N-CSR 1 dncsr.htm THE PRUDENTIAL VARIABLE CONTRACT ACCOUNT-2 The Prudential Variable Contract Account-2

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

 

Investment Company Act file number:    811-01612
Exact name of registrant as specified in charter:   

 

 

The Prudential Variable Contract Account-2

Address of principal executive offices:   

 

 

Gateway Center 3,

   100 Mulberry Street,
   Newark, New Jersey 07102
Name and address of agent for service:   

 

 

Deborah A. Docs

   Gateway Center 3,
   100 Mulberry Street,
   Newark, New Jersey 07102
Registrant’s telephone number, including area code:   

 

 

973-367-7521

Date of fiscal year end:   

 

 

12/31/2009

Date of reporting period:   

 

 

12/31/2009

Item 1 – Reports to Stockholders

 

LOGO

Prudential

Long-Term
Growth Account

 

Annual report
to participants

 

December 31, 2009

This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus for VCA-2. Investors should consider the contract and the Account’s investment objectives, risks, charges and expenses carefully before investing. This and other important information is contained in the prospectuses that can be obtained from your financial professional. You should read the prospectuses carefully before investing.

 

 

It is for the information of persons participating in The Prudential Variable Contract Account-2 (VCA-2, Long-Term Growth Account, or the Account). VCA-2 is a group annuity insurance product issued by The Prudential Insurance Company of America, 751 Broad Street, Newark, NJ 07102-3777, and is distributed by Prudential Investment Management Services LLC (PIMS), member SIPC, Three Gateway Center, 14th Floor, Newark, NJ 07102-4077. Both are Prudential Financial companies.

 

All are Prudential Financial companies and each is solely responsible for its financial condition and contractual obligations.

 

Pru, Prudential, Prudential Financial, Rock Solid, “The Rock”, the Rock Logo and the Rock Prudential Logo are registered service marks of The Prudential Insurance Company of America, Newark, NJ, and its affiliates.

 

Annuity contracts contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. Your plan sponsor or licensed financial professional can provide you with costs and complete details. Contract guarantees are based on the claims-paying ability of the issuing company.

 

A description of the Account’s proxy voting policies and procedures is available, without charge, upon request. Owners of variable annuity contracts should call 888-778-2888 to obtain descriptions of the Account’s proxy voting policies and procedures. The description is also available on the website of the Securities and Exchange Commission (the “Commission”) at www.sec.gov. Information regarding how the Account voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on the website of the Commission, at www.sec.gov and at the Fund’s website.

 

The Account’s Statement of Additional Information contains additional information about the members of the Account’s Committee and is available without charge upon request by calling 888-778-2888.

 

The Account files with the Commission a complete listing of portfolio holdings as of its first and third quarter-end on Form N-Q. Form N-Q is available on the Commission’s website at www.sec.gov or by visiting the Commission’s Public Reference Room. For more information on the Commission’s Public Reference Room, please visit the Commission’s website or call 1-800-SEC-0330. Participants may obtain copies of Form N-Q filings by calling 888-778-2888.

The Prudential Long Term Growth Program

Table of Contents

   Annual Report   December 31, 2009

 

n  

LETTER TO PARTICIPANTS

 

n  

MANAGEMENT REVIEW

 

n  

PRESENTATION OF PORTFOLIO HOLDINGS

 

n  

FINANCIAL REPORTS

A1 Statement of Net Assets and Financial Statements

B1 Financial Highlights

C1 Notes to Financial Statements

D1 Report of Independent Registered Public Accounting Firm

E1 Information about Trustees and Officers

The Prudential Long-Term Growth Program

Letter to Participants

  

December 31, 2009

 

n  

DEAR PARTICIPANT,

 

Our primary focus at Prudential is to help investors achieve and maintain long-term financial success. Variable Contract Account-2 annual report outlines our efforts to reach this goal. We hope you find it informative and useful.

 

Prudential has been building on a heritage of success for more than 130 years, and the quality of our businesses and risk diversification has enabled us to manage effectively through volatile markets. We believe the array of our products provides a highly attractive value proposition to clients like you who are focused on financial security.

 

Your financial professional is your best resource to make the most informed investment decisions to help meet your needs. Together, you can build a diversified investment portfolio that aligns with your long-term financial goals. Diversification does not assure a profit or protect against loss in declining markets.

 

Thank you for selecting Prudential as one of your financial partners. We value your trust and appreciate the opportunity to help you achieve financial security.

 

Sincerely,

 

LOGO

Judy A. Rice

President,

Variable Contract Account-2

January 29, 2010

The Prudential Variable Contract Account-2

Subadvised by: Jennison Associates LLC

   December 31, 2009

Investment Manager’s Report - As of December 31, 2009

 

Average Annual Total Return Percentages

     1-Year     5-Year     10-Year  

Account (without sales charges)

    48.23 %    4.27 %    3.37 % 

Account (with sales charges)

    45.64      3.82      3.18   

S&P 500 Index

    26.47      0.42      -0.95   

 

Account Inception: 7/1/1968.

 

Past performance does not guarantee future returns. The Account performance without sales charges is shown after the deduction of all expenses, including investment management and mortality and expense charges, but do not include the effect of any sales charge. The Account performance with sales charges is shown after the deduction of all expenses, including investment management and mortality and expenses charges, and in addition reflect the deduction of a front-end 2.5% sales charge and the impact of an annual account charge.

$10,000 INVESTED OVER 10 YEARS

 

LOGO


 

 

For the year ended December 31, 2009, the VCA-2 Capital Growth Account rose 48.23%.

 

Every sector in the benchmark, the S&P 500 Index (the Index), had positive returns for the year ended December 31, 2009. Likewise, every sector in the VCA-2 Account (the Portfolio) advanced. Stock selection across the board, with the one exception of industrials, benefited the Portfolio’s relative return. The Portfolio significantly outperformed the Index.

 

Energy positions made the most meaningful positive impact on relative performance. Jennison prefers energy companies that are best positioned to gain from rising oil and gas prices. Jennison remains bullish on the long-term supply/demand imbalances for copper and gold, which should result in higher prices for these commodities and ultimately the Portfolio’s copper and gold mining stocks. Industrialization of the developing world and difficulty in increasing supply will most likely create upward pressure on prices. Growth in global money supply should also push up gold prices. Security selection and an underweight stance in financials made a sizable contribution to relative performance.

 

From the depths of their March lows, equity markets have posted impressive rebounds, with most indexes gaining 50% or more through year-end. Corporate profits, which have been much better than were thought possible at the beginning of 2009, largely due to workforce and inventory reductions, have provided much of the fuel for this recovery in equities. Favorable interest rate and liquidity conditions have been instrumental in spurring the rally, as well. With these tailwinds in place, there is reason to be optimistic that further gains lie ahead in 2010. Yet significant challenges remain, including high unemployment, still-weak housing markets, and probable increases in tax rates. Against this backdrop, Jennison remains cautiously optimistic.

