<PAGE>
AS FILED WITH THE SEC ON ________. REGISTRATION NO. 333-64957
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED
ON FORM N-8B-2
----------------------
PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
(Exact Name of Trust)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(800) 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 April 30, 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
(date)
485
<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"; Type
of Death Benefit; Changing the Type of
Death Benefit; Premiums; Contract Date;
Allocation of Premiums; Transfers; Dollar
Cost Averaging, Auto-Rebalancing; Charges
and Expenses; How a Contract's Cash
Surrender Value Will Vary; How a Type A
(Fixed) Contract's Death Benefit Will
Vary; How a Type B (Variable) Contract's
Death Benefit Will Vary; Surrender of a
Contract; Withdrawals; Increases in Basic
Insurance Amount; Decreases in Basic
Insurance Amount; Lapse and Reinstatement;
When Proceeds are Paid; Riders; Other
General Contract Provisions; Voting
Rights; Substitution of Fund Shares
11. Introduction and Summary; The Prudential
Variable Appreciable Account
12. Cover Page; Introduction and Summary; The
Funds; Sale of the Contract and Sales
Commissions
13. Introduction and Summary; The Funds;
Charges and Expenses; Sale of the Contract
and Sales Commissions
14. Introduction and Summary; Requirements for
Issuance of a Contract
15. Introduction and Summary; Allocation of
Premiums; Transfers; Dollar Cost
Averaging, Auto-Rebalancing; The Fixed-
Rate Option
16. Introduction and Summary; Detailed
Information for Prospective Contract
Owners
17. When Proceeds are Paid
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
------------------ --------
18. The Prudential Variable Appreciable
Account
19. Reports to Contract Owners
20. Not Applicable
21. Contract Loans
22. Not Applicable
23. Not Applicable
24. Other General Contract Provisions
25. The Prudential Variable Appreciable
Account
26. Introduction and Summary; The Funds;
Charges and Expenses
27. The Prudential Insurance Company of
America; The Funds
28. The Prudential Insurance Company of
America; Directors and Officers
29. The Prudential Insurance Company of
America
30. Not Applicable
31. Not Applicable
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. The Prudential Insurance Company of
America
36. Not Applicable
37. Not Applicable
38. Sale of the Contract and Sales Commissions
39. Sale of the Contract and Sales Commissions
40. Not Applicable
41. Sale of the Contract and Sales Commissions
42. Not Applicable
43. Not Applicable
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
------------------ --------
44. Introduction and Summary; The Funds; How a
Contract's Cash Surrender Value Will Vary;
How a Type A (Fixed) Contract's Death
Benefit Will Vary; How a Type B (Variable)
Contract's Death Benefit Will Vary
45. Not Applicable
46. Introduction and Summary; The Prudential
Variable Appreciable Account; The Funds
47. The Prudential Variable Appreciable
Account; The Funds
48. Not Applicable
49. Not Applicable
50. Not Applicable
51. Not Applicable
52. Substitution of Fund Shares
53. Tax Treatment of Contract Benefits
54. Not Applicable
55. Not Applicable
56. Not Applicable
57. Not Applicable
58. Not Applicable
59. Financial Statements: Financial Statements
of the Variable Universal Life Subaccounts
of the Prudential Variable Appreciable
Account; Consolidated Financial Statements
of The Prudential Insurance Company of
America and Subsidiaries
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
<PAGE>
Variable Universal Life
Insurance
PROSPECTUS
The Prudential
Variable Appreciable Account
MAY 1, 1999
-----------
[LOGO OF PRUDENTIAL]
<PAGE>
PROSPECTUS
MAY 1, 1999
- -----------
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
VARIABLE UNIVERSAL LIFE
This prospectus describes a flexible premium variable universal life insurance
contract (the "Contract") offered by The Prudential Insurance Company of America
("Prudential"). The Contract provides life insurance coverage with flexible
premium payments and a variety of investment options. You must pay an initial
premium, after which you can pay premium amounts as desired, as long as
sufficient money is in the Contract Fund to cover all charges. Your Contract may
lapse without value if your Contract Fund has insufficient value. You may
select either of two death benefit types, a fixed death benefit or a variable
death benefit. The variable death benefit will vary with the performance of the
investment options you select. For each type, there are generally two death
benefit guarantees, each of which can be secured by a certain level of premium
payments.
You may choose to invest your Contract's premiums and its earnings in the
following ways:
. Invest in one or more of 15 available subaccounts of The Prudential Variable
Appreciable Account, each of which invests in a corresponding portfolio of the
Funds indicated below:
THE PRUDENTIAL SERIES FUND, INC. (THE "SERIES FUND")
Money Market High Yield Bond Equity
Diversified Bond Stock Index Prudential Jennison
Conservative Balanced Equity Income Global
Flexible Managed
AIM VARIABLE INSURANCE FUNDS, INC. AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
AIM V.I. Value Fund American Century VP Value Fund
JANUS ASPEN SERIES MFS(R) VARIABLE INSURANCE TRUST(SM)
Growth Portfolio Emerging Growth Series
T. ROWE PRICE INTERNATIONAL SERIES, INC.
International Stock Portfolio
. Invest in the FIXED-RATE OPTION, which pays a guaranteed interest rate.
Prudential will credit interest daily on any portion of the premium payment
that you have allocated to the fixed-rate option at rates periodically
declared by Prudential, in its sole discretion. Any such interest rate will
never be less than an effective annual rate of 4%.
This prospectus describes the Contract generally and The Prudential Variable
Appreciable Account. The attached prospectuses for the Funds and their related
statements of additional information describe the investment objectives and the
risks of investing in the portfolios. Prudential may add additional investment
options in the future. Please read this prospectus and keep it for future
reference.
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 AEMRICA
751 Broad Street
Newark, New Jersey 07102-3777
Telephone: (800) 778-2255
<PAGE>
Revised
PROSPECTUS CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS................................ 1
INTRODUCTION AND SUMMARY............................................................ 2
Brief Description of the Contract.................................................. 2
Charges............................................................................ 2
Types of Death Benefit............................................................. 5
Premium Payments................................................................... 5
Refund............................................................................. 5
GENERAL INFORMATION ABOUT THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,.............. 6
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT,........................................ 6
AND THE VARIABLE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACT.................... 6
The Prudential Insurance Company of America........................................ 6
The Prudential Variable Appreciable Account........................................ 6
The Funds.......................................................................... 7
The Fixed-Rate Option.............................................................. 9
Which Investment Option Should Be Selected?........................................ 9
DETAILED INFORMATION FOR............................................................ 10
PROSPECTIVE CONTRACT OWNERS......................................................... 10
Requirements for Issuance of a Contract............................................ 10
Short-Term Cancellation Right or "Free Look"....................................... 10
Type of Death Benefit.............................................................. 10
Changing the Type of Death Benefit................................................. 10
Premiums........................................................................... 11
Death Benefit Guarantee............................................................ 12
Contract Date...................................................................... 13
Allocation of Premiums............................................................. 14
Transfers.......................................................................... 14
Dollar Cost Averaging.............................................................. 14
Auto-Rebalancing................................................................... 15
Charges and Expenses............................................................... 15
How a Contract's Cash Surrender Value Will Vary.................................... 18
How a Type A (Fixed) Contract's Death Benefit Will Vary............................ 18
How a Type B (Variable) Contract's Death Benefit Will Vary......................... 19
Surrender of a Contract............................................................ 20
Withdrawals........................................................................ 20
Increases in Basic Insurance Amount................................................ 21
Decreases in Basic Insurance Amount................................................ 22
When Proceeds Are Paid............................................................. 22
Living Needs Benefit............................................................... 22
Illustrations of Cash Surrender Values, Death Benefits, and Accumulated Premiums... 23
Contract Loans..................................................................... 25
Sale of the Contract and Sales Commissions......................................... 26
Tax Treatment of Contract Benefits................................................. 26
Lapse and Reinstatement............................................................ 28
Legal Considerations Relating to Sex-Distinct Premiums and Benefits................ 28
Other General Contract Provisions.................................................. 28
Riders............................................................................. 29
Participation in Divisible Surplus................................................. 29
Voting Rights...................................................................... 29
Substitution of Fund Shares........................................................ 30
Reports to Contract owners......................................................... 30
State Regulation................................................................... 30
Experts............................................................................ 30
Litigation......................................................................... 31
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Revised
<S> <C>
Year 2000 Compliance............................................................... 31
Additional Information............................................................. 33
Financial Statements............................................................... 33
DIRECTORS AND OFFICERS OF PRUDENTIAL................................................ 34
FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT........................................................ A1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA AND SUBSIDIARIES................................................. B1
</TABLE>
<PAGE>
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS
ACCUMULATED NET PAYMENTS -- The actual premium payments you make, accumulated at
an effective annual rate of 4%, less any withdrawals you make, accumulated at
an effective annual rate of 4%.
ATTAINED AGE -- The insured's age on the Contract date plus the number of years
since then.
BASIC INSURANCE AMOUNT -- The amount of life insurance as shown in the Contract.
CASH SURRENDER VALUE -- The amount payable to the Contract owner upon surrender
of the Contract. It is equal to the Contract Fund minus any Contract debt and,
during the first 10 Contract years, minus the applicable surrender charge.
CONTRACT -- The variable universal life insurance policy described in this
prospectus.
CONTRACT ANNIVERSARY -- The same date as the Contract date in each later year.
CONTRACT DATE -- The date the Contract is effective, as specified in the
Contract.
CONTRACT DEBT -- The principal amount of all outstanding loans plus any interest
we have charged that is not yet due and that we have not yet added to the loan.
CONTRACT FUND -- The total amount credited to a specific Contract. On any date
it is equal to the sum of the amounts in all the subaccounts, the amount
invested under the fixed-rate option, and the principal amount of any Contract
debt.
CONTRACT OWNER -- You. Unless a different owner is named in the application,
the owner of the Contract is the insured.
CONTRACT YEAR -- A year that starts on the Contract date or on a Contract
anniversary. For any portion of a Contract representing an increase (see page
21), "Contract year" is a year that starts on the effective date of the
increase.
DEATH BENEFIT -- The amount we will pay upon the death of the insured before
reduction of any Contract debt and amounts needed to pay charges through the
date of death.
face amount -- The same as the "basic insurance amount."
FIXED-RATE OPTION -- An investment option under which interest is accrued daily
at a rate that Prudential declares periodically, but not less than an effective
annual rate of 4%.
FUNDS -- Mutual funds with separate portfolios. One or more of the available
Fund portfolios may be chosen as an underlying investment for the Contract.
LIFETIME DEATH BENEFIT GUARANTEE PERIOD -- The lifetime of the Contract, during
which time the Lifetime Death Benefit Guarantee is available if sufficient
premiums are paid. See DEATH BENEFIT GUARANTEE, page 12.
LIMITED DEATH BENEFIT GUARANTEE PERIOD -- A period which is determined on a
case-by-case basis, during which time the Limited Death Benefit Guarantee is
available if sufficient premiums are paid. See DEATH BENEFIT GUARANTEE, page
12.
MONTHLY DATE -- The Contract date and the same date in each subsequent month.
SUBACCOUNT -- An investment division of the Account, the assets of which are
invested in the shares of the corresponding portfolio of the Funds.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA -- Us, we, Prudential. The company
offering the Contract.
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT (THE "ACCOUNT") -- A separate
account of Prudential registered as a unit investment trust under the Investment
Company Act of 1940.
US, WE -- The Prudential Insurance Company of America.
- --
VALUATION PERIOD -- The period of time from one determination of the value of
the amount invested in a subaccount to the next. Such determinations are made
when the net asset values of the portfolios of the Funds are calculated, which
is generally at 4:15 p.m. Eastern time on each day during which the New York
Stock Exchange is open.
YOU -- The owner of the Contract.
1
<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 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 buy
this Contract unless the major reason for the purchase is to provide life
insurance protection.
BRIEF DESCRIPTION OF THE CONTRACT
The Contract is a form of variable universal life insurance. It is based on a
Contract Fund, the value of which changes every business day. The chart below
describes how the value of your Contract Fund changes.
You may invest premiums in one or more of the 15 available subaccounts or in the
fixed-rate option. Your Contract Fund value changes every day depending upon
the change in the value of the particular investment options that you have
selected.
Although the value of your Contract Fund will increase if there is favorable
investment performance in the subaccounts you select, there is a risk that
investment performance will be unfavorable and that the value of your Contract
Fund will decrease. The risk will be different, depending upon which investment
options you choose. See WHICH INVESTMENT OPTION SHOULD BE SELECTED?, page 9.
If you select the fixed-rate option, Prudential credits your account with a
declared rate or rates of interest but you assume the risk that the rate may
change, although it will never be lower than an effective annual rate of 4%.
CHARGES
The following chart outlines the components of your Contract Fund and the
adjustments which may be made including the maximum charges which may be
deducted from each premium payment and from the amounts held in the designated
investment options. These charges are largely designed to cover insurance costs
and risks as well as sales and administrative expenses. The maximum charges
shown in the chart, as well as the current lower charges, are fully described
under CHARGES AND EXPENSES, page 15.
2
<PAGE>
- -----------------------------------------------------------------------
PREMIUM PAYMENT
- -----------------------------------------------------------------------
. less a charge of up to 7.5% of the premiums paid for taxes
attributable to premiums.
. less a charge for sales expenses of up to 4% of the premiums paid.
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
INVESTED PREMIUM AMOUNT
To be invested in one or a combination of:
. 15 investment portfolios of the Funds
. The fixed-rate option
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
CONTRACT FUND
On the Contract Date, the Contract Fund is equal to the invested
premium amount minus any of the charges described below which may
be due on that date. Thereafter, the value of the Contract Fund
changes daily.
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
PRUDENTIAL ADJUSTS THE CONTRACT FUND FOR:
. Addition of any new invested premium amounts.
. Addition of any increase due to investment results of the chosen
subaccounts.
. Addition of guaranteed interest at an effective annual rate of 4%
(plus any excess interest if applicable) on the portion of the
. Contract Fund allocated to the fixed-rate option.
. Addition of guaranteed interest at an effective annual rate of 4%
on the amount of any Contract loan. (Separately, interest
charged on the loan accrues at an effective annual rate of 4.5%
or 5%. See CONTRACT LOANS, page 25.)
. Subtraction of any decrease due to investment results of the
chosen subaccounts.
. Subtraction of any amount withdrawn.
. Subtraction of the charges listed below, as applicable.
- ---------------------------------------------------------------------
3
<PAGE>
- ---------------------------------------------------------------------
DAILY CHARGES
. Management fees and expenses are deducted from the Fund assets.
. We deduct a daily mortality and expense risk charge, equivalent to
an annual rate of up to 0.9%, from the subaccount assets.
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
MONTHLY CHARGES
. We reduce the Contract Fund by a monthly administrative charge of
up to $10 plus $0.07 per $1,000 of the basic insurance amount;
after the first Contract year, the $0.07 per $1,000 portion of
the charge is reduced to $0.01 per $1,000 of the basic insurance
amount.
. We deduct a cost of insurance ("COI") charge.
. We reduce the Contract Fund by a Death Benefit Guarantee risk
charge of $0.01 per $1,000 of the basic insurance amount.
. If the Contract includes riders, we deduct rider charges from the
Contract Fund.
. If the rating class of an insured results in an extra charge, we
will deduct that charge from the Contract Fund.
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
POSSIBLE ADDITIONAL CHARGES
. During the first 10 Contract years, we will assess a contingent
deferred sales charge if the Contract lapses, is surrendered, or
the basic insurance amount is decreased (including as a result of
a withdrawal or a death benefit type change). For insureds age 76
or less at issue, the maximum contingent deferred sales charge is
26% of the lesser of the target level premium or the actual
premiums paid (see PREMIUMS, page 11) for the Contract. The
charge is level for six years and then declines monthly to zero at
the end of the 10th Contract year. For insureds age 77 or over at
issue, the maximum charge will be a lesser percentage of the
target level premium for the Contract or the actual premiums paid.
. During the first 10 Contract years, we will assess a contingent
deferred administrative charge if the Contract lapses, is
surrendered or the basic insurance amount is decreased (including
as a result of a withdrawal or a death benefit type change). This
charge equals the lesser of: (a) $5 per $1,000 of basic insurance
amount; and (b) $500. It is level for six years and then declines
monthly until it reaches zero at the end of the 10th Contract year.
. We assess an administrative charge of up to $25 for any withdrawals.
. We may assess an administrative charge of up to $25 for any change
in basic insurance amount.
. We assess an administrative charge of up to $25 for each transfer
exceeding 12 in any Contract year.
- ---------------------------------------------------------------------
4
<PAGE>
TYPES OF DEATH BENEFIT
There are two types of death benefit available. You may choose a Contract with
a Type A (fixed) death benefit under which the cash surrender value varies daily
with investment experience, and the death benefit generally remains at the basic
insurance amount you initially chose. However, the Contract Fund may grow to a
point where the death benefit may increase and vary with investment experience.
If you choose a Contract with a Type B (variable) death benefit, the cash
surrender value and the death benefit both vary with investment experience. For
either type of death benefit, as long as the Contract is inforce, the death
benefit will never be less than the basic insurance amount shown in your
Contract. See TYPE OF DEATH BENEFIT, page 10.
PREMIUM PAYMENTS
The Contract is a flexible premium contract - there are no scheduled premiums.
Except for the minimum initial premium, and subject to a minimum of $25 per
subsequent payment, you choose the timing and amount of premium payments. The
Contract will remain inforce if the Contract Fund less any applicable surrender
charges is greater than zero and more than any Contract debt. However, if the
accumulated premiums you pay are high enough, and Contract debt does not equal
or exceed the Contract Fund less any applicable surrender charges, Prudential
guarantees that your Contract will not lapse even if investment experience is
very unfavorable and the Contract Fund drops below zero. Each Contract
generally provides two guarantees, one that lasts for the lifetime of the
Contract and another that lasts for a stated, reasonably lengthy period. The
guarantee for the life of the Contract requires higher premium payments. See
PREMIUMS, page 11, DEATH BENEFIT GUARANTEE, page 12 and LAPSE AND REINSTATEMENT,
page 28.
We offer and suggest regular billing of premiums even though you decide when to
make premium payments and, subject to a $25 minimum, in what amounts. You
should discuss your billing options with your Prudential representative when you
apply for the Contract. See PREMIUMS, page 11.
REFUND
For a limited time, you may return your Contract for a refund in accordance with
the terms of its "free look" provision. See SHORT-TERM CANCELLATION RIGHT OR
"FREE LOOK," page 10.
For the DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, see page 1.
THE REPLACEMENT OF LIFE INSURANCE IS GENERALLY NOT IN 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 AND IN THE
PROSPECTUSES AND STATEMENTS OF ADDITIONAL INFORMATION FOR THE FUNDS.
5
<PAGE>
GENERAL INFORMATION ABOUT THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT,
AND THE VARIABLE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACT
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
The Prudential Insurance Company of America ("Prudential") is a mutual insurance
company, founded in 1875 under the laws of the State of New Jersey. Prudential
is currently considering reorganizing itself into a 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 their policies. As a general rule, owners of Prudential-issued
insurance policies and annuity contracts would be eligible, while mutual fund
customers and customers of the Company's subsidiaries would not be. It has not
yet been determined whether any exceptions to that general rule will be made
with respect to policyholders and contract owners of Prudential's subsidiaries.
Prudential is licensed to sell life insurance and annuities in the District of
Columbia, Guam, U. S. Virgin Islands, and in all states. This Contract is only
offered in New York State.
Prudential's consolidated financial statements begin on page B1 and should be
considered only as bearing upon Prudential's ability to meet its obligations
under the Contracts.
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
The Prudential Variable Appreciable Account (the "Account") was established on
August 11, 1987 under New Jersey law as a separate investment account. The
Account meets the definition of a "separate account" under federal securities
laws. The Account holds assets that are segregated from all of Prudential's
other assets.
The obligations to Contract owners and beneficiaries arising under the Contract
are general corporate obligations of Prudential. Prudential is also the legal
owner of the assets in the Account. Prudential will maintain assets in the
Account with a total market value at least equal to the reserve and other
liabilities relating to the variable benefits attributable to the Account.
These assets may not be charged with liabilities which arise from any other
business Prudential conducts. In addition to these assets, the Account's assets
may include funds contributed by Prudential to commence operation of the Account
and may include accumulations of the charges Prudential makes against the
Account. From time to time these additional assets may be withdrawn by
Prudential.
The Account is a unit investment trust, which is a type of investment company.
It is registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940 ("1940 Act"). This does not involve any
supervision by the SEC of the management, investment policies, or practices of
the Account. For state law purposes, the Account is treated as a part or
division of Prudential.
Currently, you may invest in one or a combination of 15 available subaccounts
within the Account, each of which invests in a single corresponding portfolio of
the Funds. Prudential may add additional subaccounts in the future. The
Account's financial statements begin on page A1.
6
<PAGE>
THE FUNDS
The following is a list of the Funds, the portfolios' investment objectives and
investment advisers:
THE PRUDENTIAL SERIES FUND, INC. (THE "SERIES FUND"):
. MONEY MARKET PORTFOLIO: The 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 less.
