AS FILED WITH THE SEC ON _________________ . REGISTRATION NO. 33-20000
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM S-6
POST-EFFECTIVE AMENDMENT NO. 22
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED
ON FORM N-8B-2
-----------------
THE PRUDENTIAL VARIABLE
APPRECIABLE ACCOUNT
(Exact Name of Trust)
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Name of Depositor)
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(800) 778-2255
(Address and telephone number of principal executive offices)
-----------------
THOMAS C. CASTANO
ASSISTANT SECRETARY
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(Name and address of agent for service)
-----------------
Copy to:
JEFFREY C. MARTIN
SHEA & GARDNER
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036
-----------------
It is proposed that this filing will become effective (check appropriate space):
|_| immediately upon filing pursuant to paragraph (b) of Rule 485
|X| on May 1, 2000 pursuant to paragraph (b) of Rule 485
(date)
|_| 60 days after filing pursuant to paragraph (a) of Rule 485
|_| on____________________pursuant to paragraph (a) of Rule 485
(date)
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY FORM N-8B-2)
N-8B-2 ITEM NUMBER LOCATION
------------------ --------
1. Cover Page
2. Cover Page
3. Not Applicable
4. Sale of the Contract and Sales Commissions
5. The Prudential Variable Appreciable Account
6. The Prudential Variable Appreciable Account
7. Not Applicable
8. Not Applicable
9. Litigation
10. Introduction and Summary; Short-Term Cancellation Right,
or --Free Look"; Contract Forms; Premiums; Contract
Date; Allocation of Premiums; Transfers; Contract Fees
and Charges; How the Contract Fund Changes with
Investment Experience; How a Contract's Death Benefit
Will Vary; Surrender of a Contract; Lapse and
Reinstatement; When Proceeds are Paid; Other General
Contract Provisions; Voting Rights; Withdrawal of Excess
Cash Surrender Value; Increases in Face Amount;
Decreases in Face Amount; Riders; The Prudential Series
Fund, Inc.
11. Introduction and Summary; The Prudential Variable
Appreciable Account
12. Cover Page; Introduction and Summary; The Prudential
Series Fund, Inc.; Sale of the Contract and Sales
Commissions
13. Introduction and Summary; The Prudential Series Fund,
Inc.; Contract Fees and Charges; Reduction of Charges
for Concurrent Sales to Several Individuals; Sale of the
Contract and Sales Commissions
14. Introduction and Summary; Requirements for Issuance of a
Contract
15. Introduction and Summary; Allocation of Premiums;
Transfers; Dollar Cost Averaging; Fixed-Rate Option;
General Information about Prudential, The Prudential
Variable Appreciable Account, and the Variable
Investment Options Available under the Account.
16. Introduction and Summary; Detailed Information About the
Contract
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
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17. Surrender of a Contract; When Proceeds are Paid
18. The Prudential Variable Appreciable Account
19. Reports to Contract Owners
20. Not Applicable
21. Contract Loans
22. Not Applicable
23. Not Applicable
24. Other General Contract Provisions
25. Introduction and Summary
26. Introduction and Summary; Contract Fees and Charges
27. The Prudential Insurance Company of America; The
Prudential Series Fund, Inc.
28. The Prudential Insurance Company of America; Directors
and Officers
29. The Prudential Insurance Company of America
30. Not Applicable
31. Not Applicable
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. The Prudential Insurance Company of America
36. Not Applicable
37. Not Applicable
38. Sale of the Contract and Sales Commissions
39. Sale of the Contract and Sales Commissions
40. Not Applicable
41. Sale of the Contract and Sales Commissions
42. Not Applicable
43. Not Applicable
44. Introduction and Summary; The Prudential Series Fund,
Inc.; How the Contract Fund Changes With Investment
Experience; How a Contract's Death Benefit Will Vary
<PAGE>
N-8B-2 ITEM NUMBER LOCATION
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45. Not Applicable
46. Introduction and Summary; The Prudential Variable
Appreciable Account; The Prudential Series Fund, Inc.
47. The Prudential Variable Appreciable Account; The
Prudential Series Fund, Inc.
48. Not Applicable
49. Not Applicable
50. Not Applicable
51. Not Applicable
52. Substitution of Series Fund Shares
53. Tax Treatment of Contract Benefits
54. Not Applicable
55. Not Applicable
56. Not Applicable
57. Not Applicable
58. Not Applicable
59. Financial Statements; Financial Statements of The
Variable Appreciable Life Subaccounts of The
Prudential Variable Appreciable Account; Consolidated
Financial Statements of The Prudential Insurance Company
of America and its subsidiaries
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
<PAGE>
PRUDENTIAL'S
VARIABLE APPRECIABLE LIFE(R)
INSURANCE
PROSPECTUS
THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
MAY 1, 2000
[GRAPHIC OMITTED]
<PAGE>
PROSPECTUS
MAY 1, 2000
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
VARIABLE
APPRECIABLE
LIFE(R)
INSURANCE CONTRACTS
This prospectus describes two forms of an individual variable life insurance
contract (the "Contract") offered by The Prudential Insurance Company of America
("Prudential", "we", "us", or "our") under the name Variable APPRECIABLE LIFE(R)
Insurance. The first form provides a death benefit that generally remains fixed
in an amount you, the Contract owner, choose and cash surrender values that vary
daily. The second form also provides cash surrender values that vary daily and a
death benefit that will also vary daily. Under both forms of the Contract, the
death benefit will never be less than the "face amount" of insurance you chose.
There is no guaranteed minimum cash surrender value.
You may choose to invest your Contract's premiums and its earnings in one or
more of the following ways:
o Invest in one or more of 15 available subaccounts of The Prudential
Variable Appreciable Account (the "Account"), each of which invests in a
corresponding portfolio of The Prudential Series Fund, Inc. (the "Series
Fund"):
MONEY MARKET CONSERVATIVE BALANCED EQUITY
DIVERSIFIED BOND FLEXIBLE MANAGED PRUDENTIAL JENNISON
GOVERNMENT INCOME HIGH YIELD BOND SMALL CAPITALIZATION
ZERO COUPON BOND 2000 STOCK INDEX STOCK
ZERO COUPON BOND 2005 EQUITY INCOME GLOBAL
NATURAL RESOURCES
o Invest in the FIXED-RATE OPTION, which pays a guaranteed interest rate.
o Invest in The Prudential Variable Contract Real Property Account (the
"Real Property Account"), described in a prospectus attached to this one.
This prospectus describes the Contract generally and the Account. The attached
prospectus for the Series Fund, and the Series Fund's statement of additional
information describe the investment objectives and the risks of investing in the
Series Fund portfolios. Prudential may add additional investment options in the
future. Please read this prospectus and keep it for future reference.
The Securities and Exchange Commission ("SEC") maintains a Web site
(http://www.sec.gov) that contains material incorporated by reference and other
information regarding registrants that file electronically with the SEC.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE CONTRACT MAY BE PURCHASED THROUGH REGISTERED REPRESENTATIVES LOCATED IN
BANKS AND OTHER FINANCIAL INSTITUTIONS. AN INVESTMENT IN THE CONTRACT IS NOT A
BANK DEPOSIT AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC") OR ANY OTHER GOVERNMENTAL AGENCY AND MAY LOSE VALUE. AN
INVESTMENT IS ALSO NOT A CONDITION TO THE PROVISION OR TERM OF ANY BANKING
SERVICE OR ACTIVITY. THE PARTICIPATING BANK IS NOT A REGISTERED BROKER-DEALER
AND IS NOT AFFILIATED WITH PRUCO SECURITIES CORPORATION.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
751 Broad Street
Newark, New Jersey 07102-3777
Telephone: (800) 778-2255
APPRECIABLE LIFE IS A REGISTERED MARK OF PRUDENTIAL.
<PAGE>
TABLE OF CONTENTS
PAGE
INTRODUCTION AND SUMMARY......................................................1
BRIEF DESCRIPTION OF THE CONTRACT...........................................1
CHARGES.....................................................................1
TYPES OF DEATH BENEFIT......................................................3
PREMIUM PAYMENTS............................................................4
LAPSE AND GUARANTEE AGAINST LAPSE...........................................4
REFUND......................................................................5
GENERAL INFORMATION ABOUT PRUDENTIAL, THE PRUDENTIAL VARIABLE APPRECIABLE
ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS
AVAILABLE UNDER THE CONTRACT..................................................6
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA.................................6
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT.................................6
THE PRUDENTIAL SERIES FUND, INC.............................................7
VOTING RIGHTS...............................................................8
THE FIXED-RATE OPTION.......................................................8
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT......................9
WHICH INVESTMENT OPTION SHOULD BE SELECTED?.................................9
DETAILED INFORMATION ABOUT THE CONTRACT......................................10
CONTRACT FEES AND CHARGES..................................................10
REQUIREMENTS FOR ISSUANCE OF A CONTRACT....................................14
SHORT-TERM CANCELLATION RIGHT OR "FREE-LOOK"...............................14
CONTRACT FORMS.............................................................14
CONTRACT DATE..............................................................15
PREMIUMS...................................................................15
ALLOCATION OF PREMIUMS.....................................................16
TRANSFERS..................................................................17
DOLLAR COST AVERAGING......................................................17
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS...........18
HOW THE CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE...................18
HOW A FORM A (LEVEL) CONTRACT'S DEATH BENEFIT WILL VARY....................19
HOW A FORM B (VARIABLE) CONTRACT'S DEATH BENEFIT WILL VARY.................20
INCREASES IN FACE AMOUNT...................................................20
DECREASES IN FACE AMOUNT...................................................22
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE..................................22
SURRENDER OF A CONTRACT....................................................23
WHEN PROCEEDS ARE PAID.....................................................23
LIVING NEEDS BENEFIT.......................................................24
HYPOTHETICAL ILLUSTRATIONS OF DEATH BENEFITS AND CASH SURRENDER VALUES.....24
CONTRACT LOANS.............................................................26
LAPSE AND REINSTATEMENT....................................................27
SUBSTITUTION OF SERIES FUND SHARES.........................................28
REPORTS TO CONTRACT OWNERS.................................................28
TAX TREATMENT OF CONTRACT BENEFITS.........................................28
TAX-QUALIFIED PENSION PLANS................................................30
RIDERS.....................................................................30
PARTICIPATION IN DIVISIBLE SURPLUS.........................................30
OTHER GENERAL CONTRACT PROVISIONS..........................................31
PAYING PREMIUMS BY PAYROLL DEDUCTION.......................................31
UNISEX PREMIUMS AND BENEFITS...............................................31
SALES TO PERSONS 14 YEARS OF AGE OR YOUNGER................................31
EXCHANGE OF FIXED-DOLLAR CONTRACT TO VARIABLE CONTRACT.....................32
SALE OF THE CONTRACT AND SALES COMMISSIONS.................................32
STATE REGULATION...........................................................32
EXPERTS....................................................................32
LITIGATION AND REGULATORY PROCEEDINGS......................................33
ADDITIONAL INFORMATION.....................................................33
FINANCIAL STATEMENTS.......................................................33
<PAGE>
DIRECTORS AND OFFICERS OF PRUDENTIAL.........................................34
FINANCIAL STATEMENTS OF THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS OF THE
PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT......................................A1
CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA AND ITS SUBSIDIARIES......................................B1
<PAGE>
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INTRODUCTION AND SUMMARY
This Summary provides a brief overview of the more significant aspects of the
Contract. We provide further detail in the subsequent sections of this
prospectus and in the Contract.
BRIEF DESCRIPTION OF THE CONTRACT
The Variable APPRECIABLE LIFE Insurance Contract (the "Contract") is issued by
The Prudential Insurance Company of America ("Prudential", "we", "us", or
"our"). The Contract is a form of flexible premium variable life insurance. It
is based on a Contract Fund, the value of which changes every business day. The
Contract Fund is the total amount credited to a specific Contract. On any date
it is equal to the sum of the amounts invested in the variable investment
options and the fixed-rate option, and the principal amount of any Contract debt
plus any interest earned thereon. Contract debt is the principal amount of all
outstanding loans plus any interest accrued. You will, however, have to pay a
surrender charge if you decide to surrender the Contract during the first 10
Contract years and 10 years from an increase in the face amount of insurance.
A broad objective of the Contract is to provide benefits that will increase in
value if favorable investment results are achieved. You may invest premiums in
one or more of the 15 available subaccounts, in the fixed-rate option, or in the
Real Property Account. Your Contract Fund value changes every day depending upon
the change in value of the particular investment option that you have selected.
Although the value of your Contract Fund will increase if there is favorable
investment performance in the variable investment options you select, investment
returns in the variable investment options are NOT guaranteed. There is a risk
that investment performance will be unfavorable and that the value of your
Contract Fund will decrease. The risk will be different, depending upon which
investment options you choose. See WHICH INVESTMENT OPTION SHOULD BE SELECTED?,
page 9. If you select the fixed-rate option, Prudential credits your account
with a declared rate or rates of interest. You assume the risk that the rate may
change, although it will never be lower than an effective annual rate of 4%.
Variable life insurance contracts are unsuitable as short-term savings vehicles.
Withdrawals and loans may negate any guarantees against lapse (see LAPSE AND
REINSTATEMENT, page 27) and possibly may result in adverse tax consequences. See
TAX TREATMENT OF CONTRACT BENEFITS, page 28.
CHARGES
Prudential deducts certain charges from each premium payment and from the
amounts held in the designated investment options. In addition, Prudential makes
certain additional charges if a Contract lapses or is surrendered during the
first 10 Contract years and 10 years from an increase in the face amount of
insurance. All these charges, which are largely designed to cover insurance
costs and risks as well as sales and administrative expenses, are fully
described under CONTRACT FEES AND CHARGES on page 10. In brief, and subject to
that fuller description, the following diagram outlines the maximum charges
which Prudential may make:
1
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<PAGE>
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PREMIUM PAYMENT
o less charge for taxes
attributable to premiums
o less $2 processing fee
-----------------------------
NET PREMIUM AMOUNT
To be invested in one or a combination of:
o The investment portfolios of the Series Fund
o The fixed-rate option
o The Real Property Account
- --------------------------------------------------------------------------------
DAILY CHARGES
o We deduct management fees and expenses from the Series Fund and, if
applicable, from the Real Property Account assets. See UNDERLYING
PORTFOLIO EXPENSES chart, below, and THE PRUDENTIAL VARIABLE CONTRACT REAL
PROPERTY ACCOUNT, page 9.
o We deduct a daily mortality and expense risk charge equivalent to an
annual rate of up to 0.9% from assets in the variable investment options.
- --------------------------------------------------------------------------------
MONTHLY CHARGES
o We currently deduct a sales charge from the Contract Fund in the amount of
1/2 of 1% of the primary annual premium.
o We reduce the Contract Fund by a guaranteed minimum death benefit risk
charge of not more than $0.01 per $1,000 of the face amount of insurance.
o We reduce the Contract Fund by an administrative charge of up to $3 per
Contract and $0.03 per $1,000 of face amount of insurance.
o We deduct a charge for anticipated mortality. The maximum charge is based
on the Non-Smoker/Smoker 1980 CSO Tables.
o If the Contract includes riders, we deduct rider charges from the Contract
Fund.
o If the rating class of the insured results in an extra charge, we will
deduct that charge from the Contract Fund.
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2
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<PAGE>
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POSSIBLE ADDITIONAL CHARGES
o During the first 10 Contract years, we will assess a contingent deferred
sales charge if the Contract lapses or is surrendered. During the first
five years, the maximum contingent deferred sales charge is 50% of the
first year's primary annual premium. This charge is both subject to other
important limitations and reduced for Contracts that have been inforce for
more than five years.
o During the first 10 Contract years, we will assess a contingent deferred
administrative charge if the Contract lapses or is surrendered. During the
first five years, this charge equals $5 per $1,000 of face amount. It
begins to decline uniformly after the fifth Contract year so that it
disappears on the 10th Contract anniversary.
o We assess an administrative processing charge equal to the lesser of $15
or 2% for each withdrawal of excess cash surrender value.
UNDERLYING PORTFOLIO EXPENSES
TOTAL TOTAL
PORTFOLIO INVESTMENT OTHER CONTRACTUAL ACTUAL
ADVISORY FEE EXPENSES EXPENSES EXPENSES*
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Money Market 0.40% 0.02% 0.42% 0.42%
Diversified Bond 0.40% 0.03% 0.43% 0.43%
Government Income 0.40% 0.04% 0.44% 0.44%
Zero Coupon Bond 2000 0.40% 0.18% 0.58% 0.40%
Zero Coupon Bond 2005 0.40% 0.19% 0.59% 0.40%
Conservative Balanced 0.55% 0.02% 0.57% 0.57%
Flexible Managed 0.60% 0.02% 0.62% 0.62%
High Yield Bond 0.55% 0.05% 0.60% 0.60%
Stock Index 0.35% 0.04% 0.39% 0.39%
Equity Income 0.40% 0.02% 0.42% 0.42%
Equity 0.45% 0.02% 0.47% 0.47%
Prudential Jennison 0.60% 0.03% 0.63% 0.63%
Small Capitalization Stock 0.40% 0.05% 0.45% 0.45%
Global 0.75% 0.09% 0.84% 0.84%
Natural Resources 0.45% 0.12% 0.57% 0.55%
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* Prudential currently makes payments to the following six subaccounts so
that the portfolio expenses indirectly borne by a Contract owner investing
in: (1) the Zero Coupon Bond Portfolios will not exceed the investment
advisory fee; and (2) the High Yield Bond, Stock Index, Equity Income, and
Natural Resources Portfolios will not exceed the investment advisory fee
plus 0.1% of the average daily net assets of the Portfolio. Prudential
intends to continue these adjustments in the future, although we retain
the right to discontinue them.
TYPES OF DEATH BENEFIT
The death benefit is an important feature of the Contract. You may choose one of
the following two forms of the Contract. They each have a different death
benefit amount.
CONTRACT FORM A, LEVEL DEATH BENEFIT: The death benefit will generally be equal
to the face amount of insurance. It can never be less than this amount. However,
it is possible, after the Contract has been held for many years, that the
Contract Fund will become so large that Prudential -- to meet certain
requirements of the Internal Revenue Code -- will increase the death benefit.
3
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<PAGE>
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CONTRACT FORM B, VARIABLE DEATH BENEFIT: The death benefit will increase and
decrease as the amount of the Contract Fund varies with the investment
performance of the selected options. However, the death benefit under Form B, as
is true under Form A, will never be less than the initial face amount and it may
also be increased to satisfy Internal Revenue Code requirements.
Throughout this prospectus the word "Contract" refers to both Form A and B
unless specifically stated otherwise. Under both Form A and B Contracts there is
no guaranteed minimum cash surrender value. For more information, refer to HOW A
FORM A (LEVEL) CONTRACT'S DEATH BENEFIT WILL VARY, page 19 and HOW A FORM B
(VARIABLE) CONTRACT'S DEATH BENEFIT WILL VARY, page 20.
PREMIUM PAYMENTS
Your Contract sets forth a Scheduled Premium which is payable annually,
semi-annually, quarterly or monthly. Prudential guarantees that, if the
Scheduled Premiums are paid when due (or if missed premiums are paid later, with
interest) and there are no withdrawals, the Contract will not lapse because of
unfavorable investment experience. Your Contract may terminate if the Contract
debt exceeds what the cash surrender value would be if there was no Contract
debt. Prudential will notify you before the Contract is terminated and you may
then repay all or enough of the loan to keep the Contract inforce. See CONTRACT
LOANS, page 26.
Your Scheduled Premium consists of two amounts:
o The initial amount is payable from the time you purchase your Contract
until the Contract anniversary immediately following your 65th birthday or
the Contract's seventh anniversary, whichever is later (the "Premium
Change Date");
o The guaranteed maximum amount payable after the Premium Change Date. See
PREMIUMS, page 15.
The payment of premiums in excess of Scheduled Premiums may cause the Contract
to become a Modified Endowment Contract for federal income tax purposes. See
PREMIUMS, page 15, and TAX TREATMENT OF CONTRACT BENEFITS, page 28.
LAPSE AND GUARANTEE AGAINST LAPSE
The Prudential Variable APPRECIABLE LIFE Insurance Contract is a form of life
insurance that provides much of the flexibility of variable universal life,
however, with two important distinctions:
o Prudential guarantees that if the Scheduled Premiums are paid when due, or
within the grace period (or missed premiums are paid later with interest),
the Contract will not lapse and at least the face amount of insurance will
be paid upon the death of the insured.
o If all premiums are not paid when due (or not made up later), the Contract
will still not lapse as long as the Contract Fund is higher than a stated
amount set forth in the Contract. This amount is called the "Tabular
Contract Fund", and it increases each year. In later years it becomes
quite high. The Contract lapses when the Contract Fund falls below this
stated amount, rather than when it drops to zero. This means that when a
Variable APPRECIABLE LIFE Contract lapses, it may still have considerable
value and you may have a substantial incentive to reinstate it. If you
choose otherwise, you may take, in one form or another, the cash surrender
value.
You can find more information on this topic in LAPSE AND REINSTATEMENT on page
27.
4
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<PAGE>
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REFUND
For a limited time, a Contract may be returned for a refund in accordance with
the terms of its "free-look" provision. See SHORT-TERM CANCELLATION RIGHT OR
"FREE-LOOK," page 14.
THE REPLACEMENT OF LIFE INSURANCE IS GENERALLY NOT IN YOUR BEST INTEREST. IN
MOST CASES, IF YOU REQUIRE ADDITIONAL COVERAGE, THE BENEFITS OF YOUR EXISTING
CONTRACT CAN BE PROTECTED BY PURCHASING ADDITIONAL INSURANCE OR A SUPPLEMENTAL
CONTRACT. IF YOU ARE CONSIDERING REPLACING A CONTRACT, YOU SHOULD COMPARE THE
BENEFITS AND COSTS OF SUPPLEMENTING YOUR EXISTING CONTRACT WITH THE BENEFITS AND
COSTS OF PURCHASING THE CONTRACT DESCRIBED IN THIS PROSPECTUS AND YOU SHOULD
CONSULT WITH A QUALIFIED TAX ADVISER.
