<PAGE>
[LETTER HEAD OF PRUDENTIAL]
May 1, 2000
Dear Policyowner:
It is a pleasure to provide you with three informative documents pertaining to
your Custom Variable Appreciable Life policy:
. The Prudential Series Fund, Inc. prospectus dated April 30, 2000
. 1999 Prudential Variable Appreciable Account Financial Statements
. 1999 Prudential Consolidated Financial Statements
Since this material contains important information about your policy, we suggest
that you keep it with your policy for future reference.
Your Asset Allocation Should Reflect Your Current Risk Tolerance and Financial
Goals
One of life's certainties is the inevitability of change. And as changes occur
in our personal and professional lives, we all need to review our financial
plans and insurance protection needs. The Contract Fund in your variable life
insurance policy includes several investment options. Since another of life's
certainties is that no one can predict the future performance of the financial
markets, we recommend that you regularly reevaluate the allocation of your net
premium dollars among your investment choices. With the assistance of
Prudential's Asset Allocation model, your Registered Representative can help you
analyze your allocations and adjust them to make them consistent with your
current needs, objectives, risk tolerance and time horizons.
Life Insurance Coverage Is A Critical Financial Asset
Your variable life insurance policy is a valuable asset and a significant
element of your financial security plan. Maintaining it is critical because of
the protection it provides to your loved ones and beneficiaries. Your Annual
Statement, as well as a policy review with your Representative, can tell you how
your investment choices are performing relative to your goals. This will help
you determine if you need to adjust the amount of your premium payments in order
to maintain your insurance coverage.
We Want To Help You Plan To Achieve Your Financial Security And Protection Goals
Upon receipt of your Annual Statement, we suggest that you contact your
Representative for a policy review of your variable life coverage. He or she can
also show you how Prudential's broad range of products and services can help you
in planning to achieve your overall financial security goals. If you have any
questions about this correspondence, please call your Registered Representative,
or call (800) 778-2255, 8 a.m. to 8 p.m. Eastern time. (Please note that while
telephone representatives are available until 8 p.m. Eastern time, the cut-off
time for many transactions such as transfers among investment options is 4:00
p.m. Eastern time.)
Thank you for insuring with us. We appreciate having you as our customer and we
look forward to a continued relationship with you in the years to come.
Sincerely,
/s/
____________________________
James J. Avery, Jr., FSA
President, Individual Life Insurance
Variable life insurance is distributed by Pruco securities Corporation, a
subsidiary of The Prudential Insurance Company of America, both located at 751
Board Street, Newark, NJ 07102-3777.
<PAGE>
The Prudential Variable Appreciable Account
Financial Statements
For the periods ended December 31, 1999
The Prudential Insurance Company of America
Consolidated Financial Statements
For the periods ended December 31, 1999
[LOGO]
<PAGE>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1999
<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]...................................... $128,156,517 $147,269,500 $1,613,800,819 $1,500,930,248 $1,128,695,150
Receivable from (Payable to) the Prudential
Insurance Company of America [Note 2]......... 278,800 5,795 (388,479) (363,613) (278,132)
------------ ------------ -------------- -------------- --------------
Net Assets...................................... $128,435,317 $147,275,295 $1,613,412,340 $1,500,566,635 $1,128,417,018
============ ============ ============== ============== ==============
NET ASSETS, representing:
Equity of contract owners [Note 4].............. $128,435,317 $147,275,295 $1,613,412,340 $1,500,566,635 $1,128,417,018
------------ ------------ -------------- -------------- --------------
$128,435,317 $147,275,295 $1,613,412,340 $1,500,566,635 $1,128,417,018
============ ============ ============== ============== ==============
<CAPTION>
------------
ZERO COUPON
Bond
2000
Portfolio
------------
<S> <C>
ASSETS
Investment in The Prudential Series
Fund, Inc. Portfolios at net asset value
[Note 3]...................................... $ 18,370,067
Receivable from (Payable to) the Prudential
Insurance Company of America [Note 2]......... 20,759
------------
Net Assets...................................... $ 18,390,826
============
NET ASSETS, representing:
Equity of contract owners [Note 4].............. $ 18,390,826
------------
$ 18,390,826
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
A1
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (Continued)
------------------------------------------------------------------------------------------------------------------------------------
High Zero Coupon Small
Yield Stock Equity Natural Government Bond Prudential Capitalization
Bond Index Income Resources Global Income 2005 Jennison Stock
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
----------- -------------- ------------ ------------ ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$89,203,993 $1,066,681,327 $478,304,921 $137,146,763 $227,344,138 $74,796,358 $25,280,410 $459,533,890 $126,766,164
(97,495) 262,683 (132,886) (33,183) 148,486 (7,155) (108,269) 707,665 77,159
----------- -------------- ------------ ------------ ------------ ----------- ----------- ------------ ------------
$89,106,498 $1,066,944,010 $478,172,035 $137,113,580 $227,492,624 $74,789,203 $25,172,141 $460,241,555 $126,843,323
=========== ============== ============ ============ ============ =========== =========== ============ ============
$89,106,498 $1,066,944,010 $478,172,035 $137,113,580 $227,492,624 $74,789,203 $25,172,141 $460,241,555 $126,843,323
----------- -------------- ------------ ------------ ------------ ----------- ----------- ------------ ------------
$89,106,498 $1,066,944,010 $478,172,035 $137,113,580 $227,492,624 $74,789,203 $25,172,141 $460,241,555 $126,843,323
=========== ============== ============ ============ ============ =========== =========== ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
A2
<PAGE>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------------
Money Market Diversified Bond
Portfolio Portfolio
-------------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income............................ $ 5,770,360 $ 5,267,889 $ 5,094,912 $ 0 $ 8,588,103 $ 9,043,537
----------- ----------- ----------- ------------ ----------- -----------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk
[Note 5A]................................ 820,458 702,791 661,235 1,044,261 977,226 866,520
Reimbursement for excess expenses
[Note 5D]................................ 0 0 0 0 0 0
----------- ----------- ----------- ------------ ----------- -----------
NET EXPENSES................................. 820,458 702,791 661,235 1,044,261 977,226 866,520
----------- ----------- ----------- ------------ ----------- -----------
NET INVESTMENT INCOME (LOSS)................. 4,949,902 4,565,098 4,433,677 (1,044,261) 7,610,877 8,177,017
----------- ----------- ----------- ------------ ----------- -----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Capital gains distributions received....... 0 0 0 399,858 492,608 1,452,476
Realized gain (loss) on shares redeemed.... 0 0 0 (62,342) 107,984 107,543
Net change in unrealized gain (loss)
on investments........................... 0 0 0 (1,453,759) 242,854 (702,474)
----------- ----------- ----------- ------------ ----------- -----------
NET GAIN (LOSS) ON INVESTMENTS............... 0 0 0 (1,116,243) 843,446 857,545
----------- ----------- ----------- ------------ ----------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS................................. $ 4,949,902 $ 4,565,098 $ 4,433,677 $ (2,160,504) $ 8,454,323 $ 9,034,562
=========== =========== =========== ============ =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
A3
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (Continued)
-----------------------------------------------------------------------------------------------------------------------------
Equity Flexible Managed Conservative Balanced
Portfolio Portfolio Portfolio
----------------------------------------- ---------------------------------------- ----------------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 26,581,947 $ 27,312,284 $ 28,870,327 $ 66,382 $ 46,336,137 $ 38,256,221 $ 45,641,073 $ 46,034,230 $ 45,612,319
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
11,249,143 10,647,094 8,895,624 10,502,693 10,109,863 8,970,935 8,224,025 7,958,450 7,210,074
0 0 0 0 0 0 0 0 0
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
11,249,143 10,647,094 8,895,624 10,502,693 10,109,863 8,970,935 8,224,025 7,958,450 7,210,074
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
15,332,804 16,665,190 19,974,703 (10,436,311) 36,226,274 29,285,286 37,417,048 38,075,780 38,402,245
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
188,845,438 165,422,738 73,183,544 16,843,257 147,043,667 201,042,079 6,358,209 65,867,708 110,154,176
27,402,970 14,951,173 7,311,176 2,080,576 2,295,592 3,097,268 2,277,146 1,526,727 2,680,112
(58,596,445) (78,932,919) 158,043,072 91,955,490 (58,722,618) (37,001,732) 18,533,490 6,236,915 (36,006,094
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
157,651,963 101,440,992 238,537,792 110,879,323 90,616,641 167,137,615 27,168,845 73,631,350 76,828,194
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$172,984,767 $118,106,182 $258,512,495 $100,443,012 $126,842,915 $196,422,901 $ 64,585,893 $111,707,130 $115,230,439
============ ============ ============ ============ ============ ============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
A4
<PAGE>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------
Zero Coupon Bond 2000 High Yield Bond
Portfolio Portfolio
------------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
---------- ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income............................ $ 0 $ 990,142 $ 1,012,102 $ 251,218 $ 9,308,036 $ 8,213,223
---------- ------------ ----------- ----------- ------------ ------------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk
[Note 5A]................................ 137,327 144,233 141,029 655,946 697,446 618,514
Reimbursement for excess expenses
[Note 5D]................................ (35,650) (44,243) (53,201) 0 0 0
---------- ------------ ----------- ----------- ------------ ------------
NET EXPENSES................................. 101,677 99,990 87,828 655,946 697,446 618,514
---------- ------------ ----------- ----------- ------------ ------------
NET INVESTMENT INCOME (LOSS)................. (101,677) 890,152 924,274 (404,728) 8,610,590 7,594,709
---------- ------------ ----------- ----------- ------------ ------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Capital gains distributions received....... 36,915 267,168 804,923 0 0 0
Realized gain (loss) on shares redeemed.... 34,751 60,617 46,554 (966,582) (243,731) 311,580
Net change in unrealized gain (loss)
on investments........................... 334,605 153,354 (497,282) 4,891,833 (11,461,047) 2,620,272
---------- ------------ ----------- ----------- ------------ ------------
NET GAIN (LOSS) ON INVESTMENTS............... 406,271 481,139 354,195 3,925,251 (11,704,778) 2,931,852
---------- ------------ ----------- ----------- ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS................................. $ 304,594 $ 1,371,291 $ 1,278,469 $ 3,520,523 $ (3,094,188) $ 10,526,561
========== ============ =========== =========== ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
A5
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (continued)
-------------------------------------------------------------------------------------------------------------------------------
Stock Index Equity Income Natural Resources
Portfolio Portfolio Portfolio
---------------------------------------- ----------------------------------------- ------------------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10,125,645 $ 9,059,895 $ 8,102,242 $ 10,876,592 $ 12,342,267 $ 9,608,504 $ 828,632 $ 975,725 $ 757,192
------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------- -------------
6,675,340 5,175,364 3,790,129 3,285,457 3,262,956 2,532,105 860,970 851,287 1,079,034
0 0 0 0 0 0 0 0 0
------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------- -------------
6,675,340 5,175,364 3,790,129 3,285,457 3,262,956 2,532,105 860,970 851,287 1,079,034
------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------- -------------
3,450,305 3,884,531 4,312,113 7,591,135 9,079,311 7,076,399 (32,338) 124,438 (321,842)
------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------- -------------
12,472,929 12,847,130 17,197,911 53,052,638 27,501,162 39,390,070 0 6,263,457 16,426,552
19,189,378 6,237,945 6,786,808 7,546,600 (99,580) 3,982,449 (996,568) (1,250,821) 1,240,093
136,915,479 153,992,331 113,415,557 (16,047,855) (52,611,025) 59,248,683 44,575,398 (26,817,989) (35,487,893)
------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------- -------------
168,577,786 173,077,406 137,400,276 44,551,383 (25,209,443) 102,621,202 43,578,830 (21,805,353) (17,821,248)
------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------- -------------
$172,028,091 $176,961,937 $141,712,389 $ 52,142,518 $ (16,130,132) $109,697,601 $ 43,546,492 $ (21,680,915) $ (18,143,090)
============ ============ ============ ============ ============= ============ ============ ============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
A6
<PAGE>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------------------------
Global Government Income
Portfolio Portfolio
--------------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
------------ ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividend income............................ $ 678,214 $ 1,738,704 $ 1,281,804 $ 0 $ 4,520,286 $ 4,704,795
------------ ------------ ----------- ------------ ----------- -----------
EXPENSES
Charges to contract owners for assuming
mortality risk and expense risk
[Note 5A]................................ 1,111,465 843,008 686,676 558,812 560,752 515,147
Reimbursement for excess expenses
[Note 5D]................................ 0 0 0 0 0 0
------------ ------------ ----------- ------------ ----------- -----------
NET EXPENSES................................. 1,111,465 843,008 686,676 558,812 560,752 515,147
------------ ------------ ----------- ------------ ----------- -----------
NET INVESTMENT INCOME (LOSS)................. (433,251) 895,696 595,128 (558,812) 3,959,534 4,189,648
------------ ------------ ----------- ------------ ----------- -----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Capital gains distributions received....... 1,189,193 5,918,263 5,120,114 0 0 0
Realized gain (loss) on shares redeemed.... 3,166,922 1,375,609 309,311 202,656 289,366 44,975
Net change in unrealized gain (loss)
on investments........................... 67,191,804 18,668,316 (917,843) (2,381,684) 1,952,252 1,925,166
------------ ------------ ----------- ------------ ----------- -----------
NET GAIN (LOSS) ON INVESTMENTS............... 71,547,919 25,962,188 4,511,582 (2,179,028) 2,241,618 1,970,141
------------ ------------ ----------- ------------ ----------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS................................. $ 71,114,668 $ 26,857,884 $ 5,106,710 $ (2,737,840) $ 6,201,152 $ 6,159,789
============ ============ =========== ============ =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
A7
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (Continued)
--------------------------------------------------------------------------------------------------------------------------
Zero Coupon Bond 2005 Prudential Jennison Small Capitalization Stock
Portfolio Portfolio Portfolio
------------------------------------- ---------------------------------------- -----------------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 $ 1,296,279 $ 1,246,707 $ 541,083 $ 298,391 $ 157,623 $ 0 $ 528,189 $ 330,650
----------- ----------- ----------- ------------ ------------ ------------ ------------ ------------- ------------
182,727 174,202 152,442 2,115,948 933,952 439,584 722,960 578,299 320,322
(48,249) (55,172) (73,169) 0 0 0 0 0 0
----------- ----------- ----------- ------------ ------------ ------------ ------------ ------------- ------------
134,478 119,030 79,273 2,115,948 933,952 439,584 722,960 578,299 320,322
----------- ----------- ----------- ------------ ------------ ------------ ------------ ------------- ------------
(134,478) 1,177,249 1,167,434 (1,574,865) (635,561) (281,961) (722,960) (50,110) 10,328
----------- ----------- ----------- ------------ ------------ ------------ ------------ ------------- ------------
0 29,253 489,749 18,100,277 2,902,977 5,052,341 1,918,174 5,935,686 4,897,323
173,356 164,197 71,812 1,956,464 453,639 525,215 (120,414) (102,881) 46,921
(1,723,392) 1,406,685 526,125 99,641,732 42,669,927 10,743,964 12,549,193 (7,230,189) 5,112,289
----------- ----------- ----------- ------------ ------------ ------------ ------------ ------------- ------------
(1,550,036) 1,600,135 1,087,686 119,698,473 46,026,543 16,321,520 14,346,953 (1,397,384) 10,056,533
----------- ----------- ----------- ------------ ------------ ------------ ------------ ------------- ------------
$(1,684,514) $ 2,777,384 $ 2,255,120 $118,123,608 $ 45,390,982 $ 16,039,559 $ 13,623,993 $ (1,447,494) $ 10,066,861
=========== =========== =========== ============ ============ ============ ============ ============= ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
A8
<PAGE>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------