. 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.
. 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.
. 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.
. HIGH YIELD BOND PORTFOLIO: The investment objective is a high total return.
The Portfolio invests primarily in high yield/high risk debt securities.
. 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").
. 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.
. 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.
. 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.
. 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.
Prudential is the investment adviser for the assets of each of the portfolios of
the Series Fund. Prudential's principal business address is 751 Broad Street,
Newark, New Jersey 07102-3777. Prudential has a Service Agreement with its
wholly-owned subsidiary, The Prudential Investment Corporation ("PIC"). The
Service Agreement provides that, subject to Prudential's supervision, PIC will
furnish investment advisory services in connection with the management of the
Series Fund. In addition, Prudential has entered into a Subadvisory Agreement
with its wholly-owned subsidiary Jennison Associates LLC ("Jennison"), under
which Jennison furnishes investment advisory services in connection with the
management of the Prudential Jennison Portfolio.
AIM VARIABLE INSURANCE FUNDS, INC.:
. AIM V.I. Value Fund. Seeks to achieve long-term growth of capital by investing
primarily in equity securities judged by the fund's investment adviser to be
undervalued relative to the investment adviser's appraisal of the current or
projected earnings of the companies issuing the securities, or relative to
current market values of assets owned by the companies issuing the securities
or relative to the equity market generally. Income is a secondary objective.
7
<PAGE>
AIM Advisors, Inc. ("AIM") is the investment adviser for this fund. The
principal business address for AIM is 11 Greenway Plaza, Suite 100, Houston,
Texas 77046-1173.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.:
. AMERICAN CENTURY VP VALUE FUND. Seeks long-term capital growth with income as
a secondary objective. The fund seeks to achieve its objective by investing
primarily in equity securities of well-established companies with
intermediate-to-large market capitalizations that are believed by management
to be undervalued at the time of purchase.
American Century Investment Management, Inc. ("ACIM") is the investment adviser
for this fund. ACIM's principal business address is American Century Tower,
4500 Main Street, Kansas City, Missouri 64111. The Principal Underwriter of the
fund is American Century Services, Inc., located at 4500 Main Street, Kansas
City, Missouri 64111.
JANUS ASPEN SERIES:
. GROWTH PORTFOLIO. Seeks long-term growth of capital in a manner consistent
with the preservation of capital.
Janus Capital Corporation is the investment adviser and is responsible for the
day-to-day management of the portfolio and other business affairs of the
portfolio. Janus Capital Corporation's principal business address is 100
Fillmore Street, Denver, Colorado 80206-4928.
MFS/(R)/ VARIABLE INSURANCE TRUST/SM/:
. EMERGING GROWTH SERIES. Seeks to provide long-term growth of capital.
Dividend and interest income from portfolio securities, if any, is incidental
to the Series' investment objective of long-term growth of capital.
Massachusetts Financial Services Company, a Delaware corporation, is the
investment adviser to this MFS Series. The principal business address for the
Massachusetts Financial Services Company is 500 Boylston Street, Boston,
Massachusetts 02116.
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
. INTERNATIONAL STOCK PORTFOLIO. Long-term growth of capital through
investments primarily in common stocks of established, non-U.S. companies.
Rowe Price-Fleming International, Inc. is the investment manager for this fund.
The principal business address for Rowe Price-Fleming International, Inc. is 100
East Pratt Street, Baltimore, Maryland 21202.
Further information about Fund portfolios can be found in the attached
prospectuses and their statements of additional information for each Fund.
The investment advisers for the Funds charge a daily investment management fee
as compensation for their services. These fees are described in the table under
DEDUCTIONS FROM PORTFOLIOS in the CHARGES AND EXPENSES section, page 15, and are
more fully described in the prospectus for each Fund.
In the future it may become disadvantageous for both variable life insurance and
variable annuity contract separate accounts to invest in the same underlying
mutual funds. Although neither of the companies that invest in the Funds nor
the Funds currently foresee any such disadvantage, the Board of Directors for
each Fund intends to monitor events in order to identify any material conflict
between variable life insurance and variable annuity contract owners and to
determine what action, if any, should be taken. Material conflicts could result
from such things as: (1) changes in state insurance law; (2) changes in federal
income tax law; (3) changes in the investment management of any portfolio of the
Funds; or (4) differences between voting instructions given by variable life
insurance and variable annuity contract owners.
Prudential may be compensated by an affiliate of each of the Funds (other than
the Prudential Series Fund) based upon an annual percentage of the average
assets held in the Fund by Prudential under the Contracts. These percentages
vary by Fund, and reflect administrative and other services provided by
Prudential.
8
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A FULL DESCRIPTION OF THE FUNDS, THEIR INVESTMENT OBJECTIVES, MANAGEMENT,
POLICIES, RESTRICTIONS, EXPENSES, INVESTMENT RISKS, AND ALL OTHER ASPECTS OF
THEIR OPERATION IS CONTAINED IN THE ATTACHED PROSPECTUSES FOR EACH FUND AND IN
THE RELATED STATEMENTS OF ADDITIONAL INFORMATION, WHICH SHOULD BE READ IN
CONJUNCTION WITH THIS PROSPECTUS. THERE IS NO ASSURANCE THAT THE INVESTMENT
OBJECTIVES OF THE FUNDS WILL BE MET.
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 a fixed-rate option. This amount becomes part of Prudential's
general account. The general account consists of all assets owned by Prudential
other than those in the Account and in other separate accounts that have been or
may be established by Prudential. Subject to applicable law, Prudential has
sole discretion over the investment of the general account assets. Contract
owners do not share in the investment experience of those assets. Instead,
Prudential guarantees that the part of the Contract Fund allocated to the fixed-
rate option will accrue interest daily at an effective annual rate that
Prudential declares periodically, but not less than an effective annual rate of
4%.
Currently, the following steps are taken for crediting interest rates: (1)
declared interest rates remain in effect from the date money is allocated to the
fixed-rate option until the first day of the same month in the following year;
(2) a new crediting rate will apply to that money until the first day of the
same month in the next year; (3) a new declared crediting rate will apply to
that money for the remainder of that calendar year; (4) a new crediting rate
will be declared each year for that money and it will remain in effect for the
entire calendar year. Prudential reserves the right to change this practice.
Prudential is not obligated to credit interest at a higher rate than 4%,
although it may do so. Different crediting rates may be declared for different
portions of the Contract Fund allocated to the fixed-rate option. On request,
you will be advised of the interest rates that currently apply to your Contract.
Transfers from the fixed-rate option are subject to strict limits, see
TRANSFERS, page 14. The payment of any cash surrender value attributable to the
fixed-rate option may be delayed up to six months. See WHEN PROCEEDS ARE PAID,
page 22.
WHICH INVESTMENT OPTION SHOULD BE SELECTED?
Historically, for investments held over relatively long periods, the investment
performance of common stocks has generally been superior to that of short or
long-term debt securities, even though common stocks have been subject to much
more dramatic changes in value over short periods of time. Accordingly,
portfolios such as the Stock Index, Equity Income, Equity, Prudential Jennison,
Global, AIM V.I. Value Fund, American Century VP Value Fund, Janus Growth, MFS
Emerging Growth Series or T. Rowe Price International Stock may be desirable
options if you are willing to accept such volatility in your Contract values.
Each of these equity portfolios involves different policies and investment
risks.
You may prefer the somewhat greater protection against loss of principal (and
reduced chance of high total return) provided by the Diversified Bond Portfolio.
You may want even greater safety of principal and may prefer the Money Market
Portfolio or the fixed-rate option, recognizing that the level of short-term
rates may change rather rapidly. If you are willing to take risks and possibly
achieve a higher total return, you may prefer the High Yield Bond Portfolio,
recognizing that the risks are greater for lower quality bonds with 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 Portfolio.
9
<PAGE>
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.
DETAILED INFORMATION FOR
PROSPECTIVE CONTRACT OWNERS
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
The Contract may generally be issued on insureds below the age of 81.
Currently, the minimum basic insurance amount that can be applied for is
$100,000. Prudential requires evidence of insurability, which may include a
medical examination, before issuing any Contract. Non-smokers are offered the
most favorable cost of insurance rates. We charge a higher cost of insurance
rate and/or an additional amount if an extra mortality risk is involved. These
are the current underwriting requirements. We reserve the right to change them
on a non-discriminatory basis.
SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK"
Generally, you may return the Contract for a refund within 10 days after you
receive it. You can request a refund by mailing or delivering the Contract to
the representative who sold it or to the Home Office specified in the Contract.
A Contract returned according to this provision shall be deemed void from the
beginning. You will then receive a refund of all premium payments made, with no
adjustment for investment experience.
TYPE OF DEATH BENEFIT
You may select either of two types of death benefit. Generally, a Contract with
a Type A (fixed) death benefit has a death benefit equal to the basic insurance
amount. This type of death benefit does not vary with the investment
performance of the investment options you selected, except in certain
circumstances. See HOW A TYPE A (FIXED) CONTRACT'S DEATH BENEFIT WILL VARY,
page 18. The payment of additional premiums and favorable investment results of
the subaccounts to which the assets are allocated will generally increase the
cash surrender value. See HOW A CONTRACT'S CASH SURRENDER VALUE Will VARY, page
18.
A Contract with a Type B (variable) death benefit has a death benefit which will
generally equal the basic insurance amount plus the Contract Fund. Since the
Contract Fund is a part of the death benefit, favorable investment performance
and payment of additional premiums generally result in an increase in the death
benefit as well as in the cash surrender value. Over time, however, the
increase in the cash surrender value will be less than under a Type A (fixed)
Contract. This is because, given two Contracts with the same basic insurance
amount and equal Contract Funds, generally the cost of insurance charge for a
Type B (variable) Contract will be greater. See HOW A CONTRACT'S CASH SURRENDER
VALUE Will VARY, page 18 and HOW A TYPE B (VARIABLE) CONTRACT'S DEATH BENEFIT
WILL VARY, page 19. Unfavorable investment performance will result in decreases
in the death benefit and in the cash surrender value. But, as long as the
Contract is not in default, the death benefit may not fall below the basic
insurance amount stated in the Contract.
In choosing a death benefit type, you should also consider whether you intend to
use the withdrawal feature. Contract owners of Type A (fixed) Contracts should
note that any withdrawal may result in a reduction of the basic insurance amount
and the deduction of any applicable surrender charges. In addition, we will not
allow you to make a withdrawal that will decrease the basic insurance amount
below the minimum basic insurance amount. See WITHDRAWALS, page 20.
CHANGING THE TYPE OF DEATH BENEFIT
You may change the type of death benefit on or after the first Contract
anniversary and subject to Prudential's approval. We will increase or decrease
the basic insurance amount so that the death benefit immediately after the
change matches the death benefit immediately before the change.
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If you are changing your Contract's type of death benefit from Type A (fixed) to
Type B (variable), we will reduce the basic insurance amount by the amount in
your Contract Fund on the date the change takes place. The basic insurance
amount after the change may not be lower than the minimum basic insurance amount
applicable to the Contract. If you are changing from a Type B (variable) to a
Type A (fixed) death benefit, we will increase the basic insurance amount by the
amount in your Contract Fund on the date the change takes place. This is
illustrated in the following chart.
<TABLE>
<CAPTION>
CHANGING THE DEATH BENEFIT FROM CHANGING THE DEATH BENEFIT FROM
TYPE A - TYPE B TYPE B - TYPE A
(FIXED) (VARIABLE) (VARIABLE) (FIXED)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC INSURANCE
AMOUNT $300,000 - $250,000 $250,000 - $300,000
CONTRACT FUND $ 50,000 - $ 50,000 $ 50,000 - $50,000
DEATH BENEFIT $300,000 - $300,000 $300,000 - $300,000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Changing your Contract's type of death benefit from Type A (fixed) to Type B
(variable) during the first 10 Contract years may result in the assessment of
charges. In addition, we reserve the right to make an administrative processing
charge of up to $25 for any change in basic insurance amount, although we do not
currently do so. See CHARGES AND EXPENSES, page 15.
To request a change, fill out an application for change which can be obtained
from your Prudential representative or a Home Office. If the change is approved,
we will recompute the Contract's charges and appropriate tables and send you new
Contract data pages. We may require you to send us your Contract before making
the change.
PREMIUMS
The Contract is a flexible premium contract. The minimum initial premium is due
on or before the Contract date. Thereafter, you decide when to make premium
payments and, subject to a $25 minimum, in what amounts. We reserve the right
to refuse to accept any payment that increases the death benefit by more than it
increases the Contract Fund. See HOW A TYPE A (FIXED) CONTRACT'S Death BENEFIT
WILL VARY, page 18 and HOW A TYPE B (VARIABLE) CONTRACT'S DEATH BENEFIT WILL
VARY, page 19. There are circumstances under which the payment of premiums in
amounts that are too large may cause the Contract to be characterized as a
Modified Endowment Contract, which could be significantly disadvantageous. See
TAX TREATMENT OF CONTRACT BENEFITS, page 26.
The Contract has several types of "premiums" which are described below.
Understanding them will help you understand how the Contract works.
MINIMUM INITIAL PREMIUM -- the premium needed to start the Contract. There
is no insurance under the Contract unless the minimum initial premium is
paid.
GUIDELINE PREMIUMS -- the premiums that, if paid at the beginning of each
Contract year, will keep the Contract inforce for the lifetime of the insured
regardless of investment performance, assuming no loans or withdrawals.
These guideline premiums will be higher for a Type B (variable) Contract than
for a Type A (fixed) Contract. For a Contract with no riders or extra risk
charges, these premiums will be level. If certain riders are included, the
guideline premium may increase each year. Payment of guideline premiums at
the beginning of each Contract year is one way to achieve the Lifetime Death
Benefit Guarantee Values shown on the Contract data pages. See DEATH BENEFIT
GUARANTEE, below. When you purchase a Contract, your Prudential
representative can tell you the amount[s] of the guideline premium.
TARGET PREMIUMS -- the premiums that, if paid at the beginning of each
Contract year, will keep the Contract inforce during the Limited Death
Benefit Guarantee period regardless of investment performance, assuming no
loans or withdrawals. As is the case with the guideline premium, for a
Contract with no riders or extra risk charges, these premiums will be level.
If certain riders are included, the target premium may increase each year.
Payment of target premiums at the beginning of each Contract year is one way
to achieve the Limited Death Benefit Guarantee Values shown on the Contract
data pages. At the end of the Limited Death Benefit Guarantee
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period, continuation of the Contract will depend on the Contract Fund having
sufficient money to cover all charges or meeting the conditions of the
Lifetime Death Benefit Guarantee. See DEATH BENEFIT GUARANTEE, below. When
you purchase a Contract, your Prudential representative can tell you the
amount[s] of the target premium.
TARGET LEVEL PREMIUM -- the target premium at issue minus any premiums
associated with riders or with aviation, avocation, occupational or temporary
extra insurance charges. We use the target level premium in calculating the
contingent deferred sales charges. See CHARGES AND EXPENSES, page 15.
We can bill you for the amount you select annually, semi-annually, quarterly or
monthly. Because the Contract is a flexible premium contract, there are no
scheduled premium due dates. When you receive a premium notice, you are not
required to pay this amount. The Contract will remain inforce if: (1) the
Contract Fund, less any applicable surrender charges, is greater than zero and
more than any Contract debt or (2) you have paid sufficient premiums, on an
accumulated basis, to meet the Death Benefit Guarantee conditions and Contract
debt is not equal to or greater than the Contract Fund, less any applicable
surrender charges. You may also pay premiums automatically through pre-
authorized monthly transfers from a bank checking account. If you elect to use
this feature, you choose the day of the month on which premiums will be paid and
the amount of the premiums paid.
When you apply for the Contract, you should discuss with your Prudential
representative how frequently you would like to be billed (if at all) and for
what amount.
DEATH BENEFIT GUARANTEE
Although you decide what premium amounts you wish to pay, sufficient premium
payments, on an accumulated basis, will guarantee that your Contract will not
lapse and a death benefit will be paid upon the death of the insured. This will
be true even if, because of unfavorable investment experience, your Contract
Fund value drops to zero. However, the guarantee is contingent upon Contract
debt not being equal to or greater than the Contract Fund less any applicable
surrender charges. See CONTRACT LOANS, page 25. You should consider the
importance of the Death Benefit Guarantee to you when deciding what amounts of
premiums to pay into the Contract.
For purposes of determining this guarantee, we generally calculate, and show in
the Contract data pages, two sets of amounts - the Lifetime Death Benefit
Guarantee Values and Limited Death Benefit Guarantee Values. These are not cash
---
values that you can realize by surrendering the Contract, nor are they payable
death benefits. They are values used solely to determine if a Death Benefit
Guarantee is in effect. The Lifetime Death Benefit Guarantee Values are shown
for the lifetime of the Contract and are the end-of-year accumulations of
Guideline Premiums at 4% annual interest assuming premiums are paid at the
beginning of each Contract year. The Limited Death Benefit Guarantee Values are
lower, but only apply for the length of the Limited Death Benefit Guarantee
period. They are the end-of-year accumulations of Target Premiums at 4% annual
interest assuming premiums are paid at the beginning of each Contract year.
The length of the Limited Death Benefit Guarantee period is determined on a case
by case basis depending on things like the insured's age, sex, smoker/non-smoker
status, death benefit type and extra rating class, if any. The length of the
Limited Death Benefit Guarantee period applicable to your particular Contract is
shown on the Contract data pages. For certain insureds, generally those who are
older and/or in a substandard risk classification, the Limited Death Benefit
Guarantee period may be of short duration.
At the Contract date, and on each Monthly date, we calculate your Contract's
"Accumulated Net Payments" as of that date. Accumulated Net Payments equal the
premiums you paid, accumulated at an effective annual rate of 4%, less
withdrawals also accumulated at 4%.
At each Monthly date within the Limited Death Benefit Guarantee period, we will
compare your Accumulated Net Payments to the Limited Death Benefit Guarantee
Value as of that date. At each Monthly date after the Limited Death Benefit
Guarantee period, we will compare your Accumulated Net Payments to the Lifetime
Death Benefit Guarantee Value as of that date. If your Accumulated Net Payments
equal or exceed the applicable (Lifetime or Limited) Death Benefit Guarantee
Value and Contract debt does not equal or exceed the Contract Fund less any
applicable surrender charges, then the Contract is kept inforce, regardless of
the amount in the Contract Fund.
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The Contract data pages show Lifetime Death Benefit Guarantee Values and Limited
Death Benefit Guarantee Values as of Contract anniversaries. Values for non-
anniversary Monthly dates will reflect the number of months elapsed between
Contract anniversaries.
Guideline and target premiums are premium levels that, if paid at the start of
each Contract year, correspond to the Lifetime and Limited Death Benefit
Guarantee Values, respectively (assuming no withdrawals or loans). See PREMIUMS,
page 11. They are one way of reaching the Death Benefit Guarantee Values; they
are certainly not the only way.
Here is a table of typical guideline and target premiums along with
corresponding Limited Death Benefit Guarantee periods. The examples assume the
insured is a male, non-smoker, with no extra risk or substandard ratings, and no
extra benefit riders added to the Contract.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
BASIC INSURANCE AMOUNT -- $100,000
ILLUSTRATIVE ANNUAL PREMIUMS
-----------------------------------------------------------------------------------------------------------
TARGET PREMIUM
CORRESPONDING TO THE
LIMITED DEATH BENEFIT
AGE OF GUIDELINE PREMIUM CORRESPONDING TO GUARANTEE VALUES AND
INSURED TYPE OF DEATH THE LIFETIME DEATH LIMITED DEATH BENEFIT
ISSUE BENEFIT CHOSEN GUARANTEE VALUES OF GUARANTEE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
35 Type A (fixed) $ 1,494 $ 884 for 35 years
35 Type B (variable) $ 4,896 $ 884 for 33 years
45 Type A (fixed) $ 2,266 $ 1,272 for 25 years
45 Type B (variable) $ 6,940 $ 1,272 for 23 years
55 Type A (fixed) $ 3,640 $ 2,389 for 20 years
55 Type B (variable) $ 10,324 $ 2,389 for 18 years
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Death Benefit Guarantee allows considerable flexibility as to the timing of
premium payments. Your Prudential representative can supply sample illustrations
of various premium amount and frequency combinations that correspond to the
Death Benefit Guarantee Values.
You should consider carefully the value of maintaining the guarantee. If you
desire the death benefit guarantee for lifetime protection, you may prefer to
pay generally higher premiums in all years, rather than trying to make such
payments on an as needed basis. For example, if you pay only enough premium to
meet the Limited Death Benefit Guarantee Values, a substantial amount may be
required to meet the Lifetime Death Benefit Guarantee Values in order to
continue the guarantee at the end of the Limited Death Benefit Guarantee period.
In addition, it is possible that the payment required to continue the guarantee
after the Limited Death Benefit Guarantee period could cause the Contract to
become a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS,
page 26.
