-----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, LRdavT3F2FTLv42VFYhiBfty0yNjbamBDYIeHG3nc8Z5ZrfIquUsw75F+5xUmBpP VKw40Rw2fFmrXwIwKmjGdA== /in/edgar/work/20000531/0000950130-00-003220/0000950130-00-003220.txt : 20000919 0000950130-00-003220.hdr.sgml : 20000919 ACCESSION NUMBER: 0000950130-00-003220 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000430 FILED AS OF DATE: 20000531 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT CENTRAL INDEX KEY: 0000828972 STANDARD INDUSTRIAL CLASSIFICATION: [0000 ] IRS NUMBER: 221121670 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: SEC FILE NUMBER: 811-05466 FILM NUMBER: 646628 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 N-30B-2 1 0001.txt CUSTOM VAL [LETTER HEAD OF PRUDENTIAL] May 1, 2000 Dear Policyowner: It is a pleasure to provide you with three informative documents pertaining to your Custom Variable Appreciable Life policy: . The Prudential Series Fund, Inc. prospectus dated April 30, 2000 . 1999 Prudential Variable Appreciable Account Financial Statements . 1999 Prudential Consolidated Financial Statements Since this material contains important information about your policy, we suggest that you keep it with your policy for future reference. Your Asset Allocation Should Reflect Your Current Risk Tolerance and Financial Goals One of life's certainties is the inevitability of change. And as changes occur in our personal and professional lives, we all need to review our financial plans and insurance protection needs. The Contract Fund in your variable life insurance policy includes several investment options. Since another of life's certainties is that no one can predict the future performance of the financial markets, we recommend that you regularly reevaluate the allocation of your net premium dollars among your investment choices. With the assistance of Prudential's Asset Allocation model, your Registered Representative can help you analyze your allocations and adjust them to make them consistent with your current needs, objectives, risk tolerance and time horizons. Life Insurance Coverage Is A Critical Financial Asset Your variable life insurance policy is a valuable asset and a significant element of your financial security plan. Maintaining it is critical because of the protection it provides to your loved ones and beneficiaries. Your Annual Statement, as well as a policy review with your Representative, can tell you how your investment choices are performing relative to your goals. This will help you determine if you need to adjust the amount of your premium payments in order to maintain your insurance coverage. We Want To Help You Plan To Achieve Your Financial Security And Protection Goals Upon receipt of your Annual Statement, we suggest that you contact your Representative for a policy review of your variable life coverage. He or she can also show you how Prudential's broad range of products and services can help you in planning to achieve your overall financial security goals. If you have any questions about this correspondence, please call your Registered Representative, or call (800) 778-2255, 8 a.m. to 8 p.m. Eastern time. (Please note that while telephone representatives are available until 8 p.m. Eastern time, the cut-off time for many transactions such as transfers among investment options is 4:00 p.m. Eastern time.) Thank you for insuring with us. We appreciate having you as our customer and we look forward to a continued relationship with you in the years to come. Sincerely, /s/ ____________________________ James J. Avery, Jr., FSA President, Individual Life Insurance Variable life insurance is distributed by Pruco securities Corporation, a subsidiary of The Prudential Insurance Company of America, both located at 751 Board Street, Newark, NJ 07102-3777. The Prudential Variable Appreciable Account Financial Statements For the periods ended December 31, 1999 The Prudential Insurance Company of America Consolidated Financial Statements For the periods ended December 31, 1999 [LOGO] FINANCIAL STATEMENTS OF THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF NET ASSETS December 31, 1999
SUBACCOUNTS ----------------------------------------------------------------------------- Money Diversified Flexible Conservative Market Bond Equity Managed Balanced Portfolio Portfolio Portfolio Portfolio Portfolio ------------ ------------ -------------- -------------- -------------- ASSETS Investment in The Prudential Series Fund, Inc. Portfolios at net asset value [Note 3]...................................... $128,156,517 $147,269,500 $1,613,800,819 $1,500,930,248 $1,128,695,150 Receivable from (Payable to) the Prudential Insurance Company of America [Note 2]......... 278,800 5,795 (388,479) (363,613) (278,132) ------------ ------------ -------------- -------------- -------------- Net Assets...................................... $128,435,317 $147,275,295 $1,613,412,340 $1,500,566,635 $1,128,417,018 ============ ============ ============== ============== ============== NET ASSETS, representing: Equity of contract owners [Note 4].............. $128,435,317 $147,275,295 $1,613,412,340 $1,500,566,635 $1,128,417,018 ------------ ------------ -------------- -------------- -------------- $128,435,317 $147,275,295 $1,613,412,340 $1,500,566,635 $1,128,417,018 ============ ============ ============== ============== ============== ------------ ZERO COUPON Bond 2000 Portfolio ------------ ASSETS Investment in The Prudential Series Fund, Inc. Portfolios at net asset value [Note 3]...................................... $ 18,370,067 Receivable from (Payable to) the Prudential Insurance Company of America [Note 2]......... 20,759 ------------ Net Assets...................................... $ 18,390,826 ============ NET ASSETS, representing: Equity of contract owners [Note 4].............. $ 18,390,826 ------------ $ 18,390,826 ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A1
SUBACCOUNTS (Continued) - ------------------------------------------------------------------------------------------------------------------------------------ High Zero Coupon Small Yield Stock Equity Natural Government Bond Prudential Capitalization Bond Index Income Resources Global Income 2005 Jennison Stock Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio - ----------- -------------- ------------ ------------ ------------ ----------- ----------- ------------ ------------ $89,203,993 $1,066,681,327 $478,304,921 $137,146,763 $227,344,138 $74,796,358 $25,280,410 $459,533,890 $126,766,164 (97,495) 262,683 (132,886) (33,183) 148,486 (7,155) (108,269) 707,665 77,159 - ----------- -------------- ------------ ------------ ------------ ----------- ----------- ------------ ------------ $89,106,498 $1,066,944,010 $478,172,035 $137,113,580 $227,492,624 $74,789,203 $25,172,141 $460,241,555 $126,843,323 =========== ============== ============ ============ ============ =========== =========== ============ ============ $89,106,498 $1,066,944,010 $478,172,035 $137,113,580 $227,492,624 $74,789,203 $25,172,141 $460,241,555 $126,843,323 - ----------- -------------- ------------ ------------ ------------ ----------- ----------- ------------ ------------ $89,106,498 $1,066,944,010 $478,172,035 $137,113,580 $227,492,624 $74,789,203 $25,172,141 $460,241,555 $126,843,323 =========== ============== ============ ============ ============ =========== =========== ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A2 FINANCIAL STATEMENTS OF THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF OPERATIONS For the years ended December 31, 1999, 1998 and 1997
SUBACCOUNTS -------------------------------------------------------------------------------- Money Market Diversified Bond Portfolio Portfolio -------------------------------------- --------------------------------------- 1999 1998 1997 1999 1998 1997 ----------- ----------- ----------- ------------ ----------- ----------- INVESTMENT INCOME Dividend income............................ $ 5,770,360 $ 5,267,889 $ 5,094,912 $ 0 $ 8,588,103 $ 9,043,537 ----------- ----------- ----------- ------------ ----------- ----------- EXPENSES Charges to contract owners for assuming mortality risk and expense risk [Note 5A]................................ 820,458 702,791 661,235 1,044,261 977,226 866,520 Reimbursement for excess expenses [Note 5D]................................ 0 0 0 0 0 0 ----------- ----------- ----------- ------------ ----------- ----------- NET EXPENSES................................. 820,458 702,791 661,235 1,044,261 977,226 866,520 ----------- ----------- ----------- ------------ ----------- ----------- NET INVESTMENT INCOME (LOSS)................. 4,949,902 4,565,098 4,433,677 (1,044,261) 7,610,877 8,177,017 ----------- ----------- ----------- ------------ ----------- ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received....... 0 0 0 399,858 492,608 1,452,476 Realized gain (loss) on shares redeemed.... 0 0 0 (62,342) 107,984 107,543 Net change in unrealized gain (loss) on investments........................... 0 0 0 (1,453,759) 242,854 (702,474) ----------- ----------- ----------- ------------ ----------- ----------- NET GAIN (LOSS) ON INVESTMENTS............... 0 0 0 (1,116,243) 843,446 857,545 ----------- ----------- ----------- ------------ ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................. $ 4,949,902 $ 4,565,098 $ 4,433,677 $ (2,160,504) $ 8,454,323 $ 9,034,562 =========== =========== =========== ============ =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A3
SUBACCOUNTS (Continued) - ----------------------------------------------------------------------------------------------------------------------------- Equity Flexible Managed Conservative Balanced Portfolio Portfolio Portfolio - ----------------------------------------- ---------------------------------------- ---------------------------------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ $ 26,581,947 $ 27,312,284 $ 28,870,327 $ 66,382 $ 46,336,137 $ 38,256,221 $ 45,641,073 $ 46,034,230 $ 45,612,319 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 11,249,143 10,647,094 8,895,624 10,502,693 10,109,863 8,970,935 8,224,025 7,958,450 7,210,074 0 0 0 0 0 0 0 0 0 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 11,249,143 10,647,094 8,895,624 10,502,693 10,109,863 8,970,935 8,224,025 7,958,450 7,210,074 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 15,332,804 16,665,190 19,974,703 (10,436,311) 36,226,274 29,285,286 37,417,048 38,075,780 38,402,245 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 188,845,438 165,422,738 73,183,544 16,843,257 147,043,667 201,042,079 6,358,209 65,867,708 110,154,176 27,402,970 14,951,173 7,311,176 2,080,576 2,295,592 3,097,268 2,277,146 1,526,727 2,680,112 (58,596,445) (78,932,919) 158,043,072 91,955,490 (58,722,618) (37,001,732) 18,533,490 6,236,915 (36,006,094 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 157,651,963 101,440,992 238,537,792 110,879,323 90,616,641 167,137,615 27,168,845 73,631,350 76,828,194 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ $172,984,767 $118,106,182 $258,512,495 $100,443,012 $126,842,915 $196,422,901 $ 64,585,893 $111,707,130 $115,230,439 ============ ============ ============ ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A4 FINANCIAL STATEMENTS OF THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF OPERATIONS For the years ended December 31, 1999, 1998 and 1997
SUBACCOUNTS ------------------------------------------------------------------------------ Zero Coupon Bond 2000 High Yield Bond Portfolio Portfolio ------------------------------------- --------------------------------------- 1999 1998 1997 1999 1998 1997 ---------- ------------ ----------- ----------- ------------ ------------ INVESTMENT INCOME Dividend income............................ $ 0 $ 990,142 $ 1,012,102 $ 251,218 $ 9,308,036 $ 8,213,223 ---------- ------------ ----------- ----------- ------------ ------------ EXPENSES Charges to contract owners for assuming mortality risk and expense risk [Note 5A]................................ 137,327 144,233 141,029 655,946 697,446 618,514 Reimbursement for excess expenses [Note 5D]................................ (35,650) (44,243) (53,201) 0 0 0 ---------- ------------ ----------- ----------- ------------ ------------ NET EXPENSES................................. 101,677 99,990 87,828 655,946 697,446 618,514 ---------- ------------ ----------- ----------- ------------ ------------ NET INVESTMENT INCOME (LOSS)................. (101,677) 890,152 924,274 (404,728) 8,610,590 7,594,709 ---------- ------------ ----------- ----------- ------------ ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received....... 36,915 267,168 804,923 0 0 0 Realized gain (loss) on shares redeemed.... 34,751 60,617 46,554 (966,582) (243,731) 311,580 Net change in unrealized gain (loss) on investments........................... 334,605 153,354 (497,282) 4,891,833 (11,461,047) 2,620,272 ---------- ------------ ----------- ----------- ------------ ------------ NET GAIN (LOSS) ON INVESTMENTS............... 406,271 481,139 354,195 3,925,251 (11,704,778) 2,931,852 ---------- ------------ ----------- ----------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................. $ 304,594 $ 1,371,291 $ 1,278,469 $ 3,520,523 $ (3,094,188) $ 10,526,561 ========== ============ =========== =========== ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A5
SUBACCOUNTS (continued) - ------------------------------------------------------------------------------------------------------------------------------- Stock Index Equity Income Natural Resources Portfolio Portfolio Portfolio - ---------------------------------------- ----------------------------------------- ------------------------------------------ 1999 1998 1997 1999 1998 1997 1999 1998 1997 - ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------- ------------- $ 10,125,645 $ 9,059,895 $ 8,102,242 $ 10,876,592 $ 12,342,267 $ 9,608,504 $ 828,632 $ 975,725 $ 757,192 - ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------- ------------- 6,675,340 5,175,364 3,790,129 3,285,457 3,262,956 2,532,105 860,970 851,287 1,079,034 0 0 0 0 0 0 0 0 0 - ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------- ------------- 6,675,340 5,175,364 3,790,129 3,285,457 3,262,956 2,532,105 860,970 851,287 1,079,034 - ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------- ------------- 3,450,305 3,884,531 4,312,113 7,591,135 9,079,311 7,076,399 (32,338) 124,438 (321,842) - ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------- ------------- 12,472,929 12,847,130 17,197,911 53,052,638 27,501,162 39,390,070 0 6,263,457 16,426,552 19,189,378 6,237,945 6,786,808 7,546,600 (99,580) 3,982,449 (996,568) (1,250,821) 1,240,093 136,915,479 153,992,331 113,415,557 (16,047,855) (52,611,025) 59,248,683 44,575,398 (26,817,989) (35,487,893) - ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------- ------------- 168,577,786 173,077,406 137,400,276 44,551,383 (25,209,443) 102,621,202 43,578,830 (21,805,353) (17,821,248) - ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------- ------------- $172,028,091 $176,961,937 $141,712,389 $ 52,142,518 $ (16,130,132) $109,697,601 $ 43,546,492 $ (21,680,915) $ (18,143,090) ============ ============ ============ ============ ============= ============ ============ ============= =============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A6 FINANCIAL STATEMENTS OF THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF OPERATIONS For the years ended December 31, 1999, 1998 and 1997
SUBACCOUNTS -------------------------------------------------------------------------------- Global Government Income Portfolio Portfolio --------------------------------------- --------------------------------------- 1999 1998 1997 1999 1998 1997 ------------ ------------ ----------- ------------ ----------- ----------- INVESTMENT INCOME Dividend income............................ $ 678,214 $ 1,738,704 $ 1,281,804 $ 0 $ 4,520,286 $ 4,704,795 ------------ ------------ ----------- ------------ ----------- ----------- EXPENSES Charges to contract owners for assuming mortality risk and expense risk [Note 5A]................................ 1,111,465 843,008 686,676 558,812 560,752 515,147 Reimbursement for excess expenses [Note 5D]................................ 0 0 0 0 0 0 ------------ ------------ ----------- ------------ ----------- ----------- NET EXPENSES................................. 1,111,465 843,008 686,676 558,812 560,752 515,147 ------------ ------------ ----------- ------------ ----------- ----------- NET INVESTMENT INCOME (LOSS)................. (433,251) 895,696 595,128 (558,812) 3,959,534 4,189,648 ------------ ------------ ----------- ------------ ----------- ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received....... 1,189,193 5,918,263 5,120,114 0 0 0 Realized gain (loss) on shares redeemed.... 3,166,922 1,375,609 309,311 202,656 289,366 44,975 Net change in unrealized gain (loss) on investments........................... 67,191,804 18,668,316 (917,843) (2,381,684) 1,952,252 1,925,166 ------------ ------------ ----------- ------------ ----------- ----------- NET GAIN (LOSS) ON INVESTMENTS............... 71,547,919 25,962,188 4,511,582 (2,179,028) 2,241,618 1,970,141 ------------ ------------ ----------- ------------ ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................. $ 71,114,668 $ 26,857,884 $ 5,106,710 $ (2,737,840) $ 6,201,152 $ 6,159,789 ============ ============ =========== ============ =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A7
SUBACCOUNTS (Continued) - -------------------------------------------------------------------------------------------------------------------------- Zero Coupon Bond 2005 Prudential Jennison Small Capitalization Stock Portfolio Portfolio Portfolio - ------------------------------------- ---------------------------------------- ----------------------------------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 - ----------- ----------- ----------- ------------ ------------ ------------ ------------ ------------- ------------ $ 0 $ 1,296,279 $ 1,246,707 $ 541,083 $ 298,391 $ 157,623 $ 0 $ 528,189 $ 330,650 - ----------- ----------- ----------- ------------ ------------ ------------ ------------ ------------- ------------ 182,727 174,202 152,442 2,115,948 933,952 439,584 722,960 578,299 320,322 (48,249) (55,172) (73,169) 0 0 0 0 0 0 - ----------- ----------- ----------- ------------ ------------ ------------ ------------ ------------- ------------ 134,478 119,030 79,273 2,115,948 933,952 439,584 722,960 578,299 320,322 - ----------- ----------- ----------- ------------ ------------ ------------ ------------ ------------- ------------ (134,478) 1,177,249 1,167,434 (1,574,865) (635,561) (281,961) (722,960) (50,110) 10,328 - ----------- ----------- ----------- ------------ ------------ ------------ ------------ ------------- ------------ 0 29,253 489,749 18,100,277 2,902,977 5,052,341 1,918,174 5,935,686 4,897,323 173,356 164,197 71,812 1,956,464 453,639 525,215 (120,414) (102,881) 46,921 (1,723,392) 1,406,685 526,125 99,641,732 42,669,927 10,743,964 12,549,193 (7,230,189) 5,112,289 - ----------- ----------- ----------- ------------ ------------ ------------ ------------ ------------- ------------ (1,550,036) 1,600,135 1,087,686 119,698,473 46,026,543 16,321,520 14,346,953 (1,397,384) 10,056,533 - ----------- ----------- ----------- ------------ ------------ ------------ ------------ ------------- ------------ $(1,684,514) $ 2,777,384 $ 2,255,120 $118,123,608 $ 45,390,982 $ 16,039,559 $ 13,623,993 $ (1,447,494) $ 10,066,861 =========== =========== =========== ============ ============ ============ ============ ============= ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A8 FINANCIAL STATEMENTS OF THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the years ended December 31, 1999, 1998 and 1997
SUBACCOUNTS ------------------------------------------------------------------------------------ Money Diversified Market Bond Portfolio Portfolio ---------------------------------------- ----------------------------------------- 1999 1998 1997 1999 1998 1997 ------------ ------------ ------------ ------------ ------------ ------------ OPERATIONS; Net investment income (loss)................ $ 4,949,902 $ 4,565,098 $ 4,433,677 $ (1,044,261) $ 7,610,877 $ 8,177,017 Capital gains distributions received........ 0 0 0 399,858 492,608 1,452,476 Realized gain (loss) on shares redeemed..... 0 0 0 (62,342) 107,984 107,543 Net change in unrealized gain (loss) on investments............................... 0 0 0 (1,453,759) 242,854 (702,474) ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................. 4,949,902 4,565,098 4,433,677 (2,160,504) 8,454,323 9,034,562 ------------ ------------ ------------ ------------ ------------ ------------ PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS Contract Owner Net Payments................. 29,999,800 37,611,988 43,029,352 23,078,475 26,569,268 27,918,752 Policy Loans................................ (3,827,696) (2,736,768) (2,616,136) (3,188,191) (3,179,538) (2,676,866) Policy Loan Repayments and Interest......... 2,588,192 1,950,095 1,685,370 2,135,135 1,591,062 1,259,455 Surrenders, Withdrawals and Death Benefits.................................. (11,775,018) (9,187,944) (11,469,314) (8,911,486) (7,722,756) (7,179,534) Net Transfers From (To) Other Subaccounts or Fixed Rate Option...................... 2,629,991 (4,007,277) (27,263,357) (138,588) 3,018,103 (3,556,460) Administrative and Other Charges............ (8,860,933) (8,713,945) (10,301,958) (10,654,538) (10,752,740) (11,908,704) ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS................................... 10,754,336 14,916,149 (6,936,043) 2,320,807 9,523,399 3,856,643 ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RETAINED IN THE ACCOUNT [Note 7]............................ 0 (1,854,444) (147,721) 0 15,863 (196,475) ------------ ------------ ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS...................................... 15,704,238 17,626,803 (2,650,087) 160,303 17,993,585 12,694,730 NET ASSETS: Beginning of year........................... 112,731,079 95,104,276 97,754,363 147,114,992 129,121,407 116,426,677 ------------ ------------ ------------ ------------ ------------ ------------ End of year................................. $128,435,317 $112,731,079 $ 95,104,276 $147,275,295 $147,114,992 $129,121,407 ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A9