Money Diversified
Market Bond
Portfolio Portfolio
---------------------------------------- -----------------------------------------
1999 1998 1997 1999 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS;
Net investment income (loss)................ $ 4,949,902 $ 4,565,098 $ 4,433,677 $ (1,044,261) $ 7,610,877 $ 8,177,017
Capital gains distributions received........ 0 0 0 399,858 492,608 1,452,476
Realized gain (loss) on shares redeemed..... 0 0 0 (62,342) 107,984 107,543
Net change in unrealized gain (loss) on
investments............................... 0 0 0 (1,453,759) 242,854 (702,474)
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS.................................. 4,949,902 4,565,098 4,433,677 (2,160,504) 8,454,323 9,034,562
------------ ------------ ------------ ------------ ------------ ------------
PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
Contract Owner Net Payments................. 29,999,800 37,611,988 43,029,352 23,078,475 26,569,268 27,918,752
Policy Loans................................ (3,827,696) (2,736,768) (2,616,136) (3,188,191) (3,179,538) (2,676,866)
Policy Loan Repayments and Interest......... 2,588,192 1,950,095 1,685,370 2,135,135 1,591,062 1,259,455
Surrenders, Withdrawals and Death
Benefits.................................. (11,775,018) (9,187,944) (11,469,314) (8,911,486) (7,722,756) (7,179,534)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Option...................... 2,629,991 (4,007,277) (27,263,357) (138,588) 3,018,103 (3,556,460)
Administrative and Other Charges............ (8,860,933) (8,713,945) (10,301,958) (10,654,538) (10,752,740) (11,908,704)
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM PREMIUM
PAYMENTS AND OTHER OPERATING
TRANSFERS................................... 10,754,336 14,916,149 (6,936,043) 2,320,807 9,523,399 3,856,643
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RETAINED IN THE
ACCOUNT [Note 7]............................ 0 (1,854,444) (147,721) 0 15,863 (196,475)
------------ ------------ ------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS...................................... 15,704,238 17,626,803 (2,650,087) 160,303 17,993,585 12,694,730
NET ASSETS:
Beginning of year........................... 112,731,079 95,104,276 97,754,363 147,114,992 129,121,407 116,426,677
------------ ------------ ------------ ------------ ------------ ------------
End of year................................. $128,435,317 $112,731,079 $ 95,104,276 $147,275,295 $147,114,992 $129,121,407
============ ============ ============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
A9
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (Continued)
--------------------------------------------------------------------------------------------------------------
Flexible
Equity Managed
Portfolio Portfolio
---------------------------------------------------- ----------------------------------------------------
1999 1998 1997 1999 1998 1997
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 15,332,804 $ 16,665,190 $ 19,974,703 $ (10,436,311) $ 36,226,274 $ 29,285,286
188,845,438 165,422,738 73,183,544 16,843,257 147,043,667 201,042,079
27,402,970 14,951,173 7,311,176 2,080,576 2,295,592 3,097,268
(58,596,445) (78,932,919) 158,043,072 91,955,490 (58,722,618) (37,001,732)
-------------- -------------- -------------- -------------- -------------- --------------
172,984,767 118,106,182 258,512,495 100,443,012 126,842,915 196,422,901
-------------- -------------- -------------- -------------- -------------- --------------
222,112,390 285,120,763 293,586,658 155,685,002 206,491,305 230,098,301
(46,925,941) (45,013,313) (36,815,052) (33,487,354) (34,928,110) (29,768,329)
25,863,007 21,138,295 15,156,086 20,075,111 17,294,994 13,061,811
(94,909,037) (97,071,175) (79,836,234) (67,752,219) (79,498,303) (69,955,243)
(59,651,177) (7,299,784) 281,061 (36,216,054) (18,229,089) (12,348,231)
(122,798,555) (131,817,860) (137,177,962) (98,917,196) (106,307,492) (115,580,696)
-------------- -------------- -------------- -------------- -------------- --------------
(76,309,313) 25,056,926 55,194,557 (60,612,710) (15,176,695) 15,507,613
-------------- -------------- -------------- -------------- -------------- --------------
0 (134,891) (1,730,961) 0 (115,363) (332,076)
-------------- -------------- -------------- -------------- -------------- --------------
96,675,454 143,028,217 311,976,091 39,830,302 111,550,857 211,598,438
1,516,736,886 1,373,708,669 1,061,732,578 1,460,736,333 1,349,185,476 1,137,587,038
-------------- -------------- -------------- -------------- -------------- --------------
$1,613,412,340 $1,516,736,886 $1,373,708,669 $1,500,566,635 $1,460,736,333 $1,349,185,476
============== ============== ============== ============== ============== ==============
<CAPTION>
----------------------------------------------
Conservative
Balanced
Portfolio
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C>
$ 37,417,048 $ 38,075,780 $ 38,402,245
6,358,209 65,867,708 110,154,176
2,277,146 1,526,727 2,680,112
18,533,490 6,236,915 (36,006,094)
-------------- -------------- --------------
64,585,893 111,707,130 115,230,439
-------------- -------------- --------------
122,128,969 172,963,578 193,920,159
(23,665,043) (24,402,529) (21,017,180)
15,558,408 13,921,518 10,130,000
(64,392,473) (68,346,109) (68,407,322)
(27,102,834) (16,607,607) (19,240,097)
(84,858,651) (91,363,858) (100,869,775)
-------------- -------------- --------------
(62,331,624) (13,835,007) (5,484,215)
-------------- -------------- --------------
0 (57,837) 98,440
-------------- -------------- --------------
2,254,269 97,814,286 109,844,664
1,126,162,749 1,028,348,463 918,503,799
-------------- -------------- --------------
$1,128,417,018 $1,126,162,749 $1,028,348,463
============== ============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
A10
<PAGE>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------
Zero Coupon High Yield
Bond 2000 Bond
Portfolio Portfolio
------------------------------------------ ----------------------------------------
1999 1998 1997 1999 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss)............... $ (101,677) $ 890,152 $ 924,274 $ (404,728) $ 8,610,590 $ 7,594,709
Capital gains distributions received....... 36,915 267,168 804,923 0 0 0
Realized gain (loss) on shares redeemed.... 34,751 60,617 46,554 (966,582) (243,731) 311,580
Net change in unrealized gain (loss) on
investments.............................. 334,605 153,354 (497,282) 4,891,833 (11,461,047) 2,620,272
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS................................. 304,594 1,371,291 1,278,469 3,520,523 (3,094,188) 10,526,561
------------ ------------ ------------ ------------ ------------ ------------
PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
Contract Owner Net Payments................ 2,253,874 3,242,362 4,066,622 15,705,252 20,544,444 19,451,504
Policy Loans............................... (513,608) (644,425) (515,179) (2,428,091) (2,652,877) (2,378,667)
Policy Loan Repayments and Interest........ 399,503 360,153 224,553 1,801,343 1,492,709 1,433,405
Surrenders, Withdrawals and Death
Benefits................................. (1,426,761) (1,526,453) (1,236,692) (6,795,370) (7,617,762) (6,747,487)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Option..................... (1,169,148) (1,096,463) (1,986,651) (7,871,916) 945,487 (2,355,030)
Administrative and Other Charges........... (1,418,736) (1,619,003) (1,957,807) (7,570,585) (8,497,933) (9,029,043)
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM PREMIUM
PAYMENTS AND OTHER OPERATING
TRANSFERS.................................. (1,874,876) (1,283,829) (1,405,154) (7,159,367) 4,214,068 374,682
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RETAINED IN THE
ACCOUNT [Note 7]........................... 0 (8,240) (63,959) 0 (42,474) (110,168)
------------ ------------ ------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS..................................... (1,570,282) 79,222 (190,644) (3,638,844) 1,077,406 10,791,075
NET ASSETS:
Beginning of year.......................... 19,961,108 19,881,886 20,072,530 92,745,342 91,667,936 80,876,861
------------ ------------ ------------ ------------ ------------ ------------
End of year................................ $ 18,390,826 $ 19,961,108 $ 19,881,886 $ 89,106,498 $ 92,745,342 $ 91,667,936
============ ============ ============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
A11
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (Continued)
------------------------------------------------------------------------------------------------------------------------------
Stock Equity Natural
Index Income Resources
Portfolio Portfolio Portfolio
------------------------------------------ ---------------------------------------- -----------------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 3,450,305 $ 3,884,531 $ 4,312,113 $ 7,591,135 $ 9,079,311 $ 7,076,399 $ (32,338) $ 124,438 $ (321,842)
12,472,929 12,847,130 17,197,911 53,052,638 27,501,162 39,390,070 0 6,263,457 16,426,552
19,189,378 6,237,946 6,786,808 7,546,600 (99,580) 3,982,449 (996,568) (1,250,821) 1,240,093
136,915,479 153,992,330 113,415,557 (16,047,855) (52,611,025) 59,248,683 44,575,398 (26,817,989) (35,487,893)
-------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
172,028,091 176,961,937 141,712,389 52,142,518 (16,130,132) 109,697,601 43,546,492 (21,680,915) (18,143,090)
-------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
128,537,549 139,848,176 126,688,004 72,746,641 95,299,141 79,016,436 19,035,268 29,732,123 35,927,519
(27,496,074) (21,632,900) (15,814,797) (11,949,900) (12,921,751) (9,558,454) (3,632,049) (3,757,335) (4,989,959)
14,533,537 8,895,587 5,919,148 7,032,090 5,682,713 3,893,428 2,491,659 2,389,809 2,524,073
(53,330,346) (40,266,311) (32,499,126) (28,641,449) (27,141,623) (21,564,128) (7,347,934) (9,543,364) (10,791,367)
55,524,073 22,168,188 30,361,425 (30,030,572) 9,043,514 21,482,832 (7,955,642) (15,621,028) (3,663,884)
(68,714,043) (62,397,410) (56,128,875) (37,398,609) (40,729,679) (36,599,080) (9,809,178) (11,289,685) (16,073,256)
-------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
49,054,696 46,615,330 58,525,779 (28,241,799) 29,232,315 36,671,034 (7,217,876) (8,089,480) 2,933,126
-------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
0 111,800 (910,143) 0 139,884 (393,762) 0 (97,825) (148,013)
-------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
221,082,787 223,689,067 199,328,025 23,900,719 13,242,067 145,974,873 36,328,616 (29,868,220) (15,357,977)
845,861,223 622,172,156 422,844,131 454,271,316 441,029,249 295,054,376 100,784,964 130,653,184 146,011,161
-------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$1,066,944,010 $845,861,223 $622,172,156 $478,172,035 $454,271,316 $441,029,249 $137,113,580 $100,784,964 $130,653,184
============== ============ ============ ============ ============ ============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
A12
<PAGE>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
SUBACCOUNTS
----------------------------------------------------------------------------------
Government
Global Income
Portfolio Portfolio
---------------------------------------- ----------------------------------------
1999 1998 1997 1999 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss).............. $ (433,251) $ 895,696 $ 595,128 $ (558,812) $ 3,959,534 $ 4,189,648
Capital gains distributions received...... 1,189,193 5,918,263 5,120,114 0 0 0
Realized gain (loss) on shares redeemed... 3,166,922 1,375,609 309,311 202,656 289,366 44,975
Net change in unrealized gain (loss) on
investments............................. 67,191,804 18,668,316 (917,843) (2,381,684) 1,952,252 1,925,166
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS................................ 71,114,668 26,857,884 5,106,710 (2,737,840) 6,201,152 6,159,789
------------ ------------ ------------ ------------ ------------ ------------
PREMIUM PAYMENTS
AND OTHER OPERATING TRANSFERS
Contract Owner Net Payments............... 30,573,669 35,377,261 34,211,689 9,581,320 13,880,043 15,732,416
Policy Loans.............................. (4,548,965) (3,157,015) (2,628,076) (1,721,711) (1,989,148) (1,668,544)
Policy Loan Repayments and Interest....... 2,204,939 1,774,955 1,262,980 1,350,789 898,042 767,258
Surrenders, Withdrawals and Death
Benefits................................ (8,960,008) (8,032,750) (7,075,480) (4,700,068) (5,652,510) (5,308,280)
Net Transfers From (To) Other Subaccounts
or Fixed Rate Option.................... 8,628,134 (6,124,691) 4,870,997 (3,068,530) 1,151,981 (6,634,816)
Administrative and Other Charges.......... (13,826,989) (12,788,521) (13,085,971) (6,002,933) (6,654,093) (7,709,072)
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM PREMIUM
PAYMENTS AND OTHER OPERATING
TRANSFERS................................. 14,070,780 7,049,239 17,556,139 (4,561,133) 1,634,315 (4,821,038)
------------ ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET
ASSETS RETAINED IN THE
ACCOUNTS [Note 7]......................... 0 (110,095) (317,463) 0 (9,785) (923,259)
------------ ------------ ------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS.................................... 85,185,448 33,797,028 22,345,386 (7,298,973) 7,825,682 415,492
NET ASSETS:
Beginning of year......................... 142,307,176 108,510,148 86,164,762 82,088,176 74,262,494 73,847,002
------------ ------------ ------------ ------------ ------------ ------------
End of year............................... $227,492,624 $142,307,176 $108,510,148 $ 74,789,203 $ 82,088,176 $ 74,262,494
============ ============ ============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
A13
<PAGE>
<TABLE>
<CAPTION>
SUBACCOUNTS (Continued)
----------------------------------------------------------------------------------------------------------------------------
Zero Coupon Prudential Small Capitalization
Bond 2005 Jennison Stock
Portfolio Portfolio Portfolio
---------------------------------------- ---------------------------------------- ----------------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ (134,478) $ 1,177,249 $ 1,167,434 $ (1,574,865) $ (635,561) $ (281,961) $ (722,960) $ (50,110) $ 10,328
0 29,253 489,749 18,100,277 2,902,977 5,052,341 1,918,174 5,935,686 4,897,323
173,356 164,197 71,812 1,956,464 453,639 525,215 (120,414) (102,881) 46,921
(1,723,392) 1,406,685 526,125 99,641,732 42,669,927 10,743,964 12,549,193 (7,230,189) 5,112,289
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(1,684,514) 2,777,384 2,255,120 118,123,608 45,390,982 16,039,559 13,623,993 (1,447,494) 10,066,861
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
4,018,488 4,711,062 5,574,118 78,282,647 57,263,567 34,294,641 33,299,141 36,924,377 24,433,471
(686,257) (669,881) (467,791) (10,302,874) (4,014,420) (1,732,453) (2,635,093) (2,138,180) (1,222,173)
489,420 324,154 216,018 3,885,895 1,563,575 744,576 1,315,700 1,083,949 675,140
(1,806,470) (1,903,102) (1,546,854) (17,393,950) (7,435,590) (3,227,110) (6,184,134) (4,861,386) (2,326,066)
(266,565) 1,015,999 (2,416,503) 115,758,631 39,232,682 16,630,147 (1,129,735) 7,146,825 23,570,817
(2,105,602) (2,279,627) (2,536,288) (32,069,991) (19,483,871) (11,791,465) (12,025,009) (11,395,563) (7,984,667)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(356,986) 1,198,605 (1,177,300) 138,160,358 67,125,943 34,918,336 12,640,870 26,760,022 37,146,522
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
0 (11,329) (648,770) 0 9,553 (773,643) 0 (201,407) (151,200)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(2,041,500) 3,964,660 429,050 256,283,966 112,526,478 50,184,252 26,264,863 25,111,121 47,062,183
27,213,641 23,248,981 22,819,931 203,957,589 91,431,111 41,246,859 100,578,460 75,467,339 28,405,156
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 25,172,141 $ 27,213,641 $ 23,248,981 $460,241,555 $203,957,589 $ 91,431,111 $126,843,323 $100,578,460 $ 75,467,339
============ ============ ============ ============ ============ ============ ============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
A14
<PAGE>
NOTES TO FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
December 31, 1999
Note 1: General
The Prudential Variable Appreciable Account (the "Account") of The
Prudential Insurance Company of America ("Prudential") was established
on August 11, 1987 by a resolution of Prudential's Board of Directors
in conformity with insurance laws of the State of New Jersey. The
assets of the Account are segregated from Prudential's other assets.
Proceeds from the purchases of Prudential Variable Appreciable Life
("PVAL"), Prudential Survivorship Preferred ("SVUL") and Prudential
Variable Universal Life ("VUL") contracts are invested in the Account.
The Account is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust. There are twenty subaccounts
within the Account. PVAL contracts offer the option to invest in
fifteen of these subaccounts, each of which invests in a corresponding
portfolio of The Prudential Series Fund, Inc. (the "Series Fund"). The
Series Fund is a diversified open-end management investment company,
and is managed by Prudential.
Note 2: Significant Accounting Policies
The accompanying financial statements are prepared in conformity with
accounting principles generally accepted in the United States
("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.
Receivable from (Payable to) the Prudential Insurance Company of
----------------------------------------------------------------
America -- At times, Prudential may owe an amount to or expect to
-------
receive an amount from the Account primarily related to processing
contract owner payments, surrenders, withdrawals and death benefits.
This amount is reflected in the Account's Statements of Net Assets as
either a receivable from or payable to Prudential. The receivable and
or payable does not have an effect on the contract owner's account or
the related unit value.