CONTRACT DATE
When the first premium payment is paid with the application for a Contract, the
Contract date will ordinarily be the later of the application date or the
medical examination date. If the first premium is not paid with the
application, the Contract date will be the date on which the first premium is
paid and the Contract is delivered. Under certain circumstances, we may allow
the Contract to be backdated for the purpose of lowering the insured's issue
age, but only to a date not earlier than six months prior to the application
date. This may be advantageous for some Contract owners as a lower issue age
may result in lower current charges. For a Contract that is backdated, we will
credit the initial premium as of the date of receipt and will deduct any charges
due on or before that date.
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<PAGE>
ALLOCATION OF PREMIUMS
On the Contract date, we deduct the charge for sales expenses and the premium
based administrative charge from the initial premium. The remainder of the
initial premium will be allocated on the Contract date among the subaccounts
and/or the fixed-rate option according to your desired allocation, as specified
in the application form, and the first monthly deductions are made. If the
first premium is received before the Contract date, there will be a period
during which the Contract owner's initial premium will not be invested. See
CHARGES AND EXPENSES, page 15.
The charge for sales expenses and the premium based administrative charge also
apply to all subsequent premium payments. The remainder will be invested as of
the end of the valuation period in which it is received at a Home Office, in
accordance with the allocation you previously designated. Provided the Contract
is not in default, you may change the way in which subsequent premiums are
allocated by giving written notice to a Home Office or by telephoning a Home
Office, provided you are enrolled to use the Telephone Transfer System. There
is no charge for reallocating future premiums. All percentage allocations must
be in whole numbers. For example, 33% can be selected but 33 1/3% cannot. Of
course, the total allocation to all selected investment options must equal 100%.
TRANSFERS
You may, up to 12 times each Contract year, transfer amounts from one subaccount
to another subaccount or to the fixed-rate option without charge. There is an
administrative charge of up to $25 for each transfer made exceeding 12 in any
Contract year. All or a portion of the amount credited to a subaccount may be
transferred.
Transfers will take effect as of the end of the valuation period in which a
proper transfer request is received at a Home Office. The request may be in
terms of dollars, such as a request to transfer $5,000 from one subaccount to
another, or may be in terms of a percentage reallocation among subaccounts. In
the latter case, as with premium reallocations, the percentages must be in whole
numbers. You may transfer amounts by proper written notice to a Home Office or
by telephone, provided you are enrolled to use the Telephone Transfer System.
You will automatically be enrolled to use the Telephone Transfer System unless
the Contract is jointly owned or you elect not to have this privilege.
Telephone transfers may not be available on Contracts that are assigned (see
ASSIGNMENT, page 28), depending on the terms of the assignment.
We will use reasonable procedures, such as asking you to provide certain
personal information provided on your application for insurance, to confirm that
instructions given by telephone are genuine. We will not be held liable for
following telephone instructions that we reasonably believe to be genuine.
Prudential cannot guarantee that you will be able to get through to complete a
telephone transfer during peak periods such as periods of drastic economic or
market change.
Only one transfer from the fixed-rate option will be permitted during each
Contract year. The maximum amount which may be transferred out of the fixed-
rate option each year is the greater of: (a) 25% of the amount in the fixed-
rate option; and (b) $2,000. Prudential may change these limits in the future.
We may waive these restrictions for limited periods of time in a non-
discriminatory way, (e.g., when interest rates are declining).
The Contract was not designed for professional market timing organizations,
other organizations, or individuals using programmed, large, or frequent
transfers. A pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to the investment option or to the disadvantage of
other contract owners. If such a pattern were to be found, we may modify your
right to make transfers by restricting the number, timing and amount of
transfers. We also reserve the right to prohibit transfer requests made by an
individual acting under a power of attorney on behalf of more than one contract
owner.
DOLLAR COST AVERAGING
Under the Dollar Cost Averaging ("DCA") feature, either fixed dollar amounts or
a percentage of the amount designated for use under the DCA option will be
transferred periodically from the DCA Money Market Subaccount into other
subaccounts available under the Contract, excluding the fixed-rate option. You
may choose to have periodic transfers made monthly, quarterly, semi-annually or
annually.
Each automatic transfer will take effect as of the end of the valuation period
on the date coinciding with the periodic timing you designate, provided the New
York Stock Exchange is open on that date. If the New York Stock Exchange
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<PAGE>
is not open on that date, or if the date does not occur in that particular
month, the transfer will take effect as of the end of the valuation period which
immediately follows that date. Automatic transfers will continue until: (1) $50
or less remains of the amount designated for Dollar Cost Averaging, at which
time the remaining amount will be transferred; or (2) you give us notification
of a change in DCA allocation or cancellation of the feature. Currently, a
transfer that occurs under the DCA feature is not counted towards the 12 free
transfers permitted each Contract year; however, we reserve the right to change
this practice.
AUTO-REBALANCING
As an administrative practice, we are currently offering a feature called Auto-
Rebalancing. This feature allows you to automatically rebalance subaccount
assets at specified intervals based on percentage allocations that you choose.
For example, suppose your initial investment allocation of subaccounts X and Y
is split 40% and 60%, respectively. Then, due to investment results, that split
changes. You may instruct that those assets be rebalanced to your original or
different allocation percentages.
Auto-Rebalancing can be performed on a monthly, quarterly, semi-annual or annual
basis. Each rebalance will take effect as of the end of the valuation period on
the date coinciding with the periodic timing you designate, provided the New
York Stock Exchange is open on that date. If the New York Stock Exchange is not
open on that date, or if the date does not occur in that particular month, the
transfer will take effect as of the end of the valuation period which
immediately follows that date. The fixed-rate option cannot participate in this
administrative procedure. Currently, a transfer that occurs under the Auto-
Rebalancing feature is not counted towards the 12 free transfers permitted each
Contract year. We reserve the right to change this practice, modify the
requirements or discontinue the feature.
CHARGES AND EXPENSES
This section provides a 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. If circumstances change, we
reserve the right to increase each current charge, up to the maximum charge,
without giving any advance notice.
DEDUCTIONS FROM PREMIUM PAYMENTS
(a) We charge up to 7.5% as an administrative charge. This charge is currently
equal to 3.75% of each premium, of which 1.25% of the premium is used to
cover a 1990 increase in Prudential's federal income taxes measured by
premiums.
(b) We charge up to 4% for sales expenses. This charge, often called a "sales
load", is deducted to compensate us for the cost of selling the Contracts,
including commissions, advertising and the printing and distribution of
prospectuses and sales literature.
Currently, the charge is equal to 4% of premiums paid in each Contract year up
to the amount of the target premium (see PREMIUMS, page 11) and 0% of premiums
paid in excess of this amount. Consequently, paying more than this amount in
any Contract year could reduce your total sales load. For example, assume
that a Contract with no riders or extra insurance charges has a target premium
of $884 and the Contract owner would like to pay 10 target premiums. If the
Contract owner paid $1,768 (two times the amount of the target premium) in
every other Contract year up to the ninth year (i.e. in years 1, 3, 5, 7, 9),
the sales load charge would be $176.80. If the Contract owner paid $884 in
each of the first 10 Contract years, the total sales load would be $353.60.
For additional information, see INCREASES IN BASIC INSURANCE AMOUNT, page 21.
Attempting to structure the timing and amount of premium payments to reduce
the potential sales load may increase the risk that your Contract will lapse
without value. Delaying the payment of target premium amounts to later years
will adversely affect the Death Benefit Guarantee if the accumulated premium
payments do not reach the accumulated values shown under your Contract's
Limited Death Benefit Guarantee Values. See DEATH BENEFIT GUARANTEE, page 12.
In addition, there are circumstances where payment of premiums that are too
large may cause the Contract to be characterized as a Modified Endowment
Contract, which could be significantly disadvantageous. See TAX TREATMENT OF
CONTRACT BENEFITS, page 26.
15
<PAGE>
DEDUCTIONS FROM PORTFOLIOS
We deduct an investment advisory fee daily from each portfolio of the Funds at a
rate, on an annualized basis, ranging from 0.35% for the Stock Index Portfolio
to 1.05% for the T. Rowe Price International Stock Portfolio. The expenses
incurred in conducting the investment operations of the portfolios (such as
custodian fees and preparation and distribution of annual reports) are paid out
of the portfolio's income. These expenses also vary from portfolio to
portfolio.
The total expenses of each portfolio for the year 1998, expressed as a
percentage of the average assets during the year, are shown below:
<TABLE>
<CAPTION>
INVESTMENT OTHER TOTAL
PORTFOLIO ADVISORY FEE EXPENSES EXPENSES
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SERIES FUND
MONEY MARKET 0.40% 0.01% 0.41%
DIVERSIFIED BOND 0.40% 0.02% 0.42%
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%
GLOBAL 0.75% 0.11% 0.86%
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. VALUE FUND (4) 0.61% 0.05% 0.66%
AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC.
VP VALUE PORTFOLIO (1) 1.00% 0.00% 1.00%
JANUS ASPEN SERIES
GROWTH PORTFOLIO (2) 0.65% 0.03% 0.68%
MFS(R) VARIABLE INSURANCE TRUST /SM/
EMERGING GROWTH SERIES 0.75% 0.10% 0.85%
T. ROWE PRICE INTERNATIONAL SERIES, INC.
INTERNATIONAL STOCK PORTFOLIO (3) 1.05% 0.00% 1.05%
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Fees are all-inclusive.
(2) The fees and expenses in the table above are based on gross expenses of the
Portfolio before expense offset arrangements for the fiscal year ended
December 31, 1998. The information for the Portfolio is net of fee waivers
or reductions from Janus Capital. Fee reductions for the Portfolio reduce
the management fee to the level of the corresponding Janus retail fund.
Other waivers, if applicable, are first applied against the management fee
and then against other expenses. Without such waivers or reductions, the
management fee, other expenses and total operating expenses for the
Portfolio would have been 0.72%, 0.03% and 0.75%, respectively. Janus
Capital may modify or terminate the waivers or reductions at any time upon
at least 90 days' notice to the Trustees.
(3) The investment management fee includes the ordinary expenses of operating
the Fund.
(4) AIM may from time to time voluntarily waive or reduce its respective fees.
Effective May 1, 1999, the Fund will reimburse AIM in an amount up to 0.25%
of the average net asset value of the Fund for expenses incurred in
providing, or assuring that participating insurance companies provide,
certain administrative services. Currently, the fee only applies to the
average net asset value of each Fund in excess of the net asset value of
each Fund as calculated on April 30, 1999.
THE EXPENSES RELATING TO THE FUNDS (OTHER THAN THOSE OF THE SERIES FUND) HAVE
BEEN PROVIDED TO PRUDENTIAL BY THE FUNDS. PRUDENTIAL HAS NOT INDEPENDENTLY
VERIFIED THEM.
16
<PAGE>
DAILY DEDUCTION FROM THE CONTRACT FUND
Each day we deduct a charge from the assets of each of the subaccounts in an
amount equivalent to an effective annual rate of up to 0.9%. Currently, we
intend to charge 0.6%. This charge is intended to compensate Prudential for
assuming mortality and expense risks under the Contract. The mortality risk
assumed is that insureds may live for shorter periods of time than Prudential
estimated when it determined what mortality charge to make. The expense risk
assumed is that expenses incurred in issuing and administering the Contract will
be greater than Prudential estimated in fixing its administrative charges. This
charge is not assessed against amounts allocated to the fixed-rate option.
MONTHLY DEDUCTIONS FROM THE CONTRACT FUND
Prudential deducts the following monthly charges proportionately from the dollar
amounts held in each of the chosen investment option[s].
(a) An administrative charge based on the basic insurance amount is deducted.
The charge is intended to compensate us for things like processing claims,
keeping records and communicating with Contract owners. Currently, the
charge is equal to $10 per Contract plus $0.07 per $1,000 of basic
insurance amount in the first Contract year and $5 per Contract plus $0.01
per $1,000 of basic insurance amount in all subsequent years. Prudential
reserves the right, however to charge up to $10 per Contract plus $0.07 per
$1,000 of basic insurance amount in the first Contract year and $10 per
Contract plus $0.01 per $1,000 of basic insurance amount in all subsequent
years.
For example, a Contract with a basic insurance amount of $100,000 would
currently have a charge equal to $10 plus $7 for a total of $17 per month
for the first Contract year and $5 plus $1 for a total of $6 per month in
all later years. The maximum charge for this same Contract would be $10 plus
$7 for a total of $17 per month during the first Contract year. In later
years, the maximum charge would be $10 plus $1 for a total of $11 per month.
(b) A cost of insurance ("COI") charge is deducted. When an insured dies, the
amount payable to the beneficiary (assuming there is no Contract debt) is
larger than the Contract Fund -- significantly larger if the insured dies in
the early years of a Contract. The cost of insurance charges collected from
all Contract owners enables Prudential to pay this larger death benefit. The
maximum COI charge is determined by multiplying the "net amount at risk"
under a Contract (the amount by which the Contract's death benefit exceeds
the Contract Fund) by maximum COI rates. The maximum COI rates are based
upon the 1980 Commissioners Standard Ordinary ("CSO") Tables and an
insured's current attained age, sex, smoker/non-smoker status, and extra
rating class, if any. At most ages, Prudential's current COI rates are lower
than the maximum rates. For additional information, see INCREASES IN BASIC
INSURANCE AMOUNT, page 21.
(c) A charge of $0.01 per $1,000 of basic insurance amount is made to compensate
Prudential for the risk we assume by providing the Death Benefit Guarantee
feature. See DEATH BENEFIT GUARANTEE, page 12.
(d) You may add one or more of several riders to the Contract. Some riders are
charged for separately. If you add such a rider to the basic Contract,
additional charges will be deducted.
(e) If an insured is in a substandard risk classification (for example, a person
in a hazardous occupation), additional charges will be deducted.
SURRENDER CHARGES
(a) An additional sales load is charged if during the first 10 Contract years
the Contract lapses, is surrendered or if the basic insurance amount is
decreased. It is not deducted from the death benefit if the insured should
die during this period. For issue ages 76 or less, this contingent deferred
charge will be 26% of the lesser of: (a) the target level premium for the
Contract; and (b) the actual premiums paid. The rate used in the calculation
of this contingent deferred charge will be 22% for issue ages 77-79, 16% for
issue ages 80-83 and 13% for issue ages 84-85. The rate used in the
calculation of this contingent deferred charge will remain level for six
years. After six years, this charge will reduce monthly at a constant rate
until it reaches zero at the end of the 10th year.
17
<PAGE>
(b) If during the first 10 Contract years the Contract lapses, is surrendered or
if the basic insurance amount is decreased, an administrative charge is
deducted to cover the cost of processing applications, conducting medical
examinations, determining insurability and the insured's rating class, and
establishing records. The charge is equal to the lesser of: (a) $5 per
$1,000 of basic insurance amount; and (b) $500. This charge is level for six
years. After six years, this charge will be reduced monthly at a constant
rate until it reaches zero at the end of the 10th year.
We will show a surrender charge threshold amount in the Contract data pages.
This threshold amount is the lowest basic insurance amount since issue. If
during the first 10 Contract years, the basic insurance amount is decreased
[including as a result of a withdrawal or a change in type of death benefit from
Type A (fixed) to Type B (variable)], and the new basic insurance amount is
below the threshold, we will deduct a percentage of the surrender charge. The
percentage will be the amount by which the new basic insurance amount is less
than the threshold, divided by the threshold. After this transaction, the
threshold will be updated and a corresponding new surrender charge schedule will
also be determined to reflect that portion of surrender charges deducted in the
past.
TRANSACTION CHARGES
(a) We currently charge an administrative processing fee equal to the lesser of
$25 or 2% of the withdrawal amount in connection with each withdrawal.
(b) We currently do not charge an administrative processing fee in connection
with a change in basic insurance amount. We reserve the right to make such a
charge in an amount of up to $25 for any change in basic insurance amount.
(c) We will charge an administrative processing fee of up to $25 for each
transfer exceeding 12 in any Contract year.
HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY
You may surrender the Contract for its cash surrender value (referred to as net
cash value in the Contract). The Contract's cash surrender value on any date
will be the Contract Fund less any applicable surrender charges and less any
Contract debt. See CONTRACT LOANS, page 25. The Contract Fund value changes
daily, reflecting: (1) increases or decreases in the value of the Fund
portfolios in which the assets of the subaccount[s] have been invested; (2)
interest credited on any amounts allocated to the fixed-rate option; (3)
interest credited on any loan; and (4) the daily asset charge for mortality and
expense risks assessed against the subaccounts. The Contract Fund value also
changes to reflect the receipt of premium payments and the monthly deductions
described under CHARGES AND EXPENSES, page 15. Upon request, Prudential will
tell you the cash surrender value of your Contract. It is possible for the cash
surrender value of a Contract to decline to zero because of unfavorable
investment performance or outstanding Contract debt.
The tables on pages T1 through T4 of this prospectus illustrate approximately
what the cash surrender values would be for representative Contracts paying
target premium amounts (see PREMIUMS, page 11), assuming hypothetical uniform
investment results in the Fund portfolios. Two of the tables assume current
charges will be made throughout the lifetime of the Contract and two tables
assume maximum charges will be made. See ILLUSTRATIONS OF CASH SURRENDER
VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS, page 23.
HOW A TYPE A (FIXED) CONTRACT'S DEATH BENEFIT WILL VARY
As described earlier, there are two types of death benefit available under the
Contract: Type A, a generally fixed death benefit and Type B, a variable death
benefit. A Type B (variable) death benefit varies with investment performance
while a Type A (fixed) death benefit does not, unless it must be increased to
comply with the Internal Revenue Code's definition of life insurance.
Under a Type A (fixed) Contract, the death benefit is generally equal to the
basic insurance amount. See CONTRACT LOANS, page 25. If the Contract is kept
inforce for several years, depending on how much premium you pay, and/or if
investment performance is reasonably favorable, the Contract Fund may grow to
the point where Prudential will increase the death benefit in order to ensure
that the Contract will satisfy the Internal Revenue Code's definition of life
insurance. Thus, the death benefit under a Type A (fixed) Contract will always
be the greater of: (1) the basic insurance amount; and (2) the Contract Fund
before the deduction of any monthly charges due on that date, multiplied
18
<PAGE>
by the attained age factor that applies. A listing of attained age factors can
be found on the data pages of your Contract. The latter provision ensures that
the Contract will always have a death benefit large enough so that the Contract
will be treated as life insurance for tax purposes under current law.
The following table illustrates at different ages how the attained age factor
affects the death benefit for different Contract Fund amounts. The table
assumes a $100,000 Type A (fixed) Contract was issued when the insured was a
male nonsmoker, age 35.
<TABLE>
<CAPTION>
TYPE A (FIXED) DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------------------------
IF THEN
===================================================================================================================================
THE AND THE THE ATTAINED THE CONTRACT FUND AND THE
INSURED IS AGE CONTRACT AGE FACTOR MULTIPLIED BY THE DEATH
FUND IS IS ATTAINED AGE FACTOR IS BENEFIT IS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
40 $10,000 3.64 $ 36,400 $100,000
40 $30,000 3.64 $109,200 $109,200*
40 $50,000 3.64 $182,000 $182,000*
- -----------------------------------------------------------------------------------------------------------------------------------
60 $30,000 1.96 $ 58,800 $100,000
60 $50,000 1.96 $ 98,000 $100,000
60 $70,000 1.96 $137,200 $137,200*
- -----------------------------------------------------------------------------------------------------------------------------------
80 $50,000 1.28 $ 64,000 $100,000
80 $80,000 1.28 $102,400 $102,400*
80 $90,000 1.28 $115,200 $115,200*
- -----------------------------------------------------------------------------------------------------------------------------------
* Note that the death benefit has been increased to comply with the Internal Revenue Code's definition of life insurance.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
This means, for example, that if the insured has reached the age of 60, and the
Contract Fund is $70,000, the death benefit will be $137,200, even though the
original basic insurance amount was $100,000. In this situation, for every $1
increase in the Contract Fund, the death benefit will be increased by $1.96. We
reserve the right to refuse to accept any premium payment that increases the
death benefit by more than it increases the Contract Fund. If we exercise this
right, it may in certain situations result in the loss of the death benefit
guarantee.
HOW A TYPE B (VARIABLE) CONTRACT'S DEATH BENEFIT WILL VARY
Under a Type B (variable) Contract, while the Contract is inforce, the death
benefit will never be less than the basic insurance amount, but will also vary,
immediately after it is issued, with the investment results of the selected
investment options. The death benefit may be further increased to ensure that
the Contract will satisfy the Internal Revenue Code's definition of life
insurance. Thus, the death benefit will always be the greater of: (1) the basic
insurance amount plus the Contract Fund before the deduction of any monthly
charges due on that date; and (2) the Contract Fund before the deduction of any
monthly charges due on that date, multiplied by the attained age factor that
applies. For purposes of computing the death benefit, if the Contract Fund is
less than zero we will consider it to be zero. A listing of attained age
factors can be found on the data pages of your Contract. The latter provision
ensures that the Contract will always have a death benefit large enough so that
the Contract will be treated as life insurance for tax purposes under current
law.
19
<PAGE>
The following table illustrates various attained age factors and Contract Funds
and the corresponding death benefits. The table assumes a $100,000 Type B
(variable) Contract was issued when the insured was a male nonsmoker, age 35.
