-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WZYKNlRG2VpFlovWMHTPK2fLt1MTiVFAEzzd/bgbv0xU7dh8d7oi6kKzp9UdS6j0 fGRRbVB8fMAumythRE9LVA== 0000891554-02-002534.txt : 20020430 0000891554-02-002534.hdr.sgml : 20020430 ACCESSION NUMBER: 0000891554-02-002534 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20020430 EFFECTIVENESS DATE: 20020501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT CENTRAL INDEX KEY: 0000828972 IRS NUMBER: 221121670 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 333-64957 FILM NUMBER: 02627112 BUSINESS ADDRESS: STREET 1: PRUDENTIAL INSURANCE CO OF AMERICA STREET 2: 213 WASHINGTON STREET CITY: NEWARK STATE: NJ ZIP: 07102 BUSINESS PHONE: 9738026196 MAIL ADDRESS: STREET 1: PRUDENTIAL INSURANCE CO OF AMERICA STREET 2: 213 WASHINGTON ST CITY: NEWARK STATE: NJ ZIP: 07102 FORMER COMPANY: FORMER CONFORMED NAME: PRUDENTIAL VARIABLE LIFE INSURANCE ACCOUNT DATE OF NAME CHANGE: 19880606 485BPOS 1 d50443_485bpos.txt FORM S-6 As filed with the SEC on _______ . Registration No. 333-64957 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- Post-Effective Amendment No. 4 to FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 ---------- PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT (Exact Name of Trust) THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (Name of Depositor) 751 Broad Street Newark, New Jersey 07102-3777 (800) 778-2255 (Address and telephone number of principal executive offices) Thomas C. Castano Assistant Secretary The Prudential Insurance Company of America 751 Broad Street Newark, New Jersey 07102-3777 (Name and address of agent for service) Copy to: Jeffrey C. Martin Shea & Gardner 1800 Massachusetts Avenue, N.W. Washington, D.C. 20036 It is proposed that this filing will become effective (check appropriate space): |_| immediately upon filing pursuant to paragraph (b) of Rule 485 |X| on May 1, 2002 pursuant to paragraph (b) of Rule 485 |_| 60 days after filing pursuant to paragraph (a) of Rule 485 |_| on _______ pursuant to paragraph (a) of Rule 485 (date) 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; Voting Rights; Charges and Expenses; Short-Term Cancellation Right, or "Free Look"; Type of Death Benefit; Changing the Type of Death Benefit; Contract Date; Premiums; Allocation of Premiums; Transfers; Dollar Cost Averaging, Auto-Rebalancing; How a Contract's Cash Surrender Value Will Vary; How a Type A (Fixed) Contract's Death Benefit Will Vary; How a Type B (Variable) Contract's Death Benefit Will Vary; Surrender of a Contract; Withdrawals; Increases in Basic Insurance Amount; Decreases in Basic Insurance Amount; Lapse and Reinstatement; When Proceeds are Paid; Riders; Other General Contract Provisions; Substitution of Fund Shares 11. Introduction and Summary; The Prudential Variable Appreciable Account 12. Cover Page; Introduction and Summary; The Funds; Sale of the Contract and Sales Commissions 13. Introduction and Summary; The Funds; Charges and Expenses; Sale of the Contract and Sales Commissions 14. Introduction and Summary; Requirements for Issuance of a Contract 15. Introduction and Summary; Allocation of Premiums; Transfers; Dollar Cost Averaging, Auto-Rebalancing; The Fixed-Rate Option 16. Introduction and Summary; Detailed Information for Prospective Contract Owners 17. When Proceeds are Paid N-8B-2 Item Number Location - ------------------ -------- 18. The Prudential Variable Appreciable Account 19. Reports to Contract Owners 20. Not Applicable 21. Contract Loans 22. Not Applicable 23. Not Applicable 24. Other General Contract Provisions 25. The Prudential Variable Appreciable Account 26. Introduction and Summary; The Funds; Charges and Expenses 27. The Prudential Insurance Company of America; The Funds 28. The Prudential Insurance Company of America; Directors and Officers 29. The Prudential Insurance Company of America 30. Not Applicable 31. Not Applicable 32. Not Applicable 33. Not Applicable 34. Not Applicable 35. The Prudential Insurance Company of America 36. Not Applicable 37. Not Applicable 38. Sale of the Contract and Sales Commissions 39. Sale of the Contract and Sales Commissions 40. Not Applicable 41. Sale of the Contract and Sales Commissions 42. Not Applicable 43. Not Applicable N-8B-2 Item Number Location - ------------------ -------- 44. Introduction and Summary; The Funds; How a Contract's Cash Surrender Value Will Vary; How a Type A (Fixed) Contract's Death Benefit Will Vary; How a Type B (Variable) Contract's Death Benefit Will Vary 45. Not Applicable 46. Introduction and Summary; The Prudential Variable Appreciable Account; The Funds 47. The Prudential Variable Appreciable Account; The Funds 48. Not Applicable 49. Not Applicable 50. Not Applicable 51. Not Applicable 52. Substitution of Fund Shares 53. Tax Treatment of Contract Benefits 54. Not Applicable 55. Not Applicable 56. Not Applicable 57. Not Applicable 58. Not Applicable 59. Financial Statements: Financial Statements of the Variable Universal Life Subaccounts of the Prudential Variable Appreciable Account; Consolidated Financial Statements of The Prudential Insurance Company of America and its subsidiaries PART I INFORMATION REQUIRED IN PROSPECTUS PROSPECTUS May 1, 2002 THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT Variable Universal Life This prospectus describes an individual flexible premium variable universal life insurance contract (the "Contract") offered by The Prudential Insurance Company of America ("Prudential," "us," "we," or "our"). The Contract provides life insurance coverage with flexible premium payments. As of November 16, 2001, Prudential no longer offered these Contracts for sale. Investment Choices: Variable Universal Life offers a wide variety of investment choices, including 35 variable investment options that invest in mutual funds managed by these leading asset managers: o Prudential Investments LLC o A I M Advisors, Inc. o American Century Investment Management, Inc. o Janus Capital Management LLC o MFS Investment Management" o T. Rowe Price International, Inc. For a complete list of the 35 available variable investment options and their investment objectives, see The Funds, page 7. You may also choose to invest your Contract's premiums and its earnings in the fixed-rate option which pays a guaranteed interest rate. See The Fixed-Rate Option, page 12. This prospectus describes the Contract generally and The Prudential Variable Appreciable Account (the "Account"). The attached prospectuses for the Funds and their related statements of additional information describe the investment objectives and the risks of investing in the 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 PROSPECTUS CONTENTS Page DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS ........................ 1 INTRODUCTION AND SUMMARY .................................................... 2 Brief Description of the Contract ........................................ 2 Charges .................................................................. 2 Types of Death Benefit ................................................... 5 Premium Payments ......................................................... 5 Refund ................................................................... 6 GENERAL INFORMATION ABOUT THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACT .................... 7 The Prudential Insurance Company of America .............................. 7 The Prudential Variable Appreciable Account .............................. 7 The Funds ................................................................ 7 Voting Rights ............................................................ 12 The Fixed-Rate Option .................................................... 12 Which Investment Option Should Be Selected? .............................. 13 DETAILED INFORMATION FOR PROSPECTIVE CONTRACT OWNERS ........................ 13 Charges and Expenses ..................................................... 13 Requirements for Issuance of a Contract .................................. 18 Short-Term Cancellation Right or "Free-Look" ............................. 18 Types of Death Benefit ................................................... 18 Changing the Type of Death Benefit ....................................... 18 Contract Date ............................................................ 19 Premiums ................................................................. 19 Allocation of Premiums ................................................... 20 Death Benefit Guarantee .................................................. 20 Transfers ................................................................ 22 Dollar Cost Averaging .................................................... 22 Auto-Rebalancing ......................................................... 23 How a Contract's Cash Surrender Value Will Vary .......................... 23 How a Type A (Fixed) Contract's Death Benefit Will Vary .................. 23 How a Type B (Variable) Contract's Death Benefit Will Vary ............... 24 Surrender of a Contract .................................................. 25 Withdrawals .............................................................. 25 Increases in Basic Insurance Amount ...................................... 26 Decreases in Basic Insurance Amount ...................................... 27 When Proceeds Are Paid ................................................... 27 Living Needs Benefit ..................................................... 27 Illustrations of Cash Surrender Values, Death Benefits, and Accumulated Premiums........................................... 28 Contract Loans ........................................................... 30 Sale of the Contract and Sales Commissions ............................... 31 Tax Treatment of Contract Benefits ....................................... 31 Lapse and Reinstatement .................................................. 33 Legal Considerations Relating to Sex-Distinct Premiums and Benefits ...... 33 Other General Contract Provisions ........................................ 34 Riders ................................................................... 34 Participation in Divisible Surplus ....................................... 34 Substitution of Fund Shares .............................................. 34 Reports to Contract Owners ............................................... 35 State Regulation ......................................................... 35 Experts .................................................................. 35 Litigation and Regulatory Proceedings .................................... 35 Additional Information ................................................... 36 Financial Statements ..................................................... 36 DIRECTORS AND OFFICERS OF PRUDENTIAL ........................................ 37 FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT .............................. A1 CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND ITS SUBSIDIARIES ..................................... B1 DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS accumulated net payments -- The actual premium payments you make, accumulated at an effective annual rate of 4%, less any withdrawals you make, accumulated at an effective annual rate of 4%. attained age -- The insured's age on the Contract date plus the number of years since then. basic insurance amount -- The amount of life insurance as shown in the Contract, not including riders. Also referred to as "face amount." cash surrender value -- The amount payable to the Contract owner upon surrender of the Contract. It is equal to the Contract Fund minus any Contract debt and, during the first 10 Contract years, minus the applicable surrender charge. Also referred to in the Contract as "Net Cash Value." Contract -- The variable universal life insurance policy described in this prospectus. Contract anniversary -- The same date as the Contract date in each later year. Contract date -- The date the Contract is effective, as specified in the Contract. Contract debt -- The principal amount of all outstanding loans plus any interest accrued thereon. Contract Fund -- The total amount credited to a specific Contract. On any date it is equal to the sum of the amounts in all the variable investment options and the fixed-rate option, and the principal amount of any Contract debt plus any interest earned thereon. Contract owner -- You. Unless a different owner is named in the application, the owner of the Contract is the insured. Contract year -- A year that starts on the Contract date or on a Contract anniversary. For any portion of a Contract representing an increase (see page 26), "Contract year" is a year that starts on the effective date of the increase. death benefit -- If the Contract is not in default, this is the amount we will pay upon the death of the insured, assuming no Contract debt. fixed-rate option -- An investment option under which interest is accrued daily at a rate that Prudential declares periodically, but not less than an effective annual rate of 4%. Funds -- Mutual funds with separate portfolios. One or more of the available Fund portfolios may be chosen as an underlying investment for the Contract. Lifetime Death Benefit Guarantee period -- The lifetime of the Contract, during which time the Lifetime Death Benefit Guarantee is available if sufficient premiums are paid. See Death Benefit Guarantee, page 20. Limited Death Benefit Guarantee period -- A period which is determined on a case-by-case basis, during which time the Limited Death Benefit Guarantee is available if sufficient premiums are paid. See Death Benefit Guarantee, page 20. The period applicable to your Contract is shown on the Contract data pages. Monthly date -- The Contract date and the same date in each subsequent month. separate account --"Amounts under the Contract that are allocated to the variable investment options held by us in a separate account called The Prudential Variable Appreciable Account (the "Account"). The separate account is set apart from all of the general assets of Prudential. The Prudential Insurance Company of America -- Us, we, our, Prudential. The company offering the Contract. valuation period -- The period of time from one determination of the value of the amount invested in a variable investment option to the next. Such determinations are made when the net asset values of the portfolios of the Funds are calculated, which is generally at 4:00 p.m. Eastern time on each day during which the New York Stock Exchange is open. variable investment options -- the 35 mutual funds available under this Contract, whose shares are held in the separate account. you -- The owner of the Contract. 1 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 As of November 16, 2001, Prudential no longer offered these Contracts for sale. The Contract is a form of variable universal life insurance. It is based on a Contract Fund, the value of which changes every day. The chart below describes how the value of your Contract Fund changes. 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 35 available variable investment options (in states where they are approved) or in the fixed-rate option. Your Contract Fund value changes every day depending upon the change in the value of the particular investment options that you have selected. Although the value of your Contract Fund will increase if there is favorable investment performance in the 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 13. If you select the fixed-rate option, Prudential credits your account with a declared rate or rates of interest but you assume the risk that the rate may change, although it will never be lower than an effective annual rate of 4%. Variable life insurance contracts are unsuitable as short-term savings vehicles. Withdrawals and loans will negate any guarantee against lapse and may result in adverse tax consequences. See Death Benefit Guarantee, page 20, and Tax Treatment of Contract Benefits, page 31. The replacement of life insurance is generally not in your best interest. In most cases, if you require additional coverage, the benefits of your existing contract can be protected by purchasing additional insurance or a supplemental contract. If you are considering replacing a contract, you should compare the benefits and costs of supplementing your existing contract with the benefits and costs of purchasing the Contract described in this prospectus and you should consult with a qualified tax adviser. This prospectus may only be offered in jurisdictions in which the offering is lawful. No person is authorized to make any representations in connection with this offering other than those contained in this prospectus and in the prospectuses and statements of additional information for the Funds. Charges The following chart outlines the components of your Contract Fund and the adjustments which may be made including the maximum charges which may be deducted from each premium payment and from the amounts held in the designated investment options. These charges are largely designed to cover insurance costs and risks as well as sales and administrative expenses. The maximum charges shown in the chart, as well as the current lower charges, are fully described under Charges and Expenses, page 13. 2 --------------------------- Premium Payment --------------------------- ----------------------------------------------------------------- o less an administrative charge of up to 7.5% of the premiums paid. o less a charge for sales expenses of up to 4% of the premiums paid. ----------------------------------------------------------------- ----------------------------------------------------------------------- Invested Premium Amount To be invested in one or a combination of: o 35 variable investment options o The fixed-rate option ----------------------------------------------------------------------- ---------------------------------------------------------------------------- Contract Fund On the Contract Date, the Contract Fund is equal to the invested premium amount minus any of the charges described below which may be due on that date. Thereafter, the value of the Contract Fund changes daily. ---------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Prudential adjusts the Contract Fund for: o Addition of any new invested premium amounts. o Addition of any increase due to investment results of the chosen variable investment options. o Addition of guaranteed interest at an effective annual rate of 4% (plus any excess interest if applicable) on the portion of the Contract Fund allocated to the fixed-rate option. o Addition of guaranteed interest at an effective annual rate of 4% on the amount of any Contract loan. (Separately, interest charged on the loan accrues at an effective annual rate of 4.5% or 5%. See Contract Loans, page 30.) o Subtraction of any decrease due to investment results of the chosen variable investment options. o Subtraction of any amount withdrawn. o Subtraction of the charges listed below, as applicable. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Daily Charges o Management fees and expenses are deducted from the Fund assets. See Underlying Portfolio Expenses chart, below. o We deduct a daily mortality and expense risk charge, equivalent to an annual rate of up to 0.9%, from the assets in the variable investment options. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Monthly Charges o We reduce the Contract Fund by a monthly administrative charge of up to $10 plus $0.07 per $1,000 of the basic insurance amount; after the first Contract year, the $0.07 per $1,000 portion of the charge is reduced to $0.01 per $1,000 of the basic insurance amount. o We deduct a cost of insurance ("COI") charge. o We reduce the Contract Fund by a Death Benefit Guarantee risk charge of $0.01 per $1,000 of the basic insurance amount. o If the Contract includes riders, we deduct rider charges from the Contract Fund. o If the rating class of an insured results in an extra charge, we will deduct that charge from the Contract Fund. - -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- Possible Additional Charges o During the first 10 Contract years, we will assess a contingent deferred sales charge if the Contract lapses, is surrendered, or the basic insurance amount is decreased (including as a result of a withdrawal or a death benefit type change). For insureds age 76 or less at issue, the maximum contingent deferred sales charge is 26% of the lesser of the target level premium or the actual premiums paid (see Premiums, page 19) for the Contract. The charge is level for six years and then declines monthly to zero at the end of the 10th Contract year. For insureds age 77 or over at issue, the maximum charge will be a lesser percentage of the target level premium for the Contract or the actual premiums paid. o During the first 10 Contract years, we will assess a contingent deferred administrative charge if the Contract lapses, is surrendered or the basic insurance amount is decreased (including as a result of a withdrawal or a death benefit type change). This charge equals the lesser of: (a) $5 per $1,000 of basic insurance amount; and (b) $500. It is level for six years and then declines monthly until it reaches zero at the end of the 10th Contract year. o We assess an administrative charge of up to $25 for any withdrawals. o We may assess an administrative charge of up to $25 for any change in basic insurance amount. o We assess an administrative charge of up to $25 for each transfer exceeding 12 in any Contract year. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Underlying Portfolio Expenses
Total Investment Contractual Total Actual The Prudential Series Fund, Inc. Portfolios Advisory Fees Other Expenses Expenses Expenses* ---------------------------------------------------------------------------------------------------------- Conservative Balanced 0.55% 0.03% 0.58% 0.58% Diversified Bond 0.40% 0.04% 0.44% 0.44% Equity 0.45% 0.04% 0.49% 0.49% Flexible Managed 0.60% 0.04% 0.64% 0.64% Global 0.75% 0.09% 0.84% 0.84% High Yield Bond 0.55% 0.05% 0.60% 0.60% Jennison 0.60% 0.04% 0.64% 0.64% Money Market 0.40% 0.03% 0.43% 0.43% Stock Index 0.35% 0.04% 0.39% 0.39% Value 0.40% 0.04% 0.44% 0.44% SP Aggressive Growth Asset Allocation (1) 0.84% 0.90% 1.74% 1.04% SP AIM Aggressive Growth 0.95% 2.50% 3.45% 1.07% SP AIM Core Equity 0.85% 1.70% 2.55% 1.00% SP Alliance Large Cap Growth 0.90% 0.67% 1.57% 1.10% SP Alliance Technology 1.15% 2.01% 3.16% 1.30% SP Balanced Asset Allocation (1) 0.75% 0.52% 1.27% 0.92% SP Conservative Asset Allocation (1) 0.71% 0.35% 1.06% 0.87% SP Davis Value 0.75% 0.28% 1.03% 0.83% SP Deutsche International Equity 0.90% 2.37% 3.27% 1.10% SP Growth Asset Allocation (1) 0.80% 0.66% 1.46% 0.97% SP INVESCO Small Company Growth 0.95% 1.89% 2.84% 1.15% SP Jennison International Growth 0.85% 1.01% 1.86% 1.24% SP Large Cap Value 0.80% 1.18% 1.98% 0.90% SP MFS Capital Opportunities 0.75% 2.29% 3.04% 1.00% SP MFS Mid-Cap Growth 0.80% 1.31% 2.11% 1.00% SP PIMCO High Yield 0.60% 0.48% 1.08% 0.82% SP PIMCO Total Return 0.60% 0.22% 0.82% 0.76% SP Prudential U.S. Emerging Growth 0.60% 0.81% 1.41% 0.90% SP Small/Mid Cap Value 0.90% 0.66% 1.56% 1.05% SP Strategic Partners Focused Growth 0.90% 1.71% 2.61% 1.01%
* Reflects fee waivers, reimbursement of expenses, and expense reductions, if any. - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- Underlying Portfolio Expenses
- -------------------------------------------------------------------------------------------------------------------- Investment Total Total Advisory Other Contractual Actual Portfolios Fees Expenses Expenses Expenses* - -------------------------------------------------------------------------------------------------------------------- AIM Variable Insurance Funds AIM V.I. Premier Equity Fund - Series I shares 0.60% 0.25% 0.85% 0.85% American Century Variable Portfolios, Inc. (2) VP Value Fund 0.97% 0.00% 0.97% 0.97% Janus Aspen Series (3) Growth Portfolio - Institutional Shares 0.65% 0.01% 0.66% 0.66% MFS" Variable Insurance Trust" (4) Emerging Growth Series 0.75% 0.12% 0.87% 0.86% T. Rowe Price International Series, Inc. (5) International Stock Portfolio 1.05% 0.00% 1.05 % 1.05% * Reflects fee waivers, reimbursement of expenses, and expense reductions, if any.
- -------------------------------------------------------------------------------- (1) Prudential Series Fund, Inc. EachAsset Allocation Portfolio invests shares in other Fund Portfolios. The Advisory Fees for the Asset Allocation Portfolios are the product of a blend of the Advisory Fees of those other Fund Portfolios, plus a 0.05% annual advisory fee payable to PI. (2) American Century Variable Portfolios, Inc. The "Investment Advisory Fees" include ordinary expenses of managing and operating the Fund, except brokerage expenses, taxes, interest, fees and expenses of the independent directors (including legal counsel fees), and extraordinary expenses. The Fund has a stepped fee schedule. As a result, the Fund's management fee rate decreases as the Fund's assets increase. (3) Janus Aspen Series The table reflects expenses for the fiscal year ended December 31, 2001. All expenses are shown without the effect of any offset arrangements. (4) MFS(R) Variable Insurance Trust SM An expense offset arrangement with the Fund's custodian resulted in a reduction in "Other Expenses" by 0.01% and is reflected in the "Total Actual Expenses." (5) T. Rowe Price International Series, Inc. The "Investment Advisory Fees" include ordinary recurring operating expenses of the Funds. The expenses relating to the Funds (other than those of the Series Fund) have been provided to Prudential by the Funds. Prudential has not independently verified them. Types of Death Benefit There are two types of death benefit available. You may choose a Contract with a Type A (fixed) death benefit under which the cash surrender value varies daily with investment experience, and the death benefit generally remains at the basic insurance amount you initially chose. However, the Contract Fund may grow to a point where the death benefit may increase and vary with investment experience. If you choose a Contract with a Type B (variable) death benefit, the cash surrender value and the death benefit both vary with investment experience. For either type of death benefit, as long as the Contract is in-force, the death benefit will never be less than the basic insurance amount shown in your Contract. See Types of Death Benefit, page 18. Premium Payments The Contract is a flexible premium contract - there are no scheduled premiums. Except for the minimum initial premium, and subject to a minimum of $25 per subsequent payment, you choose the timing and amount of premium payments. The Contract will remain in-force if the Contract Fund less any applicable surrender charges is greater than zero and more than any Contract debt. Paying insufficient premiums, poor investment results, or the taking of loans or withdrawals from the Contract will increase the possibility that the Contract will lapse. However, if the accumulated premiums you pay are high enough, and Contract debt does not equal or exceed the Contract Fund less any applicable surrender charges, Prudential guarantees that your Contract will not lapse even if investment experience is very unfavorable and the Contract Fund drops below zero. Each Contract generally provides two guarantees, one that lasts for the lifetime of the Contract and another that lasts for a stated, reasonably lengthy period. The guarantee for 5 the life of the Contract requires higher premium payments. See Premiums, page 19, Death Benefit Guarantee, page 20 and Lapse and Reinstatement, page 33. We offer and suggest regular billing of premiums even though you decide when to make premium payments and, subject to a $25 minimum, in what amounts. You should discuss your billing options with your Prudential representative when you apply for the Contract. See Premiums, page 19. Refund For a limited time, you may return your Contract for a refund in accordance with the terms of its "Free-Look" provision. See Short-Term Cancellation Right or "Free-Look," page 18. For the DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, see page 1. 6 GENERAL INFORMATION ABOUT THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACT The Prudential Insurance Company of America The Prudential Insurance Company of America ("Prudential") is a stock life insurance company that has been doing business since 1875. 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 an indirect wholly-owned subsidiary of Prudential Financial, Inc. ("Prudential Financial"), a New Jersey insurance holding company. Prudential Financial exercises significant influence over the operations and capital structure of Prudential. However, neither Prudential Financial nor any other related company has any legal responsibility to pay amounts that Prudential may owe under the contract or policy. 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 as a unit investment trust, which is a type of investment company. The Account meets the definition of a "separate account" under federal securities laws. The Account holds assets that are segregated from all of Prudential's other assets. Prudential is the legal owner of the assets in the Account. Prudential will maintain assets in the Account with a total market value at least equal to the reserve and other liabilities relating to the variable benefits attributable to the Account. These assets may not be charged with liabilities which arise from any other business Prudential conducts. In addition to these assets, the Account's assets may include funds contributed by Prudential to commence operation of the Account and may include accumulations of the charges Prudential makes against the Account. From time to time these additional assets may be withdrawn by Prudential. The obligations to Contract owners and beneficiaries arising under the Contract are general corporate obligations of Prudential. Currently, in states where they are approved, you may invest in one or a combination of 35 available variable investment options. When you choose a variable investment option, we purchase shares of a mutual fund which are held as an investment for that option. We hold these shares in the separate account. The division of the separate account of Prudential that invests in a particular mutual fund is referred to in your Contract as the subaccount. Prudential may add additional variable investment options in the future. The Account's financial statements begin on page A1. The Funds Listed below are the mutual funds (the "Funds") in which the variable investment options invest, the investment objectives, and investment advisers. Each Fund has a separate prospectus that is provided with this prospectus. You should read the Fund prospectus before you decide to allocate assets to the variable investment option using that Fund. There is no assurance that the investment objectives of the Funds will be met. 7 The Prudential Series Fund, Inc. (the "Series Fund"): 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 Diversified Bond Portfolio: The investment objective is a high level of income over a longer term while providing reasonable safety of capital. The Portfolio normally invests at least 80% of its investable assets in higher grade debt obligations and high quality money market investments. o Equity Portfolio: The investment objective is capital appreciation. The Portfolio normally invests at least 80% of its investable assets in common stocks of major established corporations as well as smaller companies that we believe offer attractive prospects of appreciation. o Flexible Managed Portfolio: The investment objective is a high total return consistent with an aggressively managed diversified portfolio. The Portfolio invests in a mix of equity securities, debt obligations and money market instruments. 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 High Yield Bond Portfolio: The investment objective is a high total return. The Portfolio normally invests at least 80% of its investable assets in high yield/high risk debt securities. o Jennison Portfolio (formerly Prudential Jennison Portfolio): The investment objective is long-term growth of capital. The Portfolio invests primarily in equity securities of major, established corporations that we believe offer above-average growth prospects. 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 money market instruments issued by the U.S. government or its agencies, as well as domestic and foreign corporations and banks. o Stock Index Portfolio: The investment objective is investment results that generally correspond to the performance of publicly-traded common stocks. The Portfolio attempts to duplicate the price and yield performance of the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500") by investing at least 80% of its investable assets in S&P 500 stocks. o Value Portfolio: The investment objective is capital appreciation. The Portfolio invests primarily in common stocks that are trading below their underlying asset value, cash generating ability, and overall earnings and earnings growth. o SP Aggressive Growth Asset Allocation Portfolio: The investment objective is capital appreciation. The Portfolio invests primarily in large cap equity portfolios, international portfolios, and small/mid-cap equity portfolios. o SP AIM Aggressive Growth Portfolio: The investment objective is to achieve long-term growth of capital. The portfolio seeks to meet this objective by investing primarily in the common stocks of companies whose earnings the advisers expect to grow more than 15% per year. o SP AIM Core Equity Portfolio (formerly SP AIM Growth and Income Portfolio): The investment objective is growth of capital with a secondary objective of current income. The Portfolio invests as least 80% of its investable asets plus any borrowings made for investment purposes in securities of established companies that have long-term above-average growth earnings and dividends, and growth companies that the Portfolio managers believe have the potential for above-average growth earnings and dividends. 8 o SP Alliance Large Cap Growth Portfolio: The investment objective is growth of capital. The Portfolio will pursue aggressive investment policies by investing at least 80% of the Portfolio's investable assets in stocks of companies considered to have large capitalizations. o SP Alliance Technology Portfolio: The investment objective is growth of capital. The Portfolio normally invests at least 80% of its investable assets in securities of companies that use technology extensively in the development of new or improved products or processes. o SP Balanced Asset Allocation Portfolio: The investment objective is to provide a balance between current income and growth of capital. The Portfolio invests primarily in fixed income portfolios, large cap equity portfolios, small/mid-cap equity portfolios, and international equity portfolios. o SP Conservative Asset Allocation Portfolio: The investment objective is to provide current income with low to moderate capital appreciation. The Portfolio invests primarily in fixed income portfolios, large cap equity portfolios, and small/mid-cap equity portfolios. o SP Davis Value Portfolio: The investment objective is growth of capital. The Portfolio invests primarily in common stock of U.S. companies with market capitalizations of at least $5 billion. o SP Deutsche International Equity Portfolio: The investment objective is to invest for long-term capital appreciation. The portfolio normally invests at least 80% of its investable assets in the stocks and other equity securities of companies in developed countries outside the United States. o SP Growth Asset Allocation Portfolio: The investment objective is to provide long-term growth of capital with consideration also given to current income. The Portfolio invests at least 80% of its investable assets in large-cap equity portfolios, fixed income portfolios, international equity portfolios, and small/mid-cap equity portfolios. o SP INVESCO Small Company Growth Portfolio: The investment objective is long-term capital growth. The Portfolio invests at least 80% of its investable assets in small-capitalization companies - those which are included in the Russell 2000 Growth Index at the time of purchase, or if not included in that index, have market capitalizations of $2.5 billion or below at the time of purchase. o SP Jennison International Growth Portfolio: The investment objective is long-term growth of capital. Under normal circumstances, the Portfolio invests at least 65% of its total assets in the common stock of large to medium-sized foreign companies operating or based in at least five different countries. o SP Large Cap Value Portfolio: The investment objective is long-term growth of capital. The Portfolio normally invests at least 80% of its investable assets in securities of companies with large market capitalizations (those with market capitalizations similar to companies in the Standard & Poor's 500 Composite Stock Price Index or the Russell 1000 Index). o SP MFS Capital Opportunities Portfolio: The investment objective is capital appreciation. The Portfolio invests, under normal market conditions, at least 65% of its net assets in common stocks and related securities, such as preferred stocks, convertible securities, and depositary receipts for those securities. o SP MFS Mid-Cap Growth Portfolio: The investment objective is long-term capital growth. The Portfolio invests, under normal market conditions, at least 80% of its investable assets in common stocks and related securities, such as preferred stocks, convertible securities, and depositary receipts for those securities. o SP PIMCO High Yield Portfolio: The investment objective is maximum total return, consistent with preservation of capital and prudent investment management. Under normal circumstances, the Portfolio invests at least 80% of its investable assets in a diversified portfolio of high yield securities ("junk bonds") rated below investment grade, but rated at least B by Moody's Investor Service, Inc. or Standard & Poor's Ratings Group, and investment grade fixed income instruments. 9 o SP PIMCO Total Return Portfolio: The investment objective is to seek maximum total return, consistent with preservation of capital and prudent investment management. Under normal circumstances, the Portfolio invests at least 65% of its assets in a diversified portfolio of fixed income instruments of varying maturities. o SP Prudential U.S. Emerging Growth Portfolio: The investment objective is long-term capital appreciation. The Portfolio normally invests at least 80% of its investable assets in equity securities of small and medium sized U.S. companies. o SP Small/Mid Cap Value Portfolio: The investment objective is long-term growth of capital. The Portfolio normally invests at least 80% of its investable assets in securities of companies with small to medium market capitalizations. o SP Strategic Partners Focused Growth Portfolio: The investment objective is long-term growth of capital. The Portfolio normally invests at least 65% of its total assets in equity-related securities of U.S. companies that the adviser believes to have strong capital appreciation potential. Prudential Investments LLC ("PI"), an indirect wholly-owned subsidiary of Prudential Financial, serves as the overall investment adviser for the Series Fund. PI will furnish investment advisory services in connection with the management of the Series Fund portfolios under a "manager-of-managers" approach. Under this structure, PI is authorized to select (with approval of the Series Fund's independent directors) one or more sub-advisers to handle the actual day-to-day investment management of each Portfolio. Ultimately, PI serves as the investment adviser for the SP Aggressive Growth Asset Allocation, the SP Balanced Asset Allocation, the SP Conservative Asset Allocation, and the SP Growth Asset Allocation Portfolios. PI's business address is 100 Mulberry Street, Gateway Center Three, Newark, New Jersey 07102. Jennison Associates LLC ("Jennison"), also an indirect wholly-owned subsidiary of Prudential Financial, serves as the sole sub-adviser for the Global, the Jennison, the SP Jennison International Growth, and the SP Prudential U.S. Emerging Growth Portfolios. Jennison serves as a sub-adviser for a portion of the assets of the Equity, the Value, and the SP Strategic Partners Focused Growth Portfolios. Jennison's business address is 466 Lexington Avenue, New York, New York 10017. Prudential Investment Management, Inc. ("PIM"), also an indirect wholly-owned subsidiary of Prudential Financial, serves as the sole sub-adviser for the Conservative Balanced, the Diversified Bond, the Flexible Managed, the High Yield Bond, the Money Market, and the Stock Index Portfolios. PIM's business address is 100 Mulberry Street, Gateway Center Two, Newark, New Jersey 07102. A I M Capital Management, Inc. ("A I M Capital") serves as the sub-adviser to the SP AIM Aggressive Growth Portfolio and the SP AIM Core Equity Portfolio. A I M Capital's principal business address is 11 Greenway Plaza, Suite 100, Houston, Texas 77046-1173. Alliance Capital Management, L.P. ("Alliance") serves as the sub-adviser to the SP Alliance Large Cap Growth Portfolio, the SP Alliance Technology Portfolio, and the SP Strategic Partners Focused Growth Portfolio. The sub-adviser is located at 1345 Avenue of the Americas, New York, New York 10105. Davis Selected Advisers, L.P. ("Davis") serves as the sub-adviser to the SP Davis Value Portfolio. The sub-adviser is located at 2429 East Elvira Road, Suite 101, Tucson, Arizona 85706. Deutsche Asset Management, Inc. ("DAMI") serves as a sub-adviser to the SP Deutsche International Equity Portfolio and as a sub-adviser for approximately 25% of the assets of the Value Portfolio. DAMI is a wholly-owned subsidiary of Deutsche Bank AG. DAMI's business address is 280 Park Avenue, New York, New York 10017. Fidelity Management & Research Company ("FMR") serves as the sub-adviser to the SP Large Cap Value Portfolio and the SP Small/Mid Cap Value Portfolio. FMR's business address is 82 Devonshire Street, Boston, Massachusetts 02109. GE Asset Management Incorporated ("GEAM") serves as a sub-adviser to approximately 25% of the assets of the Equity Portfolio. GEAM's ultimate parent is General Electric Corporation. GEAM's business address is 3003 Summer Street, Stamford, Connecticut 06904. 