A15
<PAGE>
Note 3: Investment Information For The Prudential Series Fund, Inc. Portfolios
The net asset value per share for each portfolio of the Series Fund,
the number of shares (rounded) of each portfolio held by the
subaccounts and the aggregate cost of investments in such shares at
December 31, 1999 were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
---------------------------------------------------------------------------------
Money Diversified Flexible Conservative
Market Bond Equity Managed Balanced
------------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Number of shares (rounded): 12,815,652 13,449,269 55,840,859 85,086,748 73,482,757
Net asset value per share: $ 10.00 $ 10.95 $ 28.90 $ 17.64 $ 15.36
Cost: $128,156,517 $147,348,631 $1,401,222,298 $1,418,591,980 $1,089,256,700
<CAPTION>
PORTFOLIOS (Continued)
---------------------------------------------------------------------------------
Zero
Coupon Bond High Stock Equity Natural
2000 Yield Bond Index Income Resources
------------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Number of shares (rounded): 1,414,170 11,862,233 23,997,330 24,503,326 7,891,068
Net asset value per share: $ 12.99 $ 7.52 $ 44.45 $ 19.52 $ 17.38
Cost: $ 17,875,241 $ 93,765,778 $ 516,310,665 $ 438,134,700 $ 123,307,830
<CAPTION>
PORTFOLIOS (Continued)
---------------------------------------------------------------------------------
Zero Small
Government Coupon Bond Prudential Capitalization
Global Income 2005 Jennison Stock
------------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Number of shares (rounded):: 7,338,416 6,475,875 1,993,723 14,187,524 7,800,995
Net asset value per share: $ 30.98 $ 11.55 $ 12.68 $ 32.39 $ 16.25
Cost: $130,485,556 $ 73,646,381 $ 24,290,856 $ 303,184,238 $ 114,103,853
</TABLE>
Note 4: Contract Owner Unit Information
Outstanding contract owner units, unit values and total value of
contract owner equity at December 31, 1999 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 $100,000 + face - rounded)..... 51,251,764 40,083,700 185,263,952 255,543,582 203,089,476
Unit Value
(PVAL $100,000 + face - rounded)..... $ 1.73699 $ 2.28553 $ 5.21569 $ 3.61436 $ 3.00432
------------ ------------ -------------- -------------- --------------
Contract Owner Equity
(PVAL $100,000 + face - rounded)..... $ 89,023,802 $ 91,612,499 $ 966,279,341 $ 923,626,503 $ 610,145,775
------------ ------------ -------------- -------------- --------------
Contract Owner Units Outstanding
(PVAL - rounded)..................... 17,905,506 23,058,385 125,562,626 163,120,068 176,543,038
Unit Value (PVAL)...................... $ 1.68239 $ 2.21278 $ 5.05053 $ 3.49968 $ 2.90888
------------ ------------ -------------- -------------- --------------
Contract Owner Equity (PVAL)........... $ 30,124,044 $ 51,023,134 $ 634,157,808 $ 570,868,038 $ 513,542,512
------------ ------------ -------------- -------------- --------------
Contract Owner Units Outstanding
(SVUL - rounded)..................... 7,751,781 3,921,851 7,025,051 3,824,994 3,116,363
Unit Value (SVUL)...................... $ 1.18187 $ 1.16944 $ 1.78856 $ 1.56150 $ 1.48415
------------ ------------ -------------- -------------- --------------
Contract Owner Equity (SVUL)........... $ 9,161,597 $ 4,586,370 $ 12,564,726 $ 5,972,729 $ 4,625,149
------------ ------------ -------------- -------------- --------------
Contract Owner Units Outstanding
(VUL - rounded)...................... 109,567 47,058 269,926 72,061 77,472
Unit Value (VUL)....................... $ 1.14883 $ 1.13250 $ 1.52066 $ 1.37891 $ 1.33701
------------ ------------ -------------- -------------- --------------
Contract Owner Equity (VUL)............ $ 125,874 $ 53,293 $ 410,466 $ 99,366 $ 103,581
------------ ------------ -------------- -------------- --------------
Total Contract Owner Equity............ $128,435,317 $147,275,295 $1,613,412,340 $1,500,566,635 $1,128,417,018
============ ============ ============== ============== ==============
</TABLE>
A16
<PAGE>
Note 4: Contract Owner Unit Information (Continued)
<TABLE>
<CAPTION>
SUBACCOUNTS (Continued)
------------------------------------------------------------------------------
Zero Coupon High Yield Stock Equity Natural
Bond 2000 Bond Index Income Resources
Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding
(PVAL $100,000 + face - rounded)..... 4,099,805 21,615,879 98,996,699 69,992,249 25,412,719
Unit Value
(PVAL $100,000 + face - rounded)..... $ 2.64483 $ 2.40134 $ 6.75269 $ 4.53247 $ 3.17306
------------ ------------ -------------- -------------- --------------
Contract Owner Equity
(PVAL $100,000 + face - rounded)..... $ 10,843,287 $ 51,907,075 $ 668,494,019 $ 317,237,766 $ 80,636,082
------------ ------------ -------------- -------------- --------------
Contract Owner Units Outstanding
(PVAL - rounded)..................... 2,947,589 15,046,988 56,886,231 35,247,759 18,211,187
Unit Value (PVAL)...................... $ 2.56058 $ 2.32577 $ 6.53757 $ 4.38754 $ 3.07258
------------ ------------ -------------- -------------- --------------
Contract Owner Equity (PVAL)........... $ 7,547,539 $ 34,995,832 $ 371,897,719 $ 154,650,954 $ 55,955,329
------------ ------------ -------------- -------------- --------------
Contract Owner Units Outstanding
(SVUL - rounded)..................... N/A 1,747,498 10,333,413 3,409,447 392,042
Unit Value (SVUL)...................... N/A $ 1.23564 $ 2.49636 $ 1.80209 $ 1.33192
------------ ------------ -------------- -------------- --------------
Contract Owner Equity (SVUL)........... N/A $ 2,159,279 $ 25,795,918 $ 6,144,131 $ 522,169
------------ ------------ -------------- -------------- --------------
Contract Owner Units Outstanding
(VUL - rounded)...................... N/A 38,612 373,683 92,114 N/A
Unit Value (VUL)....................... N/A $ 1.14763 $ 2.02405 $ 1.51100 N/A
------------ ------------ -------------- -------------- --------------
Contract Owner Equity (VUL)............ N/A $ 44,313 $ 756,354 $ 139,184 N/A
------------ ------------ -------------- -------------- --------------
Total Contract Owner Equity............ $ 18,390,826 $ 89,106,498 $1,066,944,010 $ 478,172,035 $ 137,113,580
============ ============ ============== ============== ==============
<CAPTION>
SUBACCOUNTS (Continued)
------------------------------------------------------------------------------
Small
Government Zero Coupon Prudential Capitalization
Global Income Bond 2005 Jennison Stock
Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Contract Owner Units Outstanding
(PVAL $100,000 + face - rounded)..... 63,942,723 21,761,201 6,612,997 90,695,791 45,283,520
Unit Value
(PVAL $100,000 + face - rounded)..... $ 2.58864 $ 2.07768 $ 2.49098 $ 3.59559 $ 1.95551
------------ ------------ -------------- -------------- --------------
Contract Owner Equity
(PVAL $100,000 + face - rounded)..... $165,524,691 $ 45,212,812 $ 16,472,844 $ 326,104,880 $ 88,552,376
Contract Owner Units Outstanding
(PVAL - rounded)..................... 19,984,699 14,170,479 3,283,416 33,000,756 14,135,736
Unit Value (PVAL)...................... $ 2.54551 $ 2.01244 $ 2.41301 $ 3.54619 $ 1.92826
------------ ------------ -------------- -------------- --------------
Contract Owner Equity (PVAL)........... $ 50,871,251 $ 28,517,238 $ 7,922,916 $ 117,026,949 $ 27,257,375
------------ ------------ -------------- -------------- --------------
Contract Owner Units Outstanding
(SVUL - rounded)..................... 4,784,406 917,325 673,457 5,413,683 6,497,063
Unit Value (SVUL)...................... $ 2.28529 $ 1.15461 $ 1.15283 $ 3.08973 $ 1.69824
------------ ------------ -------------- -------------- --------------
Contract Owner Equity (SVUL)........... $ 10,933,754 $ 1,059,153 $ 776,381 $ 16,726,819 $ 11,033,572
------------ ------------ -------------- -------------- --------------
Contract Owner Units Outstanding
(VUL - rounded) 81,828 N/A N/A 153,493 N/A
Unit Value (VUL)....................... $ 1.99111 N/A N/A $ 2.49462 N/A
------------ ------------ -------------- -------------- --------------
Contract Owner Equity (VUL)............ $ 162,928 N/A N/A $ 382,907 N/A
------------ ------------ -------------- -------------- --------------
Total Contract Owner Equity............ $227,492,624 $ 74,789,203 $ 25,172,141 $ 460,241,555 $ 126,843,323
============ ============ ============== ============== ==============
</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.
A17
<PAGE>
Note 5: Charges and Expenses (Continued)
C. Partial Withdrawal Charge
A charge is imposed by Prudential on partial withdrawals of the
cash surrender value. A charge equal to the lesser of $25 or 2%
for SVUL and PVUL and $15 or 2% for PVAL will be made in
connection with each partial withdrawal of the cash surrender
value of a contract.
D. Expense Reimbursement
PVAL contracts are reimbursed by Prudential, on a non-guaranteed
basis, for expenses incurred by the Series Fund in excess of the
effective rate of 0.40% for all Zero Coupon Bond Portfolios,
0.45% for the Stock Index Portfolio, 0.50% for the Equity Income
Portfolio, 0.55% for the Natural Resources Portfolio, and 0.65%
for the High Yield Bond Portfolio of the average daily net assets
of these portfolios. SVUL contracts are reimbursed by Prudential,
on a non-guaranteed basis, for expenses incurred by the Series
Fund in excess of the effective rate of 0.40% of the average
daily net assets of the portfolio of each of the Zero Coupon Bond
Portfolios.
E. Cost of Insurance and Other Related Charges
Contract owners contributions are subject to certain deductions
prior to being invested in the Account. The deductions are for
(1) transaction costs which are deducted from each premium
payment for PVAL and PVUL, to cover premium collection and
processing costs; (2) state premium taxes; (3) sales charges
which are deducted in order to compensate Prudential for the cost
of selling the contract. Contracts are also subject to monthly
charges for the costs of administering the contract and to
compensate Prudential for the guaranteed minimum death benefit
risk.
Note 6: Taxes
Prudential is taxed as a "life insurance company" as defined by the
Internal Revenue Code and the results of operations of the Account
form a part of Prudential's consolidated federal tax return. Under
current federal law, no federal income taxes are payable by the
Account. As such, no provision for tax liability has been recorded in
these financial statements.
Note 7: Net Increase (Decrease) in Net Assets 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.
A18
<PAGE>
Note 8: Unit Activity
Transactions in units (including transfers among subaccounts) for the
years ended December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNTS
------------------------------------------------------------------------------------
Money Diversified
Market Bond
Portfolio Portfolio
---------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997 1999 1998 1997
------------ ----------- ----------- ----------- ----------- -----------
Contract Owner Contributions: 120,477,063 69,014,332 65,667,687 22,216,255 19,897,577 16,213,787
Contract Owner Redemptions: (114,736,198) (57,752,616) (69,425,851) (20,070,222) (15,092,779) (14,250,810)
<CAPTION>
SUBACCOUNTS (Continued)
------------------------------------------------------------------------------------
Flexible
Equity Managed
Portfolio Portfolio
--------------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 60,448,440 81,572,816 92,473,729 55,689,347 76,938,185 93,973,164
Contract Owner Redemptions: (74,869,027) (74,174,443) (76,628,697) (72,365,779) (81,055,189) (87,813,519)
<CAPTION>
SUBACCOUNTS (Continued)
------------------------------------------------------------------------------------
Conservative Zero Coupon
Balanced Bond 2000
Portfolio Portfolio
---------------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 53,724,364 78,380,210 93,048,913 1,680,934 1,980,913 1,934,757
Contract Owner Redemptions: (74,929,420) (82,911,926) (94,880,956) (2,405,244) (2,493,753) (2,549,332)
<CAPTION>
SUBACCOUNTS (Continued)
------------------------------------------------------------------------------------
High Yield Stock
Bond Index
Portfolio Portfolio
------------------------------------------ ---------------------------------------
1999 1998 1997 1999 1998 1997
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 19,247,980 19,318,322 17,186,033 47,997,403 45,264,098 50,408,149
Contract Owner Redemptions: (22,299,293) (16,933,871) (16,878,090) (36,168,261) (34,390,053) (34,222,528)
<CAPTION>
SUBACCOUNTS (Continued)
------------------------------------------------------------------------------------
Equity Natural
Income Resources
Portfolio Portfolio
---------------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 27,292,681 34,330,488 34,569,866 13,026,517 15,093,093 18,586,440
Contract Owner Redemptions: (33,584,226) (26,544,454) (24,004,754) (15,783,619) (18,219,964) (17,455,643)
<CAPTION>
SUBACCOUNTS (Continued)
------------------------------------------------------------------------------------
Government
Global Income
Portfolio Portfolio
---------------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 42,507,388 32,534,226 37,198,997 9,143,771 12,383,025 10,260,445
Contract Owner Redemptions: (35,405,377) (27,960,335) (24,567,571) (11,091,943) (11,507,261) (12,866,478)
<CAPTION>
SUBACCOUNTS (Continued)
------------------------------------------------------------------------------------
Zero Coupon Prudential
Bond 2005 Jennison
Portfolio Portfolio
---------------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contract Owner Contributions: 5,288,563 3,651,972 2,986,424 81,466,185 53,654,104 36,782,725
Contract Owner Redemptions: (5,103,196) (3,174,685) (3,539,701) (33,061,952) (22,113,796) (16,099,947)
<CAPTION>
SUBACCOUNTS (Continued)
----------------------------------------
Small Capitalization
Stock
Portfolio
----------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Contract Owner Contributions: 44,995,701 38,172,591 38,237,386
Contract Owner Redemptions: (37,335,362) (22,883,043) (15,077,042)
</TABLE>
A19
<PAGE>
Note 9: 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, 1999
were as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
----------------------------------------------------------------------------------------
Money Diversified Flexible Conservative
Market Bond Equity Managed Balanced
------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Purchases ................ $ 114,836,682 $ 16,588,379 $ 50,382,471 $ 26,327,058 $ 20,526,529
Sales .................... $(105,181,605) $(15,317,628) $(137,552,449) $ (97,078,848) $(90,804,045)
<CAPTION>
PORTFOLIOS (Continued)
----------------------------------------------------------------------------------------
Zero Coupon
Bond High Yield Stock Equity Natural
2000 Bond Index Income Resources
------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Purchases ................ $ 1,305,363 $ 17,140,637 $ 86,655,640 $ 25,016,917 $ 8,051,691
Sales .................... $ (3,302,674) $(24,858,455) $ (44,538,967) $ (56,411,286) $(16,097,354)
<CAPTION>
PORTFOLIOS (Continued)
----------------------------------------------------------------------------------------
Zero Coupon Small
Government Bond Prudential Capitalization
Global Income 2005 Jennison Stock
------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Purchases ................ $ 44,133,526 $ 5,513,391 $ 5,194,522 $ 145,912,541 $ 39,818,481
Sales .................... $ (31,322,697) $(10,626,182) $ (5,577,717) $ (10,575,796) $(27,977,731)
</TABLE>
Note 10: 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, 1999. Equity of contracts owners in the Flexible Managed
subaccount at December 31, 1999 includes approximately $273 million
owned by Prudential.