<TABLE>
<CAPTION>
TYPE B (VARIABLE) DEATH BENEFIT
- -----------------------------------------------------------------------------------------------------------------------------------
IF THEN
===================================================================================================================================
THE AND THE THE ATTAINED THE CONTRACT fUND AND THE
INSURED IS CONTRACT AGE FACTOR MULTIPLIED BY THE DEATH
AGE FUND IS ATTAINED AGE FACTOR IS BENEFIT IS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
40 $10,000 3.64 $ 36,400 $110,000
40 $30,000 3.64 $109,200 $130,000
40 $50,000 3.64 $182,000 $182,000*
- -----------------------------------------------------------------------------------------------------------------------------------
60 $30,000 1.96 $ 58,800 $130,000
60 $50,000 1.96 $ 98,800 $150,000
60 $70,000 1.96 $137,200 $170,000
- -----------------------------------------------------------------------------------------------------------------------------------
80 $50,000 1.28 $ 64,000 $150,000
80 $80,000 1.28 $102,400 $180,000
80 $90,000 1.28 $115,200 $190,000
- -----------------------------------------------------------------------------------------------------------------------------------
* Note that the death benefit has been increased to comply with the Internal Revenue Code's definition of life insurance.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
This means, for example, that if the insured has reached the age of 40, and the
Contract Fund is $50,000, the death benefit will be $182,000, even though the
original basic insurance amount was $100,000. In this situation, for every $1
increase in the Contract Fund, the death benefit will be increased by $3.64. We
reserve the right to refuse to accept any premium payment that increases the
death benefit by more than it increases the Contract Fund. If we exercise this
right, it may in certain situations result in the loss of the death benefit
guarantee.
SURRENDER OF A CONTRACT
A Contract may be surrendered for its cash surrender value or for a fixed
reduced paid-up insurance benefit while the insured is living. To surrender a
Contract, we may require you to deliver or mail the Contract with a written
request in a form that meets Prudential's needs, to a Home Office. The cash
surrender value of a surrendered Contract will be determined as of the end of
the valuation period in which such a request is received in the Home Office.
Fixed reduced paid-up insurance provides paid-up insurance, the amount of which
will be paid when the insured dies. There will be cash values and loan values.
The loan interest rate for fixed reduced paid-up insurance is 5%. Upon
surrender of the Contract, the amount of fixed reduced paid-up insurance depends
upon the cash surrender value and the insured's issue age, sex, smoker/non-
smoker status, and the length of time since the Contract date. Surrender of a
Contract may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS,
page 26.
WITHDRAWALS
Under certain circumstances, you may withdraw a portion of the Contract's cash
surrender value without surrendering the Contract. The withdrawal amount is
limited by the requirement that the cash surrender value after the withdrawal
may not be zero or less than zero after deducting the withdrawal charges. The
amount withdrawn must be at least $500. There is an administrative processing
fee for each withdrawal which is the lesser of: (a) $25 and; (b) 2% of the
withdrawal amount. An amount withdrawn may not be repaid except as a premium
subject to the applicable charges. Upon request, we will tell you how much you
may withdraw. Withdrawal of the cash surrender value may have tax consequences.
See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
Whenever a withdrawal is made, the death benefit will immediately be reduced by
at least the amount of the withdrawal. For a Type B (variable) Contract, this
will not change the basic insurance amount. However, under a Type A (fixed)
Contract, the resulting reduction in death benefit usually requires a reduction
in the basic insurance amount. If the basic insurance amount is decreased to an
amount less than the basic insurance amount at issue, a surrender charge may be
deducted. See CHARGES AND EXPENSES, page 15. No withdrawal will be permitted
under a Type A (fixed) Contract if it would result in a basic insurance amount
of less than the minimum basic insurance amount. It is important to note,
however, that if the basic insurance amount is decreased, there is a possibility
that the Contract might be classified as a Modified Endowment Contract. See TAX
TREATMENT OF CONTRACT BENEFITS, page 26.
20
<PAGE>
Before making any withdrawal which causes a decrease in basic insurance amount,
you should consult with your tax adviser and your Prudential representative.
When a withdrawal is made, the Contract Fund is reduced by the sum of the cash
withdrawn and the withdrawal fee. An amount equal to the reduction in the
Contract Fund will be withdrawn proportionally from the investment options
unless you direct otherwise.
Withdrawal of the cash surrender value increases the risk that the Contract Fund
may be insufficient to provide Contract benefits. If such a withdrawal is
followed by unfavorable investment experience, the Contract may go into default.
Withdrawals may also affect whether a Contract is kept inforce under the Death
Benefit Guarantee, since withdrawals decrease the accumulated net payments. See
DEATH BENEFIT GUARANTEE, page 12.
INCREASES IN BASIC INSURANCE AMOUNT
Subject to the underwriting requirements determined by Prudential, on or after
the first Contract anniversary, you may increase the amount of insurance by
increasing the basic insurance amount of the Contract. The following conditions
must be met: (1) you must ask for the change in a form that meets Prudential's
needs; (2) the amount of the increase must be at least equal to the minimum
increase in basic insurance amount shown under CONTRACT LIMITATIONS in the data
pages of the Contract; (3) you must prove to us that the insured is insurable
for any increase; (4) the Contract must not be in default; (5) we must not be
paying premiums into the Contract as a result of the insured's total disability;
and (6) if we ask you to do so, you must send us the Contract to be endorsed.
If we approve the change, we will send you new Contract data pages showing the
amount and effective date of the change and the recomputed charges, values and
limitations. If the insured is not living on the effective date, the change
will not take effect. No administrative processing charge is currently being
made in connection with an increase in basic insurance amount. We reserve the
right to make such a charge in an amount of up to $25.
For sales load purposes, the target premium is calculated separately for each
basic insurance amount segment. The target premium for each segment also
includes the premium for extra insurance charges associated to that segment.
When premiums are paid, each payment is allocated to each basic insurance amount
segment based on the proportion of the target premium in each segment to the
total target premiums of all segments. Currently, the sales load charge for
each segment is equal to 4% of the allocated premium paid in each Contract year
up to the target premium and 0% of allocated premiums paid in excess of the
target premium. See the definition of Contract year for an increase in basic
insurance amount in DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, page
1.
The COI rates for an increase in basic insurance amount are based upon 1980 CSO
Tables, the age at the increase effective date and the number of years since
then, sex (except where unisex rates apply); smoker/nonsmoker status, and extra
rating class, if any. The net amount at risk for the whole contract (the death
benefit minus the contract fund) is allocated to each basic insurance amount
segment based on the proportion of its basic insurance amount to the total of
all basic insurance amount segments. In addition, the attained age factor for a
Contract with an increase in basic insurance amount is based on the Insured's
attained age for the initial basic insurance amount segment. For a description
of attained age factor, see HOW A TYPE A (FIXED) CONTRACT'S DEATH BENEFIT WILL
VARY, page 18 and HOW A TYPE B (VARIABLE) CONTRACT'S DEATH BENEFIT WILL VARY,
page 19.
Each Contract owner who elects to increase the basic insurance amount of his or
her Contract will receive a "free-look" right which will apply only to the
increase in basic insurance amount, not the entire Contract. This right is
comparable to the right afforded to a purchaser of a new Contract except that,
any cost of insurance charge for the increase in the basic insurance amount will
be returned to the Contract Fund instead of a refund of premium. See SHORT-TERM
CANCELLATION RIGHT OR "FREE LOOK", page 10. Generally, the "free-look" right
would have to be exercised no later than 10 days after receipt of the Contract
as increased.
An increase in basic insurance amount may cause the Contract to be classified as
a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
Therefore, before increasing the basic insurance amount, you should consult with
your tax adviser and your Prudential representative.
21
<PAGE>
DECREASES IN BASIC INSURANCE AMOUNT
As explained earlier, you may make a withdrawal (see WITHDRAWALS, page 20). On
or after the first Contract anniversary, you also have the option of decreasing
the basic insurance amount of your Contract without withdrawing any cash
surrender value. Contract owners who conclude that, because of changed
circumstances, the amount of insurance is greater than needed will be able to
decrease their amount of insurance protection, and the monthly deductions for
the cost of insurance. The amount of the decrease must be at least equal to the
minimum decrease in basic insurance amount shown under Contract Limitations in
the data pages of your Contract. In addition, the basic insurance amount after
the decrease must be at least equal to the minimum basic insurance amount shown
under CONTRACT LIMITATIONS in the data pages of your Contract. If the basic
insurance amount is decreased to an amount less than the lowest basic insurance
amount since issue, a surrender charge may be deducted. No administrative
processing charge is currently being made in connection with a decrease in basic
insurance amount. We reserve the right to make such a charge in an amount of up
to $25. See CHARGES AND EXPENSES, page 15. If we ask you to, you must send us
your Contract to be endorsed. The Contract will be amended to show the new
basic insurance amount, charges, values in the appropriate tables, and the
effective date of the decrease.
We may decline a reduction if we determine it would cause the Contract to fail
to qualify as "life insurance" for purposes of Section 7702 of the Internal
Revenue Code. A decrease will not take effect if the insured is not living on
the effective date.
It is important to note, however, that if the basic insurance amount is
decreased, there is a possibility that the Contract might be classified as a
Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
Before requesting any decrease in basic insurance amount, you should consult
with your tax adviser and your Prudential representative.
WHEN PROCEEDS ARE PAID
Prudential will generally pay any death benefit, cash surrender value, loan
proceeds or withdrawal within seven days after all the documents required for
such a payment are received at a Home Office. Other than the death benefit,
which is determined as of the date of death, the amount will be determined as of
the end of the valuation period in which the necessary documents are received at
a Home Office. However, Prudential may delay payment of proceeds from the
subaccount[s] and the variable portion of the death benefit due under the
Contract if the disposal or valuation of the Account's assets is not reasonably
practicable because the New York Stock Exchange is closed for other than a
regular holiday or weekend, trading is restricted by the SEC, or the SEC
declares that an emergency exists.
With respect to the amount of any cash surrender value allocated to the fixed-
rate option, Prudential expects to pay the cash surrender value promptly upon
request. However, Prudential has the right to delay payment of such cash
surrender value for up to six months. Prudential will pay interest of at least
3% a year if it delays such a payment for 10 days or more.
LIVING NEEDS BENEFIT
You may elect to add the Living Needs Benefit/SM/ to your Contract at issue.
There is no charge for adding the benefit to the Contract. However, an
administrative charge (not to exceed $150) will be made at the time the LIVING
NEEDS BENEFIT is paid.
The Living Needs Benefit allows you to elect to receive an accelerated payment
of all or part of the Contract's death benefit, adjusted to reflect current
value, at a time when certain special needs exist. The adjusted death benefit
will always be less than the death benefit, but will generally be greater than
the Contract's cash surrender value. The following options are available.
TERMINAL ILLNESS OPTION. This option is available if the insured is diagnosed
as terminally ill with a life expectancy of six months or less. When
satisfactory evidence is provided, Prudential will provide an accelerated
payment of the portion of the death benefit selected by the Contract owner as a
LIVING NEEDS BENEFIT. The benefit will be paid to you in a single sum.
22
<PAGE>
ORGAN TRANSPLANT OPTION. This option is available if the insured is diagnosed
as having a life expectancy of six months or less unless the insured receives a
vital organ transplant. When satisfactory evidence is provided, Prudential will
provide an accelerated payment of the portion of the death benefit selected by
the Contract owner as a LIVING NEEDS BENEFIT. The benefit will be paid to you
in a single sum.
All or part of the Contract's death benefit may be accelerated under the LIVING
NEEDS BENEFIT. If the benefit is only partially accelerated, a death benefit of
at least $25,000 must remain under the Contract. Prudential reserves the right
to determine the minimum amount that may be accelerated.
No benefit will be payable if you are required to elect it in order to meet the
claims of creditors or to obtain a government benefit. Prudential can furnish
details about the amount of LIVING NEEDS BENEFIT that is available to an
eligible Contract owner, and the effect on the Contract if less than the entire
death benefit is accelerated.
You should consider whether adding this settlement option is appropriate in your
given situation. Adding the LIVING NEEDS BENEFIT to the Contract has no adverse
consequences; however, electing to use it could. With the exception of certain
business-related Contracts, the 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.
ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS
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:
. a Contract with a basic insurance amount of $100,000 bought 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.
. the target premium amount (see PREMIUMS, page 11) is paid on each Contract
anniversary and no loans are taken.
. the Contract Fund has been invested in equal amounts in each of the 15
portfolios of the Funds and no portion of the Contract Fund has been allocated
to the fixed-rate option.
The first table (page T1) assumes a Type A (fixed) Contract has been purchased
and the second table (page T2) assumes a Type B (variable) 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 the maximum contractual charges have been made
from the beginning. See CHARGES AND EXPENSES, page 15.
Under the Type B (variable) Contract the death benefit changes to reflect
investment returns. Under the Type A (fixed) Contract, the death benefit
increases only if the Contract Fund becomes large enough that an increase in the
death benefit is necessary for the Contract to satisfy the Internal Revenue
Code's definition of life insurance. See TYPE OF DEATH BENEFIT, 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 will change with investment
experience.
23
<PAGE>
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 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 Fund expenses. The net return
reflects average total annual expenses of the 15 portfolios of 0.64%, and the
daily deduction from the Contract Fund of 0.6% per year for the tables based on
current charges and 0.9% per year for the tables based on maximum charges.
Thus, assuming current charges, gross returns of 0%, 4%, 8% and 12% are the
equivalent of net returns of -1.24%, 2.76%, 6.76% and 10.76%, respectively.
Assuming maximum charges, gross returns of 0%, 4%, 8% and 12% are the equivalent
of net returns of -1.54%, 2.46%, 6.46% and 10.46%, respectively. The actual
fees and expenses of the portfolios associated with a particular Contract may be
more or less than 0.64% 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 Funds and under the Contract.
Following these illustrations are two pages (pages T5 and T6) showing internal
rates of return (commonly referred to as IRRs) associated with the cash values
and death benefits shown on the preceding four pages. IRRs are often used by
insurance companies to provide some indication of the rate of return your
"investment" in the Contract (the aggregate premiums paid) may have earned if
the Contract were surrendered or if the insured were to die. The IRR on the
death benefit is equivalent to an interest rate (without considering taxes) at
which an amount equal to the premiums illustrated on the preceding pages could
have been invested to arrive at the death benefit of the Contract. The IRR on
the cash surrender value is equivalent to an interest rate (without considering
taxes) at which an amount equal to the illustrated premiums could have been
invested to arrive at the cash surrender value of the Contract. The IRRs on
page T5 are based on the Contract values shown on pages T1 and T2. The IRRs on
page T6 are based on the Contract values shown on pages T3 and T4.
If you are considering the purchase of a variable life insurance contract from
another insurance company, you should not rely upon these tables for comparison
purposes. A comparison between two tables, each showing values for a 35 year
old man, may be useful for a 35 year old man but would be inaccurate if made for
insureds of other ages or sex. Your Prudential representative can provide you
with a hypothetical illustration for your own age, sex, and rating class.
24
<PAGE>
VARIABLE UNIVERSAL LIFE
TYPE A (FIXED) DEATH BENEFIT
MALE NON-SMOKER SELECT AGE 35
$100,000.00 BASIC INSURANCE AMOUNT
$884.00 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (1)
-----------------------------------------------------
Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of
End of Accumulated -----------------------------------------------------
Policy at 4% 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.24 Net) (2.76 Net) (6.76 Net) (10.76% Net)
---- -------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
1 919 $100,000 $100,000 $100,000 $ 100,000
2 1,875 $100,000 $100,000 $100,000 $ 100,000
3 2,870 $100,000 $100,000 $100,000 $ 100,000
4 3,904 $100,000 $100,000 $100,000 $ 100,000
5 4,980 $100,000 $100,000 $100,000 $ 100,000
6 6,098 $100,000 $100,000 $100,000 $ 100,000
7 7,261 $100,000 $100,000 $100,000 $ 100,000
8 8,471 $100,000 $100,000 $100,000 $ 100,000
9 9,729 $100,000 $100,000 $100,000 $ 100,000
10 11,038 $100,000 $100,000 $100,000 $ 100,000
15 18,409 $100,000 $100,000 $100,000 $ 100,000
20 27,377 $100,000 $100,000 $100,000 $ 100,000
25 38,288 $100,000 $100,000 $100,000 $ 134,495
30 51,562 $100,000 $100,000 $100,000 $ 199,548
35 67,713 $100,000 $100,000 $112,163 $ 294,537
40 87,363 $100,000 $100,000 $139,800 $ 428,757
45 111,270 $ 0(2) $100,000 $174,678 $ 629,494
50 140,356 $ 0 $ 0(2) $217,906 $ 927,025
55 175,744 $ 0 $ 0 $270,353 $1,362,665
60 218,799 $ 0 $ 0 $332,846 $1,993,169
65 271,182 $ 0 $ 0 $412,751 $2,943,238
Cash Surrender Value (1)
--------------------------------------------------------
Assuming Hypothetical Gross (and Net)
Annual Investment Return of
End of --------------------------------------------------------
Policy 0% Gross 4% Gross 8% Gross 12% Gross
Year (-1.24 Net) (2.76 Net) (6.76 Net) (10.76% Net)
---- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
1 $ 0 $ 0 $ 0(2) $ 0(2)
2 $ 270 $ 341 $ 413 $ 488
3 $ 823 $ 963 $ 1,111 $ 1,267
4 $ 1,366 $ 1,600 $ 1,853 $ 2,127
5 $ 1,899 $ 2,250 $ 2,642 $ 3,077
6 $ 2,419 $ 2,914 $ 3,479 $ 4,124
7 $ 3,110 $ 3,771 $ 4,549 $ 5,461
8 $ 3,786 $ 4,641 $ 5,672 $ 6,915
9 $ 4,447 $ 5,520 $ 6,851 $ 8,499
10 $ 5,092 $ 6,409 $ 8,087 $ 10,225
15 $ 7,109 $10,033 $ 14,328 $ 20,647
20 $ 8,822 $14,015 $ 22,859 $ 38,009
25 $10,102 $18,300 $ 34,560 $ 66,913
30 $10,115 $22,125 $ 50,171 $ 113,379
35 $ 8,294 $24,970 $ 71,441 $ 187,603
40 $ 2,531 $24,984 $ 99,149 $ 304,083
45 $ 0(2) $18,976 $134,368 $ 484,226
50 $ 0 $ 0(2) $178,611 $ 759,857
55 $ 0 $ 0 $233,063 $1,174,711
60 $ 0 $ 0 $299,861 $1,795,648
65 $ 0 $ 0 $393,097 $2,803,084
</TABLE>
(1) Assumes no Contract loan has been made
(2) Based on a gross return of 0% the cash surrender value would go to zero in
year 1 and in year 42 and later. Because the Target Premium is being paid,
the Contract is kept inforce through the Limited Death Benefit Guarantee
Period of 35 years. The contract would be in default at the beginning of
year 42.
Based on a gross return of 4% the cash surrender value would go to zero in
year 1 and in year 50 and later. Because the Target Premium is being paid,
the Contract is kept inforce through the Limited Death Benefit Guarantee
Period of 35 years. The contract would be in default at the beginning of
year 50.
Based on a gross return of 8% the cash surrender value would go to zero in
year 1. Because the Target Premium is being paid, the Contract is kept
inforce through the Limited Death Benefit Guarantee Period of 35 years.
Based on a gross return of 12% the cash surrender value would go to zero in
year 1. Because the Target Premium is being paid, the Contract is kept
inforce through the Limited Death Benefit Guarantee Period of 35 years.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more
or less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rate of
inflation. The Death Benefit and Cash Surrender Value for a contract would be
different from those shown if the actual rates of return average 0%, 4%, 8%, and
12% over a period of years but also fluctuated above or below those averages for
individual contract years. No representations can be made by Prudential or the
funds that these hypothetical rates of return can be achieved for any one year
or sustained over any period of time.