10 INVESCO Funds Group, Inc. ("INVESCO') serves as the sub-adviser to the SP INVESCO Small Company Growth Portfolio. INVESCO's principal business address is 4350 South Monaco Street, Denver, Colorado 80237. Massachusetts Financial Services Company ("MFS") serves as the sub-adviser for the SP MFS Capital Opportunities Portfolio and the SP MFS Mid-Cap Growth Portfolio. The principal business address for MFS is 500 Boylston Street, Boston, Massachusetts 02116. Pacific Investment Management Company LLC ("PIMCO") serves as the sub-adviser for the SP PIMCO High Yield Portfolio and the SP PIMCO Total Return Portfolio. PIMCO is a subsidiary of Allianz Dresdner Asset Management of America L.P., formerly PIMCO Advisors L.P. PIMCO's principal business address is 840 Newport Center Drive, Newport Beach, California 92660. Salomon Brothers Asset Management, Inc. ("Salomon") serves as a sub-adviser for a portion of the assets of the Equity Portfolio. It is expected that under normal circumstances Salomon will manage approximately 25% of the Portfolio. Salomon is a part of the global asset management arm of Citigroup, Inc. which was formed in 1998 as a result of the merger of Travelers Group and Citicorp, Inc. Salomon's business address is 388 Greenwich Street, New York, New York 10013. Victory Capital Management, Inc. ("Victory") (formerly Key Asset Management, Inc.) serves as a sub-adviser for approximately 25% of the assets of the Value Portfolio. Victory is a wholly-owned subsidiary of KeyCorp, Inc. Victory's business address is 127 Public Square, Cleveland, Ohio 44114. As an investment adviser, PI charges the Series Fund a daily investment management fee as compensation for its services. PI pays each sub-adviser out of the fee that PI receives from the Series Fund. See Deductions from Portfolios, page 14. AIM Variable Insurance Funds: o AIM V.I. Premier Equity Fund- Series I shares (formerly AIM V.I. Value Fund). Seeks to achieve long-term growth of capital. Income is a secondary objective. A I M Advisors, Inc. ("AIM") is the investment adviser for this fund. The principal business address for AIM is 11 Greenway Plaza, Suite 100, Houston, Texas 77046-1173. American Century Variable Portfolios, Inc.: o American Century VP Value Fund. Seeks long-term capital growth with income as a secondary objective. The Fund seeks to achieve its objective by investing primarily in equity securities of well-established companies with intermediate-to-large market capitalizations that are believed by management to be undervalued at the time of purchase. American Century Investment Management, Inc. ("ACIM") is the investment adviser for this fund. ACIM's principal business address is American Century Tower, 4500 Main Street, Kansas City, Missouri 64111. The principal underwriter of the Fund is American Century Investment Services, Inc., located at 4500 Main Street, Kansas City, Missouri 64111. Janus Aspen Series: o Growth Portfolio- Institutional Shares. Seeks long-term growth of capital in a manner consistent with the preservation of capital. The Portfolio normally invests in common stocks of larger, more established companies. Janus Capital Management LLC is the investment adviser and is responsible for the day-to-day management of the portfolio and other business affairs of the portfolio. Janus Capital Corporation's principal business address is 100 Fillmore Street, Denver, Colorado 80206-4928. 11 MFS(R) Variable Insurance Trust(SM): o Emerging Growth Series. Seeks long-term growth of capital. The Series invests, under normal market conditions, at least 65% of its total assets in common stocks and related securities, such as preferred stock, convertible securities and depositary receipts of those securities, of emerging growth companies. MFS Investment Management(R) ("Massachusetts Financial Services Company"), a Delaware corporation, is the investment adviser to this MFS Series. The principal business address for the Massachusetts Financial Services Company is 500 Boylston Street, Boston, Massachusetts 02116. T. Rowe Price International Series, Inc.: o International Stock Portfolio. Seeks long-term growth of capital through investments primarily in common stocks of established, non-U.S. companies. T. Rowe Price International, Inc. is the investment manager for this fund. The principal business address for T. Rowe Price International, Inc. is 100 East Pratt Street, Baltimore, Maryland 21202. The investment advisers for the Funds charge a daily investment management fee as compensation for their services. These fees are described in the table under Deductions from Portfolios in the Charges and Expenses section, page 13, and are more fully described in the prospectus for each Fund. In the future it may become disadvantageous for both variable life insurance and variable annuity contract separate accounts to invest in the same underlying mutual funds. Although neither of the companies that invest in the Funds nor the Funds currently foresee any such disadvantage, the Board of Directors for each Fund intends to monitor events in order to identify any material conflict between variable life insurance and variable annuity contract owners and to determine what action, if any, should be taken. Material conflicts could result from such things as: (1) changes in state insurance law; (2) changes in federal income tax law; (3) changes in the investment management of any portfolio of the Funds; or (4) differences between voting instructions given by variable life insurance and variable annuity contract owners. An affiliate of each of the Funds may compensate Prudential based upon an annual percentage of the average assets held in the Fund by Prudential under the Contracts. These percentages may vary by Fund and/or Portfolio, and reflect administrative and other services we provide. Voting Rights We are the legal owner of the Fund shares associated with the variable investment options. However, we vote the shares in the 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 or state regulation. Should the applicable federal securities laws or regulations, or their current interpretation, change so as to permit Prudential to vote shares of the Funds in its own right, it may elect to do so. The Fixed-Rate Option Because of exemptive and exclusionary provisions, interests in the fixed-rate option under the Contract have not been registered under the Securities Act of 1933 and the general account has not been registered as an investment company under the Investment Company Act of 1940. Accordingly, interests in the fixed-rate option are not subject to the provisions of these Acts, and Prudential has been advised that the staff of the SEC has not reviewed the disclosure in this prospectus relating to the fixed-rate option. Any inaccurate or misleading disclosure regarding the fixed-rate option may, however, be subject to certain generally applicable provisions of federal securities laws. 12 You may choose to invest, either initially or by transfer, all or part of your Contract Fund to a fixed-rate option. This amount becomes part of Prudential's general account. The general account consists of all assets owned by Prudential other than those in the Account and in other separate accounts that have been or may be established by Prudential. Subject to applicable law, Prudential has sole discretion over the investment of the general account assets, and Contract owners do not share in the investment experience of those assets. Instead, Prudential guarantees that the part of the Contract Fund allocated to the fixed-rate option will accrue interest daily at an effective annual rate that Prudential declares periodically, but not less than an effective annual rate of 4%. Prudential Life is not obligated to credit interest at a rate higher than an effective annual rate of 4%, although we may do so. Transfers from the fixed-rate option are subject to strict limits, see Transfers, page 22. 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 27. Which Investment Option Should Be Selected? Historically, for investments held over relatively long periods, the investment performance of common stocks has generally been superior to that of short or long-term debt securities, even though common stocks have been subject to much more dramatic changes in value over short periods of time. Accordingly, portfolios such as the Equity, Global, Jennison, Stock Index, Value, AIM V.I. Premier Equity Fund, American Century VP Value Fund, Janus Growth, MFS Emerging Growth Series, or T. Rowe Price International Stock, for example, 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. See The Funds, page 7, for additional equity portfolios available under the Contract and their specific investment objectives. You may prefer the somewhat greater protection against loss of principal (and reduced chance of high total return) provided by the Diversified Bond Portfolio. You may want even greater safety of principal and may prefer the Money Market Portfolio or the fixed-rate option, recognizing that the level of short-term rates may change rather rapidly. If you are willing to take risks and possibly achieve a higher total return, you may prefer the High Yield Bond Portfolio, recognizing that the risks are greater for lower quality bonds with normally higher yields. You may wish to obtain diversification by relying on Prudential's judgment for an appropriate asset mix by choosing the Conservative Balanced Portfolio, the Flexible Managed Portfolio, the SP Aggressive Growth Asset Allocation Portfolio, the SP Balanced Asset Allocation Portfolio, the SP Conservative Asset Allocation Portfolio, or the SP Growth Asset Allocation Portfolio. You may wish to divide your invested premium among two or more of the Portfolios. Your choice should take into account your willingness to accept investment risks, how your other assets are invested, and what investment results you may experience in the future. You should consult your Prudential representative from time to time about the choices available to you under the Contract. Prudential recommends against frequent transfers among the several options. Experience generally indicates that "market timing" investing, particularly by non-professional investors, is likely to prove unsuccessful. DETAILED INFORMATION FOR PROSPECTIVE CONTRACT OWNERS Charges and Expenses The total amount invested at any time in the Contract Fund consists of the sum of the amount credited to the variable investment options, the amount allocated to the fixed-rate option, and the principal amount of any Contract loan plus the amount of interest credited to the Contract upon that loan. See Contract Loans, page 30. Most charges, although not all, are made by reducing the Contract Fund. This section provides a more detailed description of each charge that is described briefly in the chart on page 3. In several instances we will use the terms "maximum charge" and "current charge." The "maximum charge," in each instance, is the highest charge that Prudential is entitled to make under the Contract. The "current charge" is the lower 13 amount that Prudential is now charging. If circumstances change, we reserve the right to increase each current charge, up to the maximum charge, without giving any advance notice. Deductions from Premium Payments (a) We charge up to 7.5% as an administrative charge. This charge is made up of two parts which currently equal a total of 3.75% of the premiums received. The first part is a charge for state and local premium taxes. The current amount for this first part is 2.5% of the premium and is Prudential's estimate of the average burden of state taxes generally. Tax rates vary from jurisdiction to jurisdiction and generally range from 0% to 5%. The rate applies uniformly to all policyholders without regard to state of residence. The second part is for federal income taxes measured by premiums, and it is currently equal to 1.25% of premiums. We believe that this charge is a reasonable estimate of an increase in its federal income taxes resulting from a 1990 change in the Internal Revenue Code. It is intended to recover this increased tax. During 2001, 2000, and 1999, Prudential deducted a total of approximately $767,000, $561,000 and $177,000, respectively, in administrative charges. (b) We charge up to 4% for sales expenses. This charge, often called a "sales load", is deducted to compensate us for the costs of selling the Contracts, including commissions, advertising and the printing and distribution of prospectuses and sales literature. Currently, the charge is equal to 4% of premiums paid in each Contract year up to the amount of the target premium (see Premiums, page 19) and 0% of premiums paid in excess of this amount. Consequently, paying more than this amount in any Contract year could reduce your total sales load. For example, assume that a Contract with no riders or extra insurance charges has a target premium of $884 and the Contract owner would like to pay 10 target premiums. If the Contract owner paid $1,768 (two times the amount of the target premium) in every other Contract year up to the ninth year (i.e. in years 1, 3, 5, 7, 9), the sales load charge would be $176.80. If the Contract owner paid $884 in each of the first 10 Contract years, the total sales load would be $353.60. For additional information, see Increases in Basic Insurance Amount, page 26. Attempting to structure the timing and amount of premium payments to reduce the potential sales load may increase the risk that your Contract will lapse without value. Delaying the payment of target premium amounts to later years will adversely affect the Death Benefit Guarantee if the accumulated premium payments do not reach the accumulated values shown under your Contract's Limited Death Benefit Guarantee Values. See Death Benefit Guarantee, page 20. In addition, there are circumstances where payment of premiums that are too large may cause the Contract to be characterized as a Modified Endowment Contract, which could be significantly disadvantageous. See Tax Treatment of Contract Benefits, page 31. During 2001, 2000, and 1999, Prudential received a total of approximately $544,000, $354,000, and $136,000, respectively, in sales charges. Deductions from Portfolios We deduct an investment advisory fee daily from each portfolio of the Funds at a rate, on an annualized basis, ranging from 0.35% for the Series Fund Stock Index Portfolio to 1.15% for the SP Alliance Technology Portfolio. The expenses incurred in conducting the investment operations of the portfolios (such as custodian fees and preparation and distribution of annual reports) are paid out of the portfolio's income. These expenses also vary from portfolio to portfolio. The total expenses of each portfolio for the year ended December 31, 2001, expressed as a percentage of the average assets during the year, are shown below: 14 Total Portfolio Expenses
- --------------------------------------------------------------------------------------------------------------- Total Investment Other Contractual Total Actual The Prudential Series Fund, Inc. Portfolios Advisory Fees Expenses Expenses Expenses* - --------------------------------------------------------------------------------------------------------------- Conservative Balanced 0.55% 0.03% 0.58% 0.58% Diversified Bond 0.40% 0.04% 0.44% 0.44% Equity 0.45% 0.04% 0.49% 0.49% Flexible Managed 0.60% 0.04% 0.64% 0.64% Global 0.75% 0.09% 0.84% 0.84% High Yield Bond 0.55% 0.05% 0.60% 0.60% Jennison 0.60% 0.04% 0.64% 0.64% Money Market 0.40% 0.03% 0.43% 0.43% Stock Index 0.35% 0.04% 0.39% 0.39% Value 0.40% 0.04% 0.44% 0.44% SP Aggressive Growth Asset Allocation (1) 0.84% 0.90% 1.74% 1.04% SP AIM Aggressive Growth 0.95% 2.50% 3.45% 1.07% SP AIM Core Equity 0.85% 1.70% 2.55% 1.00% SP Alliance Large Cap Growth 0.90% 0.67% 1.57% 1.10% SP Alliance Technology 1.15% 2.01% 3.16% 1.30% SP Balanced Asset Allocation (1) 0.75% 0.52% 1.27% 0.92% SP Conservative Asset Allocation (1) 0.71% 0.35% 1.06% 0.87% SP Davis Value 0.75% 0.28% 1.03% 0.83% SP Deutsche International Equity 0.90% 2.37% 3.27% 1.10% SP Growth Asset Allocation (1) 0.80% 0.66% 1.46% 0.97% SP INVESCO Small Company Growth 0.95% 1.89% 2.84% 1.15% SP Jennison International Growth 0.85% 1.01% 1.86% 1.24% SP Large Cap Value 0.80% 1.18% 1.98% 0.90% SP MFS Capital Opportunities 0.75% 2.29% 3.04% 1.00% SP MFS Mid-Cap Growth 0.80% 1.31% 2.11% 1.00% SP PIMCO High Yield 0.60% 0.48% 1.08% 0.82% SP PIMCO Total Return 0.60% 0.22% 0.82% 0.76% SP Prudential U.S. Emerging Growth 0.60% 0.81% 1.41% 0.90% SP Small/Mid Cap Value 0.90% 0.66% 1.56% 1.05% SP Strategic Partners Focused Growth 0.90% 1.71% 2.61% 1.01% - ---------------------------------------------------------------------------------------------------------------
* Reflects fee waivers, reimbursement of expenses, and expense reductions, if any.
- -------------------------------------------------------------------------------------------------------------------- Investment Total Total Advisory Other Contractual Actual Portfolios Fees Expenses Expenses Expenses* - -------------------------------------------------------------------------------------------------------------------- AIM Variable Insurance Funds AIM V.I. Premier Equity Fund - Series I shares 0.60% 0.25% 0.85% 0.85% American Century Variable Portfolios, Inc. (2) VP Value Fund 0.97% 0.00% 0.97% 0.97% Janus Aspen Series (3) Growth Portfolio - Institutional Shares 0.65% 0.01% 0.66% 0.66% MFS" Variable Insurance Trust" (4) Emerging Growth Series 0.75% 0.12% 0.87% 0.86% T. Rowe Price International Series, Inc. (5) International Stock Portfolio 1.05% 0.00% 1.05% 1.05% - --------------------------------------------------------------------------------------------------------------------
* Reflects fee waivers, reimbursement of expenses, and expense reductions, if any. 15 (1) Prudential Series Fund, Inc. EachAsset Allocation Portfolio invests shares in other Fund Portfolios. The Advisory Fees for the Asset Allocation Portfolios are the product of a blend of the Advisory Fees of those other Fund Portfolios, plus a 0.05% annual advisory fee payable to PI. (2) American Century Variable Portfolios, Inc. The "Investment Advisory Fees" include ordinary expenses of managing and operating the Fund, except brokerage expenses, taxes, interest, fees and expenses of the independent directors (including legal counsel fees), and extraordinary expenses. The Fund has a stepped fee schedule. As a result, the Fund's management fee rate decreases as the Fund's assets increase. (3) Janus Aspen Series The table reflects expenses for the fiscal year ended December 31, 2001. All expenses are shown without the effect of any offset arrangements. (4) MFS(R) Variable Insurance Trust(SM) An expense offset arrangement with the Fund's custodian resulted in a reduction in "Other Expenses" by 0.01% and is reflected in the "Total Actual Expenses." (5) T. Rowe Price International Series, Inc. The "Investment Management Fees" include ordinary recurring operating expenses of the Funds. The expenses relating to the Funds (other than those of the Series Fund) have been provided to Prudential by the Funds. Prudential has not independently verified them. Daily Deduction from the Contract Fund Each day we deduct a charge from the assets of each of the variable investment options in an amount equivalent to an effective annual rate of up to 0.9%. Currently, we charge 0.6%. This charge is intended to compensate Prudential for assuming mortality and expense risks under the Contract. The mortality risk assumed is that insureds may live for shorter periods of time than Prudential estimated when it determined what mortality charge to make. The expense risk assumed is that expenses incurred in issuing and administering the Contract will be greater than Prudential estimated in fixing its administrative charges. This charge is not assessed against amounts allocated to the fixed-rate option. During 2001, 2000, and 1999, Prudential received a total of approximately $108,000, $53,000, and $7,000, respectively, in mortality and expense risk charges. Monthly Deductions from the Contract Fund Prudential deducts the following monthly charges proportionately from the dollar amounts held in each of the chosen investment option[s]. (a) An administrative charge based on the basic insurance amount is deducted. The charge is intended to compensate us for things like processing claims, keeping records and communicating with Contract owners. Currently, the charge is equal to $10 per Contract plus $0.07 per $1,000 of basic insurance amount in the first Contract year and $5 per Contract plus $0.01 per $1,000 of basic insurance amount in all subsequent years. Prudential reserves the right, however to charge up to $10 per Contract plus $0.07 per $1,000 of basic insurance amount in the first Contract year and $10 per Contract plus $0.01 per $1,000 of basic insurance amount in all subsequent years. For example, a Contract with a basic insurance amount of $100,000 would currently have a charge equal to $10 plus $7 for a total of $17 per month for the first Contract year and $5 plus $1 for a total of $6 per month in all later years. The maximum charge for this same Contract would be $10 plus $7 for a total of $17 per month during the first Contract year. In later years, the maximum charge would be $10 plus $1 for a total of $11 per month. During 2001, 2000, and 1999, Prudential received a total of approximately $1,026,000, $714,000, and $154,000, respectively, in monthly administrative charges. (b) A cost of insurance ("COI") charge is deducted. When an insured dies, the amount payable to the beneficiary (assuming there is no Contract debt) is larger than the Contract Fund-- significantly larger if the insured dies in the early years of a Contract. The cost of insurance charges collected from all Contract owners enables Prudential to pay this larger death benefit. The maximum COI charge is determined by multiplying the "net amount at risk" under a Contract (the amount by which the Contract's death benefit exceeds the Contract Fund) by maximum COI rates. The maximum COI rates are based upon the 1980 Commissioners Standard Ordinary ("CSO") Tables and an insured's current attained age, sex, smoker/non-smoker status, and extra rating class, if 16 any. At most ages, Prudential's current COI rates are lower than the maximum rates. For additional information, see Increases in Basic Insurance Amount, page 26. (c) A charge of $0.01 per $1,000 of basic insurance amount is made to compensate Prudential for the risk we assume by providing the Death Benefit Guarantee feature. See Death Benefit Guarantee, page 20. During 2001, 2000, and 1999, Prudential received a total of approximately $169,000, $124,000, and $19,000, respectively, for this risk charge. (d) You may add one or more of several riders to the Contract. Some riders are charged for separately. If you add such a rider to the basic Contract, additional charges will be deducted. (e) If an insured is in a substandard risk classification (for example, a person in a hazardous occupation), additional charges will be deducted. (f) A charge may be deducted to cover federal, state or local taxes (other than premium based administrative charges 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 14. Prudential periodically reviews the question of a charge to the Account for Company federal income taxes. We may make such a charge in the future for any federal income taxes that would be attributable to the Contracts. Surrender Charges (a) An additional sales load is charged if during the first 10 Contract years the Contract lapses, is surrendered or if the basic insurance amount is decreased. It is not deducted from the death benefit if the insured should die during this period. For issue ages 76 or less, this contingent deferred charge will be 26% of the lesser of: (a) the target level premium for the Contract; and (b) the actual premiums paid (see Premiums, page 19). The rate used in the calculation of this contingent deferred charge will be 22% for issue ages 77-79, 16% for issue ages 80-83 and 13% for issue ages 84-85. The rate used in the calculation of this contingent deferred charge will remain level for six years. After six years, this charge will reduce monthly at a constant rate until it reaches zero at the end of the 10th year. (b) If during the first 10 Contract years the Contract lapses, is surrendered or if the basic insurance amount is decreased, an administrative charge is deducted to cover the cost of processing applications, conducting medical examinations, determining insurability and the insured's rating class, and establishing records. The charge is equal to the lesser of: (a) $5 per $1,000 of basic insurance amount; and (b) $500. This charge is level for six years. After six years, this charge will be reduced monthly at a constant rate until it reaches zero at the end of the 10th year. We will show a surrender charge threshold amount in the Contract data pages. This threshold amount is the lowest basic insurance amount since issue. If during the first 10 Contract years, the basic insurance amount is decreased [including as a result of a withdrawal or a change in type of death benefit from Type A (fixed) to Type B (variable)], and the new basic insurance amount is below the threshold, we will deduct a percentage of the surrender charge. The percentage will be the amount by which the new basic insurance amount is less than the threshold, divided by the threshold. After this transaction, the threshold will be updated and a corresponding new surrender charge schedule will also be determined to reflect that portion of surrender charges deducted in the past. During 2001, 2000, and 1999, Prudential received a total of approximately $440,000, $122,000, and $10,000, respectively, from surrendered or lapsed Contracts. Transaction Charges (a) We currently charge an administrative processing fee equal to the lesser of $25 or 2% of the withdrawal amount in connection with each withdrawal. 17 (b) We currently do not charge an administrative processing fee in connection with a change in basic insurance amount. We reserve the right to make such a charge in an amount of up to $25 for any change in basic insurance amount. (c) We currently charge an administrative processing fee of up to $25 for each transfer exceeding 12 in any Contract year. Requirements for Issuance of a Contract As of November 16, 2001, Prudential no longer offered these Contract for sale. The Contract was generally issued on insureds below the age of 81. Generally, the minimum basic insurance amount was $100,000. Prudential required evidence of insurability, which may have included a medical examination, before issuing any Contract. Non-smokers were offered the most favorable cost of insurance rates. We charge a higher cost of insurance rate and/or an additional amount if an extra mortality risk is involved. These are the current underwriting requirements. We reserve the right to change them on a non-discriminatory basis. Short-Term Cancellation Right or "Free-Look" Generally, you may return the Contract for a refund within 10 days after you receive it. You can request a refund by mailing or delivering the Contract to the representative who sold it or to the Home Office specified in the Contract. A Contract returned according to this provision shall be deemed void from the beginning. If you exercise your short-term cancellation right, you will receive a refund of all premium payments made, with no adjustment for investment experience. Types of Death Benefit You may select either of two types of death benefit. Generally, a Contract with a Type A (fixed) death benefit has a death benefit equal to the basic insurance amount. This type of death benefit does not vary with the investment performance of the investment options you selected, except in certain circumstances. See How a Type A (Fixed) Contract's Death Benefit Will Vary, page 23. The payment of additional premiums and favorable investment results of the variable investment options to which the assets are allocated will generally increase the cash surrender value. See How a Contract's Cash Surrender Value Will Vary, page 23. A Contract with a Type B (variable) death benefit has a death benefit which will generally equal the basic insurance amount plus the Contract Fund. Since the Contract Fund is a part of the death benefit, favorable investment performance and payment of additional premiums generally result in an increase in the death benefit as well as in the cash surrender value. Over time, however, the increase in the cash surrender value will be less than under a Type A (fixed) Contract. This is because, given two Contracts with the same basic insurance amount and equal Contract Funds, generally the cost of insurance charge for a Type B (variable) Contract will be greater. See How a Contract's Cash Surrender Value Will Vary, page 23 and How a Type B (Variable) Contract's Death Benefit Will Vary, page 24. Unfavorable investment performance will result in decreases in the death benefit and in the cash surrender value. But, as long as the Contract is not in default, the death benefit may not fall below the basic insurance amount stated in the Contract. In choosing a death benefit type, you should also consider whether you intend to use the withdrawal feature. Contract owners of Type A (fixed) Contracts should note that any withdrawal may result in a reduction of the basic insurance amount and the deduction of any applicable surrender charges. In addition, we will not allow you to make a withdrawal that will decrease the basic insurance amount below the minimum basic insurance amount. See Withdrawals, page 25. Changing the Type of Death Benefit You may change the type of death benefit on or after the first Contract anniversary and subject to Prudential's approval. We will increase or decrease the basic insurance amount so that the death benefit immediately after the change matches the death benefit immediately before the change. 18 If you are changing your Contract's type of death benefit from Type A (fixed) to Type B (variable), we will reduce the basic insurance amount by the amount in your Contract Fund on the date the change takes place. The basic insurance amount after the change may not be lower than the minimum basic insurance amount applicable to the Contract. If you are changing from a Type B (variable) to a Type A (fixed) death benefit, we will increase the basic insurance amount by the amount in your Contract Fund on the date the change takes place. This is illustrated in the following chart.
Changing the Death Benefit from Changing the Death Benefit from Type A --> Type B Type B --> Type A (Fixed) (Variable) (Variable) (Fixed) - ------------------------------------------------------------------------------------------------ Basic Insurance Amount $300,000 --> $250,000 $250,000 --> $300,000 Contract Fund $50,000 --> $50,000 $50,000 --> $50,000 Death Benefit $300,000 --> $300,000 $300,000 --> $300,000 - ------------------------------------------------------------------------------------------------
Changing your Contract's type of death benefit from Type A (fixed) to Type B (variable) during the first 10 Contract years may result in the assessment of surrender charges. In addition, we reserve the right to make an administrative processing charge of up to $25 for any change in basic insurance amount, although we do not currently do so. See Charges and Expenses, page 13. To request a change, fill out an application for change which can be obtained from your Prudential representative or a Home Office. If the change is approved, we will recompute the Contract's charges and appropriate tables and send you new Contract data pages. We may require you to send us your Contract before making the change. Contract Date When the first premium payment is paid with the application for a Contract, the Contract date will ordinarily be the later of the application date or the medical examination date. If the first premium is not paid with the application, the Contract date will be the date on which the first premium is paid and the Contract is delivered. Under certain circumstances, we may allow the Contract to be backdated for the purpose of lowering the insured's issue age, but only to a date not earlier than six months prior to the application date. This may be advantageous for some Contract owners as a lower issue age may result in lower current charges. For a Contract that is backdated, we will credit the initial premium as of the date of receipt and will deduct any charges due on or before that date. Premiums The Contract is a flexible premium contract. The minimum initial premium is due on or before the Contract date. Thereafter, you decide when to make premium payments and, subject to a $25 minimum, in what amounts. We reserve the right to refuse to accept any payment that increases the death benefit by more than it increases the Contract Fund. See How a Type A (Fixed) Contract's Death Benefit Will Vary, page 23 and How a Type B (Variable) Contract's Death Benefit Will Vary, page 24. There are circumstances under which the payment of premiums in amounts that are too large may cause the Contract to be characterized as a Modified Endowment Contract, which could be significantly disadvantageous. See Tax Treatment of Contract Benefits, page 31. The Contract has several types of "premiums" which are described below. Understanding them will help you understand how the Contract works. Minimum initial premium -- the premium needed to start the Contract. There is no insurance under the Contract unless the minimum initial premium is paid. Guideline premiums -- the premiums that, if paid at the beginning of each Contract year, will keep the Contract in-force for the lifetime of the insured regardless of investment performance, assuming no loans or withdrawals. These guideline premiums will be higher for a Type B (variable) Contract than for a Type A (fixed) Contract. For a Contract with no riders or extra risk charges, these premiums will be level. If certain riders are included, the 19 guideline premium may increase each year. Payment of guideline premiums at the beginning of each Contract year is one way to achieve the Lifetime Death Benefit Guarantee Values shown on the Contract data pages. See Death Benefit Guarantee, page 20. When you purchase a Contract, your Prudential representative can tell you the amount[s] of the guideline premium. Target premiums -- the premiums that, if paid at the beginning of each Contract year, will keep the Contract in-force during the Limited Death Benefit Guarantee period regardless of investment performance, assuming no loans or withdrawals. As is the case with the guideline premium, for a Contract with no riders or extra risk charges, these premiums will be level. If certain riders are included, the target premium may increase each year. Payment of target premiums at the beginning of each Contract year is one way to achieve the Limited Death Benefit Guarantee Values shown on the Contract data pages. At the end of the Limited Death Benefit Guarantee period, continuation of the Contract will depend on the Contract Fund having sufficient money to cover all charges or meeting the conditions of the Lifetime Death Benefit Guarantee. See Death Benefit Guarantee, page 20. When you purchase a Contract, your Prudential representative can tell you the amount[s] of the target premium. Target Level Premium -- the target premium at issue minus any premiums associated with riders or with aviation, avocation, occupational or temporary extra insurance charges. We use the target level premium in calculating the contingent deferred sales charges. See Charges and Expenses, page 13. We can bill you for the amount you select annually, semi-annually, quarterly or monthly. Because the Contract is a flexible premium contract, there are no scheduled premium due dates. When you receive a premium notice, you are not required to pay this amount. The Contract will remain in-force if: (1) the Contract Fund, less any applicable surrender charges, is greater than zero and more than any Contract debt or (2) you have paid sufficient premiums, on an accumulated basis, to meet the Death Benefit Guarantee conditions and Contract debt is not equal to or greater than the Contract Fund, less any applicable surrender charges. You may also pay premiums automatically through pre-authorized monthly transfers from a bank checking account. If you elect to use this feature, you choose the day of the month on which premiums will be paid and the amount of the premiums paid. When you apply for the Contract, you should discuss with your Prudential representative how frequently you would like to be billed (if at all) and for what amount. Allocation of Premiums On the Contract date, we deduct the charge for sales expenses and the premium based administrative charge from the initial premium. The remainder of the initial premium will be allocated on the Contract date among the variable investment options and/or the fixed-rate option according to your desired allocation, as specified in the application form, and the first monthly deductions are made. If the first premium is received before the Contract date, there will be a period during which the Contract owner's initial premium will not be invested. See Charges and Expenses, page 13. The charge for sales expenses and the premium based administrative charge also apply to all subsequent premium payments. The remainder will be invested as of the end of the valuation period in which it is received at a Home Office, in accordance with the allocation you previously designated. Provided the Contract is not in default, you may change the way in which subsequent premiums are allocated by giving written notice to a Home Office or by telephoning a Home Office, provided you are enrolled to use the Telephone Transfer System. There is no charge for reallocating future premiums. All percentage allocations must be in whole numbers. For example, 33% can be selected but 33 "% cannot. Of course, the total allocation to all selected investment options must equal 100%. Death Benefit Guarantee Although you decide what premium amounts you wish to pay, sufficient premium payments, on an accumulated basis, will guarantee that your Contract will not lapse and a death benefit will be paid upon the death of the insured. This will be true even if, because of unfavorable investment experience, your Contract Fund value drops to zero. However, the guarantee is contingent upon Contract debt not being equal to or greater than the Contract Fund less any applicable surrender charges. See Contract Loans, page 30. You should consider the importance of the Death Benefit Guarantee to you when deciding what amounts of premiums to pay into the Contract. 20 For purposes of determining this guarantee, we generally calculate, and show in the Contract data pages, two sets of values - the Lifetime Death Benefit Guarantee Values and Limited Death Benefit Guarantee Values. These are not cash values that you can realize by surrendering the Contract, nor are they payable death benefits. They are values used solely to determine if a Death Benefit Guarantee is in effect. The Lifetime Death Benefit Guarantee Values are shown for the lifetime of the Contract and are the end-of-year accumulations of Guideline Premiums at 4% annual interest assuming premiums are paid at the beginning of each Contract year. The Limited Death Benefit Guarantee Values are lower, but only apply for the length of the Limited Death Benefit Guarantee period. They are the end-of-year accumulations of Target Premiums at 4% annual interest assuming premiums are paid at the beginning of each Contract year. The length of the Limited Death Benefit Guarantee period is determined on a case by case basis depending on things like the insured's age, sex, smoker/non-smoker status, death benefit type and extra rating class, if any. The length of the Limited Death Benefit Guarantee period applicable to your particular Contract is shown on the Contract data pages. For certain insureds, generally those who are older and/or in a substandard risk classification, the Limited Death Benefit Guarantee period may be shorter in duration. At the Contract date, and on each Monthly date, we calculate your Contract's "Accumulated Net Payments" as of that date. Accumulated Net Payments equal the premiums you paid, accumulated at an effective annual rate of 4%, less withdrawals also accumulated at 4%. At each Monthly date within the Limited Death Benefit Guarantee period, we will compare your Accumulated Net Payments to the Limited Death Benefit Guarantee Value as of that date. At each Monthly date after the Limited Death Benefit Guarantee period, we will compare your Accumulated Net Payments to the Lifetime Death Benefit Guarantee Value as of that date. If your Accumulated Net Payments equal or exceed the applicable (Lifetime or Limited) Death Benefit Guarantee Value and Contract debt does not equal or exceed the Contract Fund less any applicable surrender charges, then the Contract is kept in-force, regardless of the amount in the Contract Fund. The Contract data pages show Lifetime Death Benefit Guarantee Values and Limited Death Benefit Guarantee Values as of Contract anniversaries. Values for non-anniversary Monthly dates will reflect the number of months elapsed between Contract anniversaries. Guideline and target premiums are premium levels that, if paid at the start of each Contract year, correspond to the Lifetime and Limited Death Benefit Guarantee Values, respectively (assuming no withdrawals or loans). See Premiums, page 19. They are one way of reaching the Death Benefit Guarantee Values; they are certainly not the only way. Here is a table of typical guideline and target premiums along with corresponding Limited Death Benefit Guarantee periods. The examples assume the insured is a male, non-smoker, with no extra risk or substandard ratings, and no extra benefit riders added to the Contract.