 

Prudential Investments LLC (PI), an indirect, wholly owned subsidiary of Prudential Financial, Inc., serves as the investment manager for the Account.

The S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market. Investors cannot invest directly in an index. For a complete list of holdings, refer to the Statement of Net Assets section of this report.

Prudential Variable Contract Account-2 (VCA-2)
Presentation of Portfolio Holdings — (unaudited)		  

December 31, 2009

 

VCA-2      
Five Largest Holdings       (% of Net Assets ) 

Occidental Petroleum Corp.

   2.6%   
Advanced Micro Devices, Inc.   2.4%   
Google, Inc. Cl. A   2.3%   
H & R Block, Inc.   2.3%   
NII Holdings, Inc.   2.2%   

 

For a complete listing of holdings, refer to the Statement of Net Assets section of this report. Holdings reflect only long-term investments. Holdings/Issues/Industries/Sectors are subject to change.

FINANCIAL STATEMENTS OF VCA-2

 

     STATEMENT OF NET ASSETS    

December 31, 2009

 

 

LONG-TERM INVESTMENTS — 98.7%
COMMON STOCKS — 97.3%   Shares
   Value
(Note 2)

Aerospace & Defense — 1.1%

          

Precision Castparts Corp.

   29,400   $     3,244,290
       

Auto Components — 2.0%

          

Goodyear Tire & Rubber Co. (The)(a)

   279,400     3,939,540

Lear Corp.(a)

   29,300     1,981,852
       
          5,921,392
       

Biotechnology — 2.3%

          

Celgene Corp.(a)

   69,800     3,886,464

Gilead Sciences, Inc.(a)

   65,300     2,826,184
       
          6,712,648
       

Capital Markets — 5.1%

          

Bank of New York Mellon Corp. (The)

   87,000     2,433,390

Goldman, Sachs Group, Inc. (The)

   28,400     4,795,056

Morgan Stanley

   144,000     4,262,400

TD Ameritrade Holding Corp.(a)

   184,300     3,571,734
       
          15,062,580
       

Chemicals — 1.4%

          

Dow Chemical Co. (The)

   152,500     4,213,575
       

Commercial Banks — 0.8%

          

Keycorp

   398,800     2,213,340
       

Commercial Services & Supplies — 1.7%

          

Waste Management, Inc.

   146,600     4,956,546
       

Communications Equipment — 1.6%

          

QUALCOMM, Inc.

   100,400     4,644,504
       

Computers & Peripherals — 1.1%

          

Apple, Inc.(a)

   15,900     3,352,674
       

Consumer Finance — 1.7%

          

SLM Corp.(a)

   445,200     5,017,404
       

Diversified Consumer Services — 3.7%

          

Career Education Corp.(a)

   177,700     4,142,187

H & R Block, Inc.

   301,000     6,808,620
       
          10,950,807
       

Diversified Financial Services — 1.0%

          

JPMorgan Chase & Co.

   69,400     2,891,898
       

Electric Utilities — 1.2%

          

Entergy Corp.

   43,100     3,527,304
       

Electronic Equipment & Instruments — 1.2%

      

Flextronics International, Ltd.(a)

   464,800     3,397,688
       

Energy Equipment & Services — 1.1%

          

National Oilwell Varco, Inc.

   71,300     3,143,617
       

Food & Staples Retailing — 3.8%

          

CVS Caremark Corp.

   97,200     3,130,812

Kroger Co. (The)

   220,400     4,524,812

Wal-Mart Stores, Inc.

   67,600     3,613,220
       
          11,268,844
       

Food Products — 4.4%

          

Bunge, Ltd.

   63,600     4,059,588

ConAgra Foods, Inc.

   209,500     4,828,975
COMMON STOCKS
(continued)   Shares
   Value
(Note 2)

Food Products (continued)

      

Tyson Foods, Inc. Cl. A

   334,000   $     4,098,180
       
          12,986,743
       

Health Care Equipment & Supplies — 1.5%

          

Alcon, Inc.

   26,900     4,421,015
       

Health Care Providers & Services — 6.0%

          

Aetna, Inc.

   59,700     1,892,490

Medco Health Solutions, Inc.(a)

   78,000     4,984,980

Omnicare, Inc.

   242,800     5,873,332

Wellpoint, Inc.(a)

   85,100     4,960,479
       
          17,711,281
       

Hotels, Restaurants & Leisure — 1.0%

          

Yum Brands, Inc.

   82,600     2,888,522
       

Independent Power Producers & Energy Traders — 1.3%

          

NRG Energy, Inc.(a)

   165,000     3,895,650
       

Insurance — 2.2%

          

Arch Capital Group, Ltd.(a)

   7,800     558,090

Axis Capital Holdings, Ltd.

   105,600     3,000,096

Travelers Cos., Inc. (The)

   56,900     2,837,034
       
          6,395,220
       

Internet Software & Services — 4.3%

          

Google, Inc. Cl. A(a)

   11,000     6,819,780

IAC/InterActiveCorp.(a)

   287,700     5,892,096
       
          12,711,876
       

Media — 3.2%

          

Comcast Corp.

   285,200     4,808,472

Liberty Global, Inc. Ser. C(a)

   202,305     4,420,364
       
          9,228,836
       

Metals & Mining — 3.1%

          

Freeport-McMoRan Copper & Gold, Inc.(a)

   60,500     4,857,545

Kinross Gold Corp.

   233,000     4,287,200
       
          9,144,745
       

Multi-Utilities — 1.9%

          

Sempra Energy

   99,600     5,575,608
       

Oil, Gas & Consumable Fuels — 17.8%

          

Anadarko Petroleum Corp.

   67,400     4,207,108

Apache Corp.

   54,100     5,581,497

Canadian Natural Resources, Ltd.

   65,400     4,705,530

EOG Resources, Inc.

   52,900     5,147,170

Hess Corp.

   30,300     1,833,150

Noble Energy, Inc.

   47,200     3,361,584

Occidental Petroleum Corp.

   93,100     7,573,685

Petroleo Brasileiro SA ADR (Brazil)

   126,100     6,012,448

Suncor Energy, Inc.

   151,200     5,338,872

Williams Cos, Inc.

   259,700     5,474,476

XTO Energy, Inc.

   62,800     2,922,084
       
          52,157,604
       

Pharmaceuticals — 6.5%

          

Mylan, Inc.(a)

   165,100     3,042,793

 

SEE NOTES TO FINANCIAL STATEMENTS.

 

A1

FINANCIAL STATEMENTS OF VCA-2

 

     STATEMENT OF NET ASSETS    

December 31, 2009

 

 

COMMON STOCKS
(continued)   Shares
   Value
(Note 2)

Pharmaceuticals (continued)

      

Novartis AG ADR (Switzerland)

   76,100   $     4,142,123

Pfizer, Inc.

