Yes || No
b. in the last 5 years, had or been advised to have surgery, medical tests, or diagnostic procedures
(ECGs, stress tests, -rays, blood tests, urine tests, etc)? |_| Yes || No
7. Has anyone proposed for coverage:
a. used or is now using cocaine, amphetamines, marijuana, heroin, or other drugs except as prescribed
by a health care provider? |_| Yes || No
b. had or been advised to have treatment or counseling for alcohol or drug use? |_| Yes || No
8. Does anyone proposed for coverage have any disease, disorder or condition not indicated above? |_| Yes || No
9. Has anyone proposed for coverage had life or health insurance declined, postponed, or issued with an
increased premium? |_| Yes || No
10. Has anyone proposed for coverage requested or received disability or compensation benefits? |_| Yes || No
- -------------------------------------------------------------------------------------------------------------------
ORD 96200-96
</TABLE>
II-12
<PAGE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------------------
11. Details of yes answers for questions 4 -10.
Question No. Illness, operation or other reason Dates and Name, address and telephone
and proposed for any check-up, health care provider's duration number of health care
Insured's name advice, treatment and medications of illness providers and hospitals
_______________ ------------------------------------------ ----------- -----------------------------
_______________ ------------------------------------------ ----------- -----------------------------
_______________ ------------------------------------------ ----------- -----------------------------
_______________ ------------------------------------------ ----------- -----------------------------
_______________ ------------------------------------------ ----------- -----------------------------
_______________ ------------------------------------------ ----------- -----------------------------
_______________ ------------------------------------------ ----------- -----------------------------
_______________ ------------------------------------------ ----------- -----------------------------
_______________ ------------------------------------------ ----------- -----------------------------
FOR ADDITIONAL MEDICAL DETAILS USE ANOTHER APPLICATION
- ---------------------------------------------------------------------------------------------------------------------------------
All the answers are, to the best of my knowledge and belief, complete, true and correctly recorded. It is understood that any new
coverage could be invalidated if any information in the application is materially misrepresented.
X__________________ X____________________________ X________________________________________________________
Date Witness Signature of primary proposed Insured (if age 15 or over)
otherwise Applicant (or Owner, if policy change)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-13
<PAGE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------------------
PART 2 - MEDICAL INFORMATION
- -------------------------------------------------------------------------------------------------------------------
SECTION B - TO BE COMPLETED FOR CATEGORY I CHANGES ONLY
1. Has either the primary proposed Insured or second proposed Insured, if proposed for coverage, ever used
tobacco or other nicotine products? |_| Yes |_| No
If yes, give date last used: Cigarettes Any other nicotine product such as cigar, pipe, smokeless
(Mo/Yr) tobacco, nicotine gum or nicotine patch (mo/yr)
Primary Proposed Insured___________________ __________________________________________________________
Second Proposed Insured____________________ __________________________________________________________
2. Has anyone proposed for coverage been declined or charged an increased premium for new life insurance
or reinstatement of life insurance? If yes, give details |_| Yes |_| No
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
3. Is anyone proposed for coverage currently unable to perform the normal duties of their occupation and/or
normal daily activities? If yes, give details |_| Yes |_| No
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
4. Within the last five (5) years, has anyone proposed for coverage:
a. taken prescription medication, or been treated for or diagnosed as having: high blood pressure, any disease
or disorder of the heart, arteries or veins, diabetes, cancer, respiratory disorder (including asthma, recurrent
bronchitis, emphysema), a mental illness or psychiatric disorder or any disease or disorder of the nervous
system, alcohol or drug use? |_| Yes |_| No
b. been treated for or diagnosed as having AIDS or any AIDS related conditions, other sexually transmitted
diseases or positive test results for HIV? |_| Yes |_| No
5. Details of any "Yes" answer to question 4:
Question No. Illness, operation or other reason Dates and Name, address and telephone
and proposed for any check-up, health care provider's duration number of health care
insured's name advice, treatment and medications of illness providers and hospitals
-------------------- ------------------------------------------ ------------ -----------------------------
-------------------- ------------------------------------------ ------------ -----------------------------
-------------------- ------------------------------------------ ------------ -----------------------------
-------------------- ------------------------------------------ ------------ -----------------------------
-------------------- ------------------------------------------ ------------ -----------------------------
-------------------- ------------------------------------------ ------------ -----------------------------
-------------------- ------------------------------------------ ------------ -----------------------------
-------------------- ------------------------------------------ ------------ -----------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
All the answers are, to the best of my knowledge and belief, complete, true and correctly recorded. It is understood that any new
coverage could be invalidated if any information in the application is materially misrepresented.