- ---------------------------------------------------------------------------------------------------------------- Basic Insurance Amount -- $100,000 Illustrative Annual Premiums - ---------------------------------------------------------------------------------------------------------------- Guideline Premium corresponding Target Premium corresponding to the Age of insured Type of Death to the Lifetime Death Benefit Limited Death Benefit Guarantee Values at issue Benefit Chosen Guarantee Values and number of years of guarantee - ---------------------------------------------------------------------------------------------------------------- 35 Type A (fixed) $ 1,494 $ 884 for 35 years 35 Type B (variable) $ 4,896 $ 884 for 33 years 45 Type A (fixed) $ 2,266 $1,272 for 25 years 45 Type B (variable) $ 6,940 $1,272 for 23 years 55 Type A (fixed) $ 3,640 $2,389 for 20 years 55 Type B (variable) $ 10,324 $2,389 for 18 years - ----------------------------------------------------------------------------------------------------------------
21 You should consider carefully the value of maintaining the Death Benefit Guarantee. If you desire the Death Benefit Guarantee for lifetime protection, you may prefer to pay generally higher premiums in all years, rather than trying to make such payments on an as needed basis. For example, if you pay only enough premium to meet the Limited Death Benefit Guarantee Values, a substantial amount may be required to meet the Lifetime Death Benefit Guarantee Values in order to continue the guarantee at the end of the Limited Death Benefit Guarantee period. In addition, it is possible that the payment required to continue the guarantee after the Limited Death Benefit Guarantee period could cause the Contract to become a Modified Endowment Contract. See Tax Treatment of Contract Benefits, page 31. The Death Benefit Guarantee allows considerable flexibility as to the timing of premium payments. Your Prudential representative can supply sample illustrations of various premium amount and frequency combinations that correspond to the Death Benefit Guarantee Values. Transfers You may, up to 12 times each Contract year, transfer amounts from one variable investment option to another variable investment option or to the fixed-rate option without charge. There is an administrative charge of up to $25 for each transfer made exceeding 12 in any Contract year. All or a portion of the amount credited to a variable investment option may be transferred. Transfers will take effect as of the end of the valuation period in which a proper transfer request is received at a Home Office. The request may be in terms of dollars, such as a request to transfer $5,000 from one variable investment option to another, or may be in terms of a percentage reallocation among variable investment options. In the latter case, as with premium reallocations, the percentages must be in whole numbers. You may transfer amounts by proper written notice to a Home Office or by telephone, provided you are enrolled to use the Telephone Transfer System. You will automatically be enrolled to use the Telephone Transfer System unless the Contract is jointly owned or you elect not to have this privilege. Telephone transfers may not be available on Contracts that are assigned (see Assignment, page 34), depending on the terms of the assignment. We will use reasonable procedures, such as asking you to provide certain personal information provided on your application for insurance, to confirm that instructions given by telephone are genuine. We will not be held liable for following telephone instructions that we reasonably believe to be genuine. Prudential cannot guarantee that you will be able to get through to complete a telephone transfer during peak periods such as periods of drastic economic or market change. Only one transfer from the fixed-rate option will be permitted during each Contract year. The maximum amount which may be transferred out of the fixed-rate option each year is the greater of: (a) 25% of the amount in the fixed-rate option; and (b) $2,000. Prudential may change these limits in the future. We may waive these restrictions for limited periods of time in a non-discriminatory way, (e.g., when interest rates are declining). The Contract was not designed for professional market timing organizations, other organizations, or individuals using programmed, large, or frequent transfers. A pattern of exchanges that coincides with a "market timing" strategy may be disruptive to the investment option or to the disadvantage of other contract owners. If such a pattern were to be found, we may modify your right to make transfers by restricting the number, timing, and amount of transfers. We also reserve the right to prohibit transfer requests made by an individual acting under a power of attorney on behalf of more than one contract owner. Dollar Cost Averaging We are currently offering a feature called Dollar Cost Averaging ("DCA"). Under this feature, either fixed dollar amounts or a percentage of the amount designated for use under the DCA option will be transferred periodically from the DCA Money Market investment option into other variable investment options available under the Contract, excluding the fixed-rate option. You may choose to have periodic transfers made monthly or quarterly. Each automatic transfer will take effect as of the end of the valuation period on the date coinciding with the periodic timing you designate, provided the New York Stock Exchange is open on that date. If the New York Stock Exchange is not open on that date, or if the date does not occur in that particular month, the transfer will take effect as of the end of the valuation period which immediately follows that date. Automatic transfers will continue until: (1) $50 or less remains of the amount designated for Dollar Cost Averaging, at which time the remaining amount will be transferred; 22 or (2) you give us notification of a change in DCA allocation or cancellation of the feature. Currently, a transfer that occurs under the DCA feature is not counted towards the 12 free transfers permitted each Contract year. We reserve the right to change this practice, modify the requirements, or discontinue the feature. Auto-Rebalancing As an administrative practice, we are currently offering a feature called Auto-Rebalancing. This feature allows you to automatically rebalance variable investment option assets at specified intervals based on percentage allocations that you choose. For example, suppose your initial investment allocation of variable investment options X and Y is split 40% and 60%, respectively. Then, due to investment results, that split changes. You may instruct that those assets be rebalanced to your original or different allocation percentages. Auto-Rebalancing can be performed on a quarterly, semi-annual, or annual basis. Each rebalance will take effect as of the end of the valuation period on the date coinciding with the periodic timing you designate, provided the New York Stock Exchange is open on that date. If the New York Stock Exchange is not open on that date, or if the date does not occur in that particular month, the transfer will take effect as of the end of the valuation period which immediately follows that date. The fixed-rate option cannot participate in this administrative procedure. Currently, a transfer that occurs under the Auto-Rebalancing feature is not counted towards the 12 free transfers permitted each Contract year. We reserve the right to change this practice, modify the requirements, or discontinue the feature. How a Contract's Cash Surrender Value Will Vary You may surrender the Contract for its cash surrender value (referred to as net cash value in the Contract). The Contract's cash surrender value on any date will be the Contract Fund less any applicable surrender charges and less any Contract debt. See Contract Loans, page 30. The Contract Fund value changes daily, reflecting: (1) increases or decreases in the value of the variable investment options; (2) interest credited on any amounts allocated to the fixed-rate option; (3) interest credited on any loan; and (4) the daily asset charge for mortality and expense risks assessed against the variable investment options. The Contract Fund value also changes to reflect the receipt of premium payments and the monthly deductions described under Charges and Expenses, page 13. Upon request, Prudential will tell you the cash surrender value of your Contract. It is possible for the cash surrender value of a Contract to decline to zero because of unfavorable investment performance or outstanding Contract debt. The tables on pages T1 through T4 of this prospectus illustrate approximately what the cash surrender values would be for representative Contracts paying target premium amounts (see Premiums, page 19), assuming hypothetical uniform investment results in the Fund portfolios. Two of the tables assume current charges will be made throughout the lifetime of the Contract and two tables assume maximum charges will be made. See Illustrations of Cash Surrender Values, Death Benefits, and Accumulated Premiums, page 28. How a Type A (Fixed) Contract's Death Benefit Will Vary As described earlier, there are two types of death benefit available under the Contract: Type A, a generally fixed death benefit and Type B, a variable death benefit. A Type B (variable) death benefit varies with investment performance while a Type A (fixed) death benefit does not, unless it must be increased to comply with the Internal Revenue Code's definition of life insurance. Under a Type A (fixed) Contract, the death benefit is generally equal to the basic insurance amount. See Contract Loans, page 30. If the Contract is kept in-force for several years, depending on how much premium you pay, and/or if investment performance is reasonably favorable, the Contract Fund may grow to the point where Prudential will increase the death benefit in order to ensure that the Contract will satisfy the Internal Revenue Code's definition of life insurance. The death benefit under a Type A (fixed) Contract will always be the greater of: (1) the basic insurance amount; and (2) the Contract Fund before the deduction of any monthly charges due on that date, multiplied by the attained age factor that applies. 23 A listing of attained age factors can be found on your Contract data pages. The latter provision ensures that the Contract will always have a death benefit large enough so that the Contract will be treated as life insurance for tax purposes under current law. The following table illustrates at different ages how the attained age factor affects the death benefit for different Contract Fund amounts. The table assumes a $100,000 Type A (fixed) Contract was issued when the insured was a male nonsmoker, age 35, and there is no contract debt. Type A (Fixed) Death Benefit
- ------------------------------------------- ---------------------------------------------------------------------------------- IF THEN - ------------------------------------------- ---------------------------------------------------------------------------------- the insured is age and the Contract the attained age the Contract Fund multiplied by the and the Death Fund is factor is attained age factor is Benefit is - ---------------------- -------------------- --------------------- ------------------------------------- ---------------------- 40 $ 10,000 3.64 $ 36,400 $ 100,000 40 $ 30,000 3.64 $ 109,200 $ 109,200* 40 $ 50,000 3.64 $ 182,000 $ 182,000* - ---------------------- -------------------- --------------------- ------------------------------------- ---------------------- 60 $ 30,000 1.96 $ 58,800 $ 100,000 60 $ 50,000 1.96 $ 98,000 $ 100,000 60 $ 70,000 1.96 $ 137,200 $ 137,200* - ---------------------- -------------------- --------------------- ------------------------------------- ---------------------- 80 $ 50,000 1.28 $ 64,000 $ 100,000 80 $ 80,000 1.28 $ 102,400 $ 102,400* 80 $ 90,000 1.28 $ 115,200 $ 115,200* - ---------------------- -------------------- --------------------- ------------------------------------- ----------------------
* Note that the death benefit has been increased to comply with the Internal Revenue Code's definition of life insurance. This means, for example, that if the insured has reached the age of 60, and the Contract Fund is $70,000, the death benefit will be $137,200, even though the original basic insurance amount was $100,000. In this situation, for every $1 increase in the Contract Fund, the death benefit will be increased by $1.96. We reserve the right to refuse to accept any premium payment that increases the death benefit by more than it increases the Contract Fund. If we exercise this right, it may in certain situations result in the loss of the death benefit guarantee. How a Type B (Variable) Contract's Death Benefit Will Vary Under a Type B (variable) Contract, while the Contract is in-force, the death benefit will never be less than the basic insurance amount, but will also vary, immediately after it is issued, with the investment results of the selected investment options. The death benefit may be further increased to ensure that the Contract will satisfy the Internal Revenue Code's definition of life insurance. The death benefit under a Type B (variable) Contract will always be the greater of: (1) the basic insurance amount plus the Contract Fund before the deduction of any monthly charges due on that date; and (2) the Contract Fund before the deduction of any monthly charges due on that date, multiplied by the attained age factor that applies. For purposes of computing the death benefit, if the Contract Fund is less than zero we will consider it to be zero. A listing of attained age factors can be found on your Contract data pages. The latter provision ensures that the Contract will always have a death benefit large enough so that the Contract will be treated as life insurance for tax purposes under current law. The following table illustrates various attained age factors and Contract Funds and the corresponding death benefits. The table assumes a $100,000 Type B (variable) Contract was issued when the insured was a male nonsmoker, age 35, and there is no contract debt. 24 Type B (Variable) Death Benefit
- ------------------------------------------- ---------------------------------------------------------------------------------- IF THEN - ------------------------------------------- ---------------------------------------------------------------------------------- the insured is age and the Contract the attained age the Contract Fund multiplied by and the Death Fund is factor is the attained age factor is Benefit is - ---------------------- --------------------- --------------------- ------------------------------------ ---------------------- 40 $ 10,000 3.64 $ 36,400 $ 110,000 40 $ 30,000 3.64 $ 109,200 $ 130,000 40 $ 50,000 3.64 $ 182,000 $ 182,000* - ---------------------- --------------------- --------------------- ------------------------------------ ---------------------- 60 $ 30,000 1.96 $ 58,800 $ 130,000 60 $ 50,000 1.96 $ 98,800 $ 150,000 60 $ 70,000 1.96 $ 137,200 $ 170,000 - ---------------------- --------------------- --------------------- ------------------------------------ ---------------------- 80 $ 50,000 1.28 $ 64,000 $ 150,000 80 $ 80,000 1.28 $ 102,400 $ 180,000 80 $ 90,000 1.28 $ 115,200 $ 190,000 - ---------------------- --------------------- --------------------- ------------------------------------ ----------------------
* Note that the death benefit has been increased to comply with the Internal Revenue Code's definition of life insurance. This means, for example, that if the insured has reached the age of 40, and the Contract Fund is $50,000, the death benefit will be $182,000, even though the original basic insurance amount was $100,000. In this situation, for every $1 increase in the Contract Fund, the death benefit will be increased by $3.64. We reserve the right to refuse to accept any premium payment that increases the death benefit by more than it increases the Contract Fund. If we exercise this right, it may in certain situations result in the loss of the death benefit guarantee. Surrender of a Contract A Contract may be surrendered for its cash surrender value or for a fixed reduced paid-up insurance benefit while the insured is living. To surrender a Contract, we may require you to deliver or mail the Contract with a written request in a form that meets Prudential's needs, to a Home Office. The cash surrender value of a surrendered Contract will be determined as of the end of the valuation period in which such a request is received in the Home Office. Fixed reduced paid-up insurance provides paid-up insurance, the amount of which will be paid when the insured dies. There will be cash values and loan values. The loan interest rate for fixed reduced paid-up insurance is 5%. Upon surrender of the Contract, the amount of fixed reduced paid-up insurance depends upon the cash surrender value and the insured's issue age, sex, smoker/non-smoker status, and the length of time since the Contract date. Surrender of a Contract may have tax consequences. See Tax Treatment of Contract Benefits, page 31. Withdrawals Under certain circumstances, you may withdraw a portion of the Contract's cash surrender value without surrendering the Contract. The withdrawal amount is limited by the requirement that the cash surrender value after the withdrawal may not be zero or less than zero after deducting the withdrawal charges. The amount withdrawn must be at least $500. There is an administrative processing fee for each withdrawal which is the lesser of: (a) $25 and; (b) 2% of the withdrawal amount. An amount withdrawn may not be repaid except as a premium subject to the applicable charges. Upon request, we will tell you how much you may withdraw. Withdrawal of the cash surrender value may have tax consequences. See Tax Treatment of Contract Benefits, page 31. Whenever a withdrawal is made, the death benefit will immediately be reduced by at least the amount of the withdrawal. For a Type B (variable) Contract, this will not change the basic insurance amount. However, under a Type A (fixed) Contract, the resulting reduction in death benefit usually requires a reduction in the basic insurance amount. If the basic insurance amount is decreased to an amount less than the basic insurance amount at issue, a surrender charge may be deducted. See Charges and Expenses, page 13. No withdrawal will be permitted under a Type A (fixed) Contract if it would result in a basic insurance amount of less than the minimum basic insurance amount. It is important to note, however, that if the basic insurance amount is decreased, there is a possibility that the Contract might be classified as a Modified Endowment Contract. See Tax Treatment of Contract Benefits, page 31. Before making any withdrawal which causes a decrease in basic insurance amount, you should consult with your tax adviser and your Prudential representative. 25 When a withdrawal is made, the Contract Fund is reduced by the sum of the cash withdrawn and the withdrawal fee. An amount equal to the reduction in the Contract Fund will be withdrawn proportionally from the investment options unless you direct otherwise. Withdrawal of the cash surrender value increases the risk that the Contract Fund may be insufficient to provide Contract benefits. If such a withdrawal is followed by unfavorable investment experience, the Contract may go into default. Withdrawals may also affect whether a Contract is kept in-force under the Death Benefit Guarantee, since withdrawals decrease the accumulated net payments. See Death Benefit Guarantee, page 20. Increases in Basic Insurance Amount Subject to the underwriting requirements determined by Prudential, on or after the first Contract anniversary, you may increase the amount of insurance by increasing the basic insurance amount of the Contract. The following conditions must be met: (1) you must ask for the change in a form that meets Prudential's needs; (2) the amount of the increase must be at least equal to the minimum increase in basic insurance amount shown under Contract Limitations in your Contract data pages; (3) you must prove to us that the insured is insurable for any increase; (4) the Contract must not be in default; (5) we must not be paying premiums into the Contract as a result of the insured's total disability; and (6) if we ask you to do so, you must send us the Contract to be endorsed. If we approve the change, we will send you new Contract data pages showing the amount and effective date of the change and the recomputed charges, values and limitations. If the insured is not living on the effective date, the change will not take effect. No administrative processing charge is currently being made in connection with an increase in basic insurance amount. We reserve the right to make such a charge in an amount of up to $25. For sales load purposes, the target premium is calculated separately for each basic insurance amount segment. The target premium for each segment also includes the premium for extra insurance charges associated to that segment. When premiums are paid, each payment is allocated to each basic insurance amount segment based on the proportion of the target premium in each segment to the total target premiums of all segments. Currently, the sales load charge for each segment is equal to 4% of the allocated premium paid in each Contract year up to the target premium and 0% of allocated premiums paid in excess of the target premium. See the definition of Contract year for an increase in basic insurance amount in DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, page 1. The COI rates for an increase in basic insurance amount are based upon 1980 CSO Tables, the age at the increase effective date and the number of years since then, sex (except where unisex rates apply); smoker/nonsmoker status, and extra rating class, if any. The net amount at risk for the whole contract (the death benefit minus the Contract Fund) is allocated to each basic insurance amount segment based on the proportion of its basic insurance amount to the total of all basic insurance amount segments. In addition, the attained age factor for a Contract with an increase in basic insurance amount is based on the Insured's attained age for the initial basic insurance amount segment. For a description of attained age factor, see How a Type A (Fixed) Contract's Death Benefit Will Vary, page 23 and How a Type B (Variable) Contract's Death Benefit Will Vary, page 24. Each Contract owner who elects to increase the basic insurance amount of his or her Contract will receive a "free-look" right which will apply only to the increase in basic insurance amount, not the entire Contract. This right is comparable to the right afforded to a purchaser of a new Contract except that, any cost of insurance charge for the increase in the basic insurance amount will be returned to the Contract Fund instead of a refund of premium. See Short-Term Cancellation Right or "Free-Look", page 18. Generally, the "free-look" right would have to be exercised no later than 10 days after receipt of the Contract as increased. An increase in basic insurance amount may cause the Contract to be classified as a Modified Endowment Contract. See Tax Treatment of Contract Benefits, page 31. Therefore, before increasing the basic insurance amount, you should consult with your tax adviser and your Prudential representative. 26 Decreases in Basic Insurance Amount As explained earlier, you may make a withdrawal (see Withdrawals, page 25). On or after the first Contract anniversary, you also have the option of decreasing the basic insurance amount of your Contract without withdrawing any cash surrender value. Contract owners who conclude that, because of changed circumstances, the amount of insurance is greater than needed will be able to decrease their amount of insurance protection, and the monthly deductions for the cost of insurance. The amount of the decrease must be at least equal to the minimum decrease in basic insurance amount shown under Contract Limitations in your Contract data pages. In addition, the basic insurance amount after the decrease must be at least equal to the minimum basic insurance amount shown under Contract Limitations in your Contract data pages. If the basic insurance amount is decreased to an amount less than the lowest basic insurance amount since issue, a surrender charge may be deducted. No administrative processing charge is currently being made in connection with a decrease in basic insurance amount. We reserve the right to make such a charge in an amount of up to $25. See Charges and Expenses, page 13. If we ask you to, you must send us your Contract to be endorsed. The Contract will be amended to show the new basic insurance amount, charges, values in the appropriate tables, and the effective date of the decrease. We may decline a reduction if we determine it would cause the Contract to fail to qualify as "life insurance" for purposes of Section 7702 of the Internal Revenue Code. A decrease will not take effect if the insured is not living on the effective date. It is important to note, however, that if the basic insurance amount is decreased, there is a possibility that the Contract might be classified as a Modified Endowment Contract. See Tax Treatment of Contract Benefits, page 31. Before requesting any decrease in basic insurance amount, you should consult with your tax adviser and your Prudential representative. When Proceeds Are Paid Prudential will generally pay any death benefit, cash surrender value, loan proceeds or withdrawal within seven days after all the documents required for such a payment are received at a Home Office. Other than the death benefit, which is determined as of the date of death, the amount will be determined as of the end of the valuation period in which the necessary documents are received at a Home Office. However, Prudential may delay payment of proceeds from the variable investment option[s] and the variable portion of the death benefit due under the Contract if the disposal or valuation of the Account's assets is not reasonably practicable because the New York Stock Exchange is closed for other than a regular holiday or weekend, trading is restricted by the SEC, or the SEC declares that an emergency exists. With respect to the amount of any cash surrender value allocated to the fixed-rate option, Prudential expects to pay the cash surrender value promptly upon request. However, Prudential has the right to delay payment of such cash surrender value for up to six months (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 10 days or more. Living Needs Benefit The Living Needs Benefit" is available on your Contract. The benefit may vary by state. There is no charge for adding the benefit to a 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 benefit will be paid to you in a single sum. 27 Organ Transplant Option. This option is available if the insured is diagnosed as having a life expectancy of six months or less unless the insured receives a vital organ transplant. When satisfactory evidence is provided, Prudential will provide an accelerated payment of the portion of the death benefit selected by the Contract owner as a Living Needs Benefit. The benefit will be paid to you in a single sum. All or part of the Contract's death benefit may be accelerated under the Living Needs Benefit. If the benefit is only partially accelerated, a death benefit of at least $25,000 must remain under the Contract. Prudential reserves the right to determine the minimum amount that may be accelerated. No benefit will be payable if you are required to elect it in order to meet the claims of creditors or to obtain a government benefit. Prudential can furnish details about the amount of Living Needs Benefit that is available to an eligible Contract owner, and the effect on the Contract if less than the entire death benefit is accelerated. You should consider whether adding this settlement option is appropriate in your given situation. Adding the Living Needs Benefit to the Contract has no adverse consequences; however, electing to use it could. With the exception of certain business-related Contracts, the Living Needs Benefit is excluded from income if the insured is terminally ill or chronically ill as defined in the tax law (although the exclusion in the latter case may be limited). You should consult a qualified tax adviser before electing to receive this benefit. Receipt of a Living Needs Benefit payment may also affect your eligibility for certain government benefits or entitlements. Illustrations of Cash Surrender Values, Death Benefits, and Accumulated Premiums The following four tables show how a Contract's death benefit and cash surrender values change with the investment experience of the Account. They are "hypothetical" because they are based, in part, upon several assumptions, which are described below. All four tables assume the following: o a Contract with a basic insurance amount of $100,000 bought by a 35 year old male, select, non-smoker, with no extra risks or substandard ratings, and no extra benefit riders added to the Contract. o the target premium amount (see Premiums, page 19) is paid on each Contract anniversary and no loans are taken. o the Contract Fund has been invested in equal amounts in each of the 35 portfolios of the Funds and no portion of the Contract Fund has been allocated to the fixed-rate option. The first table (page T1) assumes a Type A (fixed) Contract has been purchased and the second table (page T2) assumes a Type B (variable) Contract has been purchased. Both assume the current charges will continue for the indefinite future. The third and fourth tables (pages T3 and T4) are based upon the same assumptions except it is assumed the maximum contractual charges have been made from the beginning. See Charges and Expenses, page 13. Under the Type B (variable) Contract the death benefit changes to reflect investment returns. Under the Type A (fixed) Contract, the death benefit increases only if the Contract Fund becomes large enough that an increase in the death benefit is necessary for the Contract to satisfy the Internal Revenue Code's definition of life insurance. See Types of Death Benefit, page 18. Finally, there are four assumptions, shown separately, about the average investment performance of the portfolios. The first is that there will be a uniform 0% gross rate of return with the average value of the Contract Fund uniformly adversely affected by very unfavorable investment performance. The other three assumptions are that investment performance will be at a uniform gross annual rate of 4%, 8% and 12%. Actual returns will fluctuate from year to year. In addition, death benefits and cash surrender values would be different from those shown if investment returns averaged 0%, 4%, 8% and 12% but fluctuated from those averages throughout the years. Nevertheless, these assumptions help show how the Contract values will change with investment experience. The first column in the following four tables (pages T1 through T4) shows the Contract year. The second column, to provide context, shows what the aggregate amount would be if the premiums had been invested to earn interest, after taxes, at 4% compounded annually. The next four columns show the death benefit payable in each of the years shown for the four different assumed investment returns. The last four columns show the cash surrender value payable in 28 each of the years shown for the four different assumed investment returns. The cash surrender values in the first 10 years reflect the surrender charges that would be deducted if the Contract were surrendered in those years. A gross return (as well as the net return) is shown at the top of each column. The gross return represents the combined effect of investment income and capital gains and losses, realized or unrealized, of the portfolios before any reduction is made for investment advisory fees or other Fund expenses. The net return reflects average total annual expenses of the 35 portfolios of 0.85%, 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 on maximum charges. Thus, assuming current charges, gross returns of 0%, 4%, 8% and 12% are the equivalent of net returns of -1.45%, 2.55%, 6.55% and 10.55%, respectively. Assuming maximum charges, gross returns of 0%, 4%, 8% and 12% are the equivalent of net returns of -1.75%, 2.25%, 6.25% and 10.25%, respectively. The actual fees and expenses of the portfolios associated with a particular Contract may be more or less than 0.85% and will depend on which variable investment options are selected. The death benefits and cash surrender values shown reflect the deduction of all expenses and charges both from the Funds and under the Contract. 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, sex, or rating class. Your Prudential representative can provide you with a hypothetical illustration for your own age, sex, and rating class. 29 VARIABLE UNIVERSAL LIFE TYPE A (FIXED) DEATH BENEFIT MALE NON-SMOKER SELECT AGE 35 $100,000.00 BASIC INSURANCE AMOUNT $884.00 ANNUAL PREMIUM PAYMENT USING CURRENT CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1) -------------------------------------------- ---------------------------------------------------- Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net) Premiums Annual Investment Return of Annual Investment Return of End of Accumulated ----------------------------------------------------- ---------------------------------------------------- Policy at 4% 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross Year Per Year (-1.45 Net) (2.55 Net) (6.55 Net) (10.55% Net) -1.45 Net) (2.55 Net) (6.55 Net) (10.55% Net) - -------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- 1 $ 919 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 0 $ 0 $ 0(2)$ 0(2) 2 $ 1,875 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 267 $ 337 $ 409 $ 484 3 $ 2,870 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 816 $ 956 $ 1,103 $ 1,259 4 $ 3,904 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 1,354 $ 1,587 $ 1,839 $ 2,112 5 $ 4,980 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 1,881 $ 2,231 $ 2,620 $ 3,053 6 $ 6,098 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 2,395 $ 2,886 $ 3,447 $ 4,088 7 $ 7,261 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 3,078 $ 3,734 $ 4,505 $ 5,409 8 $ 8,471 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 3,745 $ 4,592 $ 5,613 $ 6,844 9 $ 9,729 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 4,397 $ 5,458 $ 6,774 $ 8,404 10 $ 11,038 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 5,031 $ 6,331 $ 7,989 $ 10,099 15 $ 18,409 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 6,985 $ 9,850 $ 14,059 $ 20,251 20 $ 27,377 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 8,617 $ 13,669 $ 22,267 $ 36,994 25 $ 38,288 $ 100,000 $ 100,000 $ 100,000 $ 129,917 $ 9,805 $ 17,717 $ 33,398 $ 64,636 30 $ 51,562 $ 100,000 $ 100,000 $ 100,000 $ 191,259 $ 9,719 $ 21,213 $ 48,025 $ 108,670 35 $ 67,713 $ 100,000 $ 100,000 $ 106,349 $ 279,982 $ 7,802 $ 23,609 $ 67,739 $ 178,332 40 $ 87,363 $ 100,000 $ 100,000 $ 131,593 $ 404,080 $ 1,961 $ 22,990 $ 93,328 $ 286,582 45 $ 111,270 $ 0(2) $ 100,000 $ 163,160 $ 588,043 $ 0(2) $ 16,028 $ 125,508 $ 452,341 50 $ 140,356 $ 0 $ 0(2) $ 201,904 $ 858,208 $ 0 $ 0(2) $ 165,495 $ 703,449 55 $ 175,744 $ 0 $ 0 $ 248,424 $1,250,021 $ 0 $ 0 $ 214,158 $1,077,605 60 $ 218,799 $ 0 $ 0 $ 303,246 $1,811,589 $ 0 $ 0 $ 273,194 $1,632,062 65 $ 271,182 $ 0 $ 0 $ 372,776 $2,650,318 $ 0 $ 0 $ 355,025 $2,524,112
(1) Assumes no Contract loan has been made. (2) Based on a gross return of 0% the cash surrender value would go to zero in year 1 and in year 42 and later. Because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 35 years. The contract would be in default at the beginning of year 42. Based on a gross return of 4% the cash surrender value would go to zero in year 1 and in year 50 and later. Because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 35 years. The contract would be in default at the beginning of year 50. Based on a gross return of 8% the cash surrender value would go to zero in year 1. Because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 35 years. Based on a gross return of 12% the cash surrender value would go to zero in year 1. Because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 35 years. The hypothetical investment rates of return shown above and elsewhere in this prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors including the investment allocations made by an owner, prevailing interest rates, and rate of inflation. The Death Benefit and Cash Surrender Value for a contract would be different from those shown if the actual rates of return average 0%, 4%, 8%, and 12% over a period of years but also fluctuated above or below those averages for individual contract years. No representations can be made by Prudential or the funds that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. T1 VARIABLE UNIVERSAL LIFE TYPE B (VARIABLE) DEATH BENEFIT MALE NON-SMOKER SELECT AGE 35 $100,000.00 BASIC INSURANCE AMOUNT $884.00 ANNUAL PREMIUM PAYMENT USING CURRENT CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1) -------------------------------------------- ---------------------------------------------------- Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net) Premiums Annual Investment Return of Annual Investment Return of End of Accumulated ----------------------------------------------------- ---------------------------------------------------- Policy at 4% 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross Year Per Year (-1.45 Net) (2.55 Net) (6.55 Net) (10.55% Net) -1.45 Net) (2.55 Net) (6.55 Net) (10.55% Net) - -------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- 1 $ 919 $ 100,436 $ 100,461 $ 100,485 $ 100,510 $ 0 $ 0 $ 0 $ 0(2) 2 $ 1,875 $ 100,994 $ 101,064 $ 101,136 $ 101,211 $ 264 $ 334 $ 406 $ 481 3 $ 2,870 $ 101,541 $ 101,680 $ 101,827 $ 101,982 $ 811 $ 950 $ 1,097 $ 1,252 4 $ 3,904 $ 102,076 $ 102,307 $ 102,558 $ 102,830 $ 1,346 $ 1,577 $ 1,828 $ 2,100 5 $ 4,980 $ 102,598 $ 102,945 $ 103,332 $ 103,762 $ 1,868 $ 2,215 $ 2,602 $ 3,032 6 $ 6,098 $ 103,106 $ 103,594 $ 104,151 $ 104,787 $ 2,376 $ 2,864 $ 3,421 $ 4,057 7 $ 7,261 $ 103,600 $ 104,250 $ 105,015 $ 105,911 $ 3,052 $ 3,703 $ 4,467 $ 5,363 8 $ 8,471 $ 104,077 $ 104,915 $ 105,926 $ 107,144 $ 3,712 $ 4,550 $ 5,561 $ 6,779 9 $ 9,729 $ 104,537 $ 105,586 $ 106,887 $ 108,497 $ 4,355 $ 5,404 $ 6,704 $ 8,314 10 $ 11,038 $ 104,978 $ 106,262 $ 107,897 $ 109,978 $ 4,978 $ 6,262 $ 7,897 $ 9,978 15 $ 18,409 $ 106,852 $ 109,651 $ 113,758 $ 119,797 $ 6,852 $ 9,651 $ 13,758 $ 19,797 20 $ 27,377 $ 108,371 $ 113,242 $ 121,522 $ 135,686 $ 8,371 $ 13,242 $ 21,522 $ 35,686 25 $ 38,288 $ 109,391 $ 116,897 $ 131,736 $ 161,443 $ 9,391 $ 16,897 $ 31,736 $ 61,443 30 $ 51,562 $ 109,001 $ 119,573 $ 144,151 $ 202,210 $ 9,001 $ 19,573 $ 44,151 $ 102,210 35 $ 67,713 $ 106,648 $ 120,428 $ 158,819 $ 266,928 $ 6,648 $ 20,428 $ 58,819 $ 166,928 40 $ 87,363 $ 100,377 $ 116,923 $ 174,071 $ 378,257 $ 377 $ 16,923 $ 74,071 $ 268,268 45 $ 111,270 $ 0(2) $ 105,528 $ 186,891 $ 550,866 $ 0(2) $ 5,528 $ 86,891 $ 423,743 50 $ 140,356 $ 0 $ 0(2) $ 191,952 $ 804,321 $ 0 $ 0(2) $ 91,952 $ 659,279 55 $ 175,744 $ 0 $ 0 $ 178,455 $1,171,879 $ 0 $ 0 $ 78,455 $1,010,240 60 $ 218,799 $ 0 $ 0 $ 129,081 $1,698,669 $ 0 $ 0 $ 29,081 $1,530,333 65 $ 271,182 $ 0 $ 0 $ 0(2) $2,485,434 $ 0 $ 0 $ 0(2) $2,367,080
(1) Assumes no Contract loan has been made. (2) Based on a gross return of 0% the cash surrender value would go to zero in year 1 and in year 41 and later. Because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years. The contract would be in default at the beginning of year 41. Based on a gross return of 4% the cash surrender value would go to zero in year 1 and in year 47 and later. Because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years. The contract would be in default at the beginning of year 47. Based on a gross return of 8% the cash surrender value would go to zero in year 1 and in year 62 and later. Because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years. The contract would be in default at the beginning of year 62. Based on a gross return of 12% the cash surrender value would go to zero in year 1. Because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years. The hypothetical investment rates of return shown above and elsewhere in this prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors including the investment allocations made by an owner, prevailing interest rates, and rate of inflation. The Death Benefit and Cash Surrender Value for a contract would be different from those shown if the actual rates of return average 0%, 4%, 8%, and 12% over a period of years but also fluctuated above or below those averages for individual contract years. No representations can be made by Prudential or the funds that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. T2 VARIABLE UNIVERSAL LIFE TYPE A (FIXED) DEATH BENEFIT MALE NON-SMOKER SELECT AGE 35 $100,000.00 BASIC INSURANCE AMOUNT $884.00 ANNUAL PREMIUM PAYMENT USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1) ----------------------------------------------------- ---------------------------------------------------- Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net) Premiums Annual Investment Return of Annual Investment Return of End of Accumulated ----------------------------------------------------- ---------------------------------------------------- Policy at 4% 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross Year Per Year (-1.75 Net) (2.55 Net) (6.55 Net) (10.55% Net) -1.75 Net) (2.55 Net) (6.55 Net) (10.55% Net) - -------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- 1 $ 919 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 0 $ 0 $ 0 $ 0(2) 2 $ 1,875 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 96 $ 160 $ 225 $ 292 3 $ 2,870 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 519 $ 641 $ 770 $ 907 4 $ 3,904 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 923 $ 1,122 $ 1,338 $ 1,573 5 $ 4,980 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 1,307 $ 1,600 $ 1,928 $ 2,295 6 $ 6,098 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 1,668 $ 2,074 $ 2,540 $ 3,075 7 $ 7,261 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 2,189 $ 2,724 $ 3,356 $ 4,101 8 $ 8,471 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 2,688 $ 3,368 $ 4,194 $ 5,197 9 $ 9,729 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 3,161 $ 4,003 $ 5,056 $ 6,369 10 $ 11,038 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 3,608 $ 4,627 $ 5,939 $ 7,624 15 $ 18,409 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 4,475 $ 6,590 $ 9,755 $ 14,489 20 $ 27,377 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 4,292 $ 7,773 $ 13,930 $ 24,798 25 $ 38,288 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 2,333 $ 7,261 $ 17,886 $ 40,456 30 $ 51,562 $ 100,000 $ 100,000 $ 100,000 $ 114,450 $ 0 $ 3,412 $ 20,480 $ 65,028 35 $ 67,713 $ 100,000 $ 100,000 $ 100,000 $ 159,024 $ 0 $ 0 $ 19,078 $ 101,289 40 $ 87,363 $ 0(2) $ 0(2) $ 100,000 $ 215,272 $ 0(2) $ 0(2) $ 7,383 $ 152,675 45 $ 111,270 $ 0 $ 0 $ 0(2) $290,121 $ 0 $ 0 $ 0(2) $ 223,170 50 $ 140,356 $ 0 $ 0 $ 0 $ 388,601 $ 0 $ 0 $ 0 $ 318,525 55 $ 175,744 $ 0 $ 0 $ 0 $ 516,449 $ 0 $ 0 $ 0 $ 445,215 60 $ 218,799 $ 0 $ 0 $ 0 $ 686,710 $ 0 $ 0 $ 0 $ 618,658 65 $ 271,182 $ 0 $ 0 $ 0 $ 878,058 $ 0 $ 0 $ 0 $ 836,246