   191,800     3,488,842

Sanofi-Aventis SA ADR (France)

   112,200     4,406,094

Shire PLC ADR (Ireland)

   67,400     3,956,380
       
          19,036,232
       

Road & Rail — 1.6%

          

Union Pacific Corp.

   71,100     4,543,290
       

Semiconductors & Semiconductor Equipment — 2.4%

Advanced Micro Devices, Inc.(a)

   724,000     7,008,320
       

Software — 6.4%

          

Adobe Systems, Inc.(a)

   116,400     4,281,192

CA, Inc.

   256,500     5,760,990

Nuance Communications, Inc.(a)

   191,300     2,972,802

Symantec Corp.(a)

   314,700     5,629,983
       
          18,644,967
       

Thrifts & Mortgage Finance — 0.7%

          

People’s United Financial, Inc.

   116,460     1,944,882
       

Wireless Telecommunication Services — 2.2%

NII Holdings, Inc.(a)

   189,097     6,349,878
       

TOTAL COMMON STOCKS
(Cost: $227,695,894)

         285,163,780
       
PREFERRED STOCK — 1.4%          

Diversified Financial Services

          

Bank of America Corp.
(Cost: $4,092,636)

   272,300     4,062,716
       
CORPORATE BOND          
    Principal
Amount
(000)
    

Oil, Gas & Consumable Fuels

          

Trident Resources, Unsec’d Note, (Canada), Private Placement, due 8/12/12(a)(b)(c)(f) (Cost: $5,783,450; purchased 8/20/07)

   CAD     5,783     —
       
WARRANT  
    Units
   Value
(Note 2)
  

Oil, Gas & Consumable Fuels

            

Trident Resources Corp. (Canada), Private Placement, expiring 1/01/15(a)(b)(c)(f) (Cost: $0; purchased 8/20/07)

   499,039   $ —   
       

TOTAL LONG-TERM INVESTMENTS
(Cost: $237,571,980)

       $ 289,226,496   
       
SHORT-TERM INVESTMENTS — 1.2%   
    Shares
      

Affiliated Money Market Mutual Fund

        

Dryden Core Investment Fund— Taxable Money Market Series(e) (Cost: $3,396,989)

   3,396,989     3,396,989   
       

TOTAL INVESTMENTS(d) — 99.9%
(Cost: $240,968,969)

       $ 292,623,485   
       

OTHER ASSETS, LESS LIABILITIES

            

Receivable for Securities Sold

       $ 2,703,189   

Dividends Receivable

         279,507   

Payable for Pending Capital Transactions

         (120,129 ) 

Payable for Securities Purchased

         (2,544,080 ) 
       

OTHER ASSETS IN EXCESS OF LIABILITIES — 0.1%

         318,487   
       

NET ASSETS — 100%

       $ 292,941,972   
       

NET ASSETS, representing:

            

Equity of Participants — 8,073,833 Accumulation Units at an Accumulation Unit Value of $35.1697

       $ 283,954,127   

Equity of Annuitants

         8,585,042   

Equity of The Prudential Insurance Company of America

         402,803   
       
        $ 292,941,972   
       

(a) Non-income producing security.

 

(b) Indicates an illiquid security.

 

(c) Indicates a security restricted to resale. The aggregate cost of such securities is $5,783,450. The aggregate value of $0 is approximately 0% of net assets.

 

(d) As of December 31, 2009, two securities valued at $0 and representing 0% of the total market value of the portfolio were fair valued in accordance with the policies adopted by the Committee Members.

 

(e) The Prudential Investments LLC, the Manager of the Account, also serves as Manager of the Dryden Core Investment Fund—Taxable Money Market Series.

 

(f) The issuer has filed for bankruptcy and has defaulted in the payment of interest on the debt security. The security has been fair valued at zero.

 

ADR   American Depository Receipt
CAD   Canadian Dollar

 

SEE NOTES TO FINANCIAL STATEMENTS.

 

A2

FINANCIAL STATEMENTS OF VCA-2

 

     STATEMENT OF NET ASSETS    

December 31, 2009

 

 

Various inputs are used in determining the value of the Account’s investments. These inputs are summarized in the three broad levels listed below.

 

Level 1—quoted prices in active markets for identical securities

Level 2—other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)

Level 3—significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

 

The following is a summary of the inputs used as of December 31, 2009 in valuing the Account’s assets carried at fair value:

 

Investments in Securities

   

Level 1

   

Level 2

   

Level 3

Common Stocks

    $ 285,163,780    $   —    $   —

Corporate Bond

      —      —      —

Preferred Stocks

      4,062,716      —      —

Warrants

      —      —      —

Affiliated Mutual Funds

      3,396,989      —      —
    
  
  
       292,623,485      —      —

Other Financial Instruments*

      —      —      —
    
  
  

Total

    $ 292,623,485    $ —    $ —
    
  
  
* Other financial instruments are derivative instruments not reflected in the Schedule of Investments, such as futures, forwards and swap contracts, which are valued at the unrealized appreciation/depreciation on the instrument.

 

The following is a reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value:

 

     Corporate Bond
  

Balance as of 12/31/08

    $ 1,601,195   

Realized gain (loss)

      —   

Change in unrealized appreciation (depreciation)

      (1,837,399 ) 

Earned amortization/accretion

      —   

Net purchases (sales)

      236,204   

Transfers in and/or out of Level 3

      —   
    

Balance as of 12/31/09

    $ —   
    

 

The industry classification of portfolio holdings and other assets in excess of liabilities shown as a percentage of net assets as of December 31, 2009 were as follows:

 

Oil, Gas & Consumable Fuels

    17.8 % 

Pharmaceuticals

    6.5   

Software

    6.4   

Health Care Providers & Services

    6.0   

Capital Markets

    5.1   

Food Products

    4.4   

Internet Software & Services

    4.3   

Food & Staples Retailing

    3.8   

Diversified Consumer Services

    3.7   

Media

    3.2   

Metals & Mining

    3.1   

Diversified Financial Services

    2.4   

Semiconductors & Semiconductor Equipment

    2.4   

Biotechnology

    2.3   

Insurance

    2.2   

Wireless Telecommunication Services

    2.2   

Auto Components

    2.0   

Multi-Utilities

    1.9   

Commercial Services & Supplies

    1.7   

Consumer Finance

    1.7   

Communications Equipment

    1.6   

Road & Rail

    1.6   

 

SEE NOTES TO FINANCIAL STATEMENTS.