THIS PROSPECTUS MAY ONLY BE OFFERED IN JURISDICTIONS IN WHICH THE OFFERING IS
LAWFUL. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN THE PROSPECTUS
AND STATEMENT OF ADDITIONAL INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC.,
AND IN THE PROSPECTUS FOR THE REAL PROPERTY ACCOUNT.
5
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<PAGE>
GENERAL INFORMATION ABOUT PRUDENTIAL, THE
PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT, AND THE
VARIABLE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACT
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
The Prudential Insurance Company of America is a mutual insurance company,
founded in 1875 under the laws of the State of New Jersey. Prudential is
licensed to sell life insurance and annuities in the District of Columbia, Guam,
U. S. Virgin Islands, and in all states.
Prudential is currently considering reorganizing itself into a publicly traded
stock company through a process known as "demutualization". On February 10,
1998, Prudential's Board of Directors authorized management to take preliminary
steps necessary to allow Prudential to demutualize. On July 1, 1998, legislation
was enacted in New Jersey that would permit this conversion to occur and that
specified the process for conversion. Demutualization is a complex process
involving development of a plan of reorganization, adoption of a plan by
Prudential's Board of Directors, a public hearing, voting by qualified
policyholders, and regulatory approval. Prudential is working toward completing
this process in 2001 and currently expects adoption by the Board of Directors to
take place in the latter part of 2000. However, there is no certainty that the
demutualization will be completed in this timeframe or that the necessary
approvals will be obtained. Also it is possible that after careful review,
Prudential could decide not to demutualize or could decide to delay its plans.
The plan of reorganization, which has not been fully developed and approved,
would provide the criteria for determining eligibility and the methodology for
allocating shares or other consideration to those who would be eligible.
Generally the amount of shares or other consideration eligible customers would
receive would be based on a number of factors, including types, amounts, and
issue years of the policies. As a general rule, owners of Prudential-issued
insurance policies and annuity contracts would be eligible, provided that their
policies were in force on the date Prudential's Board of Directors adopted a
plan of reorganization, while mutual fund customers and customers of
Prudential's subsidiaries would not be. It has not yet been determined whether
any exceptions to that general rule will be made with respect to policyholders
and contractholders of Prudential's subsidiaries. This does not constitute a
proposal, offer, solicitation or recommendation regarding any plan of
reorganization that may be proposed or a recommendation regarding the ownership
of any stock that could be issued in connection with any such demutualization.
Prudential's consolidated financial statements begin on page B1 and should be
considered only as bearing upon Prudential's ability to meet its obligations
under the Contracts.
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
We have established a separate account, The Prudential Variable Appreciable
Account (the "Account"), to hold the assets that are associated with the
Contracts. The Account was established on August 11, 1987 under New Jersey law
and is registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940 ("1940 Act") as a unit investment trust, which is
a type of investment company. The Account meets the definition of a "separate
account" under the federal securities laws. The Account holds assets that are
segregated from all of Prudential's other assets.
Prudential is also the legal owner of the assets in the Account. Prudential will
maintain assets in the Account with a total market value at least equal to the
reserve and other liabilities relating to the variable benefits attributable to
the Account. These assets may not be charged with liabilities which arise from
any other business Prudential conducts. In addition to these assets, the
Account's assets may include funds contributed by Prudential to commence
operation of the Account and may include accumulations of the charges Prudential
makes against the Account. From time to time these additional assets may be
withdrawn by Prudential. Prudential will consider any possible adverse impact
the withdrawal might have on the Account before making any such withdrawal.
The obligations to Contract owners and beneficiaries arising under the Contract
are general corporate obligations of Prudential.
6
<PAGE>
Currently, you may invest in one or a combination of 15 available subaccounts.
When you choose a subaccount, we purchase shares of the Series Fund which are
held as an investment for that option. We hold these shares in the Account.
Prudential may add additional subaccounts in the future. The Account's financial
statements begin on page A1.
THE PRUDENTIAL SERIES FUND, INC.
The Series Fund is registered under the 1940 Act as an open-end diversified
management investment company. Its shares are currently sold only to separate
accounts of Prudential and certain subsidiary insurers that offer variable life
insurance and variable annuity contracts. The Account will purchase and redeem
shares from the Series Fund at net asset value. Shares will be redeemed to the
extent necessary for Prudential to provide benefits under the Contract and to
transfer assets from one subaccount to another, as requested by Contract owners.
Any dividend or capital gain distribution received from a portfolio of the
Series Fund will be reinvested immediately at net asset value in shares of that
portfolio and retained as assets of the corresponding subaccount.
THE SERIES FUND HAS A SEPARATE PROSPECTUS THAT IS PROVIDED WITH THIS PROSPECTUS.
YOU SHOULD READ THE SERIES FUND PROSPECTUS BEFORE YOU DECIDE TO ALLOCATE ASSETS
TO THE SERIES FUND SUBACCOUNTS. THERE IS NO ASSURANCE THAT THE INVESTMENT
OBJECTIVES OF THE SERIES FUND PORTFOLIOS WILL BE MET.
Listed below are the available portfolios of the Series Fund and their
investment objectives.
o MONEY MARKET PORTFOLIO: The investment objective is maximum current income
consistent with the stability of capital and the maintenance of liquidity.
The Portfolio invests in high quality short-term debt obligations that
mature in 13 months or less.
o DIVERSIFIED BOND PORTFOLIO: The investment objective is a high level of
income over a longer term while providing reasonable safety of capital.
The Portfolio invests primarily in higher grade debt obligations and high
quality money market investments.
o GOVERNMENT INCOME PORTFOLIO: The investment objective is a high level of
income over the longer term consistent with the preservation of capital.
The Portfolio invests primarily in U.S. Government securities, including
intermediate and long-term U.S. Treasury securities and debt obligations
issued by agencies or instrumentalities established by the U.S.
government.
o TWO ZERO COUPON BOND PORTFOLIOS - 2000 AND 2005: The investment objective
of these two portfolios is the highest predictable compound investment for
a specific period of time, consistent with the safety of invested capital.
The Portfolio invests primarily in debt obligations of the U.S. Treasury
and corporations that have been issued without interest coupons or have
been stripped of their interest coupons, or have interest coupons that
have been stripped from the debt obligations. On November 15, 2000, the
liquidation date of the Zero Coupon Bond Portfolio, investments in that
portfolio will be transferred to the Money Market Portfolio.
o CONSERVATIVE BALANCED PORTFOLIO: The investment objective is a total
investment return consistent with a conservatively managed diversified
portfolio. The Portfolio invests in a mix of equity securities, debt
obligations and money market instruments.
o FLEXIBLE MANAGED PORTFOLIO: The investment objective is a total investment
return consistent with an aggressively managed diversified portfolio. The
Portfolio invests in a mix of equity securities, debt obligations and
money market instruments.
o HIGH YIELD BOND PORTFOLIO: The investment objective is a high total
return. The Portfolio invests primarily in high yield/high risk debt
securities.
o STOCK INDEX PORTFOLIO: The investment objective is investment results that
generally correspond to the performance of publicly-traded common stocks.
The Portfolio attempts to duplicate the price and yield performance of the
Standard & Poor's 500 Stock Index (the "S&P 500").
7
<PAGE>
o EQUITY INCOME PORTFOLIO: The investment objective is both current income
and capital appreciation. The Portfolio invests primarily in common stocks
and convertible securities that provide good prospects for returns above
those of the S&P 500 or the NYSE Composite Index.
o EQUITY PORTFOLIO: The investment objective is capital appreciation. The
Portfolio invests primarily in common stocks of major established
corporations as well as smaller companies that offer attractive prospects
of appreciation.
o PRUDENTIAL JENNISON PORTFOLIO: The investment objective is to achieve
long-term growth of capital. The Portfolio invests primarily in equity
securities of major established corporations that offer above-average
growth prospects.
o SMALL CAPITALIZATION STOCK PORTFOLIO: The investment objective is
long-term growth of capital. The Portfolio invests primarily in equity
securities of publicly-traded companies with small market capitalization.
o GLOBAL PORTFOLIO: The investment objective is long-term growth of capital.
The Portfolio invests primarily in common stocks (and their equivalents)
of foreign and U.S. companies.
o NATURAL RESOURCES PORTFOLIO: The investment objective is long-term growth
of capital. The Portfolio invests primarily in common stocks and
convertible securities of natural resource companies and securities that
are related to the market value of some natural resource.
Prudential is the investment adviser for the assets of each of the portfolios of
the Series Fund. Prudential's principal business address is 751 Broad Street,
Newark, New Jersey 07102-3777. Prudential has a Service Agreement with its
wholly-owned subsidiary, The Prudential Investment Corporation ("PIC"). The
Service Agreement provides that, subject to Prudential's supervision, PIC will
furnish investment advisory services in connection with the management of the
Series Fund. In addition, Prudential has entered into a Subadvisory Agreement
with its wholly-owned subsidiary, Jennison Associates LLC ("Jennison"), under
which Jennison provides investment advisory services for the Prudential Jennison
Portfolio. Further detail is provided in the prospectus and statement of
additional information for the Series Fund. Prudential, PIC, and Jennison are
registered as investment advisers under the 1940 Act.
As an investment adviser, Prudential charges the Series Fund a daily investment
management fee as compensation for its services. In addition to the investment
management fee, each portfolio incurs certain expenses, such as accounting and
custodian fees. See DEDUCTIONS FROM PORTFOLIOS, page 10.
In the future it may become disadvantageous for both variable life insurance and
variable annuity contract separate accounts to invest in the same underlying
mutual fund. Although neither the companies that invest in the Series Fund nor
the Series Fund currently foresees any such disadvantage, the Series Fund's
Board of Directors intends to monitor events in order to identify any material
conflict between variable life insurance and variable annuity contract owners
and to determine what action, if any, should be taken. Material conflicts could
result from such things as: (1) changes in state insurance law; (2) changes in
federal income tax law; (3) changes in the investment management of any
portfolio of the Series Fund; or (4) differences between voting instructions
given by variable life insurance and variable annuity contract owners.
VOTING RIGHTS
We are the legal owner of the shares in the Series Fund associated with the
subaccounts. However, we vote the shares in the Series Fund according to voting
instructions we receive from Contract owners. We will mail you a proxy, which is
a form you need to complete and return to us to tell us how you wish us to vote.
When we receive those instructions, we will vote all of the shares we own on
your behalf in accordance with those instructions. We will vote the shares for
which we do not receive instructions and shares that we own, in the same
proportion as the shares for which instructions are received. We may change the
way your voting instructions are calculated if it is required by federal
regulation. Should the applicable federal securities laws or regulations, or
their current interpretation, change so as to permit Prudential to vote shares
of the Series Fund in its own right, it may elect to do so.
THE FIXED-RATE OPTION
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED-RATE
OPTION UNDER THE CONTRACT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND THE GENERAL ACCOUNT HAS NOT BEEN REGISTERED AS AN
8
<PAGE>
INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940. ACCORDINGLY,
INTERESTS IN THE FIXED-RATE OPTION ARE NOT SUBJECT TO THE PROVISIONS OF THESE
ACTS, AND PRUDENTIAL HAS BEEN ADVISED THAT THE STAFF OF THE SEC HAS NOT REVIEWED
THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE FIXED-RATE OPTION. ANY
INACCURATE OR MISLEADING DISCLOSURE REGARDING THE FIXED-RATE OPTION MAY,
HOWEVER, BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF FEDERAL
SECURITIES LAWS.
You may choose to allocate, either initially or by transfer, all or part of your
Contract Fund to the fixed-rate option. This amount becomes part of Prudential's
general account. Prudential's general account consists of all assets owned by
Prudential other than those in the Account and in other separate accounts that
have been or may be established by Prudential. Subject to applicable law,
Prudential has sole discretion over the investment of the general account
assets. Contract owners do not share in the investment experience of those
assets. Instead, Prudential guarantees that the part of the Contract Fund
allocated to the fixed-rate option will accrue interest daily at an effective
annual rate that Prudential declares periodically. This rate may not be less
than an effective annual rate of 4%.
Currently, the following steps are taken for crediting interest rates: (1)
declared interest rates remain in effect from the date money is allocated to the
fixed-rate option until the Monthly date in the same month in the following
year; (2) thereafter, a new crediting rate will be declared each year and will
remain in effect for the calendar year. Prudential reserves the right to change
this practice. The term Monthly date means the day of each month that is the
same as the Contract Date. See CONTRACT DATE, page 15.
Prudential is not obligated to credit interest at a higher rate than 4%,
although we may do so. Different crediting rates may be declared for different
portions of the Contract Fund allocated to the fixed-rate option. At least
annually and on request, you will be advised of the interest rates that
currently apply to your Contract.
Transfers from the fixed-rate option are subject to strict limits. See
TRANSFERS, page 17. The payment of any cash surrender value attributable to the
fixed-rate option may be delayed up to six months. See WHEN PROCEEDS ARE PAID,
page 23.
THE PRUDENTIAL VARIABLE CONTRACT REAL PROPERTY ACCOUNT
The Real Property Account is a separate account of Prudential. Through a general
partnership formed by Prudential and two of its wholy-owned subsidiaries, this
account invests primarily in income-producing real property such as office
buildings, shopping centers, agricultural land, hotels, apartments or industrial
properties. It also invests in mortgage loans and other real estate-related
investments, including sale-leaseback transactions. It is not registered as an
investment company under the 1940 Act and is therefore not subject to the same
regulation as the Series Fund. The objectives of the Real Property Account and
the Partnership are to preserve and protect capital, provide for compounding of
income as a result of reinvestment of cash flow from investments, and provide
for increases over time in the amount of such income through appreciation in
asset value.
The Partnership has entered into an investment management agreement with
Prudential, under which Prudential selects the properties and other investments
held by the Partnership. Prudential charges the Partnership a daily fee for
investment management which amounts to 1.25% per year of the average daily gross
assets of the Partnership.
A full description of the Real Property Account, its management, policies,
restrictions, charges and expenses, investment risks, the Partnership's
investment objectives, and all other aspects of the Real Property Account's and
the Partnership's operations is contained in the attached prospectus for the
Real Property Account. It should be read together with this prospectus by any
Contract owner considering the real estate investment option. There is no
assurance that the investment objectives of the Real Property Account will be
met.
WHICH INVESTMENT OPTION SHOULD BE SELECTED?
Historically, for investments held over relatively long periods, the investment
performance of common stocks has generally been superior to that of short or
long-term debt securities, even though common stocks have been subject to much
more dramatic changes in value over short periods of time. Accordingly, the
Stock Index, Equity Income, Equity, Prudential Jennison, Small Capitalization
Stock, Global, or Natural Resources Portfolios may be desirable options if you
are willing to accept such volatility in your Contract values. Each of these
equity portfolios involves different policies and investment risks.
9
<PAGE>
You may prefer the somewhat greater protection against loss of principal (and
reduced chance of high total return) provided by the Government Income or
Diversified Bond Portfolios. You may want even greater safety of principal and
may prefer the Money Market Portfolio or the fixed-rate option, recognizing that
the level of short-term rates may change rather rapidly. Money invested in a
Zero Coupon Bond Portfolio and held to its liquidation date will realize a
predictable return. Although the portfolio's value may fluctuate significantly
with changes in interest rates prior to its liquidation date. If you are willing
to take risks and possibly achieve a higher total return, you may prefer the
High Yield Bond Portfolio, recognizing that the risks are greater with lower
quality bonds with normally higher yields. You may wish to divide your invested
premium among two or more of the portfolios. You may wish to obtain
diversification by relying on Prudential's judgment for an appropriate asset mix
by choosing the Conservative Balanced or Flexible Managed Portfolios. The Real
Property Account permits you to diversify your investment under the Contract to
include an interest in a pool of income-producing real property, and real estate
is often considered to be a hedge against inflation.
Your choice should take into account your willingness to accept investment
risks, how your other assets are invested, and what investment results you may
experience in the future. You should consult your Prudential Representative from
time to time about the choices available to you under the Contract. Prudential
recommends against frequent transfers among the several options. Experience
generally indicates that "market timing" investing, particularly by
non-professional investors, is likely to prove unsuccessful.
DETAILED INFORMATION ABOUT THE CONTRACT
CONTRACT FEES AND CHARGES
This section provides a more detailed description of each charge that is
described briefly in the chart on page 2.
In several instances we will use the terms "maximum charge" and "current
charge." The "maximum charge," in each instance, is the highest charge that
Prudential is entitled to make under the Contract. The "current charge" is the
lower amount that Prudential is now charging. However, if circumstances change,
we reserve the right to increase each current charge, up to the maximum charge,
without giving any advance notice.
A Contract owner may add several "riders" to the Contract which provide
additional benefits and are charged for separately. The statement and
description of charges that follows assumes there are no riders to the Contract.
DEDUCTIONS FROM PREMIUMS
(a) We deduct a charge for taxes attributable to premiums from each premium
payment. That charge is currently made up of two parts. The first part is
a charge for state and local premium-based taxes. The tax rate varies from
state to state, generally ranging from 0.75% to 5% (in some instances may
exceed 5%) of the premium received by Prudential. The second part is a
charge for federal income taxes measured by premiums, and it is equal to
1.25% of the premium. We believe that this charge is a reasonable estimate
of an increase in Prudential's federal income taxes resulting from a 1990
change in the Internal Revenue Code. It is intended to recover this
increased tax. During 1999, 1998, and 1997, Prudential deducted a total of
approximately $33,102,000, $35,946,000, and $36,591,000, respectively, in
taxes attributable to premiums.
(b) We deduct a charge of $2 from each premium payment to cover the cost of
collecting and processing premiums. Thus, if you pay premiums annually,
this charge will be $2 per year. If you pay premiums monthly, the charge
will be $24 per year. If you pay premiums more frequently, for example
under a payroll deduction plan with your employer, the charge may be more
than $24 per year. During 1999, 1998, and 1997, Prudential received a
total of approximately $17,098,000, $18,557,000, and $18,692,000,
respectively, in processing charges.
DEDUCTIONS FROM PORTFOLIOS
We deduct an investment advisory fee daily from each portfolio at a rate, on an
annualized basis, from 0.35% for the Stock Index Portfolio to 0.75% for the
Global Portfolio. The expenses incurred in conducting the investment operations
of the portfolios (such as custodian fees and preparation and distribution of
annual reports) are paid out of the portfolio's income. These expenses also vary
from portfolio to portfolio.
10
<PAGE>
The total expenses of each portfolio for the year ended December 31, 1999,
expressed as a percentage of the average assets during the year, are shown
below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
TOTAL PORTFOLIO EXPENSES
- --------------------------------------------------------------------------------------------
TOTAL
PORTFOLIO INVESTMENT OTHER CONTRACTUAL TOTAL ACTUAL
ADVISORY FEE EXPENSES EXPENSES EXPENSES*
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market 0.40% 0.02% 0.42% 0.42%
Diversified Bond 0.40% 0.03% 0.43% 0.43%
Government Income 0.40% 0.04% 0.44% 0.44%
Zero Coupon Bond 2000 0.40% 0.18% 0.58% 0.40%
Zero Coupon Bond 2005 0.40% 0.19% 0.59% 0.40%
Conservative Balanced 0.55% 0.02% 0.57% 0.57%
Flexible Managed 0.60% 0.02% 0.62% 0.62%
High Yield Bond 0.55% 0.05% 0.60% 0.60%
Stock Index 0.35% 0.04% 0.39% 0.39%
Equity Income 0.40% 0.02% 0.42% 0.42%
Equity 0.45% 0.02% 0.47% 0.47%
Prudential Jennison 0.60% 0.03% 0.63% 0.63%
Small Capitalization Stock 0.40% 0.05% 0.45% 0.45%
Global 0.75% 0.09% 0.84% 0.84%
Natural Resources 0.45% 0.12% 0.57% 0.55%
---------------------------------------------------------------------------------------------
</TABLE>
* Prudential currently makes payments to the following six subaccounts so
that the portfolio expenses indirectly borne by a Contract owner investing
in: (1) the Zero Coupon Bond Portfolios will not exceed the investment
advisory fee; and (2) the High Yield Bond, Stock Index, Equity Income, and
Natural Resources Portfolios will not exceed the investment advisory fee
plus 0.1% of the average daily net assets of the Portfolio. Prudential
intends to continue these adjustments in the future, although we retain
the right to discontinue them.
DAILY DEDUCTION FROM THE CONTRACT FUND
Each day we deduct a charge from the assets of each of the subaccounts and/or
the Real Property Account (the "variable investment options") in an amount
equivalent to an effective annual rate of 0.90%. For Contracts with face amounts
of $100,000 or more, the current charge is 0.60%. This charge is intended to
compensate us for assuming mortality and expense risks under the Contract. The
mortality risk assumed is that insureds may live for shorter periods of time
than we estimated when it determined what mortality charge to make. The expense
risk assumed is that expenses incurred in issuing and administering the Contract
will be greater than Prudential estimated in fixing its administrative charges.
During 1999, 1998, and 1997, Prudential received a total of approximately
$22,838,000, $21,126,000, and $18,891,000, respectively, in mortality and
expense risk charges. This charge is not assessed against amounts allocated to
the fixed-rate option.
MONTHLY DEDUCTIONS FROM CONTRACT FUND
Prudential deducts the following monthly charges proportionately from the dollar
amounts held in each of the chosen investment option[s].
(a) An administrative charge of $3 plus $0.03 per $1,000 per month of face
amount of insurance is deducted each month. Thus, for a Contract with
$75,000 face amount, the charge is $3 plus $2.25 for a total of $5.25. The
charge is intended to pay for processing claims, keeping records, and
communicating with Contract owners. The current charge for Contracts with
face amounts greater than $100,000 is lower. The $0.03 per $1,000 portion
of the charge is reduced to $0.01 per $1,000 for that part of the face
amount that exceeds $100,000 and will not exceed $12. During 1999, 1998,
and 1997, Prudential received a total of approximately $64,174,000,
$63,674,000, and $63,019,000, respectively, in monthly administrative
charges.