X______________ X_______________ X________________________________________________________
Date Witness Signature of primary proposed Insured (if age 15 or over)
otherwise Owner
- ----------------------------------------------------------------------------------------------------------------------------------
ORD 96200-96
</TABLE>
II-14
<PAGE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------------------
PART 2 - MEDICAL INFORMATION
- -------------------------------------------------------------------------------------------------------------------
SECTION C - TO BE COMPLETED FOR GIBRALTAR PLANS ONLY
1. Doctor Information:
A. Primary Proposed Insured
Physician last consulted:_______________________________ Primary Physician:______________________
Date Last seen:__________________________________________ Date last seen:_________________________
Reason:__________________________________________________ Reason:_________________________________
Address and Phone no.:___________________________________ Address and Phone no.:__________________
--------------------------------------------------------- ----------------------------------------
--------------------------------------------------------- ----------------------------------------
B. Second Proposed Insured or AWP Applicant
Physician last consulted:_______________________________ Primary Physician:______________________
Date Last seen:__________________________________________ Date last seen:_________________________
Reason:__________________________________________________ Reason:_________________________________
Address and Phone no.:___________________________________ Address and Phone no.:__________________
--------------------------------------------------------- ----------------------------------------
--------------------------------------------------------- ----------------------------------------
2. Build: Height Weight
-----
a. Primary Proposed Insured ---------------- ----------
b. Second Proposed Insured or AWP Applicant ---------------- ----------
3. Has either the primary proposed Insured or second proposed Insured, if proposed for coverage, ever used
tobacco or other nicotine products? |_| Yes |_| No
If yes, give date last used: Cigarettes Any other nicotine product such as cigar, pipe, smokeless
(Mo/Yr) tobacco, nicotine gum or nicotine patch (mo/yr)
Primary Proposed Insured _____________________________________________
Second Proposed Insured _____________________________________________
4. Within the last five (5) years, has anyone proposed for coverage:
a. taken prescription medication, or been treated for or diagnosed as having: high blood pressure, any disease
or disorder of the heart, arteries or veins, diabetes, cancer, respiratory disorder (including asthma, recurrent
bronchitis, emphysema), a mental illness or psychiatric disorder or any disease or disorder of the nervous
system, alcohol or drug use? |_| Yes |_| No
b. been treated for or diagnosed as having AIDS or any AIDS related conditions, other sexually transmitted
diseases or positive test results for HIV? |_| Yes |_| No
5. Has anyone proposed for coverage been declined or charged an increased premium for new life insurance or
reinstatement of life insurance? |_| Yes |_| No
6. Is anyone proposed for coverage currently unable to perform the normal duties of their occupation and/or
normal daily activities? |_| Yes |_| No
Please include the details of any "Yes" answer to the questions 4-6: -----------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
All the answers are, to the best of my knowledge and belief, complete, true and
correctly recorded. It is understood that any new coverage could be invalidated
if any information in the application is materially misrepresented.
X____________________ X______________________ X________________________________________________________
Date Witness Signature of primary proposed Insured (if age 15 or over)
otherwise Applicant
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-15
<PAGE>
EXHIBIT 3
April 12, 1999
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. 333-64957, 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-16
<PAGE>
Exhibit 6
April 12, 1999
The Prudential Insurance
Company of America
Prudential Plaza
Newark, New Jersey 07102-3777
To Prudential:
This opinion is furnished in connection with the registration by The Prudential
Insurance Company of America of variable appreciable life insurance contracts
("Contracts") under the Securities Act of 1933. The prospectus included in Post-
Effective Amendment No. 21 to the Registration Statement No. 33-20000 on Form S-
6 describes the Contracts. I have reviewed the two Contract forms and I have
participated in the preparation and review of the Registration Statement and
Exhibits thereto. In my opinion:
(1) The illustrations of cash surrender values and death benefits included
in the section of the prospectus entitled "Hypothetical Illustrations
of Death Benefits and Cash Surrender Values", based on the assumptions
stated in the illustrations, are consistent with the provisions of the
respective forms of the Contracts. The rate structure of the
Contracts has not been designed so as to make the relationship between
premiums and benefits, as shown in the illustrations, appear more
favorable to a prospective purchaser of a Contract issued on a male
age 35, than to prospective purchasers of Contracts on males of other
ages or on females.
(2) The illustrations of the effect of a Contract loan on the cash
surrender value included in the section of the prospectus entitled
"Contract Loans", based on the assumptions stated in the illustration,
is consistent with the provisions of the Form A Contract.
(3) 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
projected after-tax rate of return that is a reasonable rate to use in
discounting the tax benefit of the deductions allowed in Section 848
in taxable years subsequent to the year in which the premiums are
received.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to my name under the heading "Experts" in the
prospectus.
Very truly yours,
/s/
- -------------------------------------------
Pamela A. Schiz, FSA, MAAA
Actuarial Director
The Prudential Insurance Company of America
II-17