 

A3

FINANCIAL STATEMENTS OF VCA-2

 

     STATEMENT OF NET ASSETS    

December 31, 2009

 

 

Health Care Equipment & Supplies

    1.5 % 

Chemicals

    1.4   

Independent Power Producers & Energy Traders

    1.3   

Affiliated Money Market Mutual Fund

    1.2   

Electric Utilities

    1.2   

Electronic Equipment & Instruments

    1.2   

Aerospace & Defense

    1.1   

Computers and Peripherals

    1.1   

Energy Equipment & Services

    1.1   

Hotels, Restaurants & Leisure

    1.0   

Commercial Banks

    0.8   

Thrifts & Mortgage Finance

    0.7   
    
     99.9   

Other Assets in Excess of Liabilities

    0.1   
    
     100.0 % 
    

 

The Account invested in derivative instruments during the reporting period. The primary types of risk associated with derivative instruments are commodity risk, credit risk, equity risk, foreign exchange risk and interest rate risk. The effect of such derivative instruments on the Account’s financial position and financial performance as reflected in the Statement of Assets and Liabilities and Statement of Operations is presented in the summary below.

 

Fair values of derivative instruments as of December 31, 2009 as presented in the Statement of Assets and Liabilities:

 

Derivatives not designated as hedging
instruments, carried at fair value

    Asset Derivatives
     Liability Derivatives
   Balance Sheet Location
   

Fair Value

     Balance Sheet Location
   

Fair Value

Equity contracts

    Unaffiliated investments    $ — *    —    $ —
* Includes one security with a fair value of $0.

 

For the year ended December 31, 2009, the Account did not have any realized gain or (loss) on derivatives recognized in income.

 

For the year ended December 31, 2009, the Account did not have any unrealized appreciation or (depreciation) on derivatives recognized in income.

 

SEE NOTES TO FINANCIAL STATEMENTS.

 

A4

FINANCIAL STATEMENTS OF VCA-2

 

     STATEMENT OF OPERATIONS    

Year Ended December 31, 2009

 

        

INVESTMENT INCOME

         

Unaffiliated Dividend Income (net of $32,654 foreign withholding tax)

    $ 3,716,490   

Unaffiliated Interest Income

      233,020   

Affiliated Dividend Income

      25,184   

Total Income

      3,974,694   

EXPENSES

         

Fees Charged to Participants and Annuitants for Investment Management Services

      (310,897 ) 

Fees Charged to Participants (other than Annuitants) for Assuming Mortality and Expense Risks

      (909,258 ) 

Total Expenses

      (1,220,155 ) 

NET INVESTMENT INCOME

      2,754,539   

REALIZED AND UNREALIZED LOSS ON INVESTMENTS

         

Net Realized Loss on Investment Transactions

      (29,976,356 ) 

Net Change in Unrealized Appreciation (Depreciation) on Investments

      124,768,959   

NET GAIN ON INVESTMENTS

      94,792,603   

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

    $ 97,547,142   

 

     STATEMENT OF CHANGES IN NET ASSETS    

 

       Year Ended December 31,
  
       2009      2008  

OPERATIONS

                    

Net Investment Income

      $ 2,754,539       $ 4,377,708   

Net Realized Loss on Investment Transactions

        (29,976,356 )       (57,237,612 ) 

Net Change In Unrealized Appreciation (Depreciation) on Investments

        124,768,959         (125,523,577 ) 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

        97,547,142         (178,383,481 ) 

CAPITAL TRANSACTIONS

                    

Purchase Payments and Transfers In

        8,742,398         14,459,084   

Withdrawals and Transfers Out

        (28,158,196 )       (62,375,786 ) 

Annual Administration Charges Deducted from Participants’ Accumulation Accounts

        (7,183 )       (7,746 ) 

Mortality and Expense Risk Charges Deducted from Annuitants’ Accounts

        (23,432 )       (32,995 ) 

Variable Annuity Payments

        (1,053,759 )       (1,700,293 ) 

NET DECREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS

        (20,500,172 )       (49,657,736 ) 

NET DECREASE IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS

        (99,155 )       (94,412 ) 

TOTAL INCREASE (DECREASE) IN NET ASSETS

        76,947,815         (228,135,629 ) 

NET ASSETS

                    

Beginning of year

        215,994,157         444,129,786   

End of year

      $ 292,941,972       $ 215,994,157   

 

SEE NOTES TO FINANCIAL STATEMENTS.

 

A5

FINANCIAL HIGHLIGHTS FOR VCA-2

 

     INCOME AND CAPITAL CHANGES PER ACCUMULATION UNIT*    

(For an Accumulation Unit outstanding throughout the year)

 

       Year Ended December 31,
  
       2009      2008     2007      2006      2005  

Investment Income

      $ .4604       $ .6104      $ .6673       $ .5815       $ .4098   

Expenses

                                              

Investment management fee

        (.0360 )       (.0435 )      (.0526 )       (.0453 )       (.0380 ) 

Assuming mortality and expense risks

        (.1080 )       (.1305 )      (.1576 )       (.1357 )       (.1140 ) 

Net Investment Income

        .3164         .4364        .4571         .4005         .2578   

Capital Changes

                                              

Net realized gain (loss) on investment transactions

        (3.3879 )       (5.9689 )      6.6673         5.8433         3.1463   

Net change in unrealized appreciation (depreciation) of investments

        14.5145         (12.6906 )      (4.6697 )       (1.0553 )       2.3659   

Net Increase (Decrease) in Accumulation Unit Value

        11.4430         (18.2231 )      2.4547         5.1885         5.7700   

Accumulation Unit Value

                                              

Beginning of year

        23.7267         41.9498        39.4951         34.3066         28.5366   

End of year

      $ 35.1697       $ 23.7267      $ 41.9498       $ 39.4951       $ 34.3066   

Total Return**

        48.23 %       (43.44 )%      6.22 %       15.12 %       20.22 % 

Ratio of Expenses To Average Net Assets***

        .50 %       .50 %      .50 %       .50 %       .50 % 

Ratio of Net Investment Income To Average Net Assets***

        1.10 %       1.24 %      1.09 %       1.10 %       .84 % 

Portfolio Turnover Rate

        63 %       81 %      63 %       55 %       51 % 

Number of Accumulation Units Outstanding
For Participants at end of year (000 omitted)

        8,074         8,807        10,240         11,081         12,012   

 

* Calculated by accumulating the actual per unit amounts daily.
** Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of a share on the first day and a sale on the last day of each year reported. Total returns may reflect adjustments to conform to generally accepted accounting principles.
*** These calculations exclude PICA’s equity in VCA-2.

 

The above table does not reflect the annual administration charge, which does not affect the Accumulation Unit Value. This charge is made by reducing Participants’ Accumulation Accounts by a number of Accumulation Units equal in value to the charge.

 

SEE NOTES TO FINANCIAL STATEMENTS.