A20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of the Variable Appreciable Life Subaccounts of the
Prudential Variable Appreciable Account
and the Board of Directors of
The Prudential Insurance Company of America
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of the subaccounts (Money Market
Portfolio, Diversified Bond Portfolio, Equity Portfolio, Flexible Managed
Portfolio, Conservative Balanced Portfolio, Zero Coupon Bond 2000 Portfolio,
High Yield Bond Portfolio, Stock Index Portfolio, Equity Income Portfolio,
Natural Resources Portfolio, Global Portfolio, Government Income Portfolio, Zero
Coupon Bond 2005 Portfolio, Prudential Jennison Portfolio, Small Capitalization
Stock Portfolio) of the Variable Appreciable Life Subaccounts of the Prudential
Variable Appreciable Account at December 31, 1999, 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 accounting principles
generally accepted in the United States. 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 auditing standards generally accepted in the United States, 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, 1999, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 17, 2000
A21
<PAGE>
The Prudential Insurance Company of America
Consolidated Statements of Financial Position
December 31, 1999 and 1998 (In Millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 1999: $76,815; 1998: $76,997) $ 74,697 $ 80,158
Held to maturity, at amortized cost (fair value, 1999: $14,112; 1998: $17,906) 14,237 16,848
Trading account assets, at fair value 9,741 8,888
Equity securities, available for sale, at fair value (cost, 1999: $2,531; 1998: $2,583) 3,264 2,759
Mortgage loans on real estate 16,268 16,016
Investment real estate 770 675
Policy loans 7,590 7,476
Securities purchased under agreements to resell 13,944 10,252
Cash collateral for borrowed securities 7,124 5,622
Other long-term investments 4,087 3,474
Short-term investments 12,303 9,781
--------------- ----------------
Total investments 164,025 161,949
Cash 1,330 1,943
Accrued investment income 1,836 1,795
Broker-dealer related receivables 11,346 10,142
Deferred policy acquisition costs 7,324 6,462
Other assets 17,102 16,200
Separate account assets 82,131 80,931
--------------- ----------------
TOTAL ASSETS $ 285,094 $ 279,422
=============== ================
LIABILITIES AND EQUITY
LIABILITIES
Future policy benefits $ 68,069 $ 67,059
Policyholders' account balances 31,578 33,098
Unpaid claims and claim adjustment expenses 2,829 3,806
Policyholders' dividends 1,484 1,444
Securities sold under agreements to repurchase 24,598 21,486
Cash collateral for loaned securities 10,775 7,132
Income taxes payable 804 785
Broker-dealer related payables 5,839 6,530
Securities sold but not yet purchased 6,968 5,771
Short-term debt 10,858 10,082
Long-term debt 5,513 4,734
Other liabilities 14,357 16,169
Separate account liabilities 82,131 80,931
--------------- ----------------
Total liabilities 265,803 259,027
--------------- ----------------
COMMITMENTS AND CONTINGENCIES (See Notes 14 and 15)
EQUITY
Accumulated other comprehensive income/(loss) (685) 1,232
Retained earnings 19,976 19,163
--------------- ----------------
Total equity 19,291 20,395
--------------- ----------------
TOTAL LIABILITIES AND EQUITY $ 285,094 $ 279,422
=============== ================
</TABLE>
See Notes to Consolidated Financial Statements
B1
<PAGE>
The Prudential Insurance Company of America
Consolidated Statements of Operations
Years Ended December 31, 1999, 1998 and 1997 (In Millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
REVENUES
Premiums $9,475 $9,024 $9,015
Policy charges and fee income 1,516 1,465 1,423
Net investment income 9,424 9,535 9,482
Realized investment gains, net 924 2,641 2,168
Commissions and other income 5,279 4,471 4,480
--------------- -------------- --------------
Total revenues 26,618 27,136 26,568
--------------- -------------- --------------
BENEFITS AND EXPENSES
Policyholders' benefits 10,175 9,840 9,956
Interest credited to policyholders' account balances 1,811 1,953 2,170
Dividends to policyholders 2,571 2,477 2,422
General and administrative expenses 9,656 9,108 8,620
Sales practices remedies and costs 100 1,150 2,030
--------------- -------------- --------------
Total benefits and expenses 24,313 24,528 25,198
--------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 2,305 2,608 1,370
--------------- -------------- --------------
Income taxes
Current 690 1,085 101
Deferred 352 (115) 306
--------------- -------------- --------------
Total income taxes 1,042 970 407
--------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM 1,263 1,638 963
--------------- -------------- --------------
DISCONTINUED OPERATIONS
Loss from healthcare operations, net of taxes - (298) (353)
Loss on disposal of healthcare operations, net of taxes (400) (223) -
--------------- -------------- --------------
Net loss from discontinued operations (400) (521) (353)
--------------- -------------- --------------
INCOME BEFORE EXTRAORDINARY ITEM 863 1,117 610
EXTRAORDINARY ITEM - DEMUTUALIZATION EXPENSES, NET OF TAXES (50) (11) -
--------------- -------------- --------------
NET INCOME $ 813 $1,106 $ 610
=============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
B2
<PAGE>
The Prudential Insurance Company of America
Consolidated Statements of Changes in Equity
Years Ended December 31, 1999, 1998 and 1997 (In Millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Other Comprehensive Income/(Loss)
---------------------------------------------------------------------
Total
Foreign Net Accumulated
Currency Unrealized Pension Other
Translation Investment Liability Comprehensive
Adjustments Gains/(Losses) Adjustment Income/(Loss)
--------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ (56) $ 1,136 $ (4) $ 1,076
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Change in foreign currency translation
adjustments (29) (29)
Change in net unrealized investment gains 616 616
Additional pension liability adjustment (2) (2)
Other comprehensive income
Total comprehensive income
---------------------------------------------------------------------
Balance, December 31, 1997 (85) 1,752 (6) 1,661
Comprehensive income:
Net income
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 54 54
Change in net unrealized investment gains (480) (480)
Additional pension liability adjustment (3) (3)
Other comprehensive loss
Total comprehensive income
---------------------------------------------------------------------
Balance, December 31, 1998 (31) 1,272 (9) 1,232
Comprehensive income:
Net income
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 13 13
Change in net unrealized investment gains (1,932) (1,932)
Additional pension liability adjustment 2 2
Other comprehensive loss
Total comprehensive loss
---------------------------------------------------------------------
Balance, December 31, 1999 $ (18) $ (660) $ (7) $ (685)
=====================================================================
<CAPTION>
Retained Total
Earnings Equity
-------------- ------------
<S> <C> <C>
Balance, December 31, 1996 $ 17,447 $18,523
Comprehensive income:
Net income 610 610
Other comprehensive income, net of tax:
Change in foreign currency translation
adjustments (29)
Change in net unrealized investment gains 616
Additional pension liability adjustment (2)
----------
Other comprehensive income 585
----------
Total comprehensive income 1,195
----------------------------
Balance, December 31, 1997 18,057 19,718
Comprehensive income:
Net income 1,106 1,106
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 54
Change in net unrealized investment gains (480)
Additional pension liability adjustment (3)
----------
Other comprehensive loss (429)
----------
Total comprehensive income 677
----------------------------
Balance, December 31, 1998 19,163 20,395
Comprehensive income:
Net income 813 813
Other comprehensive loss, net of tax:
Change in foreign currency translation
adjustments 13
Change in net unrealized investment gains (1,932)
Additional pension liability adjustment 2
----------
Other comprehensive loss (1,917)
----------
Total comprehensive loss (1,104)
----------------------------
Balance, December 31, 1999 $ 19,976 $19,291
============================
</TABLE>
See Notes to Consolidated Financial Statements
B3
<PAGE>
The Prudential Insurance Company of America
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997 (In Millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 813 $ 1,106 $ 610
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment gains, net (915) (2,671) (2,209)
Policy charges and fee income (237) (232) (258)
Interest credited to policyholders' account balances 1,811 1,953 2,170
Depreciation and amortization 489 337 271
Loss on disposal of businesses 400 223 -
Change in:
Deferred policy acquisition costs (178) (174) (233)
Future policy benefits and other insurance liabilities 724 597 2,537
Trading account assets (853) (2,540) (1,825)
Income taxes payable 1,074 594 (1,391)
Broker-dealer related receivables/payables (1,898) 1,495 (672)
Securities purchased under agreements to resell (3,692) (1,591) (3,314)
Cash collateral for borrowed securities (1,502) (575) (2,631)
Cash collateral for loaned securities 3,643 (6,985) 5,668
Securities sold but not yet purchased 1,197 2,122 1,633
Securities sold under agreements to repurchase 3,112 9,139 4,844
Other, net (3,356) (5,234) 3,910
-------------- -------------- --------------
Cash flows from (used in) operating activities 632 (2,436) 9,110
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities, available for sale 120,875 123,151 123,550
Fixed maturities, held to maturity 4,957 4,466 4,042
Equity securities, available for sale 3,190 2,792 2,572
Mortgage loans on real estate 2,640 4,090 4,299
Investment real estate 507 1,489 1,842
Other long-term investments 1,219 1,848 5,232
Payments for the purchase of:
Fixed maturities, available for sale (120,933) (126,742) (129,854)
Fixed maturities, held to maturity (2,414) (2,244) (2,317)
Equity securities, available for sale (2,779) (2,547) (2,461)
Mortgage loans on real estate (2,595) (3,719) (3,305)
Investment real estate (483) (31) (241)
Other long-term investments (1,354) (1,842) (4,173)
Short-term investments (2,510) 2,145 (2,848)
-------------- -------------- --------------
Cash flows from (used in) investing activities 320 2,856 (3,662)
-------------- -------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements
B4
<PAGE>
The Prudential Insurance Company of America
Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 1999, 1998 and 1997 (In Millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits 6,901 7,052 5,245
Policyholders' account withdrawals (9,835) (11,332) (9,873)
Net increase in short-term debt 444 2,422 305
Proceeds from the issuance of long-term debt 1,844 1,940 324
Repayments of long-term debt (919) (418) (464)
-------------- -------------- --------------
Cash flows used in financing activities (1,565) (336) (4,463)
-------------- -------------- --------------
NET (DECREASE)/INCREASE IN CASH (613) 84 985
CASH, BEGINNING OF YEAR 1,943 1,859 874
-------------- -------------- --------------
CASH, END OF YEAR $ 1,330 $ 1,943 $ 1,859
============== ============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes (received)/paid $ (344) $ 163 $ 968
-------------- -------------- --------------
Interest paid $ 824 $ 864 $ 708
-------------- -------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements
B5
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
1. BUSINESS
The Prudential Insurance Company of America and its subsidiaries
(collectively, "Prudential" or "the Company") provide financial services
throughout the United States and in many foreign countries. The Company's
businesses provide a full range of insurance, investment, securities and
other financial products and services to both retail and institutional
customers. 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 demutualization to occur and that
specified the process for conversion. Demutualization is a complex process
involving the development of a plan of reorganization, approval of the plan
by the Company's Board of Directors, a public hearing, approval by
two-thirds of the qualified policyholders who vote on the plan, and review
and approval by the New Jersey Department of Banking and Insurance. The
Company's management is in the process of developing a proposed plan of
demutualization, although there can be no assurance as to the terms thereof
or that the Company's Board of Directors will approve such a plan.
The Company's management currently anticipates that the Company's proposed
plan of demutualization will include the establishment of a new holding
company, Prudential, Inc., whose stock will be publicly traded and of which
the Company's stock successor will become a direct or indirect wholly-owned
subsidiary. The consolidated financial statements of the Company prior to
the demutualization will become Prudential, Inc.'s consolidated financial
statements upon demutualization. The Company's management also currently
intends to propose that a corporate reorganization occur concurrently with
the demutualization whereby the stock of various of the Company's
subsidiaries (including Prudential Securities Group, the personal lines
property-casualty insurance companies and the international insurance
companies), the stock of a newly formed subsidiary containing the Company's
asset management operations, and certain prepaid pension expense,
post-employment benefits and certain other assets will be distributed to
Prudential, Inc. If effected, the corporate reorganization can be expected
to materially reduce invested assets, net income and total equity of The
Prudential Insurance Company of America, which would be an insurance
subsidiary of Prudential, Inc. after the corporate reorganization, although
it would have no effect on the consolidated assets, net income or total
equity of Prudential, Inc. As the terms of the foregoing transactions have
not been finalized by the Company or approved by the regulatory authority,
it is not currently possible to quantify their financial effect on the
Company.
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, its
majority-owned subsidiaries, and those partnerships and joint ventures in
which the Company has a controlling financial interest, except in those
instances where the Company cannot exercise control because the minority
owners have substantive participating rights in the operating and capital
B6
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
decisions of the entity. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States ("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, in particular deferred policy acquisition
costs ("DAC") and future policy benefits, 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 is 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 and the effect on deferred policy
acquisition costs and future policy benefits 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 effect on
deferred policy acquisition costs and future policy benefits that would
result from the realization of unrealized gains and losses, are included in
a separate component of equity, "Accumulated other comprehensive
income/(loss)."
Mortgage loans on real estate are stated primarily at unpaid principal
balances, net of unamortized discounts and an allowance for losses. The
allowance for losses includes a loan specific reserve for impaired loans and
a portfolio reserve for incurred but not specifically identified losses.
Impaired loans include those loans for which a probability exists that all
amounts due according to the contractual terms of the loan agreement will
not be collected. Impaired loans are measured at the present value of
expected future cash flows discounted at the loan's effective interest rate,
or at 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 accruing 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
uncollectible interest 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 the payment of interest has been interrupted for a substantial
period, a regular payment performance has been established. The portfolio
reserve for incurred but not specifically identified losses considers the
Company's past loan loss experience, the current credit composition of the
portfolio, historical credit migration, property type diversification,
default and loss severity statistics and other relevant factors.
B7
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment real estate held for disposal is carried at the lower of
depreciated cost or fair value less estimated selling costs and is not
further 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 that the carrying value may not be recoverable. An
impairment loss is recognized when the review indicates that the carrying
value of the investment real estate exceeds the estimated undiscounted
future cash flows (excluding interest charges) from the investment. At that
time, the carrying value of the investment real estate is written down to
fair value.
Charges relating to real estate held for disposal and impairments of real
estate held for investment are included in "Realized investment gains, net."
Depreciation on real estate held for the production of income is computed
using the straight-line method over the estimated lives of the properties,
and is included in "Net investment income."
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 or control of
securities purchased under agreements to resell. Assets to be repurchased
are the same, or substantially the same, as the assets transferred and the
transferor, through right of substitution, maintains the right and ability
to redeem the collateral on short notice. The market value of securities to
be repurchased or resold is monitored, and additional collateral is
obtained, 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.
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 exercise
control and derivatives held for purposes other than trading. Such joint
venture and partnership interests are generally accounted for using the
equity method of accounting, reduced for other than temporary declines in
value, except in instances in which the Company's interest is so minor that
it exercises virtually no influence over operating and financial policies.
In such instances, the Company applies the cost method of accounting. The
Company's net income from investments in joint ventures and partnerships is
generally included in "Net investment income." However, for certain real
estate joint ventures, Prudential's
B8
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
interest is liquidated by means of one or more transactions that result in
the sale of the underlying invested assets to third parties and the ultimate
distribution of the proceeds to Prudential and other joint venture partners
in exchange for and settlement of the respective joint venture interests.
These transactions are accounted for as disposals of Prudential's joint
venture interests and the resulting gains and losses are included in
"Realized investment gains, net."
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 carrying
value of investment real estate held for disposal 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 that vary with and that are related primarily to the production of
new insurance and annuity business are deferred to the extent such costs are
deemed recoverable from future profits. Such costs include commissions,
costs of policy issuance and underwriting, and 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 average rate of
assumed investment yield used in estimating expected gross margins was 7.83%
at December 31, 1999. The effect of changes in estimated gross margins on
unamortized deferred acquisition costs is reflected in "General and
administrative expenses" in the period such estimated gross margins 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, which is updated periodically.
The effect of changes to estimated gross profits on unamortized deferred
acquisition costs is reflected in "General and administrative expenses" in
the period such estimated gross profits are revised. Deferred policy
acquisition costs related to non-participating term insurance are amortized
over the expected life of the contracts in proportion to the premium income.
The Company has offered programs under which policyholders, for a selected
product or group of products, can exchange an existing policy or contract
issued by the Company for another form of policy or contract. These
transactions are known as internal replacements. If policyholders surrender
traditional life insurance policies in exchange for life insurance policies
that do not have fixed and guaranteed terms, the Company immediately charges
to expense the remaining unamortized DAC on the surrendered policies. For
other internal replacement transactions, the unamortized DAC on the
surrendered policies is immediately charged to expense if the terms of the
new policies are not substantially similar to those of the former policies.
If the new policies have terms that
B9
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
are substantially similar to those of the earlier policies, the DAC is
retained with respect to the new policies.
For property and casualty insurance contracts, deferred policy acquisition
costs are amortized over the period in which related premiums are earned.
Future investment income is considered in determining the recoverability of
deferred policy acquisition costs.
For disability insurance, group life insurance, group annuities and
guaranteed investment contracts, acquisition costs are expensed as incurred.
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 funds 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 generally not subject to claims that arise out of any
other business of the Company. Investment risks associated with market value
changes are 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." Asset management
fees charged to the accounts are included in "Commissions and other income."