(b) A mortality charge is deducted that is intended to be used to pay death
benefits. When an insured dies, the amount payable to the beneficiary is
larger than the Contract Fund and significantly larger if the insured dies
in the early years of a Contract. The mortality charges collected from all
Contract owners enables Prudential to pay the death benefit for the few
insureds who die. We determine the maximum mortality charge by multiplying
the "net amount at risk" under a Contract (the amount by which the
Contract's death benefit exceeds the Contract Fund) by
11
<PAGE>
a rate based upon the insured's current attained age and sex (except where
unisex rates apply) and the anticipated mortality for that class of
persons. The anticipated mortality is based upon mortality tables
published by The National Association of Insurance Commissioners called
the Non-Smoker/Smoker 1980 CSO Tables. Generally, Prudential's current
mortality charge is lower than the maximum for insureds 32 years of age
and older. In addition, for insureds of all ages, if a Contract has a face
amount of at least $100,000, the insured under the Contract has met strict
underwriting requirements and qualifies for a "select rating" basis for
the particular risk classification, the current mortality charges may be
lower still.
Certain Contracts, for example Contracts issued in connection with
tax-qualified pension plans, may be issued on a "guaranteed issue" basis
and may have current mortality charges which are different from those
mortality charges for Contracts which are individually underwritten. These
Contracts with different current mortality charges may be offered to
categories of individuals meeting eligibility guidelines determined by
Prudential.
(c) A sales charge, often called a "sales load", is deducted to pay part of
the costs of selling the Contracts, including commissions, advertising,
and the printing and distribution of prospectuses and sales literature.
The charge is equal to 0.5% of the "primary annual premium". The primary
annual premium is equal to the Scheduled Premium that would be payable if
premiums were being paid annually, less the two deductions from premiums
(taxes attributable to premiums and the $2 processing charge), and less
the $3 part of the monthly deduction described in (a) above. The sales
load is charged whether the Contract owner is paying premiums annually or
more frequently. It is lower on Contracts issued on insureds over 60 years
of age. At present this sales charge is made only during the first five
Contract years or five years after an increase. However, Prudential
reserves the right to make this charge in all Contract years. To
summarize, for most Contracts, this charge is somewhat less than 6% of the
annual Scheduled Premium for each of the first five Contract years and it
may, but probably will not, continue to be charged after that. During
1999, 1998, and 1997, Prudential received a total of approximately
$62,295,000, $86,395,000, and $95,201,000, respectively, in sales charges.
There is a second sales load, which will be charged only if a Contract
lapses or is surrendered before the end of the 10th Contract year and 10
years from an increase in the face amount of insurance. It is often
described as a contingent deferred sales load ("CDSL") and is described
under SURRENDER OR WITHDRAWAL CHARGES, below.
(d) A charge of $0.01 per $1,000 of face amount of insurance is made to
compensate us for the risk we assume by guaranteeing that, no matter how
unfavorable investment experience may be, the death benefit will never be
less than the guaranteed minimum death benefit, so long as Scheduled
Premiums are paid on or before the due date or during the grace period.
This charge and the administrative charge described in (a) above may be
calculated together. During 1999, 1998, and 1997, Prudential received a
total of approximately $12,264,000, $13,470,000, and $13,673,000,
respectively, for this risk charge.
(e) If a rider is added to the basic Contract, or if an insured is in a
substandard risk classification (for example, a person in a hazardous
occupation), we increase the Scheduled Premium and the additional charges
will be deducted monthly.
(f) A charge may be deducted to cover federal, state or local taxes (other
than "taxes attributable to premiums" described above) that are imposed
upon the operations of the Account. At present no such taxes are imposed
and no charge is made.
The earnings of the Account are taxed as part of the operations of Prudential.
Currently, no charge is being made to the Account for Prudential's federal
income taxes, other than the 1.25% charge for federal income taxes measured by
premiums. See DEDUCTIONS FROM PREMIUMS, page 10. Prudential reviews the question
of a charge to the Account for Company federal income taxes periodically. We may
make such a charge in the future for any federal income taxes that would be
attributable to the Contracts.
SURRENDER OR WITHDRAWAL CHARGES
(a) Prudential charges additional sales load, the contingent deferred sales
load ("CDSL"), if the Contract lapses or is surrendered during the first
10 Contract years and 10 years from an increase in the face amount of
insurance, or if a withdrawal is made under a Form A Contract during that
10 year period. No such charge is applicable to the death benefit, no
matter when it may become payable. Subject to the additional limitations
described below, for Contracts that lapse or are surrendered during the
first five Contract years the charge will be equal to 50% of the
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<PAGE>
first year's primary annual premium. The primary annual premium is equal
to the Scheduled Premium that would be payable if premiums were being paid
annually, less the two deductions from premiums (taxes attributable to
premiums and the $2 processing charge), and less the $3 part of the
monthly administrative charge. In the next five Contract years that
percentage is reduced uniformly on a daily basis until it reaches zero on
the 10th Contract anniversary. Thus, for Contracts surrendered at the end
of the sixth year, the maximum deferred sales charge will be 40% of the
first year's primary annual premium, for Contracts surrendered at the end
of year seven, the maximum deferred sales charge will be 30% of the first
year's primary annual premium, and so forth.
The contingent deferred sales load is also subject to a further limit at
older issue ages (approximately above age 67) in order to comply with
certain requirements of state law. Specifically, the contingent deferred
sales load for such insureds is no more than $32.50 per $1,000 of face
amount.
The sales load is subject to a further important limitation that may,
particularly for Contracts that lapse or are surrendered within the first
five or six years, result in a lower contingent deferred sales load than
that described above. (This limitation might also, under unusual
circumstances, apply to reduce the monthly sales load deductions described
in item (c) under MONTHLY DEDUCTIONS FROM CONTRACT FUND, page 11.)
The limitation is based on a Guideline Annual Premium ("GAP") that is
associated with every Contract. The GAP is an amount, generally larger
than the gross annual Scheduled Premium for the Contract, determined
actuarially in accordance with a definition set forth in a regulation of
the Securities and Exchange Commission. The maximum aggregate sales load
that Prudential will charge (that is, the sum of the monthly sales load
deduction and the contingent deferred sales charge) will not be more than
30% of the premiums actually paid until those premiums total one GAP plus
no more than 9% of the next premiums paid until total premiums are equal
to five GAPS, plus no more than 6% of all subsequent premiums. If the
sales charges described above would at any time exceed this maximum amount
then the charge, to the extent of any excess, will not be made.
The following table shows the sales loads that would be paid by a 35 year
old man under a Form B Contract with $100,000 face amount of insurance,
both through the monthly deductions from the Contract Fund described above
and upon the surrender of the Contract. If the Contract is partially
surrendered or the face amount is decreased during the first 10 years, a
proportionate amount of the contingent deferred sales charge will be
deducted from the Contract Fund.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
CUMULATIVE
SURRENDER, CUMULATIVE CUMULATIVE CONTINGENT TOTAL TOTAL SALES
LAST DAY OF SCHEDULED SALES LOAD DEFERRED SALES LOAD AS
YEAR NO. PREMIUMS PAID DEDUCTED FROM SALES LOAD LOAD PERCENTAGE OF
CONTRACT FUND SCHEDULED
PREMIUMS PAID
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 $ 894.06 $ 49.56 $218.66 $268.22 30.00%
2 1,788.12 99.12 367.64 466.76 26.10%
3 2,682.18 148.68 398.55 547.23 20.40%
4 3,576.24 198.24 414.00 612.24 17.12%
5 4,470.30 247.80 414.00 661.80 14.80%
6 5,364.36 247.80 331.00 578.80 10.79%
7 6,258.42 247.80 248.00 495.80 7.92%
8 7,152.48 247.80 166.00 413.80 5.79%
9 8,046.54 247.80 83.00 330.80 4.11%
10 8,940.60 247.80 0.00 247.80 2.77%
------------------------------------------------------------------------------------------------
</TABLE>
The percentages shown in the last column will not be appreciably different
for insureds of different ages.
(b) Prudential deducts an administrative charge of $5 per $1,000 of face
amount of insurance upon lapse or surrender to cover the cost of
processing applications, conducting medical examinations, determining
insurability and the insured's rating class, and establishing records.
However, this charge is reduced beginning on the Contract's fifth
anniversary and declines daily at a constant rate until it disappears
entirely on the 10th Contract anniversary and
13
<PAGE>
10 years from an increase in the face amount of insurance. If the Contract
is partially surrendered or the face amount is decreased during the first
10 years, we will deduct a proportionate amount of the charge from the
Contract Fund. During 1999, 1998, and 1997, Prudential received a total of
approximately $9,584,000, $8,569,000, and $8,959,000, respectively, from
surrendered or lapsed Contracts.
TRANSACTION CHARGES
Prudential charges a fee for certain transactions. For example, if the face
amount of insurance is decreased or part of the cash surrender value is
withdrawn. The fee will generally be $15 or less. Currently, we waive the fee in
some instances. These fees are further described in this prospectus.
REQUIREMENTS FOR ISSUANCE OF A CONTRACT
Generally, the Contract may be issued on insureds below the age of 81. You may
apply for a minimum initial guaranteed death benefit of $75,000; however, higher
minimums apply to insureds over the age of 75. Insureds 14 years of age or less
may apply for a minimum initial guaranteed death benefit of $50,000, which will
increase by 50% at age 21. See SALES TO PERSONS 14 YEARS OF AGE OR YOUNGER, page
31. Before issuing any Contract, Prudential requires evidence of insurability,
which may include a medical examination. Non-Smokers who meet preferred
underwriting requirements are offered the most favorable premium rate.
Prudential charges a higher premium if an extra mortality risk is involved.
Certain classes of Contracts, for example a Contract issued in connection with a
tax-qualified pension plan, may be issued on a "guaranteed issue" basis and may
have a lower minimum initial death benefit than a Contract which is individually
underwritten. These are the current underwriting requirements. We reserve the
right to change them on a non-discriminatory basis.
SHORT-TERM CANCELLATION RIGHT OR "FREE-LOOK"
Generally, you may return the Contract for a refund within 10 days after you
receive it, within 45 days after Part I of the application for insurance is
signed, or within 10 days after Prudential mails or delivers a Notice of
Withdrawal Right, whichever is latest. Some states allow a longer period of time
during which a Contract may be returned for a refund. You can request a refund
by mailing or delivering the Contract to the representative who sold it or to
the Home Office specified in the Contract. A Contract returned according to this
provision shall be deemed void from the beginning. You will then receive a
refund of all premium payments made, plus or minus any change due to investment
experience. However, if applicable law so requires and if you exercise your
short-term cancellation right, you will receive a refund of all premium payments
made, with no adjustment for investment experience.
CONTRACT FORMS
You may select either of two forms of the Contract. The Scheduled Premiums shown
in the Contract will be the same for a given insured, regardless of which
Contract Form is chosen. Contract Form A has a death benefit equal to the
initial face amount of insurance. The Form A Contract death benefit does not
vary with the investment performance of the investment options you selected,
unless the death benefit is increased to ensure that the Contract meets the
Internal Revenue Code's definition of life insurance. See HOW A FORM A (LEVEL)
CONTRACT'S DEATH BENEFIT WILL VARY, page 19. The payment of greater than
Scheduled Premiums and favorable investment results of the investment options
which you selected will generally increase the cash surrender value. See HOW THE
CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE, page 18.
Contract Form B also has an initial face amount of insurance but favorable
investment performance and payment of greater than Scheduled Premiums generally
result in an increase in the death benefit and, over time, in a lesser increase
in the cash surrender value than under the Form A Contract. See HOW THE CONTRACT
FUND CHANGES WITH INVESTMENT EXPERIENCE, page 18 and HOW A FORM B (VARIABLE)
CONTRACT'S DEATH BENEFIT WILL VARY, page 20. Unfavorable investment performance
will result in decreases in the death benefit (but never below the face amount
stated in the Contract) and in the cash surrender value.
You should select the form that best meets your needs and objectives. All
permanent insurance provides both protection for beneficiaries in the event of
death and the opportunity to accumulate savings for possible use in later years.
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Prudential's Variable APPRECIABLE LIFE Contract provides more flexible
investment opportunities than do more conventional life insurance policies
because:
(1) you decide how the assets held under the Contract will be invested;
(2) it permits considerable flexibility in determining the amount and
timing of premium payments;
(3) it permits adjustment of the face amount of insurance (subject, in
the case of an increase, to evidence of insurability); and
(4) favorable investment returns result in an increase in Contract
values.
Contract owners should choose Contract Form B if they prefer to have favorable
investment results and greater than Scheduled Premiums reflected in part in the
form of an increased death benefit. Contract owners should choose Contract Form
A if they are satisfied with the amount of their insurance coverage and wish to
have favorable investment results and additional premiums reflected to the
maximum extent in increasing cash surrender values.
In choosing a Contract form, you should also consider whether you intend to use
the withdrawal feature. Purchasers of Form A Contracts should note that an early
withdrawal may result in a portion of the surrender charge being deducted from
the Contract Fund. Furthermore, a purchaser of a minimum face amount Form A
Contract cannot make withdrawals unless the Contract's death benefit has been
increased to comply with the Internal Revenue Code's definition of life
insurance. Purchasers of Form B Contracts will not incur a surrender charge for
a withdrawal and are not precluded from making withdrawals if they purchase a
minimum face amount Contract. See WITHDRAWAL OF EXCESS CASH SURRENDER VALUE,
page 22. Withdrawal of part of the cash surrender value may have tax
consequences, see TAX TREATMENT OF CONTRACT BENEFITS, page 28.
CONTRACT DATE
When the first premium payment is paid with the application for a Contract, the
Contract Date will ordinarily be the later of the application date and the
medical examination date. If the first premium is not paid with the application,
the Contract Date will ordinarily be the date the first premium is paid and the
Contract is delivered. It may be advantageous for a Contract owner to have an
earlier Contract Date when that will result in Prudential using a lower issue
age in determining the Scheduled Premium amount. Prudential will permit a
Contract to be back-dated but only to a date not earlier than six months prior
to the application date. This may be advantageous for some Contract owners as a
lower issue age may result in lower current charges. For a Contract that is
backdated, we will credit the initial premium as of the date of receipt and will
deduct any charges due on or before that date.
PREMIUMS
As explained earlier, the Contract will not lapse because of unfavorable
investment experience if you pay your Scheduled Premiums when due and take no
withdrawals or have no outstanding loans. If you pay premiums other than on a
monthly basis, you will receive a notice that a premium is due about three weeks
before each due date. If you pay premiums monthly, each year you will receive a
book with 12 coupons that will serve as a reminder. You may change the frequency
of premium payments with Prudential's consent.
You may elect to have monthly premiums paid automatically under the "Pru-Matic
Premium Plan" by pre-authorized transfers from a bank checking account. Some
Contract owners may also be eligible to have monthly premiums paid by
pre-authorized deductions from an employer's payroll.
Your Contract shows two Scheduled Premium amounts. The first or initial amount
is payable from the time you purchase your Contract until the Contract
anniversary immediately following your 65th birthday or the Contract's seventh
anniversary, whichever is later (the "Premium Change Date"). The second
Scheduled Premium Amount will be lower than the maximum amount stated in your
Contract if your Contract Fund, net of any excess premiums, on the Premium
Change Date is higher than it would have been had: (1) all Scheduled Premiums
been paid when due; (2) maximum contractual charges been deducted; and (3) only
a net rate of return of 4% been earned. We will tell you what your second
Scheduled Premium amount will be. For examples of what the second Scheduled
Premium might be, see Footnote 3 to the tables on pages T1 through T4.
A significant feature of this Contract is that it permits you to pay greater
than Scheduled Premiums. You may make unscheduled premium payments occasionally
or on a periodic basis. If you wish, you may select a higher
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contemplated premium than the Scheduled Premium. Prudential will then bill you
for the chosen premium. In general, the regular payment of higher premiums will
result in higher cash surrender values and, at least under Form B, in higher
death benefits. Conversely, a Scheduled Premium does not need to be made if the
Contract Fund is large enough to enable the charges due under the Contract to be
made without causing the Contract to lapse. See Lapse and Reinstatement, page
24. The payment of premiums in excess of Scheduled Premiums may cause the
Contract to become a Modified Endowment Contract for federal income tax
purposes. If this happens, loans and other distributions which would otherwise
not be taxable events may be subject to federal income taxation. See TAX
TREATMENT OF CONTRACT BENEFITS, page 28.
If you choose to add a "rider" to your Contract that provides additional
benefits (see RIDERS, page 30), the Scheduled Premium may be increased. Some
riders provide additional term insurance in a stated amount that does not vary
with investment experience. One of these "term riders" also allows you to choose
different insurance amounts in different years. For these riders, you may choose
to pay a billed premium higher than your initial Scheduled Premium. Under some
circumstances, this could result in a higher cash surrender value and death
benefit than if the same premium had been paid under a Contract with the same
death benefit but without the rider. After several years, however, even if the
billed premiums are paid on time, the Contract could lose its guarantee against
lapse. It could also have lower cash surrender values after many more years.
You may choose a level premium option. In that case, the Scheduled Premium, (the
amount of which can be quoted by your Prudential representative), will be higher
and it will not increase at age 65 (or seven years after issue, if later). The
Contract will not lapse because of unfavorable investment experience if the
level Scheduled Premium is paid when due or within the grace period (or missed
premiums are paid later with interest) and there are no withdrawals.
Prudential will generally accept any premium payment of at least $25. Prudential
reserves the right to limit unscheduled premiums to a total of $10,000 in any
Contract year, and to refuse to accept premiums that would immediately result in
more than a dollar-for-dollar increase in the death benefit. See HOW A FORM A
(LEVEL) CONTRACT'S DEATH BENEFIT WILL VARY, page 19 and HOW A FORM B (VARIABLE)
CONTRACT'S DEATH BENEFIT WILL VARY, page 20. The flexibility of premium payments
provides Contract owners with different opportunities under the two Forms of the
Contract. Greater than scheduled payments under a Form A Contract increase the
Contract Fund. Greater than scheduled payments under a Form B Contract increase
both the Contract Fund and the death benefit. Generally, any future increases in
the Contract Fund will be less than under a Form A Contract because the monthly
mortality charges under the Form B Contract will be higher to compensate for the
higher amount of insurance. For all Contracts, the privilege of making large or
additional premium payments offers a way of investing amounts which accumulate
without current income taxation.
Unless you elect otherwise, your Contract will include a "waiver of premium"
provision under which Prudential will pay your Scheduled Premiums if you incur a
disability before age 60 that lasts over six months. If the disability begins
after you become 60 and before you are 65, premiums will be paid only until the
first Contract anniversary following your 65th birthday. The waiver of premium
provision does not apply if you become disabled after your 65th birthday.
ALLOCATION OF PREMIUMS
On the Contract Date, Prudential deducts a $2 processing charge and the charge
for taxes attributable to premiums from the initial premium, and the first
monthly charges are made. See CONTRACT FEES AND CHARGES, page 10. The remainder
of the initial premium will be allocated on the Contract Date among the
subaccounts, the fixed-rate option or the Real Property Account according to the
allocations you specified in the application form. The invested portion of any
part of the initial premium in excess of the Scheduled Premium is generally
placed in the selected investment options on the date of receipt at a Home
Office, but not earlier than the Contract Date. If Prudential receives the
initial premium prior to the Contract Date, there will be a period during which
it will not be invested. Each subsequent premium payment, after the deductions
from premiums, will be invested as of the end of the valuation period when
received at a Home Office in accordance with the allocation previously
designated. A valuation period is the period of time from one determination of
the value of the amount invested in a subaccount to the next. Such
determinations are made when the net asset values of the portfolios of the
Series Fund are calculated, which is generally 4:00 p.m. Eastern time on each
day during which the New York Stock Exchange is open. Provided the Contract is
not in default, you may change the way in which subsequent premiums are
allocated by giving written notice to a Home Office. You may also change the way
in which subsequent premiums are allocated by telephoning a Home Office provided
you are enrolled to use the Telephone Transfer System. If any part of the
invested portion of a premium is allocated to a particular investment option,
that portion must be at least 10% on the date the allocation takes effect. All
percentage
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allocations must be in whole numbers. For example, 33% can be selected but
33 1/3% cannot. Of course, the total allocation of all selected investment
options must equal 100%.
TRANSFERS
If the Contract is not in default, or if the Contract is inforce as variable
reduced paid-up insurance (see LAPSE AND REINSTATEMENT, page 27), you may, up to
four times in each Contract year, transfer amounts from one subaccount to
another subaccount, to the fixed-rate option or to the Real Property Account.
Currently, you may make additional transfers with Prudential's consent. There is
no charge. All or a portion of the amount credited to a subaccount may be
transferred.
In addition, the total amount credited to a Contract held in the subaccounts or
the Real Property Account may be transferred to the fixed-rate option at any
time during the first two Contract years. If you wish to convert your variable
Contract to a fixed-benefit Contract in this manner, you must request a complete
transfer of funds to the fixed-rate option and also change your allocation
instructions regarding future premiums.
Transfers among subaccounts will take effect as of the end of the valuation
period (usually the business day) in which a proper transfer request is received
at a Home Office. The request may be in terms of dollars, such as a request to
transfer $10,000 from one subaccount to another, or may be in terms of a
percentage reallocation among subaccounts. In the latter case, as with premium
reallocations, the percentages must be in whole numbers. You may transfer
amounts by proper written notice to a Home Office, or by telephone, provided you
are enrolled to use the Telephone Transfer System. You will automatically be
enrolled to use the Telephone Transfer System unless your Contract is jointly
owned or if you elect not to have this privilege. Telephone transfers may not be
available on Contracts that are assigned (see ASSIGNMENT, page 31), depending on
the terms of the assignment. Prudential has adopted procedures designed to
ensure that requests by telephone are genuine. Prudential will not be held
liable for following telephone instructions that we reasonably believe to be
genuine. Prudential cannot guarantee that you will be able to get through to
complete a telephone transfer during peak periods such as periods of drastic
economic or market change.