 

B1

NOTES TO THE FINANCIAL STATEMENTS OF

VCA-2

 

Note 1:   General

 

The Prudential Variable Contract Account-2 (VCA-2 or the Account) was established on January 9, 1968 by The Prudential Insurance Company of America (“PICA”) under the laws of the State of New Jersey and is registered as an open-end, diversified management investment company under the Investment Company Act of 1940, as amended. VCA-2 has been designed for use by public school systems and certain tax-exempt organizations to provide for the purchase and payment of tax-deferred variable annuities. The investment objective of the Account is long-term growth of capital. Its investments are composed primarily of common stocks. Although variable annuity payments differ according to the investment performance of the Account, they are not affected by mortality or expense experience because PICA assumes the expense risk and the mortality risk under the contracts.

 

Note 2:   Summary of Significant Accounting Policies

 

Securities Valuation:    Securities listed on a securities exchange are valued at the last sale price on such exchange on the day of valuation or, if there was no sale on such day, at the mean between the last reported bid and ask prices, or at the last bid price on such day in the absence of an asked price. Securities traded via Nasdaq are valued at the official closing price provided by Nasdaq. Securities that are actively traded in the over-the-counter market, including listed securities for which the primary market is believed by Prudential Investments LLC (“PI” or “Manager”), in consultation with the subadviser(s), to be over-the-counter, are valued by an independent pricing agent or principal market maker. Securities for which market quotations are not readily available, or whose values have been affected by events occurring after the close of the security’s foreign market and before the Account’s normal pricing time, are valued at fair value in accordance with the Accounts’ Committee members approved fair valuation procedures. When determining the fair valuation of securities some of the factors influencing the valuation include, the nature of any restrictions on disposition of the securities; assessment of the general liquidity of the securities; the issuer’s financial condition and the markets in which it does business; the cost of the investment; the size of the holding and the capitalization of issuer; the prices of any recent transactions or bids/offers for such securities or any comparable securities; any available analyst media or other reports or information deemed reliable by the investment adviser regarding the issuer or the markets or industry in which it operates. Using fair value to price securities may result in a value that is different from a security’s most recent closing price and from the price used by other mutual funds to calculate their net asset value.

 

Investments in mutual funds are valued at their net asset value as of the close of the New York Stock Exchange on the date of valuation.

 

Short-term investments which mature in more than 60 days are valued based on current market quotations. Short-term investments having maturities of 60 days or less and of sufficient credit quality are valued at amortized cost which approximates fair value. Amortized cost is computed using the cost on the date of purchase, adjusted for constant accretion of discount or amortization of premium to maturity.

 

Warrants and Rights:    The Account may hold warrants and rights acquired either through a direct purchase, including as part of private placement, or pursuant to corporate actions. Warrants and rights entitle the holder to buy a proportionate amount of common stock at a specific price and time through the expiration dates. Such warrants and rights are held as long positions by the Account until exercised, sold or expired. Warrants and rights are valued at fair value in accordance with the Committee Members’ approved fair valuation procedures.

 

Securities Transactions and Net Investment Income:    Securities transactions are recorded on the trade date. Realized and unrealized gains or losses on sales of securities are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date and interest income, including amortization of premiums and accretion of discount on debt securities, as required is recorded on the accrual basis. Income and realized and unrealized gains and losses are allocated to the Participants and PICA on a daily basis in proportion to their respective ownership in VCA-2.

 

Estimates:    The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those amounts.

 

C1

Federal Income Taxes:    The operations of VCA-2 are part of, and are taxed with, the operations of PICA. Under the current provisions of the Internal Revenue Code, PICA does not expect to incur federal income taxes on earnings of VCA-2 to the extent the earnings are credited under the Contracts. As a result, the Unit Value of VCA-2 has not been reduced by federal income taxes.

 

Annuity Reserves:    Reserves are computed for purchased annuities using the Prudential 1950 Group Annuity Valuation (GAV) Table, adjusted, and a valuation interest rate related to the Assumed Investment Result (AIR). The valuation interest rate is equal to the AIR less .5% in contract charges defined in Note 3. The AIRs are selected by each Contract-holder and are described in the prospectus.

 

Note 3:   Investment Management Agreement and Charges

 

The Account has a management agreement with PI. Pursuant to this agreement, PI has responsibility for all investment advisory services and supervises the subadviser’s performance of such services. PI has entered into a subadvisory agreement with Jennison Associates LLC (“Jennison”). The subadvisory agreement provides that Jennison will furnish investment advisory services in connection with management of the Account. PI pays for the services of Jennison.

 

A daily charge, at an effective annual rate of 0.125% of the current value of the Participant’s (other than Annuitants’ and PICA’s) equity in VCA-2, is charged to the Account and paid to PI for investment management services. An equivalent charge is deducted monthly in determining the amount of Annuitants’ payments.

 

A daily charge, paid to PI for assuming mortality and expense risks, is calculated at an effective annual rate of 0.375% of the current value of the Participant’s (other than Annuitants’ and PICA’s) equity in VCA-2. A one-time equivalent charge is deducted when the Annuity Units for Annuitants are determined.

 

PICA, PI and Jennison are indirect, wholly-owned subsidiaries of Prudential Financial, Inc. (“Prudential”).

 

An annual administration charge of not more than $30 annually is deducted from the accumulation account of certain Participants either at the time of withdrawal of the value of the entire Participant’s account or at the end of the fiscal year by canceling Accumulation Units. This deduction may be made from a fixed-dollar annuity contract if the Participant is enrolled under such a contract.

 

A charge of 2.5% for sales and other marketing expenses is deducted from certain Participant’s purchase payments. For the year ended December 31, 2009, PICA has advised the Account it has not received any sales charges.

 

Note 4:   Purchases and Sales of Portfolio Securities

 

For the year ended December 31, 2009, the aggregate cost of purchases and the proceeds from sales of securities, excluding short-term investments, were $152,528,312 and $211,177,695, respectively.

 

Investment in the Core Fund:    The Account invests in the Taxable Money Market Series (the “Series”), a portfolio of Dryden Core Investment Fund. The Series is a money market mutual fund registered under the Investment Company Act of 1940, as amended, and managed by PI. During the year ended December 31, 2009, the Account earned $25,184, by investing its excess cash in the Series.

 

Note 5:   Unit Transactions

 

The number of Accumulation Units issued and redeemed for the years ended December 31, 2009 and December 31, 2008, respectively, are as follows:

 

     Year Ended December 31,
  
     2009        2008  

Units issued

    303,841         5,255,744   

Units redeemed

    (1,036,636 )       (6,688,892 ) 

Net decrease

    (732,795 )       (1,433,148 ) 

 

C2

Note 6:   Net Increase (Decrease) In Net Assets Resulting From Surplus Transfers

 

The increase (decrease) in net assets resulting from surplus transfers represents the net increases to/(reductions from) PICA’s investment Account. The increase (decrease) includes reserve adjustments for mortality and expense risks assumed by PICA.

 

Note 7:   Participant Loans

 

Participant loan initiations are not permitted in VCA-2. However, participants who initiated loans in other accounts are permitted to direct loan repayments into VCA-2.