SUBACCOUNTS (Continued) - -------------------------------------------------------------------------------------------------------------- Flexible Equity Managed Portfolio Portfolio - ---------------------------------------------------- ---------------------------------------------------- 1999 1998 1997 1999 1998 1997 - -------------- -------------- -------------- -------------- -------------- -------------- $ 15,332,804 $ 16,665,190 $ 19,974,703 $ (10,436,311) $ 36,226,274 $ 29,285,286 188,845,438 165,422,738 73,183,544 16,843,257 147,043,667 201,042,079 27,402,970 14,951,173 7,311,176 2,080,576 2,295,592 3,097,268 (58,596,445) (78,932,919) 158,043,072 91,955,490 (58,722,618) (37,001,732) - -------------- -------------- -------------- -------------- -------------- -------------- 172,984,767 118,106,182 258,512,495 100,443,012 126,842,915 196,422,901 - -------------- -------------- -------------- -------------- -------------- -------------- 222,112,390 285,120,763 293,586,658 155,685,002 206,491,305 230,098,301 (46,925,941) (45,013,313) (36,815,052) (33,487,354) (34,928,110) (29,768,329) 25,863,007 21,138,295 15,156,086 20,075,111 17,294,994 13,061,811 (94,909,037) (97,071,175) (79,836,234) (67,752,219) (79,498,303) (69,955,243) (59,651,177) (7,299,784) 281,061 (36,216,054) (18,229,089) (12,348,231) (122,798,555) (131,817,860) (137,177,962) (98,917,196) (106,307,492) (115,580,696) - -------------- -------------- -------------- -------------- -------------- -------------- (76,309,313) 25,056,926 55,194,557 (60,612,710) (15,176,695) 15,507,613 - -------------- -------------- -------------- -------------- -------------- -------------- 0 (134,891) (1,730,961) 0 (115,363) (332,076) - -------------- -------------- -------------- -------------- -------------- -------------- 96,675,454 143,028,217 311,976,091 39,830,302 111,550,857 211,598,438 1,516,736,886 1,373,708,669 1,061,732,578 1,460,736,333 1,349,185,476 1,137,587,038 - -------------- -------------- -------------- -------------- -------------- -------------- $1,613,412,340 $1,516,736,886 $1,373,708,669 $1,500,566,635 $1,460,736,333 $1,349,185,476 ============== ============== ============== ============== ============== ============== - ---------------------------------------------- Conservative Balanced Portfolio - ---------------------------------------------- 1999 1998 1997 - -------------- -------------- -------------- $ 37,417,048 $ 38,075,780 $ 38,402,245 6,358,209 65,867,708 110,154,176 2,277,146 1,526,727 2,680,112 18,533,490 6,236,915 (36,006,094) - -------------- -------------- -------------- 64,585,893 111,707,130 115,230,439 - -------------- -------------- -------------- 122,128,969 172,963,578 193,920,159 (23,665,043) (24,402,529) (21,017,180) 15,558,408 13,921,518 10,130,000 (64,392,473) (68,346,109) (68,407,322) (27,102,834) (16,607,607) (19,240,097) (84,858,651) (91,363,858) (100,869,775) - -------------- -------------- -------------- (62,331,624) (13,835,007) (5,484,215) - -------------- -------------- -------------- 0 (57,837) 98,440 - -------------- -------------- -------------- 2,254,269 97,814,286 109,844,664 1,126,162,749 1,028,348,463 918,503,799 - -------------- -------------- -------------- $1,128,417,018 $1,126,162,749 $1,028,348,463 ============== ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A10 FINANCIAL STATEMENTS OF THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the years ended December 31, 1999, 1998 and 1997
SUBACCOUNTS ------------------------------------------------------------------------------------ Zero Coupon High Yield Bond 2000 Bond Portfolio Portfolio ------------------------------------------ ---------------------------------------- 1999 1998 1997 1999 1998 1997 ------------ ------------ ------------ ------------ ------------ ------------ OPERATIONS Net investment income (loss)............... $ (101,677) $ 890,152 $ 924,274 $ (404,728) $ 8,610,590 $ 7,594,709 Capital gains distributions received....... 36,915 267,168 804,923 0 0 0 Realized gain (loss) on shares redeemed.... 34,751 60,617 46,554 (966,582) (243,731) 311,580 Net change in unrealized gain (loss) on investments.............................. 334,605 153,354 (497,282) 4,891,833 (11,461,047) 2,620,272 ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................. 304,594 1,371,291 1,278,469 3,520,523 (3,094,188) 10,526,561 ------------ ------------ ------------ ------------ ------------ ------------ PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS Contract Owner Net Payments................ 2,253,874 3,242,362 4,066,622 15,705,252 20,544,444 19,451,504 Policy Loans............................... (513,608) (644,425) (515,179) (2,428,091) (2,652,877) (2,378,667) Policy Loan Repayments and Interest........ 399,503 360,153 224,553 1,801,343 1,492,709 1,433,405 Surrenders, Withdrawals and Death Benefits................................. (1,426,761) (1,526,453) (1,236,692) (6,795,370) (7,617,762) (6,747,487) Net Transfers From (To) Other Subaccounts or Fixed Rate Option..................... (1,169,148) (1,096,463) (1,986,651) (7,871,916) 945,487 (2,355,030) Administrative and Other Charges........... (1,418,736) (1,619,003) (1,957,807) (7,570,585) (8,497,933) (9,029,043) ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS.................................. (1,874,876) (1,283,829) (1,405,154) (7,159,367) 4,214,068 374,682 ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RETAINED IN THE ACCOUNT [Note 7]........................... 0 (8,240) (63,959) 0 (42,474) (110,168) ------------ ------------ ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS..................................... (1,570,282) 79,222 (190,644) (3,638,844) 1,077,406 10,791,075 NET ASSETS: Beginning of year.......................... 19,961,108 19,881,886 20,072,530 92,745,342 91,667,936 80,876,861 ------------ ------------ ------------ ------------ ------------ ------------ End of year................................ $ 18,390,826 $ 19,961,108 $ 19,881,886 $ 89,106,498 $ 92,745,342 $ 91,667,936 ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A11
SUBACCOUNTS (Continued) - ------------------------------------------------------------------------------------------------------------------------------ Stock Equity Natural Index Income Resources Portfolio Portfolio Portfolio - ------------------------------------------ ---------------------------------------- ----------------------------------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 - -------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ $ 3,450,305 $ 3,884,531 $ 4,312,113 $ 7,591,135 $ 9,079,311 $ 7,076,399 $ (32,338) $ 124,438 $ (321,842) 12,472,929 12,847,130 17,197,911 53,052,638 27,501,162 39,390,070 0 6,263,457 16,426,552 19,189,378 6,237,946 6,786,808 7,546,600 (99,580) 3,982,449 (996,568) (1,250,821) 1,240,093 136,915,479 153,992,330 113,415,557 (16,047,855) (52,611,025) 59,248,683 44,575,398 (26,817,989) (35,487,893) - -------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 172,028,091 176,961,937 141,712,389 52,142,518 (16,130,132) 109,697,601 43,546,492 (21,680,915) (18,143,090) - -------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 128,537,549 139,848,176 126,688,004 72,746,641 95,299,141 79,016,436 19,035,268 29,732,123 35,927,519 (27,496,074) (21,632,900) (15,814,797) (11,949,900) (12,921,751) (9,558,454) (3,632,049) (3,757,335) (4,989,959) 14,533,537 8,895,587 5,919,148 7,032,090 5,682,713 3,893,428 2,491,659 2,389,809 2,524,073 (53,330,346) (40,266,311) (32,499,126) (28,641,449) (27,141,623) (21,564,128) (7,347,934) (9,543,364) (10,791,367) 55,524,073 22,168,188 30,361,425 (30,030,572) 9,043,514 21,482,832 (7,955,642) (15,621,028) (3,663,884) (68,714,043) (62,397,410) (56,128,875) (37,398,609) (40,729,679) (36,599,080) (9,809,178) (11,289,685) (16,073,256) - -------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 49,054,696 46,615,330 58,525,779 (28,241,799) 29,232,315 36,671,034 (7,217,876) (8,089,480) 2,933,126 - -------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 0 111,800 (910,143) 0 139,884 (393,762) 0 (97,825) (148,013) - -------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 221,082,787 223,689,067 199,328,025 23,900,719 13,242,067 145,974,873 36,328,616 (29,868,220) (15,357,977) 845,861,223 622,172,156 422,844,131 454,271,316 441,029,249 295,054,376 100,784,964 130,653,184 146,011,161 - -------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ $1,066,944,010 $845,861,223 $622,172,156 $478,172,035 $454,271,316 $441,029,249 $137,113,580 $100,784,964 $130,653,184 ============== ============ ============ ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A12 FINANCIAL STATEMENTS OF THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the years ended December 31, 1999, 1998 and 1997
SUBACCOUNTS ---------------------------------------------------------------------------------- Government Global Income Portfolio Portfolio ---------------------------------------- ---------------------------------------- 1999 1998 1997 1999 1998 1997 ------------ ------------ ------------ ------------ ------------ ------------ OPERATIONS Net investment income (loss).............. $ (433,251) $ 895,696 $ 595,128 $ (558,812) $ 3,959,534 $ 4,189,648 Capital gains distributions received...... 1,189,193 5,918,263 5,120,114 0 0 0 Realized gain (loss) on shares redeemed... 3,166,922 1,375,609 309,311 202,656 289,366 44,975 Net change in unrealized gain (loss) on investments............................. 67,191,804 18,668,316 (917,843) (2,381,684) 1,952,252 1,925,166 ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ 71,114,668 26,857,884 5,106,710 (2,737,840) 6,201,152 6,159,789 ------------ ------------ ------------ ------------ ------------ ------------ PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS Contract Owner Net Payments............... 30,573,669 35,377,261 34,211,689 9,581,320 13,880,043 15,732,416 Policy Loans.............................. (4,548,965) (3,157,015) (2,628,076) (1,721,711) (1,989,148) (1,668,544) Policy Loan Repayments and Interest....... 2,204,939 1,774,955 1,262,980 1,350,789 898,042 767,258 Surrenders, Withdrawals and Death Benefits................................ (8,960,008) (8,032,750) (7,075,480) (4,700,068) (5,652,510) (5,308,280) Net Transfers From (To) Other Subaccounts or Fixed Rate Option.................... 8,628,134 (6,124,691) 4,870,997 (3,068,530) 1,151,981 (6,634,816) Administrative and Other Charges.......... (13,826,989) (12,788,521) (13,085,971) (6,002,933) (6,654,093) (7,709,072) ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS................................. 14,070,780 7,049,239 17,556,139 (4,561,133) 1,634,315 (4,821,038) ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RETAINED IN THE ACCOUNTS [Note 7]......................... 0 (110,095) (317,463) 0 (9,785) (923,259) ------------ ------------ ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS.................................... 85,185,448 33,797,028 22,345,386 (7,298,973) 7,825,682 415,492 NET ASSETS: Beginning of year......................... 142,307,176 108,510,148 86,164,762 82,088,176 74,262,494 73,847,002 ------------ ------------ ------------ ------------ ------------ ------------ End of year............................... $227,492,624 $142,307,176 $108,510,148 $ 74,789,203 $ 82,088,176 $ 74,262,494 ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A13
SUBACCOUNTS (Continued) - ---------------------------------------------------------------------------------------------------------------------------- Zero Coupon Prudential Small Capitalization Bond 2005 Jennison Stock Portfolio Portfolio Portfolio - ---------------------------------------- ---------------------------------------- ---------------------------------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ $ (134,478) $ 1,177,249 $ 1,167,434 $ (1,574,865) $ (635,561) $ (281,961) $ (722,960) $ (50,110) $ 10,328 0 29,253 489,749 18,100,277 2,902,977 5,052,341 1,918,174 5,935,686 4,897,323 173,356 164,197 71,812 1,956,464 453,639 525,215 (120,414) (102,881) 46,921 (1,723,392) 1,406,685 526,125 99,641,732 42,669,927 10,743,964 12,549,193 (7,230,189) 5,112,289 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ (1,684,514) 2,777,384 2,255,120 118,123,608 45,390,982 16,039,559 13,623,993 (1,447,494) 10,066,861 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 4,018,488 4,711,062 5,574,118 78,282,647 57,263,567 34,294,641 33,299,141 36,924,377 24,433,471 (686,257) (669,881) (467,791) (10,302,874) (4,014,420) (1,732,453) (2,635,093) (2,138,180) (1,222,173) 489,420 324,154 216,018 3,885,895 1,563,575 744,576 1,315,700 1,083,949 675,140 (1,806,470) (1,903,102) (1,546,854) (17,393,950) (7,435,590) (3,227,110) (6,184,134) (4,861,386) (2,326,066) (266,565) 1,015,999 (2,416,503) 115,758,631 39,232,682 16,630,147 (1,129,735) 7,146,825 23,570,817 (2,105,602) (2,279,627) (2,536,288) (32,069,991) (19,483,871) (11,791,465) (12,025,009) (11,395,563) (7,984,667) - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ (356,986) 1,198,605 (1,177,300) 138,160,358 67,125,943 34,918,336 12,640,870 26,760,022 37,146,522 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 0 (11,329) (648,770) 0 9,553 (773,643) 0 (201,407) (151,200) - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ (2,041,500) 3,964,660 429,050 256,283,966 112,526,478 50,184,252 26,264,863 25,111,121 47,062,183 27,213,641 23,248,981 22,819,931 203,957,589 91,431,111 41,246,859 100,578,460 75,467,339 28,405,156 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ $ 25,172,141 $ 27,213,641 $ 23,248,981 $460,241,555 $203,957,589 $ 91,431,111 $126,843,323 $100,578,460 $ 75,467,339 ============ ============ ============ ============ ============ ============ ============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A15 THROUGH A20 A14 NOTES TO FINANCIAL STATEMENTS OF THE VARIABLE APPRECIABLE LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT December 31, 1999 Note 1: General The Prudential Variable Appreciable Account (the "Account") of The Prudential Insurance Company of America ("Prudential") was established on August 11, 1987 by a resolution of Prudential's Board of Directors in conformity with insurance laws of the State of New Jersey. The assets of the Account are segregated from Prudential's other assets. Proceeds from the purchases of Prudential Variable Appreciable Life ("PVAL"), Prudential Survivorship Preferred ("SVUL") and Prudential Variable Universal Life ("VUL") contracts are invested in the Account. The Account is registered under the Investment Company Act of 1940, as amended, as a unit investment trust. There are twenty subaccounts within the Account. PVAL contracts offer the option to invest in fifteen of these subaccounts, each of which invests in a corresponding portfolio of The Prudential Series Fund, Inc. (the "Series Fund"). The Series Fund is a diversified open-end management investment company, and is managed by Prudential. Note 2: Significant Accounting Policies The accompanying financial statements are prepared in conformity with accounting principles generally accepted in the United States ("GAAP"). The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. Investments -- The investments in shares of the Series Fund are stated ----------- at the net asset value of the respective portfolio. Security Transactions -- Realized gains and losses on security --------------------- transactions are reported on an average cost basis. Purchase and sale transactions are recorded as of the trade date of the security being purchased or sold. Distributions Received -- Dividend and capital gain distributions ---------------------- received are reinvested in additional shares of the Series Fund and are recorded on the ex-dividend date. Receivable from (Payable to) the Prudential Insurance Company of ---------------------------------------------------------------- America -- At times, Prudential may owe an amount to or expect to ------- receive an amount from the Account primarily related to processing contract owner payments, surrenders, withdrawals and death benefits. This amount is reflected in the Account's Statements of Net Assets as either a receivable from or payable to Prudential. The receivable and or payable does not have an effect on the contract owner's account or the related unit value. A15 Note 3: Investment Information For The Prudential Series Fund, Inc. Portfolios The net asset value per share for each portfolio of the Series Fund, the number of shares (rounded) of each portfolio held by the subaccounts and the aggregate cost of investments in such shares at December 31, 1999 were as follows:
PORTFOLIOS --------------------------------------------------------------------------------- Money Diversified Flexible Conservative Market Bond Equity Managed Balanced ------------ ------------ -------------- -------------- -------------- Number of shares (rounded): 12,815,652 13,449,269 55,840,859 85,086,748 73,482,757 Net asset value per share: $ 10.00 $ 10.95 $ 28.90 $ 17.64 $ 15.36 Cost: $128,156,517 $147,348,631 $1,401,222,298 $1,418,591,980 $1,089,256,700 PORTFOLIOS (Continued) --------------------------------------------------------------------------------- Zero Coupon Bond High Stock Equity Natural 2000 Yield Bond Index Income Resources ------------ ------------ -------------- -------------- -------------- Number of shares (rounded): 1,414,170 11,862,233 23,997,330 24,503,326 7,891,068 Net asset value per share: $ 12.99 $ 7.52 $ 44.45 $ 19.52 $ 17.38 Cost: $ 17,875,241 $ 93,765,778 $ 516,310,665 $ 438,134,700 $ 123,307,830 PORTFOLIOS (Continued) --------------------------------------------------------------------------------- Zero Small Government Coupon Bond Prudential Capitalization Global Income 2005 Jennison Stock ------------ ------------ -------------- -------------- -------------- Number of shares (rounded):: 7,338,416 6,475,875 1,993,723 14,187,524 7,800,995 Net asset value per share: $ 30.98 $ 11.55 $ 12.68 $ 32.39 $ 16.25 Cost: $130,485,556 $ 73,646,381 $ 24,290,856 $ 303,184,238 $ 114,103,853
Note 4: Contract Owner Unit Information Outstanding contract owner units, unit values and total value of contract owner equity at December 31, 1999 were as follows:
SUBACCOUNTS ------------------------------------------------------------------------------ Money Diversified Flexible Conservative Market Bond Equity Managed Balanced Portfolio Portfolio Portfolio Portfolio Portfolio ------------ ------------ -------------- -------------- -------------- Contract Owner Units Outstanding (PVAL $100,000 + face - rounded)..... 51,251,764 40,083,700 185,263,952 255,543,582 203,089,476 Unit Value (PVAL $100,000 + face - rounded)..... $ 1.73699 $ 2.28553 $ 5.21569 $ 3.61436 $ 3.00432 ------------ ------------ -------------- -------------- -------------- Contract Owner Equity (PVAL $100,000 + face - rounded)..... $ 89,023,802 $ 91,612,499 $ 966,279,341 $ 923,626,503 $ 610,145,775 ------------ ------------ -------------- -------------- -------------- Contract Owner Units Outstanding (PVAL - rounded)..................... 17,905,506 23,058,385 125,562,626 163,120,068 176,543,038 Unit Value (PVAL)...................... $ 1.68239 $ 2.21278 $ 5.05053 $ 3.49968 $ 2.90888 ------------ ------------ -------------- -------------- -------------- Contract Owner Equity (PVAL)........... $ 30,124,044 $ 51,023,134 $ 634,157,808 $ 570,868,038 $ 513,542,512 ------------ ------------ -------------- -------------- -------------- Contract Owner Units Outstanding (SVUL - rounded)..................... 7,751,781 3,921,851 7,025,051 3,824,994 3,116,363 Unit Value (SVUL)...................... $ 1.18187 $ 1.16944 $ 1.78856 $ 1.56150 $ 1.48415 ------------ ------------ -------------- -------------- -------------- Contract Owner Equity (SVUL)........... $ 9,161,597 $ 4,586,370 $ 12,564,726 $ 5,972,729 $ 4,625,149 ------------ ------------ -------------- -------------- -------------- Contract Owner Units Outstanding (VUL - rounded)...................... 109,567 47,058 269,926 72,061 77,472 Unit Value (VUL)....................... $ 1.14883 $ 1.13250 $ 1.52066 $ 1.37891 $ 1.33701 ------------ ------------ -------------- -------------- -------------- Contract Owner Equity (VUL)............ $ 125,874 $ 53,293 $ 410,466 $ 99,366 $ 103,581 ------------ ------------ -------------- -------------- -------------- Total Contract Owner Equity............ $128,435,317 $147,275,295 $1,613,412,340 $1,500,566,635 $1,128,417,018 ============ ============ ============== ============== ==============
A16 Note 4: Contract Owner Unit Information (Continued)
SUBACCOUNTS (Continued) ------------------------------------------------------------------------------ Zero Coupon High Yield Stock Equity Natural Bond 2000 Bond Index Income Resources Portfolio Portfolio Portfolio Portfolio Portfolio ------------ ------------ -------------- -------------- -------------- Contract Owner Units Outstanding (PVAL $100,000 + face - rounded)..... 4,099,805 21,615,879 98,996,699 69,992,249 25,412,719 Unit Value (PVAL $100,000 + face - rounded)..... $ 2.64483 $ 2.40134 $ 6.75269 $ 4.53247 $ 3.17306 ------------ ------------ -------------- -------------- -------------- Contract Owner Equity (PVAL $100,000 + face - rounded)..... $ 10,843,287 $ 51,907,075 $ 668,494,019 $ 317,237,766 $ 80,636,082 ------------ ------------ -------------- -------------- -------------- Contract Owner Units Outstanding (PVAL - rounded)..................... 2,947,589 15,046,988 56,886,231 35,247,759 18,211,187 Unit Value (PVAL)...................... $ 2.56058 $ 2.32577 $ 6.53757 $ 4.38754 $ 3.07258 ------------ ------------ -------------- -------------- -------------- Contract Owner Equity (PVAL)........... $ 7,547,539 $ 34,995,832 $ 371,897,719 $ 154,650,954 $ 55,955,329 ------------ ------------ -------------- -------------- -------------- Contract Owner Units Outstanding (SVUL - rounded)..................... N/A 1,747,498 10,333,413 3,409,447 392,042 Unit Value (SVUL)...................... N/A $ 1.23564 $ 2.49636 $ 1.80209 $ 1.33192 ------------ ------------ -------------- -------------- -------------- Contract Owner Equity (SVUL)........... N/A $ 2,159,279 $ 25,795,918 $ 6,144,131 $ 522,169 ------------ ------------ -------------- -------------- -------------- Contract Owner Units Outstanding (VUL - rounded)...................... N/A 38,612 373,683 92,114 N/A Unit Value (VUL)....................... N/A $ 1.14763 $ 2.02405 $ 1.51100 N/A ------------ ------------ -------------- -------------- -------------- Contract Owner Equity (VUL)............ N/A $ 44,313 $ 756,354 $ 139,184 N/A ------------ ------------ -------------- -------------- -------------- Total Contract Owner Equity............ $ 18,390,826 $ 89,106,498 $1,066,944,010 $ 478,172,035 $ 137,113,580 ============ ============ ============== ============== ============== SUBACCOUNTS (Continued) ------------------------------------------------------------------------------ Small Government Zero Coupon Prudential Capitalization Global Income Bond 2005 Jennison Stock Portfolio Portfolio Portfolio Portfolio Portfolio ------------ ------------ -------------- -------------- -------------- Contract Owner Units Outstanding (PVAL $100,000 + face - rounded)..... 63,942,723 21,761,201 6,612,997 90,695,791 45,283,520 Unit Value (PVAL $100,000 + face - rounded)..... $ 2.58864 $ 2.07768 $ 2.49098 $ 3.59559 $ 1.95551 ------------ ------------ -------------- -------------- -------------- Contract Owner Equity (PVAL $100,000 + face - rounded)..... $165,524,691 $ 45,212,812 $ 16,472,844 $ 326,104,880 $ 88,552,376 Contract Owner Units Outstanding (PVAL - rounded)..................... 19,984,699 14,170,479 3,283,416 33,000,756 14,135,736 Unit Value (PVAL)...................... $ 2.54551 $ 2.01244 $ 2.41301 $ 3.54619 $ 1.92826 ------------ ------------ -------------- -------------- -------------- Contract Owner Equity (PVAL)........... $ 50,871,251 $ 28,517,238 $ 7,922,916 $ 117,026,949 $ 27,257,375 ------------ ------------ -------------- -------------- -------------- Contract Owner Units Outstanding (SVUL - rounded)..................... 4,784,406 917,325 673,457 5,413,683 6,497,063 Unit Value (SVUL)...................... $ 2.28529 $ 1.15461 $ 1.15283 $ 3.08973 $ 1.69824 ------------ ------------ -------------- -------------- -------------- Contract Owner Equity (SVUL)........... $ 10,933,754 $ 1,059,153 $ 776,381 $ 16,726,819 $ 11,033,572 ------------ ------------ -------------- -------------- -------------- Contract Owner Units Outstanding (VUL - rounded) 81,828 N/A N/A 153,493 N/A Unit Value (VUL)....................... $ 1.99111 N/A N/A $ 2.49462 N/A ------------ ------------ -------------- -------------- -------------- Contract Owner Equity (VUL)............ $ 162,928 N/A N/A $ 382,907 N/A ------------ ------------ -------------- -------------- -------------- Total Contract Owner Equity............ $227,492,624 $ 74,789,203 $ 25,172,141 $ 460,241,555 $ 126,843,323 ============ ============ ============== ============== ==============