T1
<PAGE>
VARIABLE UNIVERSAL LIFE
TYPE B (VARIABLE) DEATH BENEFIT
MALE NON-SMOKER SELECT AGE 35
$100,000.00 BASIC INSURANCE AMOUNT
$884.00 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (1) Cash Surrender Value (1)
---------------------------------------------- -------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ----------------------------------------------- --------------------------------------------------
Policy at 4% 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.24 Net) (2.76 Net) (6.76 Net) (10.76% Net) (-1.24 Net) (2.76 Net) (6.76 Net) (10.76% Net)
- ------- -------- ---------- --------- --------- ----------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 919 $100,437 $100,462 $100,487 $ 100,512 $ 0 $ 0 $ 0 $ 0(2)
2 1,875 $100,998 $101,068 $101,140 $ 101,215 $ 268 $ 338 $ 410 $ 485
3 2,870 $101,548 $101,687 $101,834 $ 101,990 $ 818 $ 957 $ 1,105 $ 1,260
4 3,904 $102,087 $102,320 $102,572 $ 102,845 $1,357 $ 1,590 $ 1,842 $ 2,115
5 4,980 $102,615 $102,964 $103,354 $ 103,786 $1,885 $ 2,235 $ 2,624 $ 3,056
6 6,098 $103,130 $103,621 $104,182 $ 104,822 $2,400 $ 2,891 $ 3,452 $ 4,093
7 7,261 $103,631 $104,288 $105,058 $ 105,962 $3,084 $ 3,740 $ 4,511 $ 5,414
8 8,471 $104,117 $104,963 $105,984 $ 107,214 $3,752 $ 4,599 $ 5,620 $ 6,849
9 9,729 $104,587 $105,648 $106,963 $ 108,591 $4,405 $ 5,465 $ 6,780 $ 8,409
10 11,038 $105,038 $106,338 $107,994 $ 110,102 $5,038 $ 6,338 $ 7,994 $ 10,102
15 18,409 $106,974 $109,830 $114,021 $ 120,183 $6,974 $ 9,830 $ 14,021 $ 20,183
20 27,377 $108,568 $113,576 $122,091 $ 136,662 $8,568 $13,576 $ 22,091 $ 36,662
25 38,288 $109,673 $117,449 $132,835 $ 163,651 $9,673 $17,449 $ 32,835 $ 63,651
30 51,562 $109,366 $120,409 $146,115 $ 206,867 $9,366 $20,409 $ 46,115 $ 106,867
35 67,713 $107,078 $121,612 $162,141 $ 276,791 $7,078 $21,612 $ 62,141 $ 176,300
40 87,363 $100,824 $118,495 $179,454 $ 403,248 $ 824 $18,495 $ 79,454 $ 285,991
45 111,270 $ 0(2) $107,466 $195,301 $ 592,418 $ 0(2) $ 7,466 $ 95,301 $ 455,706
50 140,356 $ 0 $ 0(2) $204,680 $ 872,772 $ 0 $ 0(2) $104,680 $ 715,387
55 175,744 $ 0 $ 0 $197,157 $1,283,241 $ 0 $ 0 $ 97,157 $1,106,242
60 218,799 $ 0 $ 0 $155,760 $1,877,304 $ 0 $ 0 $ 55,760 $1,691,265
65 271,182 $ 0 $ 0 $ 0(2) $2,772,441 $ 0 $ 0 $ 0(2) $2,640,420
</TABLE>
(1) Assumes no Contract loan has been made
(2) Based on a gross return of 0% the cash surrender value would go to zero in
year 1 and in year 41 and later. Because the Target Premium is being paid,
the Contract is kept inforce through the Limited Death Benefit Guarantee
Period of 33 years. The contract would be in default at the beginning of
year 41. Based on a gross return of 4% the cash surrender value would go to
zero in year 1 and in year 47 and later. Because the Target Premium is being
paid, the Contract is kept inforce through the Limited Death Benefit
Guarantee Period of 33 years. The contract would be in default at the
beginning of year 47. Based on a gross return of 8% the cash surrender value
would go to zero in year 1 and in year 64 and later. Because the Target
Premium is being paid, the Contract is kept inforce through the Limited
Death Benefit Guarantee Period of 33 years. The contract would be in default
at the beginning of year 64. Based on a gross return of 12% the cash
surrender value would go to zero in year 1. Because the Target Premium is
being paid, the Contract is kept inforce through the Limited Death Benefit
Guarantee Period of 33 years.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more
or less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rate of
inflation. The Death Benefit and Cash Surrender Value for a contract would be
different from those shown if the actual rates of return average 0%, 4%, 8%, and
12% over a period of years but also fluctuated above or below those averages for
individual contract years. No representations can be made by Prudential or the
funds that these hypothetical rates of return can be achieved for any one year
or sustained over any period of time.
T2
<PAGE>
VARIABLE UNIVERSAL LIFE
TYPE A (FIXED) DEATH BENEFIT
MALE NON-SMOKER SELECT AGE 35
$100,000.00 BASIC INSURANCE AMOUNT
$884.00 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (1) Cash Surrender Value (1)
------------------- --------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End of Accumulated ------------------------------------------------------- ------------------------------------------------
Policy at 4% 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.54 Net) (2.46 Net) (6.46 Net) (10.46% Net) (-1.54 Net) (2.46 Net) (6.46 Net) (10.46% Net)
- ----- --------- ----------- ---------- ----------- ------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 919 $100,000 $100,000 $100,000 $100,000 $ 0 $ 0 $ 0 $ 0(2)
2 1,875 $100,000 $100,000 $100,000 $100,000 $ 100 $ 163 $ 228 $ 296
3 2,870 $100,000 $100,000 $100,000 $100,000 $ 525 $ 648 $ 777 $ 915
4 3,904 $100,000 $100,000 $100,000 $100,000 $ 933 $1,132 $ 1,350 $ 1,586
5 4,980 $100,000 $100,000 $100,000 $100,000 $1,321 $1,616 $ 1,946 $ 2,315
6 6,098 $100,000 $100,000 $100,000 $100,000 $1,688 $2,097 $ 2,566 $ 3,105
7 7,261 $100,000 $100,000 $100,000 $100,000 $2,215 $2,755 $ 3,392 $ 4,144
8 8,471 $100,000 $100,000 $100,000 $100,000 $2,720 $3,407 $ 4,242 $ 5,256
9 9,729 $100,000 $100,000 $100,000 $100,000 $3,201 $4,052 $ 5,117 $ 6,447
10 11,038 $100,000 $100,000 $100,000 $100,000 $3,655 $4,688 $ 6,017 $ 7,725
15 18,409 $100,000 $100,000 $100,000 $100,000 $4,566 $6,726 $ 9,959 $ 14,794
20 27,377 $100,000 $100,000 $100,000 $100,000 $4,430 $8,017 $14,360 $ 25,557
25 38,288 $100,000 $100,000 $100,000 $100,000 $2,507 $7,641 $18,698 $ 42,170
30 51,562 $100,000 $100,000 $100,000 $120,539 $ 0 $3,947 $21,923 $ 68,488
35 67,713 $100,000 $100,000 $100,000 $168,717 $ 0 $ 0 $21,599 $107,463
40 87,363 $ 0(2) $ 0(2) $100,000 $230,205 $ 0(2) $ 0(2) $11,912 $163,266
45 111,270 $ 0 $ 0 $ 0(2) $312,830 $ 0 $ 0 $ 0(2) $240,639
50 140,356 $ 0 $ 0 $ 0 $422,627 $ 0 $ 0 $ 0 $346,415
55 175,744 $ 0 $ 0 $ 0 $566,621 $ 0 $ 0 $ 0 $488,467
60 218,799 $ 0 $ 0 $ 0 $760,185 $ 0 $ 0 $ 0 $684,851
65 271,182 $ 0 $ 0 $ 0 $980,851 $ 0 $ 0 $ 0 $934,144
</TABLE>
(1) Assumes no Contract loan has been made
(2) Based on a gross return of 0% the cash surrender value would go to zero in
year 1 and in year 29 and later, but because the Target Premium is being
paid, the Contract is kept inforce through the Limited Death Benefit
Guarantee Period of 35 years. The contract would be in default at the
beginning of year 36.
Based on a gross return of 4% the cash surrender value would go to zero in
year 1 and in year 33 and later, but because the Target Premium is being
paid, the Contract is kept inforce through the Limited Death Benefit
Guarantee Period of 35 years. The contract would be in default at the
beginning of year 36.
Based on a gross return of 8% the cash surrender value would go to zero in
year 1 and in year 43 and later. Because the Target Premium is being paid,
the Contract is kept inforce through the Limited Death Benefit Guarantee
Period of 35 years. The contract would be in default at the beginning of
year 43.
Based on a gross return of 12% the cash surrender value would go to zero in
year 1. Because the Target Premium is being paid, the Contract is kept
inforce through the Limited Death Benefit Guarantee Period of 35 years.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more
or less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rate of
inflation. The Death Benefit and Cash Surrender Value for a contract would be
different from those shown if the actual rates of return average 0%, 4%, 8%, and
12% over a period of years but also fluctuated above or below those averages for
individual contract years. No representations can be made by Prudential or the
funds that these hypothetical rates of return can be achieved for any one year
or sustained over any period of time.
T3
<PAGE>
VARIABLE UNIVERSAL LIFE
TYPE B (VARIABLE) DEATH BENEFIT
MALE NON-SMOKER SELECT AGE 35
$100,000.00 BASIC INSURANCE AMOUNT
$884.00 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
Death Benefit (1) Cash Surrender Value (1)
------------------- --------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
Premiums ------------------------------------------------------ ---------------------------------------------------
End of Accumulated
Policy at 4% 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (-1.54 Net) (2.46 Net) (6.46 Net) (10.46% Net) (-1.54 Net) (2.46 Net) (6.46 Net) (10.46% Net)
- ------ ----------- ----------- ---------- ---------- ------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 919 $100,385 $100,408 $100,431 $100,454 $ 0 $ 0 $ 0 $ 0
2 1,875 $100,827 $100,890 $100,955 $101,022 $ 97 $ 160 $ 225 $ 292
3 2,870 $101,250 $101,372 $101,501 $101,637 $ 520 $ 642 $ 771 $ 907
4 3,904 $101,654 $101,852 $102,068 $102,303 $ 924 $1,122 $ 1,338 $ 1,573
5 4,980 $102,037 $102,330 $102,657 $103,023 $1,307 $1,600 $ 1,928 $ 2,293
6 6,098 $102,398 $102,803 $103,268 $103,801 $1,668 $2,073 $ 2,538 $ 3,071
7 7,261 $102,736 $103,269 $103,899 $104,641 $2,188 $2,721 $ 3,351 $ 4,094
8 8,471 $103,049 $103,727 $104,551 $105,550 $2,684 $3,362 $ 4,186 $ 5,185
9 9,729 $103,337 $104,175 $105,223 $106,531 $3,155 $3,993 $ 5,041 $ 6,348
10 11,038 $103,598 $104,612 $105,916 $107,590 $3,598 $4,612 $ 5,916 $ 7,590
15 18,409 $104,423 $106,507 $109,624 $114,280 $4,423 $6,507 $ 9,624 $ 14,280
20 27,377 $104,148 $107,510 $113,448 $123,917 $4,148 $7,510 $13,448 $ 23,917
25 38,288 $102,054 $106,622 $116,461 $137,335 $2,054 $6,622 $16,461 $ 37,335
30 51,562 $100,000 $102,231 $116,869 $155,339 $ 0 $2,231 $16,869 $ 55,339
35 67,713 $ 0(2) $ 0(2) $111,096 $178,015 $ 0(2) $ 0(2) $11,096 $ 78,015
40 87,363 $ 0 $ 0 $ 0(2) $203,863 $ 0 $ 0 $ 0(2) $103,863
45 111,270 $ 0 $ 0 $ 0 $227,434 $ 0 $ 0 $ 0 $127,434
50 140,356 $ 0 $ 0 $ 0 $238,588 $ 0 $ 0 $ 0 $138,588
55 175,744 $ 0 $ 0 $ 0 $215,692 $ 0 $ 0 $ 0 $115,692
60 218,799 $ 0 $ 0 $ 0 $126,181 $ 0 $ 0 $ 0 $ 26,181
65 271,182 $ 0 $ 0 $ 0 $ 0(2) $ 0 $ 0 $ 0 $ 0(2)
</TABLE>
(1) Assumes no Contract loan has been made
(2) Based on a gross return of 0% the cash surrender value would go to zero in
year 1 and in year 28 and later, but because the Target Premium is being
paid, the Contract is kept inforce through the Limited Death Benefit
Guarantee Period of 33 years. The contract would be in default at the
beginning of year 34.
Based on a gross return of 4% the cash surrender value would go to zero in
year 1 and in year 32 and later, but because the Target Premium is being
paid, the Contract is kept inforce through the Limited Death Benefit
Guarantee Period of 33 years. The contract would be in default at the
beginning of year 34.
Based on a gross return of 8% the cash surrender value would go to zero in
year 1 and in year 39 and later. Because the Target Premium is being paid,
the Contract is kept inforce through the Limited Death Benefit Guarantee
Period of 33 years. The contract would be in default at the beginning of
year 39.
Based on a gross return of 12% the cash surrender value would go to zero in
year 1 and in year 61 and later. Because the Target Premium is being paid,
the Contract is kept inforce through the Limited Death Benefit Guarantee
Period of 33 years. The contract would be in default at the beginning of
year 61.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more
or less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rate of
inflation. The Death Benefit and Cash Surrender Value for a contract would be
different from those shown if the actual rates of return average 0%, 4%, 8%, and
12% over a period of years but also fluctuated above or below those averages for
individual contract years. No representations can be made by Prudential or the
funds that these hypothetical rates of return can be achieved for any one year
or sustained over any period of time.
T4
<PAGE>
VARIABLE UNIVERSAL LIFE
MALE NON-SMOKER SELECT AGE 35
$100,000.00 BASIC INSURANCE AMOUNT
$884.00 ANNUAL PREMIUM PAYMENT
USING CURRENT CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
FIXED DEATH BENEFIT Internal Rates of Return on Death (1) Internal Rates of Return on Surrender (1)
--------------------------------------------- -------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
----------------------------------------------- --------------------------------------------------
End of
Policy 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year (-1.24 Net) (2.76 Net) (6.76 Net) (10.76% Net) (-1.24 Net) (2.76 Net) (6.76 Net) (10.76% Net)
- ------ ----------- ---------- ---------- ------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 130.48% 130.48% 130.48% 130.48% -26.94% -21.71% -16.69% -11.84%
10 42.61% 42.61% 42.61% 42.61% -10.34% -5.95% -1.62% 2.63%
15 22.92% 22.92% 22.92% 22.92% -8.29% -3.57% 0.96% 5.36%
20 14.68% 14.68% 14.68% 14.68% -7.22% -2.27% 2.39% 6.83%
25 10.28% 10.28% 10.28% 12.11% -6.73% -1.49% 3.28% 7.73%
30 7.59% 7.59% 7.59% 11.11% -7.26% -1.20% 3.84% 8.24%
35 5.80% 5.80% 6.32% 10.46% -9.35% -1.23% 4.25% 8.56%
40 4.55% 4.55% 5.86% 9.99% -25.88% -1.78% 4.51% 8.75%
45 (2) 3.62% 5.56% 9.68% (2) -3.64% 4.66% 8.86%
50 (2) 5.34% 9.46% (2) 4.74% 8.91%
55 5.18% 9.28% 4.78% 8.92%
60 5.03% 9.14% 4.78% 8.91%
65 4.94% 9.04% 4.83% 8.94%
</TABLE>
(1) Assumes no Contract loan has been made
(2) Based on a gross return of 0%, the Contract would go into default in
year 42 Based on a gross return of 4%, the Contract would go into
default in year 50
VARIABLE DEATH BENEFIT
<TABLE>
<CAPTION>
FIXED DEATH BENEFIT Internal Rates of Return on Death (1) Internal Rates of Return on Surrender (1)
----------------------------------------------- --------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
----------------------------------------------- --------------------------------------------------
End of
Policy 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year (-1.24 Net) (2.76 Net) (6.76 Net) (10.76% Net) (-1.24 Net) (2.76 Net) (6.76 Net) (10.76% Net)
- ------ ----------- ---------- ---------- ------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 131.87% 132.05% 132.25% 132.48% -27.15% -21.93% -16.91% -12.06%
10 43.50% 43.72% 44.00% 44.34% -10.55% -6.15% -1.84% 2.41%
15 23.65% 23.93% 24.34% 24.91% -8.56% -3.85% 0.69% 5.09%
20 15.33% 15.68% 16.25% 17.13% -7.56% -2.59% 2.08% 6.53%
25 10.85% 11.28% 12.04% 13.31% -7.16% -1.87% 2.92% 7.40%
30 8.06% 8.55% 9.54% 11.29% -7.97% -1.75% 3.36% 7.94%
35 6.11% 6.68% 7.94% 10.20% -10.93% -2.10% 3.59% 8.30%
40 4.58% 5.22% 6.81% 9.77% -51.76% -3.51% 3.61% 8.53%
45 (2) 3.88% 5.93% 9.49% (2) -10.52% 3.44% 8.67%
50 (2) 5.16% 9.29% (2) 3.06% 8.74%
55 4.32% 9.14% 2.27% 8.77%
60 3.13% 9.00% 0.16% 8.77%
65 (2) 8.92% (2) 8.82%
</TABLE>
(1) Assumes no Contract loan has been made
(2) Based on a gross return of 0%, the Contract would go into default in year
41
Based on a gross return of 4%, the Contract would go into default in year
47
Based on a gross return of 8%, the Contract would go into default in year
64
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more
or less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rate of
inflation. The Death Benefit and Cash Surrender Value for a contract would be
different from those shown if the actual rates of return average 0%, 4%, 8%, and
12% over a period of years but also fluctuated above or below those averages for
individual contract years. No representations can be made by Prudential or the
funds that these hypothetical rates of return can be achieved for any one year
or sustained over any period of time.
<PAGE>
VARIABLE UNIVERSAL LIFE
MALE NON-SMOKER SELECT AGE 35
$100,000.00 BASIC INSURANCE AMOUNT
$884.00 ANNUAL PREMIUM PAYMENT
USING MAXIMUM CONTRACTUAL CHARGES
<TABLE>
<CAPTION>
FIXED DEATH BENEFIT
Internal Rates of Return on Death (1) Internal Rates of Return on Surrender(1)
----------------------------------------------- -------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of ------------------------------------------------ -------------------------------------------------
Policy 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year (-1.54 Net) (2.46 Net) (6.46 Net) (10.46% Net) (-1.54 Net) (2.46 Net) (6.46 Net) (10.46% Net)
- ------ ----------- --------- ---------- ----------- ----------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 130.48% 130.48% 130.48% 130.48% -37.76% -31.80% -26.18% -20.83%
10 42.61% 42.61% 42.61% 42.61% -16.95% -11.95% -7.14% -2.47%
15 22.92% 22.92% 22.92% 22.92% -15.02% -9.09% -3.67% 1.36%
20 14.68% 14.68% 14.68% 14.68% -16.23% -8.33% -2.03% 3.39%
25 10.28% 10.28% 10.28% 10.28% -26.06% -9.62% -1.31% 4.66%
30 7.59% 7.59% 7.59% 8.56% -18.26% -1.26% 5.57%
35 5.80% 5.80% 5.80% 8.11% -2.10% 6.13%
40 (2) (2) 4.55% 7.74% (2) (2) -6.46% 6.45%
45 (2) 7.47% (2) 6.62%
50 7.27% 6.70%
55 7.10% 6.72%
60 6.97% 6.73%
65 6.79% 6.69%
</TABLE>
(1) Assumes no Contract loan has been made
(2) Based on a gross return of 0%, the Contract would go into default in year 36
Based on a gross return of 4%, the Contract would go into default in year 36
Based on a gross return of 8%, the Contract would go into default in year 43
<TABLE>
<CAPTION>
VARIABLE DEATH BENEFIT
Internal Rates of Return on Death (1) Internal Rates of Return on Surrender(1)
----------------------------------------------- -------------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Annual Investment Return of Annual Investment Return of
End of ------------------------------------------------ -------------------------------------------------
Policy 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross
Year (-1.54 Net) (2.46 Net) (6.46 Net) (10.46% Net) (-1.54 Net) (2.46 Net) (6.46 Net) (10.46% Net)
- ------ ----------- --------- ---------- ----------- ----------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5 131.56% 131.72% 131.89% 132.08% -38.07% -32.10% -26.47% -21.12%
10 43.25% 43.42% 43.65% 43.93% -17.27% -12.28% -7.46% -2.79%
15 23.39% 23.60% 23.91% 24.36% -15.54% -9.57% -4.13% 0.92%
20 15.00% 15.25% 15.67% 16.36% -17.24% -9.12% -2.69% 2.80%
25 10.41% 10.68% 11.23% 12.24% -30.09% -11.25% -2.35% 3.82%
30 7.59% 7.71% 8.40% 9.85% -28.38% -3.11% 4.40%
35 (2) (2) 6.28% 8.34% (2) (2) -6.79% 4.67%
40 (2) 7.29% (2) 4.70%
45 6.44% 4.48%
50 5.61% 3.96%
55 4.57% 2.80%
60 2.56% -2.62%
65 (2) (2)
</TABLE>
(1) Assumes no Contract loan has been made
(2) Based on a gross return of 0%, the Contract would go into default in year 34
Based on a gross return of 4%, the Contract would go into default in year 34
Based on a gross return of 8%, the Contract would go into default in year 39
Based on a gross return of 12%, the Contract would go into default in
year 61
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more
or less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rate of
inflation. The Death Benefit and Cash Surrender Value for a contract would be
different from those shown if the actual rates of return average 0%, 4%, 8%, and
12% over a period of years but also fluctuated above or below those averages for
individual contract years. No representations can be made by Prudential or the
funds that these hypothetical rates of return can be achieved for any one year
or sustained over any period of time.
T6
<PAGE>
CONTRACT LOANS
You may borrow from Prudential an amount up to the current loan value of your
Contract less any existing Contract debt using the Contract as the only security
for the loan. The loan value at any time is equal to the sum of (1) 90% of the
portion of the cash value attributable to the subaccounts, and (2) the balance
of the cash value. The cash value is equal to the Contract Fund less any
surrender charge. A Contract in default has no loan value. The minimum loan
amount you may borrow is $200.