 

For the years ended December 31, 2009 and December 31, 2008, $5,245 and $1,982 of participant loan principal and interest has been paid to VCA-2, respectively. The participant loan principal and interest repayments are included in purchase payments and transfers in within the Statement of Changes in Net Assets.

 

Note 8:   New Accounting Pronouncement

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06 “Improving Disclosures about Fair Value Measurements”. ASU 2010-06 will require reporting entities to make new disclosures about amount and reasons for significant transfers in and out of Level 1 and Level 2 fair value measurements and input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3, and information on purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. The new and revised disclosures are effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for interim and annual reporting periods beginning after December 15, 2010. At this time, management is evaluating the implications of ASU No. 2010-06 and its impact on the financial statements has not been determined.

 

Note 9:   Subsequent Events

 

Management has evaluated the impact of all subsequent events on the Account through February 25, 2010, the date the financial statements were issued, and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.

 

C3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Committee and Participants of

The Prudential Variable Contract Account-2:

 

We have audited the accompanying statement of net assets of The Prudential Variable Contract Account-2 (the “Account”) as of December 31, 2009, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Account’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Account as of December 31, 2009, and the results of its operations, the changes in its net assets and the financial highlights for the periods described in the first paragraph above, in conformity with U.S. generally accepted accounting principles.

 

LOGO

 

New York, New York

February 25, 2010

 

D1

MANAGEMENT OF VCA 2 (Unaudited)

VCA 2 is managed by The Prudential Variable Contract Account 2 Committee (the VCA 2 Committee). The members of the VCA 2 Committee are elected by the persons having voting rights in respect of the VCA 2 Account. The affairs of the VCA 2 Account are conducted in accordance with the Rules and Regulations of the Account.

Information pertaining to the Committee Members of VCA 2 (hereafter referred to as “Board Members”) is set forth below. Board Members who are not deemed to be “interested persons” of VCA 2 as defined in the 1940 Act, as amended (the Investment Company Act) are referred to as “Independent Board Members.” Board Members who are deemed to be “interested persons” of VCA 2 are referred to as “Interested Board Members.” “Fund Complex” consists of VCA 2 and any other investment companies managed by PI. Information pertaining to the Officers of VCA 2 is also set forth below. VCA 2 is also referred to as the “Fund.”

 

 

Independent Board Members (1)

 

Name, Address, Age

Position(s)

Portfolios Overseen

    Principal Occupation(s) During Past Five Years    Other Directorships Held
Kevin J. Bannon (57)
Board Member
Portfolios Overseen: 57		    Managing Director (since April 2008) and Chief Investment Officer (since October 2008) of Highmount Capital LLC (registered investment adviser); formerly Executive Vice President and Chief Investment Officer (April 1993-August 2007) of Bank of New York Company; President (May 2003-May 2007) of BNY Hamilton Family of Mutual Funds.    Director of Urstadt Biddle Properties (since September 2008).
Linda W. Bynoe (57)
Board Member
Portfolios Overseen: 57		    President and Chief Executive Officer (since March 1995) of Telemat Ltd. (management consulting); formerly Vice President at Morgan Stanley & Co (broker-dealer).    Director of Simon Property Group, Inc. (retail real estate) (since May 2003); Anixter International (communication products distributor) (since January 2006); Director of Northern Trust Corporation (financial services) (since April 2006); Director of Equity Residential (residential real estate) (since December 2009); formerly Director of Dynegy Inc. (power generation) (September 2002-May 2006), CitiStreet Funds, Inc. (mutual funds) (May 1993-February 2005), AM-CH, Inc. (restaurant holding company) (November 2004-February 2005).
Michael S. Hyland, CFA (64)
Board Member
Portfolios Overseen: 57		    Independent Consultant (since February 2005); formerly Senior Managing Director (July 2001-February 2005) of Bear Stearns & Co, Inc.; Global Partner, INVESCO (1999-2001); Managing Director and President Salomon Brothers Asset Management (1989-1999).    None.
Douglas H. McCorkindale (70)
Board Member
Portfolios Overseen: 57		    Formerly Chairman (February 2001-June 2006), Chief Executive Officer (June 2000-July 2005), President (September 1997-July 2005) and Vice Chairman (March 1984-May 2000) of Gannett Co. Inc. (publishing and media).    Director of Continental Airlines, Inc. (since May 1993); Director of Lockheed Martin Corp. (aerospace and defense) (since May 2001).
Stephen P. Munn (67)
Board Member
Portfolios Overseen: 57		    Lead Director (since 2007) and formerly Chairman (1993-2007) of Carlisle Companies Incorporated (manufacturer of industrial products).    None.
Richard A. Redeker (66)
Board Member
Portfolios Overseen: 57		    Retired Mutual Fund Executive (36 years); Management Consultant; Director of Penn Tank Lines, Inc. (since 1999).    None.
Robin B. Smith (70)
Board Member & Independent Chair
Portfolios Overseen: 57		    Chairman of the Board (since January 2003) of Publishers Clearing House (direct marketing); formerly Chairman and Chief Executive Officer (August 1996-January 2003) of Publishers Clearing House.    Formerly Director of BellSouth Corporation (telecommunications) (1992-2006).
Stephen G. Stoneburn (66)
Board Member
Portfolios Overseen: 57		    President and Chief Executive Officer (since June 1996) of Quadrant Media Corp. (publishing company); formerly President (June 1995- June 1996) of Argus Integrated Media, Inc.; Senior Vice President and Managing Director (January 1993-1995) of Cowles Business Media; Senior Vice President of Fairchild Publications, Inc (1975-1989).    None.

 

E1

 

Interested Board Member (1)

 

          
Judy A. Rice (62)
Board Member & President
Portfolios Overseen: 57		    President, Chief Executive Officer, Chief Operating Officer and Officer-In-Charge (since February 2003) of Prudential Investments LLC; President, Chief Executive Officer and Officer-In-Charge (since April 2003) of Prudential Mutual Fund Services LLC; Executive Vice President (since December 2008) of Prudential Investment Management Services LLC; formerly Vice President (February 1999- April 2006) of Prudential Investment Management Services LLC; formerly President, Chief Executive Officer, Chief Operating Officer and Officer-In-Charge (May 2003-June 2005) and Director (May 2003-March 2006) and Executive Vice President (June 2005-March 2006) of AST Investment Services, Inc.; Member of Board of Governors of the Investment Company Institute.    None.

 

(1)

The year that each Board Member joined the Board is as follows: Kevin J. Bannon, 2008; Linda W. Bynoe, 2008; Michael S. Hyland, 2008; Douglas H. McCorkindale, 2008; Stephen P. Munn, 2008; Richard A. Redeker, 2008; Robin B. Smith, 2008; Stephen G. Stoneburn, 2008; Judy A. Rice, Board Member since 2008 and President since 2003.