(1) Assumes no Contract loan has been made. (2) Based on a gross return of 0% the cash surrender value would go to zero in year 1 and in year 28 and later, but because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 35 years. The contract would be in default at the beginning of year 36. Based on a gross return of 4% the cash surrender value would go to zero in year 1 and in year 33 and later, but because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 35 years. The contract would be in default at the beginning of year 36. Based on a gross return of 8% the cash surrender value would go to zero in year 1 and in year 42 and later. Because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 35 years. The contract would be in default at the beginning of year 42. Based on a gross return of 12% the cash surrender value would go to zero in year 1. Because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 35 years. The hypothetical investment rates of return shown above and elsewhere in this prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors including the investment allocations made by an owner, prevailing interest rates, and rate of inflation. The Death Benefit and Cash Surrender Value for a contract would be different from those shown if the actual rates of return average 0%, 4%, 8%, and 12% over a period of years but also fluctuated above or below those averages for individual contract years. No representations can be made by Prudential or the funds that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. T3 VARIABLE UNIVERSAL LIFE TYPE B (VARIABLE) DEATH BENEFIT MALE NON-SMOKER SELECT AGE 35 $100,000.00 BASIC INSURANCE AMOUNT $884.00 ANNUAL PREMIUM PAYMENT USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1) ----------------------------------------------------- ---------------------------------------------------- Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net) Premiums Annual Investment Return of Annual Investment Return of End of Accumulated ----------------------------------------------------- ---------------------------------------------------- Policy at 4% 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross Year Per Year (-1.75 Net) (2.55 Net) (6.55 Net) (10.55% Net) -1.75 Net) (2.55 Net) (6.55 Net) (10.55% Net) - -------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- 1 $ 919 $ 100,384 $ 100,407 $ 100,430 $ 100,453 $ 0 $ 0 $ 0 $ 0 2 $ 1,875 $ 100,823 $ 100,886 $ 100,952 $ 101,019 $ 94 $ 157 $ 222 $ 289 3 $ 2,870 $ 101,244 $ 101,365 $ 101,494 $ 101,630 $ 514 $ 635 $ 764 $ 900 4 $ 3,904 $ 101,644 $ 101,841 $ 102,056 $ 102,290 $ 914 $ 1,111 $ 1,326 $ 1,560 5 $ 4,980 $ 102,023 $ 102,314 $ 102,639 $ 103,003 $ 1,293 $ 1,584 $ 1,910 $ 2,273 6 $ 6,098 $ 102,378 $ 102,780 $ 103,242 $ 103,771 $ 1,648 $ 2,050 $ 2,512 $ 3,041 7 $ 7,261 $ 102,710 $ 103,238 $ 103,863 $ 104,599 $ 2,163 $ 2,691 $ 3,315 $ 4,052 8 $ 8,471 $ 103,017 $ 103,688 $ 104,503 $ 105,492 $ 2,652 $ 3,323 $ 4,139 $ 5,127 9 $ 9,729 $ 103,298 $ 104,127 $ 105,162 $ 106,455 $ 3,116 $ 3,944 $ 4,980 $ 6,272 10 $ 11,038 $ 103,552 $ 104,552 $ 105,839 $ 107,492 $ 3,552 $ 4,552 $ 5,839 $ 7,492 15 $ 18,409 $ 104,335 $ 106,376 $ 109,427 $ 113,987 $ 4,335 $ 6,376 $ 9,427 $ 13,987 20 $ 27,377 $ 104,019 $ 107,282 $ 113,046 $ 123,209 $ 4,019 $ 7,282 $ 13,046 $ 23,209 25 $ 38,288 $ 101,898 $ 106,285 $ 115,739 $ 135,811 $ 1,898 $ 6,285 $ 15,739 $ 35,811 30 $ 51,562 $ 100,000 $ 101,797 $ 115,691 $ 152,298 $ 0 $ 1,797 $ 15,691 $ 52,298 35 $ 67,713 $ 0(2) $ 0(2) $ 109,326 $ 172,254 $ 0(2) $ 0(2) $ 9,326 $ 72,254 40 $ 87,363 $ 0 $ 0 $ 0(2) $ 193,367 $ 0 $ 0 $ 0(2) $ 93,367 45 $ 111,270 $ 0 $ 0 $ 0 $ 208,903 $ 0 $ 0 $ 0 $ 108,903 50 $ 140,356 $ 0 $ 0 $ 0 $ 206,697 $ 0 $ 0 $ 0 $ 106,697 55 $ 175,744 $ 0 $ 0 $ 0 $ 161,975 $ 0 $ 0 $ 0 $ 61,975 60 $ 218,799 $ 0 $ 0 $ 0 $ 0(2) $ 0 $ 0 $ 0 $ 0(2) 65 $ 271,182 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
(1) Assumes no Contract loan has been made. (2) Based on a gross return of 0% the cash surrender value would go to zero in year 1 and in year 28 and later, but because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years. The contract would be in default at the beginning of year 34. Based on a gross return of 4% the cash surrender value would go to zero in year 1 and in year 32 and later, but because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years. The contract would be in default at the beginning of year 34. Based on a gross return of 8% the cash surrender value would go to zero in year 1 and in year 39 and later. Because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years. The contract would be in default at the beginning of year 39. Based on a gross return of 12% the cash surrender value would go to zero in year 1 and in year 59 and later. Because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years. The contract would be in default at the beginning of year 59. The hypothetical investment rates of return shown above and elsewhere in this prospectus are illustrative only and should not be deemed a representation of past or future investment rates of return. Actual rates of return may be more or less than those shown and will depend on a number of factors including the investment allocations made by an owner, prevailing interest rates, and rate of inflation. The Death Benefit and Cash Surrender Value for a contract would be different from those shown if the actual rates of return average 0%, 4%, 8%, and 12% over a period of years but also fluctuated above or below those averages for individual contract years. No representations can be made by Prudential or the funds that these hypothetical rates of return can be achieved for any one year or sustained over any period of time. T4 Contract Loans You may borrow from Prudential an amount up to the current loan value of your Contract less any existing Contract debt using the Contract as the only security for the loan. The loan value at any time is equal to the sum of (1) 90% of the portion of the cash value attributable to the variable investment options, and (2) the balance of the cash value, provided the Contract is not in default. The cash value is equal to the Contract Fund less any surrender charge. A Contract in default has no loan value. The minimum loan amount you may borrow is $200. Interest charged on a loan accrues daily. Interest is due on each Contract anniversary or when the loan is paid back, whichever comes first. If interest is not paid when due, it becomes part of the loan and we will charge interest on it, too. Except in the case of preferred loans, we charge interest at an effective annual rate of 5%. A portion of any amount you borrow on or after the 10th Contract anniversary may be considered a preferred loan if the Contract has not been surrendered for fixed reduced paid-up insurance. The maximum preferred loan amount is the total amount you may borrow minus the total net premiums paid (net premiums equal premiums paid less total withdrawals, if any). If the net premium amount is less than zero, we will, for purposes of this calculation, consider it to be zero. Only new loans borrowed after the 10th Contract anniversary may be considered preferred loans. Standard loans will not automatically be converted into preferred loans. Preferred loans are charged interest at an effective annual rate of 4.5% . The Contract debt is the amount of all outstanding loans plus any interest accrued but not yet due. If at any time the Contract debt equals or exceeds the Contract Fund less any applicable surrender charges, the Contract will go into default. See Lapse and Reinstatement, page 33. If the Contract debt equals or exceeds the Contract Fund less any applicable surrender charges and you fail to keep the Contract in-force, the amount of unpaid Contract debt will be treated as a distribution and will be immediately taxable to the extent of gain in the contract. Reinstatement of the contract after lapse will not eliminate the taxable income which we are required to report to the Internal Revenue Service. See Tax Treatment of Contract Benefits " Pre-Death Distributions, page 32. When a loan is made, an amount equal to the loan proceeds is transferred out of the Account and/or the fixed-rate option, as applicable. Unless you ask us to take the loan amount from specific investment options and we agree, the reduction will be made in the same proportions as the value in each variable investment option and the fixed-rate option bears to the total value of the Contract. While a loan is outstanding, the amount that was so transferred will continue to be treated as part of the Contract Fund. It will be credited with an effective annual rate of return of 4%. On each Monthly date, we will increase the portion of the Contract Fund in the investment options by interest credits accrued on the loan since the last Monthly date. The net cost of a standard loan is 1% and the net cost of a preferred loan is 1/2%. A loan will not cause the Contract to lapse as long as Contract debt does not equal or exceed the Contract Fund, less any applicable surrender charges. Loans from Modified Endowment Contracts may be treated for tax purposes as distributions of income. See Tax Treatment of Contract Benefits, page 31. Loans you take against the Contract are ordinarily treated as debt and are not considered distributions subject to tax. However, you should know that the Internal Revenue Service may take the position that the loan should be treated as a distribution for tax purposes because of the relatively low differential between the loan interest rate and the Contract's crediting rate. Distributions are subject to income tax. Were the Internal Revenue Service to take this position, Prudential would take reasonable steps to attempt to avoid this result, including modifying the Contract's loan provisions, but cannot guarantee that such efforts would be successful. Any Contract debt will directly reduce a Contract's cash surrender value and will be subtracted from the death benefit to determine the amount payable. In addition, even if the loan is fully repaid, it may have an effect on future death benefits because the investment results of the selected investment options will apply only to the amount remaining invested under those options. The longer the loan is outstanding, the greater the effect is likely to be. The effect could be favorable or unfavorable. If investment results are greater than the rate being credited on the amount of the loan while the loan is outstanding, values under the Contract will not increase as rapidly as they would have if no loan had been made. If investment results are below that rate, Contract values will be higher than they would have been had no loan been made. 30 When you repay all or part of a loan, we will increase the portion of the Contract Fund in the investment options by the amount of the loan you repay using the investment allocation for future premium payments as of the loan payment date, plus interest credits accrued on the loan since the last transaction date. If loan interest is paid when due, it will not change the portion of the Contract Fund allocated to the investment options. We reserve the right to change the manner in which we allocate loan repayments. Sale of the Contract and Sales Commissions Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of Prudential, acts as the principal underwriter of the Contract. Prusec, organized in 1971 under New Jersey law, is registered as a broker and dealer under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc. Prusec's principal business address is 751 Broad Street, Newark, New Jersey 07102-3777. The Contract is sold by registered representatives of Prusec who are also authorized by state insurance departments to do so. The Contract may also be sold through other broker-dealers authorized by Prusec and applicable law to do so. Registered representatives of such other broker-dealers may be paid on a different basis than described below. Generally, representatives will receive a commission of no more than: (1) 50% of the premiums received in the first year on premiums up to the target premium (see Premiums, page 19); (2) 5% of premiums received in years two through 10 on premiums up to the target premium; and (3) 3% on premiums received in the first 10 years in excess of the target premium or received after 10 years. If the basic insurance amount is increased, representatives will generally receive a commission of no more than: (1) 25% of the premiums received up to the target premium for the increase received in the first year; (2) 5% of the premiums received up to the target premium for years two through 10; and (3) 3% on other premiums received for the increase. Moreover, trail commissions of up to 0.025% of an amount determined by averaging the Contract Fund less all outstanding loans as of the first and last day of each calendar quarter may be paid. Representatives with less than four years of service may receive compensation on a different basis. Representatives who meet certain productivity or persistency standards may be eligible for additional compensation. Tax Treatment of Contract Benefits This summary provides general information on the federal income tax treatment of the Contract. It is not a complete statement of what the federal income taxes will be in all circumstances. It is based on current law and interpretations, which may change. It does not cover state taxes or other taxes. It is not intended as tax advice. You should consult your own qualified tax adviser for complete information and advice. Treatment as Life InsuranceTreatment 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. 31 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 DistributionsPre-Death Distributions. The tax treatment of any distribution you receive before the insured's death depends on whether the Contract is classified as a Modified Endowment Contract. Contracts Not Classified as Modified Endowment Contracts. o If you surrender the Contract or allow it to lapse, you will be taxed on the amount you receive in excess of the premiums you paid less the untaxed portion of any prior withdrawals. For this purpose, you will be treated as receiving any portion of the cash surrender value used to repay Contract debt. In other words, you will immediately have taxable income to the extent of gain in the Contract. Reinstatement of the contract after lapse will not eliminate the taxable income which we are required to report to the Internal Revenue Service. 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. However, there is some risk the Internal Revenue Service might assert that the preferred loan should be treated as a distribution for tax purposes because of the relatively low differential between the loan interest rate and Contract's crediting rate. Were the Internal Revenue Service to take this position, Prudential would take reasonable steps to avoid this result, including modifying the Contract's loan provisions. Modified Endowment Contracts. 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 in amounts that are too large are paid or a decrease in the face amount of insurance is made (or a rider removed). The addition of a rider or an increase in the face amount of insurance may also cause the Contract to be classified as a Modified Endowment Contract. You should first consult a qualified tax adviser and your Prudential representative if you are contemplating any of these steps. o If the Contract is classified as a Modified Endowment Contract, then amounts you receive under the Contract before the insured's death, including loans and withdrawals, are included in income to the extent that the Contract Fund before surrender charges exceeds the premiums paid for the Contract increased by the amount of any loans previously included in income and reduced by any untaxed amounts previously received other than the amount of any loans excludible from income. An assignment of a Modified Endowment Contract is taxable in the same way. These rules also apply to pre-death distributions, including loans 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. 32 Investor Control. Treasury Department regulations do not provide guidance concerning the extent to which you may direct your investment in the particular variable investment options without causing you, instead of Prudential, to be considered the owner of the underlying assets. Because of this uncertainty, Prudential reserves the right to make such changes as it deems necessary to assure that the Contract qualifies as life insurance for tax purposes. Any such changes will apply uniformly to affected Contract owners and will be made with such notice to affected Contract owners as is feasible under the circumstances. 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 ConsiderationsOther Tax Considerations. If you transfer or assign the Contract to someone else, there may be gift, estate and/or income tax consequences. If you transfer the Contract to a person two or more generations younger than you (or designate such a younger person as a beneficiary), there may be Generation Skipping Transfer tax consequences. Deductions for interest paid or accrued on Contract debt or on other loans that are incurred or continued to purchase or carry the Contract may be denied. Your individual situation or that of your beneficiary will determine the federal estate taxes and the state and local estate, inheritance and other taxes due if you or the insured dies. Business-Owned Life Insurance. If a business, rather than an individual, is the owner of the Contract, there are some additional rules. Business Contract owners generally cannot deduct premium payments. Business Contract owners generally cannot take tax deductions for interest on Contract debt paid or accrued after October 13, 1995. An exception permits the deduction of interest on policy loans on Contracts for up to 20 key persons. The interest deduction for Contract debt on these loans is limited to a prescribed interest rate and a maximum aggregate loan amount of $50,000 per key insured person. The corporate alternative minimum tax also applies to business-owned life insurance. This is an indirect tax on additions to the Contract Fund or death benefits received under business-owned life insurance policies. Lapse and Reinstatement Prudential will determine the value of the Contract Fund on each Monthly date. If the Contract Fund less any applicable surrender charges is zero or less, the Contract is in default unless it remains in-force under the Death Benefit Guarantee. See Death Benefit Guarantee, page 20. If the Contract debt ever grows to be equal to or more than the Contract Fund less any applicable surrender charges, the Contract will be in default. Should this happen, Prudential will send you a notice of default setting forth the payment which we estimate will keep the Contract in-force for three months from the date of default. This payment must be received at a Home Office within the 61-day grace period after the notice of default is mailed or the Contract will end and have no value. A Contract that lapses with an outstanding Contract loan may have tax consequences. See Tax Treatment of Contract Benefits, page 31. A Contract that ended in default may be reinstated within 5 years after the date of default if the following conditions are met: (1) renewed evidence of insurability is provided on the insured; (2) submission of certain payments sufficient to bring the Contract up to date plus a premium that we estimate will cover all charges and deductions for the next three months; and (3) any Contract debt with interest to date must be restored or paid back. If the Contract debt is restored and the debt with interest would exceed the loan value of the reinstated Contract, the excess must be paid to us before reinstatement. The reinstatement date will be the Monthly date that coincides with or next follows the date we approve your request. We will deduct all the required charges from your payment and the balance will be placed into your Contract Fund. If we approve the reinstatement, we will credit the Contract Fund with an amount equal to the surrender charge applicable as of the date of reinstatement. Legal Considerations Relating to Sex-Distinct Premiums and Benefits The Contract generally employs mortality tables that distinguish between males and females. Thus, premiums and benefits differ under Contracts issued on males and females of the same age. Employers and employee organizations considering purchase of a Contract should consult their legal advisers to determine whether purchase of a Contract based on sex-distinct actuarial tables is consistent with Title VII of the Civil Rights Act of 1964 or other applicable law. 33 Other General Contract Provisions Assignment. This Contract may not be assigned if the assignment would violate any federal, state or local law or regulation prohibiting sex distinct rates for insurance. Generally, the Contract may not be assigned to an employee benefit plan or program without Prudential's consent. Prudential assumes no responsibility for the validity or sufficiency of any assignment. We will not be obligated to comply with any assignment unless we receive a copy at a Home Office. Beneficiary. You designate and name your beneficiary in the application. Thereafter, you may change the beneficiary, provided it is in accordance with the terms of the Contract. Should the insured die with no surviving beneficiary, the insured's estate will become the beneficiary. Incontestability. We will not contest the Contract after it has been in-force during the insured's lifetime for two years from the issue date except when any change is made in the Contract that requires Prudential's approval and would increase our liability. We will not contest such change after it has been in effect for two years during the lifetime of the insured. Misstatement of Age or Sex. If the insured's stated age or sex or both are incorrect in the Contract, Prudential will adjust the death benefit payable and any amount to be paid, as required by law, to reflect the correct age and sex. Any such benefit will be based on what the most recent deductions from the Contract Fund would have provided at the insured's correct age and sex. 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, the Contract will end and Prudential will return the premiums paid, less any Contract debt, and less any withdrawals. Generally, if the insured dies by suicide after two years from the issue date, but within two years of the effective date of an increase in the basic insurance amount, we will pay, as to the increase in amount, no more than the sum of the premiums paid on and after the effective date of an increase. Riders Contract owners may be able to obtain extra fixed benefits which may require an additional premium. These optional insurance benefits will be described in what is known as a "rider" to the Contract. Charges applicable to the riders will be deducted from the Contract Fund on each Monthly date. One rider pays certain premiums into the Contract if the insured is totally disabled within the meaning of the provision. Others pay an additional amount if the insured dies within a stated number of years after issue; similar benefits may be available if the insured's spouse or child should die. The amounts of these benefits are fully guaranteed at issue; they do not depend on the performance of the Account, although they will no longer be available if the Contract lapses. Certain restrictions may apply; they are clearly described in the applicable rider. Any Prudential representative authorized to sell the Contract can explain these extra benefits further. Samples of the provisions are available from Prudential upon written request. Participation in Divisible Surplus The Contract is eligible to be credited dividends as determined by Prudential's Board of Directors. That determination is made every year, with respect to the insurance contracts issued by Prudential. Prudential does not anticipate paying any dividends, except for annual dividends for fixed reduced paid-up insurance contracts. Substitution of Fund Shares Although Prudential believes it to be unlikely, it is possible that in the judgment of its management, one or more of the portfolios of the Funds may become unsuitable for investment by Contract owners because of investment policy changes, tax law changes, or the unavailability of shares for investment. In that event, Prudential may seek to 34 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 year, 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. You will also be sent annual and semi-annual reports of the Funds showing the financial condition of the portfolios and the investments held in each portfolio. State Regulation Prudential is subject to regulation and supervision by the Department of Insurance of the State of New Jersey, which periodically examines its operations and financial condition. It is also subject to the insurance laws and regulations of all jurisdictions in which it is authorized to do business. Prudential is required to submit annual statements of its operations, including financial statements, to the insurance departments of the various jurisdictions in which it does business to determine solvency and compliance with local insurance laws and regulations. In addition to the annual statements referred to above, Prudential is required to file with New Jersey and other jurisdictions a separate statement with respect to the operations of all its variable contract accounts, in a form promulgated by the National Association of Insurance Commissioners. Experts The consolidated financial statements of Prudential and its subsidiaries as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 and the financial statements of the Variable Universal Life Subaccounts of the Account as of December 31, 2001 and for each of the three years in the period then ended included in this prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. PricewaterhouseCoopers LLP's principal business address is 1177 Avenue of the Americas, New York, New York 10036. Actuarial matters included in this prospectus have been examined by Pamela A. Schiz, MAAA, FSA, Vice President and Actuary 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. Pending legal and regulatory actions include proceedings specific to our practices and proceedings generally applicable to business practices in the industries in which we operate. In certain of these lawsuits, large and/or indeterminate amounts are sought, including punitive or exemplary damages. Beginning in 1995, regulatory authorities and customers brought significant regulatory actions and civil litigation against Prudential involving individual life insurance sales practices. In 1996, Prudential, on behalf of itself and many of its life insurance subsidiaries 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 companies agreed to various changes to their sales and business practices controls, to a series of fines, and to provide specific forms of relief to eligible class members. Virtually all claims by class members filed in connection with the settlements have been resolved and virtually all aspects of the remediation program have been satisfied. As of December 31, 2001 Prudential remained a party to approximately 44 individual sales practices actions filed by policyholders who "opted out" of the class action settlement relating to permanent life insurance policies issued in the 35 United States between 1982 and 1995. In addition, there were 19 sales practices actions pending that were filed by policyholders who were members of the class and who failed to "opt out" of the class action settlement. Prudential believed that those actions are governed by the class settlement release and expects them to be enjoined and/or dismissed. Additional suits may be filed by class members who "opted out" of the class settlements or who failed to "opt out" but nevertheless seek to proceed against Prudential. A number of the plaintiffs in these cases seek large and/or indeterminate amounts, including punitive or exemplary damages. Some of these actions are brought on behalf of multiple plaintiffs. It is possible that substantial punitive damages might be awarded in any of these actions and particularly in an action involving multiple plaintiffs. Prudential's litigation is subject to many uncertainties, and given the complexity and scope, the outcomes cannot be predicted. It is possible that the results of operations or the cash flow of Prudential in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters. Management believes, however, that the ultimate outcome of all pending litigation and regulatory matters should not have a material adverse effect on Prudential's financial position. Additional Information Prudential has filed a registration statement with the SEC under the Securities Act of 1933, relating to the offering described in this prospectus. This prospectus does not include all the information set forth in the registration statement. Certain portions have been omitted pursuant to the rules and regulations of the SEC. The omitted information may, however, be obtained from the SEC's 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. To reduce costs, we now generally send only a single copy of prospectuses and shareholder reports to each household ("householding"), in lieu of sending a copy to each contract owner that resides in the household. You should be aware that you can revoke or "opt out" of householding at any time by calling 1-877-778-5008. Further information may also be obtained from Prudential. Its address and telephone number are set forth on the inside front cover of this prospectus. Financial Statements The financial statements of the Account should be distinguished from the consolidated financial statements of Prudential and its subsidiaries, which should be considered only as bearing upon the ability of Prudential to meet its obligations under the Contracts. 36 DIRECTORS AND OFFICERS OF PRUDENTIAL DIRECTORS OF PRUDENTIAL FRANKLIN E. AGNEW--Director since 1994 (current term expires June, 2002). Member, Committee on Finance & Dividends; Member, Corporate Governance Committee. Business consultant since 1987. Mr. Agnew is also a director of Bausch & Lomb, Inc. Age 68. Address: 600 Grant Street, Suite 660, Pittsburgh, PA 15219. FREDERIC K. BECKER--Director since 1994 (current term expires June, 2002 ). Member, Audit Committee; Member, Corporate Governance Committee. President, Wilentz Goldman & Spitzer, P.A. (law firm) since 1989, with firm since 1960. Age 66. Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095. GILBERT F. CASELLAS--Director since 1998 (current term expires June, 2002). Member, Investment Committee, Member Committee on Business Ethics. President and Chief Executive Officer, Q-Linx Inc. from January 2001 to December 2001. President and Chief Operating Officer, The Swarthmore Group, Inc. from 1999 to 2000. Partner, McConnell Valdes, LLP in 1998. Former Chairman, U.S. Equal Employment Opportunity Commission from 1994 to 1998. Mr. Casellas is also a director of The Swarthmore Group. Age 49. Address: 1025 Connecticut Avenue, N.W., Suite 1012, Washington, D.C. 20036. JAMES G. CULLEN--Director since 1994 (current term expires June, 2002). Member, Compensation Committee; Member, Committee on Business Ethics. Retired since 2000. President & Chief Operating Officer, Bell Atlantic Corporation, from 1998 to 2000. President & Chief Executive Officer, Telecom Group, Bell Atlantic Corporation, from 1997 to 1998. Vice Chairman, Bell Atlantic Corporation from 1995 to 1997. Mr. Cullen is also a director of Agilient Technologies, Inc., Quantum Bridge Communications and Johnson & Johnson. Age 59. Address: 751 Broad Street, 21 st Floor, Newark, NJ 07102-3777. CAROLYNE K. DAVIS--Director since 1989 (current term expires June, 2002). Member, Committee on Business Ethics; Member, Compensation Committee. Independent Health Care Advisor since 1997. Dr. Davis is also a director of Beckman Coulter Instruments, Inc., Minimed Incorporated and Science Applications International Corporation. Age 70. Address: 751 Broad Street, 21st Floor, Newark, NJ 07102-3777. ALLAN D. GILMOUR--Director since 1995 (current term expires June, 2002). Member, Investment Committee; Member, Committee on Finance & Dividends. Retired since 1995. Mr. Gilmour is also a director of Whirlpool Corporation, The Dow Chemical Company, DTE Energy Company, Gilmour Enterprises, Inc., Gilmour Ford, Inc., and Gilmour Properties, LLC. Age 67. Address: 751 Broad Street, 21st Floor, Newark, NJ 07102-3777. WILLIAM H. GRAY III--Director since 1991 (current term expires June, 2002). Chairman, Corporate Governance Committee. Member, Executive Committee; Member, Committee on Business Ethics. President and Chief Executive Officer, The College Fund/UNCF since 1991. Mr. Gray is also a director of JP Morgan Chase & Co., Municipal Bond Investors Assurance Corporation, Rockwell International Corporation, Dell Computer Corporation, Pfizer, Inc., Viacom, Inc., Visteon Corporation, Electronic Data Systems, and Ezgov.com, Inc. Age 60. Address: 8260 Willow Oaks Corp. Drive, Fairfax,VA 22031-4511. JON F. HANSON--Director since 1991 (current term expires June, 2002). Member, Investment Committee; Member, Committee on Finance & Dividends. Chairman, Hampshire Management Company since 1976. Mr. Hanson is also a director CDL, Inc., Yankee Entertainment Sports Network, Hampshire Management Company, James E. Hanson Management Company and Pascack Community Bank. Age 65. Address: 235 Moore Street, Suite 200, Hackensack, NJ 07601. GLEN H. HINER--Director since 1997 (current term expires June, 2002). Member, Compensation Committee. Retired since 2002. Chairman and Chief Executive Officer, Owens Corning from 1992 to 2002. Mr. Hiner is also a director of Dana Corporation, Owens Corning, and Kohler, Co. Age 67. Address: One Owens Corning Parkway, Toledo, OH 43659. CONSTANCE J. HORNER--Director since 1994 (current term expires June, 2002). Member, Compensation Committee; Member, Corporate Governance Committee. Guest Scholar, The Brookings Institution since 1993. Commissioner, US Commission on Civil Rights 1993 to 1998. Ms. Horner is also a director of Foster Wheeler Ltd., 37 Ingersoll-Rand Company, Ltd., and Pfizer, Inc. Age 60. Address: 751 Broad Street, 21st Floor, Newark, NJ 07102-3777. GAYNOR N. KELLEY--Director since 1997 (current term expires June, 2002). Member, Audit Committee. Retired since 1996. Chairman and Chief Executive Officer, The Perkin Elmer Corporation from 1990 to 1996. Age 70. Address: 751 Broad Street, 21 st Floor, Newark, NJ 07102-3777. BURTON G. MALKIEL--Director since 1978 (current term expires June, 2002). Chairman, Investment Committee; Member, Executive Committee; Member, Committee on Finance & Dividends. Chemical Bank Chairman's Professor of Economics, Princeton University, where he has served on the faculty since 1988. Professor Malkiel is also a director of Baker Fentress & Company, The Jeffrey Company, NeuVis, Inc. and Vanguard Group, Inc. Age 69. Address: Princeton University, Department of Economics, 110 Fisher Hall, Prospect Avenue, Princeton, NJ 08544-1021. ARTHUR F. RYAN--Director since 1994 (current term expires June, 2002). Member, Executive Committee; Member, Committee on Business Ethics; Member, Committee on Finance and Dividends. Chairman, Chief Executive Officer and President of Prudential Financial, Inc. since December, 2000. Chairman of the Board, Chief Executive Officer and President of The Prudential Insurance Company of America since 1994. Age 59. Address: 751 Broad Street, Newark, NJ 07102-3777. IDA F.S. SCHMERTZ--Director since 1997 (current term expires June, 2002). Member, Audit Committee. Chairman of the Volkhov International Business Incubator since 1995. Principal, Investment Strategies International from 1994 to 2000. Ms. Schmertz is also a principal of Microleasing, LLC. Age 67. Address: 751 Broad Street, 21 st Floor, Newark, NJ 07102-3777. CHARLES R. SITTER--Director since 1995 (current term expires June, 2002). Member, Committee on Finance & Dividends; Member, Investment Committee. Retired since 1996. President, Exxon Corporation from 1993 to 1996. Age 71. Address: 5959 Las Colinas Boulevard, Irving, TX 75039-2298. DONALD L. STAHELI--Director since 1995 (current term expires June, 2002). Member, Compensation Committee; Member, Audit Committee. Retired since 1997. Chairman and Chief Executive Officer, Continental Grain Company from 1994 to 1997. Age 70. Address: 47 East South Temple, #501, Salt Lake City, UT 84150. RICHARD M. THOMSON--Director since 1976 (current term expires June, 2002). Chairman, Executive Committee; Chairman, Compensation Committee. Retired since 1998. Chairman of the Board, The Toronto-Dominion Bank from 1997 to 1998 and Chairman and Chief Executive Officer from 1978 to 1997. Mr. Thomson is also a director of INCO, Limited, S.C. Johnson & Son, Inc., The Thomson Corporation, The Toronto-Dominion Bank, Ontario Power Generation, Inc., Stuart Energy Systems, Inc., Nexen Inc., Canada Pension Plan Investment Board, and TrizecHahn Corporation. Age 68. Address: 11th Floor TD Tower, Toronto Dominion Centre, Toronto, ON, M5K 1A2, Canada. JAMES A. UNRUH--Director since 1996 (current term expires June, 2002). Member, Corporate Governance Committee; Member, Audit Committee. Founding Principal, Alerion Capital Group, LLC since 1998. Chairman and Chief Executive Officer, Unisys Corporation, from 1990 to 1997. Mr. Unruh is also a director of Apex Microtechnology Corporation. Age 61. Address: 7600 Double Tree Ranch Road, Suite 240, Scottsdale, AZ 95258. P. ROY VAGELOS, M.D.--Director since 1989 (current term expires June, 2002). Chairman, Audit Committee; Member, Executive Committee; Member, Corporate Governance Committee. Chairman, Regeneron Pharmaceuticals since 1995. Chairman, Advanced Medicines, Inc. since 1997. Dr. Vagelos is also a director of Regeneron Pharmaceuticals, Inc. and Advanced Medicines, Inc. Age 72. Address: One Crossroads Drive, Building A, 3rd Floor, Bedminster, NJ 07921. STANLEY C. VAN NESS--Director since 1990 (current term expires June, 2002). Chairman, Committee on Business Ethics; Member, Executive Committee; Member, Audit Committee. Partner, Herbert, Van Ness, Cayci & Goodell (law firm) since 1998. Partner, Picco Herbert Kennedy (law firm) from 1990 to 1998. Mr. Van Ness is also a director of Jersey Central Power & Light Company. Age 68. Address: 22 Chambers Street, Princeton, NJ 08542. PAUL A. VOLCKER--Director since 1988 (current term expires June, 2002). Chairman, Committee on Finance & Dividends; Member, Executive Committee; Member, Corporate Governance Committee. Consultant since 1997. Age 74. Address: 610 Fifth Avenue, Suite 420, New York, NY 10020. 38 PRINCIPAL OFFICERS ARTHUR F. RYAN--Chairman of the Board, Chief Executive Officer and President of The Prudential Insurance Company of America since 1994. Chairman, Chief Executive Officer and President of Prudential Financial, Inc. since December, 2000. Age 59. VIVIAN BANTA--Executive Vice President, U.S. Consumer Group of The Prudential Insurance Company of America and Executive Vice President of Prudential Financial, Inc. since 2001; Executive Vice President, Individual Financial Services 2000 to 2001; Consultant, Individual Financial Services from 1998 to 1999; Consultant, Morgan Stanley from 1997 to 1998; Executive Vice President, Global Investor Service, The Chase Manhattan Bank from 1991 to 1997. Age 51. MICHELE S. DARLING--Executive Vice President, Corporate Governance, Human Resources and Community Resources of The Prudential Insurance Company of America since 2000 and Executive Vice President of Prudential Financial, Inc. since 2001; Executive Vice President, Human Resources from 1997 to 2000; prior to 1997, Executive Vice President, Human Resources, Canadian Imperial Bank of Commerce. Age 48. ROBERT C. GOLDEN--Executive Vice President, Operations and Systems of The Prudential Insurance Company of America since 1997 and Executive Vice President of Prudential Financial, Inc. since 2001. Age 55. MARK B. GRIER--Executive Vice President, Financial Management, Government Affairs and Demutualization of The Prudential Insurance Company of America and Executive Vice President of Prudential Financial, Inc. 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. Age 49. JEAN D. HAMILTON--Executive Vice President, Institutional of The Prudential Insurance Company of America and Executive Vice President of Prudential Financial, Inc. since 2001; Executive Vice President, Prudential Institutional 1998 to 2001; President, Diversified Group from 1995 to 1998. Age 55. RODGER A. LAWSON--Executive Vice President, International Investment and Global Marketing of The Prudential Insurance Company of America and Executive Vice President of Prudential Financial, Inc. since 2001; Executive Vice President, International Investments & Global Marketing Communications from 1998 to 2001; Executive Vice President, Marketing and Planning from 1996 to 1998. Age 55. JOHN R. STRANGFELD--Executive Vice President, Prudential Investment Management of The Prudential Insurance Company of America and Executive Vice President of Prudential Financial, Inc. since 2001 and Chairman and CEO of Prudential Securities since 2000; Executive Vice President, Global Asset Management 1998 to 2001 and Prudential Securities during 2000; Chief Executive Officer, Private Asset Management Group (PAMG) from 1996 to 1998. Age 48. RICHARD J. CARBONE--Senior Vice President and Chief Financial Officer of The Prudential Insurance Company of America since 1997 and Senior Vice President and Chief Financial Officer of Prudential Financial, Inc. since 2001; Controller, Salomon Brothers from 1995 to 1997. Age 54. ANTHONY S. PISZEL--Senior Vice President and Comptroller of The Prudential Insurance Company of America since 2000 and Senior Vice President and Comptroller of Prudential Financial, Inc. since 2001; Vice President and Comptroller from 1998 to 2000. Vice President, Enterprise Financial Management from 1997 to 1998. Age 47. C. EDWARD CHAPLIN--Senior Vice President and Treasurer of The Prudential Insurance Company of America since 2000 and Senior Vice President and Treasurer of Prudential Financial, Inc. since 2002. Vice President and Treasurer from 1995 to 2000. Age 45. SUSAN J. BLOUNT--Vice President and Secretary of The Prudential Insurance Company of America since 1995 and Vice President and Secretary of Prudential Financial, Inc. since 2001. Age 44. Prudential officers are elected annually. 39 FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF NET ASSETS December 31, 2001