All the shares held by the Zero Coupon Bond subaccounts in the corresponding
portfolio of the Series Fund will be redeemed on the liquidation date of that
subaccount. The proceeds of the redemption applicable to each Contract will be
transferred to the Money Market Subaccount unless the Contract owner directs
that it be transferred to another investment option[s]. A transfer that occurs
upon the liquidation date of a Zero Coupon Bond Subaccount will not be counted
as one of the four permissible transfers in a Contract year. The liquidation
date of the Zero Coupon Bond 2000 Portfolio is November 15, 2000, and the
liquidation date of the Zero Coupon Bond 2005 Portfolio is November 15, 2005.
Transfers from the fixed-rate option to the subaccounts or the Real Property
Account are currently permitted once each Contract year and only during the
30-day period beginning on the Contract anniversary. The maximum amount which
may be transferred out of the fixed-rate option each year is currently the
greater of: (a) 25% of the amount in the fixed-rate option, or (b) $2,000. Such
transfer requests received prior to the Contract anniversary will be effected on
the Contract anniversary. Transfer requests received within the 30-day period
beginning on the Contract anniversary will be effected as of the end of the
valuation period in which a proper transfer request is received at a Home
Office. Prudential may change these limits in the future. Transfers from the
Real Property Account are also subject to restrictions, and these restrictions
are described in the attached prospectus for that investment option.
The Contract was not designed for professional market timing organizations,
other organizations, or individuals using programmed, large, or frequent
transfers. A pattern of exchanges that coincides with a "market timing" strategy
may be disruptive to the subaccounts and will be discouraged. If such a pattern
were to be found, we may be required to modify the transfer procedures,
including but not limited to refusing transfer requests of an agent under a
power of attorney on behalf of more than one Contract owner.
DOLLAR COST AVERAGING
We offer a feature called Dollar Cost Averaging ("DCA"). If you wish, premiums
may be allocated to the portion of the Money Market Subaccount used for this
feature (the "DCA account"). Designated dollar amounts will be transferred
monthly from the DCA account to other investment options available under the
Contract, excluding the Money Market subaccount and the fixed-rate option, but
including the Real Property Account. Automatic monthly transfers must be at
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least 3% of the amount allocated to the DCA account (that is, if you designate
$5,000, the minimum monthly transfer is $150), with a minimum of $20 transferred
into any one investment option. These amounts are subject to change at
Prudential's discretion. The minimum transfer amount will only be recalculated
if the amount designated for transfer is increased.
When you establish DCA at issue, you must allocate to the DCA account the
greater of $2,000 or 10% of the initial premium payment. When you establish DCA
after issue, you must allocate to the DCA account at least $2,000. These
minimums are subject to change at Prudential's discretion. After DCA has been
established and as long as the DCA account has a positive balance, you may
allocate or transfer amounts to the DCA account, generally subject to the
limitations on premium payments and transfers. In addition, if you pay premiums
on an annual or semi-annual basis, and you have already established DCA, your
premium allocation instructions may include an allocation of all or a portion of
all your premium payments to the DCA account.
Each automatic monthly transfer will take effect as of the end of the valuation
period on the Monthly Date, provided the New York Stock Exchange ("NYSE") is
open on that date. If the NYSE is not open on the Monthly Date, the transfer
will take effect as of the end of the valuation period on the next day that the
NYSE is open. If the Monthly Date does not occur in a particular month (e.g.,
February 30), the transfer will take effect as of the end of the valuation
period on the last day of the month that the NYSE is open. Automatic monthly
transfers will continue until the balance in the DCA account reaches zero, or
until the Contract owner gives notification of a change in allocation or
cancellation of the feature. If you have an outstanding premium allocation to
the DCA account, but your DCA option has previously been canceled, premiums
allocated to the DCA account will be allocated to the Money Market subaccount.
Currently there is no charge for using the DCA feature.
REDUCTION OF CHARGES FOR CONCURRENT SALES TO SEVERAL INDIVIDUALS
Prudential may reduce the sales charges and/or other charges on individual
Contracts sold to members of a class of associated individuals, or to a trustee,
employer or other entity representing such a class, where it is expected that
such multiple sales will result in savings of sales or administrative expenses.
Prudential determines both the eligibility for such reduced charges, as well as
the amount of such reductions, by considering the following factors:
(1) the number of individuals;
(2) the total amount of premium payments expected to be received from
these Contracts;
(3) the nature of the association between these individuals, and the
expected persistency of the individual Contracts;
(4) the purpose for which the individual Contracts are purchased and
whether that purpose makes it likely that expenses will be reduced;
and
(5) any other circumstances which Prudential believes to be relevant in
determining whether reduced sales or administrative expenses may be
expected.
Some of the reductions in charges for these sales may be contractually
guaranteed; other reductions may be withdrawn or modified by Prudential on a
uniform basis. Prudential's reductions in charges for these sales will not be
unfairly discriminatory to the interests of any individual Contract owners.
HOW THE CONTRACT FUND CHANGES WITH INVESTMENT EXPERIENCE
As explained earlier, after the 10th Contract year (and 10 years from an
increase in face amount), there will no longer be a surrender charge and, if
there is no Contract loan, the cash surrender value will be equal to the
Contract Fund. This section, therefore, also describes how the cash surrender
value of the Contract will change with investment experience.
On the Contract Date, the Contract Fund value is the initial premium less the
deductions from premiums and the first monthly deductions. See CONTRACT FEES AND
CHARGES, page 10. This amount is placed in the investment options you chose.
Thereafter the Contract Fund value changes daily, reflecting increases or
decreases in the value of the securities in which the assets of the subaccount
have been invested, the performance of the Real Property Account if that option
has been selected, and interest credited on any amounts allocated to the
fixed-rate option. It is also reduced by the daily asset charge for mortality
and expense risks assessed against the variable investment options. The Contract
Fund value also increases to reflect the receipt of additional premium payments
and is decreased by the monthly deductions.
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A Contract's cash surrender value on any date will be the Contract Fund value
reduced by the withdrawal charges, if any, and by any Contract debt. Upon
request, Prudential will tell you the cash surrender value of your Contract. It
is possible, although highly unlikely, that the cash surrender value of a
Contract could decline to zero because of unfavorable investment performance,
even if you continue to pay Scheduled Premiums when due.
The tables on pages T1 through T4 of this prospectus illustrate what the death
benefit and cash surrender values would be for a representative Contract,
assuming uniform hypothetical investment results in the selected portfolio[s],
and also provide information about the aggregate premiums payable under the
Contract. The tables also show, if the level premium option has not been chosen,
the maximum Scheduled Premium that may be payable for the period after the
insured reaches the age of 65 for the illustrated Contract under each of the
assumed investment returns.
HOW A FORM A (LEVEL) CONTRACT'S DEATH BENEFIT WILL VARY
As explained earlier, there are two Forms of the Contract, Form A and Form B.
The death benefit under a Form B Contract varies with investment performance
while the death benefit under a Form A Contract does not, unless it must be
increased to satisfy tax requirements.
Under a Form A Contract, the guaranteed minimum death benefit is equal to the
face amount of insurance. However, should the death benefit become payable while
a Contract loan is outstanding, the debt will be deducted from the death
benefit. If the Contract is kept inforce for several years and if investment
performance is reasonably favorable, the Contract Fund value may grow to the
point where it is necessary to increase the death benefit in order for the
Contract to satisfy the Internal Revenue Code's definition of life insurance.
Thus, the death benefit under a Form A Contract will always be the greater of:
(1) the guaranteed minimum death benefit; and
(2) the Contract Fund divided by the "net single premium" per $1 of
death benefit at the insured's attained age on that date.
The latter provision ensures that the Contract will always have a death benefit
large enough to be treated as life insurance for tax purposes under current law.
The net single premium is used only in the calculation of the death benefit, not
for premium payment purposes. The following is a table of illustrative net
single premiums for $1 of death benefit under Contracts issued on insureds in
the preferred rating class.
- --------------------------------------------------------------------------------
INCREASE IN INSURANCE
MALE NET SINGLE AMOUNT PER $1
ATTAINED AGE PREMIUM INCREASE IN CONTRACT FUND
- --------------------------------------------------------------------------------
5 .09151 $10.93
25 .17000 $ 5.88
35 .23700 $ 4.22
55 .45209 $ 2.21
65 .59468 $ 1.68
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INCREASE IN INSURANCE
FEMALE NET SINGLE AMOUNT PER $1
ATTAINED AGE PREMIUM INCREASE IN CONTRACT FUND
- --------------------------------------------------------------------------------
5 .07919 $12.63
25 .15112 $ 6.62
35 .21127 $ 4.73
55 .40090 $ 2.49
65 .53639 $ 1.86
- --------------------------------------------------------------------------------
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Whenever the death benefit is determined in this way, Prudential reserves the
right to limit unscheduled premiums to a total of $10,000 in any Contract year
and to refuse to accept premium payments that would immediately result in more
than a dollar-for-dollar increase in the death benefit.
HOW A FORM B (VARIABLE) CONTRACT'S DEATH BENEFIT WILL VARY
Under a Form B Contract, the death benefit will vary with investment experience.
Assuming no withdrawals, the death benefit will be equal to the face amount of
insurance plus the amount (if any) by which the Contract Fund value exceeds the
applicable "Tabular Contract Fund Value" for the Contract (subject to an
exception described below under which the death benefit is higher). Each
Contract contains a table that sets forth the Tabular Contract Fund Value as of
the end of each of the first 20 years of the Contract. The Tabular Contract Fund
Value for each Contract year is an amount that is slightly less than the
Contract Fund value that would result as of the end of such year if:
(1) you paid only Scheduled Premiums;
(2) you paid premiums when due;
(3) your selected investment options earned a net return at a uniform
rate of 4% per year;
(4) we deducted full mortality charges based upon the 1980 CSO Table;
(5) we deducted the maximum sales load and expense charges; and
(6) there was no Contract debt.
Thus, under a Form B Contract with no withdrawals, the death benefit will equal
the face amount if the Contract Fund equals the Tabular Contract Fund Value. If
the Contract Fund value is a given amount greater than the Tabular Contract Fund
Value, the death benefit will be the face amount plus that excess amount. This
may happen if: (1) investment results are greater than a 4% net return; (2)
payments are made that are more than the Scheduled Premiums; or (3) smaller than
maximum charges are assessed.
The death benefit under a Form B Contract will not fall below the initial face
amount stated in the Contract if, due to investment results less favorable than
a 4% net return, the Contract Fund value is less than the Tabular Contract Fund
Value. Any unfavorable investment experience must first be offset by favorable
performance or additional payments that bring the Contract Fund up to the
Tabular level before favorable investment results or additional payments will
increase the death benefit. Again, the death benefit will reflect a deduction
for the amount of any Contract debt. See CONTRACT LOANS, page 26.
As is the case under a Form A Contract, the Contract Fund of a Form B Contract
could grow to the point where it is necessary to increase the death benefit in
order to ensure that the Contract will satisfy the Internal Revenue Code's
definition of life insurance. Thus, the death benefit under a Form B Contract
will always be the greater of:
(1) the face amount plus the Contract Fund minus the Tabular Contract
Fund Value;
(2) the guaranteed minimum death benefit; and
(3) the Contract Fund divided by the net single premium per $1 of death
benefit at the insured's attained age on that date.
You may also increase or decrease the face amount of your Contract, subject to
certain conditions. See INCREASES IN FACE AMOUNT, below and DECREASES IN FACE
AMOUNT, page 22.
INCREASES IN FACE AMOUNT
You may increase your amount of insurance by increasing the face amount of the
Contract (which is also the guaranteed minimum death benefit), subject to state
approval and underwriting requirements determined by Prudential. An increase in
face amount is similar to the purchase of a second Contract. It differs in the
following respects:
(1) the minimum permissible increase is $25,000, while the minimum for a
new Contract is $75,000;
(2) monthly fees are lower because only a single $3 per month
administrative charge is made rather than two;
(3) a combined premium payment results in deduction of a single $2 per
premium processing charge while separate premium payments for
separate Contracts would involve two charges;
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(4) the monthly expense charge of $0.03 per $1,000 of face amount may be
lower if the increase is to a face amount greater than $100,000; and
(5) the Contract will lapse as a unit, unlike the case if two separate
Contracts are purchased.
These differences aside, the decision to increase face amount is comparable to
the purchase of a second Contract in that it involves a commitment to higher
Scheduled Premiums in exchange for greater insurance benefits.
You may increase the face amount of your Contract no earlier than the first
anniversary of the Contract. The following conditions must be met:
(1) you must ask for the increase in writing on an appropriate form;
(2) the amount of the face amount increase must be at least $25,000;
(3) the insured must supply evidence of insurability for the increase
satisfactory to Prudential;
(4) if we request, you must send in the Contract to be endorsed;
(5) the Contract must not be in default on the date the increase takes
effect;
(6) you must pay an appropriate premium at the time of the increase;
(7) Prudential has the right to deny more than one increase in a
Contract year; and
(8) if between the Contract Date and the date that your requested
increase in face amount would take effect, Prudential has changed
any of the bases on which benefits and charges are calculated for
newly issued Contracts, then we have the right to deny the increase.
An increase in face amount resulting in a total face amount of at least $100,000
may render the Contract eligible for a select rating if the insured has met
strict underwriting requirements and is a non-smoker.
Upon an increase in face amount, Prudential will recompute the Contract's
Scheduled Premiums, contingent deferred sales and administrative charges,
Tabular values, and monthly deductions from the Contract Fund. You may choose,
limited only by applicable state law, whether the recomputation will be made as
of the prior or next Contract anniversary. A payment will be required on the
date of increase. The amount of the payment will depend, in part, on which
Contract anniversary you select for the recomputation. Prudential will tell you
the amount of the required payment. It should also be noted that an increase in
face amount may cause the Contract to be classified as a Modified Endowment
Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 28. Therefore, before
increasing the face amount, you should consult with your Prudential
representative.
If the increase is approved, the new insurance will take effect once Prudential
receives the proper forms, any medical evidence necessary to underwrite the
additional insurance, and any amount needed by the company.
We will supply you with pages which show the increased face amount, the
effective date of the increase, and the recomputed items described earlier. The
pages will also describe how the face amount increase affects various provisions
of the Contract. Including a statement that, for the amount of the increase in
face amount, the period stated in the INCONTESTABILITY and SUICIDE provisions
(see OTHER GENERAL CONTRACT PROVISIONS, page 31) will run from the effective
date of the increase.
In order to determine the sales load that will be charged after the increase and
upon any subsequent lapse or surrender, the Contract is treated like two
separate Contracts. A "base Contract" representing the Contract before the
increase and an "incremental Contract" representing the increase viewed as a
separate Contract. At the time of the increase, a certain portion of the
Contract Fund may be allocated to the incremental Contract as a prepayment of
premiums for purposes of the sales load limit. That portion is equal to the
Guideline Annual Premium ("GAP") of the incremental Contract divided by the GAP
of the entire Contract after the increase. Premium payments made after the
increase are also allocated between the base Contract and the incremental
Contract for purposes of the sales load limit. A portion of each premium payment
after the increase is allocated to the increase based on the GAP for the
incremental Contract divided by the GAP for the entire Contract. A monthly
deduction equal to 0.5% of the primary annual premium for each part of the
Contract (i.e., the base and incremental Contracts, respectively) will be made
until each part of the Contract has been inforce for five years, although
Prudential reserves the right to continue to make this deduction thereafter.
Similarly, the amount, if any, of sales charges upon lapse or surrender and the
application of the overall limitation upon sales load, as described in item (a)
under SURRENDER OR WITHDRAWAL CHARGES, page 12, will be determined as explained
in that section as if there were two Contracts rather than one. Moreover, the
contingent deferred administrative charge is also determined as if there were
two separate Contracts. Thus, an owner considering an increase in face amount
should be aware that such an increase will entail charges, including periodic
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sales load deductions and contingent deferred sales and administrative charges,
comparable to the purchase of a new Contract.
Each Contract owner who elects to increase the face amount of his or her
Contract will be granted a "free-look" right which will apply only to the
increase in face amount, not the entire Contract. The right is comparable to the
right afforded to a purchaser of a new Contract. See SHORT-TERM CANCELLATION
RIGHT OR "FREE-LOOK", page 14. The "free-look" right would have to be exercised
no later than 45 days after execution of the application for the increase or, if
later, within 10 days after either receipt of the Contract as increased or
receipt of the withdrawal right notice by the owner. Upon exercise of the
"free-look" right, you will receive a refund in the amount of the aggregate
premiums paid since the increase was requested and attributable to the increase,
not the base Contract, as determined pursuant to the proportional premium
allocation rule described earlier. There will be no adjustment for investment
experience. All charges deducted after the increase will be reduced to what they
would have been had no increase been effected. You may transfer the total amount
attributable to the increase in face amount from the subaccounts or the Real
Property Account to the fixed-rate option at any time within two years after the
increase in face amount.
DECREASES IN FACE AMOUNT
You may make a partial surrender of a Contract (see SURRENDER OF A CONTRACT,
page 23) or a partial withdrawal of excess cash surrender value (see WITHDRAWAL
OF EXCESS CASH SURRENDER VALUE, page 22). You also have the additional option of
decreasing the face amount (which is also the guaranteed minimum death benefit)
of your Contract without withdrawing any such surrender value. Contract owners
who conclude that, because of changed circumstances, the amount of insurance is
greater than needed will be able to decrease their amount of insurance
protection, and the monthly deductions for the cost of insurance, without
decreasing their current cash surrender value. The cash surrender value of the
Contract on the date of the decrease will not change, except that an
administrative processing fee of $15 may be deducted from that value (unless
that fee is separately paid at the time the decrease in face amount is
requested). Your Contract Fund value, however, will be reduced by deduction of a
proportionate part of the contingent deferred sales and administrative charges,
if any. Scheduled Premiums for the Contract will also be proportionately
reduced. Contracts with a reduced face amount will be amended to show the new
face amount, tabular values, Scheduled Premiums, monthly charges, and, if
applicable, the remaining contingent deferred sales and administrative charges.
The minimum permissible decrease is $10,000. A decrease will not be permitted if
it causes the face amount of the Contract to drop below the minimum face amount
applicable to the Contract. See REQUIREMENTS FOR ISSUANCE OF A CONTRACT, page
14. A reduction will not be permitted if it would cause the Contract to fail to
qualify as "life insurance" for purposes of Section 7702 of the Internal Revenue
Code. A Contract is no longer eligible for the select rating if the face amount
is reduced below $100,000.
It is important to note, however, that if the face amount is decreased there is
a danger the Contract might be classified as a Modified Endowment Contract. See
TAX TREATMENT OF CONTRACT BENEFITS, page 28. Before requesting any decreases in
face amount, you should consult your Prudential representative.
WITHDRAWAL OF EXCESS CASH SURRENDER VALUE
Under certain circumstances, you may withdraw a portion of the Contract's cash
surrender value without surrendering the Contract. The withdrawal amount is
limited by the requirement that the Contract Fund after withdrawal must not be
less than the tabular Contract Fund value. (A Table of Tabular Contract Fund
Values is included in the Contract; the values increase with each year the
Contract remains inforce.) Because the Contract Fund may be made up in part by
an outstanding Contract loan, there is a further limitation that the amount
withdrawn may not be larger than an amount sufficient to reduce the cash
surrender value to zero. The amount withdrawn must be at least $2,000 under a
Form A Contract (in which the death benefit is generally equal to the
face-amount of insurance) and at least $500 under a Form B Contract (in which
the death benefit varies daily). You may make no more than four withdrawals in
each Contract year, and there is an administrative processing fee for each
withdrawal equal to the lesser of $15 and 2% of the amount withdrawn. An amount
withdrawn may not be repaid except as a scheduled or unscheduled premium subject
to the applicable charges. Upon request, Prudential will tell you how much you
may withdraw. Withdrawal of part of the cash surrender value may have tax
consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 28. A temporary need
for funds may also be met by making a loan and you should consult your
Prudential representative about how best to meet your needs.
22
<PAGE>
Under a Form A Contract, the face amount of insurance is reduced by no more than
the withdrawal amount. No partial withdrawal will be permitted under a Form A
Contract if it would result in a new face amount of less than the minimum face
amount applicable to the insured's Contract. See REQUIREMENTS FOR ISSUANCE OF A
CONTRACT, page 14. If the face amount is decreased, there is a danger that the
Contract might be classified as a Modified Endowment Contract. See TAX TREATMENT
OF CONTRACT BENEFITS, page 28. Before making any withdrawal which causes a
decrease in face amount, you should consult your Prudential representative.
Also, if a withdrawal under a Form A Contract is made before the end of the 10th
year, the Contract Fund may be reduced not only by the amount withdrawn but also
by a proportionate amount of any surrender charges that would be made if the
Contract were surrendered. The proportion is based on the percentage reduction
in face amount. Form A Contract owners who make a partial withdrawal will be
sent replacement Contract pages showing the new face amount, Scheduled Premiums,
maximum surrender charges, Tabular values, and monthly deductions.
Under a Form B Contract, the cash surrender value and Contract Fund value are
reduced by the amount of the withdrawal, and the death benefit is reduced
accordingly. Neither the face amount of insurance nor the amount of Scheduled
Premiums will be changed due to a withdrawal of excess cash surrender value
under a Form B Contract. No surrender charges will be assessed for a withdrawal
under a Form B Contract.
Withdrawal of part of the cash surrender value increases the risk that the
Contract Fund may be insufficient to provide Contract benefits. If such a
withdrawal is followed by unfavorable investment experience, the Contract may
lapse even if Scheduled Premiums continue to be paid when due. This is because,
for purposes of determining whether a lapse has occurred, Prudential treats
withdrawals as a return of premium.
SURRENDER OF A CONTRACT
You may surrender a Contract, in whole or in part, for its cash surrender value
while the insured is living. A partial surrender involves splitting the Contract
into two Contracts. One Contract is surrendered for its cash surrender value;
the other is continued inforce on the same terms as the original Contract except
that premiums will be based on the new face amount. You will be given a new
Contract document. The cash surrender value and the guaranteed minimum death
benefit of the new Contract will be proportionately reduced based upon the
reduction in the face amount of insurance. The new Contract must have a face
amount of insurance at least equal to the minimum face amount applicable to the
insured. Otherwise a partial surrender is not permitted. See REQUIREMENTS FOR
ISSUANCE OF A CONTRACT, page 14.