Other Assets and Other Liabilities
Other assets consist primarily of prepaid benefit costs, reinsurance
recoverables, certain restricted assets, trade receivables, mortgage
securitization inventory, 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, employee benefit liabilities, and
reserves for sales practices remedies and costs.
Contingencies
Amounts related to contingencies are accrued if it is probable that a
liability has been incurred and an amount is reasonably estimable.
Management evaluates whether there are incremental legal or other costs
directly associated with the ultimate resolution of the matter that are
reasonably estimable and, if so, they are included in the accrual.
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 based on the Company's statutory results and
past experience, including investment income, realized investment gains, net
over a number of years, mortality experience and other factors.
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 with life contingencies, premiums are recognized when due with
any excess profit deferred and recognized in a constant relationship to the
amount of expected future benefit payments.
B10
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Amounts received as payment for interest-sensitive life 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 and surrender charges.
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.
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 included, net of related hedge
gains and losses and income taxes, in "Accumulated other comprehensive
income (loss)," 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
securities business.
Derivative Financial Instruments
Derivatives are financial instruments whose values are derived from interest
rates, foreign exchange rates, financial indices, or the value of securities
or commodities. Derivative financial instruments used by the Company include
swaps, futures, forwards and option contracts and may be exchange-traded or
contracted in the over-the-counter market. The Company uses derivative
financial instruments to seek to reduce 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 by the Company's securities
business to meet the needs of 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
B11
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
these exposures through the use of various analytical techniques.
Derivatives held for trading purposes are included at fair value in "Trading
account assets," "Other liabilities" or "Broker-dealer related
receivables/payables" 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 seek
to 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 as part of the Company's risk management activities.
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 included in "Realized investment gains, net"
without considering changes in the hedged assets or liabilities. Cash flows
from other than trading derivatives 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 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.
Extraordinary Item - Demutualization Expenses, Net of Taxes
The Consolidated Statements of Operations reflect extraordinary charges for
demutualization expenses of $50 million and $11 million, net of taxes of
zero, for the years ended December 31, 1999 and 1998, respectively.
Demutualization expenses consist primarily of the cost of engaging
independent accounting, actuarial, investment banking, legal and other
consultants to advise the Company and the New Jersey Department of Banking
and Insurance and the New York Department of Insurance in the
demutualization process and related matters. Future demutualization expenses
will also include the cost of printing and postage for communications with
policyholders.
New Accounting Pronouncements
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 does not apply to most
traditional insurance contracts. However, certain hybrid contracts that
contain features which may affect settlement amounts similarly to
derivatives may require separate accounting for the "host contract" and the
underlying "embedded derivative"
B12
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
provisions. The latter provisions would be accounted for as derivatives as
specified by the statement.
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).
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, as amended, as of January 1, 2001 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 the
current year presentation.
3. DISCONTINUED OPERATIONS
In December 1998, the Company entered into a definitive agreement to sell
its healthcare business to Aetna, Inc. ("Aetna"). The sale was completed on
August 6, 1999. Included in this transaction were 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") business. The healthcare business is
recorded as a discontinued operation in the accompanying consolidated
financial statements, with a measurement date of December 31, 1998
Proceeds from the sale were $500 million of cash, $500 million of Aetna
three-year senior notes and stock appreciation rights covering one million
shares of Aetna common stock, valued at approximately $30 million at the
date of closing, with a term of five years and a reference price of $81.81
per Aetna common share. The sale resulted in a loss of $623 million, net of
tax. Loss from healthcare operations for 1998 includes results through
December 31, 1998 (the measurement date). 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 1998 loss on disposal of $223 million, net of taxes, included
anticipated operating losses to be incurred by the healthcare business
subsequent to December 31, 1998 (the measurement date) through the expected
date of
B13
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS (continued)
the sale, as well as estimates of other costs the Company would incur in
connection with the disposition of the healthcare business. These include
costs attributable to facilities closure and systems terminations, severance
and termination benefits, payments to Aetna related to the ASO business and
estimated payments in connection with a medical loss ratio agreement
covering the fully insured medical and dental business (the "MLR
Agreement"). The MLR 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 MLR Agreement for the years
1999 and 2000. The loss on disposal also included the estimated positive
impact of net curtailment gains from expected modifications of certain
pension and other postretirement benefit plans in which employees of the
healthcare business participate. (See Note 9).
In 1999 the Company recognized an additional loss on disposal of its
healthcare business of $400 million, after related tax benefits. The
additional loss resulted primarily from higher than anticipated healthcare
operating losses during the 1999 period through the August 6 closing date.
The higher losses resulted principally from adverse claims experience and
the impact of this experience on the evaluation of the Company's obligation
under the MLR Agreement. The pretax operating loss from the healthcare
business from January 1, 1999 through August 6, 1999 was $370 million, which
exceeded the original estimate of $160 million, recorded within the "Loss on
disposal of healthcare operations" in 1998. In addition to the obligations
noted above, the Company has retained certain liabilities pertaining to the
healthcare business, including all liabilities associated with litigation
which existed at August 6, 1999 or commences within two years of that date
with respect to claims that were incurred prior to August 6, 1999.
Management's best estimate of these costs is included in the loss on
disposal. It is possible that additional adjustments to estimates may be
necessary which might be material to future results of operations of a
particular quarterly or annual period.
Upon the closing of the sale of the healthcare business, the Company entered
into a coinsurance agreement with Aetna. The agreement is 100% indemnity
reinsurance on a coinsurance basis for all of the Company's insured medical
and dental business in-force upon the completion of the sale of the business
on August 6, 1999. The agreement requires the Company to issue additional
policies for new customers in response to proposals made to brokers or
customers within six months after the closing date and to renew insurance
policies until two years after the closing date. All such additional new and
renewal policies are 100% coinsured by Aetna, when issued. The purpose of
the agreement is to provide for the uninterrupted operation and growth,
including renewals of existing policies and issuance of new policies, of the
healthcare business that Aetna acquired from Prudential. The operation of
the business and the attendant risks, except for the existence of the MLR
Agreement as discussed above, were assumed entirely by Aetna. Consequently,
the following amounts pertaining to the agreement had no effect on the
Company's results of operations. The Company ceded premiums and benefits of
$896 million and $757 million, respectively, for the period from August 6,
1999 through December 31, 1999. Reinsurance recoverable under this
agreement, included in other assets, was $500 million at December 31, 1999.
The following table presents the results and the loss on the disposal of the
Company's healthcare business, determined as of the measurement date and
subsequently adjusted, which are included in "Discontinued Operations" in
the Consolidated Statements of Operations. Amounts for 1997 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.
B14
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS (continued)
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- --------------
(In Millions)
<S> <C> <C> <C>
Revenues $ - $ 7,461 $10,305
Policyholder benefits - (6,064) (8,484)
General and administrative expenses - (1,822) (2,364)
--------------- --------------- --------------
Loss before income taxes - (425) (543)
Income tax benefit - 127 190
--------------- --------------- --------------
Loss from operations - (298) (353)
Loss on disposal, net of tax benefits of $240 in 1999 and $131 in 1998 (400) (223) -
--------------- --------------- --------------
Loss from discontinued operations, net of taxes $ (400) $ (521) $ (353)
=============== =============== ==============
</TABLE>
B15
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
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>
1999
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses 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 $ 5,594 $ 36 $ 236 $ 5,394
Obligations of U.S. states and
their political subdivisions 2,437 41 118 2,360
Foreign government bonds 4,590 140 90 4,640
Corporate securities 57,503 580 2,431 55,652
Mortgage-backed securities 6,566 96 135 6,527
Other 125 - 1 124
--------------------------------------------------------------
Total fixed maturities available for sale $ 76,815 $ 893 $ 3,011 $ 74,697
==============================================================
Equity securities available for sale $ 2,531 $ 829 $ 96 $ 3,264
==============================================================
</TABLE>
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses 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 $ 5 $ - $ - $ 5
Obligations of U.S. states and
their political subdivisions 81 1 3 79
Foreign government bonds 214 11 1 224
Corporate securities 13,883 280 408 13,755
Mortgage-backed securities 1 - - 1
Other 53 - 5 48
--------------------------------------------------------------
Total fixed maturities held to maturity $ 14,237 $ 292 $ 417 $ 14,112
==============================================================
</TABLE>
B16
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
4. INVESTMENTS (continued)
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses 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 3,486 258 59 3,685
Corporate securities 57,043 2,540 546 59,037
Mortgage-backed securities 7,935 208 14 8,129
Other 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>
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses 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 $ 5 $ - $ - $ 5
Obligations of U.S. states and
their political subdivisions 62 2 1 63
Foreign government bonds 216 8 1 223
Corporate securities 16,514 1,092 48 17,558
Mortgage-backed securities 1 - - 1
Other 50 6 - 56
--------------------------------------------------------------
Total fixed maturities held to maturity $ 16,848 $ 1,108 $ 50 $ 17,906
==============================================================
</TABLE>
B17
<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, 1999, 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 $ 3,171 $ 3,166 $ 671 $ 671
Due after one year through five years 18,132 17,911 4,063 4,078
Due after five years through ten years 19,249 18,725 5,449 5,345
Due after ten years 29,697 28,368 4,053 4,017
Mortgage-backed securities 6,566 6,527 1 1
--------------- -------------- --------------- --------------
Total $ 76,815 $ 74,697 $ 14,237 $ 14,112
=============== ============== =============== ==============
</TABLE>
Actual maturities may differ from contractual maturities because issuers have
the right to call or prepay obligations.
Proceeds from the repayment of held to maturity fixed maturities during 1999,
1998 and 1997 were $4,957 million, $4,466 million, and $4,042 million,
respectively. Gross gains of $73 million, $135 million, and $62 million, and
gross losses of $0 million, $2 million, and $1 million were realized on
prepayment of held to maturity fixed maturities during 1999, 1998 and 1997,
respectively.
Proceeds from the sale of available for sale fixed maturities during 1999,
1998 and 1997 were $117,547 million, $119,096 million and $120,604 million,
respectively. Proceeds from the maturity of available for sale fixed
maturities during 1999, 1998 and 1997 were $3,328 million, $4,055 million and
$2,946 million, respectively. Gross gains of $884 million, $1,765 million and
$1,310 million, and gross losses of $1,231 million, $443 million and $639
million were realized on sales and prepayments of available for sale fixed
maturities during 1999, 1998 and 1997, respectively.
Writedowns for impairments which were deemed to be other than temporary for
fixed maturities were $266 million, $96 million and $13 million and for
equity securities were $205 million, $95 million and $31 million for the
years 1999, 1998 and 1997, respectively.
During the years ended December 31, 1999 and 1998, certain securities
classified as held to maturity were either sold or transferred to the
available for sale portfolio. These actions were taken as a result of a
significant deterioration in creditworthiness. The aggregate amortized cost
of the securities sold or transferred was $230 million in 1999 and $73
million in 1998. Gross unrealized investment losses of $5 million in 1999 and
$.4 million in 1998 were recorded in "Accumulated other comprehensive income"
at the time of the transfer. Prior to transfer, impairments related to these
securities, if any, were included in "Realized investment gains, net."
Realized gains on securities sold were $3 million in 1999.
B18
<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:
<TABLE>
<CAPTION>
Amount Percentage Amount Percentage
(In Millions) of Total (In Millions) of Total
1999 1998
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Office Buildings $ 3,960 24.1% $ 4,156 25.3%
Retail stores 2,627 15.9% 2,866 17.4%
Residential properties 662 4.0% 716 4.3%
Apartment complexes 4,508 27.3% 4,179 25.4%
Industrial buildings 2,161 13.1% 1,971 12.0%
Agricultural properties 1,959 11.9% 1,936 11.8%
Other 612 3.7% 619 3.8%
---------------- ---------------- --------------- ---------------
Subtotal 16,489 100% 16,443 100%
================ ===============
Allowance for losses (221) (427)
---------------- ---------------
Net carrying value $ 16,268 $ 16,016
================ ===============
</TABLE>
The mortgage loans are geographically dispersed throughout the United States
and Canada with the largest concentrations in California (23.4%) and New York
(10.1%) at December 31, 1999. Mortgage loans receivable at December 31, 1998
include $87 million from non-consolidated joint ventures.
Activity in the allowance for losses for all mortgage loans, for the years
ended December 31, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
(In Millions)
<S> <C> <C> <C>
Allowance for losses, beginning of year $ 427 $ 450 $ 515
Release of allowance for losses (201) - (41)
Charge-offs, net of recoveries (5) (23) (24)
----------------- ----------------- -----------------
Allowance for losses, end of year $ 221 $ 427 $ 450
================= ================= =================
</TABLE>
The $201 million reduction of the mortgage loan allowance for losses in 1999
is primarily attributable to the improved economic climate, changes in the
nature and mix of borrowers and underlying collateral and a decrease in
impaired loans.
Impaired mortgage loans identified in management's specific review of
probable loan losses and the related allowance for losses at December 31, are
as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with allowance for losses $ 411 $ 501
Impaired mortgage loans with no allowance for losses 283 572
Allowance for losses, end of year (24) (45)
----------------- -----------------
Net carrying value of impaired mortgage loans $ 670 $ 1,028
================= =================
</TABLE>
B19
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
4. INVESTMENTS (continued)
Impaired mortgage loans with no allowance for losses are loans in which the
fair value of the collateral or the net present value of the loans' expected
future cash flows equals or exceeds the recorded investment. The average
recorded investment in impaired loans before allowance for losses was $884
million, $1,329 million and $2,102 million during 1999, 1998 and 1997,
respectively. Net investment income recognized on these loans totaled $55
million, $94 million and $140 million for the years ended December 31, 1999,
1998 and 1997, respectively.
Investment Real Estate
"Investment real estate" of $770 million and $675 million at December 31,
1999 and 1998, respectively, is directly owned. Of the Company's real estate,
$293 million and $675 million consists of commercial and agricultural assets
held for disposal at December 31, 1999 and 1998, respectively. Impairment
losses amounted to $3 million, $8 million and $40 million for the years ended
December 31, 1999, 1998 and 1997, respectively, and are included in "Realized
investment gains, net."
Restricted Assets and Special Deposits
Assets of $4,463 million and $2,803 million at December 31, 1999 and 1998,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Additionally, assets valued at $2,325
million and $3,898 million at December 31, 1999 and 1998, respectively, were
held in voluntary trusts. Of these amounts, $1,553 million and $3,131 million
at December 31, 1999 and 1998, respectively, related to the multi-state
policyholder settlement described in Note 15. The remainder relates to trusts
established to fund guaranteed dividends to certain policyholders and to fund
certain employee benefits. Assets valued at $128 million and $173 million at
December 31, 1999 and 1998, respectively, were pledged as collateral for bank
loans and other financing agreements. Restricted cash and securities of
$4,082 million and $2,366 million at December 31, 1999 and 1998,
respectively, were included in the Consolidated Statements of Financial
Position 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 $4,087 million and $3,474
million as of December 31, 1999 and 1998, respectively, are comprised of
$1,212 million and $1,133 million in real estate related interests and $2,875
million and $2,341 million of non-real estate related interests. Net
investment income from other long-term investments was $365 million, $311
million and $443 million for 1999, 1998 and 1997, respectively.
B20
<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>
1999 1998 1997
------------- ------------ -------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities - available for sale $ 5,450 $ 5,366 $ 5,074
Fixed maturities - held to maturity 1,217 1,406 1,622
Trading account assets 622 677 504
Equity securities - available for sale 63 54 52
Mortgage loans on real estate 1,401 1,525 1,555
Investment real estate 101 230 565
Policy loans 448 410 396
Securities purchased under agreements to resell 25 18 15
Broker-dealer related receivables 976 836 706
Short-term investments 642 725 697
Other investment income 354 430 535
------------- ------------ -------------
Gross investment income 11,299 11,677 11,721
Less investment expenses (1,824) (2,035) (2,027)
------------- ------------ -------------
Subtotal 9,475 9,642 9,694
Less amount relating to discontinued operations (51) (107) (212)
------------- ------------ -------------
Net investment income $ 9,424 $ 9,535 $ 9,482
============= ============ =============
</TABLE>
B21
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
4. INVESTMENTS (continued)
Realized investment gains, net, for the years ended December 31, were from
the following sources:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities $ (557) $ 1,381 $ 684
Equity securities - available for sale 223 427 363
Mortgage loans on real estate 209 22 68
Investment real estate 106 642 700
Joint ventures and limited partnerships 656 454 289
Derivatives 305 (263) 108
Other (27) 8 (3)
--------------- --------------- ---------------
Subtotal 915 2,671 2,209
Less amount related to discontinued operations 9 (30) (41)
--------------- --------------- ---------------
Realized investment gains, net $ 924 $ 2,641 $ 2,168
=============== =============== ===============
</TABLE>
The "joint ventures and limited partnerships" category includes net realized
investment gains relating to real estate joint ventures' and partnerships'
sales of their underlying invested assets, as described more fully in Note
2, "Other long-term investments," amounting to $114 million, $177 million
and $56 million in 1999, 1998 and 1997, respectively.