Interest charged on a loan accrues daily. Interest is due on each Contract
anniversary or when the loan is paid back, whichever comes first. If interest
is not paid when due, it becomes part of the loan and we will charge interest on
it, too. Except in the case of preferred loans, we charge interest at an
effective annual rate of 5%.
A portion of any amount you borrow on or after the 10th Contract anniversary may
be considered a preferred loan if the Contract has not been surrendered for
fixed reduced paid-up insurance. The maximum preferred loan amount is the total
amount you may borrow minus the total net premiums paid (net premiums equal
premiums paid less total withdrawals, if any). If the net premium amount is
less than zero, we will, for purposes of this calculation, consider it to be
zero. Only new loans borrowed after the 10th Contract anniversary may be
considered preferred loans. Standard loans will not automatically be converted
into preferred loans. Preferred loans are charged interest at an effective
annual rate of 4.5% .
The Contract debt is the amount of all outstanding loans plus any interest
accrued but not yet due. If at any time the Contract debt equals or exceeds the
Contract Fund less any applicable surrender charges, the Contract will go into
default. See LAPSE AND REINSTATEMENT, page 28. If the Contract debt equals or
exceeds the Contract Fund less any applicable surrender charges and you fail to
keep the Contract inforce, the amount of unpaid Contract debt will be treated as
a distribution which may be taxable. See TAX TREATMENT OF CONTRACT BENEFITS,
page 26.
When a loan is made, an amount equal to the loan proceeds is transferred out of
the Account and/or the fixed-rate option, as applicable. Unless you ask us to
take the loan amount from specific investment options and we agree, the
reduction will be made in the same proportions as the value in each subaccount
and the fixed-rate option bears to the total value of the Contract. While a
loan is outstanding, the amount that was so transferred will continue to be
treated as part of the Contract Fund. It will be credited with an effective
annual rate of return of 4%. On each Monthly date, we will increase the portion
of the Contract Fund in the investment options by interest credits accrued on
the loan since the last Monthly date. The net cost of a standard loan is 1% and
the net cost of a preferred loan is 1/2%.
A loan will not affect the Death Benefit Guarantee as long as Contract debt does
not equal or exceed the Contract Fund, less any applicable surrender charges.
Loans from Modified Endowment Contracts may be treated for tax purposes as
distributions of income. See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
Any Contract debt will directly reduce a Contract's cash surrender value and
will be subtracted from the death benefit to determine the amount payable. In
addition, even if the loan is fully repaid, it may have an effect on future
death benefits because the investment results of the selected investment options
will apply only to the amount remaining invested under those options. The
longer the loan is outstanding, the greater the effect is likely to be. The
effect could be favorable or unfavorable. If investment results are greater
than the rate being credited on the amount of the loan while the loan is
outstanding, values under the Contract will not increase as rapidly as they
would have if no loan had been made. If investment results are below that rate,
Contract values will be higher than they would have been had no loan been made.
When you repay all or part of a loan, we will increase the portion of the
Contract Fund in the investment options by the amount of the loan you repay
using the investment allocation for future premium payments as of the loan
payment date, plus interest credits accrued on the loan since the last
transaction date. If loan interest is paid when due, it will not change the
portion of the Contract Fund allocated to the investment options. We reserve
the right to change the manner in which we allocate loan repayments.
25
<PAGE>
SALE OF THE CONTRACT AND SALES COMMISSIONS
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
Prudential, acts as the principal underwriter of the Contract. Prusec,
organized in 1971 under New Jersey law, is registered as a broker and dealer
under the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. Prusec's principal business address is
751 Broad Street, Newark, New Jersey 07102-3777. The Contract is sold by
registered representatives of Prusec who are also authorized by state insurance
departments to do so. The Contract may also be sold through other broker-
dealers authorized by Prusec and applicable law to do so. Registered
representatives of such other broker-dealers may be paid on a different basis
than described below.
Generally, representatives will receive a commission of no more than: (1) 50%
of the premiums received in the first year on premiums up to the target premium
(see PREMIUMS, page 11); (2) 5% of premiums received in years two through 10 on
premiums up to the target premium; and (3) 3% on premiums received in the first
10 years in excess of the target premium or received after 10 years. If the
basic insurance amount is increased, representatives will generally receive a
commission of no more than: (1) 25% of the premiums received up to the target
premium for the increase received in the first year; (2) 5% of the premiums
received up to the target premium for years two through 10; and (3) 3% on other
premiums received for the increase. Moreover, trail commissions of up to 0.025%
of the Contract Fund as of the end of each calendar quarter may be paid.
Representatives with less than 4 years of service may receive compensation on a
different basis. Representatives who meet certain productivity or persistency
standards may be eligible for additional compensation.
TAX TREATMENT OF CONTRACT BENEFITS
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:
. you will not be taxed on the growth of the funds in the Contract,
unless you receive a distribution from the Contract,
. 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.
. 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.
26
<PAGE>
. 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.
. 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.
. Loans you take against the Contract are ordinarily treated as debt
and are not considered distributions subject to tax. However, there
is some risk the Internal Revenue Service might assert that the
preferred loan should be treated as a distribution for tax purposes
because of the relatively low differential between the loan interest
rate and Contract's crediting rate. Were the Internal Revenue
Service to take this position, Prudential would take reasonable
steps to avoid this result, including modifying the Contract's loan
provisions.
MODIFIED ENDOWMENT CONTRACTS.
. 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.
. 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.
. 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.
. 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
27
<PAGE>
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 insurance. This is an indirect tax on additions
to the Contract Fund or death benefits received under business-owned life
insurance policies.
LAPSE AND REINSTATEMENT
Prudential will determine the value of the Contract Fund on each Monthly date.
If the Contract Fund less any applicable surrender charges is zero or less, the
Contract is in DEFAULT unless it remains inforce under the Death Benefit
Guarantee. See DEATH BENEFIT GUARANTEE, page 12. If the Contract debt ever
grows to be equal to or more than the Contract Fund less any applicable
surrender charges, the Contract will be in default. Should this happen,
Prudential will send you a notice of default setting forth the payment which we
estimate will keep the Contract inforce for three months from the date of
default. This payment must be received at a Home Office within the 61-day grace
period after the notice of default is mailed or the Contract will end and have
no value. A Contract that lapses with an outstanding Contract loan may have tax
consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 26.
A Contract that ended in default may be reinstated within 5 years after the date
of default if the following conditions are met: (1) renewed evidence of
insurability is provided on the insured; (2) submission of certain payments
sufficient to bring the Contract up to date plus a premium that we estimate will
cover all charges and deductions for the next three months; and (3) any Contract
debt with interest to date must be restored (if the debt with interest would
exceed the loan value of the reinstated Contract, the excess must be paid to us
before reinstatement) or paid back. The reinstatement date will be the Monthly
date that coincides with or next follows the date we approve your request. We
will deduct all the required charges from your payment and the balance will be
placed into your Contract Fund. If we approve the reinstatement, we will credit
the Contract Fund with an amount equal to the surrender charge applicable as of
the date of reinstatement.
LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS
The Contract generally employs mortality tables that distinguish between males
and females. Thus, premiums and benefits differ under Contracts issued on males
and females of the same age. Employers and employee organizations considering
purchase of a Contract should consult their legal advisers to determine whether
purchase of a Contract based on sex-distinct actuarial tables is consistent with
Title VII of the Civil Rights Act of 1964 or other applicable law.
OTHER GENERAL CONTRACT PROVISIONS
ASSIGNMENT. This Contract may not be assigned if the assignment would violate
any federal, state or local law or regulation prohibiting sex distinct rates for
insurance. Generally, the Contract may not be assigned to an employee benefit
plan or program without Prudential's consent. Prudential assumes no
responsibility for the validity or sufficiency of any assignment. We will not
be obligated to comply with any assignment unless we receive a copy at a Home
Office.
BENEFICIARY. 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.
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 or both are
incorrect in the Contract, Prudential will adjust the death benefit payable and
any amount to be paid, as required by law, to reflect the correct age and sex.
Any such benefit will be based on what the most recent deductions from the
Contract Fund would have provided at the insured's correct age and sex.
28
<PAGE>
SETTLEMENT OPTIONS. The Contract grants to most owners, or to the beneficiary,
a variety of optional ways of receiving Contract proceeds, other than in a lump
sum. Any Prudential representative authorized to sell this Contract can explain
these options upon request.
SUICIDE EXCLUSION. Generally, if the insured dies by suicide within two years
from the Contract date, the Contract will end and Prudential will return the
premiums paid, less any Contract debt, and less any withdrawals. Generally, if
the insured dies by suicide after two years from the issue date, but within two
years of the effective date of an increase in the basic insurance amount, we
will pay, as to the increase in amount, no more than the sum of the premiums
paid on and after the effective date of an increase.
RIDERS
Contract owners may be able to obtain extra fixed benefits which may require an
additional premium. These optional insurance benefits will be described in what
is known as a "rider" to the Contract. Charges applicable to the riders will be
deducted from the Contract Fund on each Monthly date.
One rider pays certain premiums into the Contract if the insured is totally
disabled within the meaning of the provision. Others pay an additional amount if
the insured dies within a stated number of years after issue; similar benefits
may be available if the insured's spouse or child should die. The amounts of
these benefits are fully guaranteed at issue; they do not depend on the
performance of the Account, although they will no longer be available if the
Contract lapses. Certain restrictions may apply; they are clearly described in
the applicable rider.
Any Prudential representative authorized to sell the Contract can explain these
extra benefits further. Samples of the provisions are available from Prudential
upon written request.
PARTICIPATION IN DIVISIBLE SURPLUS
The Contract is eligible to be credited part of Prudential's divisible surplus
attributable to the Contracts, as determined by Prudential's Board of Directors.
That determination is made, with respect to the insurance Contracts issued by
Prudential, every year. However, Prudential does not expect to credit any
dividends upon these Contracts because favorable investment performance will be
reflected in Contract values and because Prudential intends, if experience
indicates that current charges will be greater than needed to cover expenses, to
reduce those charges further so that there will be no source of distributable
surplus attributable to these Contracts.
VOTING RIGHTS
As described earlier, all of the assets held in the subaccounts will be invested
in shares of the corresponding portfolios of the Funds. Prudential is the legal
owner of those shares and as such has the right to vote on any matter voted on
at shareholders meetings of the Funds. However, Prudential will, as required by
law, vote the shares of the Funds in accordance with voting instructions
received from Contract owners at any regular and special shareholders meetings.
A Fund may not hold annual shareholders meetings when not required to do so
under the laws of the state of its incorporation or the Investment Company Act
of 1940. Fund shares for which no timely instructions from Contract owners are
received, and any shares attributable to general account investments of
Prudential, will be voted in the same proportion as shares in the respective
portfolios for which instructions are received. Should the applicable federal
securities laws or regulations, or their current interpretation, change so as to
permit Prudential to vote shares of the Funds in its own right, it may elect to
do so.
Matters on which Contract owners may give voting instructions include the
following: (1) election of the Board of Directors of the Series Fund; (2)
ratification of the independent accountant of the Series Fund; (3) approval of
the investment advisory agreement for a portfolio of the Series Fund
corresponding to the Contract owner's selected subaccount[s]; (4) any change in
the fundamental investment policy of a portfolio corresponding to the Contract
owner's selected subaccount[s]; and (5) any other matter requiring a vote of the
shareholders of the Series Fund. With respect to approval of the investment
advisory agreement or any change in a portfolio's fundamental investment policy,
Contract owners participating in such portfolios will vote separately on the
matter, pursuant to the requirements of Rule 18f-2 under the Investment Company
Act of 1940.
The number of Fund shares for which a Contract owner may give instructions is
determined by dividing the portion of the value of the Contract derived from
participation in a subaccount, by the value of one share in the
corresponding
29
<PAGE>
portfolio of the applicable Fund. The number of votes for which each Contract
owner may give Prudential instructions will be determined as of the record date
chosen by the Board of Directors of the applicable Fund. Prudential will
furnish Contract owners with proper forms and proxies to enable them to give
these instructions. Prudential reserves the right to modify the manner in which
the weight to be given voting instructions is calculated where such a change is
necessary to comply with current federal regulations or interpretations of those
regulations.
Prudential may, if required by state insurance regulations, disregard voting
instructions if they would require shares to be voted so as to cause a change in
the sub-classification or investment objectives of one or more of a Fund's
portfolios, or to approve or disapprove an investment advisory contract for a
Fund. In addition, Prudential itself may disregard voting instructions that
would require changes in the investment policy or investment adviser of one or
more of a Fund's portfolios, provided that Prudential reasonably disapproves
such changes in accordance with applicable federal regulations. If Prudential
does disregard voting instructions, it will advise Contract owners of that
action and its reasons for such action in the next annual or semi-annual report
to Contract owners.
SUBSTITUTION OF FUND SHARES
Although Prudential believes it to be unlikely, it is possible that in the
judgment of its management, one or more of the portfolios of the Funds may
become unsuitable for investment by Contract owners because of investment policy
changes, tax law changes, or the unavailability of shares for investment. In
that event, Prudential may seek to substitute the shares of another portfolio or
of an entirely different mutual fund. Before this can be done, the approval of
the SEC, and possibly one or more state insurance departments, may be required.
Contract owners will be notified of such substitution.
REPORTS TO CONTRACT OWNERS
Once each year, Prudential will send you a statement that provides certain
information pertinent to your own Contract. This statement will detail values
and transactions made and specific Contract data that apply only to your
particular Contract. Currently we intend to provide three quarterly reports (in
addition to the year-end statement) which provide abbreviated information
pertinent to your own Contract.
You will also be sent annual and semi-annual reports of the Funds showing the
financial condition of the portfolios and the investments held in each
portfolio.
STATE REGULATION
Prudential is subject to regulation and supervision by the Department of
Insurance of the State of New Jersey, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
Prudential is required to submit annual statements of its operations, including
financial statements, to the insurance departments of the various jurisdictions
in which it does business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, Prudential is required
to file with New Jersey and other jurisdictions a separate statement with
respect to the operations of all its variable contract accounts, in a form
promulgated by the National Association of Insurance Commissioners.
EXPERTS
The consolidated financial statements of Prudential and Subsidiaries as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 and the financial statements of the 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 Ching-Meei
Chang, MAAA, FSA, Actuarial Director of Prudential, whose opinion is filed as an
exhibit to the registration statement.
30
<PAGE>
LITIGATION
On October 28, 1996, Prudential entered into a Stipulation of Settlement in a
multidistrict proceeding involving allegations of various claims relating to
Prudential's life insurance sales practices. (In re Prudential Insurance
--------------------------
Company of America Sales Practices Litigation, D.N.J., MDL No. 1061, Master
- ---------------------------------------------
Docket No. 95-4704 (AMW)). On March 7, 1997, the United States District Court
for the District of New Jersey approved the Stipulation of Settlement as fair,
reasonable and adequate, and later issued a Final Order and Judgement in the
consolidated class actions before the court, 962 F. Supp. 450 (March 17, 1997,
as amended April 14, 1997). The Court's Final Order and Judgement approving the
class Settlement was appealed to the United States Court of Appeals for the
Third Circuit, which upheld the district court's approval of the Stipulation of
Settlement on July 23, 1998. The Supreme Court denied certiorari in January
1999, thereby making final the approval of the class action settlement.
Pursuant to the Settlement, Prudential agreed to provide and has been
implementing an Alternative Dispute Resolution ("ADR") process for class members
who believe they were misled concerning the sale or performance of their life
insurance Contracts. As of December 31, 1998, based on an analysis of claims
actually remedied, a sample of claims still to be remedied, and estimates of
additional liabilities associated with the ADR program, management estimated the
cost, before taxes, of remedying policyholder claims in the ADR process to be
approximately $2.56 billion. While management believes these to be reasonable
estimates based on available information, the ultimate amount of the total cost
of remedied policyholder claims and other related costs is dependent on complex
and varying factors, including the relief options still to be chosen by
claimants, the dollar value of those options, and the number and type of claims
that may successfully be appealed.
In addition, a number of actions have been filed against Prudential by
policyholders who have excluded themselves from the Settlement; Prudential
anticipates that additional suits may be filed by other policyholders.
Also, on July 9, 1996, a Multi-State Life Insurance Task Force comprised of
insurance regulators from 29 states and the District of Columbia, released a
report on Prudential's activities. As of February 24, 1997, Prudential had
entered into consent orders or agreements with all 50 states and the District of
Columbia to implement a remediation plan, whose terms closely parallel the
Settlement approved in the MDL proceeding, and agreed to a series of payments
allocated to all 50 states and the District of Columbia amounting to a total of
approximately $65 million. These agreements are now being implemented through
Prudential's implementation of the class Settlement.
Prudential's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted with precision. It is
possible that the results of operations or the cash flow of the company, in
particular quarterly or annual periods, could be materially affected by an
ultimate unfavorable outcome of the matters specifically discussed above.
Management believes, however, that the ultimate resolution of all such matters,
after consideration of applicable reserves, should not have a material adverse
effect on Prudential's financial position.
YEAR 2000 COMPLIANCE
The services provided to you as a purchaser of a Variable Universal 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
Universal 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.
31
<PAGE>
REVISED
To address this potential problem Prudential organized its Year 2000 efforts
around the following three areas:
. BUSINESS SYSTEMS - Computer programs directly used to support our business;
----------------
. INFRASTRUCTURE - Computers and other business equipment like telephones and
--------------
fax machines; and
. BUSINESS PARTNERS - Year 2000 readiness of essential business partners.
-----------------
BUSINESS SYSTEMS. The business systems component includes a wide range of
- -----------------
computer programs that directly support Prudential's business operations
including systems for: insurance product processing, securities trading,
personnel record keeping and general accounting systems. All business systems
were analyzed to determine whether each computer program with a Year 2000
problem should be retired, replaced or renovated. The majority of this work has
been completed. A few remaining programs are currently being tested and
completion of this process is expected by June 1999.
INFRASTRUCTURE. As with business applications, we established a specific
- ---------------
methodology and process for addressing infrastructure issues. The
infrastructure effort includes mainframe computer system hardware and operating
system software, mid-range systems and servers, telecommunications equipment and
systems, buildings and facilities systems, personal computers, and vendor
hardware and software. Other than desktop systems, substantially all other
infrastructure systems have been tested. Presently a small number of midrange
computers, and building and facility systems are still in the testing phase. We
expect to have the infrastructure implementation process completed by June 1999.
BUSINESS PARTNERS. Prudential recognizes the importance of determining the Year
- ------------------
2000 readiness of external business relationships especially those that involve
electronic data transfer products and services, and products that impact our
essential business processes. Prudential first classified each business partner
as "highly critical" or "less critical" to our business and then began to
develop risk assessment and contingency plans to address the potential that a
business partner could experience a Year 2000 failure. All highly critical
business partner relationships have been assessed and contingency planning is
completed. Risk assessment and contingency planning continues for less critical
business partners, and the target completion date for these relationships is
June 1999.
Prudential believes that the Business 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,
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 Universal 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 Universal 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 Universal 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.
32
<PAGE>
Most of the operations of the Variable Universal 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 the information set forth in the registration
statement. Certain portions have been omitted pursuant to the rules and
regulations of the SEC. The omitted information may, however, be obtained from
the SEC's principal office in Washington, D.C., upon payment of a prescribed
fee.
Further information may also be obtained from Prudential. Its address and
telephone number are set forth on the inside front cover of this prospectus.
FINANCIAL STATEMENTS
The financial statements of the Account should be distinguished from the
consolidated financial statements of Prudential and subsidiaries, which should
be considered only as bearing upon the ability of Prudential to meet its
obligations under the Contracts.
33
<PAGE>
REVISED
DIRECTORS AND OFFICERS OF PRUDENTIAL
DIRECTORS OF PRUDENTIAL
FRANKLIN E. AGNEW--Director since 1994 (current term expires April, 2000).
Member, Committee on Finance & Dividends; Member, Corporate Governance
Committee. Business consultant since 1986. Senior Vice President, H.J. Heinz
from 1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb, Inc. and Erie
Plastics Corporation. Age 64. Address: 600 Grant Street, Suite 660, Pittsburgh,
PA 15219.
FREDERICK K. BECKER--Director since 1994 (current term expires April, 2005).
Member, Auditing Committee; Member, Corporate Governance Committee. President,
Wilentz Goldman and Spitzer, P.A. (law firm) since 1989, with firm since 1960.
Age 63. Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
GILBERT F. CASELLAS--Director since 1998 (current term expires April, 2003).
Member, Compensation Committee. President, The Swarthmore Group, Inc. since
1999. Partner, McConnell Valdes, LLP in 1998. Chairman, U.S. Equal Employment
Opportunity Commission from 1994 to 1998. Age 46. Address: 1646 West Chester
Pike, Suite 3, West Chester, PA 19382.
JAMES G. CULLEN--Director since 1994 (current term expires April, 2001).