To surrender a Contract, in whole or in part, you must deliver or mail it,
together with a written request in a form that meets Prudential's needs, to a
Home Office. The cash surrender value of a surrendered or partially surrendered
Contract (taking into account the deferred sales and administrative charges, if
any) will be determined as of the end of the valuation period in which such a
request is received in a Home Office. Surrender of all or part of a Contract may
have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 28.
WHEN PROCEEDS ARE PAID
Prudential will generally pay any death benefit, cash surrender value, loan
proceeds or withdrawal within seven days after all the documents required for
such a payment are received at a Home Office. Other than the death benefit,
which is determined as of the date of death, the amount will be determined as of
the end of the valuation period in which the necessary documents are received at
a Home Office. However, Prudential may delay payment of proceeds from the
subaccount[s] and the variable portion of the death benefit due under the
Contract if the sale or valuation of the Account's assets is not reasonably
practicable because the New York Stock Exchange is closed for other than a
regular holiday or weekend, trading is restricted by the SEC, or the SEC
declares that an emergency exists.
With respect to the amount of any cash surrender value allocated to the
fixed-rate option, and with respect to a Contract inforce as fixed reduced
paid-up insurance, Prudential expects to pay the cash surrender value promptly
upon request. However, Prudential has the right to delay payment of such cash
surrender value for up to six months (or a shorter period if required by
applicable law). Prudential will pay interest of at least 3% a year if it delays
such a payment for more than 30 days (or a shorter period if required by
applicable law).
23
<PAGE>
LIVING NEEDS BENEFIT
You may elect to add the LIVING NEEDS BENEFIT(SM) to your Contract at issue. The
benefit may vary by state. There is no charge for adding the benefit to the
Contract. However, an administrative charge (not to exceed $150) will be made at
the time the LIVING NEEDS BENEFIT is paid.
Subject to state regulatory approval, the LIVING NEEDS BENEFIT allows you to
elect to receive an accelerated payment of all or part of the Contract's death
benefit, adjusted to reflect current value, at a time when certain special needs
exist. The adjusted death benefit will always be less than the death benefit,
but will generally be greater than the Contract's cash surrender value. One or
both of the following options may be available. A Prudential representative
should be consulted as to whether additional options may be available.
TERMINAL ILLNESS OPTION. This option is available if the insured is diagnosed as
terminally ill with a life expectancy of six months or less. When satisfactory
evidence is provided, Prudential will provide an accelerated payment of the
portion of the death benefit selected by the Contract owner as a LIVING NEEDS
BENEFIT. The Contract owner may (1) elect to receive the benefit in a single sum
or (2) receive equal monthly payments for six months. If the insured dies before
all the payments have been made, the present value of the remaining payments
will be paid to the beneficiary designated in the LIVING NEEDS BENEFIT claim
form in a single sum.
NURSING HOME OPTION. This option is available after the insured has been
confined to an eligible nursing home for six months or more. When satisfactory
evidence is provided, including certification by a licensed physician, that the
insured is expected to remain in the nursing home until death, Prudential will
provide an accelerated payment of the portion of the death benefit selected by
the Contract owner as a LIVING NEEDS BENEFIT. The Contract owner may (1) elect
to receive the benefit in a single sum or (2) receive equal monthly payments for
a specified number of years (not more than 10 nor less than two), depending upon
the age of the insured. If the insured dies before all of the payments have been
made, the present value of the remaining payments will be paid to the
beneficiary designated in the LIVING NEEDS BENEFIT claim form in a single sum.
All or part of the Contract's death benefit may be accelerated under the LIVING
NEEDS BENEFIT. If the benefit is only partially accelerated, a death benefit of
at least $25,000 must remain under the Contract. Prudential reserves the right
to determine the minimum amount that may be accelerated.
No benefit will be payable if the Contract owner is required to elect it in
order to meet the claims of creditors or to obtain a government benefit.
Prudential can furnish details about the amount of LIVING NEEDS BENEFIT that is
available to an eligible Contract owner, and the adjusted premium payments that
would be in effect if less than the entire death benefit is accelerated.
You should consider whether adding this settlement option is appropriate in your
given situation. Adding the LIVING NEEDS BENEFIT to the Contract has no adverse
consequences; however, electing to use it could. With the exception of certain
business-related policies, the LIVING NEEDS BENEFIT is excluded from income if
the insured is terminally ill or chronically ill as defined in the tax law
(although the exclusion in the latter case may be limited). You should consult a
qualified tax adviser before electing to receive this benefit. Receipt of a
LIVING NEEDS BENEFIT payment may also affect your eligibility for certain
government benefits or entitlements.
HYPOTHETICAL ILLUSTRATIONS OF DEATH BENEFITS AND CASH SURRENDER VALUES
The following four tables show how a Contract's death benefit and cash surrender
values change with the investment experience of the Account. They are
"hypothetical" because they are based, in part, upon several assumptions which
are described below. All four tables assume the following:
o a Contract with a face amount of $100,000 bought on or after December 31,
1998 by a 35 year old male, select, non-smoker, with no extra risks or
substandard ratings, and no extra benefit riders added to the Contract.
o the Scheduled Premium of $894.06 is paid on each Contract anniversary, the
deduction for taxes attributable to premiums is 3.25% and no loans are
taken.
o the Contract Fund has been invested in equal amounts in each of the 15
available portfolios of the Series Fund and no portion of the Contract
Fund has been allocated to the fixed-rate option or the Real Property
Account.
24
<PAGE>
The tables are not applicable to Contracts issued on a guaranteed issue basis or
to Contracts where the risk classification is on a multiple life basis.
The first table (page T1) assumes a Form A Contract has been purchased and the
second table (page T2) assumes a Form B Contract has been purchased. Both assume
the current charges will continue for the indefinite future. The third and
fourth tables (pages T3 and T4) are based upon the same assumptions except it is
assumed that the maximum contractual charges have been made from the beginning.
See CONTRACT FEES AND CHARGES, page 10.
Under the Form B Contract, the death benefit changes to reflect investment
returns. Under the Form A Contract, the death benefit increases only if the
Contract Fund becomes large enough that an increase in death benefit is
necessary for the Contract to satisfy the Internal Revenue Code's definition of
life insurance. See CONTRACT FORMS, page 14.
Finally, there are four assumptions, shown separately, about the average
investment performance of the portfolios. The first is that there will be a
uniform 0% gross rate of return with the average value of the Contract Fund
uniformly adversely affected by very unfavorable investment performance. The
other three assumptions are that investment performance will be at a uniform
gross annual rate of 4%, 8% and 12%. Actual returns will fluctuate from year to
year. In addition, death benefits and cash surrender values would be different
from those shown if investment returns averaged 0%, 4%, 8% and 12% but
fluctuated from those averages throughout the years. Nevertheless, these
assumptions help show how the Contract values change with investment experience.
The first column in the following four tables (pages T1 through T4) shows the
Contract year. The second column, to provide context, shows what the aggregate
amount would be if the Scheduled Premiums had been invested to earn interest,
after taxes, at 4% compounded annually. The next four columns show the death
benefit payable in each of the years shown for the four different assumed
investment returns. The last four columns show the cash surrender value payable
in each of the years shown for the four different assumed investment returns.
The cash surrender values in the first 10 years reflect the surrender charges
that would be deducted if the Contract were surrendered in those years.
A gross return (as well as the net return) is shown at the top of each column.
The gross return represents the combined effect of investment income and capital
gains and losses, realized or unrealized, of the portfolios before any reduction
is made for investment advisory fees or other Series Fund expenses. The net
return reflects average total annual expenses of the 15 portfolios of 0.51%, and
the daily deduction from the Contract Fund of 0.60% per year for the tables
based on current charges and 0.90% per year for the tables based upon maximum
charges. For Contracts with face amounts of less than $100,000, the current
charge is 0.90% per year. Thus, assuming maximum charges, gross investment
returns of 0%, 4%, 8% and 12% are the equivalent of net investment returns of
- -1.41%, 2.59%, 6.59% and 10.59%, respectively. The actual fees and expenses of
the portfolios associated with a particular Contract may be more or less than
0.51% and will depend on which subaccounts are selected. The death benefits and
cash surrender values shown reflect the deduction of all expenses and charges
both from the Series Fund and under the Contract.
If you are considering the purchase of a variable life insurance contract from
another insurance company, you should not rely upon these tables for comparison
purposes. A comparison between two tables, each showing values for a 35 year old
man, may be useful for a 35 year old man but would be inaccurate if made for
insureds of other ages or sex. Your Prudential representative can provide you
with a hypothetical illustration for a person of your own age, sex, and rating
class.
25
<PAGE>
ILLUSTRATIONS
-------------
VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$100,000 GUARANTEED DEATH BENEFIT
$894.06 MINIMUM INITIAL SCHEDULED PREMIUM (1) (3)
USING CURRENT CONTRACTUAL CHARGES
Death Benefit (2)
---------------------------------------------------
Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of
End of Accumulated ---------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (3) (-1.11% Net) (2.89% Net) (6.89% Net) (10.89% Net)
------ -------------- ------------ ----------- ----------- ------------
1 $ 930 $100,000 $100,000 $100,000 $100,000
2 $ 1,897 $100,000 $100,000 $100,000 $100,000
3 $ 2,903 $100,000 $100,000 $100,000 $100,000
4 $ 3,948 $100,000 $100,000 $100,000 $100,000
5 $ 5,036 $100,000 $100,000 $100,000 $100,000
6 $ 6,167 $100,000 $100,000 $100,000 $100,000
7 $ 7,344 $100,000 $100,000 $100,000 $100,000
8 $ 8,568 $100,000 $100,000 $100,000 $100,000
9 $ 9,840 $100,000 $100,000 $100,000 $100,000
10 $ 11,164 $100,000 $100,000 $100,000 $100,000
15 $ 18,618 $100,000 $100,000 $100,000 $100,000
20 $ 27,688 $100,000 $100,000 $100,000 $100,000
25 $ 38,723 $100,000 $100,000 $100,000 $138,998
30 (Age 65) $ 52,149 $100,000 $100,000 $100,000 $207,409
35 $ 81,214 $100,000 $100,000 $117,930 $307,047
40 $116,576 $100,000 $100,000 $149,366 $454,379
45 $159,600 $100,000 $100,000 $188,628 $674,598
Cash Surrender Value (2)
----------------------------------------------------
Assuming Hypothetical Gross (and Net)
Annual Investment Return of
End of ----------------------------------------------------
Policy 0% Gross 4% Gross 8% Gross 12% Gross
Year (-1.11% Net) (2.89% Net) (6.89% Net) (10.89% Net)
------ ------------ ----------- ----------- ------------
1 $ 0 $ 0 $ 0 $ 0
2 $ 319 $ 399 $ 482 $ 567
3 $ 835 $ 991 $ 1,157 $ 1,332
4 $ 1,338 $ 1,594 $ 1,873 $ 2,176
5 $ 1,826 $ 2,207 $ 2,632 $ 3,107
6 $ 2,555 $ 3,086 $ 3,695 $ 4,392
7 $ 3,275 $ 3,982 $ 4,816 $ 5,796
8 $ 3,976 $ 4,887 $ 5,990 $ 7,323
9 $ 4,662 $ 5,803 $ 7,223 $ 8,988
10 $ 5,332 $ 6,731 $ 8,520 $ 10,806
15 $ 7,519 $10,625 $ 15,202 $ 21,959
20 $ 9,657 $15,211 $ 24,678 $ 40,928
25 $11,178 $20,064 $ 37,648 $ 72,515
30 (Age 65) $11,112 $24,291 $ 54,963 $123,342
35 $27,690 $39,959 $ 78,735 $204,997
40 $41,865 $56,982 $110,069 $334,836
45 $52,897 $75,999 $150,425 $537,972
(1) If premiums are paid more frequently than annually, the initial payments
would be $456.85 semi-annually, $231.52 quarterly or $78.55 monthly. The
ultimate payments would be $2,411.37 semi-annually, $1,218.60 quarterly or
$410.34 monthly. The death benefits and cash surrender values would be
slightly different for a Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
(3) For a hypothetical gross investment return of 0%, the second Scheduled
Premium will be $4,726.61. For a gross return of 4%, the second Scheduled
Premium will be $3,154.09. For a gross return of 8%, the second Scheduled
Premium will be $894.06. For a gross return of 12%, the second Scheduled
Premium will be $894.06. The premiums accumulated at 4% interest in column
2 are those payable if the gross investment return is 4%. For an
explanation of why the scheduled premium may increase on the premium
change date, see Premiums.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 4%, 8%,
and 12% over a period of years but also fluctuated above or below those averages
for individual contract years. No representations can be made by Prudential or
the Series Fund that these hypothetical rates of return can be achieved for any
one year or sustained over any period of time.
T1
<PAGE>
VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$100,000 GUARANTEED DEATH BENEFIT
$894.06 MINIMUM INITIAL SCHEDULED PREMIUM (1) (3)
USING CURRENT CONTRACTUAL CHARGES
Death Benefit (2)
---------------------------------------------------
Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of
End of Accumulated ---------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (3) (-1.11% Net) (2.89% Net) (6.89% Net) (10.89% Net)
------ -------------- ------------ ----------- ----------- ------------
1 $ 930 $100,000 $100,019 $100,048 $100,076
2 $ 1,897 $100,000 $100,036 $100,119 $100,204
3 $ 2,903 $100,000 $100,049 $100,215 $100,390
4 $ 3,948 $100,000 $100,061 $100,340 $100,643
5 $ 5,036 $100,000 $100,072 $100,498 $100,972
6 $ 6,167 $100,000 $100,132 $100,741 $101,438
7 $ 7,344 $100,000 $100,191 $101,024 $102,004
8 $ 8,568 $100,000 $100,252 $101,353 $102,683
9 $ 9,840 $100,000 $100,314 $101,731 $103,489
10 $ 11,164 $100,000 $100,379 $102,161 $104,437
15 $ 18,618 $100,000 $100,850 $105,378 $112,047
20 $ 27,688 $100,000 $102,210 $111,516 $127,423
25 $ 38,723 $100,000 $104,783 $121,840 $155,845
30 (Age 65) $ 52,149 $100,000 $108,983 $137,855 $205,555
35 $ 83,472 $100,000 $110,700 $142,805 $300,279
40 $121,582 $100,000 $114,132 $154,710 $444,523
45 $167,949 $100,000 $119,728 $176,227 $660,109
Cash Surrender Value (2)
----------------------------------------------------
Assuming Hypothetical Gross (and Net)
Annual Investment Return of
End of ----------------------------------------------------
Policy 0% Gross 4% Gross 8% Gross 12% Gross
Year (-1.11% Net) (2.89% Net) (6.89% Net) (10.89% Net)
------ ------------ ----------- ----------- ------------
1 $ 0 $ 0 $ 0 $ 0
2 $ 270 $ 351 $ 434 $ 519
3 $ 790 $ 946 $ 1,112 $ 1,287
4 $ 1,311 $ 1,568 $ 1,847 $ 2,150
5 $ 1,835 $ 2,216 $ 2,642 $ 3,116
6 $ 2,576 $ 3,107 $ 3,716 $ 4,413
7 $ 3,300 $ 4,007 $ 4,840 $ 5,820
8 $ 4,007 $ 4,917 $ 6,018 $ 7,348
9 $ 4,697 $ 5,837 $ 7,254 $ 9,012
10 $ 5,369 $ 6,767 $ 8,549 $ 10,825
15 $ 7,589 $10,689 $ 15,217 $ 21,886
20 $ 9,739 $15,274 $ 24,580 $ 40,487
25 $11,256 $20,053 $ 37,110 $ 71,115
30 (Age 65 $11,189 $23,983 $ 52,854 $120,555
35 $27,747 $41,001 $ 73,106 $200,478
40 $41,874 $58,959 $ 99,537 $327,573
45 $52,874 $77,255 $133,754 $526,417
(1) If premiums are paid more frequently than annually, the initial payments
would be $456.85 semi-annually, $231.52 quarterly or $78.55 monthly. The
ultimate payments would be $2,411.37 semi-annually, $1,218.60 quarterly or
$410.34 monthly. The death benefits and cash surrender values would be
slightly different for a Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
(3) For a hypothetical gross investment return of 0%, the second Scheduled
Premium will be $4,726.61. For a gross return of 4%, the second Scheduled
Premium will be $3,555. For a gross return of 8%, the second Scheduled
Premium will be $894.06. For a gross return of 12%, the second Scheduled
Premium will be $894.06. The premiums accumulated at 4% interest in column
2 are those payable if the gross investment return is 4%. For an
explanation of why the scheduled premium may increase on the premium
change date, see Premiums.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 4%, 8%,
and 12% over a period of years but also fluctuated above or below those averages
for individual contract years. No representations can be made by Prudential or
the Series Fund that these hypothetical rates of return can be achieved for any
one year or sustained over any period of time.
T2
<PAGE>
VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
FORM A -- FIXED DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$100,000 GUARANTEED DEATH BENEFIT
$894.06 MINIMUM INITIAL SCHEDULED PREMIUM (1) (3)
USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (2)
---------------------------------------------------
Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of
End of Accumulated ---------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (3) (-1.41% Net) (2.59% Net) (6.59% Net) (10.59% Net)
------ -------------- ------------ ----------- ----------- ------------
1 $ 930 $100,000 $100,000 $100,000 $100,000
2 $ 1,897 $100,000 $100,000 $100,000 $100,000
3 $ 2,903 $100,000 $100,000 $100,000 $100,000
4 $ 3,948 $100,000 $100,000 $100,000 $100,000
5 $ 5,036 $100,000 $100,000 $100,000 $100,000
6 $ 6,167 $100,000 $100,000 $100,000 $100,000
7 $ 7,344 $100,000 $100,000 $100,000 $100,000
8 $ 8,568 $100,000 $100,000 $100,000 $100,000
9 $ 9,840 $100,000 $100,000 $100,000 $100,000
10 $ 11,164 $100,000 $100,000 $100,000 $100,000
15 $ 18,618 $100,000 $100,000 $100,000 $100,000
20 $ 27,688 $100,000 $100,000 $100,000 $100,000
25 $ 38,723 $100,000 $100,000 $100,000 $107,633
30 (Age 65) $ 52,149 $100,000 $100,000 $100,000 $154,438
35 $ 90,072 $100,000 $100,000 $100,000 $216,431
40 $136,211 $100,000 $100,000 $106,656 $301,525
45 $192,347 $100,000 $100,000 $139,489 $417,688
Cash Surrender Value (2)
----------------------------------------------------
Assuming Hypothetical Gross (and Net)
Annual Investment Return of
End of ----------------------------------------------------
Policy 0% Gross 4% Gross 8% Gross 12% Gross
Year (-1.41% Net) (2.59% Net) (6.59% Net) (10.59% Net)
------ ------------ ----------- ----------- ------------
1 $ 0 $ 0 $ 0 $ 0
2 $ 268 $ 346 $ 427 $ 511
3 $ 752 $ 903 $ 1,064 $ 1,234
4 $1,217 $ 1,464 $ 1,733 $ 2,025
5 $1,663 $ 2,027 $ 2,435 $ 2,891
6 $2,293 $ 2,798 $ 3,378 $ 4,043
7 $2,908 $ 3,574 $ 4,362 $ 5,291
8 $3,499 $ 4,349 $ 5,382 $ 6,636
9 $4,066 $ 5,122 $ 6,441 $ 8,087
10 $4,608 $ 5,889 $ 7,538 $ 9,655
15 $5,944 $ 8,660 $ 12,714 $ 18,767
20 $6,230 $10,837 $ 18,922 $ 33,120
25 $4,737 $11,564 $ 25,978 $ 56,152
30 (Age 65) $ 167 $ 9,306 $ 33,485 $ 91,841
35 $8,258 $21,690 $ 52,383 $144,498
40 $8,658 $30,563 $ 78,596 $222,197
45 $ 0 $31,475 $111,239 $333,094
(1) If premiums are paid more frequently than annually, the payments would be
$456.85 semi-annually, $231.52 quarterly or $78.55 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
(3) For a hypothetical gross investment return of 0%, the premium after age 65
will be $4,726.61; for a gross return of 4% the premium after age 65 will
be $4,726.61; for a gross return of 8% the premium after age 65 will be
$2,913.62; for a gross return of 12% the premium after age 65 will be
$894.06. The premiums accumulated at 4% interest in column 2 are those
payable if the gross investment return is 4%. For an explanation of why
the scheduled premium may increase on the premium change date, see
Premiums.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 4%, 8%,
and 12% over a period of years but also fluctuated above or below those averages
for individual contract years. No representations can be made by Prudential or
the Series Fund that these hypothetical rates of return can be achieved for any
one year or sustained over any period of time.