 

 

Fund Officers (a)(1)

 

Name, Address and Age

Position with Fund

    Principal Occupation(s) During Past Five Years
Scott E. Benjamin (36)
Vice President		    Executive Vice President (since June 2009) of Prudential Investments LLC and Prudential Investment Management Services LLC; Senior Vice President Product Development and Marketing, Prudential Investments (since February 2006); Vice President Product Development and Product Management, Prudential Investments (2003-2006).
Kathryn L. Quirk (57)
Chief Legal Officer		    Vice President and Corporate Counsel (since September 2004) of Prudential; Executive Vice President, Chief Legal Officer and Secretary (since July 2005) of PI and Prudential Mutual Fund Services LLC; Vice President and Corporate Counsel (since June 2005) and Secretary (since February 2006) of AST Investment Services, Inc.; formerly Senior Vice President and Assistant Secretary (November 2004-August 2005) of PI; formerly Assistant Secretary (June 2005-February 2006) of AST Investment Services, Inc.; formerly Managing Director, General Counsel, Chief Compliance Officer, Chief Risk Officer and Corporate Secretary (1997-2002) of Zurich Scudder Investments, Inc.
Deborah A. Docs (52)
Secretary		    Vice President and Corporate Counsel (since January 2001) of Prudential; Vice President (since December 1996) and Assistant Secretary (since March 1999) of PI; formerly Vice President and Assistant Secretary (May 2003-June 2005) of AST Investment Services, Inc.
Jonathan D. Shain (51)
Assistant Secretary		    Vice President and Corporate Counsel (since August 1998) of Prudential; Vice President and Assistant Secretary (since May 2001) of PI; Vice President and Assistant Secretary (since February 2001) of PMFS; formerly Vice President and Assistant Secretary (May 2003-June 2005) of AST Investment Services, Inc.
Claudia DiGiacomo (35)
Assistant Secretary		    Vice President and Corporate Counsel (since January 2005) of Prudential; Vice President and Assistant Secretary of PI (since December 2005); Associate at Sidley Austin Brown & Wood LLP (1999-2004).
John P. Schwartz (38)
Assistant Secretary		    Vice President and Corporate Counsel (since April 2005) of Prudential; Vice President and Assistant Secretary of PI (since December 2005); Associate at Sidley Austin Brown & Wood LLP (1997-2005).
Andrew R. French (47)
Assistant Secretary		    Vice President and Corporate Counsel (since February 2010) of Prudential; formerly Director and Corporate Counsel (2006-2010) of Prudential; Vice President and Assistant Secretary (since January 2007) of PI; Vice President and Assistant Secretary (since January 2007) of PMFS; formerly Senior Legal Analyst of Prudential Mutual Fund Law Department (1997-2006).
Timothy J. Knierim (51)
Chief Compliance Officer		    Chief Compliance Officer of Prudential Investment Management, Inc. (since July 2007); formerly Chief Risk Officer of PIM and PI (2002-2007) and formerly Chief Ethics Officer of PIM and PI (2006-2007).
Valerie M. Simpson (51)
Deputy Chief Compliance Officer 		   Chief Compliance Officer (since April 2007) of PI and AST Investment Services, Inc.; formerly Vice President-Financial Reporting (June 1999-March 2006) for Prudential Life and Annuities Finance.
Theresa C. Thompson (47)
Deputy Chief Compliance Officer 		   Vice President, Compliance, PI (since April 2004); and Director, Compliance, PI (2001-2004).
Noreen M. Fierro (45)
Anti-Money Laundering
Compliance Officer		    Vice President, Corporate Compliance (since May 2006) of Prudential; formerly Corporate Vice President, Associate General Counsel (April 2002-May 2005) of UBS Financial Services, Inc., in their Money Laundering Prevention Group; Senior Manager (May 2005-May 2006) of Deloitte Financial Advisory Services, LLP, in their Forensic and Dispute Services, Anti-Money Laundering Group.
Grace C. Torres (50)
Treasurer and Principal Financial and
Accounting Officer		    Assistant Treasurer (since March 1999) and Senior Vice President (since September 1999) of PI; Assistant Treasurer (since May 2003) and Vice President (since June 2005) of AST Investment Services, Inc.; Senior Vice President and Assistant Treasurer (since May 2003) of Prudential Annuities Advisory Services, Inc.; formerly Senior Vice President (May 2003-June 2005) of AST Investment Services, Inc.
M. Sadiq Peshimam (46)
Assistant Treasurer		    Vice President (since 2005) of Prudential Investments LLC.
Peter Parrella (51)
Assistant Treasurer		    Vice President (since 2007) and Director (2004-2007) within Prudential Mutual Fund Administration; formerly Tax Manager at SSB Citi Fund Management LLC (1997-2004).

 

(a)

Excludes Ms. Rice, an interested Board Member who also serves as President.

(1)

The year in which each individual became an Officer of the Fund is as follows:

Scott E. Benjamin, 2009; Kathryn L. Quirk, 2005; Deborah A. Docs, 2005; Jonathan D. Shain, 2005; Claudia DiGiacomo, 2005; John P. Schwartz, 2006; Andrew R. French, 2006; Timothy J. Knierim, 2008; Valerie M. Simpson, 2008; Theresa C. Thompson, 2008; Noreen M. Fierro, 2006; Grace C. Torres, 1997; Peter Parrella, 2007; M. Sadiq Peshimam, 2006.

 

E2

Explanatory Notes to Tables:

 

•  

Board Members are deemed to be “Interested,” as defined in the 1940 Act, by reason of their affiliation with Prudential Investments LLC and/or an affiliate of Prudential Investments LLC.

 

•  

Unless otherwise noted, the address of all Board Members and Officers is c/o Prudential Investments LLC, Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077.

 

•  

There is no set term of office for Board Members or Officers. The Board Members have adopted a retirement policy, which calls for the retirement of Board Members on December 31 of the year in which they reach the age of 75.

 

•  

“Other Directorships Held” includes only directorships of companies required to register or file reports with the Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (that is, “public companies”) or other investment companies registered under the 1940 Act.

 

•  

“Portfolios Overseen” includes all investment companies managed by Prudential Investments LLC. The investment companies for which PI serves as manager include the Prudential Investments Mutual Funds, The Prudential Variable Contract Accounts, Target Mutual Funds, The Prudential Series Fund, Prudential’s Gibraltar Fund, Inc. and the Advanced Series Trust.

 

E3

The toll-free number shown below can be used to make transfers and reallocations, review how your premiums are being allocated, and receive current investment option values in your contract. Unit values for each investment option are available to all participants from the toll-free number. The phone lines are open each business day during the hours shown below. Please be sure to have your contract number available when you call.