Note 5: Charges and Expenses A. Mortality Risk and Expense Risk Charges The mortality risk and expense risk charges, at an effective annual rate of 0.90%, is applied daily against the net assets representing equity of PVAL contract owners held in each subaccount. For contract owners investing in PVAL with face amounts of $100,000 or more the annual rate is 0.60%. For contract owners investing in SVUL the annual rate is 0.90%. For contract owners investing In PVUL the annual rate is 0.90 %. Mortality risk is that contract owners may not live as long as estimated and expense risk is that the cost of issuing and administering the policies may exceed related charges by Prudential. B. Deferred Sales Charge A deferred sales charge is imposed upon surrenders of certain variable life insurance contracts to compensate Prudential for sales and other marketing expenses. The amount of any sales charge will depend on the number of years that have elapsed since the contract was issued. No sales charge will be imposed after the tenth year of the contract. No sales charge will be imposed on death benefits. A17 Note 5: Charges and Expenses (Continued) C. Partial Withdrawal Charge A charge is imposed by Prudential on partial withdrawals of the cash surrender value. A charge equal to the lesser of $25 or 2% for SVUL and PVUL and $15 or 2% for PVAL will be made in connection with each partial withdrawal of the cash surrender value of a contract. D. Expense Reimbursement PVAL contracts are reimbursed by Prudential, on a non-guaranteed basis, for expenses incurred by the Series Fund in excess of the effective rate of 0.40% for all Zero Coupon Bond Portfolios, 0.45% for the Stock Index Portfolio, 0.50% for the Equity Income Portfolio, 0.55% for the Natural Resources Portfolio, and 0.65% for the High Yield Bond Portfolio of the average daily net assets of these portfolios. SVUL contracts are reimbursed by Prudential, on a non-guaranteed basis, for expenses incurred by the Series Fund in excess of the effective rate of 0.40% of the average daily net assets of the portfolio of each of the Zero Coupon Bond Portfolios. E. Cost of Insurance and Other Related Charges Contract owners contributions are subject to certain deductions prior to being invested in the Account. The deductions are for (1) transaction costs which are deducted from each premium payment for PVAL and PVUL, to cover premium collection and processing costs; (2) state premium taxes; (3) sales charges which are deducted in order to compensate Prudential for the cost of selling the contract. Contracts are also subject to monthly charges for the costs of administering the contract and to compensate Prudential for the guaranteed minimum death benefit risk. Note 6: Taxes Prudential is taxed as a "life insurance company" as defined by the Internal Revenue Code and the results of operations of the Account form a part of Prudential's consolidated federal tax return. Under current federal law, no federal income taxes are payable by the Account. As such, no provision for tax liability has been recorded in these financial statements. Note 7: Net Increase (Decrease) in Net Assets Retained in the Account The increase (decrease) in net assets retained in the account represents the net contributions (withdrawals) of Prudential to (from) the Account. Effective October 13, 1998 Prudential no longer maintains a position in the account. Previously, Prudential maintained a position in the Account for liquidity purposes including unit purchases and redemptions, fund share transactions and expense processing. A18 Note 8: Unit Activity Transactions in units (including transfers among subaccounts) for the years ended December 31, 1999, 1998 and 1997 were as follows:
SUBACCOUNTS ------------------------------------------------------------------------------------ Money Diversified Market Bond Portfolio Portfolio ---------------------------------------- --------------------------------------- 1999 1998 1997 1999 1998 1997 ------------ ----------- ----------- ----------- ----------- ----------- Contract Owner Contributions: 120,477,063 69,014,332 65,667,687 22,216,255 19,897,577 16,213,787 Contract Owner Redemptions: (114,736,198) (57,752,616) (69,425,851) (20,070,222) (15,092,779) (14,250,810) SUBACCOUNTS (Continued) ------------------------------------------------------------------------------------ Flexible Equity Managed Portfolio Portfolio --------------------------------------- --------------------------------------- 1999 1998 1997 1999 1998 1997 ------------ ----------- ----------- ----------- ----------- ----------- Contract Owner Contributions: 60,448,440 81,572,816 92,473,729 55,689,347 76,938,185 93,973,164 Contract Owner Redemptions: (74,869,027) (74,174,443) (76,628,697) (72,365,779) (81,055,189) (87,813,519) SUBACCOUNTS (Continued) ------------------------------------------------------------------------------------ Conservative Zero Coupon Balanced Bond 2000 Portfolio Portfolio ---------------------------------------- --------------------------------------- 1999 1998 1997 1999 1998 1997 ------------ ----------- ----------- ----------- ----------- ----------- Contract Owner Contributions: 53,724,364 78,380,210 93,048,913 1,680,934 1,980,913 1,934,757 Contract Owner Redemptions: (74,929,420) (82,911,926) (94,880,956) (2,405,244) (2,493,753) (2,549,332) SUBACCOUNTS (Continued) ------------------------------------------------------------------------------------ High Yield Stock Bond Index Portfolio Portfolio ------------------------------------------ --------------------------------------- 1999 1998 1997 1999 1998 1997 ------------ ----------- ----------- ----------- ----------- ----------- Contract Owner Contributions: 19,247,980 19,318,322 17,186,033 47,997,403 45,264,098 50,408,149 Contract Owner Redemptions: (22,299,293) (16,933,871) (16,878,090) (36,168,261) (34,390,053) (34,222,528) SUBACCOUNTS (Continued) ------------------------------------------------------------------------------------ Equity Natural Income Resources Portfolio Portfolio ---------------------------------------- --------------------------------------- 1999 1998 1997 1999 1998 1997 ------------ ----------- ----------- ----------- ----------- ----------- Contract Owner Contributions: 27,292,681 34,330,488 34,569,866 13,026,517 15,093,093 18,586,440 Contract Owner Redemptions: (33,584,226) (26,544,454) (24,004,754) (15,783,619) (18,219,964) (17,455,643) SUBACCOUNTS (Continued) ------------------------------------------------------------------------------------ Government Global Income Portfolio Portfolio ---------------------------------------- --------------------------------------- 1999 1998 1997 1999 1998 1997 ------------ ----------- ----------- ----------- ----------- ----------- Contract Owner Contributions: 42,507,388 32,534,226 37,198,997 9,143,771 12,383,025 10,260,445 Contract Owner Redemptions: (35,405,377) (27,960,335) (24,567,571) (11,091,943) (11,507,261) (12,866,478) SUBACCOUNTS (Continued) ------------------------------------------------------------------------------------ Zero Coupon Prudential Bond 2005 Jennison Portfolio Portfolio ---------------------------------------- --------------------------------------- 1999 1998 1997 1999 1998 1997 ------------ ----------- ----------- ----------- ----------- ----------- Contract Owner Contributions: 5,288,563 3,651,972 2,986,424 81,466,185 53,654,104 36,782,725 Contract Owner Redemptions: (5,103,196) (3,174,685) (3,539,701) (33,061,952) (22,113,796) (16,099,947) SUBACCOUNTS (Continued) ---------------------------------------- Small Capitalization Stock Portfolio ---------------------------------------- 1999 1998 1997 ------------ ----------- ----------- Contract Owner Contributions: 44,995,701 38,172,591 38,237,386 Contract Owner Redemptions: (37,335,362) (22,883,043) (15,077,042)
A19 Note 9: Purchases and Sales of Investments The aggregate costs of purchases and proceeds from sales of investments in the Series Fund for the year ended December 31, 1999 were as follows:
PORTFOLIOS ---------------------------------------------------------------------------------------- Money Diversified Flexible Conservative Market Bond Equity Managed Balanced ------------- ------------ ------------- ------------- ------------ Purchases ................ $ 114,836,682 $ 16,588,379 $ 50,382,471 $ 26,327,058 $ 20,526,529 Sales .................... $(105,181,605) $(15,317,628) $(137,552,449) $ (97,078,848) $(90,804,045) PORTFOLIOS (Continued) ---------------------------------------------------------------------------------------- Zero Coupon Bond High Yield Stock Equity Natural 2000 Bond Index Income Resources ------------- ------------ ------------- ------------- ------------ Purchases ................ $ 1,305,363 $ 17,140,637 $ 86,655,640 $ 25,016,917 $ 8,051,691 Sales .................... $ (3,302,674) $(24,858,455) $ (44,538,967) $ (56,411,286) $(16,097,354) PORTFOLIOS (Continued) ---------------------------------------------------------------------------------------- Zero Coupon Small Government Bond Prudential Capitalization Global Income 2005 Jennison Stock ------------- ------------ ------------- ------------- ------------ Purchases ................ $ 44,133,526 $ 5,513,391 $ 5,194,522 $ 145,912,541 $ 39,818,481 Sales .................... $ (31,322,697) $(10,626,182) $ (5,577,717) $ (10,575,796) $(27,977,731)
Note 10: Related Party Transactions Prudential has purchased multiple PVAL contracts insuring the lives of certain employees. Prudential is the owner and beneficiary of the contracts. There were no net premium payments for the year ended December 31, 1999. Equity of contracts owners in the Flexible Managed subaccount at December 31, 1999 includes approximately $273 million owned by Prudential. A20 REPORT OF INDEPENDENT ACCOUNTANTS To the Contract Owners of the Variable Appreciable Life Subaccounts of the Prudential Variable Appreciable Account and the Board of Directors of The Prudential Insurance Company of America In our opinion, the accompanying statements of net assets and the related statements of operations and of changes in net assets present fairly, in all material respects, the financial position of the subaccounts (Money Market Portfolio, Diversified Bond Portfolio, Equity Portfolio, Flexible Managed Portfolio, Conservative Balanced Portfolio, Zero Coupon Bond 2000 Portfolio, High Yield Bond Portfolio, Stock Index Portfolio, Equity Income Portfolio, Natural Resources Portfolio, Global Portfolio, Government Income Portfolio, Zero Coupon Bond 2005 Portfolio, Prudential Jennison Portfolio, Small Capitalization Stock Portfolio) of the Variable Appreciable Life Subaccounts of the Prudential Variable Appreciable Account at December 31, 1999, the results of each of their operations and the changes in each of their net assets for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of The Prudential Insurance Company of America's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of fund shares owned at December 31, 1999, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP New York, New York March 17, 2000 A21 The Prudential Insurance Company of America Consolidated Statements of Financial Position December 31, 1999 and 1998 (In Millions) - --------------------------------------------------------------------------------
1999 1998 --------------- ---------------- ASSETS Fixed maturities: Available for sale, at fair value (amortized cost, 1999: $76,815; 1998: $76,997) $ 74,697 $ 80,158 Held to maturity, at amortized cost (fair value, 1999: $14,112; 1998: $17,906) 14,237 16,848 Trading account assets, at fair value 9,741 8,888 Equity securities, available for sale, at fair value (cost, 1999: $2,531; 1998: $2,583) 3,264 2,759 Mortgage loans on real estate 16,268 16,016 Investment real estate 770 675 Policy loans 7,590 7,476 Securities purchased under agreements to resell 13,944 10,252 Cash collateral for borrowed securities 7,124 5,622 Other long-term investments 4,087 3,474 Short-term investments 12,303 9,781 --------------- ---------------- Total investments 164,025 161,949 Cash 1,330 1,943 Accrued investment income 1,836 1,795 Broker-dealer related receivables 11,346 10,142 Deferred policy acquisition costs 7,324 6,462 Other assets 17,102 16,200 Separate account assets 82,131 80,931 --------------- ---------------- TOTAL ASSETS $ 285,094 $ 279,422 =============== ================ LIABILITIES AND EQUITY LIABILITIES Future policy benefits $ 68,069 $ 67,059 Policyholders' account balances 31,578 33,098 Unpaid claims and claim adjustment expenses 2,829 3,806 Policyholders' dividends 1,484 1,444 Securities sold under agreements to repurchase 24,598 21,486 Cash collateral for loaned securities 10,775 7,132 Income taxes payable 804 785 Broker-dealer related payables 5,839 6,530 Securities sold but not yet purchased 6,968 5,771 Short-term debt 10,858 10,082 Long-term debt 5,513 4,734 Other liabilities 14,357 16,169 Separate account liabilities 82,131 80,931 --------------- ---------------- Total liabilities 265,803 259,027 --------------- ---------------- COMMITMENTS AND CONTINGENCIES (See Notes 14 and 15) EQUITY Accumulated other comprehensive income/(loss) (685) 1,232 Retained earnings 19,976 19,163 --------------- ---------------- Total equity 19,291 20,395 --------------- ---------------- TOTAL LIABILITIES AND EQUITY $ 285,094 $ 279,422 =============== ================
See Notes to Consolidated Financial Statements B1 The Prudential Insurance Company of America Consolidated Statements of Operations Years Ended December 31, 1999, 1998 and 1997 (In Millions) - --------------------------------------------------------------------------------
1999 1998 1997 --------------- -------------- -------------- REVENUES Premiums $9,475 $9,024 $9,015 Policy charges and fee income 1,516 1,465 1,423 Net investment income 9,424 9,535 9,482 Realized investment gains, net 924 2,641 2,168 Commissions and other income 5,279 4,471 4,480 --------------- -------------- -------------- Total revenues 26,618 27,136 26,568 --------------- -------------- -------------- BENEFITS AND EXPENSES Policyholders' benefits 10,175 9,840 9,956 Interest credited to policyholders' account balances 1,811 1,953 2,170 Dividends to policyholders 2,571 2,477 2,422 General and administrative expenses 9,656 9,108 8,620 Sales practices remedies and costs 100 1,150 2,030 --------------- -------------- -------------- Total benefits and expenses 24,313 24,528 25,198 --------------- -------------- -------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 2,305 2,608 1,370 --------------- -------------- -------------- Income taxes Current 690 1,085 101 Deferred 352 (115) 306 --------------- -------------- -------------- Total income taxes 1,042 970 407 --------------- -------------- -------------- INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM 1,263 1,638 963 --------------- -------------- -------------- DISCONTINUED OPERATIONS Loss from healthcare operations, net of taxes - (298) (353) Loss on disposal of healthcare operations, net of taxes (400) (223) - --------------- -------------- -------------- Net loss from discontinued operations (400) (521) (353) --------------- -------------- -------------- INCOME BEFORE EXTRAORDINARY ITEM 863 1,117 610 EXTRAORDINARY ITEM - DEMUTUALIZATION EXPENSES, NET OF TAXES (50) (11) - --------------- -------------- -------------- NET INCOME $ 813 $1,106 $ 610 =============== ============== ==============
See Notes to Consolidated Financial Statements B2 The Prudential Insurance Company of America Consolidated Statements of Changes in Equity Years Ended December 31, 1999, 1998 and 1997 (In Millions) - --------------------------------------------------------------------------------
Accumulated Other Comprehensive Income/(Loss) --------------------------------------------------------------------- Total Foreign Net Accumulated Currency Unrealized Pension Other Translation Investment Liability Comprehensive Adjustments Gains/(Losses) Adjustment Income/(Loss) --------------- ----------------- ------------- ----------------- Balance, December 31, 1996 $ (56) $ 1,136 $ (4) $ 1,076 Comprehensive income: Net income Other comprehensive income, net of tax: Change in foreign currency translation adjustments (29) (29) Change in net unrealized investment gains 616 616 Additional pension liability adjustment (2) (2) Other comprehensive income Total comprehensive income --------------------------------------------------------------------- Balance, December 31, 1997 (85) 1,752 (6) 1,661 Comprehensive income: Net income Other comprehensive loss, net of tax: Change in foreign currency translation adjustments 54 54 Change in net unrealized investment gains (480) (480) Additional pension liability adjustment (3) (3) Other comprehensive loss Total comprehensive income --------------------------------------------------------------------- Balance, December 31, 1998 (31) 1,272 (9) 1,232 Comprehensive income: Net income Other comprehensive loss, net of tax: Change in foreign currency translation adjustments 13 13 Change in net unrealized investment gains (1,932) (1,932) Additional pension liability adjustment 2 2 Other comprehensive loss Total comprehensive loss --------------------------------------------------------------------- Balance, December 31, 1999 $ (18) $ (660) $ (7) $ (685) ===================================================================== Retained Total Earnings Equity -------------- ------------ Balance, December 31, 1996 $ 17,447 $18,523 Comprehensive income: Net income 610 610 Other comprehensive income, net of tax: Change in foreign currency translation adjustments (29) Change in net unrealized investment gains 616 Additional pension liability adjustment (2) ---------- Other comprehensive income 585 ---------- Total comprehensive income 1,195 ---------------------------- Balance, December 31, 1997 18,057 19,718 Comprehensive income: Net income 1,106 1,106 Other comprehensive loss, net of tax: Change in foreign currency translation adjustments 54 Change in net unrealized investment gains (480) Additional pension liability adjustment (3) ---------- Other comprehensive loss (429) ---------- Total comprehensive income 677 ---------------------------- Balance, December 31, 1998 19,163 20,395 Comprehensive income: Net income 813 813 Other comprehensive loss, net of tax: Change in foreign currency translation adjustments 13 Change in net unrealized investment gains (1,932) Additional pension liability adjustment 2 ---------- Other comprehensive loss (1,917) ---------- Total comprehensive loss (1,104) ---------------------------- Balance, December 31, 1999 $ 19,976 $19,291 ============================
See Notes to Consolidated Financial Statements B3 The Prudential Insurance Company of America Consolidated Statements of Cash Flows Years Ended December 31, 1999, 1998 and 1997 (In Millions) - --------------------------------------------------------------------------------
1999 1998 1997 -------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 813 $ 1,106 $ 610 Adjustments to reconcile net income to net cash provided by operating activities: Realized investment gains, net (915) (2,671) (2,209) Policy charges and fee income (237) (232) (258) Interest credited to policyholders' account balances 1,811 1,953 2,170 Depreciation and amortization 489 337 271 Loss on disposal of businesses 400 223 - Change in: Deferred policy acquisition costs (178) (174) (233) Future policy benefits and other insurance liabilities 724 597 2,537 Trading account assets (853) (2,540) (1,825) Income taxes payable 1,074 594 (1,391) Broker-dealer related receivables/payables (1,898) 1,495 (672) Securities purchased under agreements to resell (3,692) (1,591) (3,314) Cash collateral for borrowed securities (1,502) (575) (2,631) Cash collateral for loaned securities 3,643 (6,985) 5,668 Securities sold but not yet purchased 1,197 2,122 1,633 Securities sold under agreements to repurchase 3,112 9,139 4,844 Other, net (3,356) (5,234) 3,910 -------------- -------------- -------------- Cash flows from (used in) operating activities 632 (2,436) 9,110 -------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the sale/maturity of: Fixed maturities, available for sale 120,875 123,151 123,550 Fixed maturities, held to maturity 4,957 4,466 4,042 Equity securities, available for sale 3,190 2,792 2,572 Mortgage loans on real estate 2,640 4,090 4,299 Investment real estate 507 1,489 1,842 Other long-term investments 1,219 1,848 5,232 Payments for the purchase of: Fixed maturities, available for sale (120,933) (126,742) (129,854) Fixed maturities, held to maturity (2,414) (2,244) (2,317) Equity securities, available for sale (2,779) (2,547) (2,461) Mortgage loans on real estate (2,595) (3,719) (3,305) Investment real estate (483) (31) (241) Other long-term investments (1,354) (1,842) (4,173) Short-term investments (2,510) 2,145 (2,848) -------------- -------------- -------------- Cash flows from (used in) investing activities 320 2,856 (3,662) -------------- -------------- --------------
See Notes to Consolidated Financial Statements B4 The Prudential Insurance Company of America Consolidated Statements of Cash Flows (continued) Years Ended December 31, 1999, 1998 and 1997 (In Millions) - --------------------------------------------------------------------------------
1999 1998 1997 -------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Policyholders' account deposits 6,901 7,052 5,245 Policyholders' account withdrawals (9,835) (11,332) (9,873) Net increase in short-term debt 444 2,422 305 Proceeds from the issuance of long-term debt 1,844 1,940 324 Repayments of long-term debt (919) (418) (464) -------------- -------------- -------------- Cash flows used in financing activities (1,565) (336) (4,463) -------------- -------------- -------------- NET (DECREASE)/INCREASE IN CASH (613) 84 985 CASH, BEGINNING OF YEAR 1,943 1,859 874 -------------- -------------- -------------- CASH, END OF YEAR $ 1,330 $ 1,943 $ 1,859 ============== ============== ============== SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes (received)/paid $ (344) $ 163 $ 968 -------------- -------------- -------------- Interest paid $ 824 $ 864 $ 708 -------------- -------------- --------------