T3
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VARIABLE APPRECIABLE LIFE INSURANCE CONTRACT
FORM B -- VARIABLE DEATH BENEFIT
MALE SELECT PREFERRED ISSUE AGE 35
$100,000 GUARANTEED DEATH BENEFIT
$894.06 MINIMUM INITIAL SCHEDULED PREMIUM (1) (3)
USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (2)
---------------------------------------------------
Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of
End of Accumulated ---------------------------------------------------
Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross
Year Per Year (3) (-1.41% Net) (2.59% Net) (6.59% Net) (10.59% Net)
------ -------------- ------------ ----------- ----------- ------------
1 $ 930 $100,000 $100,000 $100,020 $100,048
2 $ 1,897 $100,000 $100,000 $100,056 $100,139
3 $ 2,903 $100,000 $100,000 $100,110 $100,279
4 $ 3,948 $100,000 $100,000 $100,183 $100,474
5 $ 5,036 $100,000 $100,000 $100,277 $100,730
6 $ 6,167 $100,000 $100,000 $100,394 $101,055
7 $ 7,344 $100,000 $100,000 $100,534 $101,456
8 $ 8,568 $100,000 $100,000 $100,701 $101,943
9 $ 9,840 $100,000 $100,000 $100,897 $102,525
10 $ 11,164 $100,000 $100,000 $101,122 $103,212
15 $ 18,618 $100,000 $100,000 $102,781 $108,677
20 $ 27,688 $100,000 $100,000 $105,557 $119,075
25 $ 38,723 $100,000 $100,000 $109,792 $137,410
30 (Age 65) $ 52,149 $100,000 $100,000 $115,804 $168,243
35 $ 90,072 $100,000 $100,000 $120,690 $199,356
40 $136,211 $100,000 $100,000 $129,815 $272,613
45 $192,347 $100,000 $100,000 $144,715 $379,651
Cash Surrender Value (2)
----------------------------------------------------
Assuming Hypothetical Gross (and Net)
Annual Investment Return of
End of ----------------------------------------------------
Policy 0% Gross 4% Gross 8% Gross 12% Gross
Year (-1.41% Net) (2.59% Net) (6.59% Net) (10.59% Net)
------ ------------ ----------- ----------- ------------
1 $ 0 $ 0 $ 0 $ 0
2 $ 213 $ 291 $ 372 $ 455
3 $ 696 $ 847 $ 1,007 $ 1,176
4 $1,176 $ 1,422 $ 1,690 $ 1,981
5 $1,652 $ 2,016 $ 2,421 $ 2,874
6 $2,290 $ 2,792 $ 3,369 $ 4,030
7 $2,905 $ 3,568 $ 4,350 $ 5,272
8 $3,496 $ 4,342 $ 5,366 $ 6,608
9 $4,063 $ 5,114 $ 6,420 $ 8,048
10 $4,605 $ 5,881 $ 7,510 $ 9,600
15 $5,941 $ 8,649 $ 12,620 $ 18,516
20 $6,227 $10,824 $ 18,621 $ 32,139
25 $4,734 $11,549 $ 25,062 $ 52,680
30 (Age 65) $ 164 $ 9,288 $ 30,804 $ 83,243
35 $8,255 $21,666 $ 50,991 $129,657
40 $8,655 $30,529 $ 74,642 $200,891
45 $ 0 $31,419 $102,242 $302,761
(1) If premiums are paid more frequently than annually, the payments would be
$456.85 semi-annually, $231.52 quarterly or $78.55 monthly. The death
benefits and cash surrender values would be slightly different for a
Contract with more frequent premium payments.
(2) Assumes no Contract loan has been made.
(3) For a hypothetical gross investment return of 0%, the premium after age 65
will be $4,726.61; for a gross return of 4% the premium after age 65 will
be $4,726.61; for a gross return of 8% the premium after age 65 will be
$3,885.07; for a gross return of 12% the premium after age 65 will be
$1,092.89. The premiums accumulated at 4% interest in column 2 are those
payable if the gross investment return is 4%. For an explanation of why
the scheduled premium may increase on the premium change date, see
Premiums.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 4%, 8%,
and 12% over a period of years but also fluctuated above or below those averages
for individual contract years. No representations can be made by Prudential or
the Series Fund that these hypothetical rates of return can be achieved for any
one year or sustained over any period of time.
T4
<PAGE>
CONTRACT LOANS
You may borrow from Prudential up to the "loan value" of the Contract, using the
Contract as the only security for the loan. The loan value is equal to (1) 90%
of an amount equal to the portion of the Contract Fund value attributable to the
variable investment options and to any prior loan[s] supported by the variable
investment options, minus the portion of any charges attributable to variable
investment options that would be payable upon an immediate surrender; plus (2)
100% of an amount equal to the portion of the Contract Fund value attributable
to the fixed-rate option and to any prior loan[s] supported by the fixed-rate
option, minus the portion of any charges attributable to the fixed-rate option
that would be payable upon an immediate surrender. The minimum amount that may
be borrowed at any one time is $200 unless the proceeds are used to pay premiums
on the Contract.
If you request a loan you may choose one of two interest rates. You may elect to
have interest charges accrued daily at a fixed effective annual rate of 5.5%.
Alternatively, you may elect a variable interest rate that changes from time to
time. You may switch from the fixed to variable interest loan provision, or
vice-versa, with Prudential's consent.
If you elect the variable loan interest rate provision, interest charged on any
loan will accrue daily at an annual rate Prudential determines at the start of
each Contract year (instead of at the fixed 5.5% rate). This interest rate will
not exceed the greatest of (1) the "Published Monthly Average" for the calendar
month ending two months before the calendar month of the Contract anniversary;
(2) 5%; or (3) the rate permitted by law in the state of issue of the Contract.
The "Published Monthly Average" means Moody's Corporate Bond Yield Average "
Monthly Average Corporates, as published by Moody's Investors Service, Inc. or
any successor to that service, or if that average is no longer published, a
substantially similar average established by the insurance regulator where the
Contract is issued. For example, the Published Monthly Average in 1999 ranged
from 6.76% to 7.93%.
Interest payments on any loan are due at the end of each Contract year. If
interest is not paid when due, it is added to the principal amount of the loan.
The "Contract debt" is the principal amount of all outstanding loans plus any
interest accrued thereon. If at any time the Contract debt exceeds what the cash
surrender value would be if there were no Contract debt, Prudential will notify
you of its intent to terminate the Contract in 61 days, within which time you
may repay all or enough of the loan to reduce it to below the cash surrender
value and thus keep the Contract inforce. If you fail to keep the Contract
inforce, the amount of unpaid Contract debt will be treated as a distribution
which may be taxable. See LAPSE AND REINSTATEMENT, page 27, and TAX TREATMENT OF
CONTRACT BENEFITS, page 28.
When a loan is made, an amount equal to the loan proceeds (the "loan amount") is
transferred out of the subaccounts and the Real Property Account (collectively,
the "variable investment options"), and/or the fixed-rate option to Prudential's
general account. The investment options will normally be reduced proportionally
based on their balances at the time the loan is made. The loan amount is treated
as part of the Contract Fund. While a fixed-rate (5.5%) loan is outstanding, the
loan amount will be credited with the daily equivalent of an annual return of 4%
rather than with the actual rate of return of the variable options or the
fixed-rate option. While a loan made pursuant to the variable loan interest rate
provision is outstanding, the loan amount will be credited with the daily
equivalent of a rate that is 1% less than the loan interest rate for the
Contract year. If a loan remains outstanding at a time Prudential fixes a new
rate, the new interest rate will apply. When the loan is repaid, the repayment
is made to the investment options. The loan repayment is first divided between
the variable options as a group and the fixed-rate option in the same
proportions used for the transfer at the time the loan was made. The portion of
the loan repayment allocated to the variable options as a group is divided among
those options proportionately based on their balances at the time of loan
repayment. The portion of the loan repayment allocated to the fixed-rate option
will be credited with the lesser of the current rate applicable to new premium
payments and the current rate applicable to the portion of the fixed-rate option
from which the loan was made.
Choosing the variable rate option may mean a higher outlay of cash when interest
payments are made or when the loan is repaid, but it may also result in a
greater increase in the Contract Fund value.
A loan will not affect the amount of the premiums due. Should the death benefit
become payable while a loan is outstanding, or should the Contract be
surrendered, any Contract debt will be deducted from the death benefit or the
cash surrender value. Loans from Modified Endowment Contracts may be treated for
tax purposes as distributions of income. See TAX TREATMENT OF CONTRACT BENEFITS,
page 28.
A loan will have an effect on a Contract's cash surrender value and may have an
effect on the death benefit, even if the loan is fully repaid, because the
investment results of the selected investment options will apply only to the
amount
26
<PAGE>
remaining invested under those options. The longer the loan is outstanding, the
greater the effect is likely to be. The effect could be favorable or
unfavorable. If investment results are greater than the rate being credited on
the loan balance while the loan is outstanding, values under the Contract will
not increase as rapidly as they would have if no loan had been made. If
investment results are below that rate, Contract values will be higher than they
would have been had no loan been made. A loan that is repaid will not have any
effect upon the guaranteed minimum death benefit.
LAPSE AND REINSTATEMENT
As explained earlier, if Scheduled Premiums are paid on or before each due date,
or within the grace period after each due date, and there are no withdrawals or
outstanding loans, a Contract will remain inforce even if the investment results
of that Contract's variable investment option[s] have been so unfavorable that
the Contract Fund has decreased to zero or less.
In addition, even if a Scheduled Premium is not paid, the Contract will remain
inforce as long as the Contract Fund on any Monthly Date is equal to or greater
than the Tabular Contract Fund Value on the following Monthly Date. (A Table of
Tabular Contract Fund Values is included in the Contract; the values increase
with each year the Contract remains inforce.) This could occur because of such
factors as favorable investment experience, deduction of current rather than
maximum charges, or the previous payment of greater than Scheduled Premiums.
However, if a Scheduled Premium is not paid, and the Contract Fund is
insufficient to keep the Contract inforce, the Contract will go into default.
Should this happen, Prudential will send the Contract owner a notice of default
setting forth the payment necessary to keep the Contract inforce on a premium
paying basis. This payment must be received at a Home Office within the 61 day
grace period after the notice of default is mailed or the Contract will lapse. A
Contract that lapses with an outstanding Contract loan may have tax
consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 28.
Neither transfers nor reallocations of premium payments may be made if a
Contract is in default.
A Contract that has lapsed may be reinstated within five years after the date of
default unless the Contract has been surrendered for its cash surrender value.
To reinstate a lapsed Contract, Prudential requires renewed evidence of
insurability, and submission of certain payments due under the Contract.
If your Contract does lapse, it will still provide some benefits. You can
receive the cash surrender value by making a request of Prudential prior to the
end of the 61 day grace period. You may also choose one of the three forms of
insurance described below for which no further premiums are payable.
1. FIXED EXTENDED TERM INSURANCE. The amount of insurance that would have
been paid on the date of default will continue for a stated period of
time. You will be told in writing how long that will be. The insurance
amount will not change. There will be a diminishing cash surrender value
but no loan value. Extended term insurance is not available to insureds in
high risk classifications or under Contracts issued in connection with
tax-qualified pension plans.
2. FIXED REDUCED PAID-UP INSURANCE. This insurance continues for the lifetime
of the insured but at an insurance amount that is lower than that provided
by fixed extended term insurance. It will increase in amount only if
dividends are paid and it will decrease only if you take a Contract loan.
Upon request, we will tell you what the amount of insurance will be. Fixed
paid-up insurance has a cash surrender value and a loan value both of
which will gradually increase in value. It is possible for this Contract
to be classified as a Modified Endowment Contract if this option is
exercised. See TAX TREATMENT OF CONTRACT BENEFITS, page 28.
3. VARIABLE REDUCED PAID-UP INSURANCE. This is similar to fixed paid-up
insurance and will initially be in the same amount. The Contract Fund will
continue to vary to reflect the experience of the selected investment
options. There will be a new guaranteed minimum death benefit. Loans will
be available subject to the same rules that apply to premium-paying
Contracts.
Variable paid-up insurance is not available to insureds in high risk rating
classes or if the new guaranteed amount is less than $5,000. It is possible for
this Contract to be classified as a Modified Endowment Contract if this option
is exercised. See TAX TREATMENT OF CONTRACT BENEFITS, page 28.
27
<PAGE>
WHAT HAPPENS IF NO REQUEST IS MADE? Except in the two situations described
below, if no request is made the "automatic option" will be fixed extended term
insurance. If fixed extended term insurance is not available to the insured,
then fixed reduced paid-up insurance will be provided. However, if variable
reduced paid-up insurance is available and the amount is at least as great as
the amount of fixed extended term insurance, then the automatic option will be
variable reduced paid-up insurance. This could occur if the Contract lapses and
there is a Contract debt outstanding.
SUBSTITUTION OF SERIES FUND SHARES
Although Prudential believes it to be unlikely, it is possible that in the
judgment of its management, one or more of the portfolios of the Series Fund may
become unsuitable for investment by Contract owners because of investment policy
changes, tax law changes, or the unavailability of shares for investment. In
that event, Prudential may seek to substitute the shares of another portfolio or
of an entirely different mutual fund. Before this can be done, the approval of
the SEC, and possibly one or more state insurance departments, may be required.
Contract owners will be notified of any such substitution.
REPORTS TO CONTRACT OWNERS
Once each Contract year (except where the Contract is inforce as fixed extended
term insurance or fixed reduced paid-up insurance), Prudential will send you a
statement that provides certain information pertinent to your own Contract. This
statement will detail values, transactions made, and specific Contract data that
apply only to your particular Contract. On request, you will be sent a current
statement in a form similar to that of the annual statement described above, but
Prudential may limit the number of such requests or impose a reasonable charge
if such requests are made too frequently.
You will also receive, usually at the end of February, an annual report of the
operations of the Series Fund. That report will list the investments held in
each portfolio and include audited financial statements for the Series Fund. A
semi-annual report with similar unaudited information will be sent to you,
usually at the end of August.
TAX TREATMENT OF CONTRACT BENEFITS
This summary provides general information on the federal income tax treatment of
the Contract. It is not a complete statement of what the federal income taxes
will be in all circumstances. It is based on current law and interpretations,
which may change. It does not cover state taxes or other taxes. It is not
intended as tax advice. You should consult your own qualified tax adviser for
complete information and advice.
TREATMENT AS LIFE INSURANCE. The Contract must meet certain requirements to
qualify as life insurance for tax purposes. These requirements include certain
definitional tests and rules for diversification of the Contract's investments.
For further information on the diversification requirements, see TAXATION OF THE
FUND in the statement of additional information for the Series Fund.
We believe we have taken adequate steps to insure that the Contract qualifies as
life insurance for tax purposes. Generally speaking, this means that:
o you will not be taxed on the growth of the funds in the Contract,
unless you receive a distribution from the Contract,
o the Contract's death benefit will be income tax free to your
beneficiary.
Although we believe that the Contract should qualify as life insurance for tax
purposes, there are some uncertainties, particularly because the Secretary of
Treasury has not yet issued permanent regulations that bear on this question.
Accordingly, we reserve the right to make changes -- which will be applied
uniformly to all Contract owners after advance written notice -- that we deem
necessary to insure that the Contract will qualify as life insurance.
PRE-DEATH DISTRIBUTIONS. The tax treatment of any distribution you receive
before the insured's death depends on whether the Contract is classified as a
Modified Endowment Contract.
28
<PAGE>
CONTRACTS NOT CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
o If you surrender the Contract or allow it to lapse, you will be
taxed on the amount you receive in excess of the premiums you paid
less the untaxed portion of any prior withdrawals. For this purpose,
you will be treated as receiving any portion of the cash surrender
value used to repay Contract debt. The tax consequences of a
surrender may differ if you take the proceeds under an income
payment settlement option.
o Generally, you will be taxed on a withdrawal to the extent the
amount you receive exceeds the premiums you paid for the Contract
less the untaxed portion of any prior withdrawals. However, under
some limited circumstances, in the first 15 Contract years, all or a
portion of a withdrawal may be taxed if the Contract Fund exceeds
the total premiums paid less the untaxed portions of any prior
withdrawals, even if total withdrawals do not exceed total premiums
paid.
o Extra premiums for optional benefits and riders generally do not
count in computing the premiums paid for the Contract for the
purposes of determining whether a withdrawal is taxable.
o Loans you take against the Contract are ordinarily treated as debt
and are not considered distributions subject to tax.
MODIFIED ENDOWMENT CONTRACTS.
o The rules change if the Contract is classified as a Modified
Endowment Contract. The Contract could be classified as a Modified
Endowment Contract if premiums substantially in excess of scheduled
premiums are paid or a decrease in the face amount of insurance is
made (or a rider removed). The addition of a rider or an increase in
the face amount of insurance may also cause the Contract to be
classified as a Modified Endowment Contract. You should first
consult a qualified tax adviser and your Prudential representative
if you are contemplating any of these steps.
o If the Contract is classified as a Modified Endowment Contract, then
amounts you receive under the Contract before the insured's death,
including loans and withdrawals, are included in income to the
extent that the Contract Fund before surrender charges exceeds the
premiums paid for the Contract increased by the amount of any loans
previously included in income and reduced by any untaxed amounts
previously received other than the amount of any loans excludable
from income. An assignment of a Modified Endowment Contract is
taxable in the same way. These rules also apply to pre-death
distributions, including loans and assignments, made during the
two-year period before the time that the Contract became a Modified
Endowment Contract.
o Any taxable income on pre-death distributions (including full
surrenders) is subject to a penalty of 10 percent unless the amount
is received on or after age 59 1/2, on account of youR becoming
disabled or as a life annuity. It is presently unclear how the
penalty tax provisions apply to Contracts owned by businesses.
o All Modified Endowment Contracts issued by us to you during the same
calendar year are treated as a single Contract for purposes of
applying these rules.
WITHHOLDING. You must affirmatively elect that no taxes be withheld from a
pre-death distribution. Otherwise, the taxable portion of any amounts you
receive will be subject to withholding. You are not permitted to elect out of
withholding if you do not provide a social security number or other taxpayer
identification number. You may be subject to penalties under the estimated tax
payment rules if your withholding and estimated tax payments are insufficient to
cover the tax due.
OTHER TAX CONSIDERATIONS. If you transfer or assign the Contract to someone
else, there may be gift, estate and/or income tax consequences. If you transfer
the Contract to a person two or more generations younger than you (or designate
such a younger person as a beneficiary), there may be Generation Skipping
Transfer tax consequences. Deductions for interest paid or accrued on Contract
debt or on other loans that are incurred or continued to purchase
29
<PAGE>
or carry the Contract may be denied. Your individual situation or that of your
beneficiary will determine the federal estate taxes and the state and local
estate, inheritance and other taxes due if you or the insured dies.
BUSINESS-OWNED LIFE INSURANCE. If a business, rather than an individual, is the
owner of the Contract, there are some additional rules. Business Contract owners
generally cannot deduct premium payments. Business Contract owners generally
cannot take tax deductions for interest on Contract debt paid or accrued after
October 13, 1995. An exception permits the deduction of interest on policy loans
on Contracts for up to 20 key persons. The interest deduction for Contract debt
on these loans is limited to a prescribed interest rate and a maximum aggregate
loan amount of $50,000 per key insured person. The corporate alternative minimum
tax also applies to business-owned life insurance. This is an indirect tax on
additions to the Contract Fund or death benefits received under business-owned
life insurance policies.
TAX-QUALIFIED PENSION PLANS
You may acquire the Contract to fund a pension plan that qualifies for tax
favored treatment under the Internal Revenue Code. We will issue such a Contract
with a minimum face amount of $10,000, and with increases and decreases in face
amount in minimum increments of $10,000. The monthly charge for anticipated
mortality costs and the scheduled premiums will be the same for male and female
insureds of a particular age and underwriting classification, as required for
insurance and annuity contracts sold to tax-qualified pension plans. We will
give illustrations showing premiums and charges if you wish to fund a
tax-qualified pension plan. Only certain riders are available for a Contract
issued in connection with a tax-qualified pension plan. Fixed reduced paid-up
insurance and payment of the cash surrender value are the only options on lapse
available for a Contract issued in connection with a tax-qualified pension plan.
See LAPSE AND REINSTATEMENT, page 27. Finally, a Contract issued in connection
with a tax-qualified pension plan may not invest in the Real Property Account.
You should consult a qualified tax advisor before purchasing a Contract in
connection with a tax-qualified pension plan to confirm, among other things, the
suitability of the Contract for your particular plan.
RIDERS
Contract owners may be able to obtain additional fixed benefits which may
increase the Scheduled Premium. If they do cause an increase in the Scheduled
Premium, they will be charged for by making monthly deductions from the Contract
Fund. These optional insurance benefits will be described in what is known as a
"rider" to the Contract. One rider pays an additional amount if the insured dies
in an accident. Another waives certain premiums if the insured is disabled
within the meaning of the provision (or, in the case of a Contract issued on an
insured under the age of 15, if the applicant dies or becomes disabled within
the meaning of the provision). Others pay an additional amount if the insured
dies within a stated number of years after issue; similar benefits may be
available if the insured's spouse or child should die. The amounts of these
benefits are fully guaranteed at issue; they do not depend on the performance of
the Account, although they will no longer be available if the Contract lapses.
Certain restrictions may apply; they are clearly described in the applicable
rider.
Under other riders, which provide a fixed amount of term insurance in exchange
for increasing total scheduled annual premiums, the amount payable upon death of
the insured may be substantially increased for a given total initial annual
premium. The rider may be appropriate for Contract owners who reasonably expect
their incomes to increase regularly so that they will be able to afford the
increasing scheduled annual premiums or who may be willing to rely upon their
future Contract Fund values to prevent the Contract from lapsing in later years.
Any Prudential representative authorized to sell the Contract can explain these
extra benefits further. Samples of the provisions are available from Prudential
upon written request.
PARTICIPATION IN DIVISIBLE SURPLUS
The Contract is eligible to be credited part of Prudential's divisible surplus
attributable to the Contracts, as determined by Prudential's Board of Directors.
That determination is made every year, with respect to the insurance contracts
issued by Prudential. However, Prudential does not expect to credit any
dividends upon these Contracts because favorable investment performance will be
reflected in Contract values and because Prudential intends, if experience
indicates that current charges will be greater than needed to cover expenses, to
reduce those charges further so that there will be no source of distributable
surplus attributable to these Contracts.
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<PAGE>
OTHER GENERAL CONTRACT PROVISIONS
ASSIGNMENT. This Contract may not be assigned if the assignment would violate
any federal, state, or local law or regulation. Generally, the Contract may not
be assigned to an employee benefit plan or program without Prudential's consent.
Prudential assumes no responsibility for the validity or sufficiency of any
assignment, and it will not be obligated to comply with any assignment unless it
has received a copy at a Home Office.
BENEFICIARY. You designate and name your beneficiary in the application.
Thereafter, you may change the beneficiary, provided it is in accordance with
the terms of the Contract. Should the insured die with no surviving beneficiary,
the insured's estate will become the beneficiary.
INCONTESTABILITY. We will not contest the Contract after it has been inforce
during the insured's lifetime for two years from the issue date except when any
change is made in the Contract that requires Prudential's approval and would
increase our liability. We will not contest such change after it has been in
effect for two years during the lifetime of the insured.