Based on the carrying value, assets categorized as "non-income producing"
for the year ended December 31, 1999 included in fixed maturities available
for sale, mortgage loans on real estate and other long-term investments
totaled $15 million, $25 million and $1 million, respectively.
Net Unrealized Investment Gains/Losses
Net unrealized investment gains on securities available for sale and certain
other long-term investments 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 including in "Other comprehensive income/(loss)" those items that are
included as part of "Net income" for a period that also had been part of
"Other comprehensive income/(loss)" in earlier periods. The amounts for the
years ended December 31, are as follows:
B22
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
4. INVESTMENTS (continued)
<TABLE>
<CAPTION>
Impact of unrealized investment gains (losses) on:
---------------------------------------------------------
Deferred
Unrealized policy Future Deferred
gains(losses) on acquisition policy income tax
investments costs benefits (liability)benefit
------------------ --------------- ---------------- ----------------------
(In Millions)
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ 2,527 $ (193) $ (573) $ (625)
Net investment gains (losses) on
investments arising during the
period 2,667 - - (961)
Reclassification adjustment for
gains included in net income (986) - - 355
Impact of net unrealized investment - (154) - 55
gains on deferred policy acquisition
costs
Impact of net unrealized investment - - (563) 203
gains on future policy benefits
------------------ --------------- ---------------- ----------------------
Balance, December 31, 1997 4,208 (347) (1,136) (973)
Net investment gains (losses) on
investments arising during the
period 804 - - (282)
Reclassification adjustment for
gains included in net income (1,675) - - 588
Impact of net unrealized investment
gains on deferred policy acquisition
costs - 98 - (36)
Impact of net unrealized investment
gains on future policy benefits - - 38 (15)
------------------ --------------- ---------------- ----------------------
Balance, December 31, 1998 3,337 (249) (1,098) (718)
Net investment gains (losses) on
investments arising during the
period (5,089) - - 1,845
Reclassification adjustment for
gains included in net income 404 - - (146)
Impact of net unrealized investment
losses on deferred policy acquisition - 566 - (213)
costs
Impact of net unrealized investment
losses on future policy benefits - - 1,095 (394)
------------------ --------------- ---------------- ----------------------
Balance, December 31, 1999 $ (1,348) $ 317 $ (3) $ 374
================== =============== ================ ======================
<CAPTION>
Accumulated
other
comprehensive
income/(loss)
related to net
unrealized
investment
gains (losses)
------------------
<S> <C>
Balance, December 31, 1996 $ 1,136
Net investment gains (losses) on
investments arising during the
period 1,706
Reclassification adjustment for
gains included in net income (631)
Impact of net unrealized investment (99)
gains on deferred policy acquisition
costs
Impact of net unrealized investment (360)
gains on future policy benefits
------------------
Balance, December 31, 1997 1,752
Net investment gains (losses) on
investments arising during the
period 522
Reclassification adjustment for
gains included in net income (1,087)
Impact of net unrealized investment
gains on deferred policy acquisition
costs 62
Impact of net unrealized investment
gains on future policy benefits 23
------------------
Balance, December 31, 1998 1,272
Net investment gains (losses) on
investments arising during the
period (3,244)
Reclassification adjustment for
gains included in net income 258
Impact of net unrealized investment
losses on deferred policy acquisition 353
costs
Impact of net unrealized investment
losses on future policy benefits 701
------------------
Balance, December 31, 1999 $ (660)
==================
</TABLE>
B23
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
4. INVESTMENTS (continued)
The table below presents unrealized gains (losses) on investments by asset
class:
<TABLE>
<CAPTION>
As of December 31,
1999 1998 1997
------------- --------------- -------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities $ (2,118) $ 3,161 $ 3,774
Equity securities 733 176 434
Other long-term investments 37 - -
------------- --------------- -------------
Unrealized gains (losses) on investments $ (1,348) $ 3,337 $ 4,208
============= =============== =============
</TABLE>
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>
1999 1998 1997
--------- ---------- ----------
(In Millions)
<S> <C> <C> <C>
Balance, beginning of year $ 6,462 $ 6,083 $ 6,095
Capitalization of commissions, sales and issue
expenses 1,333 1,313 1,409
Amortization (1,155) (1,139) (1,176)
Change in unrealized investment gains 566 98 (154)
Foreign currency translation 118 107 (91)
--------- ---------- ----------
Balance, end of year $ 7,324 $ 6,462 $ 6,083
========= ========== ==========
</TABLE>
6. POLICYHOLDERS' LIABILITIES
Future policy benefits at December 31, are as follows:
1999 1998
-------- --------
(In Millions)
Life insurance $ 51,667 $ 48,981
Annuities 14,138 15,360
Other contract liabilities 2,264 2,718
-------- --------
Total future policy benefits $ 68,069 $ 67,059
======== ========
The majority of the Company's participating insurance is in its domestic
individual life insurance business. Participating insurance represented
approximately 90% of domestic individual life insurance inforce and
approximately 90% of domestic individual life insurance premiums for 1999,
1998 and 1997. Revenues and expenses of this business come directly from
the underlying policies and supporting assets.
B24
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (continued)
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 life contingent group annuities. Other contract liabilities
primarily consist of unearned premium and benefit reserves for group health
products.
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
Product Mortality Interest Rate Estimation Method
---------------------------- --------------------------- -------------------------- ---------------------------
<S> <C> <C> <C>
Life insurance Generally, rates 2.5% to 11.5% Net level premium
guaranteed in calculating based on non-forfeiture
cash surrender values interest rate
Individual annuities 1971 and 1983 Individual 3.5% to 13.4% Present value of
Annuity Mortality expected future payments
Tables with certain based on historical
modifications experience
Group annuities 1950 and 1971 Group 3.8% to 17.3% Present value of
Annuity Mortality expected future payments
Tables with certain based on historical
modifications experience
Other contract liabilities 2.5% to 11.5% Present value of
expected future payments
based on historical
experience
</TABLE>
Premium deficiency reserves are established, if necessary, when the
liability for future policy benefits plus the present value of expected
future gross premiums are determined to be insufficient to provide for
expected future policy benefits and expenses and to recover any unamortized
acquisition costs. Premium deficiency reserves have been recorded for the
group single premium annuity business, which consists of limited-payment,
long duration, traditional and non-participating annuities, and for certain
individual health policies. Liabilities of $1,930 million and $1,844
million is included in "Future policy benefits" with respect to these
deficiencies at December 31, 1999 and 1998, respectively.
Policyholders' account balances at December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(In Millions)
<S> <C> <C>
Individual annuities $ 4,612 $ 4,997
Group annuities 2,176 2,362
Guaranteed investment contracts and guaranteed interest accounts 13,429 14,408
Interest-sensitive life contracts 3,607 3,566
Dividend accumulations and other 7,754 7,765
------------ ------------
Policyholders' account balances $ 31,578 $ 33,098
============ ============
</TABLE>
B25
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
6. POLICYHOLDERS' LIABILITIES (continued)
Policyholders' account balances for interest-sensitive life and
investment-type contracts represent an accumulation of account deposits
plus credited interest less withdrawals, expenses and mortality charges.
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 11.3% 0% to 8% for up to 8 years
Group annuities 2.0% to 13.9% Contractually limited or subject
to market value adjustment
Guaranteed investment contracts and 3.9% to 15.4% Generally, subject to market value
Guaranteed interest accounts withdrawal provisions for any funds
withdrawn other than for benefit
responsive and contractual payments
Interest-sensitive life contracts 2.0% to 6.0% Various up to 10 years
Dividend accumulations and other 3.0% to 7.0% Withdrawal or surrender
contractually limited or subject
to market value adjustment
</TABLE>
B26
<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 insurance, which includes the
Company's personal lines automobile and homeowner's business, as well as the
Company's wind-down commercial lines business, primarily environmental and
asbestos-related claims, and accident and health insurance at December 31:
<TABLE>
<CAPTION>
1999 1998
-------------------------------- -------------------------------
Accident Property Accident Property
and Health and Casualty and Health and Casualty
-------------- --------------- -------------- --------------
(In Millions)
<S> <C> <C> <C> <C>
Balance at January 1 $ 1,090 $ 2,716 $ 1,857 $ 2,956
Less reinsurance recoverables, net 52 533 810 535
-------------- --------------- -------------- --------------
Net balance at January 1 1,038 2,183 1,047 2,421
-------------- --------------- -------------- --------------
Incurred related to:
Current year 4,110 1,249 6,132 1,314
Prior years (72) (54) (15) (154)
-------------- --------------- -------------- --------------
Total incurred 4,038 1,195 6,117 1,160
-------------- --------------- -------------- --------------
Paid related to:
Current year 3,397 700 5,287 717
Prior years 672 720 839 681
-------------- --------------- -------------- --------------
Total paid 4,069 1,420 6,126 1,398
-------------- --------------- -------------- --------------
Disposal of healthcare business (See Note 3) (965) - - -
-------------- --------------- -------------- --------------
Net balance at December 31 42 1,958 1,038 2,183
Plus reinsurance recoverables, net 378 451 52 533
-------------- --------------- -------------- --------------
Balance at December 31 $ 420 $ 2,409 $ 1,090 $ 2,716
============== =============== ============== ==============
<CAPTION>
1997
--------------------------------
Accident Property
and Health and Casualty
-------------- ---------------
(In Millions)
<S> <C> <C>
Balance at January 1 $ 1,932 $ 3,076
Less reinsurance recoverables, net 10 553
-------------- ---------------
Net balance at January 1 1,922 2,523
-------------- ---------------
Incurred related to:
Current year 8,379 1,484
Prior years 63 (50)
-------------- ---------------
Total incurred 8,442 1,434
-------------- ---------------
Paid related to:
Current year 6,673 739
Prior years 1,842 797
-------------- ---------------
Total paid 8,515 1,536
-------------- ---------------
Disposal of healthcare business (See Note 3) - -
-------------- ---------------
Net balance at December 31 1,849 2,421
Plus reinsurance recoverables, net 8 535
-------------- ---------------
Balance at December 31 $ 1,857 $ 2,956
============== ===============
</TABLE>
The Accident and Health reinsurance recoverable balance at December 31,
1999 includes $371 million attributable to the Company's discontinued
healthcare business. The Accident and Health balance at December 31, 1998
and 1997 includes amounts attributable to the Company's discontinued
healthcare business of $1,026 million and $1,693 million, respectively.
The unpaid claims and claim adjustment expenses presented above 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 are
discounted using interest rates ranging from 3.5% to 7.5%.
In 1999, 1998 and 1997, the amounts incurred for claims and claim
adjustment expenses for property and casualty related to prior years were
primarily driven by lower than anticipated losses for the auto line of
business.
The amounts incurred for claims and claim adjustment expense for Accident
and Health related to prior years are primarily due to factors including
changes in claim cost trends and an accelerated decline in the indemnity
health business.
B27
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
7. REINSURANCE
The Company participates in reinsurance in order to 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 a pro-rata basis and excess of
loss, including stop loss, basis. Reinsurance ceded arrangements do not
discharge the Company as the primary insurer. Ceded balances would
represent a liability of the Company in the event the reinsurers were
unable to meet their obligations to the Company under the terms of the
reinsurance agreements. Reinsurance premiums, commissions, expense
reimbursements, benefits and reserves related to reinsured long-duration
contracts are accounted for over the life of the underlying reinsured
contracts using assumptions consistent with those used to account for the
underlying contracts. The cost of reinsurance related to short-duration
contracts is accounted for over the reinsurance contract period. Amounts
recoverable from reinsurers, for both short and long-duration reinsurance
arrangements, are estimated in a manner consistent with the claim
liabilities and policy benefits associated with the reinsured policies.
The tables presented below exclude amounts pertaining to the Company's
discontinued healthcare operations. See Note 3 for a discussion of the
Company's coinsurance agreement with Aetna.
Reinsurance amounts included in the Consolidated Statements of Operations
for the years ended December 31, were as follows:
1999 1998 1997
--------- --------- ---------
(In Millions)
Direct premiums $ 10,068 $ 9,637 $ 9,667
Reinsurance assumed 66 65 64
Reinsurance ceded (659) (678) (716)
--------- --------- ---------
Premiums $ 9,475 $ 9,024 $ 9,015
========= ========= =========
Policyholders' benefits ceded $ 483 $ 510 $ 530
========= ========= =========
Reinsurance recoverables, included in "Other assets" in the Company's
Consolidated Statements of Financial Position at December 31, were as
follows:
1999 1998
---------- ----------
(In Millions)
Life insurance $ 576 $ 620
Property-casualty 473 564
Other reinsurance 90 92
---------- ----------
$ 1,139 $ 1,276
========== ==========
Two major reinsurance companies account for approximately 58% of the
reinsurance recoverable at December 31, 1999. The Company periodically
reviews the financial condition of its reinsurers and amounts recoverable
therefrom in order to minimize its exposure to loss from reinsurer
insolvencies, recording an allowance when necessary for uncollectible
reinsurance.
B28
<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
1999 1998
----------- ----------
(In Millions)
Commercial paper (b) $ 7,506 $ 7,057
Notes payable 2,598 2,164
Current portion of long-term debt 754 861
----------- ----------
Total short-term debt $ 10,858 $ 10,082
=========== ==========
The weighted average interest rate on outstanding short-term debt was
approximately 5.2% and 5.4% at December 31, 1999 and 1998, respectively.
Long-term debt
<TABLE>
<CAPTION>
Description Maturity Dates Rate 1999 1998
----------- ----------------------- ------------------- ------------ ------------
(In Millions)
<S> <C> <C> <C> <C>
Fixed rate notes 2000 - 2023 .50% - 12.28% $ 1,161 $ 1,480
Floating rate notes ("FRN") 2000 - 2003 (a) 865 767
Surplus notes 2003 - 2025 6.875% - 8.30% 987 987
Commercial paper backed by long-term
credit agreement (b) 2,500 1,500
------------ ------------
Total long-term debt $ 5,513 $ 4,734
============ ============
</TABLE>
(a) Floating interest rates are generally based on such rates as LIBOR, Constant
Maturity Treasury, or the Federal Funds Rate. Interest on the FRN's ranged
from 6.17% to 14.00% for 1999 and 1998, respectively. Included in the
floating rate notes are equity indexed instruments. 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, 1999 and 1998, the rate was 14%.
Excluding this note, floating interest rates ranged from 6.17% to 9.54% for
1999 and 4.04% to 7.9% for 1998.
(b) At December 31, 1999 and 1998, the Company classified $2.5 billion and $1.5
billion, respectively, of its commercial paper as long-term debt. This
classification is supported by long-term syndicated credit line agreements.
The Company has the ability and intent to use these agreements, if
necessary, to refinance commercial paper on a long-term basis.
B29
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT (continued)
The following table summarizes the Company's use of the proceeds from
issuing long-term debt:
1999 1998
--------------- ----------------
(In Millions)
Corporate $ 1,782 $ 1,917
Investment related 1,121 751
Securities business related 2,610 2,066
--------------- ----------------
Total long-term debt $ 5,513 $ 4,734
=============== ================
The net proceeds from the issuance of the Company's long-term debt may be
used for general corporate purposes. This includes investing in equity and
debt securities of subsidiaries, advancing funds to its subsidiaries for
liquidity and operational purposes, and supporting liquidity of the
Company's other businesses.
Investment related long-term debt consists of debt issued to finance
specific investment assets or portfolios of investment assets including real
estate, institutional spread lending investment portfolios and real estate
related investments held in consolidated joint ventures.
Securities business related long-term debt consists of debt issued to
finance primarily the liquidity of the Company's securities business. Loans
made by the Company to its securities subsidiaries using the proceeds from
the Company's issuance of long-term debt may be made on a long-term,
short-term, or subordinated basis, depending on the particular requirements
of its securities business.
Payment of interest and principal on the surplus notes issued after 1993, of
which $688 million were outstanding at December 31, 1999 and 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 repayment of long-term debt (In Millions)
2001 $ 738
2002 1,942
2003 459
2004 1,334
2005 58
2006 and thereafter 982
------------------
Total $ 5,513
==================
At December 31, 1999, the Company had $9,934 million in lines of credit
from numerous financial institutions of which $7,947 million were unused.