SUBACCOUNTS ------------------------------------------------------------------------------------- Prudential Prudential Prudential Prudential Prudential Money Diversified Prudential Flexible Conservative High Yield Market Bond Equity Managed Balanced Bond Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio --------- ---------- ---------- ---------- ------------ ---------- ASSETS Investment in The Prudential Series Fund Inc. Portfolios and non- Prudential administered funds at, net asset value [Note 3] ........... $149,803,902 $163,498,934 $1,356,366,869 $1,267,786,516 $962,475,586 $77,870,620 ------------ ------------ -------------- -------------- ------------ ----------- Net Assets ........................... $149,803,902 $163,498,934 $1,356,366,869 $1,267,786,516 $962,475,586 $77,870,620 ============ ============ ============== ============== ============ =========== NET ASSETS, representing: Accumulation units [Note 9] ......... $149,803,902 $163,498,934 $1,356,366,869 $1,267,786,516 $962,475,586 $77,870,620 ------------ ------------ -------------- -------------- ------------ ----------- $149,803,902 $163,498,934 $1,356,366,869 $1,267,786,516 $962,475,586 $77,870,620 ============ ============ ============== ============== ============ =========== Units outstanding .................... 83,793,334 65,406,382 298,797,327 390,792,044 341,216,574 37,841,595 ============ ============ ============== ============== ============ ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A1
SUBACCOUNTS (Continued) - ----------------------------------------------------------------------------------------------------------------------------------- MFS Prudential T. Rowe Price Janus Emerging American Stock Prudential Prudential Prudential International AIM V.I. Aspen Growth Century VP Index Value Global Jennison Stock Value Growth Series Value Portfolio Portfolio Portfolio Portfolio Portfolio Fund Portfolio Portfolio Fund - ------------ ------------ ------------ ------------ --------------- ---------- ---------- ---------- ----------- $865,987,367 $508,784,419 $193,992,871 $451,810,994 $905,264 $2,066,730 $2,535,719 $1,378,475 $1,237,007 - ------------ ------------ ------------ ------------ -------- ---------- ---------- ---------- ---------- $865,987,367 $508,784,419 $193,992,871 $451,810,994 $905,264 $2,066,730 $2,535,719 $1,378,475 $1,237,007 ============ ============ ============ ============ ======== ========== ========== ========== ========== $865,987,367 $508,784,419 $193,992,871 $451,810,994 $905,264 $2,066,730 $2,535,719 $1,378,475 $1,237,007 - ------------ ------------ ------------ ------------ -------- ---------- ---------- ---------- ---------- $865,987,367 $508,784,419 $193,992,871 $451,810,994 $905,264 $2,066,730 $2,535,719 $1,378,475 $1,237,007 ============ ============ ============ ============ ======== ========== ========== ========== ========== 174,445,809 105,681,938 113,393,328 191,013,777 1,025,423 1,556,003 1,921,232 1,014,569 828,765 ============ ============ ============ ============ ========= ========== ========== ========== ==========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A2 FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF OPERATIONS For the years ended December 31, 2001, 2000 and 1999
SUBACCOUNTS --------------------------------------------------------------------------------- Prudential Prudential Money Market Diversified Bond Portfolio Portfolio ---------------------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- ----------- INVESTMENT INCOME Dividend income .......................... $ 5,691,321 $ 7,374,565 $ 5,770,360 $ 9,660,311 $ 9,363,742 $ 0 ----------- ----------- ----------- ----------- ----------- ----------- EXPENSES Charges to contract owners for assuming mortality risk and expense risk [Note 4A] ............................... 1,004,822 857,383 820,458 1,154,591 1,055,858 1,044,261 ----------- ----------- ----------- ----------- ----------- ----------- NET INVESTMENT INCOME (LOSS) ............... 4,686,499 6,517,182 4,949,902 8,505,720 8,307,884 (1,044,261) ----------- ----------- ----------- ----------- ----------- ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received ..... 0 0 0 0 18,515 399,858 Realized gain (loss) on shares redeemed ................................ 0 0 0 1,463,159 86,063 (62,342) Net change in unrealized gain (loss) on investments .......................... 0 0 0 (379,997) 4,554,260 (1,453,759) ----------- ----------- ----------- ----------- ----------- ----------- NET GAIN (LOSS) ON INVESTMENTS ............. 0 0 0 1,083,162 4,658,838 (1,116,243) ----------- ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ................................ $ 4,686,499 $ 6,517,182 $ 4,949,902 $ 9,588,882 $12,966,722 $(2,160,504) =========== =========== =========== =========== =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A3
SUBACCOUNTS (Continued) - ------------------------------------------------------------------------------------------------------------------------------------ Prudential Prudential Prudential Equity Flexible Managed Conservative Balanced Portfolio Portfolio Portfolio - ---------------------------------------------- --------------------------------------- ---------------------------------------- 2001 2000 1999 2001 2000 1999 2001 2000 1999 - ------------- ----------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ $ 11,778,719 $28,717,308 $ 26,581,947 $ 49,145,298 $ 51,475,016 $ 66,382 $ 33,596,157 $ 39,032,025 $ 45,641,073 - ------------- ----------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ 10,233,632 10,912,470 11,249,143 9,313,450 10,246,499 10,502,693 7,282,105 7,930,987 8,224,025 - ------------- ----------- ------------ ------------ ------------ ------------ ------------ ------------ ----------- 1,545,087 17,804,838 15,332,804 39,831,848 41,228,517 (10,436,311) 26,314,052 31,101,038 37,417,048 - ------------- ----------- ------------ ------------ ------------ ------------ ------------ ------------ ----------- 74,972,452 252,626,405 188,845,438 18,948,318 20,228,730 16,843,257 10,268,699 7,927,522 6,358,209 (11,972,627) 12,712,901 27,402,970 (5,121,442) 3,425,308 2,080,576 (3,219,178) 2,714,849 2,277,146 (248,117,507) (246,644,445) (58,596,445) (141,197,546) (96,184,606) 91,955,490 (61,523,825) (54,474,725) 18,533,490 ------------- ----------- ------------ ------------ ------------ ------------ ------------ ------------ ----------- (185,117,682) 18,694,861 157,651,963 (127,370,670) (72,530,568) 110,879,323 (54,474,304) (43,832,354) 27,168,845 - ------------- ----------- ------------ ------------ ------------ ------------ ------------ ------------ ----------- $(183,572,595) $36,499,699 $172,984,767 $(87,538,822) $(31,302,051) $100,443,012 $(28,160,252) $(12,731,316) $64,585,893 ============= =========== ============ ============ ============ ============ ============ ============ ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A4 FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF OPERATIONS For the years ended December 31, 2001, 2000 and 1999
SUBACCOUNTS ---------------------------------------------------------------------------------------- Prudential Prudential High Yield Bond Stock Index Portfolio Portfolio ----------------------------------------- ------------------------------------------- 2001 2000 1999 2001 2000 1999 ----------- ----------- ----------- ------------- ------------- ------------ INVESTMENT INCOME Dividend income ....................... $ 9,427,159 $ 9,628,996 $ 251,218 $ 9,128,445 $ 9,144,548 $10,125,645 ----------- ----------- ----------- ------------- ------------- ----------- EXPENSES Charges to contract owners for assuming mortality risk and expense risk [Note 4A] ............................ 580,357 601,288 655,946 6,421,387 7,509,378 6,675,340 ----------- ----------- ----------- ------------- ------------- ----------- NET INVESTMENT INCOME (LOSS) ............ 8,846,802 9,027,708 (404,728) 2,707,058 1,635,170 3,450,305 ----------- ----------- ----------- ------------- ------------- ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received .. 0 0 0 51,332,600 35,213,342 12,472,929 Realized gain (loss) on shares redeemed ............................. (1,984,736) (1,139,978) (966,582) 14,703,822 16,646,062 19,189,378 Net change in unrealized gain (loss) on investments ....................... (7,772,594) (15,147,733) 4,891,833 (196,280,113) (160,730,652) 136,915,479 ----------- ----------- ----------- ------------- ------------- ------------ NET GAIN (LOSS) ON INVESTMENTS .......... (9,757,330) (16,287,711) 3,925,251 (130,243,691) (108,871,248) 168,577,786 ----------- ----------- ----------- ------------- ------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............................. $ (910,528) $(7,260,003) $ 3,520,523 $(127,536,633) $(107,236,078) $172,028,091 =========== =========== =========== ============= ============= ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A5
SUBACCOUNTS (Continued) ----------------------------------------------------------------------------------------------------------------------------------- Prudential Prudential Prudential Value Global Jennison Portfolio Portfolio Portfolio ---------------------------------------- ----------------------------------------- -------------------------------------------- 2001 2000 1999 2001 2000 1999 2001 2000 1999 ------------ ----------- ----------- ------------ ------------ ----------- ------------- ------------- ------------- $ 8,012,590 $10,338,921 $10,876,592 $ 734,834 $ 1,914,868 $ 678,214 $ 796,086 $ 384,515 $ 541,083 ------------ ----------- ----------- ------------ ------------ ----------- ------------- ------------- ------------ 3,558,508 3,178,543 3,285,457 1,440,781 1,752,355 1,111,465 3,229,200 3,978,955 2,115,948 ------------ ----------- ----------- ------------ ------------ ----------- ------------- ------------- ------------ 4,454,082 7,160,378 7,591,135 (705,947) 162,513 (433,251) (2,433,114) (3,594,440) (1,574,865) ------------ ----------- ----------- ------------ ------------ ----------- ------------- ------------- ------------- 47,413,973 35,832,915 53,052,638 48,429,909 16,578,985 1,189,193 4,599,398 76,293,654 18,100,277 555,997 2,234,121 7,546,600 (7,478,356) 917,015 3,166,922 (8,820,129) 1,403,528 1,956,464 (66,822,363) 20,197,962 (16,047,855) (83,717,864) (70,915,302) 67,191,804 (96,533,999) (198,113,004) 99,641,732 ------------ ----------- ----------- ------------ ------------ ----------- ------------- ------------- ------------ (18,852,393) 58,264,998 44,551,383 (42,766,311) (53,419,302) 71,547,919 (100,754,730) (120,415,822) 119,698,473 ------------ ----------- ----------- ------------ ------------ ----------- ------------- ------------- ------------ $(14,398,311) $65,425,376 $52,142,518 $(43,472,258) $(53,256,789) $71,114,668 $(103,187,844) $(124,010,262) $118,123,608 ============ =========== =========== ============ ============ =========== ============= ============= ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A6 FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF OPERATIONS For the years ended December 31, 2001, 2000 and 1999
SUBACCOUNTS ---------------------------------------------------------------------- T. Rowe Price AIM V.I. International Stock Value Portfolio Fund --------------------------------- ----------------------------------- 2001 2000 1999 2001 2000 1999 --------- --------- ------- --------- --------- --------- INVESTMENT INCOME Dividend income ................................. $ 18,843 $ 4,192 $ 570 $ 2,693 $ 1,609 $ 1,048 --------- --------- ------- --------- --------- --------- EXPENSES Charges to contract owners for assuming mortality risk and expense risk [Note 4A] ....................................... 4,594 2,592 221 10,008 5,257 599 --------- --------- ------- --------- --------- --------- NET INVESTMENT INCOME (LOSS) ...................... 14,249 1,600 349 (7,315) (3,648) 449 --------- --------- ------- --------- --------- --------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received ............ 0 20,121 1,792 40,882 56,065 5,479 Realized gain (loss) on shares redeemed ....................................... (14,787) 6,356 0 (25,903) 7,979 0 Net change in unrealized gain (loss) on investments ................................. (183,179) (129,440) 28,848 (223,173) (265,995) 43,489 --------- --------- ------- --------- --------- --------- NET GAIN (LOSS) ON INVESTMENTS .................... (197,966) (102,963) 30,640 (208,194) (201,951) 48,968 --------- --------- ------- --------- --------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ...................................... $(183,717) $(101,363) $30,989 $(215,509) $(205,599) $ 49,417 ========= ========= ======= ========= ========= =========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A7
SUBACCOUNTS (Continued) --------------------------------------------------------------------------------------------------------- Janus Aspen MFS Emerging Growth Growth Series American Century Portfolio Portfolio VP Value - ---------------------------------- ----------------------------------- ------------------------------ 2001 2000 1999 2001 2000 1999 2001 2000 1999 - ---------- ---------- -------- --------- --------- --------- --------- ------- ------- $ 1,491 $ 29,366 $ 742 $ 0 $ 0 $ 0 $ 5,401 $ 1,715 $ 0 --------- --------- ------- --------- --------- --------- --------- ------- ------- 12,066 8,122 745 6,908 4,451 424 4,726 1,658 85 --------- ---------- -------- --------- --------- --------- --------- ------- ------- (10,575) 21,244 (3) (6,908) (4,451) (424) 675 57 (85) --------- ---------- -------- --------- --------- --------- --------- ------- ------- 3,728 68,363 107 72,082 31,841 0 0 4,388 0 (90,696) 8,468 0 (52,483) 19,917 0 7,745 2,209 0 (407,229) (461,183) 73,745 (445,703) (273,214) 106,728 105,697 65,436 (1,710) --------- ---------- -------- --------- --------- --------- --------- ------- ------- (494,197) (384,352) 73,852 (426,104) (221,456) 106,728 113,442 72,033 (1,710) --------- ---------- -------- --------- --------- --------- --------- ------- ------- $(504,772) $(363,108) $73,849 $(433,012) $(225,907) $ 106,304 $ 114,117 $72,090 $(1,795) ========= ========= ======= ========= ========= ========= ========= ======= =======
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A8 FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the years ended December 31, 2001, 2000 and 1999
SUBACCOUNTS ---------------------------------------------------------------------------------------- Prudential Prudential Money Market Diversified Bond Portfolio Portfolio ------------------------------------------ ------------------------------------------- 2001 2000 1999 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ ------------ OPERATIONS Net investment income (loss) ............ $ 4,686,499 $ 6,517,182 $ 4,949,902 $ 8,505,720 $ 8,307,884 $(1,044,261) Capital gains distributions received .... 0 0 0 0 18,515 399,858 Realized gain (loss) on shares redeemed ............................... 0 0 0 1,463,159 86,063 (62,342) Net change in unrealized gain (loss) on investments ......................... 0 0 0 (379,997) 4,554,260 (1,453,759) ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .............................. 4,686,499 6,517,182 4,949,902 9,588,882 12,966,722 (2,160,504) ------------ ------------ ------------ ------------ ------------ ------------ CONTRACT OWNER TRANSACTIONS Contract Owner Net Payments ............. 27,534,492 33,271,809 29,999,800 20,475,507 23,708,710 23,078,475 Policy Loans ............................ (3,880,970) (2,951,631) (3,827,696) (3,509,028) (2,951,317) (3,188,191) Policy Loan Repayments and Interest ............................... 2,987,045 1,690,948 2,588,192 2,352,792 1,966,848 2,135,135 Surrenders, Withdrawals and Death Benefits ............................... (16,502,180) (10,207,810) (11,775,018) (27,437,627) (7,206,907) (8,911,486) Net Transfers From (To) Other Subaccounts or Fixed Rate Option ....... 9,817,151 (13,623,199) 2,629,991 13,343,277 (6,126,033) (138,588) Withdrawal and Other Charges ............ (9,841,971) (8,128,780) (8,860,933) (10,978,673) (9,969,514) (10,654,538) ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS ...................... 10,113,567 51,337 10,754,336 (5,753,752) (578,213) 2,320,807 ------------ ------------ ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS .............................. 14,800,066 6,568,519 15,704,238 3,835,130 12,388,509 160,303 NET ASSETS: Beginning of year ....................... 135,003,836 128,435,317 112,731,079 159,663,804 147,275,295 147,114,992 ------------ ------------ ------------ ------------ ------------ ------------ End of year ............................. $149,803,902 $135,003,836 $128,435,317 $163,498,934 $159,663,804 $147,275,295 ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A9
SUBACCOUNTS (Continued) - -------------------------------------------------------------------------------------------------------------- Prudential Prudential Equity Flexible Managed Portfolio Portfolio - ----------------------------------------------------- ----------------------------------------------------- 2001 2000 1999 2001 2000 1999 - --------------- --------------- --------------- --------------- --------------- --------------- $ 1,545,087 $ 17,804,838 $ 15,332,804 $ 39,831,848 $ 41,228,517 $ (10,436,311) 74,972,452 252,626,405 188,845,438 18,948,318 20,228,730 16,843,257 (11,972,627) 12,712,901 27,402,970 (5,121,442) 3,425,308 2,080,576 (248,117,507) (246,644,445) (58,596,445) (141,197,546) (96,184,606) 91,955,490 - --------------- --------------- --------------- --------------- --------------- --------------- (183,572,595) 36,499,699 172,984,767 (87,538,822) (31,302,051) 100,443,012 - --------------- --------------- --------------- --------------- --------------- --------------- 209,889,474 222,204,944 222,112,390 152,653,244 160,739,340 155,685,002 (39,007,160) (44,682,481) (46,925,941) (27,811,107) (32,903,486) (33,487,354) 29,559,815 26,549,494 25,863,007 22,716,426 20,974,631 20,075,111 (107,153,507) (89,287,653) (94,909,037) (89,055,901) (73,837,706) (67,752,219) (11,110,043) (93,203,124) (59,651,177) (11,269,057) (64,915,895) (36,216,054) (103,407,621) (110,324,713) (122,798,555) (82,084,813) (89,144,922) (98,917,196) - --------------- --------------- --------------- --------------- --------------- --------------- (21,229,042) (88,743,533) (76,309,313) (34,851,208) (79,088,038) (60,612,710) - --------------- --------------- --------------- --------------- --------------- --------------- (204,801,637) (52,243,834) 96,675,454 (122,390,030) (110,390,089) 39,830,302 1,561,168,506 1,613,412,340 1,516,736,886 1,390,176,546 1,500,566,635 1,460,736,333 - --------------- --------------- --------------- --------------- --------------- --------------- $ 1,356,366,869 $ 1,561,168,506 $ 1,613,412,340 $ 1,267,786,516 $ 1,390,176,546 $ 1,500,566,635 =============== =============== =============== =============== =============== ===============
--------------------------------------------------- Prudential Conservative Balanced Portfolio -------------------------------------------------- 2001 2000 1999 -------------- -------------- -------------- $ 26,314,052 $ 31,101,038 $ 37,417,048 10,268,699 7,927,522 6,358,209 (3,219,178) 2,714,849 2,277,146 (61,523,825) (54,474,725) 18,533,490 -------------- -------------- -------------- (28,160,252) (12,731,316) 64,585,893 -------------- -------------- -------------- 124,589,424 132,066,783 122,128,969 (21,870,768) (24,363,776) (23,665,043) 17,263,176 15,280,452 15,558,408 (80,372,641) (67,850,819) (64,392,473) (11,000,589) (60,909,587) (27,102,834) (71,104,797) (76,776,722) (84,858,651) -------------- -------------- -------------- (42,496,195) (82,553,669) (62,331,624) -------------- -------------- -------------- (70,656,447) (95,284,985) 2,254,269 1,033,132,033 1,128,417,018 1,126,162,749 -------------- -------------- -------------- $ 962,475,586 $1,033,132,033 $1,128,417,018 ============== ============== ============== SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A10 FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the years ended December 31, 2001, 2000 and 1999
SUBACCOUNTS ------------------------------------------------------------------------------------------- Prudential Prudential High Yield Bond Stock Index Portfolio Portfolio -------------------------------------------- --------------------------------------------- 2001 2000 1999 2001 2000 1999 ----------- ------------ ------------- ------------ ------------ ------------- OPERATIONS Net investment income (loss) ....... $ 8,846,802 $ 9,027,708 $ (404,728) $ 2,707,058 $ 1,635,170 $ 3,450,305 Capital gains distributions received 0 0 0 51,332,600 35,213,342 12,472,929 Realized gain (loss) on shares redeemed .......................... (1,984,736) (1,139,978) (966,582) 14,703,822 16,646,062 19,189,378 Net change in unrealized gain (loss) on investments .................... (7,772,594) (15,147,733) 4,891,833 (196,280,113) (160,730,652) 136,915,479 ------------ ------------ ------------ ------------- ------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ......................... (910,528) (7,260,003) 3,520,523 (127,536,633) (107,236,078) 172,028,091 ------------ ------------ ------------ ------------- ------------- -------------- CONTRACT OWNER TRANSACTIONS Contract Owner Net Payments ........ 13,869,897 14,981,479 15,705,252 137,075,014 143,813,535 128,537,549 Policy Loans ....................... (1,978,781) (2,126,320) (2,428,091) (22,073,451) (31,788,094) (27,496,074) Policy Loan Repayments and Interest .......................... 1,582,960 1,428,737 1,801,343 18,345,046 16,352,451 14,533,537 Surrenders, Withdrawals and Death Benefits .......................... (6,304,511) (5,853,422) (6,795,370) (72,921,724) (55,218,390) (53,330,346) Net Transfers From (To) Other Subaccounts or Fixed Rate Option .. 508,338 (6,209,425) (7,871,916) (9,290,237) 43,134,926 55,524,073 Withdrawal and Other Charges ....... (6,339,467) (6,624,832) (7,570,585) (63,635,362) (69,977,646) (68,714,043) ------------ ------------ ------------ ------------- ------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS ....................... 1,338,436 (4,403,783) (7,159,367) (12,500,714) 46,316,782 49,054,696 ------------ ------------ ------------ ------------- ------------- -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS ......................... 427,908 (11,663,786) (3,638,844) (140,037,347) (60,919,296) 221,082,787 NET ASSETS: Beginning of year .................. 77,442,712 89,106,498 92,745,342 1,006,024,714 1,066,944,010 845,861,223 ------------ ------------ ------------ ------------- -------------- -------------- End of year ........................ $ 77,870,620 $ 77,442,712 $ 89,106,498 $865,987,367 $1,006,024,714 $1,066,944,010 ============ ============ ============ ============= ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A11
SUBACCOUNTS (Continued) ------------------------------------------------------------------------------------------------- Prudential Prudential Value Global Portfolio Portfolio ---------------------------------------------- ---------------------------------------------- 2001 2000 1999 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ ------------ $ 4,454,082 $ 7,160,378 $ 7,591,135 $ (705,947) $ 162,513 $ (433,251) 47,413,973 35,832,915 53,052,638 48,429,909 16,578,985 1,189,193 555,997 2,234,121 7,546,600 (7,478,356) 917,015 3,166,922 (66,822,363) 20,197,962 (16,047,855) (83,717,864) (70,915,302) 67,191,804 ------------ ------------ ------------ ------------ ------------ ------------ (14,398,311) 65,425,376 52,142,518 (43,472,258) (53,256,789) 71,114,668 ------------ ------------ ------------ ------------ ------------ ------------ 67,102,332 71,330,448 72,746,641 39,726,205 39,422,009 30,573,669 (12,626,611) (12,152,062) (11,949,900) (5,525,598) (7,601,293) (4,548,965) 9,238,764 6,794,156 7,032,090 3,646,145 3,673,153 2,204,939 (36,169,132) (28,058,562) (28,641,449) (17,174,664) (12,990,958) (8,960,008) 14,858,828 (31,865,939) (30,030,572) (6,966,843) 60,926,199 8,628,134 (35,679,010) (33,187,893) (37,398,609) (16,037,216) (17,867,845) (13,826,989) ------------ ------------ ------------ ------------ ------------ ------------ 6,725,171 (27,139,852) (28,241,799) (2,331,971) 65,561,265 14,070,780 ------------ ------------ ------------ ------------ ------------ ------------ (7,673,140) 38,285,524 23,900,719 (45,804,229) 12,304,476 85,185,448 516,457,559 478,172,035 454,271,316 239,797,100 227,492,624 142,307,176 ------------ ------------ ------------ ------------ ------------ ------------ $508,784,419 $516,457,559 $478,172,035 $193,992,871 $239,797,100 $227,492,624 ============ ============ ============ ============ ============ ============
Prudential Jennison Portfolio ---------------------------------------------- 2001 2000 1999 ------------ ------------ ------------ $ (2,433,114) $ (3,594,440) $ (1,574,865) 4,599,398 76,293,654 18,100,277 (8,820,129) 1,403,528 1,956,464 (96,533,999) (198,113,004) 99,641,732 ------------ ------------ ------------ (103,187,844) (124,010,262) 118,123,608 ------------ ------------ ------------ 111,015,272 108,600,153 78,282,647 (13,191,797) (19,316,019) (10,302,874) 10,310,202 8,402,856 3,885,895 (38,427,779) (26,583,880) (17,393,950) (12,719,136) 180,065,121 115,758,631 (42,382,485) (47,004,963) (32,069,991) ------------ ------------ ------------ 14,604,277 204,163,268 138,160,358 ------------ ------------ ------------ (88,583,567) 80,153,006 256,283,966 540,394,561 460,241,555 203,957,589 ------------ ------------ ------------ $451,810,994 $540,394,561 $460,241,555 ============ ============ ============ SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A12 FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the years ended December 31, 2001, 2000 and 1999
SUBACCOUNTS -------------------------------------------------------------------------- T. Rowe Price AIM V.I. International Stock Value Portfolio Fund ---------------------------------- ------------------------------------ 2001 2000 1999 2001 2000 1999 --------- --------- -------- --------- --------- -------- OPERATIONS Net investment income (loss) ......... $ 14,249 $ 1,600 $ 349 $ (7,315) $ (3,648) $ 449 Capital gains distributions received . 0 20,121 1,792 40,882 56,065 5,479 Realized gain (loss) on shares redeemed ............................ (14,787) 6,356 0 (25,903) 7,979 0 Net change in unrealized gain (loss) on investments ...................... (183,179) (129,440) 28,848 (223,173) (265,995) 43,489 --------- --------- -------- ---------- ---------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............................ (183,717) (101,363) 30,989 (215,509) (205,599) 49,417 --------- --------- -------- ---------- ---------- -------- CONTRACT OWNER TRANSACTIONS Contract Owner Net Payments .......... 604,074 651,285 96,770 1,373,089 1,287,439 309,294 Policy Loans ......................... (9,549) (948) (3,961) (5,117) (5,486) (3,633) Policy Loan Repayments and Interest ............................ 1,112 165 28 2,749 242 28 Surrenders, Withdrawals and Death Benefits ............................ (11,390) (3,852) (495) (40,492) (5,979) (513) Net Transfers From (To) Other Subaccounts or Fixed Rate Option .... 6,804 40,079 87,453 29,146 34,533 154,808 Withdrawal and Other Charges ......... (168,945) (112,378) (16,897) (389,519) (247,849) (54,319) --------- --------- -------- ---------- ---------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS .................... 422,106 574,351 162,898 969,856 1,062,900 405,665 --------- --------- -------- ---------- ---------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS ............................ 238,389 472,988 193,887 754,347 857,301 455,082 NET ASSETS: Beginning of year .................... 666,875 193,887 0 1,312,383 455,082 0 --------- --------- -------- ---------- ---------- -------- End of year .......................... $ 905,264 $ 666,875 $193,887 $2,066,730 $1,312,383 $455,082 ========= ========= ======== ========== ========== ========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A13
SUBACCOUNTS (Continued) ------------------------------------------------------------------------------------------------------------------- Janus Aspen MFS Emerging American Century Growth Growth Series VP Portfolio Portfolio Value Fund ------------------------------------ ------------------------------------ ----------------------------------- 2001 2000 1999 2001 2000 1999 2001 2000 1999 ---------- ---------- -------- ---------- ---------- -------- ---------- --------- -------- $ (10,575) $ 21,244 $ (3) $ (6,908) $ (4,451) $ (424) $ 675 $ 57 $ (85) 3,728 68,363 107 72,082 31,841 0 0 4,388 0 (90,696) 8,468 0 (52,483) 19,917 0 7,745 2,209 0 (407,229) (461,183) 73,745 (445,703) (273,214) 106,728 105,697 65,436 (1,710) ---------- ---------- -------- ---------- ---------- -------- ---------- --------- -------- (504,772) (363,108) 73,849 (433,012) (225,907) 106,304 114,117 72,090 (1,795) ---------- ---------- -------- ---------- ---------- -------- ---------- --------- -------- 1,805,334 1,854,404 377,988 1,126,041 1,090,388 199,838 832,143 418,662 100,256 (15,805) (3,134) 0 (9,279) (4,132) (3,837) (21,608) 0 0 2,656 70 0 4,309 236 28 278 0 0 (88,774) (5,574) (832) (35,185) (3,353) (947) (14,793) (1,619) (526) 43,762 36,035 438,710 (25,915) 62,504 87,988 139,880 (45,524) 828 (570,150) (463,187) (81,753) (295,919) (225,512) (36,163) (240,062) (101,416) (13,904) ---------- ---------- -------- ---------- ---------- -------- ---------- --------- -------- 1,177,023 1,418,614 734,113 764,052 920,131 246,907 695,838 270,103 86,654 ---------- ---------- -------- ---------- ---------- -------- ---------- --------- -------- 672,251 1,055,506 807,962 331,040 694,224 353,211 809,955 342,193 84,859 1,863,468 807,962 0 1,047,435 353,211 0 427,052 84,859 0 ---------- ---------- -------- ---------- ---------- -------- ---------- --------- -------- $2,535,719 $1,863,468 $807,962 $1,378,475 $1,047,435 $353,211 $1,237,007 $ 427,052 $ 84,859 ========== ========== ======== ========== ========== ======== ========== ========= ========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A14 NOTES TO FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT DECEMBER 31, 2001 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 ("PVUL") contracts are invested in the Account. The Account is registered under the Investment Company act of 1940, as amended, as a unit investment trust. The Account is a funding vehicle for individual variable life insurance contracts. Each contract offers the option to invest in various subaccounts, each of which invests in either a corresponding portfolio of The Prudential Series Fund, Inc. (the "Series fund") or one of the non-Prudential administered funds. Options available to the VUL contracts which invest in a corresponding portfolio of the Series Fund are: Prudential Money Market Portfolio, Prudential Diversified Bond Portfolio, Prudential Equity Portfolio, Prudential Flexible Managed Portfolio, Prudential Conservative Balanced Portfolio, Prudential High Yield Bond Portfolio, Prudential Stock Index Portfolio, Prudential Value Portfolio, Prudential Global Portfolio, Prudential Jennison Portfolio. Options available to the VUL contracts which invest in a corresponding portfolio of the non-Prudential administered funds are: T. Rowe Price International Stock Portfolio, AIM V.I. Value Portfolio, Janus Aspen Growth Portfolio, MFS Emerging Growth Series, American Century VP Value 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 of America ("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 or the non-Prudential administered funds are stated at the net asset values of the respective portfolios, which value their investment securities at fair value.. 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 or the non-Prudential administered funds and are recorded on the ex-dividend date. A15 NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT The net asset value per share for each portfolio of the Series Fund or the non-Prudential administered funds, the number of shares (rounded) of each portfolio held by the subaccounts and the aggregate cost of investments in such shares at December 31, 2001 were as follows:
PORTFOLIOS ---------------------------------------------------------------------------------- Prudential Prudential Prudential Prudential Money Diversified Prudential Flexible Conservative Market Bond Equity Managed Balanced Portfolio Portfolio Portfolio Portfolio Portfolio ------------ ------------ -------------- -------------- -------------- Number of shares (rounded): 14,980,390 14,392,513 66,196,529 85,719,169 70,305,010 Net asset value per share: $ 10.00 $ 11.36 $ 20.49 $ 14.79 $ 13.69 Cost: $149,803,902 $159,403,802 $1,638,550,300 $1,422,830,400 $1,039,035,686 PORTFOLIOS (Continued) ---------------------------------------------------------------------------------- Prudential Prudential High Yield Stock Prudential Prudential Prudential Bond Index Value Global Jennison Portfolio Portfolio Portfolio Portfolio Portfolio ------------ ------------ -------------- -------------- -------------- Number of shares (rounded): 14,420,485 27,370,018 28,407,840 12,687,565 24,330,156 Net asset value per share: $ 5.40 $ 31.64 $ 17.91 $ 15.29 $ 18.57 Cost: $105,352,732 $672,627,470 $515,238,599 $251,767,455 $590,108,345 PORTFOLIOS (Continued) --------------------------------------------------------------------------------- T. Rowe Price International AIM V.I. Janus MFS American Stock Value Aspen Growth Emerging Century VP Portfolio Fund Portfolio Growth Series Value Fund ------------ ------------ -------------- -------------- -------------- Number of shares (rounded): 78,924 88,511 127,487 76,667 166,264 Net asset value per share: $ 11.47 $ 23.35 $ 19.89 $ 17.98 $ 7.44 Cost: $ 1,189,035 $ 2,512,409 $3,330,386 $1,990,664 $1,067,584
A16 NOTE 4: CHARGES AND EXPENSES A. Mortality Risk and Expense Risk Charges The mortality risk and expense risk charges, at an effective annual rates of up to 0.90% are applied daily against the net assets of PVAL, SVUL and PVUL contract owners held in each subaccount. 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. Prudential currently intends to charge only 0.60% on PVAL contracts with face amounts of $100,000 or more and for PVUL contracts but reserves the right to make the full 0.90% charge. B. Deferred Sales Charge A deferred sales charge is imposed upon surrenders of certain variable life insurance contracts to compensate Prudential for sales and other marketing expenses. The amount of any sales charge will depend on the number of years that have elapsed since the contract was issued. No sales charge will be imposed after the tenth year of the contract. No sales charge will be imposed on death benefits. C. Partial Withdrawal Charge A charge is imposed by Prudential on partial withdrawals of the cash surrender value. A charge equal to the lesser of $25 or 2% for SVUL and VUL and $15 or 2% for PVAL will be made in connection with each partial withdrawal of the cash surrender value of a contract. D. Cost of Insurance and Other Related Charges Contract owner 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 VUL, to cover premium collection and processing costs; (2) state premium taxes; and (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 5: TAXES Prudential is taxed as a "life insurance company" as defined by the Internal Revenue Code. 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. A17 NOTE 6: UNIT ACTIVITY Transactions in units (including transfers among subaccounts) for the years ended December 31, 2001, 2000, and 1999 were as follows:
SUBACCOUNTS --------------------------------------------------------------------------------------- Prudential Prudential Money Market Diversified Bond Portfolio Portfolio ------------------------------------------- ----------------------------------------- 2001 2000 1999 2001 2000 1999 ----------- ------------ ------------ ----------- ----------- ----------- Contract Owner Contributions: 105,091,671 114,194,561 120,477,063 18,552,419 14,105,601 22,216,255 Contract Owner Redemptions: (98,974,223) (113,537,294) (114,736,198) (20,248,087) (14,109,854) (20,070,222) SUBACCOUNTS (Continued) --------------------------------------------------------------------------------------- Prudential Prudential Equity Flexible Managed Portfolio Portfolio ------------------------------------------- ----------------------------------------- 2001 2000 1999 2001 2000 1999 ----------- ------------ ------------ ----------- ----------- ----------- Contract Owner Contributions: 50,172,529 55,966,094 60,448,440 46,753,155 51,084,427 55,689,347 Contract Owner Redemptions: (53,678,358) (71,783,274) (74,869,027) (56,876,097) (72,728,803) (72,365,779) SUBACCOUNTS (Continued) --------------------------------------------------------------------------------------- Prudential Prudential Conservative Balanced High Yield Bond Portfolio Portfolio ------------------------------------------- ----------------------------------------- 2001 2000 1999 2001 2000 1999 ----------- ------------ ------------ ----------- ----------- ----------- Contract Owner Contributions: 44,140,060 48,304,976 53,724,364 26,551,188 9,772,562 19,247,980 Contract Owner Redemptions: (58,485,082) (75,572,311) (74,929,420) (25,743,919) (11,186,778) (22,299,293) SUBACCOUNTS (Continued) --------------------------------------------------------------------------------------- Prudential Prudential Stock Index Value Portfolio Portfolio ------------------------------------------- ----------------------------------------- 2001 2000 1999 2001 2000 1999 ----------- ------------ ------------ ----------- ----------- ----------- Contract Owner Contributions: 31,193,542 18,523,899 47,997,403 26,288,127 10,949,452 27,292,681 Contract Owner Redemptions: (32,538,122) (9,320,711) (36,168,261) (23,928,211) (16,366,923) (33,584,226) SUBACCOUNTS (Continued) --------------------------------------------------------------------------------------- Prudential Prudential Global Jennison Portfolio Portfolio ------------------------------------------- ----------------------------------------- 2001 2000 1999 2001 2000 1999 ----------- ------------ ------------ ----------- ----------- ----------- Contract Owner Contributions: 49,140,870 54,236,060 42,507,388 55,276,289 83,460,460 81,466,185 Contract Owner Redemptions: (50,342,322) (28,429,088) (35,405,377) (49,463,953) (27,512,457) (33,061,952) SUBACCOUNTS (Continued) --------------------------------------------------------------------------------------- T. Rowe Price International Stock AIM V.I. Portfolio Value Fund ------------------------------------------- ----------------------------------------- 2001 2000 1999 2001 2000 1999 ----------- ------------ ------------ ----------- ----------- ----------- Contract Owner Contributions: 621,120 564,964 156,396 1,010,468 775,493 294,943 Contract Owner Redemptions: (179,834) (119,526) (17,697) (313,309) (169,319) (42,273)
A18 NOTE 6: UNIT ACTIVITY (CONTINUED)
SUBACCOUNTS (Continued) --------------------------------------------------------------------------------------- Janus Aspen MFS Emerging Growth Growth Series Portfolio Portfolio ------------------------------------------- ----------------------------------------- 2001 2000 1999 2001 2000 1999 ----------- ------------ ------------ ----------- ----------- ----------- Contract Owner Contributions: 1,349,084 925,017 440,125 763,094 500,468 159,851 Contract Owner Redemptions: (484,287) (257,420) (51,287) (258,271) (128,093) (22,481)
SUBACCOUNTS (Continued) --------------------------------------------- American Century VP Value Fund --------------------------------------------- 2001 2000 1999 ------------ ----------- ---------- Contract Owner Contributions: 679,994 376,232 86,847 Contract Owner Redemptions: (172,110) (130,226) (11,972) NOTE 7: PURCHASES AND SALES OF INVESTMENTS The aggregate costs of purchases and proceeds from sales of investments in the Series Fund and the non-Prudential administered fund for the year ended December 31, 2001 were as follows:
PORTFOLIOS --------------------------------------------------------------------------- Prudential Prudential Prudential Prudential Money Diversified Prudential Flexible Conservative Market Bond Equity Managed Balanced Portfolio Portfolio Portfolio Portfolio Portfolio ------------- ------------ ------------ -------------- ------------ Purchases ............... $ 119,592,728 $ 17,909,916 $ 56,285,702 $ 26,864,265 $ 17,435,883 Sales ................... $(110,483,982) $(24,818,260) $(87,748,376) $ (71,028,922) $(67,214,182) PORTFOLIOS (Continued) -------------------------------------------------------------------------- Prudential Prudential High Yield Stock Prudential Prudential Prudential Bond Index Value Global Jennison Portfolio Portfolio Portfolio Portfolio Portfolio ------------ ------------ ------------ -------------- ------------ Purchases ............... $ 26,431,494 $ 39,362,990 $ 38,739,750 $ 52,785,875 $ 47,166,755 Sales ................... $(25,673,415) $(58,285,091) $(35,573,088) $(56,558,625) $(35,791,678) PORTFOLIOS (Continued) -------------------------------------------------------------------------- T. Rowe Price Janus MFS American International AIM V.I. Aspen Emerging Century Stock Value Growth Growth Series VP Value Portfolio Fund Portfolio Portfolio Fund ------------ ------------ ------------ -------------- ------------ Purchases ............... $ 485,116 $ 1,117,633 $1,522,008 $ 908,694 $ 777,451 Sales ................... $ (67,564) $ (157,785) $ (357,051) $(151,550) $ (86,266)
NOTE 8: 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, 2001. Equity of contracts owners in the Flexible Managed subaccount at December 31, 2001 includes approximately $241 million by Prudential. Prudential and its affiliates perform various services on behalf of the mutual fund company that administers the Series Fund in which the Account invests and may receive fees for the services performed. These services include, among other things, shareholder communications, preparation, postage, fund transfer agency and various other record keeping and customer service functions. A19 NOTE 9: FINANCIAL HIGHLIGHTS Prudential sells a number of variable life insurance products that are funded by the Account. These products have unique combinations of features and fees that are charged against the contract owner's account balance. Differences in the fee structures result in a variety of unit values, expense ratios and total returns. The following table was developed by determining which products offered by the Prudential and funded by the Account have the lowest and highest total return. Only product designs within each subaccount that had units outstanding throughout the respective periods were considered when determining the lowest and highest return. The summary may not reflect the minimum and maximum contract charges offered by Prudential as contract owners may not have selected all available and applicable contract options as discussed in note 1.