Member, Compensation Committee; Member, Committee on Business Ethics. President
& Chief Operating Officer, Bell Atlantic Corporation, since 1998. President &
Chief Executive Officer, Telecom Group, Bell Atlantic Corporation, from 1997 to
1998. Vice Chairman, Bell Atlantic Corporation from 1995 to 1997. President,
Bell Atlantic Corporation from 1993 to 1995. Mr. Cullen is also a director of
Bell Atlantic Corporation and Johnson & Johnson. Age 56. Address: 1310 North
Court House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS--Director since 1989 (current term expires April, 2001).
Member, Committee on Business Ethics; Member, Compensation Committee.
Independent Health Care Advisor since 1997. National and International Health
Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr. Davis is also a
director of Beckman Coulter Instruments, Inc., Merck & Co., Inc., Minimed
Incorporated, and Beverley Enterprises. Age 67. Address: 751 Broad Street,
23rd Floor, Newark, NJ 07102.
ROGER A. ENRICO--Director since 1994 (current term expires April, 2002).
Member, Committees on Nominations & Corporate Governance; Member, Compensation
Committee. Chairman and Chief Executive Officer, PepsiCo, Inc. since 1996. Mr.
Enrico originally joined PepsiCo, Inc. in 1971. Mr. Enrico is also a director
of A.H. Belo Corporation and Dayton Hudson Corporation. Age 54. Address: 700
Anderson Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR--Director since 1995 (current term expires April, 2003).
Member, Investment Committee; Member, Committee on Finance & Dividends. Retired
since 1995. Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr. Gilmour
originally joined Ford in 1960. Mr. Gilmour is also a director of Whirlpool
Corporation, MeidiaOne Group, Inc., AP Automotive 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.
34
<PAGE>
REVISED
CONSTANCE J. HORNER--Director since 1994 (current term expires April, 2002).
Member, Auditing Committee; Member, Committees on Nominations & Corporate
Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is
also a director of Foster Wheeler Corporation, Ingersoll-Rand Company, and
Pfizer, Inc. Age 56. Address: 1775 Massachusetts Ave., N.W. Washington, D.C.
20036-2188.
GAYNOR N. KELLEY--Director since 1997 (current term expires April, 2001).
Member, Auditing Committee. Retired since 1996. Chairman and Chief Executive
Officer, The Perkin Elmer Corporation from 1990 to 1996. Mr. Kelley is also a
director of Hercules Incorporated, and Alliant Techsystems. Age 67. Address:
751 Broad Street, 23rd Floor, Newark, NJ 07102-3777.
BURTON G. MALKIEL--Director since 1978 (current term expires April, 2002).
Chairman, Investment Committee; Member, Executive Committee; Member, Committee
on Finance & Dividends. Professor of Economics, Princeton University, since
1988. Dr. Malkiel is also a director of Banco Bilbao Vizcaya, Baker Fentress &
Company, The Jeffrey Company, The Southern New England Telecommunications
Company, and Vanguard Group, Inc. Age 66. Address: Princeton University, 110
Fisher Hall, Prospect Avenue, Princeton, NJ 08544-1021.
ARTHUR F. RYAN--Chairman of the Board, President and Chief Executive Officer of
Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
Bank from 1990 to 1994, with Chase since 1972. Age 56. Address: 751 Broad
Street, Newark, NJ 07102.
IDA F.S. SCHMERTZ--Director since 1997 (current term expires April, 2004).
Member, Audit Committee. Principal, Investment Strategies International since
1994. Age 64. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102.
CHARLES R. SITTER--Director since 1995 (current term expires April, 2003).
Member, Committee on Finance & Dividend; Member, Investment Committee. Retired
since 1996. President, Exxon Corporation from 1993 to 1996. Mr. Sitter began
his career with Exxon in 1957. Age 68. Address: 5959 Las Colinas Boulevard,
Irving, TX 75039-2298.
DONALD L. STAHELI--Director since 1995 (current term expires April, 2003).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1996.
Chairman and Chief Executive Officer, Continental Grain Company from 1994 to
1997. President and Chief Executive Officer, Continental Grain Company from 1988
to 1994. Mr. Staheli is also director of Bankers Trust Company, Conti-Financial
Corporation and Continental Grain Company. Age 67 Address: 39 Locust Street,
Suite 204, New Canaan, CT 06840.
RICHARD M. THOMSON--Director since 1976 (current term expires April, 2000).
Chairman, Executive Committee; Chairman, Compensation Committee. Retired since
1998. Chairman of the Board, The Toronto-Dominion Bank from 1997 to 1998.
Chairman and Chief Executive Officer from 1978 to 1997. Mr. Thomson is also a
director of CGC, Inc., INCO, Limited, S.C. Johnson & Son, Inc., The Thomson
Corporation, Canadian Occidental Petroleum, Ltd., The Toronto-Dominion Bank and
Ontario Hydro. Age 64. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto,
Ontario, M5K 1A2, Canada.
JAMES A. UNRUH--Director since 1996 (current term expires April, 2000). Member,
Committees on Nominations & Corporate Governance; Member, Investment Committee.
Retired since 1997. Chairman and Chief Executive Officer, Unisys Corporation,
from 1990 to 1997. Mr. Unruh is also a director of Ameritech Corporation and
Moss Micro. Age 57. Address: 751 Broad Street, Newark, NJ 07102-3777.
P. ROY VAGELOS, M.D.--Director since 1989 (current term expires April, 2001).
Chairman, Auditing Committee; Member, Executive Committee; Member, Committees on
Nominations & Corporate Governance. Chairman, Regeneron Pharmaceuticals since
1995. Chairman, Advanced Medicines, Inc. since 1997. Chairman, Chief Executive
Officer and President, Merck & Co., Inc. from 1986 to 1995. Dr. Vagelos
originally joined Merck in 1975. Dr. Vagelos is also a director of The Estee
Lauder Companies, Inc. and PepsiCo., Inc. Age 69. Address: One Crossroads
Drive, Building A, 3rd Floor, Bedminster, NJ 07921.
STANLEY C. VAN NESS--Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Executive Committee; Member,
Auditing Committee. Partner, Herbert, Van Ness, Cayci & Goodell (law firm) since
1998. Counselor at Law, Picco Herbert Kennedy (law firm) from 1990 to 1998.
Mr. Van Ness is also a director of Jersey Central Power & Light Company. Age
64. Address: 22 Chambers Street, Princeton, NJ 08542.
35
<PAGE>
Revised
PAUL A. VOLCKER--Director since 1988 (current term expires April, 2000).
Chairman, Committee on Finance & Dividends; Member, Executive Committee; Member,
Committee on Nominations & Corporate Governance. Consultant since 1997.
Chairman, Wolfensohn & Co., Inc. 1988 to 1996. Chairman, James D. Wolfensohn,
Inc. 1988 to 1996. Chief Executive Officer, James D. Wolfensohn, Inc. from 1995
to 1996. Mr. Volcker is also a director of Nestle, S.A., and Bankers Trust New
York Corporation as well as a Director of the Board of Overseers of TIAA-CREF.
Age 71, Address: 610 Fifth Avenue, Suite 420, New York, NY 10020.
JOSEPH H. WILLIAMS--Director since 1994 (current term expires April, 2002).
Member, Committee on Finance & Dividends; Member, Investment Committee.
Director, The Williams Companies since 1979. Chairman & Chief Executive
Officer, The Williams Companies from 1979 to 1993. Mr. Williams is also a
director of The Orvis Company, MTC Investors, LLC., and AEA Investors, Inc. Age
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, Operations and Systems since 1997;
prior to 1997, Executive Vice President, Prudential Securities,. Age 53.
MARK B. GRIER--Executive Vice President, Corporate Governance, since 1998;
Executive Vice President, Financial Management from 1997 to 1998; Chief
Financial Officer from 1995 to 1997; prior to 1995, Executive Vice President,
Chase Manhattan Corporation. Age 46.
JEAN D. HAMILTON--Executive Vice President, Institutional, since 1998;
President, Diversified Group since 1995 to 1998; prior to 1995, President,
Prudential Capital Group. Age 52.
RODGER A. LAWSON--Executive Vice President, International Investments & Global
Marketing, since 1998; Executive Vice President, Marketing and Planning from
1996 to 1998; President and CEO, Van Eck Global, from 1994 to 1996; prior to
1994, President and CEO, Global Private Banking, Bankers Trust Company. Age 52.
KIYOFUMI SAKAGUCHI--Executive Vice President, International Insurance, since
1998; President, International Insurance Group from 1995 to 1998; prior to 1995,
Chairman and CEO, The Prudential Life Insurance Co., Ltd. Age 56.
JOHN V. SCICUTELLA--Executive Vice President, Individual Financial Services,
since 1998; Chief Executive Officer, Individual Insurance Group from 1997 to
1998; Executive Vice President Operations and Systems from 1995 to 1997; prior
to 1995, Executive Vice President, Chase Manhattan Corporation. Age 49.
JOHN R. STRANGFELD--Executive Vice President, Global Asset Management, since
1998; Chief Executive Officer, Private Asset Management Group (PAMG) from 1996
to 1998; President, PAMG, from 1994 to 1996; prior to 1994, Senior Managing
Director. Age 45.
JAMES J. AVERY, JR.--Senior Vice President & Chief Actuary, Individual Insurance
Group since 1997; President Prudential Select from 1996 to 1997; prior to 1995,
Executive Vice President and Chief Operating Officer, Prudential Select. Age
47.
MARTIN A. BERKOWITZ--Senior Vice President, Financial Management, since 1998;
Senior Vice President and Comptroller from 1995 to 1998; prior to 1995, Senior
Vice President and CFO, Prudential Investment Corporation. Age 50.
WILLIAM M. BETHKE--Senior Vice President and Chief Investment Officer since
1997; prior to 1997, President, Capital Management Group. Age 51.
36
<PAGE>
Revised
ANNE E. BOSSI--Senior Vice President, Institutional, since 1998; President,
Group Life & Disability 1997 to 1998; President, Group Life Insurance 1995 to
1997; prior to 1995, President, Northeastern Group Operations. Age 47
RICHARD J. CARBONE--Senior Vice President and Chief Financial Officer since
1997. Controller, Salomon Brothers from 1995 to 1997; prior to 1995,
Controller, Bankers Trust. Age 51.
THOMAS J. CARROLL-- Senior Vice President and Chief Auditor since 1999. Managing
Director, Bankers Trust Company from 1996 to 1998; prior to 1996, Global Chief
Auditor and Managing Director, Credit Suisse First Boston. Age 57.
THOMAS W. CRAWFORD--Senior Vice President, Individual Financial Services, since
1998; President and Chief Executive Officer, Prudential Property & Casualty
Company from 1996 to 1998; Vice President, Prudential Property & Casualty
Company in 1996; prior to 1996, President & CEO, Southern Heritage Insurance
Company. Age 55.
WILLIAM D. FRIEL--Senior Vice President and Chief Information Officer since
1996; prior to 1996, Chief Executive Officer, Prudential Service Company. Age
60.
MICHAEL J. HINES--Senior Vice President, Marketing and Communications, since
1999; 1996 to 1998 Vice President, Marketing and Communications. Age 47.
RONALD P. JOELSON--Senior Vice President, Financial Management, since 1999.
Senior Vice President, Guaranteed Products from 1996 to 1999; Vice President,
Guaranteed Investments during 1996; prior to 1996, Managing Director, Retirement
Services. Age 40.
IRA J. KLEINMAN--Senior Vice President, International Insurance, since 1997;
prior to 1997, Chief Marketing & Product Development Officer. Age 51.
KATHLEEN KRALL--Senior Vice President, Individual Financial Services, since
1999; Vice President, Individual Financial Services from 1996 to 1999; Vice
President, Operations and Systems from 1995 to 1996; prior to 1995 Vice
President, Chase Manhattan Bank. Age 41.
JOYCE R. LEIBOWITZ--Senior Vice President, Management Internal Controls, since
1999; Vice President, Management Internal Controls from 1995 to 1999; prior to
1995 Integrated Control Officer. Age 51.
JOHN M. LIFTIN--Senior Vice President and General Counsel since 1998; Self-
employed from 1997 to 1998; prior to 1997 Senior Vice President and General
Counsel, Kidder & Peabody Group, Inc. Age 55.
NEIL A. McGUINNESS--Senior Vice President, Individual Financial Services, since
1996; Director, Putnam Investments, in 1996; prior to 1996, President, Fidelity
Investment Employer Services Company. Age 52.
PRISCILLA A. MYERS--Senior Vice President, Demutualization, since 1998; Senior
Vice President and Auditor from 1995 to 1998; prior to 1995, Vice President and
Auditor. Age 48.
I. EDWARD PRICE--Senior Vice President, Individual Financial Services, since
1996; Senior Vice President and Actuary from 1995 to 1996; prior to 1995, Chief
Executive Officer, Prudential International Insurance. Age 56.
ROBERT J. SULLIVAN--Senior Vice President, Individual Financial Services, since
1997; prior to 1997, Managing Director, Fidelity Investments. Age 60.
SUSAN J. BLOUNT--Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 41.
C. EDWARD CHAPLIN--Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 41.
ANTHONY S. PISZEL--Vice President and Controller since 1998; Vice President,
Enterprise Financial Management from 1997 to 1998; prior to 1997, Chief
Financial Officer, Individual Insurance Group. Age 44.
PRUDENTIAL OFFICERS ARE ELECTED ANNUALLY.
37
<PAGE>
FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1998
<TABLE>
<CAPTION>
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
============ ============ ============== ============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A1
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
-----------------------------------------------------------------------------
HIGH
YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
$92,745,342 $845,861,223 $454,271,316 $142,307,176 $203,957,589
----------- ------------ ------------ ------------ ------------
$92,745,342 $845,861,223 $454,271,316 $142,307,176 $203,957,589
=========== ============ ============ ============ ============
$92,745,342 $845,861,223 $454,271,316 $142,307,176 $203,957,589
----------- ------------ ------------ ------------ ------------
$92,745,342 $845,861,223 $454,271,316 $142,307,176 $203,957,589
=========== ============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A2
<PAGE>
FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
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
----------- ----------- ----------- ----------- ----------- -----------
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
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A3
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
EQUITY PORTFOLIO FLEXIBLE MANAGED PORTFOLIO CONSERVATIVE BALANCED 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
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ -----------
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
============ ============ ============ ============ ============ ============ ============ ============ ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A4
<PAGE>
FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------
HIGH YIELD BOND PORTFOLIO STOCK INDEX PORTFOLIO
------------------------------------- --------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income.................................. $ 9,308,036 $ 8,213,223 $7,376,933 $ 9,059,895 $ 8,102,242 $ 6,724,618
----------- ----------- ---------- ------------ ------------ -----------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk [Note 5A]...... 697,446 618,514 532,324 5,175,364 3,790,129 2,544,825
----------- ----------- ---------- ------------ ------------ -----------
NET EXPENSES........................................ 697,446 618,514 532,324 5,175,364 3,790,129 2,544,825
----------- ----------- ---------- ------------ ------------ -----------
NET INVESTMENT INCOME (LOSS)........................ 8,610,590 7,594,709 6,844,609 3,884,531 4,312,113 4,179,793
----------- ----------- ---------- ------------ ------------ -----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Capital gains distributions received............. 0 0 0 12,847,130 17,197,911 4,749,836
Realized gain (loss) on shares redeemed.......... (243,731) 311,580 20,787 6,237,946 6,786,808 263,052
Net change in unrealized gain (loss) on
investments.................................... (11,461,047) 2,620,272 581,780 153,992,330 113,415,557 61,075,735
----------- ----------- ---------- ------------ ------------ -----------
NET GAIN (LOSS) ON INVESTMENTS...................... (11,704,778) 2,931,852 602,567 173,077,406 137,400,276 66,088,623
----------- ----------- ---------- ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS........................ $(3,094,188) $10,526,561 $7,447,176 $176,961,937 $141,712,389 $70,268,416
=========== =========== ========== ============ ============ ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A5
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO GLOBAL PORTFOLIO PRUDENTIAL JENNISON PORTFOLIO
- ------------------------------------------ --------------------------------------- ----------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------------ ------------ ----------- ----------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 12,342,267 $ 9,608,504 $ 9,118,093 $ 1,738,704 $1,281,804 $ 1,778,642 $ 298,391 $ 157,623 $ 64,455
- ------------ ------------ ----------- ----------- ---------- ----------- ----------- ----------- ----------
3,262,956 2,532,105 1,767,583 843,008 686,676 446,499 933,952 439,584 149,932
- ------------ ------------ ----------- ----------- ---------- ----------- ----------- ----------- ----------
3,262,956 2,532,105 1,767,583 843,008 686,676 446,499 933,952 439,584 149,932
- ------------ ------------ ----------- ----------- ---------- ----------- ----------- ----------- ----------
9,079,311 7,076,399 7,350,510 895,696 595,128 1,332,143 (635,561) (281,961) (85,477)
- ------------ ------------ ----------- ----------- ---------- ----------- ----------- ----------- ----------
27,501,162 39,390,070 9,133,917 5,918,263 5,120,114 1,298,584 2,902,977 5,052,341 0
(99,580) 3,982,449 171,030 1,375,609 309,311 16,670 453,639 525,215 0
(52,611,025) 59,248,683 32,816,172 18,668,316 (917,843) 9,125,406 42,669,927 10,743,964 3,012,624
- ------------ ------------ ----------- ----------- ---------- ----------- ----------- ----------- ----------
(25,209,443) 102,621,202 42,121,119 25,962,188 4,511,582 10,440,660 46,026,543 16,321,520 3,012,624
- ------------ ------------ ----------- ----------- ---------- ----------- ----------- ----------- ----------
$(16,130,132) $109,697,601 $49,471,629 $26,857,884 $5,106,710 $11,772,803 $45,390,982 $16,039,559 $2,927,147
============ ============ =========== =========== ========== =========== =========== =========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A6
<PAGE>
FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
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
============ =========== =========== ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A7
<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
============== ============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- -----------------------------------------
CONSERVATIVE
BALANCED
PORTFOLIO
----------------------------------------
1998 1997 1996
- -------------- -------------- ----------
<S> <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
============== ============== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A8
<PAGE>
FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------
HIGH YIELD STOCK
BOND INDEX
PORTFOLIO PORTFOLIO
---------------------------------------- -----------------------------------------
1998 1997 1996 1998 1997 1996
------------ ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) .......... $ 8,610,590 $ 7,594,709 $ 6,844,609 $ 3,884,531 $ 4,312,113 $ 4,179,793
Capital gains distributions received .. 0 0 0 12,847,130 17,197,911 4,749,836
Realized gain (loss) on shares redeemed (243,731) 311,580 20,787 6,237,946 6,786,808 263,052
Net change in unrealized gain (loss) on
investments ......................... (11,461,047) 2,620,272 581,780 153,992,330 113,415,557 61,075,735
------------ ----------- ----------- ------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ............. (3,094,188) 10,526,561 7,447,176 176,961,937 141,712,389 70,268,416
------------ ----------- ----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
[Note 7] .............................. 4,214,068 374,682 5,326,899 46,615,330 58,525,779 55,125,681
------------ ----------- ----------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RETAINED IN THE ACCOUNT [Note 8] ...... (42,474) (110,168) 52,425 111,800 (910,143) 82,144
------------ ----------- ----------- ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS .. 1,077,406 10,791,075 12,826,500 223,689,067 199,328,025 125,476,241
NET ASSETS
Beginning of year ..................... 91,667,936 80,876,861 68,050,361 622,172,156 422,844,131 297,367,890
------------ ----------- ----------- ------------ ------------ ------------
End of year ........................... $ 92,745,342 $91,667,936 $80,876,861 $845,861,223 $622,172,156 $422,844,131
============ =========== =========== ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A9
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
EQUITY PRUDENTIAL
INCOME GLOBAL JENNISON
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------- ------------------------------------------- ----------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------------ ------------ ------------ ------------ ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9,079,311 $ 7,076,399 $ 7,350,510 $ 895,696 $ 595,128 $ 1,332,143 $ (635,561) $ (281,961) $ (85,477)
27,501,162 39,390,070 9,133,917 5,918,263 5,120,114 1,298,584 2,902,977 5,052,341 0
(99,580) 3,982,449 171,030 1,375,609 309,311 16,670 453,639 525,215 0
(52,611,025) 59,248,683 32,816,172 18,668,316 (917,843) 9,125,406 42,669,927 10,743,964 3,012,624
- ------------ ------------ ------------ ------------ ------------ ----------- ------------ ----------- -----------
(16,130,132) 109,697,601 49,471,629 26,857,884 5,106,710 11,772,803 45,390,982 16,039,559 2,927,147
- ------------ ------------ ------------ ------------ ------------ ----------- ------------ ----------- -----------
29,232,315 36,671,034 23,125,635 7,049,239 17,556,139 24,827,377 67,125,943 34,918,336 30,275,275
- ------------ ------------ ------------ ------------ ------------ ----------- ------------ ----------- -----------
139,884 (393,762) (711,051) (110,095) (317,463) (137,878) 9,553 (773,643) 385,656
- ------------ ------------ ------------ ------------ ------------ ----------- ------------ ----------- -----------
13,242,067 145,974,873 71,886,213 33,797,028 22,345,386 36,462,302 112,526,478 50,184,252 33,588,078
441,029,249 295,054,376 223,168,163 108,510,148 86,164,762 49,702,460 91,431,111 41,246,859 7,658,781
- ------------ ------------ ------------ ------------ ------------ ----------- ------------ ----------- -----------
$454,271,316 $441,029,249 $295,054,376 $142,307,176 $108,510,148 $86,164,762 $203,957,589 $91,431,111 $41,246,859
============ ============ ============ ============ ============ =========== ============ =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A11 THROUGH A16
A10
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
THE VARIABLE UNIVERSAL 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.