These lines of credit generally have terms ranging from one to five years.
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. A portion of commercial
B30
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
8. SHORT-TERM AND LONG-TERM DEBT (continued)
paper borrowings are supported by various lines of credit referred to
above. At December 31, 1999 and 1998, the weighted average maturity of
commercial paper outstanding was 23 and 21 days, respectively.
Interest expense for short-term and long-term debt is $863 million, $920
million, and $743 million for the years ended December 31, 1999, 1998 and
1997, respectively. Securities business related interest expense of $254
million, $288 million, and $248 million in 1999, 1998 and 1997,
respectively, is included in "Net investment income."
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 healthcare 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.
Prepaid and accrued benefits 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:
B31
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (continued)
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
---------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- --------------
(In Millions)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at the beginning of period $ (6,309) $ (5,557) $ (2,213) $ (2,128)
Service cost (193) (159) (39) (35)
Interest cost (410) (397) (141) (142)
Plan participants' contributions - - (6) (6)
Amendments (2) (58) (2) -
Actuarial gains (losses) 974 (600) 312 (31)
Contractual termination benefits (53) (30) - -
Special termination benefits (51) - (2) -
Curtailment 206 - 43 -
Benefits paid 408 485 108 128
Foreign currency changes - 7 (1) 1
--------------- --------------- --------------- --------------
Benefit obligation at end of period $ (5,430) $ (6,309) $ (1,941) $ (2,213)
=============== =============== =============== ==============
Change in plan assets:
Fair value of plan assets at beginning of period $ 8,427 $ 8,489 $ 1,422 $ 1,354
Actual return on plan assets 1,442 445 213 146
Transfer to third party (14) (4) - -
Contribution from pension plan - - - 31
Employer contributions 21 25 15 13
Plan participants' contributions - - 6 6
Withdrawal under IRS Section 420 - (36) - -
Benefits paid (408) (485) (108) (128)
Foreign currency changes - (7) - -
--------------- --------------- --------------- --------------
Fair value of plan assets at end of period $ 9,468 $ 8,427 $ 1,548 $ 1,422
=============== =============== =============== ==============
Funded status:
Funded status at end of period $ 4,038 $ 2,118 $ (393) $ (791)
Unrecognized transition (asset) liability (448) (554) 462 660
Unrecognized prior service cost 225 335 2 -
Unrecognized actuarial net (gain) (2,514) (813) (746) (353)
Effects of fourth quarter activity (3) (9) - 2
--------------- --------------- --------------- --------------
Net amount recognized $ 1,298 $ 1,077 $ (675) $ (482)
=============== =============== =============== ==============
Amounts recognized in the Statements of
Financial Position consist of:
Prepaid benefit cost $ 1,601 $ 1,348 $ - $ -
Accrued benefit liability (316) (287) (675) (482)
Intangible asset 6 7 - -
Accumulated other comprehensive income 7 9 - -
--------------- --------------- --------------- --------------
Net amount recognized $ 1,298 $ 1,077 $ (675) $ (482)
=============== =============== =============== ==============
</TABLE>
B32
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
9. EMPLOYEE BENEFIT PLANS (continued)
The projected benefit obligations, accumulated benefit obligations and fair
value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $401 million, $309 million and
$0, respectively, as of September 30, 1999 and $384 million, $284 million
and $0, respectively, as of September 30, 1998.
The effects of fourth quarter activity are summarized as follows:
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
--------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(In Millions)
<S> <C> <C> <C> <C>
Contractual termination benefits $ (9) $ (14) $ - $ -
Employer contributions 6 5 - 2
-------------- -------------- -------------- --------------
Effects of 4th quarter activity $ (3) $ (9) $ - $ 2
============== ============== ============== ==============
</TABLE>
Pension plan assets consist primarily of equity securities, bonds, real
estate and short-term investments, of which $6,534 million and $5,926
million are included in Separate Account assets and liabilities at
September 30, 1999 and 1998, respectively.
Other postretirement plan assets consist of group and individual life
insurance policies, group life and health contracts, common stocks,
corporate debt securities, U.S. government securities and short-term
investments. During 1999 the assets of group life and health contracts were
transferred into common stocks, debt securities and short-term investments.
Plan assets include $434 million and $1,018 million of Company insurance
policies and contracts at September 30, 1999 and 1998, respectively.
The Prudential Plan was amended during the time period presented to provide
contractual termination benefits to certain plan participants whose
employment had been terminated. Costs related to these amendments are
reflected in contractual termination benefits that follow.
B33
<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>
Pension Benefits Other Postretirement Benefits
----------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ------------ ------------ ------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefits
costs:
Service cost $ 193 $ 159 $ 127 $ 39 $ 35 $ 38
Interest cost 410 397 376 141 142 149
Expected return on plan assets (724) (674) (617) (121) (119) (87)
Amortization of transition amount (106) (106) (106) 47 47 50
Amortization of prior service cost 45 45 42 - - -
Amortization of actuarial net (gain) loss 4 1 - (10) (13) (13)
Special termination benefits 51 - - 2 - -
Curtailment (gain) loss (122) 5 - 108 - -
Contractual termination benefits 48 14 30 - - -
----------- ----------- ----------- ------------ ------------ ------------
Subtotal (201) (159) (148) 206 92 137
Less amounts related to discontinued operations 84 25 - (130) (34) (38)
----------- ----------- ----------- ------------ ------------ ------------
Net periodic (benefit) cost $ (117) $ (134) $ (148) $ 76 $ 58 $ 99
=========== =========== =========== ============ ============ ============
</TABLE>
Discontinued operations amounts for 1998 and 1997 were included in loss
from healthcare operations. The 1999 amounts were included in loss on
disposal of healthcare operations. See Note 3 for discussion of the
disposal of the Company's healthcare business. Discontinued operations for
pension benefits in 1999 includes $122 million of curtailment gains and $51
million of special termination benefit costs. Discontinued operations for
postretirement benefits in 1999 includes $108 million of curtailment losses
and $2 million of special termination benefit costs.
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>
Pension Benefits Other Postretirement Benefits
------------------------------------- --------------------------------------------------
1999 1998 1997 1999 1998 1997
---------- ----------- ----------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average assumptions:
Discount rate (beginning of period) 6.50% 7.25% 7.75% 6.50% 7.25% 7.75%
Discount rate (end of period) 7.75% 6.50% 7.25% 7.75% 6.50% 7.25%
Rate of increase in compensation 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
levels (beginning of period)
Rate of increase in compensation 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
levels (end of period)
Expected return on plan assets 9.50% 9.50% 9.50% 9.00% 9.00% 9.00%
Health care cost trend rates - - - 7.50 - 9.80% 7.80 - 11.00% 8.20 - 11.80%
Ultimate health care cost trend rate - - - 5.00% 5.00% 5.00%
after gradual decrease until 2006
</TABLE>
B34
<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
----------------------------
1999
------------
(In Millions)
One percentage point increase
Increase in total service and interest costs $ 25
Increase in postretirement benefit obligation 200
One percentage point decrease
Decrease in total service and interest costs $ 20
Decrease in postretirement benefit obligation 167
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, 1999 and 1998
was $157 million and $135 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. The
matching contributions by the Company included in "General and
administrative expenses" are as follows:
<TABLE>
<CAPTION>
401(k) Company Match
---------------------------------------------------
1999 1998 1997
-------------- --------------- --------------
(In Millions)
<S> <C> <C> <C>
Company match $ 60 $ 54 $ 63
Less amounts related to discontinued operations (8) (14) (16)
-------------- --------------- --------------
401(k) Company match included in
general and administrative expenses $ 52 $ 40 $ 47
============== =============== ==============
</TABLE>
Discontinued operations amounts for 1998 and 1997 were included in loss
from healthcare operations. The 1999 amount was included in loss on
disposal of healthcare operations.
B35
<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:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
(In Millions)
<S> <C> <C> <C>
Current tax expense (benefit):
U.S. $ 614 $ 883 $ (14)
State and local 84 54 51
Foreign (8) 148 64
-------------- -------------- --------------
Total 690 1,085 101
Deferred tax expense (benefit):
U.S. 206 (93) 269
State and local 44 (6) 4
Foreign 102 (16) 33
-------------- -------------- --------------
Total 352 (115) 306
Total income tax expense $ 1,042 $ 970 $ 407
============== ============== ==============
</TABLE>
Income from continuing operations before income taxes and extraordinary
item, for the years ended December 31, was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- ---------------
(In Millions)
<S> <C> <C> <C>
Domestic $ 1,989 $ 2,384 $ 1,039
International 316 224 331
-------------- -------------- ---------------
Total income from continuing operations
before income taxes and extraordinary item $ 2,305 $ 2,608 $ 1,370
============== ============== ===============
</TABLE>
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>
1999 1998 1997
-------------- -------------- --------------
(In Millions)
<S> <C> <C> <C>
Expected federal income tax expense $ 807 $ 913 $ 480
Equity tax (benefit) 190 75 (65)
State and local income taxes 83 31 37
Tax-exempt interest and dividend received (63) (46) (67)
deduction
Other 25 (3) 22
-------------- -------------- --------------
Total income tax expense $ 1,042 $ 970 $ 407
============== ============== ==============
</TABLE>
B36
<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:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
(In Millions)
<S> <C> <C>
Deferred tax assets
Insurance reserves $ 1,582 $ 1,807
Net unrealized investment (gains)/losses 474 (1,225)
Policyholder dividends 277 265
Net operating loss carryforwards 280 276
Litigation related reserves 61 87
Employee benefits 32 63
Other - 135
------------- ------------
Deferred tax assets before valuation allowance 2,706 1,408
Valuation allowance (24) (13)
------------- ------------
Deferred tax assets after valuation allowance 2,682 1,395
------------- ------------
Deferred tax liabilities
Deferred policy acquisition cost 1,942 1,697
Investments 284 151
Depreciation 59 64
------------- ------------
Deferred tax liabilities 2,285 1,912
------------- ------------
Net defered tax asset/(liability) $ 397 $ (517)
============= ============
</TABLE>
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,
1999 and 1998, respectively, the Company had federal life net operating loss
carryforwards of $660 million and $540 million, which expire in 2012. At
December 31, 1999 and 1998, respectively, the Company had state operating
loss carryforwards for tax purposes approximating $570 million and $1,278
million, which expire between 2000 and 2019.
Deferred taxes are not provided on the undistributed earnings of foreign
subsidiaries (considered to be permanent investments), which at December 31,
1999 were $521 million. Determining the tax liability that would arise if
these earnings were remitted is not practical.
The Internal Revenue Service (the "Service") has completed all examinations
of the consolidated federal income tax returns through 1992. The Service has
begun their examination of the years 1993 through 1995.
B37
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
11. STATUTORY NET INCOME AND SURPLUS
Reconciliation of Statutory Net Income and Surplus
Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following
tables reconcile the Company's statutory net income and surplus as of and
for the years ended December 31, 1999, 1998, and 1997, determined in
accordance with accounting practices prescribed or permitted by the New
Jersey Department of Banking and Insurance, to net income and equity
determined using GAAP:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ----------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $ 333 $ 1,247 $ 1,471
Adjustments to reconcile to net income on a GAAP basis:
Insurance revenues and expenses 136 (117) 12
Income taxes 436 128 601
Valuation of investments (27) (143) (62)
Realized investment gains 73 1,162 702
Litigation and other reserves (102) (1,150) (1,975)
Discontinued operations and other, net (36) (21) (139)
---------------- --------------- ----------------
GAAP net income $ 813 $ 1,106 $ 610
================ =============== ================
</TABLE>
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
(In Millions)
<S> <C> <C>
Statutory surplus $ 9,249 $ 8,536
Adjustments to reconcile to equity on a GAAP basis:
Deferred policy acquisition costs 7,295 6,462
Valuation of investments 2,909 8,358
Future policy benefits and policyholder account balances (1,544) (2,621)
Non-admitted assets 2,069 2,119
Income taxes 522 (576)
Surplus notes (987) (987)
Discontinued operations and other, net (222) (896)
---------------- ---------------
GAAP equity $ 19,291 $ 20,395
================ ===============
</TABLE>
The New York State Insurance Department ("Department") recognizes only
statutory accounting for determining and reporting the financial condition
of an insurance company, for determining its solvency under the New York
Insurance Law and for determining whether its financial condition warrants
the payment of a dividend to its policyholders. No consideration is given by
the Department to financial statements prepared in accordance with GAAP in
making such determinations.
B38
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
12. OPERATING LEASES (continued)
The Company occupies leased office space in many locations under various
long-term leases and has entered into numerous leases covering the long-term
use of computers and other equipment. At December 31, 1999, future minimum
lease payments under non-cancelable operating leases are, as follows:
(In Millions)
2000 $ 294
2001 265
2002 217
2003 178
2004 147
Remaining years after 2004 776
----------------
Total $ 1,877
================
Rental expense incurred for the years ended December 31, 1999, 1998 and 1997
was $278 million, $320 million and $352 million, respectively, excluding
expenses relating to the Company's healthcare business.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values presented below have been determined by using
available market information and by applying valuation methodologies.
Considerable judgment is applied in interpreting data to develop the
estimates of fair value. Estimated fair values 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 values approximate estimated fair values).
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. Generally fair values for private
placement fixed maturities 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 fixed maturities is based on
amounts estimated by management.
Mortgage loans on real estate
The estimated fair value of mortgage loans on real estate is primarily based
upon the present value of the expected future cash flows discounted at the
appropriate U.S. Treasury rate, adjusted for the current market spread for
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.
B39
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Derivative financial instruments
Refer to Note 14 for the disclosure of fair values on these instruments.
Investment contracts
For guaranteed investment contracts, income annuities, and other similar
contracts without life contingencies, estimated fair values are derived
using discounted projected cash flows, based on interest rates being offered
for similar contracts with maturities consistent with those of the contracts
being valued. For individual deferred annuities and other deposit
liabilities, 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.
B40
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
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>
1999 1998
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 $ 74,697 $ 74,697 $ 80,158 $ 80,158
Held to maturity 14,237 14,112 16,848 17,906
Equity securities 3,264 3,264 2,759 2,759
Mortgage loans on real estate 16,268 15,826 16,016 16,785
Policy loans 7,590 7,462 7,476 8,123
Securities purchased under agreements to resell - - 1,737 1,737
Short-term investments 12,303 12,303 9,781 9,781
Mortgage securitization inventory 803 803 480 480
Cash 1,330 1,330 1,943 1,943
Restricted cash and securities 4,082 4,082 2,366 2,366
Separate Account assets 82,131 82,131 80,931 80,931
Trading:
Trading account assets $ 9,741 $ 9,741 $ 8,888 $ 8,888
Broker-dealer related receivables 11,346 11,346 10,142 10,142
Securities purchased under agreements to resell 13,944 13,944 8,515 8,515
Cash collateral for borrowed securities 7,124 7,124 5,622 5,622
FINANCIAL LIABILITIES:
Other than trading:
Investment contracts $ 25,164 $ 25,352 $ 26,246 $ 27,051
Securities sold under agreements to repurchase 4,260 4,260 7,085 7,085
Cash collateral for loaned securities 2,582 2,582 2,450 2,450
Short-term and long-term debt 16,371 16,563 14,816 15,084
Securities sold but not yet purchased - - 2,215 2,215
Separate Account liabilities 82,131 82,131 80,931 80,931
Trading:
Broker-dealer related payables $ 5,839 $ 5,839 $ 6,530 $ 6,530
Securities sold under agreements to repurchase 20,338 20,338 14,401 14,401
Cash collateral for loaned securities 8,193 8,189 4,682 4,682
Securities sold but not yet purchased 6,968 6,968 3,556 3,556
</TABLE>
B41
<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 manage interest rate exposures arising from mismatches
between assets and liabilities. Under interest rate 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 fair 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 those futures and options
is based on market quotes.
In exchange-traded futures transactions, the Company purchases or sells
contracts, the value of which are determined by the value of designated
classes of Treasury securities, and posts variation margins 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.
B42
<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 Company's 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 is intended to permit such
investment transactions to be executed with less adverse market impact.
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 exchange rates with respect to 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 a 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 "Realized investment gains, net."
Forwards
The Company uses forwards to manage market risks relating to interest rates
and commodities. Additionally, in connection with the Company's investment
banking activities, the Company trades in mortgage backed securities forward
contracts. 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.