AT DECEMBER 31, 2001 FOR THE YEAR ENDED DECEMBER 31, 2001 ------------------------------------------- ------------------------------------------------ INVESTMENT UNITS NET ASSETS INCOME EXPENSE TOTAL (000S) UNIT FAIR VALUE (000S) RATIO* RATIO** RETURN*** ------ -------------------- ---------- ---------- -------------- ------------------ Prudential Money Market Portfolio ..................... 83,793 $1.25552 to $1.89767 149,804 3.97% 0.60% to 0.90% 3.17% to 3.48% Prudential Diversified Bond Portfolio ..................... 65,406 $1.31342 to $2.65097 163,499 6.00% 0.60% to 0.90% 6.03% to 6.34% Prudential Equity Portfolio ..... 298,796 $1.37832 to $4.72760 1,356,367 0.83% 0.60% to 0.90% -11.97% to -11.71% Prudential Flexible Managed Portfolio ..................... 390,792 $1.26663 to $3.31989 1,267,787 3.76% 0.60% to 0.90% -6.52% to -6.24% Prudential Conservative Balanced Portfolio ............ 341,217 $1.28828 to $2.89478 962,476 3.40% 0.60% to 0.90% -2.89% to -2.60% Prudential High Yield Bond Portfolio ..................... 37,842 $1.03945 to $2.39981 77,871 11.77% 0.60% to 0.90% -1.32% to -1.03% Prudential Stock Index Portfolio ..................... 174,445 $1.60022 to $5.33848 865,987 1.00% 0.60% to 0.90% -12.83% to -12.57% Prudential Value Portfolio ...... 105,682 $1.68979 to $5.06872 508,784 1.58% 0.60% to 0.90% -2.94% to -2.66% Prudential Global Portfolio ..... 113,393 $1.33447 to $1.73500 193,993 0.35% 0.60% to 0.90% -18.35% to -18.10% Prudential Jennison Portfolio ... 191,014 $1.66508 to $2.39981 451,811 0.17% 0.60% to 0.90% -18.98% to -18.74% T. Rowe Price International Stock Portfolio ............... 1,025 $0.88282 905 2.44% 0.60% to 0.60% -22.67% to -22.67% AIM VI Value Fund ............... 1,556 $1.32823 2,067 0.16% 0.60% to 0.60% -13.08% to -13.08% Janus Aspen Growth Portfolio .... 1,921 $1.31984 2,536 0.07% 0.60% to 0.60% -25.18% to -25.18% MFS Emerging Growth Series Portfolio ..................... 1,015 $1.35868 1,378 0.00% 0.60% to 0.60% -33.88% to -33.88% American Century VP Value Fund .. 829 $1.49259 1,237 0.68% 0.60% to 0.60% 12.15% to 12.15%
- ------------ * These amounts represent the dividends, excluding distributions of capital gains, received by the subaccount from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. This ratio excludes those expenses, such as mortality and expense charges, that result in direct reductions in the unit values. The recognition of investment income by the subaccount is affected by the timing of the declaration of dividends by the underlying fund in which the subaccounts invest. ** These ratios represent the annualized contract expenses of the separate account, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying fund are excluded. *** These amounts represent the total return for the periods indicated, including changes in the value of the underlying fund, and reflect deductions for all items included in the expense ratio. The total return does not include any expenses assessed through the redemption of units; inclusion of these expenses in the calculation would result in a reduction in the total return presented. A20 REPORT OF INDEPENDENT ACCOUNTANTS To the Contract Owners of the Variable Universal Life Subaccounts of the Prudential Variable Appreciable Account and the Board of Directors of The Prudential Insurance Company of America In our opinion, the accompanying statements of net assets and the related statements of operations and of changes in net assets present fairly, in all material respects, the financial position of each of the Variable Universal Life Subaccounts (as defined in Note 1) of the Prudential Variable Appreciable Account at December 31, 2001, and the results of each of their operations and the changes in each of their net assets for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the management of The Prudential Insurance Company of America; 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 of America, 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, 2001 with the transfer agents of the investee mutual funds, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York April 15, 2002 A21 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA Consolidated Financial Statements and Report of Independent Accountants December 31, 2001 and 2000 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder 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 stockholder's 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. New York, New York February 12, 2002 2 The Prudential Insurance Company of America Consolidated Statements of Financial Position December 31, 2001 and 2000 (in Millions) - --------------------------------------------------------------------------------
2001 2000 ---- ---- ASSETS Fixed maturities: Available for sale, at fair value (amortized cost: 2001 - $83,304; 2000 - $83,115)... $ 85,586 $ 83,827 Held to maturity, at amortized cost (fair value: 2001 - $0; 2000 - $12,615) ......... -- 12,448 Trading account assets, at fair value .................................................... 882 7,217 Equity securities, available for sale, at fair value (cost: 2001 - $992; 2000 - $2,266) .............................................................................. 1,069 2,317 Commercial loans ......................................................................... 14,909 15,919 Policy loans ............................................................................. 7,930 8,046 Securities purchased under agreements to resell .......................................... 110 5,395 Cash collateral for borrowed securities .................................................. -- 3,858 Other long-term investments .............................................................. 3,824 4,459 Short-term investments ................................................................... 4,048 5,029 --------- --------- Total investments .................................................................... 118,358 148,515 Cash and cash equivalents ................................................................ 6,587 7,676 Accrued investment income ................................................................ 1,551 1,916 Broker-dealer related receivables ........................................................ -- 11,860 Deferred policy acquisition costs ........................................................ 5,122 7,063 Other assets ............................................................................. 5,948 13,506 Due from parent and affiliates ........................................................... 5,750 -- Separate account assets .................................................................. 76,736 82,217 --------- --------- TOTAL ASSETS ......................................................................... $ 220,052 $ 272,753 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES Future policy benefits ................................................................... $ 64,328 $ 67,859 Policyholders' account balances .......................................................... 33,525 32,722 Unpaid claims and claim adjustment expenses .............................................. 1,647 3,549 Policyholders' dividends ................................................................. 1,363 1,463 Securities sold under agreements to repurchase ........................................... 6,130 15,010 Cash collateral for loaned securities .................................................... 4,808 11,053 Income taxes payable ..................................................................... 1,571 1,610 Broker-dealer related payables ........................................................... -- 5,965 Securities sold but not yet purchased .................................................... 108 4,959 Short-term debt .......................................................................... 3,837 11,131 Long-term debt ........................................................................... 2,726 2,502 Other liabilities ........................................................................ 7,047 12,105 Due to parent and affiliates ............................................................. 363 -- Separate account liabilities ............................................................. 76,736 82,217 ----------- ----------- Total liabilities .................................................................... 204,189 252,145 ----------- ----------- COMMITMENTS AND CONTINGENCIES (See Note 18) STOCKHOLDER'S EQUITY Common Stock ($5.00 par value; 1,000 shares authorized, issued and outstanding at December 31, 2001) ................................................ -- -- Additional paid-in capital ............................................................... 14,716 -- Accumulated other comprehensive income ................................................... 1,099 234 Retained earnings ........................................................................ 48 20,374 ----------- ----------- Total stockholder's equity ........................................................... 15,863 20,608 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ........................................... $ 220,052 $ 272,753 =========== ===========
See Notes to Consolidated Financial Statements 3 The Prudential Insurance Company of America Consolidated Statements of Operations Years Ended December 31, 2001, 2000 and 1999 (in Millions) - --------------------------------------------------------------------------------
2001 2000 1999 ---- ---- ---- REVENUES Premiums ............................................................ $ 12,477 $ 10,181 $ 9,528 Policy charges and fee income ....................................... 1,803 1,639 1,516 Net investment income ............................................... 9,147 9,497 9,367 Realized investment gains (losses), net ............................. (709) (288) 924 Commissions and other income ........................................ 4,451 5,475 5,233 --------- -------- -------- Total revenues .................................................. 27,169 26,504 26,568 --------- -------- -------- BENEFITS AND EXPENSES Policyholders' benefits ............................................. 12,752 10,640 10,226 Interest credited to policyholders' account balances ................ 1,804 1,751 1,811 Dividends to policyholders .......................................... 2,722 2,724 2,571 General and administrative expenses ................................. 9,524 10,043 9,530 Capital markets restructuring ....................................... -- 476 -- Sales practices remedies and costs .................................. -- -- 100 Demutualization costs and expenses: Administrative expenses ......................................... 248 143 75 Consideration to former Canadian branch policyholders ........... 340 -- -- --------- --------- -------- Total benefits and expenses ..................................... 27,390 25,777 24,313 ---------- --------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES .................................................... (221) 727 2,255 --------- --------- -------- Income taxes: Current ......................................................... (921) 434 690 Deferred ........................................................ 863 (28) 352 --------- --------- -------- Total income tax expense (benefit) .......................... (58) 406 1,042 --------- --------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS ............................ (163) 321 1,213 --------- --------- -------- DISCONTINUED OPERATIONS Gain (loss) on disposal of healthcare operations, net of taxes ...... 16 77 (400) --------- --------- -------- NET INCOME (LOSS) ................................................... $ (147) $ 398 $ 813 ========= ========= ========
See Notes to Consolidated Financial Statements 4 The Prudential Insurance Company of America Consolidated Statements of Stockholder's Equity Years Ended December 31, 2001, 2000, and 1999 (in Millions) - --------------------------------------------------------------------------------
Accumulated Other Comprehensive Income (Loss) ---------------------------------------------------- Net Total Foreign Unrealized Accumulated Additional Currency Investment Pension Other Common Paid-in Retained Translation Gains Liability Comprehensive Stock Capital Earnings Adjustments (Losses) Adjustment Income (Loss) ----- ------- -------- ---------- -------- ---------- ------------- Balance, December 31, 1998 .................. $ -- $ -- $ 19,163 $ (31) $ 1,272 $ (9) $ 1,232 Comprehensive income: Net income ................................ -- -- 813 -- -- -- -- 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 .................. -- -- 19,976 (18) (660) (7) (685) Comprehensive income: Net income ................................ -- -- 398 -- -- -- -- Other comprehensive income, net of tax: Change in foreign currency translation adjustments ............... -- -- -- (89) -- -- (89) Change in net unrealized investment gains ................................. -- -- -- -- 1,019 -- 1,019 Additional pension liability adjustment ............................ -- -- -- -- -- (11) (11) Other comprehensive income ................ Total comprehensive income .................. ------ ---------- -------- ---------- ---------- ---------- ------------- Balance, December 31, 2000 .................. -- -- 20,374 (107) 359 (18) 234 Demutualization reclassification of retained earnings ......................... -- 13,666 (13,666) -- -- -- -- Destacking dividend to parent ............... -- -- (5,384) 220 (103) 16 133 Policy credits issued and cash payments to be made to eligible policyholders ...... -- -- (1,129) -- -- -- -- Capital contribution from parent ............ -- 1,050 -- -- -- -- -- Comprehensive income: Net loss before date of demutualization ... -- -- (195) -- -- -- -- Net income after date of demutualization .. -- -- 48 -- -- -- -- Other comprehensive income, net of tax: Change in foreign currency translation adjustments ............... -- -- -- (142) -- -- (142) Change in net unrealized investment gains ................................. -- -- -- -- 903 -- 903 Additional pension liability adjustment ............................ -- -- -- -- -- (29) (29) Other comprehensive income ................ Total comprehensive income .................. ------ ---------- -------- ---------- ---------- ---------- ------------- Balance, December 31, 2001 .................. $ -- $ 14,716 $ 48 $ (29) $ 1,159 $ (31) $ 1,099 ====== ========== ======== ========== ========== ========== ============= Total Stockholder's Equity ------ Balance, December 31, 1998 .................. $ 20,395 Comprehensive income: Net income ................................ 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 .................. 19,291 Comprehensive income: Net income ................................ 398 Other comprehensive income, net of tax: Change in foreign currency translation adjustments ............... (89) Change in net unrealized investment gains ................................. 1,019 Additional pension liability adjustment ............................ (11) ------------- Other comprehensive income ................ 919 ------------- Total comprehensive income .................. 1,317 ------------- Balance, December 31, 2000 .................. 20,608 Demutualization reclassification of retained earnings ......................... -- Destacking dividend to parent ............... (5,251) Policy credits issued and cash payments to be made to eligible policyholders ...... (1,129) Capital contribution from parent ............ 1,050 Comprehensive income: Net loss before date of demutualization ... (195) Net income after date of demutualization .. 48 Other comprehensive income, net of tax: Change in foreign currency translation adjustments ............... (142) Change in net unrealized investment gains ................................. 903 Additional pension liability adjustment ............................ (29) ------------- Other comprehensive income ................ 732 ------------- Total comprehensive income .................. 585 ------------- Balance, December 31, 2001 .................. $ 15,863 =============
See Notes to Consolidated Financial Statements 5 The Prudential Insurance Company of America Consolidated Statements of Cash Flows Years Ended December 31, 2001, 2000 and 1999 (in Millions) - --------------------------------------------------------------------------------
2001 2000 1999 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)........................................................ $ (147) $ 398 $ 813 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Realized investment (gains) losses, net ............................... 709 288 (915) Policy charges and fee income ......................................... (482) (342) (300) Interest credited to policyholders' account balances .................. 1,804 1,751 1,811 Depreciation and amortization, including premiums and discounts ....... 446 740 689 Loss (gain) on disposal of healthcare operations, net of taxes ........ (16) (77) 400 Change in: Deferred policy acquisition costs ................................... (259) (228) (178) Future policy benefits and other insurance liabilities .............. 933 1,473 788 Trading account assets .............................................. 2,268 2,524 (853) Income taxes payable ................................................ (1,308) 214 933 Broker-dealer related receivables/payables .......................... 4,538 (388) (1,898) Securities purchased under agreements to resell ..................... 974 8,549 (3,692) Cash collateral for borrowed securities ............................. (1,407) 3,266 (1,502) Cash collateral for loaned securities ............................... (1,571) 278 3,643 Securities sold but not yet purchased ............................... (2,168) (2,009) 1,197 Securities sold under agreements to repurchase ...................... (2,625) (9,588) 3,112 Due from parent and affiliates ...................................... (139) -- -- Other, net .......................................................... 3,714 1,016 (3,486) -------- -------- -------- Cash flows from operating activities .............................. 5,264 7,865 562 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the sale/maturity of: Fixed maturities, available for sale .................................. 98,150 99,971 122,790 Fixed maturities, held to maturity .................................... 139 3,266 4,957 Equity securities, available for sale ................................. 5,503 3,025 3,190 Commercial loans ...................................................... 5,443 1,632 2,640 Other long-term investments ........................................... 764 2,044 2,169 Payments for the purchase of: Fixed maturities, available for sale .................................. (97,492) (103,086) (124,759) Fixed maturities, held to maturity .................................... (56) (1,544) (2,414) Equity securities, available for sale ................................. (2,557) (2,316) (2,779) Commercial loans ...................................................... (1,521) (1,334) (2,595) Other long-term investments ........................................... (1,307) (1,374) (2,280) Cash acquired from Gibraltar Life. ...................................... 5,912 -- -- Short-term investments .................................................. 179 (2,257) (1,138) Due from parent and affiliates .......................................... (5,248) -- -- -------- -------- -------- Cash flows from (used in) investing activities .................... 7,909 (1,973) (219) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Policyholders' account deposits ......................................... 6,771 6,813 7,667 Policyholders' account withdrawals ...................................... (9,014) (8,186) (10,531) Net increase (decrease) in short-term debt .............................. (6,098) (2,678) 444 Proceeds from the issuance of long-term debt ............................ 1,464 638 1,844 Repayments of long-term debt ............................................ (720) (1,230) (919) Capital contribution from parent ........................................ 1,050 -- -- Cash destacked .......................................................... (7,715) -- -- -------- -------- -------- Cash flows used in financing activities ........................... (14,262) (4,643) (1,495) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................... (1,089) 1,249 (1,152) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................ 7,676 6,427 7,579 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR .................................. $ 6,587 $ 7,676 $ 6,427 ======== ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION Income taxes paid (received) ............................................ $ 466 $ 248 $ (344) -------- -------- -------- Interest paid ........................................................... $ 638 $ 1,040 $ 824 -------- -------- -------- NON-CASH TRANSACTIONS DURING THE YEAR Policy credits issued and demutualization consideration payable to eligible policyholders ............................................. $ 1,469 $ -- $ -- -------- -------- --------
See Notes to Consolidated Financial Statements 6 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1. BUSINESS The Prudential Insurance Company of America ("Prudential Insurance"), together with its subsidiaries (collectively, the "Company"), is a wholly owned subsidiary of Prudential Holdings, LLC ("Prudential Holdings"), which is a wholly owned subsidiary of Prudential Financial, Inc. ("Prudential Financial"). The principal products and services of the Company include individual life insurance, annuities, group insurance and retirement services. Demutualization and Destacking On December 18, 2001 (the "date of demutualization"), the Company converted from a mutual life insurance company to a stock life insurance company and became a direct, wholly owned subsidiary of Prudential Holdings, which became a direct, wholly owned subsidiary of Prudential Financial. The Company had 1,000 shares of common stock authorized, issued and outstanding at December 31, 2001, all of which was owned by Prudential Holdings. On the date of demutualization, policyholder membership interests in Prudential Insurance were extinguished and eligible policyholders collectively received 457.1 million shares of Common Stock of Prudential Financial, the rights to receive cash totaling $3,487 million, including $340 million of demutualization consideration payable to former Canadian branch policyholders pertaining to certain policies Prudential Insurance previously transferred to London Life Insurance Company, and increases to their policy values in the form of policy credits totaling $1,042 million. Of these amounts, the Company recorded a liability to policyholders of $427 million for rights to receive cash, including $340 million of demutualization consideration discussed above, with the remaining amounts being recorded by Prudential Financial, and increases to policy values in the form of policy credits totaling $1,042 million. The demutualization was accounted for as a reorganization. Accordingly, the Company's retained earnings on the date of demutualization, net of the aforementioned cash payments other than those to former Canadian policyholders and policy credits which were charged directly to retained earnings, were reclassified to "Additional paid-in capital." Concurrent with the demutualization, the Company completed a corporate reorganization (the "destacking") whereby various subsidiaries (and certain related assets and liabilities) of the Company were dividended so that they became wholly owned subsidiaries of Prudential Financial rather than of the Company. The subsidiaries distributed by the Company to Prudential Financial included its property and casualty insurance companies, its principal securities brokerage companies, its international insurance companies, its principal asset management operations, its international securities and investments operations, its domestic banking operations and its residential real estate brokerage franchise and relocation services operations. The destacking was reflected as a dividend from the Company to Prudential Financial. The effect of the destacking was to decrease assets by $75,086 million, liabilities by $69,835 million and stockholder's equity by $5,251 million. For financial reporting purposes, the destacking is assumed to have occurred on December 31, 2001. The Company's Consolidated Statements of Financial Position at December 31, 2001 do not include the destacked companies and operations. The net income for the destacked companies and operations for the period December 18, 2001 through December 31, 2001 that is included within the Company's results of operations was not material. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Prudential Insurance, 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 decisions of the entity. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). 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, investment allowances, future policy benefits, disclosure of contingent 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. 7 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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." See Note 17 for a discussion of the Company's reclassificiation of "held to maturity" securities to "available for sale" in connection with the implementation of new accounting standards for derivatives. 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. See the discussion below on realized investment gains and losses for a description of the accounting for impairment adjustments. 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 (loss)." 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 "Accumulated other comprehensive income (loss)." See the discussion below on realized investment gains and losses for a description of the accounting for impairment adjustments. Commercial loans 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 it is probable that amounts due according to the contractual terms of the loan agreement will not all 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. Policy loans are carried at unpaid principal balances. Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized 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 and to value the securities daily. Assets to be repurchased are the same, or substantially the same, as the assets transferred. 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. Substantially all of the Company's securities borrowed transactions are with brokers and dealers, commercial banks and institutional clients. Substantially all of the Company's securities loaned transactions 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 8 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 limited partnerships in which the Company does not exercise control. Other long-term investments also include investments in the Company's own separate accounts, which are carried at estimated fair value, investment real estate and derivatives held for purposes other than trading. See Note 17 for a discussion of accounting policies for derivative instruments. 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, the Company's 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 the Company and other joint venture partners in exchange for and settlement of the respective joint venture interests. These transactions are accounted for as disposals of the Company's joint venture interests and the resulting gains and losses are included in "Realized investment gains (losses), net." 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. 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." Short-term investments consist of highly liquid debt instruments with a maturity of greater than three months and less than twelve months when purchased. These investments are carried at amortized cost, which approximates fair value. Realized investment gains (losses), 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. Impairment adjustments are included in "Realized investment gains (losses), net." Factors considered in evaluating whether a decline in value is other than temporary are: 1) whether the decline is substantial; 2) the Company's ability and intent to retain the investment for a period of time sufficient to allow for an anticipated recovery in value; 3) the duration and extent to which the market value has been less than cost; and 4) the financial condition and near-term prospects of the issuer. Provisions for losses on commercial loans are included in "Realized investment gains (losses), net." Decreases in the carrying value of investment real estate held for disposal or for the production of income are recorded in "Realized investment gains (losses), net." Cash and Cash Equivalents Cash and cash equivalents include cash on hand, amounts due from banks, money market instruments and other debt issues with a maturity of three months or less when purchased. 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 ("DAC") are subject to recoverability 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 (loss)." For participating life insurance, DAC is 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 future investment yield used in estimating expected gross margins was 7.28% at December 31, 2001 and gradually increases to 8.06% for periods after December 31, 2031. The effect of changes in estimated gross margins on unamortized 9 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 and variable life products and certain investment-type products are deferred and amortized over the expected life of the contracts (periods ranging from 7 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. DAC related to non-participating term insurance is amortized over the expected life of the contracts in proportion to premiums. 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 are substantially similar to those of the earlier policies, the DAC is retained with respect to the new policies and amortized over the life of the new policies. For property and casualty insurance contracts, DAC is amortized over the period in which related premiums are earned. Future investment income is considered in determining the recoverability of DAC. The property and casualty insurance operations were destacked on the date of demutualization as discussed in Note 1. For group life and disability 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, property and equipment and receivables resulting from sales of securities that had not yet settled at the balance sheet date. In 2000, other assets also include mortgage securitization inventory and mortgage servicing rights of a subsidiary that was destacked on the date of demutualization. During 2001, the Company sold $1,409 million of commercial mortgage loans and other securities in securitization transactions versus $1,874 million in 2000, through a subsidiary that was destacked on the date of demutualization. The Company did not retain any material ownership interest in the financial assets that were transferred. The Company recognized pretax gains of $42 million in 2001 versus losses of $6 million in 2000 in connection with securitization and related hedging activity which are recorded in "Commissions and other income." 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, demutualization consideration not yet paid to policyholders, and payables resulting from purchases of securities that had not yet settled at the balance sheet date. 10 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 statutory results and past experience of Prudential Insurance, including investment income, net realized investment gains or losses over a number of years, mortality experience and other factors. See Note 9 for further discussion of the impact of policyholders' dividends on earnings. Insurance Revenue and Expense Recognition Premiums from life insurance policies, excluding interest-sensitive life contracts, are recognized when due. Benefits are recorded as an expense when they are incurred. A liability for future policy benefits is recorded when premiums are recognized using the net level premium method. Premiums from non-participating group annuities with life contingencies are recognized when earned. For single premium immediate annuities and structured settlements with life contingencies, premiums are recognized when earned in a constant relationship to the amount of expected future benefit payments. Amounts received as payment for interest-sensitive life contracts, deferred annuities, structured settlements, contracts without life contingencies 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 DAC. For group life and disability 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. The property and casualty insurance operations were destacked on the date of demutualization as discussed in Note 1. Premiums, benefits and expenses are stated net of reinsurance ceded to other companies. Estimated reinsurance recoverables 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)." Commissions and Other Income Commissions and other income principally includes securities and commodities commission revenues and asset management fees which are recognized in the period in which the services are performed. Realized and unrealized gains from trading activities of the Company's securities business are also included in "Commissions and other income." The Company's principal securities brokerage companies, its principal asset management operations and its international securities and investments operations were destacked on the date of demutualization as discussed in Note 1. 11 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. See Note 17 for a discussion of the Company's use of derivative financial instruments and the related accounting and reporting treatment of such instruments. Income Taxes The Company and its domestic subsidiaries file a consolidated federal income tax return with Prudential Financial. 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. Effective for the year ended December 31, 2001, the Company, as a stock company, is no longer subject to the equity tax. The provision for income taxes includes an estimate for changes in the total equity tax to be paid for 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 amount that is expected to be realized. Demutualization Costs and Expenses Demutualization costs and expenses include the cost of engaging external accounting, actuarial, investment banking, legal and other consultants to advise the Company, the New Jersey Department of Banking and Insurance and the New York State Insurance Department in the demutualization process and related matters as well as the cost of printing and postage for communications with policyholders and other administrative costs. Demutualization costs and expenses also include $340 million of demutualization consideration payable to former Canadian branch policyholders pertaining to certain policies that Prudential Insurance transferred to London Life Insurance Company in 1996 in connection with the sale of most of its Canadian branch operations. Under the Plan of Reorganization, these policyholders are required to receive demutualization compensation in the form of cash. New Accounting Pronouncements In September 2000, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of FASB Statement No. 125." The Company has adopted the provisions of SFAS No. 140 relating to transfers and extinguishments of liabilities which are effective for periods occurring after March 31, 2001. The adoption did not have a material effect on the results of operations of the Company. In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the Company account for all business combinations in the scope of the statement using the purchase method. SFAS No. 142 requires that an intangible asset acquired either individually or with a group of other assets shall initially be recognized and measured based on fair value. An intangible asset with a finite life is amortized over its useful life to the reporting entity; an intangible asset with an indefinite useful life, including goodwill, is not amortized. All indefinite lived intangible assets shall be tested for impairment in accordance with the statement. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, goodwill and intangible assets acquired after June 30, 2001 are subject immediately to the nonamortization and amortization provisions of this statement. The Company has ceased the amortization of goodwill as of January 1, 2002 and believes that the effect of implementing the impairment provisions of this statement will not be material to its results of operations and financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 eliminated the requirement that discontinued operations be measured at net realizable value or that entities include losses that have not yet occurred. SFAS No. 144 eliminated the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower 12 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) of book value or fair value less cost to sell. An impairment for assets that are not to be disposed of is recognized only if the carrying amounts of long-lived assets are not recoverable and exceed their fair values. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations and cash flows that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. At the date of adoption of this standard, the impact on results of operations of the Company is not material. 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. The healthcare business is reported as discontinued operations in the accompanying consolidated financial statements. As of December 31, 1998, the measurement date, the Company recorded a loss on disposal of $223 million, net of taxes, which included estimated operating losses of the healthcare business subsequent to December 31, 1998 through the date of the sale, the estimated cost of retained liabilities associated with litigation, as well as estimates of other costs in connection with the disposition of the business. These included facilities closure and systems termination costs, severance and termination benefits, the impact of modifications to pension and benefit plans, payments to Aetna related to the Administrative Services Only business and payments in connection with a medical loss ratio agreement (the "MLR Agreement"). The MLR Agreement provided for payments to Aetna in the event that the medical loss ratios (i.e., incurred medical expense divided by earned premiums) of the sold businesses were less favorable than levels specified in the MLR Agreement for the years 1999 and 2000. The Company retained all liabilities associated with litigation that existed at August 6, 1999 or commenced within two years of that date with respect to claims that were incurred prior to August 6, 1999. The loss on disposal includes management's best estimate of the cost of the ultimate resolution of such litigation as well as the cost of resolving certain matters pertaining to contractual and regulatory requirements. It is possible that additional adjustments to this estimate may be necessary which might be material to future results of operations of a particular quarterly or annual period. The loss on disposal was increased in 1999 by $400 million, net of taxes, primarily as a result of higher than anticipated healthcare operating losses prior to the August 6, 1999 closing date and an increase in the Company's estimated obligation under the MLR Agreement. Actual pretax losses of $370 million during that period exceeded the original estimate of $160 million. In 2000, upon the completion of the period covered by the MLR Agreement and taking into consideration other costs incurred compared with those estimated in 1998 and 1999, the Company reduced the loss on disposal by $77 million, net of taxes. In 2001, upon the final settlement of the MLR Agreement, the Company reduced the loss on disposal by an additional $16 million, net of taxes. Pursuant to a coinsurance agreement with Aetna, the Company was required 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 were 100% coinsured by Aetna. The purpose of the agreement was 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 Insurance. The operation of the business and the attendant risks, except for the existence of the MLR Agreement, 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 $966 million and $827 million, respectively for the year ended December 31, 2001. Premium and benefits ceded for the year ended December 31, 2000 were $1,872 million and $1,418 million, respectively, and for the period from August 6, 1999 through December 31, 1999 were $896 million and $757 million, respectively. Reinsurance recoverable under this agreement, included in "Other assets," was $202 million at December 31, 2001 and $355 million at December 31, 2000. 13 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 4. CAPITAL MARKETS RESTRUCTURING In the fourth quarter of 2000, Prudential Securities Group Inc. exited the lead-managed equity underwriting for corporate issuers and institutional fixed income businesses. Exiting these businesses resulted in staff reductions of approximately 700 positions, 350 of which were eliminated in 2000 and the remainder in 2001. The positions eliminated included investment bankers, traders, analysts and other professional and support staff. Results for 2000 include a pretax charge of $476 million in connection with the restructuring, which is presented as "Capital markets restructuring." The charge includes $213 million for employee related costs, consisting largely of severance and termination benefits. The charge also includes the write-off of $140 million of goodwill previously recorded in connection with investment banking acquisitions. Remaining charges of $123 million consist of lease termination payments and other facility exit costs, including office equipment and leasehold improvements write-downs, and other related costs. Prudential Securities Group Inc. was destacked on the date of demutualization as discussed in Note 1. 5. ACQUISITION OF KYOEI LIFE INSURANCE COMPANY, LTD. In April 2001, the Company completed the acquisition of Kyoei Life Insurance Co., Ltd. ("Kyoei"), a stock life insurance company located in Japan, which has been accounted for as a purchase. Kyoei was renamed Gibraltar Life Insurance Company, Ltd. ("Gibraltar Life") by the Company concurrent with the acquisition. Gibraltar Life provides financial services throughout Japan. Gibraltar Life primarily offers four types of insurance products: individual insurance, including life and indemnity health coverage; individual annuities; group life insurance; and group annuities. It distributes these products through an agency force and large employer groups. Gibraltar Life also has domestic and foreign subsidiaries, including non-insurance businesses, which are not material to its financial position or results of operations. On October 20, 2000, Gibraltar Life filed for reorganization under the Reorganization Law of Japan. The Reorganization Law, similar to Chapter 11 of the U.S. Bankruptcy Code, is intended to provide a mechanism for restructuring financially troubled companies by permitting the adjustment of the interests of creditors, shareholders and other interested parties. On October 20, 2000, the Tokyo District Court issued an order generally freezing Gibraltar Life's assets and appointed an interim Trustee who, on October 23, 2000, was appointed as sole Trustee. On April 2, 2001, the Tokyo District Court issued its official recognition order approving the Reorganization Plan, which was submitted by the Trustee and approved by Gibraltar Life's creditors. The Reorganization Plan became effective immediately upon the issuance of the recognition order, and is binding upon Gibraltar Life, its creditors, including policyholders, its shareholders and other interested parties, whether or not they submitted claims or voted for or against the plan. The Reorganization Plan included the extinguishment of all existing stock for no consideration and the issuance of 1.0 million new shares of common stock. Pursuant to the Reorganization Plan, on April 19, 2001 the Company contributed (Y)50 billion ($395 million) in cash to Gibraltar Life's capital and on April 20, 2001 received 100% of Gibraltar Life's newly issued common stock. The Company also provided (Y)98 billion ($775 million) to Gibraltar Life in the form of a subordinated loan. On April 23, 2001, the Tokyo District Court declared the reorganization proceedings concluded and dismissed the Trustee. For purposes of inclusion in the Company's consolidated financial statements, Gibraltar Life has adopted a November 30 fiscal year end; therefore, the December 31, 2001 consolidated financial statements include Gibraltar Life's results of operations for the period April 2, 2001 through November 30, 2001. The Company's Consolidated Statements of Operations include income from continuing operations before income taxes for Gibraltar Life of $238 million. Gibraltar Life was destacked on the date of demutualization as discussed in Note 1. 14 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 6. INVESTMENTS Fixed Maturities and Equity Securities The following tables provide additional information relating to fixed maturities and equity securities (excluding trading account assets) at December 31,
2001 --------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (In Millions) Fixed maturities available for sale U.S. Treasury securities and obligations of U.S. government corporations and agencies................................... $ 7,715 $ 192 $ 33 $ 7,874 Obligations of U.S. states and their political subdivisions .. 711 24 8 727 Foreign government bonds ..................................... 1,961 199 14 2,146 Corporate securities ......................................... 68,130 2,682 898 69,914 Mortgage-backed securities ................................... 4,787 157 19 4,925 --------- ---------- ---------- Total fixed maturities available for sale .................... $ 83,304 $ 3,254 $ 972 $ 85,586 ========= ========== ========== ========= Equity securities available for sale ......................... $ 992 $ 188 $ 111 $ 1,069 ========= ========== ========== =========
2000 --------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (In Millions) Fixed maturities available for sale U.S. Treasury securities and obligations of U.S. government corporations and agencies .................................. $ 7,068 $ 358 $ 2 $ 7,424 Obligations of U.S. states and their political subdivisions .. 3,012 164 3 3,173 Foreign government bonds ..................................... 4,457 228 38 4,647 Corporate securities ......................................... 62,066 1,205 1,374 61,897 Mortgage-backed securities ................................... 6,512 188 14 6,686 --------- ---------- ----------- --------- Total fixed maturities available for sale .................... $ 83,115 $ 2,143 $ 1,431 $ 83,827 ========= ========== ========== ========= Equity securities available for sale ......................... $ 2,266 $ 239 $ 188 $ 2,317 ========= ========== ========== =========
2000 --------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (In Millions) Fixed maturities held to maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies .................................. $ 7 $ -- $ -- $ 7 Obligations of U.S. states and their political subdivisions .. 40 1 1 40 Foreign government bonds ..................................... 193 13 -- 206 Corporate securities ......................................... 12,208 343 189 12,362 --------- ----------- ---------- --------- Total fixed maturities held to maturity ...................... $ 12,448 $ 357 $ 190 $ 12,615 ========= ========== ========== =========
The amortized cost and estimated fair value of fixed maturities by contractual maturities at December 31, 2001, is shown below:
Available for Sale ---------------------- Estimated Amortized Fair Cost Value ---- ----- (In Millions) Due in one year or less ...................................... $ 10,424 $ 10,577 Due after one year through five years ........................ 20,859 21,364 Due after five years through ten years ....................... 20,152 20,676 Due after ten years .......................................... 27,082 28,044 Mortgage-backed securities ................................... 4,787 4,925 --------- ---------- Total .................................................... $ 83,304 $ 85,586 ========= ==========
15 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 6. INVESTMENTS (continued) 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 2001, 2000 and 1999 were $139 million, $3,266 million, and $4,957 million, respectively. Gross gains of $0 million, $8 million, and $73 million were realized on prepayment of held to maturity fixed maturities during 2001, 2000 and 1999, respectively. Proceeds from the sale of available for sale fixed maturities during 2001, 2000 and 1999 were $84,629 million, $93,653 million and $117,685 million, respectively. Proceeds from the maturity of available for sale fixed maturities during 2001, 2000 and 1999 were $13,521 million, $6,318 million and $5,105 million, respectively. Gross gains of $1,270 million, $909 million and $884 million, and gross losses of $1,136 million, $1,408 million and $1,231 million were realized on sales and prepayments of available for sale fixed maturities during 2001, 2000 and 1999, respectively. Realized losses included $356 million in 2001 resulting from the sale of substantially all of the Company's Enron Corp. holdings. Write-downs for impairments which were deemed to be other than temporary for fixed maturities were $777 million, $540 million and $266 million, and for equity securities were $238 million, $34 million and $205 million for the years ended 2001, 2000 and 1999, respectively. Due to the adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001, the aggregate amortized cost of the securities transferred to the "available for sale" portfolio was $11,937 million. Unrealized investment gains of $94 million, net of tax, were recorded in "Accumulated other comprehensive income (loss)" at the time of the transfer in 2001. Commercial Loans The Company's commercial loans were as follows at December 31,
2001 2000 ----------------------------------------------------- Amount % of Amount % of (In Millions) Total (In Millions) Total ------------- ------- ------------- ------- Collateralized loans by property type Office buildings ........................................ $ 3,548 23.5% $ 3,727 23.1% Retail stores ........................................... 2,054 13.6% 2,465 15.3% Residential properties .................................. 158 1.0% 713 4.4% Apartment complexes ..................................... 4,203 27.8% 4,455 27.6% Industrial buildings .................................... 2,685 17.8% 2,331 14.4% Agricultural properties ................................. 1,908 12.6% 1,856 11.5% Other ................................................... 555 3.7% 597 3.7% ------- ------ ------- ------ Subtotal of collateralized loans .................... 15,111 100.0% 16,144 100.0% ====== ====== Valuation allowance ..................................... (202) (225) ------- ------- Total collateralized loans .............................. $14,909 $15,919 ======= =======
The commercial loans are geographically dispersed throughout the United States and Canada with the largest concentrations in California (27.0%) and New York (10.2%) at December 31, 2001. Activity in the allowance for losses for commercial loans, for the years ended December 31, is summarized as follows:
2001 2000 1999 ---- ---- ---- (In Millions) Allowance for losses, beginning of year ................. $ 225 $ 221 $ 427 Allowance on loans acquired from Gibraltar Life ......... 739 -- -- Addition (release) of allowance for losses .............. (24) 17 (201) Charge-offs, net of recoveries .......................... (412) (13) (5) Change in foreign exchange .............................. 7 -- -- Destacking .............................................. (333) -- -- ----- ----- ----- Allowance for losses, end of year ....................... $ 202 $ 225 $ 221 ====== ====== =====
16 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 6. INVESTMENTS (continued) Impaired commercial loans identified in management's specific review of probable loan losses and the related allowance for losses at December 31, are as follows:
2001 2000 ---- ---- (In Millions) Impaired commercial loans with allowance for losses ........ $ 155 $ 192 Impaired commercial loans with no allowance for losses ..... 222 247 Allowance for losses, end of year .......................... (36) (35) ----- ----- Net carrying value of impaired commercial loans ............ $ 341 $ 404 ====== =====
Impaired commercial 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 $407 million, $565 million and $884 million for 2001, 2000 and 1999, respectively. Net investment income recognized on these loans totaled $32 million, $37 million and $55 million for the years ended December 31, 2001, 2000 and 1999, respectively. Other Long-term Investments The Company's "Other long-term investments" include investments in joint ventures and limited partnerships of $2,091 million and $2,391 million at December 31, 2001 and 2000, respectively. These investments include $957 million and $1,363 million in real estate related interests and $1,134 million and $1,028 million in non-real estate related interests at December 31, 2001 and 2000, respectively. The Company's share of net income from such entities was $84 million, $187 million and $217 million for the years ended 2001, 2000 and 1999, respectively, and is reported in "Net investment income." Summarized combined financial information for joint ventures and limited partnership interests accounted for under the equity method, in which the Company has an investment of $10 million or greater and an equity interest of 10% or greater, is as follows:
At December 31, --------------- 2001 2000 ---- ---- (In Millions) STATEMENTS OF FINANCIAL POSITION Investments in real estate ..................................... $ 3,603 $ 3,617 Investments in securities ...................................... 1,694 1,899 Cash and cash equivalents ...................................... 87 111 Other assets ................................................... 208 173 ------- ------- Total assets ................................................... $ 5,592 $ 5,800 ======= ======= Borrowed funds-third party ..................................... $ 598 $ 598 Borrowed funds-Prudential Financial ............................ 2 -- Other liabilities .............................................. 1,399 1,450 ------- ------- Total liabilities .............................................. 1,999 2,048 Partners' capital .............................................. 3,593 3,752 ------- ------- Total liabilities and partners' capital ........................ $ 5,592 $ 5,800 ======= ======= Equity in partners' capital included above ..................... $ 971 $ 1,030 Equity in limited partnership interests not included above ..... 1,120 1,361 ------- ------- Carrying value ................................................. $ 2,091 $ 2,391 ======= =======
For the years ended December 31, ------------ 2001 2000 1999 ---- ---- ---- (In Millions) STATEMENTS OF OPERATIONS Income of real estate joint ventures ........................... $ 245 $ 257 $ 102 Income of other limited partnership interests .................. 142 256 530 Interest expense-third party ................................... (31) (31) (7) Other expenses ................................................. (251) (226) (121) ------- ------- ----- Net earnings ................................................... $ 105 $ 256 $ 504 ======= ======= ===== Equity in net earnings included above .......................... $ 37 $ 79 $ 122 Equity in net earnings of limited partnership interests not included above ............................................... 47 108 95 ------- ------- ----- Total equity in net earnings ................................... $ 84 $ 187 $ 217 ======= ======= =====
17 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 6. INVESTMENTS (continued) "Other long-term investments" also includes investments in the Company's separate accounts of $975 million and $1,077 million, investment real estate of $148 million and $239 million which is held through direct ownership and other miscellaneous investments of $610 million and $752 million at December 31, 2001 and 2000, respectively. Of the Company's real estate, $146 million and $181 million consist of commercial and agricultural assets held for disposal at December 31, 2001 and 2000, respectively. Impairment losses were $7 million, $0 million and $3 million for the years ended December 31, 2001, 2000 and 1999, respectively, and are included in "Realized investment gains (losses), net." Net Investment Income Net investment income for the years ended December 31, was from the following sources:
2001 2000 1999 ---- ---- ---- (In Millions) Fixed maturities available for sale .............. $ 6,826 $ 5,938 $ 5,602 Fixed maturities held to maturity ................ 12 1,028 1,217 Trading account assets ........................... 294 734 622 Equity securities available for sale ............. 45 67 63 Commercial loans ................................. 1,432 1,370 1,401 Policy loans ..................................... 522 478 448 Securities purchased under agreements to resell .. 11 28 25 Broker-dealer related receivables ................ 513 1,222 976 Short-term investments and cash equivalents ...... 461 683 490 Other investment income .......................... 419 479 455 ------- ------- ------- Gross investment income .......................... 10,535 12,027 11,299 Less investment expenses ......................... (1,388) (2,530) (1,881) ------- ------- ------- Subtotal .................................... 9,147 9,497 9,418 Less amount relating to discontinued operations .. -- -- (51) ------- ------- ------- Net investment income ............................ $ 9,147 $ 9,497 $ 9,367 ======= ======= =======
Based on the carrying value, assets categorized as "non-income producing" at December 31, 2001 included in fixed maturities, equity securities, commercial loans and other long-term investments totaled $47 million, $6 million, $19 million and $33 million, respectively. Realized Investment Gains (Losses), Net Realized investment gains (losses), net, for the years ended December 31, were from the following sources:
2001 2000 1999 ---- ---- ---- (In Millions) Fixed maturities ................................. $ (639) $(1,066) $ (557) Equity securities available for sale ............. (245) 450 223 Commercial loans ................................. 1 (5) 209 Investment real estate ........................... 40 49 106 Joint ventures and limited partnerships .......... -- 124 656 Derivatives ...................................... 120 165 305 Other ............................................ 14 (5) (27) ------- ------- ------- Subtotal .................................... (709) (288) 915 Less amount related to discontinued operations ... -- -- 9 ------- ------- ------- Realized investment gains (losses), net .......... $ (709) $ (288) $ 924 ======= ======= =======
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, "Investments," amounting to $0 million, $91 million and $114 million for the years ended 2001, 2000 and 1999, respectively. 18 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 6. INVESTMENTS (continued) Net Unrealized Investment Gains (Losses) Net unrealized investment gains and losses 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 (loss)." Changes in these amounts include reclassification adjustments to exclude from "Other comprehensive income (loss)" those items that are included as part of "Net income" for a period that had been part of "Other comprehensive income (loss)" in earlier periods. The amounts for the years ended December 31, are as follows:
Impact of unrealized investment gains (losses) on: ---------------------------------------------------------------- Accumulated other comprehensive Deferred income (loss) Unrealized Deferred income related to net gains policy Future tax unrealized (losses) on acquisition policy (liability) investment investments costs benefits benefit gains (losses) ----------- ----- -------- ------- -------------- (In Millions) Balance, December 31, 1998 .............................. $ 3,337 $ (260) $(1,095) $ (710) $ 1,272 Net investment gains (losses) on investments arising during the period ..................................... (5,089) -- -- 1,845 (3,244) Reclassification adjustment for (gains) losses included in net income ......................................... 404 -- -- (146) 258 Impact of net unrealized investment (gains) losses on deferred policy acquisition costs ..................... -- 566 -- (213) 353 Impact of net unrealized investment (gains) losses on future policy benefits ................................ -- -- 1,092 (391) 701 ------- ------- ------- ------ ------- Balance, December 31, 1999 .............................. (1,348) 306 (3) 385 (660) Net investment gains (losses) on investments arising during the period ..................................... 1,458 -- -- (540) 918 Reclassification adjustment for (gains) losses included in net income ......................................... 621 -- -- (230) 391 Impact of net unrealized investment (gains) losses on deferred policy acquisition costs ..................... -- (356) -- 132 (224) Impact of net unrealized investment (gains) losses on future policy benefits ................................ -- -- (101) 35 (66) ------- ------- ------- ------ ------- Balance, December 31, 2000 .............................. 731 (50) (104) (218) 359 Net investment gains (losses) on investments arising during the period ..................................... 796 -- -- (294) 502 Reclassification adjustment for (gains) losses included in net income ......................................... 884 -- -- (327) 557 Impact of net unrealized investment (gains) losses on deferred policy acquisition costs ..................... -- (270) -- 97 (173) Impact of net unrealized investment (gains) losses on future policy benefits ................................ -- -- 27 (10) 17 Destacking dividend to parent ........................... (156) 3 -- 50 (103) ------- ------- ------- ------ ------- Balance, December 31, 2001 .............................. $ 2,255 $ (317) $ (77) $ (702) $ 1,159 ======= ======= ======= ====== =======
The table below presents unrealized gains (losses) on investments by asset class:
At December 31, --------------- 2001 2000 1999 ---- ---- ---- (In Millions) Fixed maturities ........................................ $2,282 $ 712 $(2,118) Equity securities ....................................... 77 51 733 Other long-term investments ............................. (104) (32) 37 ------ ------- ------- Unrealized gains (losses) on investments ................ $2,255 $ 731 $(1,348) ====== ======= =======
19 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 6. INVESTMENTS (continued) Securities Pledged, Restricted Assets and Special Deposits The Company pledges investment securities it owns to unaffiliated parties through certain transactions, including securities lending, securities sold under agreement to repurchase and futures contracts. At December 31, the carrying value of investments pledged to third parties as reported in the Consolidated Statements of Financial Position included the following: 2001 2000 ---- ---- (In Millions) Fixed maturities available for sale .............. $ 11,009 $ 20,080 Trading account assets ........................... 269 5,796 Separate account assets .......................... 2,659 2,558 -------- -------- Total securities pledged ......................... $ 13,937 $ 28,434 ======== ======== In the normal course of its business activities, the Company accepts collateral that can be sold or repledged. The primary sources of this collateral are securities in customer accounts, securities purchased under agreements to resell and securities borrowed transactions. At December 31, 2001, the fair value of this collateral was approximately $5,162 million versus $19,329 million in 2000 of which $4,932 million versus $13,099 million in 2000 had either been sold or repledged. Assets of $237 million and $2,538 million at December 31, 2001 and 2000, respectively, were on deposit with governmental authorities or trustees as required by certain insurance laws. Additionally, assets valued at $960 million and $1,227 million at December 31, 2001 and 2000, respectively, were held in voluntary trusts. Of these amounts, $244 million and $470 million at December 31, 2001 and 2000, respectively, related to the multi-state policyholder settlement described in Note 18. The remainder relates to trusts established to fund guaranteed dividends to certain policyholders and to fund certain employee benefits. Assets valued at $140 million and $48 million at December 31, 2001 and 2000, respectively, were pledged as collateral for bank loans and other financing agreements. Letter stock or other securities restricted as to sale amounted to $183 million and $779 million at December 31, 2001 and 2000, respectively. Restricted cash and securities of $0 million and $2,196 million at December 31, 2001 and 2000, respectively, were included in "Other assets." The restricted cash represents funds deposited by clients and funds accruing to clients as a result of trades or contracts. 7. 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:
2001 2000 1999 ---- ---- ---- (In Millions) Balance, beginning of year ........................ $ 7,063 $ 7,324 $ 6,462 Capitalization of commissions, sales and issue expenses ......................................... 1,385 1,324 1,333 Amortization ...................................... (1,126) (1,096) (1,155) Change in unrealized investment gains and losses .. (270) (356) 566 Foreign currency translation ...................... (184) (154) 118 Acquisition of subsidiary ......................... -- 21 -- Destacking ........................................ (1,746) -- -- -------- -------- -------- Balance, end of year .............................. $ 5,122 $ 7,063 $ 7,324 ======== ======== ========
8. POLICYHOLDERS' LIABILITIES Future Policy Benefits Future policy benefits at December 31, are as follows: 2001 2000 ---- ---- (In Millions) Life insurance .................................... $ 50,886 $ 53,453 Annuities ......................................... 13,046 13,398 Other contract liabilities ........................ 396 1,008 -------- -------- Total future policy benefits ...................... $ 64,328 $ 67,859 ======== ======== Participating insurance represented 37% and 40% of domestic individual life insurance in force at December 31, 2001 and 2000, respectively, and 92%, 94% and 95% of domestic individual life insurance premiums for 2001, 2000 and 1999, respectively. 20 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 8. POLICYHOLDERS' LIABILITIES (continued) Life insurance liabilities include reserves for death and endowment policy benefits, terminal dividends and certain health benefits. Annuity liabilities include reserves for life contingent 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 (excluding consideration of premium deficiency reserves):
Product Mortality Interest Rate Estimation Method - ---------------------------- -------------------------------------- ------------------- --------------------------------- Life insurance ......... For Closed Block policies, rates 2.5% to 11.3% Net level premium guaranteed in calculating cash surrender values; for remaining policies, based on company experience or standard industry tables established at policy issue Individual annuities ... 1971 IAM, 1983 IAM and A2000 3.5% to 13.4% Present value of expected future individual annuity mortality tables payments based on historical with certain modifications based on experience company experience established at policy issue Group annuities ........ 1951 and 1983 Group Annuity Mortality 4.0% to 17.3% Present value of expected future Tables with certain modifications payments based on historical based on company experience experience established at policy issue Other contract 2.5% to 11.5% Present value of expected future liabilities ............ payments based on historical experience
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 policy 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; structured settlements and single premium immediate annuities with life contingencies; and for certain individual health policies. Liabilities of $1,867 million and $2,002 million are included in "Future policy benefits" with respect to these deficiencies at December 31, 2001 and 2000, respectively. Policyholders' Account Balances Policyholders' account balances at December 31, are as follows: 2001 2000 ---- ---- (In Millions) Individual annuities ............................. $ 5,243 $ 5,097 Group annuities .................................. 1,900 2,022 Guaranteed investment contracts and guaranteed interest accounts ............................... 13,031 12,852 Interest-sensitive life contracts ................ 3,788 3,809 Dividend accumulations and other ................. 9,563 8,942 -------- -------- Policyholders' account balances .................. $ 33,525 $ 32,722 ======== ======== 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. 21 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 8. POLICYHOLDERS' LIABILITIES (continued) Certain contract provisions that determine the policyholders' account balances are as follows:
Product Interest Rate Withdrawal/Surrender Charges - ----------------------------------------- ---------------------- -------------------------------------------- Individual annuities ................ 2.5% to 16.0% 0% to 7% for up to 9 years Group annuities ..................... 2.0% to 13.9% Contractually limited or subject to market value adjustment Guaranteed investment contracts and guaranteed interest accounts ...... 3.0% to 15.4% Generally, subject to market value withdrawal provisions for any funds withdrawn other than for benefit responsive and contractual payments Interest-sensitive life contracts ... 3.0% to 6.8% Various up to 10 years Dividend accumulations and other .... 2.0% to 11.5% Generally, not subject to withdrawal/surrender charges, except for certain contracts where withdrawal/surrender is limited or subject to a market value adjustment
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 wind-down commercial lines business, primarily environmental and asbestos-related claims, and accident and health insurance at December 31:
2001 2000 1999 --------------------- --------------------- --------------------- Accident Property Accident Property Accident Property and and and and and and Health Casualty Health Casualty Health Casualty ------ -------- ------ -------- ------ -------- (In Millions) Balance at January 1 ................. $ 1,701 $ 1,848 $ 1,735 $ 2,409 $ 2,307 $ 2,716 Less reinsurance recoverables, net ... 246 608 378 451 50 533 ------- ------- ------- ------- ------- ------- Net balance at January 1 ............. 1,455 1,240 1,357 1,958 2,257 2,183 ------- ------- ------- ------- ------- ------- Incurred related to: Current year ....................... 632 1,440 537 1,271 4,218 1,249 Prior years ........................ (45) (113) (22) (150) (73) (54) ------- ------- ------- ------- ------- ------- Total incurred ....................... 587 1,327 515 1,121 4,145 1,195 ------- ------- ------- ------- ------- ------- Paid related to: Current year ....................... 219 932 152 842 3,206 700 Prior years ........................ 312 553 265 634 874 720 ------- ------- ------- ------- ------- ------- Total paid ........................... 531 1,485 417 1,476 4,080 1,420 ------- ------- ------- ------- ------- ------- Acquisitions (dispositions) (a) ...... 15 -- -- (363) (965) -- Destacking ........................... (8) (1,082) -- -- -- -- ------- ------- ------- ------- ------- ------- Net balance at December 31 ........... 1,518 -- 1,455 1,240 1,357 1,958 Plus reinsurance recoverables, net ... 129 -- 246 608 378 451 ------- ------- ------- ------- ------- ------- Balance at December 31 ............... $ 1,647 $ -- $ 1,701 $ 1,848 $ 1,735 $ 2,409 ======= ======= ======= ======= ======= =======
(a) The 2001 accident and health increase relates to the acquisition of Gibraltar Life which was subsequently destacked. The reduction in the 2000 property and casualty balance is primarily attributable to the sale of Gibraltar Casualty Company; the 1999 accident and health reduction relates to the sale of the Company's healthcare business. The accident and health reinsurance recoverable balance at December 31, 2001, 2000 and 1999 includes $117 million, $239 million and $371 million, respectively, attributable to the Company's discontinued healthcare business. The accident and health balance at January 1, 1999 includes $1,026 million attributable to the Company's discontinued healthcare business. 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 Statements 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%. 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 22 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 8. POLICYHOLDERS' LIABILITIES (continued) expenses for accident and health related to prior years were primarily due to improved long-term disability claim termination experience. 9. CLOSED BLOCK Effective with demutualization, the Company adopted the American Institute of Certified Public Accountants Statement of Position ("SOP") 00-3, "Accounting by Insurance Enterprises for Demutualizations and Formations of Mutual Insurance Holding Companies and For Certain Long-Duration Participating Contracts." SOP 00-3 addresses financial statement presentation and accounting for certain participating policies after demutualization, accounting for demutualization expenses, and accounting for retained earnings and other comprehensive income at the date of demutualization. On the date of demutualization, Prudential Insurance established a Closed Block for certain individual life insurance policies and annuities issued by Prudential Insurance in the United States. The Company established a separate closed block for participating individual life insurance policies issued by the Canadian branch of Prudential Insurance. Because of the substantially smaller number of outstanding Canadian policies, this separate closed block is insignificant in size and is not included in the information presented below. The policies included in the Closed Block are specified individual life insurance policies and individual annuity contracts that were in force on the effective date of the Plan of Reorganization and for which Prudential Insurance is currently paying or expects to pay experience-based policy dividends. Assets have been allocated to the Closed Block in an amount that has been determined to produce cash flows which, together with revenues from policies included in the Closed Block, are expected to be sufficient to support obligations and liabilities relating to these policies, including provision for payment of benefits, certain expenses, and taxes and to provide for continuation of the policyholder dividend scales in effect in 2000, assuming experience underlying such scales continues. To the extent that, over time, cash flows from the assets allocated to the Closed Block and claims and other experience related to the Closed Block are, in the aggregate, more or less favorable than what was assumed when the Closed Block was established, total dividends paid to Closed Block policyholders in the future may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect in 2000 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to Closed Block policyholders and will not be available to stockholders. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside of the Closed Block. The Closed Block will continue in effect as long as any policy in the Closed Block remains in force unless, with the consent of the New Jersey insurance regulator, it is terminated earlier. The recorded assets and liabilities were allocated to the Closed Block at their historical carrying amounts. The excess of Closed Block Liabilities over Closed Block Assets at the effective date of the demutualization (adjusted to eliminate the impact of related amounts in "Accumulated other comprehensive income (loss)") represents the estimated maximum future earnings from the Closed Block expected to result from operations attributed to the Closed Block after income taxes. As required by SOP 00-3, the Company developed an actuarial calculation of the timing of such maximum future earnings. If actual cumulative earnings in any given period are greater than the expected cumulative earnings, only the expected earnings will be recognized in income. Any excess of actual cumulative earnings over expected cumulative earnings will represent undistributed accumulated earnings attributable to policyholders and will be recorded as a policyholder dividend obligation to be paid to Closed Block policyholders as an additional policyholder dividend unless otherwise offset by future Closed Block performance that is less favorable than originally expected. As of December 31, 2001, no such additional policyholder dividends were recorded. If over such period, the actual cumulative earnings of the Closed Block are less than the expected cumulative earnings of the Closed Block, the Company will recognize only the actual earnings in income. However, the Company may change policyholder dividend scales in the future, which would be intended to increase future actual earnings until the actual cumulative earnings equal the expected cumulative earnings. On November 13, 2001, the Company's Board of Directors acted to reduce dividends, effective January 1, 2002, on Closed Block policies to reflect unfavorable investment experience that has emerged since July 1, 2000, the date the Closed Block was originally funded. This action resulted in a $104 million reduction of the liability for policyholder dividends recognized in the year ended December 31, 2001. 23 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 9. CLOSED BLOCK (continued) Closed Block Liabilities and Assets designated to the Closed Block at December 31, 2001, as well as maximum future earnings to be recognized from Closed Block Liabilities and Closed Block Assets, are as follows:
Closed Block Liabilities and Closed Block Assets December 31, 2001 ----------------- (In Millions) Closed Block Liabilities Future policy benefits ................................... $ 47,239 Policyholders' dividends payable ......................... 1,171 Policyholders' account balances .......................... 5,389 Other Closed Block liabilities ........................... 4,603 -------- Total Closed Block Liabilities ...................... $ 58,402 -------- Closed Block Assets Total investments ........................................ $ 52,492 Cash ..................................................... 1,810 Accrued investment income ................................ 716 Other Closed Block assets ................................ 635 -------- Total Closed Block Assets ........................... $ 55,653 -------- Excess of reported Closed Block Liabilities over Closed Block Assets ............................................... $ 2,749 Portion of above representing other comprehensive income ..... 792 -------- Maximum future earnings to be recognized from Closed Block Assets and Closed Block Liabilities .................. $ 3,541 ========
Closed Block revenues and benefits and expenses for the period from the date of demutualization through December 31, 2001 were as follows:
December 18, 2001 through Closed Block Revenues and Benefits and Expenses December 31, 2001 ----------------- (In Millions) Revenues Premiums ................................................... $ 293 Net investment income ...................................... 129 Realized investment gains, net ............................. 24 Other income ............................................... 3 -------- Total Closed Block revenues .............................. 449 -------- Benefits and Expenses Policyholders' benefits .................................... 288 Interest credited to policyholders' account balances ....... 5 Dividends to policyholders ................................. 100 General and administrative expense charge .................. 33 -------- Total Closed Block benefits and expenses ................. 426 -------- Closed Block benefits and expenses, net of Closed Block revenues before income taxes ............................. 23 -------- Income taxes ................................................. 2 -------- Closed Block benefits and expenses, net of Closed Block revenues and income taxes .................................. $ 21 ========
10. 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 and 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. 24 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 10. REINSURANCE (continued) 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: 2001 2000 1999 ---- ---- ---- (In Millions) Direct premiums ..................... $ 13,066 $ 10,686 $ 10,121 Reinsurance assumed ............... 95 86 66 Reinsurance ceded ................. (684) (591) (659) -------- -------- -------- Premiums ............................ $ 12,477 $ 10,181 $ 9,528 ======== ======== ======== Policyholders' benefits ceded ....... $ 845 $ 642 $ 483 ======== ======== ======== Reinsurance recoverables, included in "Other assets" at December 31, were as follows: 2001 2000 ---- ---- (In Millions) Life insurance ...................... $ 712 $ 674 Property and casualty ............... -- 628 Other reinsurance ................... 82 76 -------- -------- Total reinsurance recoverable ....... $ 794 $ 1,378 ======== ======== Three major reinsurance companies account for approximately 67% of the reinsurance recoverable at December 31, 2001. 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. Reinsurance recoverables, included in "Due from parent and affiliates" and reinsurance payables included in "Due to parent and affiliates" at December 31, 2001, were $309 million and $128 million, respectively. Reinsurance recoverables and payables are due from/to the following companies: Prudential Life Insurance Company of Taiwan Inc., The Prudential Life Insurance Company of Korea, Ltd., The Prudential Life Insurance Company, Ltd., Prumerica Life S.P.A. and The Prumerica Life Insurance Company, Inc. 11. SHORT-TERM AND LONG-TERM DEBT Short-term Debt Short-term debt at December 31, is as follows: 2001 2000 ---- ---- (In Millions) Commercial paper .................... $ 3,022 $ 7,686 Notes payable ....................... 61 2,728 Current portion of long-term debt ... 754 717 -------- -------- Total short-term debt ............... $ 3,837 $ 11,131 ======== ======== The weighted average interest rate on outstanding short-term debt, excluding the current portion of long-term debt, was approximately 4.6% and 6.4% at December 31, 2001 and 2000, respectively. At December 31, 2001, the Company had $4,075 million in committed lines of credit from numerous financial institutions, all of which 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. At December 31, 2001 and 2000, a portion of commercial paper borrowings were supported by $4,000 million and $3,500 million of the Company's existing lines of credit, respectively. At December 31, 2001 and 2000, the weighted average maturity of commercial paper outstanding was 21 and 25 days, respectively. 25 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 11. SHORT-TERM AND LONG-TERM DEBT (continued) Long-term Debt Long-term debt at December 31, is as follows:
Maturity Description Dates Rate 2001 2000 ----------- ----- ---- ---- ---- (In Millions) Fixed rate notes U.S. Dollar ....................... 2002-2023 5.97%-8.17% $1,066 $ 758 Floating rate notes ("FRNs") U.S. Dollar ....................... 2002-2004 (a) 591 640 Canadian Dollar ................... 2003 (b) 80 96 Great Britain Pound ............... 2002 (c) -- 20 Surplus notes ....................... 2003-2025 6.875%-8.30% 989 988 ------ ------ Total long-term debt ................ $2,726 $2,502 ====== ======
(a) The interest rates on the U.S. dollar denominated FRNs are generally based on rates such as LIBOR, Constant Maturity Treasury and the Federal Funds Rate. Interest rates on the U.S. dollar denominated FRNs ranged from 2.07% to 6.99% in 2001 and 5.99% to 7.08% in 2000. The 2000 interest rate range excludes a $29 million S&P 500 index linked note which had an interest rate range of 0.10% to 0.46%. (b) The interest rate on the Canadian Dollar denominated FRN is based on the Canadian Bankers Acceptances Rate (CADBA) less 0.30%. This note has a contractual floor of 6.00% with a contractual cap of 9.125%. This rate ranged from 6.00% to 6.84% and 6.12% to 6.84% in 2001 and 2000, respectively. (c) The interest rate on the Great Britain Pound denominated FRN was based on the three month Sterling LIBOR plus 0.10% per year. This rate ranged from 6.22% to 6.89% in 2000. Several long-term debt agreements have restrictive covenants related to the total amount of debt, net tangible assets and other matters. At December 31, 2001 and 2000, the Company was in compliance with all debt covenants. Payment of interest and principal on the surplus notes issued after 1993, of which $690 million and $689 million were outstanding at December 31, 2001 and 2000, respectively, may be made only with the prior approval of the Commissioner of Banking and Insurance of the State of New Jersey ("the Commissioner"). The Commissioner could prohibit the payment of the interest and principal on the surplus notes if certain statutory capital requirements are not met. At December 31, 2001, the Company has met these statutory capital requirements. 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 contractual formulas and may be subject to certain minimum or maximum rates. See Note 17 for additional information on the Company's use of derivative instruments. Interest expense for short-term and long-term debt was $641 million, $1,056 million, and $863 million, for the years ended December 31, 2001, 2000, and 1999, respectively. Securities business related interest expense of $287 million, $456 million and $312 million for the years ended December 31, 2001, 2000 and 1999, respectively, is included in "Net investment income." 12. 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 as well as employees of certain destacked subsidiaries. The Company also has several non-funded non-contributory defined benefit plans covering certain executives. For some employees, benefits are based on final average earnings and length of service, while other employees are based on an account balance that takes into consideration age, service and salary during their career. The Company's funding policy is to contribute annually an amount necessary to satisfy the Internal Revenue Code contribution guidelines. The Company provides certain life insurance and health care benefits ("other postretirement benefits") for retired employees (including those of certain destacked subsidiaries), their beneficiaries and covered dependents. The health care plan is contributory; the life insurance plan is non-contributory. Employees generally become eligible to receive other postretirement 26 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 12. EMPLOYEE BENEFIT PLANS (continued) 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:
Other Postretirement Pension Benefits Benefits ---------------- -------- 2001 2000 2001 2000 ---- ---- ---- ---- (In Millions) Change in benefit obligation Benefit obligation at the beginning of period .......... $(5,461) $(5,430) $(1,996) $(1,941) Service cost ........................................... (167) (140) (18) (29) Interest cost .......................................... (431) (427) (150) (151) Plan participants' contributions ....................... -- -- (8) (7) Amendments ............................................. 6 112 -- 221 Acquisitions ........................................... (765) -- -- -- Variable annuity purchase .............................. 232 -- -- -- Actuarial gains (losses) ............................... (510) 34 (77) (262) Contractual termination benefits ....................... (1) (17) -- -- Benefits paid .......................................... 462 407 152 172 Foreign currency changes ............................... 28 -- 1 1 Destacking ............................................. 756 -- 69 -- ------- ------- ------- ------- Benefit obligation at end of period .................... $(5,851) $(5,461) $(2,027) $(1,996) ======= ======= ======= ======= Change in plan assets Fair value of plan assets at beginning of period ....... $10,356 $ 9,468 $ 1,560 $ 1,548 Actual return on plan assets ........................... (1,114) 1,270 (82) 170 Variable annuity purchase .............................. (232) -- -- -- Employer contributions ................................. 81 25 9 7 Plan participants' contributions ....................... -- -- 8 7 Benefits paid .......................................... (462) (407) (152) (172) Destacking ............................................. (1) -- -- -- ------- ------- ------- ------- Fair value of plan assets at end of period ............. $ 8,628 $10,356 $ 1,343 $ 1,560 ======= ======= ======= ======= Funded status Funded status at end of period ......................... $ 2,777 $ 4,895 $ (684) $ (436) Unrecognized transition (asset) liability .............. (236) (342) 159 207 Unrecognized prior service costs ....................... 42 65 1 1 Unrecognized actuarial net gain ........................ (351) (2,956) (169) (498) Effects of fourth quarter activity ..................... 6 9 1 2 ------- ------- ------- ------- Net amount recognized .................................. $ 2,238 $ 1,671 $ (692) $ (724) ======= ======= ======= ======= Amounts recognized in the Statements of Financial Position Prepaid benefit cost ................................... $ 2,570 $ 2,022 $ -- $ -- Accrued benefit liability .............................. (379) (382) (692) (724) Intangible asset ....................................... 2 7 -- -- Accumulated other comprehensive income ................. 45 24 -- -- ------- ------- ------- ------- Net amount recognized .................................. $ 2,238 $ 1,671 $ (692) $ (724) ======= ======= ======= =======
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 $461 million, $379 million and $0 million, respectively, at September 30, 2001 and $464 million, $384 million and $1 million, respectively, at September 30, 2000. Pension plan assets consist primarily of equity securities, bonds, real estate and short-term investments, of which $6,867 million and $7,381 million are included in Separate Account assets and liabilities at September 30, 2001 and 2000, respectively. In 2001, the pension plan purchased a variable annuity contract for $232 million from Prudential Insurance. The approximate future annual benefit payment for the variable annuity contract was $14 million. 27 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 12. EMPLOYEE BENEFIT PLANS (continued) The benefit obligation for pensions decreased by $6 million in the year 2001 for miscellaneous changes related to the cash balance formula. The benefit obligation for pensions decreased by a net $112 million in the year 2000 for the effect of a Cost of Living Adjustment ("COLA") and the introduction of the cash balance formula of ($134) million and $246 million, respectively. The COLA was effective as of July 1, 2000 and increased benefits, subject to a maximum, to retirees based upon their year of retirement. The introduction of the cash balance formula was a feature of the substantive plan as of the measurement date and is effective January 1, 2001 for new employees and January 1, 2002 for existing employees. Other postretirement benefit plan assets consist of group and individual life insurance policies, common stocks, corporate debt securities, U.S. government securities, short-term investments and tax-exempt municipal debt. Plan assets include $395 million and $463 million of Company insurance policies at September 30, 2001 and 2000, respectively. The benefit obligation for other postretirement benefits was not affected by amendments in 2001. The benefit obligation for other postretirement benefits decreased by $221 million in the year 2000 for changes in the substantive plan made to medical, dental and life benefits for individuals retiring on or after January 1, 2001. The significant cost reduction features relate to the medical and life benefits. The Company adopted a cap that limits its long-term cost commitment to retiree medical coverage. The cap is defined as two times the estimated company contribution toward the cost of coverage per retiree in 2000. The new life insurance plan provides a reduced benefit of $10,000 of life insurance to retirees. The pension benefits were 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 in the table below. 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:
Other Pension Benefits Postretirement Benefits ---------------- ----------------------- 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- (In Millions) Components of net periodic (benefit) cost Service cost ...................................... $ 167 $ 140 $ 193 $ 18 $ 29 $ 39 Interest cost ..................................... 431 427 410 150 150 141 Expected return on plan assets .................... (880) (799) (724) (134) (133) (121) Amortization of transition amount ................. (106) (106) (106) 17 36 47 Amortization of prior service cost ................ 12 47 45 -- -- -- Amortization of actuarial net (gain) loss ......... (85) (77) 4 (16) (24) (10) Special termination benefits - discontinued operations ...................................... -- -- 51 -- -- 2 Curtailment (gain) loss - discontinued operations ...................................... -- -- (122) -- -- 108 Contractual termination benefits .................. 4 6 48 -- -- -- ------ ----- ----- ----- ----- ----- Subtotal ...................................... (457) (362) (201) 35 58 206 Less amounts included in discontinued operations .. -- -- 84 -- (130) ------ ----- ----- ----- ----- ----- Net periodic (benefit) cost ....................... $(457) $(362) $(117) $ 35 $ 58 $ 76 ====== ===== ===== ===== ===== =====
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:
Other Pension Benefits Postretirement Benefits ---------------- ----------------------- 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- Weighted-average assumptions Discount rate (beginning of period) ........... 7.75% 7.75% 6.50% 7.75% 7.75% 6.50% Discount rate (end of period) ................. 7.25% 7.75% 7.75% 7.25% 7.75% 7.75% Rate of increase in compensation levels (beginning of period) ....................... 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% Rate of increase in compensation levels (end of period) ............................. 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% Expected return on plan assets ................ 9.50% 9.50% 9.50% 9.00% 9.00% 9.00% Health care cost trend rates .................. -- -- -- 6.76 - 8.76% 7.10 - 9.50% 7.50 - 10.30% Ultimate health care cost trend rate after gradual decrease until 2006 ................. -- -- -- 5.00% 5.00% 5.00%
28 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 12. 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 ----------------------- 2001 ---- (In Millions) One percentage point increase Increase in total service and interest costs ....... $ 10 Increase in postretirement benefit obligation ...... 125 One percentage point decrease Decrease in total service and interest costs ....... $ 8 Decrease in postretirement benefit obligation ...... 108
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, 2001 and 2000 was $183 million and $152 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 4%, 3% and 3% of annual salary for 2001, 2000 and 1999, respectively. The matching contributions by the Company included in "General and administrative expenses" are as follows:
401(k) Company Match -------------------- 2001 2000 1999 ---- ---- ---- (In Millions) Company match ...................................... $ 72 $ 62 $ 60 Less amount included in discontinued operations .... -- -- (8) --- ---- ---- 401(k) Company match included in general and administrative expenses .......................... $ 72 $ 62 $ 52 ===== ==== ====
Stock Options Prudential Financial adopted a stock option plan pursuant to which it may grant stock options, as well as stock appreciation rights, to employees and non-employees (i.e., statutory agents who perform services for Prudential Financial and participating subsidiaries) of the Company. Prudential Financial elected to apply Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for employee stock options, pursuant to which compensation expense is not recorded if the option exercise price is no less than the fair market value of Prudential Financial common stock on the date the option is granted. Prudential Financial charges the Company for expenses incurred in connection with grants of options to non-employees. These charges were $270 thousand in 2001. 29 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 13. INCOME TAXES The components of income tax expense (benefit) for the years ended December 31, were as follows: 2001 2000 1999 ---- ---- ---- (In Millions) Current tax expense (benefit) U.S.................................. $(1,021) $ 362 $ 614 State and local ..................... 57 31 84 Foreign ............................. 43 41 (8) ------- ------ ------ Total ............................... (921) 434 690 Deferred tax expense (benefit) U.S. ................................ 765 (86) 206 State and local ..................... (73) (37) 44 Foreign ............................. 171 95 102 ------- ------ ------ Total ............................... 863 (28) 352 ------- ------ ------ Total income tax expense (benefit) ...... $ (58) $ 406 $1,042 ======= ====== ====== The Company's actual income tax expense (benefit) for the years ended December 31, differs from the expected amount computed by applying the statutory federal income tax rate of 35% to income from continuing operations before income taxes for the following reasons: 2001 2000 1999 ---- ---- ---- (In Millions) Expected federal income tax expense ..... $ (77) $ 254 $ 789 Non-deductible expenses ................. 228 61 33 Equity tax .............................. (200) 100 190 Non-taxable investment income ........... (83) (42) (78) State and local income taxes ............ (12) (4) 83 Other ................................... 86 37 25 ------- ------ ------ Total income tax expense (benefit) .. $ (58) $ 406 $1,042 ======= ====== ====== Deferred tax assets and liabilities at December 31, resulted from the items listed in the following table: 2001 2000 ---- (In Millions) Deferred tax assets Insurance reserves ........................ $ 1,185 $ 1,371 Policyholder dividends .................... 231 297 Litigation related reserves ............... 84 32 Net operating loss carryforwards .......... 51 353 Investments ............................... 60 (129) -------- ------- Deferred tax assets before valuation allowance ................................. 1,611 1,924 Valuation allowance ....................... (25) (38) -------- ------- Deferred tax assets after valuation allowance ................................. 1,586 1,886 -------- ------- Deferred tax liabilities Deferred policy acquisition costs ......... 1,212 1,858 Net unrealized investment gains (losses) .. 845 273 Employee benefits ......................... 740 16 Depreciation .............................. 40 71 Other ..................................... 378 (137) -------- ------- Deferred tax liabilities .................. 3,215 2,081 -------- ------- Net deferred tax liability .................... $ (1,629) $ (195) ======== ======= 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, 2001 and 2000, respectively, the Company had federal net operating loss carryforwards of $61 million and $848 million, which expire between 2009 and 2018. At December 31, 2001 and 2000, respectively, the Company had state operating loss carryforwards for tax purposes approximating $1,867 million and $509 million, which expire between 2005 and 2021. 30 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 13. INCOME TAXES (continued) The Internal Revenue Service (the "Service") has completed all examinations of the consolidated federal income tax returns through 1992. The Service has examined the years 1993 through 1995. Discussions are being held with the Service with respect to proposed adjustments. Management, however, believes there are adequate defenses against, or sufficient reserves to provide for such adjustments. The Service has completed its examination of 1996 and has begun its examination of 1997 through 2000. 14. STOCKHOLDER'S EQUITY Dividend Restrictions New Jersey insurance law provides that dividends or distributions may be declared or paid by Prudential Insurance without prior regulatory approval only from unassigned surplus, as determined pursuant to statutory accounting principles, less unrealized capital gains and certain other adjustments. In connection with the demutualization, unassigned surplus was reduced to zero, thereby limiting Prudential Insurance's ability to pay a dividend in 2002 primarily to the amount of its statutory net gain from operations, not including realized investment gains, for the period subsequent to the date of demutualization. In addition, Prudential Insurance must obtain prior non-disapproval from the New Jersey insurance regulator prior to paying a dividend if the dividend, together with other dividends or distributions made within the preceding twelve months, would exceed the greater of 10% of Prudential Insurance's surplus as of the preceding December 31 or its net gain from operations for the twelve month period ending on the preceding December 31. The laws regulating dividends of Prudential Insurance's insurance subsidiaries domiciled in other states are similar, but not identical, to New Jersey's. Statutory Net Income and Surplus Prudential Insurance is required to prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the New Jersey Department of Banking and Insurance. Statutory accounting practices primarily differ from GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions and valuing investments and certain assets on a different basis. Statutory net income (loss) of Prudential Insurance amounted to $(896) million, $149 million and $333 million for the years ended December 31, 2001, 2000 and 1999, respectively. Statutory surplus of Prudential Insurance amounted to $6,420 million and $8,640 million at December 31, 2001 and 2000, respectively. The New York State Insurance Department recognizes only statutory accounting practices for determining and reporting the financial condition and results of operations 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 New York State Insurance Department to financial statements prepared in accordance with GAAP in making such determinations. 15. RELATED PARTY TRANSACTIONS Service Agreements The Company has service agreements with Prudential Financial and certain subsidiaries of Prudential Financial, that prior to the destacking, were subsidiaries of Prudential Insurance. These companies include, along with their subsidiaries, PRUCO, Inc. (includes Prudential Securities Group Inc. and Prudential P&C Holdings, Inc.), Prudential Asset Management Holding Company, Prudential International Insurance Holdings, Ltd., Prudential IBH Holdco, Inc., The Prudential Real Estate Affiliates, Inc., Prudential International Investments Corporation, and Prudential Japan Holdings Inc. Under the agreements, the Company furnishes the services of its officers and employees, provides supplies, use of equipment, office space, accounts payable processing functions, makes operating advances, and engages in other transactions in the normal course of business. The Company charges these companies based on the level of service provided and amounts advanced. The amounts due to the Company at December 31, 2001 totaled $193 million and are included in "Due from parent and affiliates." Prudential Financial and certain of its subsidiaries have service agreements with the Company. Under the agreements, the Company receives the services of the officers and employees of Prudential Financial, asset management services from Prudential Asset Management Holding Company and Prudential Financial makes tax payments under the consolidated federal income tax return for the Company. The Company is charged based on the level of service received and payments made on their behalf. 31 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 13. RELATED PARTY TRANSACTIONS (continued) The amounts due to Prudential Financial and certain subsidiaries at December 31, 2001 totaled $235 million and are included in "Due to parent and affiliates." Notes Receivable Prudential Funding, LLC, a wholly owned consolidated subsidiary of the Company borrows funds primarily through the issuance of commercial paper, private placement medium-term notes, Eurobonds, Euro-commercial paper and Euro medium-term notes which are reflected in "Short-term debt" and "Long-term debt." Historically, Prudential Funding, LLC lent net proceeds to Prudential Insurance and its subsidiaries generally at cost. At demutualization, the interest rates on loans to the destacked subsidiaries were adjusted to market rates. Loans made to destacked subsidiaries after demutualization will be made at market rates of interest. Accrued interest receivable related to these loans is included in "Due from parent and affiliates." At December 31, 2001, "Due from parent and affiliates" includes affiliated notes receivable of the following:
Maturity Description Dates Rates 2001 ----------- ----- ----- ---- (In Millions) U.S. Dollar floating rate notes (a) ....................... 2002-2005 1.78% - 7.29% $ 2,590 Japanese Yen fixed rate note .............................. 2008 1.92% 565 Great Britain Pound floating rate note .................... 2004 2.99% - 5.59% 77 ------------ Total long-term notes receivable - affiliated (b) ......... 3,232 Short-term notes receivable - affiliated (c) .............. 2,016 ------------ Total notes receivable - affiliated ....................... $ 5,248 ============
(a) On the date of demutualization, Prudential Financial made a contribution of capital to the Company amounting to $1,050 million that was financed with the proceeds from the purchase by Prudential Insurance of a series of notes issued by Prudential Financial with market rates of interest and maturities ranging from nineteen months to three years which is included in floating rate notes. Also, included within floating rate notes is the current portion of long-term notes receivable, which is $150 million at December 31, 2001. (b) All long-term notes receivable may be called for prepayment prior to the respective maturity dates under specified circumstances, with the exception of the Prudential Financial notes described in (a) above. (c) Short-term notes receivable have variable rates which averaged 2.28% at December 31, 2001. Short-term notes receivable are payable on demand. Reinsurance As discussed in Note 10, the Company participates in reinsurance transactions with certain subsidiaries of Prudential Financial. Stock Based Compensation Prudential Financial adopted a stock option plan in which eligible participants were granted options to purchase shares of Prudential Financial's common stock as discussed in Note 12. 32 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 16. 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 methods and assumptions discussed below were used in calculating the estimated fair values of the instruments. See Note 17 for a discussion of derivative instruments. 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. Commercial Loans The estimated fair value of commercial loans 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 loans. 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 repayment patterns. Mortgage Securitization Inventory The estimated fair value of the mortgage securitization inventory is primarily based upon the intended exit strategy for the mortgage loans, including securitization and whole loan sales. For loans expected to be securitized, the value is estimated using a pricing model that, among other factors, considers current investor yield requirements for subordination and yield. This activity was part of operations destacked on the date of demutualization as discussed in Note 1. Notes Receivable - Affiliated The estimated fair value of affiliated notes receivable is derived by using discount rates based on the borrowing rates currently available to the Company for notes with similar terms and remaining maturities. 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. 33 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 16. 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,
2001 2000 ---- ---- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- (In Millions) FINANCIAL ASSETS Other than trading Fixed maturities Available for sale ............................. $85,586 $85,586 $ 83,827 $83,827 Held to maturity ............................... -- -- 12,448 12,615 Equity securities .................................. 1,069 1,069 2,317 2,317 Commercial loans ................................... 14,909 15,568 15,919 15,308 Policy loans ....................................... 7,930 8,867 8,046 8,659 Short-term investments ............................. 4,048 4,048 5,029 5,029 Mortgage securitization inventory .................. -- -- 1,420 1,448 Cash and cash equivalents .......................... 6,587 6,587 7,676 7,676 Restricted cash and securities ..................... -- -- 2,196 2,196 Notes receivable - affiliated ...................... 5,248 5,299 -- -- Separate account assets ............................ 76,736 76,736 82,217 82,217 Trading Trading account assets ............................. $ 882 $ 882 $ 7,217 $ 7,217 Broker-dealer related receivables .................. -- -- 11,860 11,860 Securities purchased under agreements to resell .... 110 110 5,395 5,395 Cash collateral for borrowed securities ............ -- -- 3,858 3,858 FINANCIAL LIABILITIES Other than trading Investment contracts ............................... $25,814 $26,346 $ 25,033 $25,359 Securities sold under agreements to repurchase ..... 5,952 5,952 7,162 7,162 Cash collateral for loaned securities .............. 4,808 4,808 4,762 4,762 Short-term and long-term debt ...................... 6,563 6,713 13,633 13,800 Securities sold but not yet purchased .............. -- -- 157 157 Separate account liabilities ....................... 76,736 76,736 82,217 82,217 Trading Broker-dealer related payables ..................... $ -- $ -- $ 5,965 $ 5,965 Securities sold under agreements to repurchase ..... 178 178 7,848 7,848 Cash collateral for loaned securities .............. -- -- 6,291 6,291 Securities sold but not yet purchased .............. 108 108 4,802 4,802
17. DERIVATIVE INSTRUMENTS Adoption of Statement of Financial Accounting Standards ("SFAS") No. 133 The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, on January 1, 2001. Except as noted below, the adoption of this statement did not have a material impact on the results of operations of the Company. Upon its adoption of SFAS No. 133, the Company reclassified "held to maturity" securities with a fair market value of approximately $12,085 million to "available-for-sale" as permitted by the new standard. This reclassification resulted in unrealized investment gains of $94 million, net of tax, which were recorded as a component of "Accumulated other comprehensive income (loss)." Accounting for Derivatives and Hedging Activities 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. 34 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 17. DERIVATIVE INSTRUMENTS (continued) Derivatives held for trading purposes were used in the Company's securities operations to meet the needs of customers and by the Company's commercial mortgage securitizations business. Both of these businesses have been destacked. Trading derivatives are also utilized in a limited-purpose subsidiary primarily through the operation of hedge portfolios. Trading derivative positions are carried at estimated fair value, 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. Derivatives held for trading purposes are recorded at fair value in the Consolidated Statements of Financial Position either as assets, within "Trading account assets" or "Broker-dealer related receivables," or as liabilities within "Broker-dealer related payables" or "Other liabilities." Realized and unrealized changes in fair value are included in "Commissions and other income" in 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 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. Other than trading derivatives are also used to manage the characteristics of the Company's asset/liability mix, manage the interest rate characteristics of invested assets and to mitigate the risk of a diminution, upon translation to U.S. dollars, of expected non-U.S. earnings resulting from unfavorable changes in currency exchange rates. Derivatives held for purposes other than trading are recognized on the Consolidated Statements of Financial Position at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as either (1) a hedge of the fair value of a recognized asset or liability or unrecognized firm commitment ("fair value" hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow" hedge), (3) a foreign-currency fair value or cash flow hedge ("foreign currency" hedge), (4) a hedge of a net investment in a foreign operation, or (5) a derivative entered into as an economic hedge that does not qualify for hedge accounting. To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged item. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a derivative qualifies for special hedge accounting treatment, there may be an element of ineffectiveness of the hedge. Under such circumstances, the ineffective portion of adjusting the derivative to fair value is recorded in "Realized investment gains (losses), net." The ineffective portion of derivatives accounted for using both cash flow and fair value hedge accounting for the period ended December 31, 2001 was not material to the results of operations of the Company. The Company discontinues hedge accounting prospectively when (1) it is determined that the derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item (including firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is no longer designated as a hedge instrument, because (a) it is unlikely that a forecasted transaction will occur; (b) because a hedged firm commitment no longer meets the definition of a firm commitment; or (c) management determines that designation of the derivative as a hedge instrument is no longer appropriate. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as a highly effective fair value hedge, the derivative will continue to be carried on the balance sheet at its fair value, and the hedged asset or liability, which normally would not be carried at fair value, will no longer be adjusted for changes in fair value. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the derivative will continue to be carried on the balance sheet at its fair value, and any asset or liability that was recorded pursuant to recognition of the firm commitment will be removed from the balance sheet and recognized as a gain or loss in current-period earnings. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will continue to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in other comprehensive income will be recognized immediately in earnings. In all other situations in which hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current-period earnings. For the year ended December 31, 2001, there were no reclassifications to earnings due to firm commitments no longer deemed probable or due to forecasted transactions that had not occurred by the end of the originally specified time period. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives 35 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 17. DERIVATIVE INSTRUMENTS (continued) designated as fair value, cash flow, or foreign currency hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. When a derivative is designated as a fair value hedge and is determined to be highly effective, changes in its fair value, along with changes in the fair value of the hedged asset or liability (including losses or gains on firm commitments), are reported on a net basis in the income statement line item associated with the hedged item. Under certain circumstances, the change in fair value of an unhedged item is either not recorded or recorded instead in "Accumulated other comprehensive income (loss)." When such items are hedged and the hedge qualifies as a fair value hedge, the change in fair value of the hedged item and the derivative are reported on a net basis in "Realized investment gains (losses), net." When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its fair value are recorded in "Accumulated other comprehensive income (loss)" until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). At that time, the related portion of deferred gains or losses are reclassified to the income statement classification of the hedged item. Presented below is a roll forward of current period cash flow hedges in "Accumulated other comprehensive income (loss)" before taxes.