See Notes to Consolidated Financial Statements B5 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1. BUSINESS The Prudential Insurance Company of America and its subsidiaries (collectively, "Prudential" or "the Company") provide financial services throughout the United States and in many foreign countries. The Company's businesses provide a full range of insurance, investment, securities and other financial products and services to both retail and institutional customers. Principal products and services provided include life insurance, property and casualty insurance, annuities, mutual funds, pension and retirement related investments and administration, asset management, and securities brokerage. Demutualization On February 10, 1998, the Company's Board of Directors authorized management to take the preliminary steps necessary to allow the Company to demutualize and become a publicly traded stock company. On July 1, 1998, legislation was enacted in New Jersey that would permit demutualization to occur and that specified the process for conversion. Demutualization is a complex process involving the development of a plan of reorganization, approval of the plan by the Company's Board of Directors, a public hearing, approval by two-thirds of the qualified policyholders who vote on the plan, and review and approval by the New Jersey Department of Banking and Insurance. The Company's management is in the process of developing a proposed plan of demutualization, although there can be no assurance as to the terms thereof or that the Company's Board of Directors will approve such a plan. The Company's management currently anticipates that the Company's proposed plan of demutualization will include the establishment of a new holding company, Prudential, Inc., whose stock will be publicly traded and of which the Company's stock successor will become a direct or indirect wholly-owned subsidiary. The consolidated financial statements of the Company prior to the demutualization will become Prudential, Inc.'s consolidated financial statements upon demutualization. The Company's management also currently intends to propose that a corporate reorganization occur concurrently with the demutualization whereby the stock of various of the Company's subsidiaries (including Prudential Securities Group, the personal lines property-casualty insurance companies and the international insurance companies), the stock of a newly formed subsidiary containing the Company's asset management operations, and certain prepaid pension expense, post-employment benefits and certain other assets will be distributed to Prudential, Inc. If effected, the corporate reorganization can be expected to materially reduce invested assets, net income and total equity of The Prudential Insurance Company of America, which would be an insurance subsidiary of Prudential, Inc. after the corporate reorganization, although it would have no effect on the consolidated assets, net income or total equity of Prudential, Inc. As the terms of the foregoing transactions have not been finalized by the Company or approved by the regulatory authority, it is not currently possible to quantify their financial effect on the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of The Prudential Insurance Company of America, a mutual life insurance company, its majority-owned subsidiaries, and those partnerships and joint ventures in which the Company has a controlling financial interest, except in those instances where the Company cannot exercise control because the minority owners have substantive participating rights in the operating and capital B6 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) decisions of the entity. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). All significant intercompany balances and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, in particular deferred policy acquisition costs ("DAC") and future policy benefits, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Investments Fixed maturities classified as "available for sale" are carried at estimated fair value. Fixed maturities that the Company has both the positive intent and ability to hold to maturity are stated at amortized cost and classified as "held to maturity." The amortized cost of fixed maturities is written down to estimated fair value when a decline in value is considered to be other than temporary. Unrealized gains and losses on fixed maturities "available for sale," net of income tax and the effect on deferred policy acquisition costs and future policy benefits that would result from the realization of unrealized gains and losses, are included in a separate component of equity, "Accumulated other comprehensive income." Trading account assets and securities sold but not yet purchased are carried at estimated fair value. Realized and unrealized gains and losses on trading account assets and securities sold but not yet purchased are included in "Commissions and other income." Equity securities, available for sale, are comprised of common and non-redeemable preferred stock and are carried at estimated fair value. The associated unrealized gains and losses, net of income tax and the effect on deferred policy acquisition costs and future policy benefits that would result from the realization of unrealized gains and losses, are included in a separate component of equity, "Accumulated other comprehensive income/(loss)." Mortgage loans on real estate are stated primarily at unpaid principal balances, net of unamortized discounts and an allowance for losses. The allowance for losses includes a loan specific reserve for impaired loans and a portfolio reserve for incurred but not specifically identified losses. Impaired loans include those loans for which a probability exists that all amounts due according to the contractual terms of the loan agreement will not be collected. Impaired loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate, or at the fair value of the collateral if the loan is collateral dependent. Interest received on impaired loans, including loans that were previously modified in a troubled debt restructuring, is either applied against the principal or reported as revenue, according to management's judgment as to the collectibility of principal. Management discontinues accruing interest on impaired loans after the loans are 90 days delinquent as to principal or interest, or earlier when management has serious doubts about collectibility. When a loan is recognized as impaired, any accrued but uncollectible interest is reversed against interest income of the current period. Generally, a loan is restored to accrual status only after all delinquent interest and principal are brought current and, in the case of loans where the payment of interest has been interrupted for a substantial period, a regular payment performance has been established. The portfolio reserve for incurred but not specifically identified losses considers the Company's past loan loss experience, the current credit composition of the portfolio, historical credit migration, property type diversification, default and loss severity statistics and other relevant factors. B7 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Investment real estate held for disposal is carried at the lower of depreciated cost or fair value less estimated selling costs and is not further depreciated once classified as such. Real estate which the Company has the intent to hold for the production of income is carried at depreciated cost less any write-downs to fair value for impairment losses and is reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognized when the review indicates that the carrying value of the investment real estate exceeds the estimated undiscounted future cash flows (excluding interest charges) from the investment. At that time, the carrying value of the investment real estate is written down to fair value. Charges relating to real estate held for disposal and impairments of real estate held for investment are included in "Realized investment gains, net." Depreciation on real estate held for the production of income is computed using the straight-line method over the estimated lives of the properties, and is included in "Net investment income." Policy loans are carried at unpaid principal balances. Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as financing arrangements and are carried at the amounts at which the securities will be subsequently resold or reacquired, including accrued interest, as specified in the respective agreements. The Company's policy is to take possession or control of securities purchased under agreements to resell. Assets to be repurchased are the same, or substantially the same, as the assets transferred and the transferor, through right of substitution, maintains the right and ability to redeem the collateral on short notice. The market value of securities to be repurchased or resold is monitored, and additional collateral is obtained, where appropriate, to protect against credit exposure. Securities borrowed and securities loaned are treated as financing arrangements and are recorded at the amount of cash advanced or received. With respect to securities loaned, the Company obtains collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. The Company monitors the market value of securities borrowed and loaned on a daily basis with additional collateral obtained as necessary. Non-cash collateral received is not reflected in the consolidated statements of financial position because the debtor typically has the right to redeem the collateral on short notice. Substantially all of the Company's securities borrowed contracts are with other brokers and dealers, commercial banks and institutional clients. Substantially all of the Company's securities loaned are with large brokerage firms. Securities repurchase and resale agreements and securities borrowed and loaned transactions are used to generate net investment income and facilitate trading activity. These instruments are short-term in nature (usually 30 days or less) and are collateralized principally by U.S. Government and mortgage-backed securities. The carrying amounts of these instruments approximate fair value because of the relatively short period of time between the origination of the instruments and their expected realization. Other long-term investments primarily represent the Company's investments in joint ventures and partnerships in which the Company does not exercise control and derivatives held for purposes other than trading. Such joint venture and partnership interests are generally accounted for using the equity method of accounting, reduced for other than temporary declines in value, except in instances in which the Company's interest is so minor that it exercises virtually no influence over operating and financial policies. In such instances, the Company applies the cost method of accounting. The Company's net income from investments in joint ventures and partnerships is generally included in "Net investment income." However, for certain real estate joint ventures, Prudential's B8 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) interest is liquidated by means of one or more transactions that result in the sale of the underlying invested assets to third parties and the ultimate distribution of the proceeds to Prudential and other joint venture partners in exchange for and settlement of the respective joint venture interests. These transactions are accounted for as disposals of Prudential's joint venture interests and the resulting gains and losses are included in "Realized investment gains, net." Short-term investments, including highly liquid debt instruments purchased with an original maturity of twelve months or less, are carried at amortized cost, which approximates fair value. Realized investment gains, net are computed using the specific identification method. Costs of fixed maturities and equity securities are adjusted for impairments considered to be other than temporary. Allowances for losses on mortgage loans on real estate are netted against asset categories to which they apply and provisions for losses on investments are included in "Realized investment gains, net." Decreases in the carrying value of investment real estate held for disposal are recorded in "Realized investment gains, net." Cash Cash includes cash on hand, amounts due from banks, and money market instruments. Deferred Policy Acquisition Costs The costs that vary with and that are related primarily to the production of new insurance and annuity business are deferred to the extent such costs are deemed recoverable from future profits. Such costs include commissions, costs of policy issuance and underwriting, and variable field office expenses. Deferred policy acquisition costs are subject to recoverability testing at the time of policy issue and loss recognition testing at the end of each accounting period. Deferred policy acquisition costs, for certain products, are adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding credits or charges included in "Accumulated other comprehensive income." For participating life insurance, deferred policy acquisition costs are amortized over the expected life of the contracts (up to 45 years) in proportion to estimated gross margins based on historical and anticipated future experience, which is updated periodically. The average rate of assumed investment yield used in estimating expected gross margins was 7.83% at December 31, 1999. The effect of changes in estimated gross margins on unamortized deferred acquisition costs is reflected in "General and administrative expenses" in the period such estimated gross margins are revised. Policy acquisition costs related to interest-sensitive products and certain investment-type products are deferred and amortized over the expected life of the contracts (periods ranging from 15 to 30 years) in proportion to estimated gross profits arising principally from investment results, mortality and expense margins, and surrender charges based on historical and anticipated future experience, which is updated periodically. The effect of changes to estimated gross profits on unamortized deferred acquisition costs is reflected in "General and administrative expenses" in the period such estimated gross profits are revised. Deferred policy acquisition costs related to non-participating term insurance are amortized over the expected life of the contracts in proportion to the premium income. The Company has offered programs under which policyholders, for a selected product or group of products, can exchange an existing policy or contract issued by the Company for another form of policy or contract. These transactions are known as internal replacements. If policyholders surrender traditional life insurance policies in exchange for life insurance policies that do not have fixed and guaranteed terms, the Company immediately charges to expense the remaining unamortized DAC on the surrendered policies. For other internal replacement transactions, the unamortized DAC on the surrendered policies is immediately charged to expense if the terms of the new policies are not substantially similar to those of the former policies. If the new policies have terms that B9 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) are substantially similar to those of the earlier policies, the DAC is retained with respect to the new policies. For property and casualty insurance contracts, deferred policy acquisition costs are amortized over the period in which related premiums are earned. Future investment income is considered in determining the recoverability of deferred policy acquisition costs. For disability insurance, group life insurance, group annuities and guaranteed investment contracts, acquisition costs are expensed as incurred. Separate Account Assets and Liabilities Separate account assets and liabilities are reported at estimated fair value and represent segregated funds which are invested for certain policyholders, pension funds and other customers. The assets consist of common stocks, fixed maturities, real estate related securities, real estate mortgage loans and short-term investments. The assets of each account are legally segregated and are generally not subject to claims that arise out of any other business of the Company. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. The investment income and gains or losses for separate accounts generally accrue to the policyholders and are not included in the Consolidated Statements of Operations. Mortality, policy administration and surrender charges on the accounts are included in "Policy charges and fee income." Asset management fees charged to the accounts are included in "Commissions and other income." Other Assets and Other Liabilities Other assets consist primarily of prepaid benefit costs, reinsurance recoverables, certain restricted assets, trade receivables, mortgage securitization inventory, and property and equipment. Property and equipment are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets which generally range from 3 to 40 years. Other liabilities consist primarily of trade payables, employee benefit liabilities, and reserves for sales practices remedies and costs. Contingencies Amounts related to contingencies are accrued if it is probable that a liability has been incurred and an amount is reasonably estimable. Management evaluates whether there are incremental legal or other costs directly associated with the ultimate resolution of the matter that are reasonably estimable and, if so, they are included in the accrual. Policyholders' Dividends The amount of the dividends to be paid to policyholders is determined annually by the Company's Board of Directors. The aggregate amount of policyholders' dividends is based on the Company's statutory results and past experience, including investment income, realized investment gains, net over a number of years, mortality experience and other factors. Insurance Revenue and Expense Recognition Premiums from participating insurance policies are recognized when due. Benefits are recorded as an expense when they are incurred. A liability for future policy benefits is recorded using the net level premium method. Premiums from non-participating group annuities with life contingencies are recognized when due. For single premium immediate annuities and structured settlements with life contingencies, premiums are recognized when due with any excess profit deferred and recognized in a constant relationship to the amount of expected future benefit payments. B10 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Amounts received as payment for interest-sensitive life contracts, deferred annuities and participating group annuities are reported as deposits to "Policyholders' account balances." Revenues from these contracts are reflected in "Policy charges and fee income" and consist primarily of fees assessed during the period against the policyholders' account balances for mortality charges, policy administration charges and surrender charges. Benefits and expenses for these products include claims in excess of related account balances, expenses of contract administration, interest credited and amortization of deferred policy acquisition costs. For disability insurance, group life insurance, and property and casualty insurance, premiums are recognized over the period to which the premiums relate in proportion to the amount of insurance protection provided. Claim and claim adjustment expenses are recognized when incurred. Premiums, benefits and expenses are stated net of reinsurance ceded to other companies. Estimated reinsurance receivables and the cost of reinsurance are recognized over the life of the reinsured policies using assumptions consistent with those used to account for the underlying policies. Foreign Currency Translation Adjustments Assets and liabilities of foreign operations and subsidiaries reported in other than U.S. dollars are translated at the exchange rate in effect at the end of the period. Revenues, benefits and other expenses are translated at the average rate prevailing during the period. The effects of translating the Statements of Financial Position of non-U.S. entities with functional currencies other than the U.S. dollar are included, net of related hedge gains and losses and income taxes, in "Accumulated other comprehensive income (loss)," a separate component of equity. Commissions and Other Income Commissions and other income principally includes securities and commodities commission revenues, asset management fees, investment banking revenue and realized and unrealized gains from trading activities of the Company's securities business. Derivative Financial Instruments Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, or the value of securities or commodities. Derivative financial instruments used by the Company include swaps, futures, forwards and option contracts and may be exchange-traded or contracted in the over-the-counter market. The Company uses derivative financial instruments to seek to reduce market risk from changes in interest rates or foreign currency exchange rates and to alter interest rate or currency exposures arising from mismatches between assets and liabilities. Additionally, derivatives are used in the broker-dealer business and in a limited-purpose subsidiary for trading purposes. To qualify as a hedge, derivatives must be designated as hedges for existing assets, liabilities, firm commitments or anticipated transactions which are identified and probable to occur, and effective in reducing the market risk to which the Company is exposed. The effectiveness of the derivatives are evaluated at the inception of the hedge and throughout the hedge period. Derivatives held for trading purposes are used by the Company's securities business to meet the needs of customers by structuring transactions that allow customers to manage their exposure to interest rates, foreign exchange rates, indices or prices of securities and commodities. Trading derivative positions are valued daily, generally by obtaining quoted market prices or through the use of pricing models. Values are affected by changes in interest rates, currency exchange rates, credit spreads, market volatility and liquidity. The Company monitors B11 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) these exposures through the use of various analytical techniques. Derivatives held for trading purposes are included at fair value in "Trading account assets," "Other liabilities" or "Broker-dealer related receivables/payables" in the Consolidated Statements of Financial Position, and realized and unrealized changes in fair value are included in "Commissions and other income" of the Consolidated Statements of Operations in the periods in which the changes occur. Cash flows from trading derivatives are reported in the operating activities section of the Consolidated Statements of Cash Flows. Derivatives held for purposes other than trading are primarily used to seek to reduce exposure to interest rate and foreign currency risks associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be incurred. Additionally, other than trading derivatives are used to change the characteristics of the Company's asset/liability mix as part of the Company's risk management activities. See Note 14 for a discussion of the accounting treatment of derivatives that qualify as hedges. If the Company's use of other than trading derivatives does not meet the criteria to apply hedge accounting, the derivatives are recorded at fair value in "Other long-term investments" or "Other liabilities" in the Consolidated Statements of Financial Position, and changes in their fair value are included in "Realized investment gains, net" without considering changes in the hedged assets or liabilities. Cash flows from other than trading derivatives are reported in the investing activities section in the Consolidated Statements of Cash Flows. Income Taxes The Company and its domestic subsidiaries file a consolidated federal income tax return. The Internal Revenue Code (the "Code") limits the amount of non-life insurance losses that may offset life insurance company taxable income. The Code also imposes an "equity tax" on mutual life insurance companies which, in effect, imputes an additional tax to the Company based on a formula that calculates the difference between stock and mutual life insurance companies' earnings. Income taxes include an estimate for changes in the total equity tax to be paid for current and prior years. Subsidiaries operating outside the United States are taxed under applicable foreign statutes. Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. A valuation allowance is recorded to reduce a deferred tax asset to that portion that is expected to be realized. Extraordinary Item - Demutualization Expenses, Net of Taxes The Consolidated Statements of Operations reflect extraordinary charges for demutualization expenses of $50 million and $11 million, net of taxes of zero, for the years ended December 31, 1999 and 1998, respectively. Demutualization expenses consist primarily of the cost of engaging independent accounting, actuarial, investment banking, legal and other consultants to advise the Company and the New Jersey Department of Banking and Insurance and the New York Department of Insurance in the demutualization process and related matters. Future demutualization expenses will also include the cost of printing and postage for communications with policyholders. New Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which requires that companies recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS No. 133 does not apply to most traditional insurance contracts. However, certain hybrid contracts that contain features which may affect settlement amounts similarly to derivatives may require separate accounting for the "host contract" and the underlying "embedded derivative" B12 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) provisions. The latter provisions would be accounted for as derivatives as specified by the statement. SFAS No. 133 provides, if certain conditions are met, that a derivative may be specifically designated as (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (fair value hedge), (2) a hedge of the exposure to variable cash flows of a forecasted transaction (cash flow hedge), or (3) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security or a foreign-currency-denominated forecasted transaction (foreign currency hedge). Under SFAS No. 133, the accounting for changes in fair value of a derivative depends on its intended use and designation. For a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item. For a cash flow hedge, the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. For a foreign currency hedge, the gain or loss is reported in other comprehensive income as part of the foreign currency translation adjustment. For all other derivatives not designated as hedging instruments, the gain or loss is recognized in earnings in the period of change. The Company is required to adopt this Statement, as amended, as of January 1, 2001 and is currently assessing the effect of the new standard. In October 1998, the AICPA issued Statement of Position 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk" ("SOP 98-7"). This statement provides guidance on how to account for insurance and reinsurance contracts that do not transfer insurance risk. SOP 98-7 is effective for fiscal years beginning after June 15, 1999. The adoption of this statement is not expected to have a material effect on the Company's financial position or results of operations. Reclassifications Certain amounts in prior years have been reclassified to conform to the current year presentation. 3. DISCONTINUED OPERATIONS In December 1998, the Company entered into a definitive agreement to sell its healthcare business to Aetna, Inc. ("Aetna"). The sale was completed on August 6, 1999. Included in this transaction were the Company's managed medical care, point of service, preferred provider organization and indemnity health lines, dental business, as well as the Company's Administrative Services Only ("ASO") business. The healthcare business is recorded as a discontinued operation in the accompanying consolidated financial statements, with a measurement date of December 31, 1998 Proceeds from the sale were $500 million of cash, $500 million of Aetna three-year senior notes and stock appreciation rights covering one million shares of Aetna common stock, valued at approximately $30 million at the date of closing, with a term of five years and a reference price of $81.81 per Aetna common share. The sale resulted in a loss of $623 million, net of tax. Loss from healthcare operations for 1998 includes results through December 31, 1998 (the measurement date). Amounts within the footnotes have been adjusted, where noted, to eliminate the impact of discontinued operations and to be consistent with the presentation in the Consolidated Statements of Operations. The 1998 loss on disposal of $223 million, net of taxes, included anticipated operating losses to be incurred by the healthcare business subsequent to December 31, 1998 (the measurement date) through the expected date of B13 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 3. DISCONTINUED OPERATIONS (continued) the sale, as well as estimates of other costs the Company would incur in connection with the disposition of the healthcare business. These include costs attributable to facilities closure and systems terminations, severance and termination benefits, payments to Aetna related to the ASO business and estimated payments in connection with a medical loss ratio agreement covering the fully insured medical and dental business (the "MLR Agreement"). The MLR Agreement provides for payments either to or from Aetna in the event that medical loss ratios (i.e., incurred medical expense divided by earned premiums) for covered businesses are either less favorable or more favorable than levels specified in the MLR Agreement for the years 1999 and 2000. The loss on disposal also included the estimated positive impact of net curtailment gains from expected modifications of certain pension and other postretirement benefit plans in which employees of the healthcare business participate. (See Note 9). In 1999 the Company recognized an additional loss on disposal of its healthcare business of $400 million, after related tax benefits. The additional loss resulted primarily from higher than anticipated healthcare operating losses during the 1999 period through the August 6 closing date. The higher losses resulted principally from adverse claims experience and the impact of this experience on the evaluation of the Company's obligation under the MLR Agreement. The pretax operating loss from the healthcare business from January 1, 1999 through August 6, 1999 was $370 million, which exceeded the original estimate of $160 million, recorded within the "Loss on disposal of healthcare operations" in 1998. In addition to the obligations noted above, the Company has retained certain liabilities pertaining to the healthcare business, including all liabilities associated with litigation which existed at August 6, 1999 or commences within two years of that date with respect to claims that were incurred prior to August 6, 1999. Management's best estimate of these costs is included in the loss on disposal. It is possible that additional adjustments to estimates may be necessary which might be material to future results of operations of a particular quarterly or annual period. Upon the closing of the sale of the healthcare business, the Company entered into a coinsurance agreement with Aetna. The agreement is 100% indemnity reinsurance on a coinsurance basis for all of the Company's insured medical and dental business in-force upon the completion of the sale of the business on August 6, 1999. The agreement requires the Company to issue additional policies for new customers in response to proposals made to brokers or customers within six months after the closing date and to renew insurance policies until two years after the closing date. All such additional new and renewal policies are 100% coinsured by Aetna, when issued. The purpose of the agreement is to provide for the uninterrupted operation and growth, including renewals of existing policies and issuance of new policies, of the healthcare business that Aetna acquired from Prudential. The operation of the business and the attendant risks, except for the existence of the MLR Agreement as discussed above, were assumed entirely by Aetna. Consequently, the following amounts pertaining to the agreement had no effect on the Company's results of operations. The Company ceded premiums and benefits of $896 million and $757 million, respectively, for the period from August 6, 1999 through December 31, 1999. Reinsurance recoverable under this agreement, included in other assets, was $500 million at December 31, 1999. The following table presents the results and the loss on the disposal of the Company's healthcare business, determined as of the measurement date and subsequently adjusted, which are included in "Discontinued Operations" in the Consolidated Statements of Operations. Amounts for 1997 include revenues and expenses relating to a contract with the American Association of Retired Persons for healthcare and similar coverages which was terminated effective December 31, 1997. B14 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 3. DISCONTINUED OPERATIONS (continued)
1999 1998 1997 --------------- --------------- -------------- (In Millions) Revenues $ - $ 7,461 $10,305 Policyholder benefits - (6,064) (8,484) General and administrative expenses - (1,822) (2,364) --------------- --------------- -------------- Loss before income taxes - (425) (543) Income tax benefit - 127 190 --------------- --------------- -------------- Loss from operations - (298) (353) Loss on disposal, net of tax benefits of $240 in 1999 and $131 in 1998 (400) (223) - --------------- --------------- -------------- Loss from discontinued operations, net of taxes $ (400) $ (521) $ (353) =============== =============== ==============
B15 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 4. INVESTMENTS Fixed Maturities and Equity Securities The following tables provide additional information relating to fixed maturities and equity securities (excluding trading account assets) as of December 31:
1999 -------------------------------------------------------------- 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 $ 5,594 $ 36 $ 236 $ 5,394 Obligations of U.S. states and their political subdivisions 2,437 41 118 2,360 Foreign government bonds 4,590 140 90 4,640 Corporate securities 57,503 580 2,431 55,652 Mortgage-backed securities 6,566 96 135 6,527 Other 125 - 1 124 -------------------------------------------------------------- Total fixed maturities available for sale $ 76,815 $ 893 $ 3,011 $ 74,697 ============================================================== Equity securities available for sale $ 2,531 $ 829 $ 96 $ 3,264 ==============================================================
1999 -------------------------------------------------------------- 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 $ 5 $ - $ - $ 5 Obligations of U.S. states and their political subdivisions 81 1 3 79 Foreign government bonds 214 11 1 224 Corporate securities 13,883 280 408 13,755 Mortgage-backed securities 1 - - 1 Other 53 - 5 48 -------------------------------------------------------------- Total fixed maturities held to maturity $ 14,237 $ 292 $ 417 $ 14,112 ==============================================================
B16 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 4. INVESTMENTS (continued)
1998 -------------------------------------------------------------- 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 $ 5,761 $ 580 $ 9 $ 6,332 Obligations of U.S. states and their political subdivisions 2,672 204 1 2,875 Foreign government bonds 3,486 258 59 3,685 Corporate securities 57,043 2,540 546 59,037 Mortgage-backed securities 7,935 208 14 8,129 Other 100 - - 100 -------------------------------------------------------------- Total fixed maturities available for sale $ 76,997 $ 3,790 $ 629 $ 80,158 ============================================================== Equity securities available for sale $ 2,583 $ 472 $ 296 $ 2,759 ==============================================================
1998 -------------------------------------------------------------- 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 $ 5 $ - $ - $ 5 Obligations of U.S. states and their political subdivisions 62 2 1 63 Foreign government bonds 216 8 1 223 Corporate securities 16,514 1,092 48 17,558 Mortgage-backed securities 1 - - 1 Other 50 6 - 56 -------------------------------------------------------------- Total fixed maturities held to maturity $ 16,848 $ 1,108 $ 50 $ 17,906 ==============================================================
B17 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 4. INVESTMENTS (continued) The amortized cost and estimated fair value of fixed maturities by contractual maturities at December 31, 1999, is shown below:
Available for Sale Held to Maturity ---------------------------------- ---------------------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value --------------- -------------- --------------- -------------- (In Millions) (In Millions) Due in one year or less $ 3,171 $ 3,166 $ 671 $ 671 Due after one year through five years 18,132 17,911 4,063 4,078 Due after five years through ten years 19,249 18,725 5,449 5,345 Due after ten years 29,697 28,368 4,053 4,017 Mortgage-backed securities 6,566 6,527 1 1 --------------- -------------- --------------- -------------- Total $ 76,815 $ 74,697 $ 14,237 $ 14,112 =============== ============== =============== ==============
Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations. Proceeds from the repayment of held to maturity fixed maturities during 1999, 1998 and 1997 were $4,957 million, $4,466 million, and $4,042 million, respectively. Gross gains of $73 million, $135 million, and $62 million, and gross losses of $0 million, $2 million, and $1 million were realized on prepayment of held to maturity fixed maturities during 1999, 1998 and 1997, respectively. Proceeds from the sale of available for sale fixed maturities during 1999, 1998 and 1997 were $117,547 million, $119,096 million and $120,604 million, respectively. Proceeds from the maturity of available for sale fixed maturities during 1999, 1998 and 1997 were $3,328 million, $4,055 million and $2,946 million, respectively. Gross gains of $884 million, $1,765 million and $1,310 million, and gross losses of $1,231 million, $443 million and $639 million were realized on sales and prepayments of available for sale fixed maturities during 1999, 1998 and 1997, respectively. Writedowns for impairments which were deemed to be other than temporary for fixed maturities were $266 million, $96 million and $13 million and for equity securities were $205 million, $95 million and $31 million for the years 1999, 1998 and 1997, respectively. During the years ended December 31, 1999 and 1998, certain securities classified as held to maturity were either sold or transferred to the available for sale portfolio. These actions were taken as a result of a significant deterioration in creditworthiness. The aggregate amortized cost of the securities sold or transferred was $230 million in 1999 and $73 million in 1998. Gross unrealized investment losses of $5 million in 1999 and $.4 million in 1998 were recorded in "Accumulated other comprehensive income" at the time of the transfer. Prior to transfer, impairments related to these securities, if any, were included in "Realized investment gains, net." Realized gains on securities sold were $3 million in 1999. B18 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 4. INVESTMENTS (continued) Mortgage Loans on Real Estate The Company's mortgage loans were collateralized by the following property types at December 31:
Amount Percentage Amount Percentage (In Millions) of Total (In Millions) of Total 1999 1998 ---------------------------------- --------------------------------- Office Buildings $ 3,960 24.1% $ 4,156 25.3% Retail stores 2,627 15.9% 2,866 17.4% Residential properties 662 4.0% 716 4.3% Apartment complexes 4,508 27.3% 4,179 25.4% Industrial buildings 2,161 13.1% 1,971 12.0% Agricultural properties 1,959 11.9% 1,936 11.8% Other 612 3.7% 619 3.8% ---------------- ---------------- --------------- --------------- Subtotal 16,489 100% 16,443 100% ================ =============== Allowance for losses (221) (427) ---------------- --------------- Net carrying value $ 16,268 $ 16,016 ================ ===============
The mortgage loans are geographically dispersed throughout the United States and Canada with the largest concentrations in California (23.4%) and New York (10.1%) at December 31, 1999. Mortgage loans receivable at December 31, 1998 include $87 million from non-consolidated joint ventures. Activity in the allowance for losses for all mortgage loans, for the years ended December 31, is summarized as follows:
1999 1998 1997 ----------------- ----------------- ----------------- (In Millions) Allowance for losses, beginning of year $ 427 $ 450 $ 515 Release of allowance for losses (201) - (41) Charge-offs, net of recoveries (5) (23) (24) ----------------- ----------------- ----------------- Allowance for losses, end of year $ 221 $ 427 $ 450 ================= ================= =================
The $201 million reduction of the mortgage loan allowance for losses in 1999 is primarily attributable to the improved economic climate, changes in the nature and mix of borrowers and underlying collateral and a decrease in impaired loans. Impaired mortgage loans identified in management's specific review of probable loan losses and the related allowance for losses at December 31, are as follows:
1999 1998 ----------------- ----------------- (In Millions) Impaired mortgage loans with allowance for losses $ 411 $ 501 Impaired mortgage loans with no allowance for losses 283 572 Allowance for losses, end of year (24) (45) ----------------- ----------------- Net carrying value of impaired mortgage loans $ 670 $ 1,028 ================= =================
B19 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 4. INVESTMENTS (continued) Impaired mortgage loans with no allowance for losses are loans in which the fair value of the collateral or the net present value of the loans' expected future cash flows equals or exceeds the recorded investment. The average recorded investment in impaired loans before allowance for losses was $884 million, $1,329 million and $2,102 million during 1999, 1998 and 1997, respectively. Net investment income recognized on these loans totaled $55 million, $94 million and $140 million for the years ended December 31, 1999, 1998 and 1997, respectively. Investment Real Estate "Investment real estate" of $770 million and $675 million at December 31, 1999 and 1998, respectively, is directly owned. Of the Company's real estate, $293 million and $675 million consists of commercial and agricultural assets held for disposal at December 31, 1999 and 1998, respectively. Impairment losses amounted to $3 million, $8 million and $40 million for the years ended December 31, 1999, 1998 and 1997, respectively, and are included in "Realized investment gains, net." Restricted Assets and Special Deposits Assets of $4,463 million and $2,803 million at December 31, 1999 and 1998, respectively, were on deposit with governmental authorities or trustees as required by certain insurance laws. Additionally, assets valued at $2,325 million and $3,898 million at December 31, 1999 and 1998, respectively, were held in voluntary trusts. Of these amounts, $1,553 million and $3,131 million at December 31, 1999 and 1998, respectively, related to the multi-state policyholder settlement described in Note 15. The remainder relates to trusts established to fund guaranteed dividends to certain policyholders and to fund certain employee benefits. Assets valued at $128 million and $173 million at December 31, 1999 and 1998, respectively, were pledged as collateral for bank loans and other financing agreements. Restricted cash and securities of $4,082 million and $2,366 million at December 31, 1999 and 1998, respectively, were included in the Consolidated Statements of Financial Position in "Other assets." The restricted cash represents funds deposited by clients and funds accruing to clients as a result of trades or contracts. Other Long-Term Investments The Company's "Other long-term investments" of $4,087 million and $3,474 million as of December 31, 1999 and 1998, respectively, are comprised of $1,212 million and $1,133 million in real estate related interests and $2,875 million and $2,341 million of non-real estate related interests. Net investment income from other long-term investments was $365 million, $311 million and $443 million for 1999, 1998 and 1997, respectively. B20 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 4. INVESTMENTS (continued) Investment Income and Investment Gains and Losses Net investment income arose from the following sources for the years ended December 31:
1999 1998 1997 ------------- ------------ ------------- (In Millions) Fixed maturities - available for sale $ 5,450 $ 5,366 $ 5,074 Fixed maturities - held to maturity 1,217 1,406 1,622 Trading account assets 622 677 504 Equity securities - available for sale 63 54 52 Mortgage loans on real estate 1,401 1,525 1,555 Investment real estate 101 230 565 Policy loans 448 410 396 Securities purchased under agreements to resell 25 18 15 Broker-dealer related receivables 976 836 706 Short-term investments 642 725 697 Other investment income 354 430 535 ------------- ------------ ------------- Gross investment income 11,299 11,677 11,721 Less investment expenses (1,824) (2,035) (2,027) ------------- ------------ ------------- Subtotal 9,475 9,642 9,694 Less amount relating to discontinued operations (51) (107) (212) ------------- ------------ ------------- Net investment income $ 9,424 $ 9,535 $ 9,482 ============= ============ =============
B21 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 4. INVESTMENTS (continued) Realized investment gains, net, for the years ended December 31, were from the following sources:
1999 1998 1997 --------------- --------------- --------------- (In Millions) Fixed maturities $ (557) $ 1,381 $ 684 Equity securities - available for sale 223 427 363 Mortgage loans on real estate 209 22 68 Investment real estate 106 642 700 Joint ventures and limited partnerships 656 454 289 Derivatives 305 (263) 108 Other (27) 8 (3) --------------- --------------- --------------- Subtotal 915 2,671 2,209 Less amount related to discontinued operations 9 (30) (41) --------------- --------------- --------------- Realized investment gains, net $ 924 $ 2,641 $ 2,168 =============== =============== ===============
The "joint ventures and limited partnerships" category includes net realized investment gains relating to real estate joint ventures' and partnerships' sales of their underlying invested assets, as described more fully in Note 2, "Other long-term investments," amounting to $114 million, $177 million and $56 million in 1999, 1998 and 1997, respectively. Based on the carrying value, assets categorized as "non-income producing" for the year ended December 31, 1999 included in fixed maturities available for sale, mortgage loans on real estate and other long-term investments totaled $15 million, $25 million and $1 million, respectively. Net Unrealized Investment Gains/Losses Net unrealized investment gains on securities available for sale and certain other long-term investments are included in the Consolidated Statements of Financial Position as a component of "Accumulated other comprehensive income." Changes in these amounts include reclassification adjustments to avoid including in "Other comprehensive income/(loss)" those items that are included as part of "Net income" for a period that also had been part of "Other comprehensive income/(loss)" in earlier periods. The amounts for the years ended December 31, are as follows: B22 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 4. INVESTMENTS (continued)