MISSTATEMENT OF AGE OR SEX. If the insured's stated age or sex (except where
unisex rates apply) or both are incorrect in the Contract, Prudential will
adjust the death benefits payable, as required by law, to reflect the correct
age and sex. Any death benefit will be based on what the most recent charge for
mortality would have provided at the correct age and sex.
SETTLEMENT OPTIONS. The Contract grants to most owners, or to the beneficiary, a
variety of optional ways of receiving Contract proceeds, other than in a lump
sum. Any Prudential representative authorized to sell this Contract can explain
these options upon request.
SUICIDE EXCLUSION. Generally, if the insured, whether sane or insane, dies by
suicide within two years from the Contract Date, Prudential will pay no more
under the Contract than the sum of the premiums paid. If the insured, whether
sane or insane, dies by suicide within two years from the effective date of an
increase in the face amount of insurance, Prudential will pay, with respect to
the amount of the increase, no more than the sum of the Scheduled Premiums
attributable to the increase.
PAYING PREMIUMS BY PAYROLL DEDUCTION
In addition to the annual, semi-annual, quarterly and monthly premium payment
modes, a payroll budget method of paying premiums may also be available under
certain Contracts. The employer generally deducts the necessary amounts from
employee paychecks and sends premium payments to Prudential monthly. Some
Contracts sold using the payroll budget method may be eligible for a guaranteed
issue program under which the initial minimum death benefit is $25,000 and the
Contracts are based on unisex mortality tables. Any Prudential representative
authorized to sell this Contract can provide further details concerning the
payroll budget method of paying premiums.
UNISEX PREMIUMS AND BENEFITS
The Contract generally uses mortality tables that distinguish between males and
females. Thus, premiums and benefits differ under Contracts issued on males and
females of the same age. However, in those states that have adopted regulations
prohibiting sex-distinct insurance rates, premiums and cost of insurance charges
will be based on a blended unisex rate, whether the insured is male or female.
In addition, employers and employee organizations considering purchase of a
Contract should consult their legal advisers to determine whether purchase of a
Contract based on sex-distinct actuarial tables is consistent with Title VII of
the Civil Rights Act of 1964 or other applicable law. Prudential may offer the
Contract with unisex mortality rates to employers and employee organizations.
SALES TO PERSONS 14 YEARS OF AGE OR YOUNGER
Both Form A and Form B Contracts covering insureds of 14 years of age or less
contain a special provision providing that the face amount of insurance will
automatically be increased on the Contract anniversary after the insured's 21st
birthday to 150% of the initial face amount, so long as the Contract is not then
in default. The death benefit will also usually increase, at the same time, by
the same dollar amount. In certain circumstances, however, it may increase by a
smaller amount. See HOW A FORM A (LEVEL) CONTRACT'S DEATH BENEFIT WILL VARY,
page 19 and HOW A FORM B
31
<PAGE>
(VARIABLE) CONTRACT'S DEATH BENEFIT WILL VARY, page 20. This increase in death
benefit will also generally increase the net amount at risk under the Contract,
thus increasing the mortality charge deducted each month from amounts invested
under the Contract. See item (b) under MONTHLY DEDUCTIONS FROM CONTRACT FUND,
page 11. The automatic increase in the face amount of insurance may affect the
level of future premium payments you can make without causing the Contract to be
classified as a Modified Endowment Contract. A Contract owner should consult his
or her Prudential representative before making unscheduled premium payments.
EXCHANGE OF FIXED-DOLLAR CONTRACT TO VARIABLE CONTRACT
Prudential may, on a non-discriminatory basis, permit the owner of an
APPRECIABLE LIFE insurance policy issued by Prudential (an APPRECIABLE LIFE
policy is a general account, universal life type policy with guaranteed minimum
values) to exchange his or her policy for a comparable Variable APPRECIABLE LIFE
Contract with the same Contract Date, Scheduled Premiums, and Contract Fund. No
charge will be made for the exchange. There is no new "free-look" right when an
APPRECIABLE LIFE insurance policy owner elects to exchange his or her policy for
a comparable Variable APPRECIABLE LIFE Contract.
SALE OF THE CONTRACT AND SALES COMMISSIONS
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
Prudential, acts as the principal underwriter of the Contract. Prusec, organized
in 1971 under New Jersey law, is registered as a broker and dealer under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. Prusec's principal business address is 751 Broad
Street, Newark, New Jersey 07102-3777. The Contract is sold by registered
representatives of Prusec who are also authorized by state insurance departments
to do so. The Contract may also be sold through other broker-dealers authorized
by Prusec and applicable law to do so. Registered representatives of such other
broker-dealers may be paid on a different basis than described below.
Where the insured is less than 60 years of age, the representative will
generally receive a commission of no more than: (1) 50% of the Scheduled
Premiums for the first year; (2) 6% of the Scheduled Premiums for the second
through 10th years; and (3) 2% of the Scheduled Premiums thereafter. For
insureds over 59 years of age, the commission will be lower. The representative
may be required to return all or part of the first year commission if the
Contract is not continued through the second year. Representatives with less
than three years of service may be paid on a different basis. Representatives
who meet certain productivity, profitability, and persistency standards with
regard to the sale of the Contract will be eligible for additional compensation.
STATE REGULATION
Prudential is subject to regulation and supervision by the Department of
Insurance of the State of New Jersey, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
Prudential is required to submit annual statements of its operations, including
financial statements, to the insurance departments of the various jurisdictions
in which it does business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, Prudential is required
to file with New Jersey and other jurisdictions a separate statement with
respect to the operations of all its variable contract accounts, in a form
promulgated by the National Association of Insurance Commissioners.
EXPERTS
The consolidated financial statements of Prudential and its subsidiaries as of
December 31, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999 and the financial statements of the Account as of December 31,
1999 and for each of the three years in the period then ended included in this
prospectus have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting. PricewaterhouseCoopers LLP's
principal business address is 1177 Avenue of the Americas, New York, New York
10036.
32
<PAGE>
Actuarial matters included in this prospectus have been examined by Pamela A.
Schiz, FSA, MAAA, Actuarial Director of Prudential, whose opinion is filed as an
exhibit to the registration statement.
LITIGATION AND REGULATORY PROCEEDINGS
We are subject to legal and regulatory actions in the ordinary course of our
businesses, including class actions. Our pending legal and regulatory actions
include proceedings specific to us and proceedings generally applicable to
business practices in the industries in which we operate. In our insurance
operations, we are subject to class actions and individual suits involving a
variety of issues, including sales practices, claims payment, coverage
obligations, premium charges for policies paid on a periodic basis and other
fees and denial of benefit matters and, with respect to property and casualty
products, "redlining" or impermissible discrimination among customers and method
of determining coverage and claims payment. In our asset management operations,
we are subject to litigation involving commercial disputes with counterparties
or partners and class actions and individual suits alleging, among other things,
that we made improper or inadequate disclosures in connection with the sale of
assets and annuity and investment products, recommended unsuitable products to
customers, mishandled customer accounts, charged excessive fees and breached
fiduciary duties to customers. In our securities operations, we are subject to
class actions and individual suits, arbitrations and other actions arising out
of our retail brokerage, account management, underwriting, investment banking
and other activities, including claims of improper or inadequate disclosure
regarding investments, recommending unsuitable investments and excessive or
unauthorized trading. We are a defendant in, or are contractually responsible to
third parties for, class action and individual litigation including various
claims arising from businesses that we are winding down or have divested. With
respect to our discontinued healthcare operations, we are subject to litigation
including class action and individual suits involving various issues, including
payment of claims, denial of benefits, vicarious liability for malpractice
claims, contract disputes with provider groups, class actions challenging
practices of our former managed care operations, and coordination of benefits
with other carriers. In some of our pending legal and regulatory actions,
parties are seeking large and/or indeterminate amounts, including punitive or
exemplary damages.
Our litigation is subject to many uncertainties, and given their complexity and
scope, the outcomes cannot be predicted. It is possible that our results of
operations or cash flow, 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 operations 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 our financial
position. See Note 15 of Notes to Consolidated Financial Statements, which Note
is incorporated by this reference.
ADDITIONAL INFORMATION
Prudential has filed a registration statement with the SEC under the Securities
Act of 1933, relating to the offering described in this prospectus. This
prospectus does not include all of the information set forth in the registration
statement. Certain portions have been omitted pursuant to the rules and
regulations of the SEC. The omitted information may, however, be obtained from
the SEC's Public Reference Section at 450 Fifth Street, N.W., Washington, D.C.
20549, or by telephoning (800) SEC-0330, upon payment of a prescribed fee.
Further information may also be obtained from Prudential. Its address and
telephone number are on the inside front cover of this prospectus.
FINANCIAL STATEMENTS
The financial statements of the Account should be distinguished from the
consolidated financial statements of Prudential and its subsidiaries, which
should be considered only as bearing upon the ability of Prudential to meet its
obligations under the Contracts.
33
<PAGE>
DIRECTORS AND OFFICERS OF PRUDENTIAL
DIRECTORS OF PRUDENTIAL
FRANKLIN E. AGNEW--Director since 1994 (current term expires April, 2005).
Member, Committee on Finance & Dividends; Member, Corporate Governance
Committee. Business consultant since 1987. Chief Financial Officer, H.J. Heinz
from 1971 to 1986. Mr. Agnew is also a director of Erie Plastics Corporation.
Age 65. Address: 600 Grant Street, Suite 660, Pittsburgh, PA 15219.
FREDERIC K. BECKER--Director since 1994 (current term expires April, 2005).
Member, Auditing Committee; Member, Corporate Governance Committee. President,
Wilentz Goldman and Spitzer, P.A. (law firm) since 1989, with firm since 1960.
Age 64. Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095.
GILBERT F. CASELLAS--Director since 1998 (current term expires April, 2003).
Member, Compensation Committee. President and Chief Operating Officer, The
Swarthmore Group, Inc. since 1999. Partner, McConnell Valdes, LLP in 1998.
Chairman, U.S. Equal Employment Opportunity Commission from 1994 to 1998. Age
47. Address: 1646 West Chester Pike, Suite 3, West Chester, PA 19382.
JAMES G. CULLEN--Director since 1994 (current term expires April, 2001). Member,
Compensation Committee; Member, Committee on Business Ethics. President & Chief
Operating Officer, Bell Atlantic Corporation, since 1998. President & Chief
Executive Officer, Telecom Group, Bell Atlantic Corporation, from 1997 to 1998.
Vice Chairman, Bell Atlantic Corporation from 1995 to 1997. President, Bell
Atlantic Corporation from 1993 to 1995. Mr. Cullen is also a director of Bell
Atlantic Corporation and Johnson & Johnson. Age 57. Address: 1310 North Court
House Road, 11th Floor, Alexandria, VA 22201.
CAROLYNE K. DAVIS--Director since 1989 (current term expires April, 2001).
Member, Committee on Business Ethics; Member, Compensation Committee.
Independent Health Care Advisor since 1997. Health Care Advisor, Ernst & Young,
LLP from 1985 to 1997. Dr. Davis is also a director of Beckman Coulter
Instruments, Inc., Merck & Co., Inc., Minimed Incorporated, Science Applications
International Corporation, and Beverley Enterprises. Age 68. Address: 751 Broad
Street, 21st Floor, Newark, NJ 07102-3777.
ROGER A. ENRICO--Director since 1994 (current term expires April, 2002). Member,
Committees on Nominations & Corporate Governance; Member, Compensation
Committee. Chairman and Chief Executive Officer, PepsiCo, Inc. since 1996. Mr.
Enrico originally joined PepsiCo, Inc. in 1971. Mr. Enrico is also a director of
A.H. Belo Corporation, Target Corporation, and Electronic Data Systems. Age 55.
Address: 700 Anderson Hill Road, Purchase, NY 10577.
ALLAN D. GILMOUR--Director since 1995 (current term expires April, 2003).
Member, Investment Committee; Member, Committee on Finance & Dividends. Retired
since 1995. Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr. Gilmour
originally joined Ford in 1960. Mr. Gilmour is also a director of Whirlpool
Corporation, MediaOne Group, Inc., The Dow Chemical Company and DTE Energy
Company. Age 65. Address: 751 Broad Street, 21st Floor, Newark, NJ 07102-3777.
WILLIAM H. GRAY III--Director since 1991 (current term expires April, 2004).
Chairman, Committees on Nominations & Corporate Governance. Member, Executive
Committee; Member, Committee on Business Ethics. President and Chief Executive
Officer, The College Fund/UNCF since 1991. Mr. Gray served in Congress from 1979
to 1991. Mr. Gray is also a director of Chase Manhattan Corporation, Chase
Manhattan Bank, Municipal Bond Investors Assurance Corporation, Rockwell
International Corporation, Warner-Lambert Company, CBS Corporation, Electronic
Data Systems, and Ezgov.com, Inc. Age 58. Address: 8260 Willow Oaks Corp. Drive,
Fairfax,VA 22031-4511.
JON F. HANSON--Director since 1991 (current term expires April, 2003). Member,
Investment Committee; Member, Committee on Business Ethics. Chairman, Hampshire
Management Company since 1976. Mr. Hanson is also a director of James E. Hanson
Management Company, Neumann Distributors, Inc., United Water Resources, and
Consolidated Delivery and Logistics. Age 63. Address: 235 Moore Street, Suite
200, Hackensack, NJ 07601.
34
<PAGE>
GLEN H. HINER--Director since 1997 (current term expires April, 2001). Member,
Compensation Committee. Chairman and Chief Executive Officer, Owens Corning
since 1992. Senior Vice President and Group Executive, Plastics Group, General
Electric Company from 1983 to 1991. Mr. Hiner is also a director of Dana
Corporation, Owens Corning, and Kohler, Co. Age 65. Address: One Owens Corning
Parkway, Toledo, OH 43659.
CONSTANCE J. HORNER--Director since 1994 (current term expires April, 2002).
Member, Auditing Committee; Member, Committees on Nominations & Corporate
Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is
also a director of Foster Wheeler Corporation, Ingersoll-Rand Company, and
Pfizer, Inc. Age 58. Address: 1775 Massachusetts Ave., N.W. Washington, D.C.
20036-2188.
GAYNOR N. KELLEY--Director since 1997 (current term expires April, 2001).
Member, Auditing Committee. Retired since 1996. Chairman and Chief Executive
Officer, The Perkin Elmer Corporation from 1990 to 1996. Mr. Kelley is also a
director of Hercules Incorporated and Alliant Techsystems. Age 68. Address: 751
Broad Street, 21st Floor, Newark, NJ 07102-3777.
BURTON G. MALKIEL--Director since 1978 (current term expires April, 2002).
Chairman, Investment Committee; Member, Executive Committee; Member, Committee
on Finance & Dividends. Professor of Economics, Princeton University, since
1988. Dr. Malkiel is also a director of Banco Bilbao Vizcaya Gestinova, Baker
Fentress & Company, The Jeffrey Company, Select Sector SPDR Trusts, and Vanguard
Group, Inc. Age 67. Address: Princeton University, Department of Economics, 110
Fisher Hall, Prospect Avenue, Princeton, NJ 08544-1021.
ARTHUR F. RYAN--Chairman of the Board Chief Executive Officer and President of
Prudential since 1994. President and Chief Operating Officer, Chase Manhattan
Bank from 1990 to 1994, with Chase since 1972. Age 57. Address: 751 Broad
Street, Newark, NJ 07102-3777.
IDA F.S. SCHMERTZ--Director since 1997 (current term expires April, 2004).
Member, Audit Committee. Principal, Investment Strategies International since
1994. Age 65. Address: 751 Broad Street, 21st Floor, Newark, NJ 07102-3777.
CHARLES R. SITTER--Director since 1995 (current term expires April, 2003).
Member, Committee on Finance & Dividend; Member, Investment Committee. Retired
since 1996. President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his
career with Exxon in 1957. Age 69. Address: 5959 Las Colinas Boulevard, Irving,
TX 75039-2298.
DONALD L. STAHELI--Director since 1995 (current term expires April, 2003).
Member, Compensation Committee; Member, Auditing Committee. Retired since 1996.
Chairman and Chief Executive Officer, Continental Grain Company from 1994 to
1997. President and Chief Executive Officer, Continental Grain Company from 1988
to 1994. Age 68 Address: 47 East South Temple, #501, Salt Lake City, UT 84150.
RICHARD M. THOMSON--Director since 1976 (current term expires April, 2004).
Chairman, Executive Committee; Chairman, Compensation Committee. Retired since
1998. Chairman of the Board, The Toronto-Dominion Bank from 1997 to 1998.
Chairman and Chief Executive Officer from 1978 to 1997. Mr. Thomson is also a
director of CGC, Inc., INCO, Limited, S.C. Johnson & Son, Inc., The Thomson
Corporation, Canadian Occidental Petroleum Ltd., The Toronto-Dominion Bank,
Ontario Power Generation, Inc., Canada Pension Plan Investment Board, and
TrizecHahn Corporation. Age 66. Address: P.O. Box 1, Toronto-Dominion Centre,
Toronto, Ontario, M5K 1A2, Canada.
JAMES A. UNRUH--Director since 1996 (current term expires April, 2004). Member,
Committees on Nominations & Corporate Governance; Member, Investment Committee.
Founding Member, Alerion Capital Group, LLC since 1998. Chairman and Chief
Executive Officer, Unisys Corporation, from 1990 to 1997. Mr. Unruh is also a
director of Moss Software, Inc. Age 59. Address: 751 Broad Street, 21st Floor,
Newark, NJ 07102-3777.
P. ROY VAGELOS, M.D.--Director since 1989 (current term expires April, 2001).
Chairman, Auditing Committee; Member, Executive Committee; Member, Committees on
Nominations & Corporate Governance. Chairman, Regeneron Pharmaceuticals since
1995. Chairman, Advanced Medicines, Inc. since 1997. Chairman, Chief Executive
Officer and President, Merck & Co., Inc. from 1986 to 1995. Dr. Vagelos
originally joined Merck in 1975. Dr. Vagelos is also a director of The Estee
Lauder Companies, Inc. and PepsiCo., Inc. Age 70. Address: One Crossroads Drive,
Building A, 3rd Floor, Bedminster, NJ 07921.
35
<PAGE>
STANLEY C. VAN NESS--Director since 1990 (current term expires April, 2002).
Chairman, Committee on Business Ethics; Member, Executive Committee; Member,
Auditing Committee. Partner, Herbert, Van Ness, Cayci & Goodell (law firm) since
1998. Counselor at Law, Picco Herbert Kennedy (law firm) from 1990 to 1998. Mr.
Van Ness is also a director of Jersey Central Power & Light Company. Age 66.
Address: 22 Chambers Street, Princeton, NJ 08542.
PAUL A. VOLCKER--Director since 1988 (current term expires April, 2004).
Chairman, Committee on Finance & Dividends; Member, Executive Committee; Member,
Committee on Nominations & Corporate Governance. Consultant since 1997. Chairman
and Chief Executive Officer, Wolfensohn & Co., Inc. 1995 to 1996. Chairman,
James D. Wolfensohn, Inc. 1988 to 1995. Mr. Volcker is also a director of
Nestle, S.A,. and as well as a Member of the Board of Overseers of TIAA-CREF.
Age 72. Address: 610 Fifth Avenue, Suite 420, New York, NY 10020.
JOSEPH H. WILLIAMS--Director since 1994 (current term expires April, 2002).
Member, Committee on Finance & Dividends; Member, Investment Committee.
Director, The Williams Companies since 1979. Chairman & Chief Executive Officer,
The Williams Companies from 1979 to 1993. Mr. Williams is also a director of The
Orvis Company, and AEA Investors, Inc. Age 66. Address: One Williams Center,
Tulsa, OK 74172.
PRINCIPAL OFFICERS
ARTHUR F. RYAN--Chairman of the Board, Chief Executive Officer, and President
since 1994; prior to 1994, President and Chief Operating Officer, Chase
Manhattan Corporation. Age 57.
MICHELE S. DARLING--Executive Vice President, Corporate Governance and Human
Resources since 2000; Executive Vice President, Human Resources from 1997 to
2000; prior to 1997, Executive Vice President, Human Resources, Canadian
Imperial Bank of Commerce. Age 46.
ROBERT C. GOLDEN--Executive Vice President, Operations and Systems since 1997;
prior to 1997, Executive Vice President, Prudential Securities. Age 53.
MARK B. GRIER--Executive Vice President, Financial Management and Government
Affairs since 2000; Executive Vice President, Corporate Governance from 1998 to
2000; Executive Vice President, Financial Management from 1997 to 1998; Chief
Financial Officer from 1995 to 1997; prior to 1995, Executive Vice President,
Chase Manhattan Corporation. Age 47.
JEAN D. HAMILTON--Executive Vice President, Prudential Institutional since 1998;
President, Diversified Group since 1995 to 1998; prior to 1995, President,
Prudential Capital Group. Age 53.
RODGER A. LAWSON--Executive Vice President, International Investments & Global
Marketing Communications since 1998; Executive Vice President, Marketing and
Planning from 1996 to 1998; President and CEO, Van Eck Global, from 1994 to
1996; prior to 1994, President and CEO, Global Private Banking, Bankers Trust
Company. Age 53.
KIYOFUMI SAKAGUCHI--Executive Vice President, International Insurance since
1998; President, International Insurance Group from 1995 to 1998; prior to 1995,
Chairman and CEO, The Prudential Life Insurance Co., Ltd., Japan. Age 57.
JOHN R. STRANGFELD--Executive Vice President, Global Asset Management since
1998; Chief Executive Officer, Private Asset Management Group (PAMG) from 1996
to 1998; President, PAMG, from 1994 to 1996; prior to 1994, Senior Managing
Director. Age 46.
VIVIAN BANTA--Executive Vice President, Individual Financial Services since
2000; Executive Vice President, Global Investor Service, The Chase Manhattan
Bank from 1991-1997. Age 49.
RICHARD J. CARBONE--Senior Vice President and Chief Financial Officer since
1997; Controller, Salomon Brothers, from 1995 to 1997; prior to 1995,
Controller, Bankers Trust. Age 52.