(In Millions) Additions due to cumulative effect of change in accounting principle upon adoption of SFAS No. 133 at January 1, 2001 .................. $ 8 Net deferred losses on cash flow hedges from January 1 to December 31, 2001 .............................................................. 3 Amount reclassified into current period earnings ...................... (18) Destacking ............................................................ 15 ---- Balance, December 31, 2001 ................................... $ 8 ====
It is anticipated that a pre-tax gain of approximately $29 million will be reclassified from "Accumulated other comprehensive income (loss)" to earnings during the year ended December 31, 2002 and offset by equal amounts pertaining to the hedged items. The maximum length for which variable cash flows are hedged is 7 years. Income amounts deferred in "Accumulated other comprehensive income (loss)" as a result of cash flow hedges are included in "Net unrealized investment gains (losses)" in the Consolidated Statements of Stockholder's Equity. When a derivative is designated as a foreign currency hedge and is determined to be effective, changes in its fair value are recorded in either current period earnings or "Accumulated other comprehensive income (loss)," depending on whether the hedge transaction is a fair value hedge (e.g., a hedge of a firm commitment that is to be settled in a foreign currency) or a cash flow hedge (e.g., a foreign currency denominated forecasted transaction). If, however, a derivative is used as a hedge of a net investment in a foreign operation, its changes in fair value, to the extent effective as a hedge, are recorded in the cumulative translation adjustments account within "Accumulated other comprehensive income (loss)." Those amounts, before applicable taxes, were gains of $75 million in 2001, $88 million in 2000 and a loss of $47 million in 1999. If a derivative does not qualify for hedge accounting as described above, it is recorded at fair value in "Other long-term investments" or "Other liabilities" in the Consolidated Statements of Financial Position, and changes in its fair value are included in current earnings without considering changes in fair value of the hedged assets or liabilities. See "Types of Derivative Instruments" for further discussion of the classification of derivative activity in current earnings. Cash flows from other than trading derivatives are reported in the investing activities section in the Consolidated Statements of Cash Flows. The Company occasionally purchases a financial instrument that contains a derivative instrument that is "embedded" in the financial instrument. Upon purchasing the instrument, the Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and changes in its fair value are included in "Realized investment gains (losses), net." 36 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 17. DERIVATIVE INSTRUMENTS (continued) Types of Derivative Instruments Interest rate swaps are used by the Company to manage interest rate exposures arising from mismatches between assets and liabilities (including duration mismatches) and to hedge against changes in the value of assets it anticipates acquiring and other anticipated transactions and commitments. 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 proprietary pricing models or market quotes. As discussed above, if an interest rate swap does not qualify for hedge accounting, changes in its fair value are included in "Realized investment gains (losses), net" without considering changes in fair value of the hedged assets or liabilities. During the period that interest rate swaps are outstanding, net receipts or payments are included in "Net investment income." Net interest receipts (payments) were $(29) million in 2001, $11 million in 2000 and $(4) million in 1999. Exchange-traded futures and options are used by the Company 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 or selling. In exchange-traded futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which are determined by the value of designated classes of Treasury securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. 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. Treasury futures typically are 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. When the Company anticipates a significant decline in the stock market that 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, including exchange-traded currency futures and options, currency forwards and currency swaps, are used by the Company 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 or sell. Under exchange-traded currency futures and options, the Company agrees to purchase or sell a specified number of contracts and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded currency futures and options with regulated futures commissions merchants who are members of a trading exchange. Under currency forwards, the Company agrees with other parties upon delivery of a specified amount of an identified 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 37 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 17. DERIVATIVE INSTRUMENTS (continued) 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. Forward contracts are used by the Company to manage market risks relating to interest rates and commodities and trades in mortgage-backed securities forward contracts. The later activity was exited in connection with the restructuring of Prudential Securities Group Inc.'s capital markets activities as discussed in Note 4. 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. The tables below summarize the Company's outstanding positions by derivative instrument types at December 31, 2001 and 2000. 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 gains and losses. 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.
Derivative Financial Instruments December 31, 2001 Trading Other than Trading Total --------------- ---------------------------------------- ------------------- Non-Hedge --------- Hedge Accounting Accounting ---------------- ---------- Estimated Estimated Estimated Estimated Fair Fair Fair Fair Notional Value Notional Value Notional Value Notional Value -------- ----- -------- ----- -------- ----- -------- ----- (In Millions) Swap Instruments Interest rate Asset ................................. $ 16,824 $ 724 $ -- $ -- $ 2,039 $ 69 $ 18,863 $ 793 Liability ............................. 18,084 767 -- -- 1,402 26 19,486 793 Currency Asset ................................. 1,201 135 605 32 742 88 2,548 255 Liability ............................. 1,307 177 -- -- 234 17 1,541 194 Equity and commodity Asset ................................. 35 7 -- -- 29 2 64 9 Liability ............................. 70 7 -- -- -- -- 70 7 Forward contracts Interest rate Asset ................................. 600 2 -- -- -- -- 600 2 Liability ............................. 851 2 -- -- -- -- 851 2 Currency Asset ................................. 2,903 100 1,006 7 3,537 127 7,446 234 Liability ............................. 3,689 111 362 6 1,016 41 5,067 158 Futures contracts Interest rate Asset ................................. 3,732 1 -- -- 1,610 11 5,342 12 Liability ............................. 398 -- -- -- 599 9 997 9 Equity and commodity Asset ................................. -- -- -- -- 171 4 171 4 Liability ............................. -- -- -- -- 625 1 625 1 Option contracts Interest rate Asset ................................. 10,635 72 -- -- 338 3 10,973 75 Liability ............................. 8,250 48 -- -- -- -- 8,250 48 -------- ------- ------- ------ -------- ------ -------- ------- Total Derivatives Assets ................................ $ 35,930 $ 1,041 $ 1,611 $ 39 $ 8,466 $ 304 $ 46,007 $ 1,384 ======== ======= ======= ====== ======== ====== ======== ======= Liabilities ........................... $ 32,649 $ 1,112 $ 362 $ 6 $ 3,876 $ 94 $ 36,887 $ 1,212 ======== ======= ======= ====== ======== ====== ======== =======
38 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 17. DERIVATIVE INSTRUMENTS (continued) Derivative Financial Instruments December 31, 2000
Trading Other than Trading Total ------------- --------------------------------------------- --------------- Non-Hedge --------- Hedge Accounting Accounting -------------------- ------------------- Estimated Estimated Estimated Estimated --------- --------- --------- --------- Fair Fair Fair Fair ---- ---- ---- ---- Notional Value Notional Value Notional Value Notional Value -------- ----- ---------- ----- -------- ----- -------- ----- (In Millions) Swap Instruments Interest rate Asset ................................... $ 9,693 $ 352 $ -- $ -- $ 1,908 $ 57 $ 11,601 $ 409 Liability ............................... 10,521 370 -- -- 2,126 81 12,647 451 Currency Asset ................................... 7 -- -- -- 383 31 390 31 Liability ............................... 30 34 -- -- 302 20 332 54 Equity and commodity Asset ................................... 55 14 -- -- 46 17 101 31 Liability ............................... 55 12 -- -- -- -- 55 12 Forward contracts Interest rate Asset ................................... 3,469 33 -- -- -- -- 3,469 33 Liability ............................... 3,319 33 -- -- -- -- 3,319 33 Currency Asset ................................... 6,044 185 472 9 2,319 29 8,835 223 Liability ............................... 5,897 195 429 9 27 79 6,353 283 Equity and commodity Asset ................................... 2,091 75 -- -- -- -- 2,091 75 Liability ............................... 1,923 75 -- -- -- -- 1,923 75 Futures contracts Interest rate Asset ................................... 11,582 14 -- -- 2,410 55 13,992 69 Liability ............................... 6,513 29 -- -- 1,468 21 7,981 50 Equity and commodity Asset ................................... 782 27 -- -- -- -- 782 27 Liability ............................... 1,324 36 -- -- -- -- 1,324 36 Option contracts Interest rate Asset ................................... 4,141 48 -- -- -- -- 4,141 48 Liability ............................... 4,273 29 -- -- -- -- 4,273 29 Currency Asset ................................... 1,108 27 -- -- -- -- 1,108 27 Liability ............................... 1,174 26 -- -- -- -- 1,174 26 Equity and commodity Asset ................................... 175 3 -- -- -- -- 175 3 Liability ............................... 126 1 -- -- -- -- 126 1 -------- ------ ------ ----- ------- ------ -------- ------ Total Derivatives Assets .................................. $ 39,147 $ 778 $ 472 $ 9 $ 7,066 $ 189 $ 46,685 $ 976 ======== ====== ====== ===== ======= ====== ======== ====== Liabilities ............................. $ 35,155 $ 840 $ 429 $ 9 $ 3,923 $ 201 $ 39,507 $1,050 ======== ====== ====== ===== ======= ====== ======== ======
Credit Risk The Company is exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. Generally, the current credit exposure of the Company's derivative contracts is limited to the fair value at the reporting date. The credit exposure of the Company's swaps transactions is represented by the fair value (market value) of contracts with a positive fair value (market value) at the reporting date. Because exchange-traded futures and options are effected through regulated exchanges, and positions are marked to market on a daily basis, the Company has little exposure to credit-related losses in the event of nonperformance by counterparties to such financial instruments. The credit exposure of exchange-traded instruments is represented by the negative change, if any, in the fair value (market value) of contracts from the fair value (market value) at the reporting date. The credit exposure of currency forwards is represented by the difference, if any, between the exchange rate specified in the contract and the exchange rate for the same currency at the reporting date. 39 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 17. DERIVATIVE INSTRUMENTS (continued) The Company manages credit risk by entering into transactions with creditworthy counterparties and obtaining collateral where appropriate and customary. In addition, the Company enters into over-the-counter swaps pursuant to master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. Likewise, the Company effects exchange-traded futures and options through regulated exchanges and these positions are marked to market on a daily basis. 18. COMMITMENTS AND GUARANTEES, CONTINGENCIES AND LITIGATION Commitments and Guarantees The following table presents, as of December 31, 2001, the Company's future commitments on short-term and long-term debt, as more fully described in Note 11 and future minimum lease payments under non-cancelable operating leases: Short-term and Operating Long-term Debt Leases -------------- ------ (In Millions) 2002 ........................ $3,837 $ 126 2003 ........................ 651 108 2004 ........................ 454 95 2005 ........................ 58 77 2006 ........................ 62 68 Beyond 2006 ................. 1,501 195 ------- ------ Total ....................... $6,563 $ 669 ======= ====== 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. Rental expense incurred for the years ended December 31, 2001, 2000 and 1999 was $520 million, $498 million and $456 million, respectively, excluding expenses relating to the Company's healthcare business. During the normal course of its business, the Company utilizes financial instruments with off-balance sheet credit risk such as commitments, financial guarantees and letters of credit. Commitments include commitments to purchase and sell mortgage loans and the underfunded portion of commitments to fund investments in private placement securities. These mortgage loans and private commitments were $1,727 million, of which $781 million remain available at December 31, 2001. 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, 2001, financial guarantees and letters of credit issued by the Company were $325 million. Contingencies On September 19, 2000, the Company sold Gibraltar Casualty Company ("Gibraltar Casualty"), a subsidiary engaged in the commercial property and casualty insurance business, to Everest Re Group, Ltd. ("Everest"). Upon closing of the sale, a subsidiary of the Company entered into a stop-loss reinsurance agreement with Everest whereby the subsidiary reinsured Everest for up to 80% of the first $200 million of any adverse loss development in excess of Gibraltar Casualty's carried reserves as of the closing of the sale. The subsidiary was among those that Prudential Insurance dividended to Prudential Financial in conjunction with the destacking. Prudential Insurance has indemnified the subsidiary for any losses it may incur in connection with this agreement. As of December 31, 2001, no liability has been recorded by Prudential Insurance in connection with this agreement. 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 as a result of payments in connection with the matter discussed above depending, in part, upon the results of operations or cash flow for such period. Management believes, however, that ultimate payments in connection with this matter should not have a material adverse effect on the Company's financial position. 40 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 18. COMMITMENTS AND GUARANTEES, CONTINGENCIES AND LITIGATION (continued) Litigation The Company is subject to legal and regulatory actions in the ordinary course of its businesses. Pending legal and regulatory actions include proceedings relating to aspects of our businesses and operations that are specific to the Company and proceedings that are typical of the businesses in which the Company operates, including in both cases businesses that have either been divested or placed in wind-down status. Some of these proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, 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, to a series of fines, and to provide specific forms of relief to eligible class members. Virtually all claims by class members filed in connection with the settlements have been resolved and virtually all aspects of the remediation program have been satisfied. 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. As of December 31, 2001, the Company remained a party to approximately 44 individual sales practices actions filed by policyholders who "opted out" of the class action settlement relating to permanent life insurance policies the Company issued in the United States between 1982 and 1995. In addition, there were 19 sales practices actions pending that were filed by policyholders who were members of the class and who failed to "opt out" of the class action settlement. The Company believes that those actions are governed by the class settlement release and expects them to be enjoined and/or dismissed. Additional suits may be filed by class members who "opted out" of the class settlement or who failed to "opt out" but nevertheless seek to proceed against the Company. A number of the plaintiffs in these cases seek large and/or indeterminate amounts, including punitive or exemplary damages. Some of these actions are brought on behalf of multiple plaintiffs. It is possible that substantial punitive damages might be awarded in any of these actions and particularly in an action involving multiple plaintiffs. The Company believes that its reserves related to sales practices, as of December 31, 2001, are adequate. No incremental provisions were recorded in 2001 or 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. The following table summarizes the Company's charges for the estimated total costs of sales practices remedies and additional sales practices costs and related liability balances as of the dates indicated:
Year Ended December 31, ----------------------------------------------------------------- 2001 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- ---- (In Millions) Liability balance at beginning of period ..... $ 253 $ 891 $3,058 $2,553 $ 963 $ -- Charges to expense Remedy costs ............................. -- (54) (99) 510 1,640 410 Additional sales practices costs ......... -- 54 199 640 390 715 ----- ------ ------ ------- ------- ------ Total charges to expense ............. -- -- 100 1,150 2,030 1,125 Amounts paid or credited Remedy costs ............................. 71 448 1,708 147 -- -- Additional sales practices costs ......... 130 190 559 498 440 162 ----- ------ ------ ------- ------- ------ Total amounts paid or credited ....... 201 638 2,267 645 440 162 ----- ------ ------ ------- ------- ------ Liability balance at end of period ........... $ 52 $ 253 $ 891 $3,058 $2,553 $ 963 ===== ====== ====== ======= ======= ======
41 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 18. COMMITMENTS AND GUARANTEES, CONTINGENCIES AND LITIGATION (continued) In 1996, the Company recorded in its Consolidated Statement 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 cost 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 before taxes 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 (1) estimates derived from an analysis of claims actually remedied (including interest); (2) a sample of claims still to be remedied; (3) an estimate of additional liabilities associated with a claimant's right to "appeal" the Company's decision; and (4) 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, the Company recorded an increase of $199 million of the estimate of total additional sales practices costs. This increase was partially offset by a $99 million release of the previously recorded liability relative to remedy costs reflecting a decrease in the estimate of the total costs of remedying policyholder claims. In 2000, the Company recorded an increase of $54 million of the estimate of total additional sales practices costs. This increase was offset by a $54 million release of the previously recorded liability relative to remedy costs reflecting a decrease in the estimate of the total costs of remedying policyholder claims. In addition, the Company retained all liabilities for the litigation associated with its discontinued healthcare business that existed at the date of closing with Aetna (August 6, 1999), or commenced within two years of that date, with respect to claims relating to events that occurred prior to the closing date. This litigation includes purported class actions and individual suits involving various issues, including payment of claims, denial of benefits, vicarious liability for malpractice claims, and contract disputes with provider groups and former policyholders. Some of the purported class actions challenge practices of the Company's former managed care operations and assert nationwide classes. On October 23, 2000, by Order of the Judicial Panel on Multi-district Litigation, a number of these class actions were consolidated for pre-trial purposes, along with lawsuits pending against other managed health care companies, in the United States District Court for the Southern District of Florida in a consolidated proceeding captioned In Re Managed Care Litigation. Some of these class actions allege, among other things, misrepresentation of the level of services and quality of care, failure to disclose financial incentive agreements with physicians, interference with the physician-patient relationship, breach of contract and fiduciary duty, violations of ERISA, violations of and conspiracy to violate RICO, deprivation of plaintiffs' rights to the delivery of honest medical services and industry-wide conspiracy to defraud physicians by failing to pay under provider agreements and by unlawfully coercing providers to enter into agreements with unfair and unreasonable terms. The remedies sought include unspecified damages, restitution, disgorgement of profits, treble damages, punitive damages and injunctive relief. Motions to dismiss certain of the amended complaints and plaintiff's motions to certify nationwide classes in the consolidated proceedings are pending. In one of the consolidated actions the court granted our motion to dismiss, in part. The Company's litigation is subject to many uncertainties, and given the 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 resolution 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 outcome 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. 42 PART II OTHER INFORMATION 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 Universal Life Insurance Contracts registered by this registration statement, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by Prudential. UNDERTAKING WITH RESPECT TO INDEMNIFICATION The Registrant, in connection with certain affiliates, maintains various insurance coverages under which the underwriter and certain affiliated persons may be insured against liability which may be incurred in such capacity, subject to the terms, conditions, and exclusions of the insurance policies. 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 Article VII, Section 1, which relates to indemnification of officers and directors, is incorporated by reference to Exhibit (3B) to Form S-1, Registration No. 33-20083-01, filed April 25, 2002 on behalf of The Prudential Variable Contract Real Property 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 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 109 pages. The undertaking to file reports. The representation with respect to charges. The undertaking with respect to indemnification. The signatures. Written consents of the following persons: 1. PricewaterhouseCoopers, LLP 2. Clifford E. Kirsch, Esq. 3. Pamela A. Schiz, MAAA, FSA The following exhibits: 1. The following exhibits correspond to those required by paragraph A of the instructions as to exhibits in Form N-8B-2: A. (1) (a) Resolution of Board of Directors of The Prudential Insurance Company of America establishing The Prudential Variable Appreciable Account. (Note 2) (b) Authorization for Separate Account to Invest in Unaffiliated Mutual Funds (Note 5) (2) Not Applicable. (3) Distributing Contracts: (a) Distribution Agreement between Pruco Securities Corporation and The Prudential Insurance Company of America. (Note 5) (b) Proposed form of Agreement between Pruco Securities Corporation and independent brokers with respect to the Sale of the Contracts. (Note 5) (c) Schedules of Sales Commissions. (Note 9) (d) Participation Agreements: (i) (a) AIM Variable Insurance Funds, Inc., AIM V.I. Value Fund. (Note 9) (ii) (a) American Century Variable Portfolios, Inc., VP Value Portfolio. (Note 7) (b) Amendment to the American Century Variable Portfolios, Inc. Participation Agreement. (Note 9) (iii)(a) Janus Aspen Series, Growth Portfolio. (Note 7) (b) Amendment to the Janus Aspen Series Participation Agreement. (Note 9) (iv) (a) MFS Variable Insurance Trust, Emerging Growth Series. (Note 7) (b) Amendment to the MFS Variable Insurance Trust Participation Agreement. (Note 9) (v) (a) T. Rowe Price International Series, Inc., International Stock Portfolio. (Note 8) (b) Amendment to the T. Rowe Price International Series, Inc. Participation Agreement. (Note 9) (4) Not Applicable. (5) Variable Universal Life Insurance Contract: (Note 9) (6) (a) Charter of The Prudential Insurance Company of America, as amended February 12, 2002. (Note 3) (b) By-laws of The Prudential Insurance Company of America, as amended December 18, 2001. (Note 3) (7) Not Applicable. (8) Not Applicable. II-2 (9) Not Applicable. (10) (a) Application Form. (Note 5) (b) Supplement to the Application. (Note 5) (11) Not Applicable. (12) Memorandum describing Prudential's issuance, transfer, and redemption procedures for the Contracts pursuant to Rule 6e-3(T)(b)(12)(iii) and method of computing adjustments in payments and cash surrender values upon conversion to fixed-benefit policies pursuant to Rule 6e-3(T)(b)(13)(v)(B). (Note 5) (13) Available Contract Riders and Endorsements: (a) Rider for Payment of Premium Benefit Upon Insured's Total Disability. (Note 5) (b) 10 Year Level Premium Term Rider on Insured. (Note 9) (c) 10 Year Level Premium Term Rider on Spouse. (Note 9) (d) Children's Rider (i) The dependent child is named in the application for the contract and on the date of the application has not reached his or her 18th birthday. (Note 9) (ii) The dependent child just before the contract date of this contract was insured under the earlier contract that was converted or changed to this contract. (Note 9) (iii)The dependent child is named in the application for change. (Note 9) (iv) After-issue. (Note 9) (e) Endorsement to the Rider for Level Term Insurance Benefit on Dependent Children. (Note 9) (f) Living Needs Benefit Rider (i) for use in all approved jurisdictions except Florida. (Note 2) 2. See Exhibit 1.A.(5). 3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality of the securities being registered. (Note 1) 4. None. 5. Not Applicable. 6. Opinion and Consent of Pamela A. Schiz, MAAA, FSA, as to actuarial matters pertaining to the securities being registered. (Note 1) 7. Powers of Attorney. (a) F. Agnew, F. Becker, R. Carbone, G. Casellas, J. Cullen, C. Davis, A. Gilmour, W. Gray, III, J. Hanson, G. Hiner, C. Horner, G. Kelley, B. Malkiel, A. Piszel, A. Ryan, I. Schmertz, C. Sitter, D. Staheli, R. Thomson, J. Unruh, P. Vagelos, S. Van Ness, P. Volcker, (Note 4) (Note 1) Filed herewith. (Note 2) Incorporated by reference to Post-Effective Amendment No. 15 to Form S-6, Registration No. 33-20000, filed May 1, 1995 on behalf of The Prudential Variable Appreciable Account. (Note 3) Incorporated by reference to Post-Effective Amendment No. 15 to Form S-1, Registration No. 33-20083, filed April 25, 2002 on behalf of The Prudential Variable Contract Real Property Account. (Note 4) Incorporated by reference to Post-Effective Amendment No. 14 to Form S-1, Registration No. 33-20083, filed April 10, 2001 on behalf of The Prudential Variable Contract Real Property Account. (Note 5) Incorporated by reference to Registrant's Form S-6, filed September 30, 1998. (Note 6) Incorporated by reference to Pre-Effective Amendment No. 1 to Form N-4, Registration No. 333-23271, filed June 17, 1997 on behalf of The Prudential Discovery Select Group Variable Contract Account. (Note 7) Incorporated by reference to Registrant's Pre-Effective Amendment No. 1 to Form S-6, filed on December 23, 1998 on behalf of The Prudential Variable Appreciable Account. II-3 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 22nd day of April, 2002. (Seal) The Prudential Variable Appreciable Account (Registrant) By: The Prudential Insurance Company of America (Depositor) Attest: /s/ Thomas C. Castano By: /s/ Andrew J. Mako Thomas C. Castano Andrew J. Mako Assistant Secretary Executive Vice President Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 4 to the Registration Statement has been signed below by the following persons in the capacities indicated on this 22nd day of April, 2002. Signature and Title /s/* - --------------------------------------- Arthur F. Ryan Chairman of the Board, President, and Chief Executive Officer /s/* - --------------------------------------- Anthony S. Piszel Senior Vice President and Controller /s/* - --------------------------------------- By: /s/ Thomas C. Castano Richard J. Carbone --------------------- Senior Vice President and Thomas C. Castano Chief Financial Officer (Attorney-in-Fact) /s/* - --------------------------------------- Franklin E. Agnew Director /s/* - --------------------------------------- Frederic K. Becker Director /s/* - --------------------------------------- Gilbert F. Casellas Director /s/* - --------------------------------------- James G. Cullen Director /s/* - --------------------------------------- Carolyne K. Davis Director /s/* - --------------------------------------- Allan D. Gilmour Director II-4 /s/* - --------------------------------------- William H. Gray, III Director /s/* - --------------------------------------- Jon F. Hanson Director /s/* - --------------------------------------- Glen H. Hiner, Jr. Director /s/* - --------------------------------------- Constance J. Horner Director /s/* - --------------------------------------- Gaynor N. Kelley Director /s/* - --------------------------------------- *By: /s/ Thomas C. Castano Burton G. Malkiel --------------------- Director Thomas C. Castano (Attorney-in-Fact) /s/* - --------------------------------------- Ida F. S. Schmertz Director /s/* - --------------------------------------- Charles R. Sitter Director /s/* - --------------------------------------- Donald L. Staheli Director /s/* - --------------------------------------- Richard M. Thomson Director /s/* - --------------------------------------- James A. Unruh Director /s/* - --------------------------------------- P. Roy Vagelos, M.D. Director /s/* - --------------------------------------- Stanley C. Van Ness Director /s/* - --------------------------------------- Paul A. Volcker Director II-5 Consent of Independent Accountants We hereby consent to the use in this Registration Statement on Form S-6 (the "Registration Statement") of our report dated April 15, 2002, relating to the financial statements of the Prudential Variable Appreciable Account, which appears in such Registration Statement. We also consent to the use in this Registration Statement of our report dated February 12, 2002, relating to the consolidated financial statements of Pruco Life Insurance Company and its subsidiaries, which appears in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. PricewaterhouseCoopers LLP New York, New York April 25, 2002 EXHIBIT INDEX Consent of PricewaterhouseCoopers LLP, independent accountants. 3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality of the securities being registered 6. Opinion and Consent of Pamela A. Schiz, MAAA, FSA, as to actuarial matters pertaining to the securities being registered EX-3 4 d50443_exh3.txt OPINION AND CONSENT Exhibit 3 April 24, 2002 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 EX-6 5 d50443_exh6.txt OPINION AND CONSENT Exhibit 6 April 24, 2002 The Prudential Insurance Company of America 213 Washington Street Newark, New Jersey 07102-2992 To Prudential: This opinion is furnished in connection with the registration by The Prudential Insurance Company of America of its Variable Universal Life Contract (the "Contract") under the Securities Act of 1933. The prospectus included in Post-Effective Amendment No. 3 to Registration Statement No. 333-64957 on Form S-6 describes the Contract. I have reviewed the Contract and I have participated in the preparation and review of the Registration Statement and Exhibits thereto. In my opinion: (1) The illustrations of cash surrender values and death benefits included in the section of the prospectus entitled "Illustrations of Cash Surrender Values, Death Benefits, and Accumulated Premiums," based on the assumptions stated in the illustrations, are consistent with the provisions of the Contracts. The rate structure of the Contract has not been designed so as to make the relationship between premiums and benefits, as shown in the illustrations, appear more favorable to a prospective purchaser of a Contract for male age 35 than to prospective purchasers of Contracts on males of other ages or on females. (2) The examples shown in the section of the prospectus entitled "Changing the Type of Death Benefit" are consistent with the provisions of the Contract. (3) The examples shown in the section of the prospectus entitled "Death Benefit Guarantee" are consistent with the provisions of the Contract. (4) The charts included in the sections of the prospectus "How a Type A (Fixed) Contract's Death Benefit Will Vary" and "How a Type B (Variable) Contract's Death Benefit Will Vary" are consistent with the provisions of the Contract. (5) The deduction in an amount equal to 1.25% of each premium is a reasonable charge in relation to the additional income tax burden imposed upon The Prudential Insurance Company of America as the result of the enactment of Section 848 of the internal Revenue Code. In reaching that conclusion, a number of factors were taken into account that, in my opinion, were appropriate and which resulted in a project after-tax rate of return that is a reasonable rate to use in discounting the tax benefit of the deductions allowed in Section 848 in taxable years subsequent to the year in which the premiums are received. I hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the reference to my name under the heading "Experts" in the prospectus. Very truly yours, /s/ - --------------------------------------------- Pamela A. Schiz, FSA, MAAA Vice President and Actuary The Prudential Insurance Company of America -----END PRIVACY-ENHANCED MESSAGE-----