Impact of unrealized investment gains (losses) on: --------------------------------------------------------- Deferred Unrealized policy Future Deferred gains(losses) on acquisition policy income tax investments costs benefits (liability)benefit ------------------ --------------- ---------------- ---------------------- (In Millions) Balance, December 31, 1996 $ 2,527 $ (193) $ (573) $ (625) Net investment gains (losses) on investments arising during the period 2,667 - - (961) Reclassification adjustment for gains included in net income (986) - - 355 Impact of net unrealized investment - (154) - 55 gains on deferred policy acquisition costs Impact of net unrealized investment - - (563) 203 gains on future policy benefits ------------------ --------------- ---------------- ---------------------- Balance, December 31, 1997 4,208 (347) (1,136) (973) Net investment gains (losses) on investments arising during the period 804 - - (282) Reclassification adjustment for gains included in net income (1,675) - - 588 Impact of net unrealized investment gains on deferred policy acquisition costs - 98 - (36) Impact of net unrealized investment gains on future policy benefits - - 38 (15) ------------------ --------------- ---------------- ---------------------- Balance, December 31, 1998 3,337 (249) (1,098) (718) Net investment gains (losses) on investments arising during the period (5,089) - - 1,845 Reclassification adjustment for gains included in net income 404 - - (146) Impact of net unrealized investment losses on deferred policy acquisition - 566 - (213) costs Impact of net unrealized investment losses on future policy benefits - - 1,095 (394) ------------------ --------------- ---------------- ---------------------- Balance, December 31, 1999 $ (1,348) $ 317 $ (3) $ 374 ================== =============== ================ ====================== Accumulated other comprehensive income/(loss) related to net unrealized investment gains (losses) ------------------ Balance, December 31, 1996 $ 1,136 Net investment gains (losses) on investments arising during the period 1,706 Reclassification adjustment for gains included in net income (631) Impact of net unrealized investment (99) gains on deferred policy acquisition costs Impact of net unrealized investment (360) gains on future policy benefits ------------------ Balance, December 31, 1997 1,752 Net investment gains (losses) on investments arising during the period 522 Reclassification adjustment for gains included in net income (1,087) Impact of net unrealized investment gains on deferred policy acquisition costs 62 Impact of net unrealized investment gains on future policy benefits 23 ------------------ Balance, December 31, 1998 1,272 Net investment gains (losses) on investments arising during the period (3,244) Reclassification adjustment for gains included in net income 258 Impact of net unrealized investment losses on deferred policy acquisition 353 costs Impact of net unrealized investment losses on future policy benefits 701 ------------------ Balance, December 31, 1999 $ (660) ==================
B23 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 4. INVESTMENTS (continued) The table below presents unrealized gains (losses) on investments by asset class:
As of December 31, 1999 1998 1997 ------------- --------------- ------------- (In Millions) Fixed maturities $ (2,118) $ 3,161 $ 3,774 Equity securities 733 176 434 Other long-term investments 37 - - ------------- --------------- ------------- Unrealized gains (losses) on investments $ (1,348) $ 3,337 $ 4,208 ============= =============== =============
5. DEFERRED POLICY ACQUISITION COSTS The balances of and changes in deferred policy acquisition costs as of and for the years ended December 31, are as follows:
1999 1998 1997 --------- ---------- ---------- (In Millions) Balance, beginning of year $ 6,462 $ 6,083 $ 6,095 Capitalization of commissions, sales and issue expenses 1,333 1,313 1,409 Amortization (1,155) (1,139) (1,176) Change in unrealized investment gains 566 98 (154) Foreign currency translation 118 107 (91) --------- ---------- ---------- Balance, end of year $ 7,324 $ 6,462 $ 6,083 ========= ========== ==========
6. POLICYHOLDERS' LIABILITIES Future policy benefits at December 31, are as follows: 1999 1998 -------- -------- (In Millions) Life insurance $ 51,667 $ 48,981 Annuities 14,138 15,360 Other contract liabilities 2,264 2,718 -------- -------- Total future policy benefits $ 68,069 $ 67,059 ======== ======== The majority of the Company's participating insurance is in its domestic individual life insurance business. Participating insurance represented approximately 90% of domestic individual life insurance inforce and approximately 90% of domestic individual life insurance premiums for 1999, 1998 and 1997. Revenues and expenses of this business come directly from the underlying policies and supporting assets. B24 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 6. POLICYHOLDERS' LIABILITIES (continued) Life insurance liabilities include reserves for death and endowment policy benefits, terminal dividends, premium deficiency reserves and certain health benefits. Annuity liabilities include reserves for immediate annuities and life contingent group annuities. Other contract liabilities primarily consist of unearned premium and benefit reserves for group health products. The following table highlights the key assumptions generally utilized in calculating these reserves:
Product Mortality Interest Rate Estimation Method - ---------------------------- --------------------------- -------------------------- --------------------------- Life insurance Generally, rates 2.5% to 11.5% Net level premium guaranteed in calculating based on non-forfeiture cash surrender values interest rate Individual annuities 1971 and 1983 Individual 3.5% to 13.4% Present value of Annuity Mortality expected future payments Tables with certain based on historical modifications experience Group annuities 1950 and 1971 Group 3.8% to 17.3% Present value of Annuity Mortality expected future payments Tables with certain based on historical modifications experience Other contract liabilities 2.5% to 11.5% Present value of expected future payments based on historical experience
Premium deficiency reserves are established, if necessary, when the liability for future policy benefits plus the present value of expected future gross premiums are determined to be insufficient to provide for expected future policy benefits and expenses and to recover any unamortized acquisition costs. Premium deficiency reserves have been recorded for the group single premium annuity business, which consists of limited-payment, long duration, traditional and non-participating annuities, and for certain individual health policies. Liabilities of $1,930 million and $1,844 million is included in "Future policy benefits" with respect to these deficiencies at December 31, 1999 and 1998, respectively. Policyholders' account balances at December 31, are as follows:
1999 1998 ------------ ------------ (In Millions) Individual annuities $ 4,612 $ 4,997 Group annuities 2,176 2,362 Guaranteed investment contracts and guaranteed interest accounts 13,429 14,408 Interest-sensitive life contracts 3,607 3,566 Dividend accumulations and other 7,754 7,765 ------------ ------------ Policyholders' account balances $ 31,578 $ 33,098 ============ ============
B25 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 6. POLICYHOLDERS' LIABILITIES (continued) Policyholders' account balances for interest-sensitive life and investment-type contracts represent an accumulation of account deposits plus credited interest less withdrawals, expenses and mortality charges. Certain contract provisions that determine the policyholder account balances are as follows:
Withdrawal/ Product Interest Rate Surrender Charges - ---------------------------------------------- -------------------------- ----------------------------------- Individual annuities 3.0% to 11.3% 0% to 8% for up to 8 years Group annuities 2.0% to 13.9% Contractually limited or subject to market value adjustment Guaranteed investment contracts and 3.9% to 15.4% Generally, subject to market value Guaranteed interest accounts withdrawal provisions for any funds withdrawn other than for benefit responsive and contractual payments Interest-sensitive life contracts 2.0% to 6.0% Various up to 10 years Dividend accumulations and other 3.0% to 7.0% Withdrawal or surrender contractually limited or subject to market value adjustment
B26 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 6. POLICYHOLDERS' LIABILITIES (continued) Unpaid claims and claim adjustment expenses. The following table provides a reconciliation of the activity in the liability for unpaid claims and claim adjustment expenses for property and casualty insurance, which includes the Company's personal lines automobile and homeowner's business, as well as the Company's wind-down commercial lines business, primarily environmental and asbestos-related claims, and accident and health insurance at December 31:
1999 1998 -------------------------------- ------------------------------- Accident Property Accident Property and Health and Casualty and Health and Casualty -------------- --------------- -------------- -------------- (In Millions) Balance at January 1 $ 1,090 $ 2,716 $ 1,857 $ 2,956 Less reinsurance recoverables, net 52 533 810 535 -------------- --------------- -------------- -------------- Net balance at January 1 1,038 2,183 1,047 2,421 -------------- --------------- -------------- -------------- Incurred related to: Current year 4,110 1,249 6,132 1,314 Prior years (72) (54) (15) (154) -------------- --------------- -------------- -------------- Total incurred 4,038 1,195 6,117 1,160 -------------- --------------- -------------- -------------- Paid related to: Current year 3,397 700 5,287 717 Prior years 672 720 839 681 -------------- --------------- -------------- -------------- Total paid 4,069 1,420 6,126 1,398 -------------- --------------- -------------- -------------- Disposal of healthcare business (See Note 3) (965) - - - -------------- --------------- -------------- -------------- Net balance at December 31 42 1,958 1,038 2,183 Plus reinsurance recoverables, net 378 451 52 533 -------------- --------------- -------------- -------------- Balance at December 31 $ 420 $ 2,409 $ 1,090 $ 2,716 ============== =============== ============== ============== 1997 -------------------------------- Accident Property and Health and Casualty -------------- --------------- (In Millions) Balance at January 1 $ 1,932 $ 3,076 Less reinsurance recoverables, net 10 553 -------------- --------------- Net balance at January 1 1,922 2,523 -------------- --------------- Incurred related to: Current year 8,379 1,484 Prior years 63 (50) -------------- --------------- Total incurred 8,442 1,434 -------------- --------------- Paid related to: Current year 6,673 739 Prior years 1,842 797 -------------- --------------- Total paid 8,515 1,536 -------------- --------------- Disposal of healthcare business (See Note 3) - - -------------- --------------- Net balance at December 31 1,849 2,421 Plus reinsurance recoverables, net 8 535 -------------- --------------- Balance at December 31 $ 1,857 $ 2,956 ============== ===============
The Accident and Health reinsurance recoverable balance at December 31, 1999 includes $371 million attributable to the Company's discontinued healthcare business. The Accident and Health balance at December 31, 1998 and 1997 includes amounts attributable to the Company's discontinued healthcare business of $1,026 million and $1,693 million, respectively. The unpaid claims and claim adjustment expenses presented above include estimates for liabilities associated with reported claims and for incurred but not reported claims based, in part, on the Company's experience. Changes in the estimated cost to settle unpaid claims are charged or credited to the Consolidated Statement of Operations periodically as the estimates are revised. Accident and Health unpaid claims liabilities are discounted using interest rates ranging from 3.5% to 7.5%. In 1999, 1998 and 1997, the amounts incurred for claims and claim adjustment expenses for property and casualty related to prior years were primarily driven by lower than anticipated losses for the auto line of business. The amounts incurred for claims and claim adjustment expense for Accident and Health related to prior years are primarily due to factors including changes in claim cost trends and an accelerated decline in the indemnity health business. B27 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 7. REINSURANCE The Company participates in reinsurance in order to provide additional capacity for future growth and limit the maximum net loss potential arising from large risks. Life reinsurance is accomplished through various plans of reinsurance, primarily yearly renewable term and coinsurance. Property-casualty reinsurance is placed on a pro-rata basis and excess of loss, including stop loss, basis. Reinsurance ceded arrangements do not discharge the Company as the primary insurer. Ceded balances would represent a liability of the Company in the event the reinsurers were unable to meet their obligations to the Company under the terms of the reinsurance agreements. Reinsurance premiums, commissions, expense reimbursements, benefits and reserves related to reinsured long-duration contracts are accounted for over the life of the underlying reinsured contracts using assumptions consistent with those used to account for the underlying contracts. The cost of reinsurance related to short-duration contracts is accounted for over the reinsurance contract period. Amounts recoverable from reinsurers, for both short and long-duration reinsurance arrangements, are estimated in a manner consistent with the claim liabilities and policy benefits associated with the reinsured policies. The tables presented below exclude amounts pertaining to the Company's discontinued healthcare operations. See Note 3 for a discussion of the Company's coinsurance agreement with Aetna. Reinsurance amounts included in the Consolidated Statements of Operations for the years ended December 31, were as follows: 1999 1998 1997 --------- --------- --------- (In Millions) Direct premiums $ 10,068 $ 9,637 $ 9,667 Reinsurance assumed 66 65 64 Reinsurance ceded (659) (678) (716) --------- --------- --------- Premiums $ 9,475 $ 9,024 $ 9,015 ========= ========= ========= Policyholders' benefits ceded $ 483 $ 510 $ 530 ========= ========= ========= Reinsurance recoverables, included in "Other assets" in the Company's Consolidated Statements of Financial Position at December 31, were as follows: 1999 1998 ---------- ---------- (In Millions) Life insurance $ 576 $ 620 Property-casualty 473 564 Other reinsurance 90 92 ---------- ---------- $ 1,139 $ 1,276 ========== ========== Two major reinsurance companies account for approximately 58% of the reinsurance recoverable at December 31, 1999. The Company periodically reviews the financial condition of its reinsurers and amounts recoverable therefrom in order to minimize its exposure to loss from reinsurer insolvencies, recording an allowance when necessary for uncollectible reinsurance. B28 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 8. SHORT-TERM AND LONG-TERM DEBT Debt consists of the following at December 31: Short-term debt 1999 1998 ----------- ---------- (In Millions) Commercial paper (b) $ 7,506 $ 7,057 Notes payable 2,598 2,164 Current portion of long-term debt 754 861 ----------- ---------- Total short-term debt $ 10,858 $ 10,082 =========== ========== The weighted average interest rate on outstanding short-term debt was approximately 5.2% and 5.4% at December 31, 1999 and 1998, respectively. Long-term debt
Description Maturity Dates Rate 1999 1998 - ----------- ----------------------- ------------------- ------------ ------------ (In Millions) Fixed rate notes 2000 - 2023 .50% - 12.28% $ 1,161 $ 1,480 Floating rate notes ("FRN") 2000 - 2003 (a) 865 767 Surplus notes 2003 - 2025 6.875% - 8.30% 987 987 Commercial paper backed by long-term credit agreement (b) 2,500 1,500 ------------ ------------ Total long-term debt $ 5,513 $ 4,734 ============ ============
(a) Floating interest rates are generally based on such rates as LIBOR, Constant Maturity Treasury, or the Federal Funds Rate. Interest on the FRN's ranged from 6.17% to 14.00% for 1999 and 1998, respectively. Included in the floating rate notes are equity indexed instruments. The Company issued an S&P 500 index linked note of $29 million in September of 1997. The interest rate on the note is based on the appreciation of the S&P 500 index, with a contractual cap of 14%. At December 31, 1999 and 1998, the rate was 14%. Excluding this note, floating interest rates ranged from 6.17% to 9.54% for 1999 and 4.04% to 7.9% for 1998. (b) At December 31, 1999 and 1998, the Company classified $2.5 billion and $1.5 billion, respectively, of its commercial paper as long-term debt. This classification is supported by long-term syndicated credit line agreements. The Company has the ability and intent to use these agreements, if necessary, to refinance commercial paper on a long-term basis. B29 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 8. SHORT-TERM AND LONG-TERM DEBT (continued) The following table summarizes the Company's use of the proceeds from issuing long-term debt: 1999 1998 --------------- ---------------- (In Millions) Corporate $ 1,782 $ 1,917 Investment related 1,121 751 Securities business related 2,610 2,066 --------------- ---------------- Total long-term debt $ 5,513 $ 4,734 =============== ================ The net proceeds from the issuance of the Company's long-term debt may be used for general corporate purposes. This includes investing in equity and debt securities of subsidiaries, advancing funds to its subsidiaries for liquidity and operational purposes, and supporting liquidity of the Company's other businesses. Investment related long-term debt consists of debt issued to finance specific investment assets or portfolios of investment assets including real estate, institutional spread lending investment portfolios and real estate related investments held in consolidated joint ventures. Securities business related long-term debt consists of debt issued to finance primarily the liquidity of the Company's securities business. Loans made by the Company to its securities subsidiaries using the proceeds from the Company's issuance of long-term debt may be made on a long-term, short-term, or subordinated basis, depending on the particular requirements of its securities business. Payment of interest and principal on the surplus notes issued after 1993, of which $688 million were outstanding at December 31, 1999 and 1998, may be made only with the prior approval of the Commissioner of Insurance of the State of New Jersey. In order to modify exposure to interest rate and currency exchange rate movements, the Company utilizes derivative instruments, primarily interest rate swaps, in conjunction with some of its debt issues. The effect of these derivative instruments is included in the calculation of the interest expense on the associated debt, and as a result, the effective interest rates on the debt may differ from the rates reflected in the tables above. Floating rates are determined by formulas and may be subject to certain minimum or maximum rates. Scheduled principal repayment of long-term debt (In Millions) 2001 $ 738 2002 1,942 2003 459 2004 1,334 2005 58 2006 and thereafter 982 ------------------ Total $ 5,513 ================== At December 31, 1999, the Company had $9,934 million in lines of credit from numerous financial institutions of which $7,947 million were unused. These lines of credit generally have terms ranging from one to five years. The Company issues commercial paper primarily to manage operating cash flows and existing commitments, meet working capital needs and take advantage of current investment opportunities. A portion of commercial B30 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 8. SHORT-TERM AND LONG-TERM DEBT (continued) paper borrowings are supported by various lines of credit referred to above. At December 31, 1999 and 1998, the weighted average maturity of commercial paper outstanding was 23 and 21 days, respectively. Interest expense for short-term and long-term debt is $863 million, $920 million, and $743 million for the years ended December 31, 1999, 1998 and 1997, respectively. Securities business related interest expense of $254 million, $288 million, and $248 million in 1999, 1998 and 1997, respectively, is included in "Net investment income." 9. EMPLOYEE BENEFIT PLANS Pension and Other Postretirement Plans The Company has funded non-contributory defined benefit pension plans which cover substantially all of its employees. The Company also has several non-funded non-contributory defined benefit plans covering certain executives. Benefits are generally based on career average earnings and credited length of service. The Company's funding policy is to contribute annually an amount necessary to satisfy the Internal Revenue Service contribution guidelines. The Company provides certain life insurance and healthcare benefits ("Other postretirement benefits") for its retired employees, their beneficiaries and covered dependents. The healthcare plan is contributory; the life insurance plan is non-contributory. Substantially all of the Company's employees may become eligible to receive benefits if they retire after age 55 with at least 10 years of service or under certain circumstances after age 50 with at least 20 years of continuous service. These benefits are funded as considered necessary by Company management. The Company has elected to amortize its transition obligation for other postretirement benefits over 20 years. Prepaid and accrued benefits costs are included in "Other assets" and "Other liabilities," respectively, in the Company's Consolidated Statements of Financial Position. The status of these plans as of September 30, adjusted for fourth-quarter activity, is summarized below: B31 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 9. EMPLOYEE BENEFIT PLANS (continued)
Other Pension Benefits Postretirement Benefits ---------------------------------- --------------------------------- 1999 1998 1999 1998 --------------- --------------- --------------- -------------- (In Millions) Change in benefit obligation: Benefit obligation at the beginning of period $ (6,309) $ (5,557) $ (2,213) $ (2,128) Service cost (193) (159) (39) (35) Interest cost (410) (397) (141) (142) Plan participants' contributions - - (6) (6) Amendments (2) (58) (2) - Actuarial gains (losses) 974 (600) 312 (31) Contractual termination benefits (53) (30) - - Special termination benefits (51) - (2) - Curtailment 206 - 43 - Benefits paid 408 485 108 128 Foreign currency changes - 7 (1) 1 --------------- --------------- --------------- -------------- Benefit obligation at end of period $ (5,430) $ (6,309) $ (1,941) $ (2,213) =============== =============== =============== ============== Change in plan assets: Fair value of plan assets at beginning of period $ 8,427 $ 8,489 $ 1,422 $ 1,354 Actual return on plan assets 1,442 445 213 146 Transfer to third party (14) (4) - - Contribution from pension plan - - - 31 Employer contributions 21 25 15 13 Plan participants' contributions - - 6 6 Withdrawal under IRS Section 420 - (36) - - Benefits paid (408) (485) (108) (128) Foreign currency changes - (7) - - --------------- --------------- --------------- -------------- Fair value of plan assets at end of period $ 9,468 $ 8,427 $ 1,548 $ 1,422 =============== =============== =============== ============== Funded status: Funded status at end of period $ 4,038 $ 2,118 $ (393) $ (791) Unrecognized transition (asset) liability (448) (554) 462 660 Unrecognized prior service cost 225 335 2 - Unrecognized actuarial net (gain) (2,514) (813) (746) (353) Effects of fourth quarter activity (3) (9) - 2 --------------- --------------- --------------- -------------- Net amount recognized $ 1,298 $ 1,077 $ (675) $ (482) =============== =============== =============== ============== Amounts recognized in the Statements of Financial Position consist of: Prepaid benefit cost $ 1,601 $ 1,348 $ - $ - Accrued benefit liability (316) (287) (675) (482) Intangible asset 6 7 - - Accumulated other comprehensive income 7 9 - - --------------- --------------- --------------- -------------- Net amount recognized $ 1,298 $ 1,077 $ (675) $ (482) =============== =============== =============== ==============