Currently only proceeds from the purchases of Prudential Variable
Appreciable Life ("PVAL") and Prudential Survivorship Preferred
("SVUL") contracts invest in the Account. Beginning December 31, 1998
Prudential Variable Universal Life ("PVUL") contracts will invest in
the Account.
The Account is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust. There are twenty subaccounts
within the Account. PVUL contracts will offer the option to invest in
fifteen of these subaccounts, each of which invest in either a
corresponding portfolio of The Prudential Series Fund, Inc. (the
"Series Fund"), or any of the following five additional non-Prudential
administered funds: AIM V.I. Value Fund, American Century V.P. Value
Fund, Janus Growth Portfolio, MFS Emerging Growth Series and the T.
Rowe Price International Stock Portfolio. The Series Fund is a
diversified open-ended management investment company, and is managed
by Prudential.
At December 31, 1998, there were no balances in the subaccounts
pertaining to the non-Prudential administered funds.
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.
A11
<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)
----------------------------------------------------------------------------------
HIGH
YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Number of shares: 12,867,179 22,412,857 22,676,693 6,726,280 8,531,342
Net asset value per share (rounded): $ 7.21 $ 37.74 $ 20.03 $ 21.16 $ 23.91
Cost: $102,198,960 $432,406,040 $398,053,240 $112,640,398 $147,249,669
</TABLE>
NOTE 4: CONTRACT OWNER UNIT INFORMATION
There were no outstanding PVUL contract owner units or PVUL contract
owner equity as of December 31, 1998. Outstanding contract owner
units, unit values and total value of contract owner equity for PVAL
and SVUL 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>
A12
<PAGE>
NOTE 4: CONTRACT OWNER UNIT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------------------------
HIGH YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding (PVAL).. 23,784,077 93,930,360 75,321,133 59,733,321 57,301,215
Unit Value (PVAL) ....................... $ 2.30936 $ 5.63518 $ 4.05205 $1.75630 $ 2.54336
----------- ------------ ------------ ------------ ------------
Contract Owner Equity (PVAL) ............ $54,925,995 $529,314,487 $305,204,997 $104,909,632 $145,737,617
----------- ------------ ------------ ------------ ------------
Contract Owner Units Outstanding
(PVAL $100,000+ face) ................. 15,884,568 56,008,717 36,620,899 18,348,364 20,322,932
Unit Value (PVAL $100,000+ face) ........ $ 2.24346 $ 5.47186 $ 3.93413 $ 1.73223 $ 2.51579
----------- ------------ ------------ ------------ ------------
Contract Owner Equity (PVAL
$100,000+ face) ....................... $35,636,392 $306,471,859 $144,071,378 $ 31,783,586 $ 51,128,228
----------- ------------ ------------ ------------ ------------
Contract Owner Units Outstanding (SVUL).. 1,831,645 4,821,807 3,091,081 3,609,961 3,235,344
Unit Value (SVUL) ....................... $ 1.19180 $ 2.08944 $ 1.61592 $1.55513 $ 2.19196
----------- ------------ ------------ ------------ ------------
Contract Owner Equity (SVUL) ............ $ 2,182,955 $ 10,074,877 $ 4,994,941 $ 5,613,958 $ 7,091,744
----------- ------------ ------------ ------------ ------------
TOTAL CONTRACT OWNER EQUITY ............. $92,745,342 $845,861,223 $454,271,316 $142,307,176 $203,957,589
=========== ============ ============ ============ ============
</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%. For
contract owners investing in PVUL the annual rate is 0.90%.
Mortality risk is that contract owners may not live as long as
estimated and expense risk is that the cost of issuing and
administering the policies may exceed 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.
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.
A13
<PAGE>
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 PORTFOLIO DIVERSIFIED BOND 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 PORTFOLIO FLEXIBLE MANAGED 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
============ ============ ============ ============
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------
CONSERVATIVE BALANCED HIGH YIELD BOND
PORTFOLIO PORTFOLIO
----------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Contract Owner Net Payments................................ $172,963,578 $193,920,159 $20,544,444 $19,451,504
Policy Loans............................................... (24,402,529) (21,017,180) (2,652,877) (2,378,667)
Policy Loan Repayment and Interest......................... 13,921,518 10,130,000 1,492,709 1,433,405
Surrenders, Withdrawals and Death Benefits................. (68,346,109) (68,407,322) (7,617,762) (6,747,487)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Options.................................... (16,607,607) (19,240,097) 945,487 (2,355,030)
Administrative and Other Charges........................... (91,363,858) (100,869,775) (8,497,933) (9,029,043)
------------ ------------ ----------- -----------
Net Increase (Decrease) in Net Assets Resulting from
PremiumPayments and Other Operating Transfers............ $(13,835,007) $ (5,484,215) $ 4,214,068 $ 374,682
============ ============ =========== ===========
</TABLE>
A14
<PAGE>
NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------
STOCK INDEX PORTFOLIO EQUITY INCOME PORTFOLIO
------------------------------ ----------------------------
1998 1997 1998 1997
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Contract Owner Net Payments $139,848,176 $126,688,004 $95,299,141 $79,016,436
Policy Loans................................................ (21,632,900) (15,814,797) (12,921,751) (9,558,454)
Policy Loan Repayment and Interest.......................... 8,895,587 5,919,148 5,682,713 3,893,428
Surrenders, Withdrawals and Death Benefits.................. (40,266,311) (32,499,126) (27,141,623) (21,564,128)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Options..................................... 22,168,188 30,361,425 9,043,514 21,482,832
Administrative and Other Charges............................ (62,397,410) (56,128,875) (40,729,679) (36,599,080)
------------ ------------ ----------- -----------
Net Increase (Decrease) in Net Assets Resulting from Premium
Payments and Other Operating Transfers.................... $ 46,615,330 $ 58,525,779 $29,232,315 $36,671,034
============ ============ =========== ===========
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------------------------------
GLOBAL PORTFOLIO PRUDENTIAL JENNISON PORTFOLIO
---------------------------- -----------------------------
1998 1997 1998 1997
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Contract Owner Net Payments $35,377,261 $34,211,689 $57,263,567 $34,294,641
Policy Loans................................................ (3,157,015) (2,628,076) (4,014,420) (1,732,453)
Policy Loan Repayment and Interest.......................... 1,774,955 1,262,980 1,563,575 744,576
Surrenders, Withdrawals and Death Benefits.................. (8,032,750) (7,075,480) (7,435,590) (3,227,110)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Options..................................... (6,124,691) 4,870,997 39,232,682 16,630,147
Administrative and Other Charges............................ (12,788,521) (13,085,971) (19,483,871) (11,791,465)
Net Increase (Decrease) in Net Assets Resulting from Premium ----------- ----------- ----------- -----------
Payments and Other Operating Transfers.................... $ 7,049,239 $17,556,139 $67,125,943 $34,918,336
=========== =========== =========== ===========
</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.
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 HIGH YIELD
MANAGED BALANCED BOND
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 19,318,322 17,186,033
Contract Owner Redemptions: (81,055,189) (87,813,519) (82,911,926) (94,880,956) (16,933,871) (16,878,090)
</TABLE>
A15
<PAGE>
NOTE 9: UNIT ACTIVITY (CONTINUED)
<TABLE>
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------------------------------------------------------------------
STOCK INDEX EQUITY INCOME GLOBAL
PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------- --------------------------- ----------------------------
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 45,264,098 50,408,149 34,330,488 34,569,866 32,534,226 37,198,997
Contract Owner Redemptions: (34,390,053) (34,222,528) (26,544,454) (24,004,754) (27,960,335) (24,567,571)
<CAPTION>
SUBACCOUNTS (CONTINUED)
-------------------------------------
PRUDENTIAL JENNISON
PORTFOLIO
-------------------------------------
1998 1997
----------- --------------
<S> <C> <C>
Contract Owner Contributions: 53,654,104 36,782,725
Contract Owner Redemptions: (22,113,796) (16,099,947)
</TABLE>
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)
----------------------------------------------------------------------------------
HIGH YIELD STOCK EQUITY PRUDENTIAL
BOND INDEX INCOME GLOBAL JENNISON
------------- ------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Purchases......................... $ 19,316,751 $ 67,429,443 $ 43,196,936 $ 16,771,209 $ 69,593,982
Sales............................. $(15,842,603) $(25,048,171) $(16,697,526) $(10,675,075) $ (3,377,329)
</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.
A16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of the
Variable Universal Life Subaccounts of the
Prudential Variable Appreciable Account
and the Board of Directors of
The Prudential Insurance Company of America
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of the Money Market Portfolio,
Diversified Bond Portfolio, Equity Portfolio, Flexible Managed Portfolio,
Conservative Balanced Portfolio, High Yield Bond Portfolio, Stock Index
Portfolio, Equity Income Portfolio, Global Portfolio, and Prudential Jennison
Portfolio of the Variable Universal 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 fund shares owned at December 31, 1998,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 19, 1999
A17
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>
VARIABLE UNIVERSAL LIFE
INSURANCE
Variable Universal Life 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.
[LOGO OF PRUDENTIAL INSURANCE]
The Prudential Insurance Company of America
751 Broad Street, Newark, NJ 07102-3777
Telephone 800 778-2255
38
<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 Universal Life Insurance Contracts registered by
this registration statement, in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred, and the risks assumed
by Prudential.
UNDERTAKING WITH RESPECT TO INDEMNIFICATION
The Registrant, in conjunction with certain affiliates, maintains insurance on
behalf of any person who is or was a trustee, director, officer, employee, or
agent of the Registrant, or who is or was serving at the request of the
Registrant as a trustee, director, officer, employee or agent of such other
affiliated trust or corporation, against any liability asserted against and
incurred by him or her arising out of his or her position with such trust or
corporation.
New Jersey, being the state of organization of Prudential Insurance Company of
America ("Prudential"), permits entities organized under its jurisdiction to
indemnify directors and officers with certain limitations. The relevant
provisions of New Jersey law permitting indemnification can be found in Section
14A:3-5 of the New Jersey Statutes Annotated. The text of Prudential's By-law
27, which relates to indemnification of officers and directors, is incorporated
by reference to Exhibit 6(b) of Registrant's Form S-6, 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 112 pages.
The undertaking to file reports.
The representation with respect to charges.
The undertaking with respect to indemnification.
The signatures.
Written consents of the following persons:
1. PricewaterhouseCoopers, LLP
2. Clifford E. Kirsch, Esq.
3. Ching-Meei Chang, MAAA, FSA
The following exhibits:
- ----------------------
1. The following exhibits correspond to those required by paragraph A of the
instructions as to exhibits in Form N-8B-2:
A. (1) (a) Resolution of Board of Directors of The Prudential Insurance
Company of America establishing The Prudential Variable
Appreciable Account. (Note 2)
(b) Authorization for Separate Account to Invest in Unaffiliated
Mutual Funds (Note 5)
(2) Not Applicable.
(3) Distributing Contracts:
(a) Distribution Agreement between Pruco Securities Corporation
and The Prudential Insurance Company of America. (Note 5)
(b) Proposed form of Agreement between Pruco Securities
Corporation and independent brokers with respect to the Sale
of the Contracts. (Note 5)
(c) Schedules of Sales Commissions. (Note 9)
(d) Participation Agreements:
(i) (a) AIM Variable Insurance Funds, Inc., AIM V.I. Value
Fund. (Note 9)
(ii) (a) American Century Variable Portfolios, Inc., VP
Value Portfolio. (Note 7)
(b) Amendment to the American Century Variable
Portfolios, Inc. Participation Agreement. (Note 9)
(iii) (a) Janus Aspen Series, Growth Portfolio. (Note 7)
(b) Amendment to the Janus Aspen Series Participation
Agreement. (Note 9)
(iv) (a) MFS Variable Insurance Trust, Emerging Growth
Series. (Note 7)
(b) Amendment to the MFS Variable Insurance Trust
Participation Agreement. (Note 9)
(v) (a) T. Rowe Price International Series, Inc.,
International Stock Portfolio. (Note 8)
(b) Amendment to the T. Rowe Price International
Series, Inc. Participation Agreement. (Note 9)
(4) Not Applicable.
(5) Variable Universal Life Insurance Contract: (Note 9)
(6) (a) Charter of The Prudential Insurance Company of America, as
amended November 14, 1995. (Note 3)
(b) By-laws of The Prudential Insurance Company of America, as
amended May 12, 1998. (Note 5)
(7) Not Applicable.
(8) Not Applicable.
II-2
<PAGE>
(9) Not Applicable.
(10) (a) Application Form. (Note 5)
(b) Supplement to the Application. (Note 5)
(11) Not Applicable.
(12) Memorandum describing Prudential's issuance, transfer, and
redemption procedures for the Contracts pursuant to Rule 6e-
3(T)(b)(12)(iii) and method of computing adjustments in payments
and cash surrender values upon conversion to fixed-benefit
policies pursuant to Rule 6e-3(T)(b)(13)(v)(B). (Note 5)
(13) Available Contract Riders and Endorsements:
(a) Rider for Payment of Premium Benefit Upon Insured's Total
Disability. (Note 5)
(b) 10 Year Level Premium Term Rider on Insured. (Note 9)
(c) 10 Year Level Premium Term Rider on Spouse. (Note 9)
(d) Children's Rider
(i) The dependent child is named in the application for
the contract and on the date of the application has
not reached his or her 18th birthday. (Note 9)
(ii) The dependent child just before the contract date of
this contract was insured under the earlier contract
that was converted or changed to this contract.
(Note 9)
(iii) The dependent child is named in the application for
change. (Note 9)
(iv) After-issue. (Note 9)
(e) Endorsement to the Rider for Level Term Insurance Benefit on
Dependent Children. (Note 9)
(f) Living Needs Benefit Rider
(i) for use in all approved jurisdictions except Florida.
(Note 2)
2. See Exhibit 1.A.(5).
3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality of the
securities being registered. (Note 1)
4. None.
5. Not Applicable.
6. Opinion and Consent of Ching-Meei Chang, MAAA, FSA, as to actuarial matters
pertaining to the securities being registered. (Note 1)
7. Powers of Attorney.
(a) F. Agnew, F. Becker, J. Cullen, C. Davis, R. Enrico,
A. Gilmour, W. Gray, III, J. Hanson, G. Hiner, C. Horner,
G. Kelley, B. Malkiel, A. Ryan, I. Schmertz,
C. Sitter, D. Staheli, R. Thomson, J. Unruh,
P. Vagelos, S. Van Ness, P. Volcker, J. Williams (Note 4)
(b) G. Casellas (Note 5)
(c) R. Carbone (Note 6)
(d) A. Piszel (Note 10)
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Post-Effective Amendment No. 15 to Form
S-6, Registration No. 33-20000, filed May 1, 1995 on behalf of The
Prudential Variable Appreciable Account.
(Note 3) Incorporated by reference to Post-Effective Amendment No. 9 to Form
S-1, Registration No. 33- 20083, filed April 9, 1997 on behalf of The
Prudential Variable Contract Real Property Account.
II-3
<PAGE>
(Note 4) Incorporated by reference to Post-Effective Amendment No. 10 to Form
S-1, Registration No. 33- 20083, filed April 9, 1998 on behalf of The
Prudential Variable Contract Real Property Account.
(Note 5) Incorporated by reference to Registrant's Form S-6, filed September
30, 1998.
(Note 6) Incorporated by reference to Post-Effective Amendment No. 3 to Form
N-4, Registration No. 333- 23271, filed October 16, 1998 on behalf of
The Prudential Discovery Select Group Variable Contract Account.
(Note 7) Incorporated by reference to Post-Effective Amendment No. 1 to Form
S-6, Registration No. 333- 01031, filed May 14, 1997 on behalf of The
Prudential Variable Contract Account GI-2.
(Note 8) Incorporated by reference to Pre-Effective Amendment No. 1 to Form N-
4, Registration No. 333- 23271, filed June 17, 1997 on behalf of The
Prudential Discovery Select Group Variable Contract Account.
(Note 9) Incorporated by reference to Registrant's Pre-Effective Amendment
No. 1 to Form S-6, filed on December 23, 1998 on behalf of The
Prudential Variable Appreciable 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, the
Prudential Variable Appreciable Account, has duly caused this Registration
Statement to be signed on its behalf by the undersigned thereunto duly
authorized, and its seal hereunto affixed and attested, all in the city of
Newark and the State of New Jersey, on this 28th day of April, 1999.
(Seal) THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
(Registrant)
By: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Depositor)
<TABLE>
<S> <C>
Attest: /s/ Thomas C. Castano By: /s/ Esther H. Milnes
--------------------------------- -------------------------------------
Thomas C. Castano Esther H. Milnes
Assistant Secretary Vice President and Actuary
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities indicated on this 28th day of April, 1999.
Signature and Title
-------------------
<TABLE>
<S> <C>
/s/ *
- ----------------------------------
Arthur F. Ryan
Chairman of the Board, President,
and Chief Executive Officer
/s/ *
- ----------------------------------
Anthony S. Piszel
Vice President and Controller
/s/ * *By: /s/ Thomas C. Castano
- ---------------------------------- ----------------------------------
Richard J. Carbone Thomas C. Castano
Chief Financial Officer (Attorney-in-Fact)
</TABLE>
/s/ *
- ----------------------------------
Franklin E. Agnew
Director
/s/ *
- ----------------------------------
Frederic K. Becker
Director
/s/ *
- ----------------------------------
Gilbert F. Casellas
Director
/s/ *
- ----------------------------------
James G. Cullen
Director
/s/ *
- ----------------------------------
Carolyne K. Davis
Director
/s/ *
- ----------------------------------
Roger A. Enrico
Director
/s/*
_________________________________
Allan D. Gilmour
Director
II-5
<PAGE>
/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
<TABLE>
<S> <C>
/s/ * *By: /s/ Thomas C. Castano
- ---------------------------------- ----------------------------------
Burton G. Malkiel Thomas C. Castano
Director (Attorney-in-Fact)
</TABLE>
/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
<TABLE>
<CAPTION>
<S> <C> <C>
Consent of PricewaterhouseCoopers LLP, independent accountants. Page II- 8
3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality of Page II- 9
the securities being registered
6. Opinion and Consent of Ching-Meei Chang, MAAA, FSA, as to actuarial matters pertaining Page II-10
to the securities being registered
</TABLE>
II-7
<PAGE>
Exhibit 3
April 26, 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-9
<PAGE>
Exhibit 6
April 28, 1999
The Prudential Insurance Company
of America
213 Washington Street
Newark, New Jersey 07102-2992
To Prudential:
This opinion is furnished in connection with the registration by The Prudential
Insurance Company of America of its Variable Universal Life Contract
("Contract") under the Securities Act of 1933. The prospectus included in Post-
Effective Amendment No. 1 to Registration Statement No. 333-64957 on Form S-6
describes the Contract. I have reviewed the Contract and I have participated in
the preparation and review of the Registration Statement and Exhibits thereto.
In my opinion:
(1) The illustrations of cash surrender values and death benefits included
in the section of the prospectus entitled "Illustrations of Cash
Surrender Values, Death Benefits, and Accumulated Premiums," based on
the assumptions stated in the illustrations, are consistent with the
provisions of the Contracts. The rate structure of the Contract has
not been designed so as to make the relationship between premiums and
benefits, as shown in the illustrations, appear more favorable to a
prospective purchaser of a Contract for male age 35 than to
prospective purchasers of Contracts on males of other ages or on
females.
(2) The examples shown in the section of the prospectus entitled "Changing
the Type of Death Benefit" are consistent with the provisions of the
Contract.
(3) The examples shown in the section of the prospectus entitled "Death
Benefit Guarantee" are consistent with the provisions of the Contract.
(4) The charts included in the sections of the prospectus "How a Type A
(Fixed) Contract's Death Benefit Will Vary" and "How a Type B
(Variable) Contract's Death Benefit Will Vary" are consistent with the
provisions of the Contract.
(5) The deduction in an amount equal to 1.25% of each premium is a
reasonable charge in relation to the additional income tax burden
imposed upon The Prudential Insurance Company of America as the result
of the enactment of Section 848 of the internal Revenue Code. In
reaching that conclusion, a number of factors were taken into account
that, in my opinion, were appropriate and which resulted in a project
after-tax rate of return that is a reasonable rate to use in
discounting the tax benefit of the deductions allowed in Section 848
in taxable years subsequent to the year in which the premiums are
received.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to my name under the heading "Experts" in the
prospectus.
Very truly yours,
/S/
- -------------------------------------
Ching-Meei Chang, FSA, MAAA
Actuarial Director
The Prudential Insurance Company of America