ANTHONY S. PISZEL--Senior Vice President and Controller since 2000; Vice
President and Controller from 1998 to 2000. Vice President, Enterprise Financial
Management from 1997 to 1998; prior to 1997, Chief Financial Officer, Individual
Insurance Group. Age 45.
36
<PAGE>
SUSAN J. BLOUNT--Vice President and Secretary since 1995; prior to 1995,
Assistant General Counsel. Age 42.
C. EDWARD CHAPLIN--Vice President and Treasurer since 1995; prior to 1995,
Managing Director and Assistant Treasurer. Age 43.
Prudential officers are elected annually.
37
<PAGE>
<TABLE>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF NET ASSETS
December 31, 1999
<CAPTION>
SUBACCOUNTS
--------------------------------------------------------------
MONEY DIVERSIFIED FLEXIBLE
MARKET BOND EQUITY MANAGED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ -------------- --------------
<S> <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
Receivable from (Payable to) the Prudential
Insurance Company of America [Note 2] .......... 278,800 5,795 (388,479) (363,613)
------------ ------------ -------------- --------------
Net Assets ....................................... $128,435,317 $147,275,295 $1,613,412,340 $1,500,566,635
============ ============ ============== ==============
NET ASSETS, representing:
Equity of contract owners [Note 4] ............... $128,435,317 $147,275,295 $1,613,412,340 $1,500,566,635
------------ ------------ -------------- --------------
$128,435,317 $147,275,295 $1,613,412,340 $1,500,566,635
============ ============ ============== ==============
<CAPTION>
SUBACCOUNTS (CONTINUED)
------------------------------
ZERO COUPON
CONSERVATIVE BOND
BALANCED 2000
PORTFOLIO PORTFOLIO
-------------- ------------
<S> <C> <C>
ASSETS
Investment in The Prudential Series
Fund, Inc. Portfolios at net asset value
[Note 3] ....................................... $1,128,695,150 $ 18,370,067
Receivable from (Payable to) the Prudential
Insurance Company of America [Note 2] .......... (278,132) 20,759
-------------- ------------
Net Assets ....................................... $1,128,417,018 $ 18,390,826
============== ============
NET ASSETS, representing:
Equity of contract owners [Note 4] ............... $1,128,417,018 $ 18,390,826
-------------- ------------
$1,128,417,018 $ 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
=========== ============== ============ ============ ============ =========== =========== ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
</TABLE>
A2
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
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
=========== =========== =========== ============ =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
</TABLE>
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
============ ============ ============ ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
</TABLE>
A4
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
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
========== ============ =========== =========== ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
</TABLE>
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)
============ ============ ============ ============ ============= ============ ============ ============= =============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
</TABLE>
A6
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
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
============ ============ =========== ============ =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
</TABLE>
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
=========== =========== =========== ============ ============ ============ ============ ============= ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
</TABLE>
A8
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1999, 1998 and 1997
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
============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
</TABLE>
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
============== ============== ============== ============== ============== ==============
- ------------------------------------------------
CONSERVATIVE
BALANCED
PORTFOLIO
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<C> <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
============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
</TABLE>
A10
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1999, 1998 and 1997
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
============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
</TABLE>
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
============== ============ ============ ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
</TABLE>
A12
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS
OF THE PRUDENTIAL
VARIABLE APPRECIABLE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1999, 1998 and 1997
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
============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
</TABLE>
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
============ ============ ============ ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20
</TABLE>
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
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
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
============ ============ ============== ============== ==============
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)
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)
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)
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)
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)
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)
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)
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)
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)
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>
<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
<PAGE>
Prudential's
Variable Appreciable Life(R)
Insurance
Variable Appreciable Life(R) is issued by The Prudential Insurance Company of
America and offered through Pruco Securities Corporation, a subsidiary of
Prudential, both located at 751 Broad Street, Newark, NJ 07102-3777. Appreciable
Life is a registered mark of Prudential.
[GRAPHIC OMITTED]
The Prudential Insurance Company of America
751 Broad Street, Newark, NJ 07102-3777
Telephone 800 778-2255
PVAL-1 Ed. 5/2000 CAT# 646960S
<PAGE>
PART II
OTHER INFORMATION
<PAGE>
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
REPRESENTATION WITH RESPECT TO CHARGES
The Prudential Insurance Company of America ("Prudential") represents that the
fees and charges deducted under the Variable Appreciable Life Insurance
Contracts registered by this registration statement, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by Prudential.
UNDERTAKING WITH RESPECT TO INDEMNIFICATION
The Registrant, in conjunction with certain affiliates, maintains insurance on
behalf of any person who is or was a trustee, director, officer, employee, or
agent of the Registrant, or who is or was serving at the request of the
Registrant as a trustee, director, officer, employee or agent of such other
affiliated trust or corporation, against any liability asserted against and
incurred by him or her arising out of his or her position with such trust or
corporation.
New Jersey, being the state of organization of Prudential, permits entities
organized under its jurisdiction to indemnify directors and officers with
certain limitations. The relevant provisions of New Jersey law permitting
indemnification can be found in Section 14A:3-5 of the New Jersey Statutes
Annotated. The text of Prudential's By-law 27, which relates to indemnification
of officers and directors, is incorporated by reference to Exhibit 6(b) of Form
S-6, Registration No. 333-64957, filed September 30, 1998 on behalf of The
Prudential Variable Appreciable Account.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-1
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of 118 pages.
The undertaking to file reports.
The representation with respect to charges.
The undertaking with respect to indemnification.
The signatures.
Written consents of the following persons:
1. PricewaterhouseCoopers LLP, independent accountants.
2. Clifford E. Kirsch, Esq.
3. Pamela A. Schiz, FSA, MAAA.
The following exhibits:
1. The following exhibits correspond to those required by paragraph A of the
instructions as to exhibits in Form N-8B-2:
A. (1) Resolution of Board of Directors of The Prudential Insurance
Company of America establishing The Prudential Variable
Appreciable Account. (Note 4)
(2) Not Applicable.
(3) Distributing Contracts:
(a) Distribution Agreement between Pruco Securities
Corporation and The Prudential Insurance Company of
America. (Note 5)
(b) Proposed form of Agreement between Pruco Securities
Corporation and independent brokers with respect to the
Sale of the Contracts. (Note 4)
(c) Schedules of Sales Commissions. (Note 5)
(4) Not Applicable.
(5) Variable Appreciable Life Insurance Contracts: (Note 5)
(a) With fixed death benefit for use in New Jersey and
domicile approval states.
(b) With variable death benefit for use in New Jersey and
domicile approval states.
(c) With fixed death benefit for use in non-domicile
approval states.
(d) With variable death benefit for use in non-domicile
approval states.
(6) (a) Charter of The Prudential Insurance Company of America,
as amended November 14, 1995. (Note 7)
(b) By-laws of The Prudential Insurance Company of America,
as amended May 12, 1998. (Note 8)
(7) Not Applicable.
(8) Not Applicable.
(9) Not Applicable.
(10) (a) Application Form. (Note 11)
(b) Supplement to the Application for Variable Appreciable
Life Insurance Contract. (Note 5)
(11) Form of Notice of Withdrawal Right. (Note 5)
(12) Memorandum describing Prudential's issuance, transfer, and
redemption procedures for the Contracts pursuant to Rule
6e-3(T)(b)(12)(iii) and method of computing adjustments in
payments and cash surrender values upon conversion to
fixed-benefit policies pursuant to Rule 6e-3(T)(b)(13)(v)(B).
(Note 5)
II-2
<PAGE>
(13) Available Contract Riders and Endorsements:
(a) Rider for Insured's Waiver of Premium Benefit. (Note 5)
(b) Rider for Applicant's Waiver of Premium Benefit. (Note
5)
(c) Rider for Insured's Accidental Death Benefit. (Note 5)
(d) Rider for Level Term Insurance Benefit on Life of
Insured. (Note 5)
(e) Rider for Decreasing Term Insurance Benefit on Life of
Insured. (Note 6)
(f) Rider for Interim Term Insurance Benefit. (Note 5)
(g) Rider for Option to Purchase Additional Insurance on
Life of Insured. (Note 5)
(h) Rider for Decreasing Term Insurance Benefit on Life of
Insured Spouse. (Note 6)
(i) Rider for Level Term Insurance Benefit on Dependent
Children. (Note 5)
(j) Rider for Level Term Insurance Benefit on Dependent
Children"from Term Conversions. (Note 5)
(k) Rider for Level Term Insurance Benefit on Dependent
Children"from Term Conversions or Attained Age Change.
(Note 5)
(l) Endorsement defining Insured Spouse. (Note 5)
(m) Rider covering lack of Evidence of Insurability on a
Child. (Note 5)
(n) Rider modifying Waiver of Premium Benefit. (Note 5)
(o) Rider to terminate a Supplementary Benefit. (Note 5)
(p) Rider providing for election of Variable Reduced Paid-up
Insurance. (Note 5)
(q) Rider to provide for exclusion of Aviation Risk. (Note
5)
(r) Rider to provide for exclusion of Military Aviation
Risk. (Note 5)
(s) Rider to provide for exclusion for War Risk. (Note 5)
(t) Rider to provide for Reduced Paid-up Insurance. (Note 5)
(u) Rider providing for Option to Exchange Policy. (Note 5)
(v) Endorsement defining Ownership and Control of the
Contract. (Note 5)
(w) Rider providing for Modification of Incontestability and
Suicide Provisions. (Note 5)
(x) Endorsement issued in connection with Non-Smoker
Qualified Contracts. (Note 5)
(y) Endorsement issued in connection with Smoker Qualified
Contracts. (Note 5)
(z) Home Office Endorsement. (Note 5)
(aa) Endorsement showing Basis of Computation for Non-Smoker
Contracts. (Note 5)
(bb) Endorsement showing Basis of Computation for Smoker
Contracts. (Note 5)
(cc) Rider for Term Insurance Benefit on Life of
Insured"Decreasing Amount After Three Years. (Note 5)
(dd) Rider for Renewable Term Insurance Benefit on Life of
Insured. (Note 5)
(ee) Rider for Level Term Insurance Benefit on Life of
Insured Spouse. (Note 5)
(ff) Living Needs Benefit Rider
(i) for use in Florida. (Note 5)
(ii) for use in all approved jurisdictions except
Florida and New York. (Note 5)
(iii) for use in New York. (Note 5)
(gg) Rider for Renewable Term Insurance Benefit on Life of
Insured Spouse. (Note 5)
(hh) Rider for Level Term Insurance Benefit on Life of
Insured"Premium Increases Annually. (Note 5)
(ii) Rider for Term Insurance Benefit on Life of
Insured"Decreasing Amount. (Note 5)
(jj) Rider for a Level Premium Option. (Note 5)
(kk) Payment of Unscheduled Premium Benefit (Note 5)
(ll) Rider for Scheduled Term Insurance Benefit on Life of
Insured. (Note 5)
(mm) Endorsement altering the Assignment provision. (Note 2)
(nn) Rider for Non-Convertible Term Insurance Benefit on Life
of Insured Spouse. (Note 6)
(oo) Rider for Convertible Term Insurance Benefit on Life of
Insured Spouse. (Note 6)
(pp) Rider for Level Term Insurance Benefit on Life of
Insured"Premium Increases Annually (Note 6)
(qq) Rider for Non-Convertible Term Insurance Benefit on Life
of Insured. (Note 6)
(rr) Rider for Convertible Term Insurance Benefit on Life of
Insured. (Note 6)
(ss) Endorsement for altering List of Investment Options.
(Note 1)
2. See Exhibit 1.A.(5).
3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality of the
securities being registered. (Note 1)
II-3
<PAGE>
4. None.
5. Not Applicable.
6. Opinion and Consent of Pamela A. Schiz, FSA, MAAA, as to actuarial matters
pertaining to the securities being registered. (Note 1)
7. Powers of Attorney.
(a) F. Agnew, F. Becker, J.Cullen,
C. Davis, R.Enrico, A. Gilmour,
W. Gray, III, J. Hanson, G. Hiner, C. Horner,
G. Kelley, B. Malkiel, A. Ryan, I. Schmertz,
C. Sitter, D. Staheli, R. Thomson, J. Unruh,
P. Vagelos, S. Van Ness, P. Volcker, J. Williams (Note 3)
(b) G. Casellas (Note 8)
(c) R. Carbone (Note 9)
(d) A. Piszel (Note 10)
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Post-Effective Amendment No. 14 to this
Registration Statement, filed February 15, 1995.
(Note 3) Incorporated by reference to Post-Effective Amendment No. 10 to Form
S-1, Registration No. 33-20083, filed April 9, 1998 on behalf of The
Prudential Variable Contract Real Property Account.
(Note 4) Incorporated by reference to Post-Effective Amendment No. 15 to this
Registration Statement filed May 1, 1995.
(Note 5) Incorporated by reference to Post-Effective Amendment No. 19 to this
Registration Statement, filed April 28, 1997.
(Note 6) Incorporated by reference to Post-Effective Amendment No. 18 to this
Registration Statement, filed December 26, 1996.
(Note 7) Incorporated by reference to Post-Effective Amendment No. 9 to Form
S-1, Registration No. 33-20083, filed April 9, 1997 on behalf of The
Prudential Variable Contract Real Property Account.
(Note 8) Incorporated by reference to Form S-6, Registration No. 333-64957,
filed September 30, 1998 on behalf of The Prudential Variable
Appreciable Account.
(Note 9) Incorporated by reference to Post-Effective Amendment No. 3 to Form
N-4, Registration No. 333-23271, filed October 16, 1998 on behalf of
The Prudential Discovery Select Group Variable Contract Account.
(Note 10) Incorporated by reference to Post-Effective Amendment No. 4 to Form
N-4, Registration No. 333-23271, filed February 23, 1999 on behalf of
The Prudential Discovery Select Group Variable Contract Account.
(Note 11) Incorporated by reference to Post-Effective Amendment No. 21 to this
Registration Statement, filed April 19, 1999.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Prudential Variable Appreciable Account, certifies that this Amendment is filed
solely for one or more of the purposes specified in Rule 485(b)(1) under the
Securities Act of 1933 and that no material event requiring disclosure in the
prospectus, other than one listed in Rule 485(b)(1), has occurred since the
effective date of the most recent Post-Effective Amendment to the Registration
Statement which included a prospectus, and has caused this Registration
Statement to be signed on its behalf by the undersigned thereunto duly
authorized, and its seal hereunto affixed and attested, all in the city of
Newark and the State of New Jersey, on this 25th day of April, 2000.
(Seal) THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
(Registrant)
By: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
(Depositor)
Attest: /s/ Thomas C. Castano By: /s/ Esther H. Milnes
----------------------------- --------------------
Thomas C. Castano Esther H. Milnes
Assistant Secretary Vice President and Actuary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 22 to the Registration Statement has been signed below by the
following persons in the capacities indicated on this 25th day of April, 2000.
SIGNATURE AND TITLE
/s/*
- -------------------------------------------
Arthur F. Ryan
Chairman of the Board, President, and Chief
Executive Officer
/s/*
- -------------------------------------------
Anthony S. Piszel
Vice President and Controller
/s/*
- -------------------------------------------
Richard J. Carbone
Senior Vice President and Chief Financial Officer
/s/* *By: /s/ Thomas C. Castano
- ------------------------------------------- ---------------------
Franklin E. Agnew Thomas C. Castano
Director (Attorney-in-Fact)
/s/*
- -------------------------------------------
Frederic K. Becker
Director
/s/*
- -------------------------------------------
Gilbert F. Casellas
Director
/s/*
- -------------------------------------------
James G. Cullen
Director
/s/*
- -------------------------------------------
Carolyne K. Davis
Director
/s/*
- -------------------------------------------
Roger A. Enrico
Director
II-5
<PAGE>
/s/*
- -------------------------------------------
Allan D. Gilmour
Director
/s/*
- -------------------------------------------
William H. Gray, III
Director
/s/*
- -------------------------------------------
Jon F. Hanson
Director
/s/*
- -------------------------------------------
Glen H. Hiner, Jr.
Director
/s/*
- -------------------------------------------
Constance J. Horner
Director
/s/*
- -------------------------------------------
Gaynor N. Kelley
Director
/s/*
- -------------------------------------------
Burton G. Malkiel
Director
/s/* *By:/s/ Thomas C. Castano
- ------------------------------------------- ---------------------
Ida F.S. Schmertz Thomas C. Castano
Director (Attorney-in-Fact)
/s/*
- -------------------------------------------
Charles R. Sitter
Director
/s/*
- -------------------------------------------
Donald L. Staheli
Director
/s/*
- -------------------------------------------
Richard M. Thomson
Director
/s/*
- -------------------------------------------
James A. Unruh
Director
/s/*
- -------------------------------------------
P. Roy Vagelos, M.D.
Director
/s/*
- -------------------------------------------
Stanley C. Van Ness
Director
/s/*
- -------------------------------------------
Paul A. Volcker
Director
/s/*
- -------------------------------------------
Joseph H. Williams
Director
II-6
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 22 to the registration statement on Form S-6 (the
"Registration Statement") of our report dated March 17, 2000, relating to the
financial statements of the Variable Appreciable Life Subaccounts of the
Prudential Variable Appreciable Account, which appears in such Prospectus.
We also consent to the use in the Prospectus constituting part of this
Registration Statement of our report dated March 21, 2000, relating to the
consolidated financial statements of The Prudential Insurance Company of America
and its subsidiaries, which appears in such Prospectus.
We also consent to the reference to us under the heading "Experts" in the
Prospectus.
PricewaterhouseCoopers LLP
New York, New York
April 21, 2000
II-7
<PAGE>
EXHIBIT INDEX
Consent of PricewaterhouseCoopers LLP, independent
accountants. Page II-7
1.A.(13)(ss) Endorsement for altering List of Investment
Options. Page II-9
3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the
legality of the securities being registered. Page II-10
6. Opinion and Consent of Pamela A. Schiz, FSA, MAAA, as to
actuarial matters pertaining to the securities
being registered. Page II-11
II-8
EXHIBIT 1.A.(13)(ss)
ENDORSEMENTS
(Only we can endorse this contract.)
ALTERATION OF TEXT
This endorsement modifies certain provisions of the policy to which it is
attached, as follows:
The first paragraph under List Of Investment Options is replaced with the
following:
I. THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
This account is registered with the SEC under the Investment Company Act of
1940. Each investment option of this account invests in a specific portfolio of
The Prudential Series Fund, Inc., and such other funds as we may specify from
time to time. The Prudential Series Fund, Inc. and other funds identified below
are registered with the SEC under the Investment Company Act of 1940 as open-end
diversified management investment companies. We show below the available
investment options and the funds and fund portfolios they invest in.
The Prudential Insurance Company of America.
By /s/ Susan L. Blount SPECIMEN
Secretary
Exhibit 3
April 21, 2000
The Prudential Insurance Company of America
Prudential Plaza
Newark, New Jersey 07102-3777
Gentlemen:
In my capacity as Chief Counsel, Variable Products, Law Department of The
Prudential Insurance Company of America ("Prudential"), I have reviewed the
establishment on August 11, 1987 of The Prudential Variable Appreciable Account
(the "Account") by the Finance Committee of the Board of Directors of Prudential
as a separate account for assets applicable to certain variable life insurance
contracts, pursuant to the provisions of Section 17B:28-7 of the Revised
Statutes of New Jersey. I am responsible for oversight of the preparation and
review of the Registration Statements on Form S-6, as amended, filed by
Prudential with the Securities and Exchange Commission (Registration Numbers:
33-20000, 333-64957, and 33-61079) under the Securities Act of 1933 for the
registration of certain variable life insurance contracts issued with respect to
the Account.
I am of the following opinion:
1. Prudential is a corporation duly organized under the laws of the
State of New Jersey and is a validly existing corporation.
2. The Account has been duly created and is validly existing as a
separate account pursuant to the aforesaid provisions of New Jersey
law.
3. The portion of the assets held in the Account equal to the reserve
and other liabilities for variable benefits under the variable life
insurance contracts is not chargeable with liabilities arising out
of any other business Prudential may conduct.
4. The variable life insurance contracts are legal and binding
obligations of Prudential, in accordance with their terms.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as I judged to be necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ Clifford E. Kirsch
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Clifford E. Kirsch
Exhibit 6
April 21, 2000
The Prudential Insurance Company of America
Prudential Plaza
Newark, New Jersey 07102-3777
To Prudential:
This opinion is furnished in connection with the registration by The Prudential
Insurance Company of America of variable appreciable life insurance contracts
(the "Contracts") under the Securities Act of 1933. The prospectus included in
Post-Effective Amendment No. 22 to the Registration Statement No. 33-20000 on
Form S-6 describes the Contracts. I have reviewed the two Contract forms and I
have participated in the preparation and review of the Registration Statement
and Exhibits thereto. In my opinion:
(1) The illustrations of cash surrender values and death benefits
included in the section of the prospectus entitled "Hypothetical
Illustrations of Death Benefits and Cash Surrender Values", based on
the assumptions stated in the illustrations, are consistent with the
provisions of the respective forms of the Contracts. The rate
structure of the Contracts has not been designed so as to make the
relationship between premiums and benefits, as shown in the
illustrations, appear more favorable to a prospective purchaser of a
Contract issued on a male age 35, than to prospective purchasers of
Contracts on males of other ages or on females.
(2) The deduction in an amount equal to 1.25% of each premium is a
reasonable charge in relation to the additional income tax burden
imposed upon The Prudential Insurance Company of America as the
result of the enactment of Section 848 of the Internal Revenue Code.
In reaching that conclusion a number of factors were taken into
account that, in my opinion, were appropriate and which resulted in
a projected after-tax rate of return that is a reasonable rate to
use in discounting the tax benefit of the deductions allowed in
Section 848 in taxable years subsequent to the year in which the
premiums are received.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to my name under the heading "Experts" in the
prospectus.
Very truly yours,
/s/ Pamela A. Schiz, FSA, MAAA
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Pamela A. Schiz, FSA, MAAA
Actuarial Director
The Prudential Insurance Company of America