B32 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 9. EMPLOYEE BENEFIT PLANS (continued) The projected benefit obligations, accumulated benefit obligations and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $401 million, $309 million and $0, respectively, as of September 30, 1999 and $384 million, $284 million and $0, respectively, as of September 30, 1998. The effects of fourth quarter activity are summarized as follows:
Other Pension Benefits Postretirement Benefits --------------------------------- --------------------------------- 1999 1998 1999 1998 -------------- -------------- -------------- -------------- (In Millions) Contractual termination benefits $ (9) $ (14) $ - $ - Employer contributions 6 5 - 2 -------------- -------------- -------------- -------------- Effects of 4th quarter activity $ (3) $ (9) $ - $ 2 ============== ============== ============== ==============
Pension plan assets consist primarily of equity securities, bonds, real estate and short-term investments, of which $6,534 million and $5,926 million are included in Separate Account assets and liabilities at September 30, 1999 and 1998, respectively. Other postretirement plan assets consist of group and individual life insurance policies, group life and health contracts, common stocks, corporate debt securities, U.S. government securities and short-term investments. During 1999 the assets of group life and health contracts were transferred into common stocks, debt securities and short-term investments. Plan assets include $434 million and $1,018 million of Company insurance policies and contracts at September 30, 1999 and 1998, respectively. The Prudential Plan was amended during the time period presented to provide contractual termination benefits to certain plan participants whose employment had been terminated. Costs related to these amendments are reflected in contractual termination benefits that follow. B33 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 9. EMPLOYEE BENEFIT PLANS (continued) Net periodic benefit cost included in "General and administrative expenses" in the Company's Consolidated Statements of Operations for the years ended December 31, includes the following components:
Pension Benefits Other Postretirement Benefits ---------------------------------------------------------------------------------- 1999 1998 1997 1999 1998 1997 ----------- ----------- ----------- ------------ ------------ ------------ (In Millions) Components of net periodic benefits costs: Service cost $ 193 $ 159 $ 127 $ 39 $ 35 $ 38 Interest cost 410 397 376 141 142 149 Expected return on plan assets (724) (674) (617) (121) (119) (87) Amortization of transition amount (106) (106) (106) 47 47 50 Amortization of prior service cost 45 45 42 - - - Amortization of actuarial net (gain) loss 4 1 - (10) (13) (13) Special termination benefits 51 - - 2 - - Curtailment (gain) loss (122) 5 - 108 - - Contractual termination benefits 48 14 30 - - - ----------- ----------- ----------- ------------ ------------ ------------ Subtotal (201) (159) (148) 206 92 137 Less amounts related to discontinued operations 84 25 - (130) (34) (38) ----------- ----------- ----------- ------------ ------------ ------------ Net periodic (benefit) cost $ (117) $ (134) $ (148) $ 76 $ 58 $ 99 =========== =========== =========== ============ ============ ============
Discontinued operations amounts for 1998 and 1997 were included in loss from healthcare operations. The 1999 amounts were included in loss on disposal of healthcare operations. See Note 3 for discussion of the disposal of the Company's healthcare business. Discontinued operations for pension benefits in 1999 includes $122 million of curtailment gains and $51 million of special termination benefit costs. Discontinued operations for postretirement benefits in 1999 includes $108 million of curtailment losses and $2 million of special termination benefit costs. The assumptions at September 30, used by the Company to calculate the benefit obligations as of that date and to determine the benefit cost in the subsequent year are as follows:
Pension Benefits Other Postretirement Benefits ------------------------------------- -------------------------------------------------- 1999 1998 1997 1999 1998 1997 ---------- ----------- ----------- --------------- -------------- ------------- Weighted-average assumptions: Discount rate (beginning of period) 6.50% 7.25% 7.75% 6.50% 7.25% 7.75% Discount rate (end of period) 7.75% 6.50% 7.25% 7.75% 6.50% 7.25% Rate of increase in compensation 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% levels (beginning of period) Rate of increase in compensation 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% levels (end of period) Expected return on plan assets 9.50% 9.50% 9.50% 9.00% 9.00% 9.00% Health care cost trend rates - - - 7.50 - 9.80% 7.80 - 11.00% 8.20 - 11.80% Ultimate health care cost trend rate - - - 5.00% 5.00% 5.00% after gradual decrease until 2006
B34 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 9. EMPLOYEE BENEFIT PLANS (continued) Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point increase and decrease in assumed health care cost trend rates would have the following effects: Other Postretirement Benefits ---------------------------- 1999 ------------ (In Millions) One percentage point increase Increase in total service and interest costs $ 25 Increase in postretirement benefit obligation 200 One percentage point decrease Decrease in total service and interest costs $ 20 Decrease in postretirement benefit obligation 167 Postemployment Benefits The Company accrues postemployment benefits primarily for life and health benefits provided to former or inactive employees who are not retirees. The net accumulated liability for these benefits at December 31, 1999 and 1998 was $157 million and $135 million, respectively, and is included in "Other liabilities." Other Employee Benefits The Company sponsors voluntary savings plans for employees (401(k) plans). The plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 3% of annual salary. The matching contributions by the Company included in "General and administrative expenses" are as follows:
401(k) Company Match --------------------------------------------------- 1999 1998 1997 -------------- --------------- -------------- (In Millions) Company match $ 60 $ 54 $ 63 Less amounts related to discontinued operations (8) (14) (16) -------------- --------------- -------------- 401(k) Company match included in general and administrative expenses $ 52 $ 40 $ 47 ============== =============== ==============
Discontinued operations amounts for 1998 and 1997 were included in loss from healthcare operations. The 1999 amount was included in loss on disposal of healthcare operations. B35 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 10. INCOME TAXES The components of income tax expense for the years ended December 31, were as follows:
1999 1998 1997 -------------- -------------- -------------- (In Millions) Current tax expense (benefit): U.S. $ 614 $ 883 $ (14) State and local 84 54 51 Foreign (8) 148 64 -------------- -------------- -------------- Total 690 1,085 101 Deferred tax expense (benefit): U.S. 206 (93) 269 State and local 44 (6) 4 Foreign 102 (16) 33 -------------- -------------- -------------- Total 352 (115) 306 Total income tax expense $ 1,042 $ 970 $ 407 ============== ============== ==============
Income from continuing operations before income taxes and extraordinary item, for the years ended December 31, was as follows:
1999 1998 1997 -------------- -------------- --------------- (In Millions) Domestic $ 1,989 $ 2,384 $ 1,039 International 316 224 331 -------------- -------------- --------------- Total income from continuing operations before income taxes and extraordinary item $ 2,305 $ 2,608 $ 1,370 ============== ============== ===============
The Company's income tax expense for the years ended December 31, differs from the amount computed by applying the expected federal income tax rate of 35% to income from continuing operations before income taxes for the following reasons:
1999 1998 1997 -------------- -------------- -------------- (In Millions) Expected federal income tax expense $ 807 $ 913 $ 480 Equity tax (benefit) 190 75 (65) State and local income taxes 83 31 37 Tax-exempt interest and dividend received (63) (46) (67) deduction Other 25 (3) 22 -------------- -------------- -------------- Total income tax expense $ 1,042 $ 970 $ 407 ============== ============== ==============
B36 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 10. INCOME TAXES (continued) Deferred tax assets and liabilities at December 31, resulted from the items listed in the following table:
1999 1998 ------------- ------------ (In Millions) Deferred tax assets Insurance reserves $ 1,582 $ 1,807 Net unrealized investment (gains)/losses 474 (1,225) Policyholder dividends 277 265 Net operating loss carryforwards 280 276 Litigation related reserves 61 87 Employee benefits 32 63 Other - 135 ------------- ------------ Deferred tax assets before valuation allowance 2,706 1,408 Valuation allowance (24) (13) ------------- ------------ Deferred tax assets after valuation allowance 2,682 1,395 ------------- ------------ Deferred tax liabilities Deferred policy acquisition cost 1,942 1,697 Investments 284 151 Depreciation 59 64 ------------- ------------ Deferred tax liabilities 2,285 1,912 ------------- ------------ Net defered tax asset/(liability) $ 397 $ (517) ============= ============
Management believes that based on its historical pattern of taxable income, the Company will produce sufficient income in the future to realize its deferred tax asset after valuation allowance. Adjustments to the valuation allowance will be made if there is a change in management's assessment of the amount of the deferred tax asset that is realizable. At December 31, 1999 and 1998, respectively, the Company had federal life net operating loss carryforwards of $660 million and $540 million, which expire in 2012. At December 31, 1999 and 1998, respectively, the Company had state operating loss carryforwards for tax purposes approximating $570 million and $1,278 million, which expire between 2000 and 2019. Deferred taxes are not provided on the undistributed earnings of foreign subsidiaries (considered to be permanent investments), which at December 31, 1999 were $521 million. Determining the tax liability that would arise if these earnings were remitted is not practical. The Internal Revenue Service (the "Service") has completed all examinations of the consolidated federal income tax returns through 1992. The Service has begun their examination of the years 1993 through 1995. B37 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 11. STATUTORY NET INCOME AND SURPLUS Reconciliation of Statutory Net Income and Surplus Accounting practices used to prepare statutory financial statements for regulatory purposes differ in certain instances from GAAP. The following tables reconcile the Company's statutory net income and surplus as of and for the years ended December 31, 1999, 1998, and 1997, determined in accordance with accounting practices prescribed or permitted by the New Jersey Department of Banking and Insurance, to net income and equity determined using GAAP:
1999 1998 1997 ---------------- --------------- ---------------- (In Millions) Statutory net income $ 333 $ 1,247 $ 1,471 Adjustments to reconcile to net income on a GAAP basis: Insurance revenues and expenses 136 (117) 12 Income taxes 436 128 601 Valuation of investments (27) (143) (62) Realized investment gains 73 1,162 702 Litigation and other reserves (102) (1,150) (1,975) Discontinued operations and other, net (36) (21) (139) ---------------- --------------- ---------------- GAAP net income $ 813 $ 1,106 $ 610 ================ =============== ================
1999 1998 ---------------- --------------- (In Millions) Statutory surplus $ 9,249 $ 8,536 Adjustments to reconcile to equity on a GAAP basis: Deferred policy acquisition costs 7,295 6,462 Valuation of investments 2,909 8,358 Future policy benefits and policyholder account balances (1,544) (2,621) Non-admitted assets 2,069 2,119 Income taxes 522 (576) Surplus notes (987) (987) Discontinued operations and other, net (222) (896) ---------------- --------------- GAAP equity $ 19,291 $ 20,395 ================ ===============
The New York State Insurance Department ("Department") recognizes only statutory accounting for determining and reporting the financial condition of an insurance company, for determining its solvency under the New York Insurance Law and for determining whether its financial condition warrants the payment of a dividend to its policyholders. No consideration is given by the Department to financial statements prepared in accordance with GAAP in making such determinations. B38 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 12. OPERATING LEASES (continued) The Company occupies leased office space in many locations under various long-term leases and has entered into numerous leases covering the long-term use of computers and other equipment. At December 31, 1999, future minimum lease payments under non-cancelable operating leases are, as follows: (In Millions) 2000 $ 294 2001 265 2002 217 2003 178 2004 147 Remaining years after 2004 776 ---------------- Total $ 1,877 ================ Rental expense incurred for the years ended December 31, 1999, 1998 and 1997 was $278 million, $320 million and $352 million, respectively, excluding expenses relating to the Company's healthcare business. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values presented below have been determined by using available market information and by applying valuation methodologies. Considerable judgment is applied in interpreting data to develop the estimates of fair value. Estimated fair values may not be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair values. The following methods and assumptions were used in calculating the estimated fair values (for all other financial instruments presented in the table, the carrying values approximate estimated fair values). Fixed maturities and Equity securities Estimated fair values for fixed maturities and equity securities, other than private placement securities, are based on quoted market prices or estimates from independent pricing services. Generally fair values for private placement fixed maturities are estimated using a discounted cash flow model which considers the current market spreads between the U.S. Treasury yield curve and corporate bond yield curve, adjusted for the type of issue, its current credit quality and its remaining average life. The fair value of certain non-performing private placement fixed maturities is based on amounts estimated by management. Mortgage loans on real estate The estimated fair value of mortgage loans on real estate is primarily based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate, adjusted for the current market spread for similar quality mortgage. Policy loans The estimated fair value of policy loans is calculated using a discounted cash flow model based upon current U.S. Treasury rates and historical loan repayments. B39 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Derivative financial instruments Refer to Note 14 for the disclosure of fair values on these instruments. Investment contracts For guaranteed investment contracts, income annuities, and other similar contracts without life contingencies, estimated fair values are derived using discounted projected cash flows, based on interest rates being offered for similar contracts with maturities consistent with those of the contracts being valued. For individual deferred annuities and other deposit liabilities, fair value approximates carrying value. Debt The estimated fair value of short-term and long-term debt is derived by using discount rates based on the borrowing rates currently available to the Company for debt with similar terms and remaining maturities. B40 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) The following table discloses the carrying amounts and estimated fair values of the Company's financial instruments at December 31:
1999 1998 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value --------------- --------------- --------------- -------------- (In Millions) FINANCIAL ASSETS: Other than trading: Fixed maturities: Available for sale $ 74,697 $ 74,697 $ 80,158 $ 80,158 Held to maturity 14,237 14,112 16,848 17,906 Equity securities 3,264 3,264 2,759 2,759 Mortgage loans on real estate 16,268 15,826 16,016 16,785 Policy loans 7,590 7,462 7,476 8,123 Securities purchased under agreements to resell - - 1,737 1,737 Short-term investments 12,303 12,303 9,781 9,781 Mortgage securitization inventory 803 803 480 480 Cash 1,330 1,330 1,943 1,943 Restricted cash and securities 4,082 4,082 2,366 2,366 Separate Account assets 82,131 82,131 80,931 80,931 Trading: Trading account assets $ 9,741 $ 9,741 $ 8,888 $ 8,888 Broker-dealer related receivables 11,346 11,346 10,142 10,142 Securities purchased under agreements to resell 13,944 13,944 8,515 8,515 Cash collateral for borrowed securities 7,124 7,124 5,622 5,622 FINANCIAL LIABILITIES: Other than trading: Investment contracts $ 25,164 $ 25,352 $ 26,246 $ 27,051 Securities sold under agreements to repurchase 4,260 4,260 7,085 7,085 Cash collateral for loaned securities 2,582 2,582 2,450 2,450 Short-term and long-term debt 16,371 16,563 14,816 15,084 Securities sold but not yet purchased - - 2,215 2,215 Separate Account liabilities 82,131 82,131 80,931 80,931 Trading: Broker-dealer related payables $ 5,839 $ 5,839 $ 6,530 $ 6,530 Securities sold under agreements to repurchase 20,338 20,338 14,401 14,401 Cash collateral for loaned securities 8,193 8,189 4,682 4,682 Securities sold but not yet purchased 6,968 6,968 3,556 3,556
B41 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS Interest Rate Swaps The Company uses interest rate swaps to reduce market risks from changes in interest rates and to manage interest rate exposures arising from mismatches between assets and liabilities. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. Cash is paid or received based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty at each due date. The fair value of swap agreements is estimated based on the present value of future cash flows under the agreements, discounted at the applicable zero coupon U.S. Treasury rate and swap spread. If swap agreements meet the criteria for hedge accounting, net interest receipts or payments are accrued and recognized over the life of the swap agreements as an adjustment to interest income or expense of the hedged item. Any unrealized gains or losses are not recognized until the hedged item is sold or matures. Gains or losses on early termination of interest rate swaps are deferred and amortized over the remaining period originally covered by the swaps. If the criteria for hedge accounting are not met, the swap agreements are accounted for at fair value with changes in fair value reported in current period earnings. Futures and Options The Company uses exchange-traded Treasury futures and options to reduce market risks from changes in interest rates, to alter mismatches between the duration of assets in a portfolio and the duration of liabilities supported by those assets, and to hedge against changes in the value of securities it owns or anticipates acquiring. The Company enters into exchange-traded futures and options with regulated futures commissions merchants who are members of a trading exchange. The fair value of those futures and options is based on market quotes. In exchange-traded futures transactions, the Company purchases or sells contracts, the value of which are determined by the value of designated classes of Treasury securities, and posts variation margins on a daily basis in an amount equal to the difference in the daily market values of those contracts. Futures are typically used to hedge duration mismatches between assets and liabilities by replicating Treasury performance. Treasury futures move substantially in value as interest rates change and can be used to either modify or hedge existing interest rate risk. This strategy protects against the risk that cash flow requirements may necessitate liquidation of investments at unfavorable prices resulting from increases in interest rates. This strategy can be a more cost effective way of temporarily reducing the Company's exposure to a market decline than selling fixed income securities and purchasing a similar portfolio when such a decline is believed to be over. If futures meet hedge accounting criteria, changes in their fair value are deferred and recognized as an adjustment to the carrying value of the hedged item. Deferred gains or losses from the hedges for interest-bearing financial instruments are amortized as a yield adjustment over the remaining lives of the hedged item. Futures that do not qualify as hedges are carried at fair value with changes in value reported in current period earnings. The gains and losses associated with anticipatory transactions are not material. B42 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued) When the Company anticipates a significant decline in the stock market which will correspondingly affect its diversified portfolio, it may purchase put index options where the basket of securities in the index is appropriate to provide a hedge against a decrease in the value of the Company's equity portfolio or a portion thereof. This strategy effects an orderly sale of hedged securities. When the Company has large cash flows which it has allocated for investment in equity securities, it may purchase call index options as a temporary hedge against an increase in the price of the securities it intends to purchase. This hedge is intended to permit such investment transactions to be executed with less adverse market impact. Currency Derivatives The Company uses currency derivatives, including exchange-traded currency futures and options, currency forwards and currency swaps, to reduce market risks from changes in currency exchange rates with respect to investments denominated in foreign currencies that the Company either holds or intends to acquire and to alter the currency exposures arising from mismatches between such foreign currencies and the U.S. dollar. Under currency forwards, the Company agrees with other parties upon delivery of a specified amount of a specified currency at a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. Under currency swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between one currency and another at a forward exchange rate and calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty for payments made in the same currency at each due date. If currency derivatives are effective as hedges of foreign currency translation and transaction exposures, gains or losses are recorded in "Accumulated other comprehensive income." If currency derivatives do not meet hedge accounting criteria, gains or losses from those derivatives are recognized in "Realized investment gains, net." Forwards The Company uses forwards to manage market risks relating to interest rates and commodities. Additionally, in connection with the Company's investment banking activities, the Company trades in mortgage backed securities forward contracts. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. If the forwards are effective as hedges, gains or losses are recorded in "Accumulated other comprehensive income." If forwards do not meet hedge accounting criteria, gains or losses from those forwards are recognized in current period earnings. The tables below summarize the Company's outstanding positions by derivative instrument types as of December 31, 1999 and 1998. The amounts presented are classified as either trading or other than trading, based on management's intent at the time of contract inception and throughout the life of the contract. The table includes the estimated fair values of outstanding derivative positions only and does not include the changes in fair values of associated financial and non-financial assets and liabilities, which generally offset derivative notional amounts. The fair value amounts presented also do not reflect the netting of amounts pursuant to right of setoff, qualifying master netting agreements with counterparties or collateral arrangements. B43 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued) DERIVATIVE FINANCIAL INSTRUMENTS December 31, 1999 (In Millions)