If the forwards are effective as hedges, gains or losses are recorded in
"Accumulated other comprehensive income." If forwards do not meet hedge
accounting criteria, gains or losses from those forwards are recognized in
current period earnings.
The tables below summarize the Company's outstanding positions by derivative
instrument types as of December 31, 1999 and 1998. 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.
B43
<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, 1999
(In Millions)
<TABLE>
<CAPTION>
Trading Other than Trading
------------------------------------------ ------------------------------------------
Hedge Accounting
------------------------------------------
Estimated Estimated
Notional Fair Value Notional Fair Value
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Swap Instruments
Interest rate
Asset $ 7,116 $ 151 $ - $ -
Liability 6,490 137 - -
Currency
Asset 24 45 343 30
Liability 77 51 369 33
Equity and commodity
Asset 8 9 - -
Liability 8 5 - -
Forward contracts
Interest rate
Asset 14,837 105 - -
Liability 12,459 84 - -
Currency
Asset 11,181 275 54 2
Liability 10,377 247 841 16
Equity and commodity
Asset 1,664 68 - -
Liability 1,592 60 - -
Futures contracts
Interest rate
Asset 2,374 2 - -
Liability 3,017 3 - -
Equity and commodity
Asset 2,283 44 - -
Liability 837 57 - -
Option contracts
Interest rate
Asset 3,725 22 - -
Liability 2,185 11 - -
Currency
Asset 613 5 - -
Liability 4,439 5 - -
Equity and commodity
Asset 340 6 - -
Liability 366 3 - -
------------------ ------------------- ------------------ ------------------
Total Derivatives:
Assets $ 44,165 $ 732 $ 397 $ 32
================== =================== ================== ==================
Liabilities $ 41,847 $ 663 $ 1,210 $ 49
================== =================== ================== ==================
<CAPTION>
Other than Trading Total
------------------------------------------ ------------------------------------------
Non-Hedge Accounting
------------------------------------------
Estimated Estimated
Notional Fair Value Notional Fair Value
------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Swap Instruments
Interest rate
Asset $ 2,185 $ 146 $ 9,301 $ 297
Liability 1,261 32 7,751 169
Currency
Asset - - 367 75
Liability - - 446 84
Equity and commodity
Asset 47 13 55 22
Liability - - 8 5
Forward contracts
Interest rate
Asset - - 14,837 105
Liability - - 12,459 84
Currency
Asset 1,182 16 12,417 293
Liability 1,347 21 12,565 284
Equity and commodity
Asset - - 1,664 68
Liability - - 1,592 60
Futures contracts
Interest rate
Asset 800 14 3,174 16
Liability 3,696 44 6,713 47
Equity and commodity
Asset 71 4 2,354 48
Liability 12 11 849 68
Option contracts
Interest rate
Asset - - 3,725 22
Liability 13 - 2,198 11
Currency
Asset 10 - 623 5
Liability 10 - 4,449 5
Equity and commodity
Asset - - 340 6
Liability - - 366 3
------------------- ------------------ ------------------ -------------------
Total Derivatives:
Assets $ 4,295 $ 193 $ 48,857 $ 957
=================== ================== ================== ===================
Liabilities $ 6,339 $ 108 $ 49,396 $ 820
=================== ================== ================== ===================
</TABLE>
B44
<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
------------------------------------------ ------------------------------------------
Hedge Accounting
------------------------------------------
Estimated Estimated
Notional Fair Value Notional Fair Value
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Swap Instruments
Interest rate
Asset $ 4,145 $ 204 $ - $ -
Liability 4,571 192 - -
Currency
Asset 372 91 229 16
Liability 263 84 464 46
Equity and commodity
Asset 47 14 - -
Liability - - - -
Forward contracts
Interest rate
Asset 31,568 72 - -
Liability 24,204 56 - -
Currency
Asset 12,879 198 60 1
Liability 13,594 221 573 11
Equity and commodity
Asset 1,204 12 - -
Liability 1,355 3 - -
Futures contracts
Interest rate
Asset 2,429 10 - -
Liability 3,147 3 - -
Equity and commodity
Asset 843 51 - -
Liability 1,224 44 - -
Option contracts
Interest rate
Asset 2,500 10 - -
Liability 1,451 8 - -
Currency
Asset 4,882 101 - -
Liability 4,151 112 - -
Equity and commodity
Asset 928 2 - -
Liability 901 4 - -
------------------ ------------------- ------------------ ------------------
Total Derivatives:
Assets $ 61,797 $ 765 $ 289 $ 17
================== =================== ================== ==================
Liabilities $ 54,861 $ 727 $ 1,037 $ 57
================== =================== ================== ==================
<CAPTION>
Other than Trading Total
------------------------------------------ ------------------------------------------
Non-Hedge Accounting
------------------------------------------
Estimated Estimated
Notional Fair Value Notional Fair Value
------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Swap Instruments
Interest rate
Asset $ 1,949 $ 73 $ 6,094 $ 277
Liability 2,501 301 7,072 493
Currency
Asset - - 601 107
Liability - - 727 130
Equity and commodity
Asset 22 7 69 21
Liability - - - -
Forward contracts
Interest rate
Asset - - 31,568 72
Liability - - 24,204 56
Currency
Asset 942 13 13,881 212
Liability 1,466 26 15,633 258
Equity and commodity
Asset 2 - 1,206 12
Liability - - 1,355 3
Futures contracts
Interest rate
Asset 1,762 22 4,191 32
Liability 478 4 3,625 7
Equity and commodity
Asset 24 1 867 52
Liability 53 1 1,277 45
Option contracts
Interest rate
Asset 130 2 2,630 12
Liability 98 - 1,549 8
Currency
Asset - - 4,882 101
Liability - - 4,151 112
Equity and commodity
Asset - - 928 2
Liability - - 901 4
------------------- ------------------ ------------------ -------------------
Total Derivatives:
Assets $ 4,831 $ 118 $ 66,917 $ 900
=================== ================== ================== ===================
Liabilities $ 4,596 $ 332 $ 60,494 $ 1,116
=================== ================== ================== ===================
</TABLE>
B45
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
The following table discloses net trading revenues by derivative instrument
types as of December 31:
1999 1998 1997
-------- -------- --------
(In Millions)
Forwards $ 53 $ 67 $ 59
Futures 80 (5) 37
Swaps 16 (13) (13)
Options (14) - -
-------- -------- --------
Net trading revenues $ 135 $ 49 $ 83
======== ======== ========
Average fair values for trading derivatives in an asset position during the
years ended December 31, 1999 and 1998 were $789 million and $922 million,
respectively, and for derivatives in a liability position were $766 million
and $905 million, respectively. The average fair values do not reflect the
netting of amounts pursuant to the right of offset or qualifying master
netting agreements. Of those derivatives held for trading purposes at
December 31, 1999, 61% of the notional amount consisted of interest rate
derivatives, 33% consisted of foreign currency derivatives and 6% consisted
of equity and commodity derivatives. Of those derivatives held for purposes
other than trading at December 31, 1999, 65% of notional consisted of
interest rate derivatives, 34% consisted of foreign currency derivatives,
and 1% consisted of equity and commodity derivatives.
Credit Risk
The 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, 1999 and 1998, approximately 81% and 95%,
respectively, of the net credit exposure for the Company from derivative
contracts is with investment-grade counterparties.
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 consumer banking business, loan commitment
for credit cards and home equity lines of credit and other 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, home equity and other commitments were $2.7 billion, of which $2.0
billion remains available at December 31, 1999.
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 an unsecured basis. Aggregate
financing commitments on a secured basis, for periods of less than one year,
approximate $4.9 billion, of which $2.73 billion remains available at
December 31, 1999. Unsecured commitments approximate $528 million, of which
$334 million remains available at December 3l, 1999.
B46
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
Other commitments primarily include commitments to purchase and sell
mortgage loans and the unfunded portion of commitments to fund investments
in private placement securities. These mortgage loans and private
commitments were $2.9 billion, of which $1.9 billion remain available at
December 31, 1999. Additionally, mortgage loans sold with recourse were $0.1
billion at December 31, 1999.
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, 1999
these were immaterial.
15. CONTINGENCIES AND LITIGATION
Stop-Loss Reinsurance and Stop-Loss Indemnification Agreements
On February 24, 2000, the Company entered into an agreement to sell 100% of
the capital stock of its subsidiary, Gibraltar Casualty Company
("Gibraltar") to Everest Reinsurance Holdings, Inc. (now known as Everest Re
Group, Ltd.) ("Everest"). The transaction is expected to be completed in the
second quarter of 2000, subject to approval by state regulators and other
customary closing conditions. Proceeds from the sale will consist of
approximately $52 million in cash, which approximated the book value of
Gibraltar at December 31, 1999. In connection with the sale, the Company
will provide a stop-loss indemnification agreement covering 80% of the first
$200 million of any adverse loss development in excess of Gibraltar's
carried reserves as of the closing date of the transaction, resulting in a
maximum potential exposure to the Company of $160 million. In connection
with the Company's 1995 sale of what is now Everest, Gibraltar had entered
into a stop-loss reinsurance agreement with Everest whereby Gibraltar
reinsured up to $375 million of the first $400 million of aggregate adverse
loss development, on an incurred basis, with respect to reserves recorded by
Everest as of June 30, 1995. Upon the expected completion of the
aforementioned sale of Gibraltar, the Company will no longer be subject to
exposure under the 1995 stop-loss agreement. Management believes that based
on currently available information and established reserves, the ultimate
settlement of claims under either the 1995 stop-loss agreement or the
stop-loss indemnification agreement should not have a material adverse
effect on the Company's financial position.
Environmental and Asbestos-Related Claims
Certain of the Company's subsidiaries are subject to claims under expired
contracts that assert alleged injuries and/or damages relating to or
resulting from toxic torts, toxic waste and other hazardous substances. The
liabilities for these claims cannot be reasonably estimated using
traditional reserving techniques. The predominant source of such exposure
for the Company is Gibraltar, which, as discussed above, is expected to be
sold in the second quarter of 2000. The liabilities recorded for
environmental and asbestos-related claims, net of reinsurance recoverables,
of $342 million ($321 million for Gibraltar) and $239 million ($217 million
for Gibraltar) at December 31, 1999 and 1998, respectively, reflect the
Company's best estimate of ultimate claims and claim adjustment expenses
based upon known facts and current law. However, as a result of judicial
decisions and legislative actions, the coverage afforded under these
contracts may be expanded beyond their original terms. Given the expansion
of coverage and liability by the courts and legislatures in the past, and
the potential for other unfavorable trends in the future, the ultimate cost
of these claims could increase from the levels currently established.
Because of these uncertainties, these additional amounts, or a range of
these additional amounts, cannot be reasonably estimated, and could result
in a liability exceeding recorded liabilities by an amount that could be
material to the Company's results of operations in a future quarterly or
annual period. The Company's residual exposure pertaining to Gibraltar upon
completion of the expected sale, pursuant to a
B47
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
15. CONTINGENCIES AND LITIGATION (continued)
stop-loss indemnification agreement, is discussed above. Management believes
that these claims should not have a material adverse effect on the Company's
financial position.
Managed Care Reimbursement
The Company has reviewed its obligations retained in the sale of the
healthcare operations 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.
Litigation
The Company is subject to legal and regulatory actions in the ordinary
course of its businesses, including class actions. Pending legal and
regulatory actions include proceedings specific to the Company's practices
and proceedings generally applicable to business practices in the industries
in which the Company operates. In certain of these matters, large and/or
indeterminate amounts are sought, including punitive or exemplary damages.
In particular, the Company has been subject to substantial regulatory
actions and civil litigation involving individual life insurance sales
practices. In 1996, the Company entered into settlement agreements with
relevant insurance regulatory authorities and plaintiffs in the principal
life insurance sales practices class action lawsuit covering policyholders
of individual permanent life insurance policies issued in the United States
from 1982 to 1995. Pursuant to the settlements, the Company agreed to
various changes to its sales and business practices controls and a series of
fines, and is in the process of distributing final remediation relief to
eligible class members. In many instances, claimants have the right to
"appeal" the Company's decision to an independent reviewer. The bulk of such
appeals were resolved in 1999, and the balance is expected to be addressed
in 2000. As of January 31, 2000, the Company remained a party to two
putative class actions and approximately 158 individual actions relating to
permanent life insurance policies the Company issued in the United States
between 1982 and 1995. Additional suits may be filed by individuals who
opted out of the settlements. 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 U.S.
District Court has also retained jurisdiction as to all matters relating to
the administration, consummation, enforcement and interpretation of the
settlements. In November 1999, upon the joint application of the Company and
class counsel, the Court ordered an investigation into certain allegations
of improprieties in the administration and implementation of the remediation
program at the Company's Plymouth, Minnesota facility. Class counsel is
expected to submit a summary of its findings pursuant to the investigation
to the Court in mid-April 2000.
In 1999, 1998, 1997 and 1996, the Company recorded provisions in its
Consolidated Statements of Operations of $100 million, $1,150 million,
$2,030 million and $1,125 million, respectively, to provide for estimated
remediation costs, and additional sales practices costs including related
administrative costs, regulatory fines, penalties and related payments,
litigation costs and settlements, including settlements associated with the
resolution of claims of deceptive sales practices asserted by policyholders
who elected to "opt-out" of the class action settlement and litigate their
claims against the Company separately, and other fees and expenses
associated with the resolution of sales practices issues.
B48
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
15. CONTINGENCIES AND LITIGATION (continued)
The following table summarizes the Company's charges for the estimated total
costs of sales practices remedies and additional sales practices costs and
the related liability balances as of the dates indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1999 1998 1997 1996
---------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Liability balance at beginning of period $ 3,058 $ 2,553 $ 963 $ -
Charges to expense:
Remedy costs (99) 510 1,640 410
Additional sales practices costs 199 640 390 715
--------- --------- --------- ---------
Total charges to expense 100 1,150 2,030 1,125
Amounts paid or credited:
Remedy costs 1,708 147 - -
Additional sales practices costs 559 498 440 162
--------- --------- --------- ---------
Total amounts paid or credited 2,267 645 440 162
Liability balance at end of period $ 891 $ 3,058 $ 2,553 $ 963
========= ========= ========= =========
</TABLE>
In 1996, the Company recorded in its Consolidated Statements of Operations
the cost of $410 million before taxes 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 the losses associated with the settlement. Charges were also recorded in
1996 for estimated additional sales practices costs totaling $715 million
before taxes.
In 1997, management increased the estimated liability for the costs of
remedying policyholder claims by $1,640 million before taxes. This increase
was based on additional information derived from claim sampling techniques,
the terms of the settlement and the number of claim forms received. The
Company also recorded additional charges of $390 million to recognize the
increase in estimated total additional sales practices costs.
In 1998, the Company recorded an additional charge of $510 million before
taxes to recognize the increase of the estimated total cost of remedying
policyholder claims to a total of $2,560 million before taxes. This increase
was based on (i) estimates derived from an analysis of claims actually
remedied (including interest); (ii) a sample of claims still to be remedied;
(iii) an estimate of additional liabilities associated with a claimant's
right to "appeal" the Company's decision; and (iv) an estimate of an
additional liability associated with the results of an investigation by a
court-appointed independent expert regarding the impact of the Company's
failure to properly implement procedures to preserve all documents relevant
to the class action and remediation program. The Company also recorded
additional charges of $640 million before taxes to recognize the increase in
estimated total additional sales practices costs.
In 1999, as a result of a decrease in the estimated cost of remedying
policyholder claims, the Company recorded a credit of $99 million before
taxes to reduce its liability relative to remedy costs. The revised estimate
was based on additional information derived from claims actually remedied
and an evaluation of remaining obligations taking into consideration
experience in 1999. The Company also recorded a charge of $199 million
before taxes to recognize an increase in estimated total additional sales
practices costs based on additional information obtained in 1999.
B49
<PAGE>
The Prudential Insurance Company of America
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
15. CONTINGENCIES AND LITIGATION (continued)
The Company's litigation is subject to many uncertainties, and given their
complexity and scope, the outcomes cannot be predicted. It is possible that
the results of operations or the cash flow of the Company, in a particular
quarterly or annual period, could be materially affected by an ultimate
unfavorable outcome of pending litigation and regulatory matters depending,
in part, upon the results of operation or cash flow for such period.
Management believes, however, that the ultimate resolution of all pending
litigation and regulatory matters, after consideration of applicable
reserves, should not have a material adverse effect on the Company's
financial position.
******
B50
<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, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, 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.
PricewaterhouseCoopers LLP
New York, New York
March 21, 2000
B51