Trading Other than Trading ------------------------------------------ ------------------------------------------ Hedge Accounting ------------------------------------------ Estimated Estimated Notional Fair Value Notional Fair Value ------------------ ------------------- ------------------ ------------------ Swap Instruments Interest rate Asset $ 7,116 $ 151 $ - $ - Liability 6,490 137 - - Currency Asset 24 45 343 30 Liability 77 51 369 33 Equity and commodity Asset 8 9 - - Liability 8 5 - - Forward contracts Interest rate Asset 14,837 105 - - Liability 12,459 84 - - Currency Asset 11,181 275 54 2 Liability 10,377 247 841 16 Equity and commodity Asset 1,664 68 - - Liability 1,592 60 - - Futures contracts Interest rate Asset 2,374 2 - - Liability 3,017 3 - - Equity and commodity Asset 2,283 44 - - Liability 837 57 - - Option contracts Interest rate Asset 3,725 22 - - Liability 2,185 11 - - Currency Asset 613 5 - - Liability 4,439 5 - - Equity and commodity Asset 340 6 - - Liability 366 3 - - ------------------ ------------------- ------------------ ------------------ Total Derivatives: Assets $ 44,165 $ 732 $ 397 $ 32 ================== =================== ================== ================== Liabilities $ 41,847 $ 663 $ 1,210 $ 49 ================== =================== ================== ================== Other than Trading Total ------------------------------------------ ------------------------------------------ Non-Hedge Accounting ------------------------------------------ Estimated Estimated Notional Fair Value Notional Fair Value ------------------- ------------------ ------------------ ------------------- Swap Instruments Interest rate Asset $ 2,185 $ 146 $ 9,301 $ 297 Liability 1,261 32 7,751 169 Currency Asset - - 367 75 Liability - - 446 84 Equity and commodity Asset 47 13 55 22 Liability - - 8 5 Forward contracts Interest rate Asset - - 14,837 105 Liability - - 12,459 84 Currency Asset 1,182 16 12,417 293 Liability 1,347 21 12,565 284 Equity and commodity Asset - - 1,664 68 Liability - - 1,592 60 Futures contracts Interest rate Asset 800 14 3,174 16 Liability 3,696 44 6,713 47 Equity and commodity Asset 71 4 2,354 48 Liability 12 11 849 68 Option contracts Interest rate Asset - - 3,725 22 Liability 13 - 2,198 11 Currency Asset 10 - 623 5 Liability 10 - 4,449 5 Equity and commodity Asset - - 340 6 Liability - - 366 3 ------------------- ------------------ ------------------ ------------------- Total Derivatives: Assets $ 4,295 $ 193 $ 48,857 $ 957 =================== ================== ================== =================== Liabilities $ 6,339 $ 108 $ 49,396 $ 820 =================== ================== ================== ===================
B44 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued) DERIVATIVE FINANCIAL INSTRUMENTS December 31, 1998 (In Millions)
Trading Other than Trading ------------------------------------------ ------------------------------------------ Hedge Accounting ------------------------------------------ Estimated Estimated Notional Fair Value Notional Fair Value ------------------ ------------------- ------------------ ------------------ Swap Instruments Interest rate Asset $ 4,145 $ 204 $ - $ - Liability 4,571 192 - - Currency Asset 372 91 229 16 Liability 263 84 464 46 Equity and commodity Asset 47 14 - - Liability - - - - Forward contracts Interest rate Asset 31,568 72 - - Liability 24,204 56 - - Currency Asset 12,879 198 60 1 Liability 13,594 221 573 11 Equity and commodity Asset 1,204 12 - - Liability 1,355 3 - - Futures contracts Interest rate Asset 2,429 10 - - Liability 3,147 3 - - Equity and commodity Asset 843 51 - - Liability 1,224 44 - - Option contracts Interest rate Asset 2,500 10 - - Liability 1,451 8 - - Currency Asset 4,882 101 - - Liability 4,151 112 - - Equity and commodity Asset 928 2 - - Liability 901 4 - - ------------------ ------------------- ------------------ ------------------ Total Derivatives: Assets $ 61,797 $ 765 $ 289 $ 17 ================== =================== ================== ================== Liabilities $ 54,861 $ 727 $ 1,037 $ 57 ================== =================== ================== ================== Other than Trading Total ------------------------------------------ ------------------------------------------ Non-Hedge Accounting ------------------------------------------ Estimated Estimated Notional Fair Value Notional Fair Value ------------------- ------------------ ------------------ ------------------- Swap Instruments Interest rate Asset $ 1,949 $ 73 $ 6,094 $ 277 Liability 2,501 301 7,072 493 Currency Asset - - 601 107 Liability - - 727 130 Equity and commodity Asset 22 7 69 21 Liability - - - - Forward contracts Interest rate Asset - - 31,568 72 Liability - - 24,204 56 Currency Asset 942 13 13,881 212 Liability 1,466 26 15,633 258 Equity and commodity Asset 2 - 1,206 12 Liability - - 1,355 3 Futures contracts Interest rate Asset 1,762 22 4,191 32 Liability 478 4 3,625 7 Equity and commodity Asset 24 1 867 52 Liability 53 1 1,277 45 Option contracts Interest rate Asset 130 2 2,630 12 Liability 98 - 1,549 8 Currency Asset - - 4,882 101 Liability - - 4,151 112 Equity and commodity Asset - - 928 2 Liability - - 901 4 ------------------- ------------------ ------------------ ------------------- Total Derivatives: Assets $ 4,831 $ 118 $ 66,917 $ 900 =================== ================== ================== =================== Liabilities $ 4,596 $ 332 $ 60,494 $ 1,116 =================== ================== ================== ===================
B45 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued) The following table discloses net trading revenues by derivative instrument types as of December 31: 1999 1998 1997 -------- -------- -------- (In Millions) Forwards $ 53 $ 67 $ 59 Futures 80 (5) 37 Swaps 16 (13) (13) Options (14) - - -------- -------- -------- Net trading revenues $ 135 $ 49 $ 83 ======== ======== ======== Average fair values for trading derivatives in an asset position during the years ended December 31, 1999 and 1998 were $789 million and $922 million, respectively, and for derivatives in a liability position were $766 million and $905 million, respectively. The average fair values do not reflect the netting of amounts pursuant to the right of offset or qualifying master netting agreements. Of those derivatives held for trading purposes at December 31, 1999, 61% of the notional amount consisted of interest rate derivatives, 33% consisted of foreign currency derivatives and 6% consisted of equity and commodity derivatives. Of those derivatives held for purposes other than trading at December 31, 1999, 65% of notional consisted of interest rate derivatives, 34% consisted of foreign currency derivatives, and 1% consisted of equity and commodity derivatives. Credit Risk The credit exposure of the Company's derivative contracts is limited to the fair value at the reporting date. Credit risk is managed by entering into transactions with creditworthy counterparties and obtaining collateral where appropriate and customary. The Company also attempts to minimize its exposure to credit risk through the use of various credit monitoring techniques. At December 31, 1999 and 1998, approximately 81% and 95%, respectively, of the net credit exposure for the Company from derivative contracts is with investment-grade counterparties. Off-Balance Sheet Credit-Related Instruments During the normal course of its business, the Company utilizes financial instruments with off-balance sheet credit risk such as commitments, financial guarantees, loans sold with recourse and letters of credit. Commitments include commitments to purchase and sell mortgage loans, the underfunded portion of commitments to fund investments in private placement securities and unused credit card and home equity lines. In connection with the Company's consumer banking business, loan commitment for credit cards and home equity lines of credit and other lines of credit include agreements to lend up to specified limits to customers. It is anticipated that commitment amounts will only be partially drawn down based on overall customer usage patterns, and, therefore, do not necessarily represent future cash requirements. The Company evaluates each credit decision on such commitments at least annually and has the ability to cancel or suspend such lines at its option. The total available lines of credit card, home equity and other commitments were $2.7 billion, of which $2.0 billion remains available at December 31, 1999. Also, in connection with the Company's investment banking activities, the Company enters into agreements with mortgage originators and others to provide financing on both a secured and an unsecured basis. Aggregate financing commitments on a secured basis, for periods of less than one year, approximate $4.9 billion, of which $2.73 billion remains available at December 31, 1999. Unsecured commitments approximate $528 million, of which $334 million remains available at December 3l, 1999. B46 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 14. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued) Other commitments primarily include commitments to purchase and sell mortgage loans and the unfunded portion of commitments to fund investments in private placement securities. These mortgage loans and private commitments were $2.9 billion, of which $1.9 billion remain available at December 31, 1999. Additionally, mortgage loans sold with recourse were $0.1 billion at December 31, 1999. The Company also provides financial guarantees incidental to other transactions and letters of credit that guarantee the performance of customers to third parties. These credit-related financial instruments have off-balance sheet credit risk because only their origination fees, if any, and accruals for probable losses, if any, are recognized until the obligation under the instrument is fulfilled or expires. These instruments can extend for several years and expirations are not concentrated in any period. The Company seeks to control credit risk associated with these instruments by limiting credit, maintaining collateral where customary and appropriate and performing other monitoring procedures. At December 31, 1999 these were immaterial. 15. CONTINGENCIES AND LITIGATION Stop-Loss Reinsurance and Stop-Loss Indemnification Agreements On February 24, 2000, the Company entered into an agreement to sell 100% of the capital stock of its subsidiary, Gibraltar Casualty Company ("Gibraltar") to Everest Reinsurance Holdings, Inc. (now known as Everest Re Group, Ltd.) ("Everest"). The transaction is expected to be completed in the second quarter of 2000, subject to approval by state regulators and other customary closing conditions. Proceeds from the sale will consist of approximately $52 million in cash, which approximated the book value of Gibraltar at December 31, 1999. In connection with the sale, the Company will provide a stop-loss indemnification agreement covering 80% of the first $200 million of any adverse loss development in excess of Gibraltar's carried reserves as of the closing date of the transaction, resulting in a maximum potential exposure to the Company of $160 million. In connection with the Company's 1995 sale of what is now Everest, Gibraltar had entered into a stop-loss reinsurance agreement with Everest whereby Gibraltar reinsured up to $375 million of the first $400 million of aggregate adverse loss development, on an incurred basis, with respect to reserves recorded by Everest as of June 30, 1995. Upon the expected completion of the aforementioned sale of Gibraltar, the Company will no longer be subject to exposure under the 1995 stop-loss agreement. Management believes that based on currently available information and established reserves, the ultimate settlement of claims under either the 1995 stop-loss agreement or the stop-loss indemnification agreement should not have a material adverse effect on the Company's financial position. Environmental and Asbestos-Related Claims Certain of the Company's subsidiaries are subject to claims under expired contracts that assert alleged injuries and/or damages relating to or resulting from toxic torts, toxic waste and other hazardous substances. The liabilities for these claims cannot be reasonably estimated using traditional reserving techniques. The predominant source of such exposure for the Company is Gibraltar, which, as discussed above, is expected to be sold in the second quarter of 2000. The liabilities recorded for environmental and asbestos-related claims, net of reinsurance recoverables, of $342 million ($321 million for Gibraltar) and $239 million ($217 million for Gibraltar) at December 31, 1999 and 1998, respectively, reflect the Company's best estimate of ultimate claims and claim adjustment expenses based upon known facts and current law. However, as a result of judicial decisions and legislative actions, the coverage afforded under these contracts may be expanded beyond their original terms. Given the expansion of coverage and liability by the courts and legislatures in the past, and the potential for other unfavorable trends in the future, the ultimate cost of these claims could increase from the levels currently established. Because of these uncertainties, these additional amounts, or a range of these additional amounts, cannot be reasonably estimated, and could result in a liability exceeding recorded liabilities by an amount that could be material to the Company's results of operations in a future quarterly or annual period. The Company's residual exposure pertaining to Gibraltar upon completion of the expected sale, pursuant to a B47 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 15. CONTINGENCIES AND LITIGATION (continued) stop-loss indemnification agreement, is discussed above. Management believes that these claims should not have a material adverse effect on the Company's financial position. Managed Care Reimbursement The Company has reviewed its obligations retained in the sale of the healthcare operations under certain managed care arrangements for possible failure to comply with contractual and regulatory requirements. It is the opinion of management that adequate reserves have been established to provide for appropriate reimbursements to customers. Litigation The Company is subject to legal and regulatory actions in the ordinary course of its businesses, including class actions. Pending legal and regulatory actions include proceedings specific to the Company's practices and proceedings generally applicable to business practices in the industries in which the Company operates. In certain of these matters, large and/or indeterminate amounts are sought, including punitive or exemplary damages. In particular, the Company has been subject to substantial regulatory actions and civil litigation involving individual life insurance sales practices. In 1996, the Company entered into settlement agreements with relevant insurance regulatory authorities and plaintiffs in the principal life insurance sales practices class action lawsuit covering policyholders of individual permanent life insurance policies issued in the United States from 1982 to 1995. Pursuant to the settlements, the Company agreed to various changes to its sales and business practices controls and a series of fines, and is in the process of distributing final remediation relief to eligible class members. In many instances, claimants have the right to "appeal" the Company's decision to an independent reviewer. The bulk of such appeals were resolved in 1999, and the balance is expected to be addressed in 2000. As of January 31, 2000, the Company remained a party to two putative class actions and approximately 158 individual actions relating to permanent life insurance policies the Company issued in the United States between 1982 and 1995. Additional suits may be filed by individuals who opted out of the settlements. While the approval of the class action settlement is now final, the Company remains subject to oversight and review by insurance regulators and other regulatory authorities with respect to its sales practices and the conduct of the remediation program. The U.S. District Court has also retained jurisdiction as to all matters relating to the administration, consummation, enforcement and interpretation of the settlements. In November 1999, upon the joint application of the Company and class counsel, the Court ordered an investigation into certain allegations of improprieties in the administration and implementation of the remediation program at the Company's Plymouth, Minnesota facility. Class counsel is expected to submit a summary of its findings pursuant to the investigation to the Court in mid-April 2000. In 1999, 1998, 1997 and 1996, the Company recorded provisions in its Consolidated Statements of Operations of $100 million, $1,150 million, $2,030 million and $1,125 million, respectively, to provide for estimated remediation costs, and additional sales practices costs including related administrative costs, regulatory fines, penalties and related payments, litigation costs and settlements, including settlements associated with the resolution of claims of deceptive sales practices asserted by policyholders who elected to "opt-out" of the class action settlement and litigate their claims against the Company separately, and other fees and expenses associated with the resolution of sales practices issues. B48 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 15. CONTINGENCIES AND LITIGATION (continued) The following table summarizes the Company's charges for the estimated total costs of sales practices remedies and additional sales practices costs and the related liability balances as of the dates indicated:
Year Ended December 31, --------------------------------------------- 1999 1998 1997 1996 --------------------------------------------- (In Millions) Liability balance at beginning of period $ 3,058 $ 2,553 $ 963 $ - Charges to expense: Remedy costs (99) 510 1,640 410 Additional sales practices costs 199 640 390 715 --------- --------- --------- --------- Total charges to expense 100 1,150 2,030 1,125 Amounts paid or credited: Remedy costs 1,708 147 - - Additional sales practices costs 559 498 440 162 --------- --------- --------- --------- Total amounts paid or credited 2,267 645 440 162 Liability balance at end of period $ 891 $ 3,058 $ 2,553 $ 963 ========= ========= ========= =========
In 1996, the Company recorded in its Consolidated Statements of Operations the cost of $410 million before taxes as a guaranteed minimum remediation expense pursuant to the settlement agreement. Management had no better information available at that time upon which to make a reasonable estimate of the losses associated with the settlement. Charges were also recorded in 1996 for estimated additional sales practices costs totaling $715 million before taxes. In 1997, management increased the estimated liability for the costs of remedying policyholder claims by $1,640 million before taxes. This increase was based on additional information derived from claim sampling techniques, the terms of the settlement and the number of claim forms received. The Company also recorded additional charges of $390 million to recognize the increase in estimated total additional sales practices costs. In 1998, the Company recorded an additional charge of $510 million before taxes to recognize the increase of the estimated total cost of remedying policyholder claims to a total of $2,560 million before taxes. This increase was based on (i) estimates derived from an analysis of claims actually remedied (including interest); (ii) a sample of claims still to be remedied; (iii) an estimate of additional liabilities associated with a claimant's right to "appeal" the Company's decision; and (iv) an estimate of an additional liability associated with the results of an investigation by a court-appointed independent expert regarding the impact of the Company's failure to properly implement procedures to preserve all documents relevant to the class action and remediation program. The Company also recorded additional charges of $640 million before taxes to recognize the increase in estimated total additional sales practices costs. In 1999, as a result of a decrease in the estimated cost of remedying policyholder claims, the Company recorded a credit of $99 million before taxes to reduce its liability relative to remedy costs. The revised estimate was based on additional information derived from claims actually remedied and an evaluation of remaining obligations taking into consideration experience in 1999. The Company also recorded a charge of $199 million before taxes to recognize an increase in estimated total additional sales practices costs based on additional information obtained in 1999. B49 The Prudential Insurance Company of America Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 15. CONTINGENCIES AND LITIGATION (continued) The Company's litigation is subject to many uncertainties, and given their complexity and scope, the outcomes cannot be predicted. It is possible that the results of operations or the cash flow of the Company, in a particular quarterly or annual period, could be materially affected by an ultimate unfavorable outcome of pending litigation and regulatory matters depending, in part, upon the results of operation or cash flow for such period. Management believes, however, that the ultimate resolution of all pending litigation and regulatory matters, after consideration of applicable reserves, should not have a material adverse effect on the Company's financial position. ****** B50 Report of Independent Accountants --------------------------------- To the Board of Directors and Policyholders of The Prudential Insurance Company of America In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of operations, of changes in equity and of cash flows present fairly, in all material respects, the financial position of The Prudential Insurance Company of America and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP New York, New York March 21, 2000 B51 -----END PRIVACY-ENHANCED MESSAGE-----