 

800-458-6333

 

LOGO

 

The Prudential Insurance Company of America

751 Broad Street

Newark NJ 07102-3777

Presorted

Standard

U.S. Postage

PAID

Prudential

 

 

In the past, participants who held several variable contracts at the same address received multiple copies of annual and semiannual reports. In an effort to lessen waste and reduce expenses of postage and printing, we will attempt to mail only one copy of this report based on our current records for participants with the same last name and same address. No action on your part is necessary. Upon request, we will furnish you with additional reports. The toll-free number listed on the inside back cover should be used to request additional copies. Proxy material and tax information will continue to be sent for each account of record.

 

Prudential Retirement, Prudential Financial, PRU, Prudential and the Rock logo are registered service marks of The Prudential Insurance Company of America, Newark, NJ and its affiliates.

 

0172937-00001-00        LT.RS.001        

LOGO

Item 2 – Code of Ethics – See Exhibit (a)

As of the end of the period covered by this report, the registrant has adopted a code of ethics (the “Section 406 Standards for Investment Companies – Ethical Standards for Principal Executive and Financial Officers”) that applies to the registrant’s Principal Executive Officer and Principal Financial Officer; the registrant’s Principal Financial Officer also serves as the Principal Accounting Officer.

The registrant hereby undertakes to provide any person, without charge, upon request, a copy of the code of ethics. To request a copy of the code of ethics, contact the registrant 973-367-7521, and ask for a copy of the Section 406 Standards for Investment Companies – Ethical Standards for Principal Executive and Financial Officers.

Item 3 – Audit Committee Financial Expert –

The registrant’s Board has determined that Mr. Stephen P. Munn, member of the Board’s Audit Committee is an “audit committee financial expert,” and that he is “independent,” for purposes of this Item.

Item 4 – Principal Accountant Fees and Services –

(a) Audit Fees

For the fiscal years ended December 31, 2009 and December 31, 2008, KPMG LLP (“KPMG”), the Registrant’s principal accountant, billed the Registrant $18,370 and $18,370, respectively, for professional services rendered for the audit of the Registrant’s annual financial statements or services that are normally provided in connection with statutory and regulatory filings.

(b) Audit-Related Fees

None.

(c) Tax Fees

None.

(d) All Other Fees

None.

(e) (1) Audit Committee Pre-Approval Policies and Procedures

THE PRUDENTIAL MUTUAL FUNDS

AUDIT COMMITTEE POLICY

on

Pre-Approval of Services Provided by the Independent Accountants

The Audit Committee of each Prudential Mutual Fund is charged with the responsibility to monitor the independence of the Fund’s independent accountants. As part of this responsibility, the Audit Committee must pre-approve any independent accounting firm’s engagement to render audit and/or permissible non-audit services, as required by law. In evaluating a proposed engagement of the independent accountants, the Audit Committee will assess the effect that the engagement might reasonably be expected to have on the accountant’s independence. The Committee’s evaluation will be based on:

 

  •  

a review of the nature of the professional services expected to be provided,

 

  •  

a review of the safeguards put into place by the accounting firm to safeguard independence, and

 

  •  

periodic meetings with the accounting firm.

Policy for Audit and Non-Audit Services Provided to the Funds

On an annual basis, the scope of audits for each Fund, audit fees and expenses, and audit-related and non-audit services (and fees proposed in respect thereof) proposed to be performed by the Fund’s independent accountants will be presented by the Treasurer and the independent accountants to the Audit Committee for review and, as appropriate, approval prior to the initiation of such services. Such presentation shall be accompanied by confirmation by both the Treasurer and the independent accountants that the proposed services will not adversely affect the independence of the independent accountants. Proposed services shall be described in sufficient detail to enable the Audit Committee to assess the appropriateness of such services and fees, and the compatibility of the provision of such services with the auditor’s independence. The Committee shall receive periodic reports on the progress of the audit and other services which are approved by the Committee or by the Committee Chair pursuant to authority delegated in this Policy.

The categories of services enumerated under “Audit Services”, “Audit-related Services”, and “Tax Services” are intended to provide guidance to the Treasurer and the independent accountants as to those categories of services which the Committee believes are generally consistent with the independence of the independent accountants and which the Committee (or the Committee Chair) would expect upon the presentation of specific proposals to pre-approve. The enumerated categories are not intended as an exclusive list of audit, audit-related or tax services, which the Committee (or the Committee Chair) would consider for pre-approval.

Audit Services

The following categories of audit services are considered to be consistent with the role of the Fund’s independent accountants:

 

  •  

Annual Fund financial statement audits

  •  

Seed audits (related to new product filings, as required)

 

  •  

SEC and regulatory filings and consents

Audit-related Services

The following categories of audit-related services are considered to be consistent with the role of the Fund’s independent accountants:

 

  •  

Accounting consultations

 

  •  

Fund merger support services

 

  •  

Agreed Upon Procedure Reports

 

  •  

Attestation Reports

 

  •  

Other Internal Control Reports

Individual audit-related services that fall within one of these categories and are not presented to the Audit Committee as part of the annual pre-approval process will be subject to pre-approval by the Committee Chair (or any other Committee member on whom this responsibility has been delegated) so long as the estimated fee for those services does not exceed $50,000.

Tax Services

The following categories of tax services are considered to be consistent with the role of the Fund’s independent accountants:

 

  •  

Tax compliance services related to the filing or amendment of the following:

 

  •  

Federal, state and local income tax compliance; and,

 

  •  

Sales and use tax compliance

 

  •  

Timely RIC qualification reviews

 

  •  

Tax distribution analysis and planning

 

  •  

Tax authority examination services

 

  •  

Tax appeals support services

 

  •  

Accounting methods studies

 

  •  

Fund merger support services

 

  •  

Tax consulting services and related projects

Individual tax services that fall within one of these categories and are not presented to the Audit Committee as part of the annual pre-approval process will be subject to pre-approval by the Committee Chair (or any other Committee member on whom this responsibility has been delegated) so long as the estimated fee for those services does not exceed $50,000.

Other Non-audit Services

Certain non-audit services that the independent accountants are legally permitted to render will be subject to pre-approval by the Committee or by one or more Committee members to whom the Committee has delegated this authority and who will report to the full Committee any pre-approval decisions made pursuant to this Policy. Non-audit services presented for pre-approval pursuant to this paragraph will be accompanied by a confirmation from both the Treasurer and the independent accountants that the proposed services will not adversely affect the independence of the independent accountants.

Proscribed Services

The Fund’s independent accountants will not render services in the following categories of non-audit services:

 

  •  

Bookkeeping or other services related to the accounting records or financial statements of the Fund

 

  •  

Financial information systems design and implementation

 

  •  

Appraisal or valuation services, fairness opinions, or contribution-in-kind reports

 

  •  

Actuarial services

 

  •  

Internal audit outsourcing services

 

  •  

Management functions or human resources

 

  •  

Broker or dealer, investment adviser, or investment banking services

 

  •  

Legal services and expert services unrelated to the audit

 

  •  

Any other service that the Public Company Accounting Oversight Board determines, by regulation, is impermissible.

Pre-approval of Non-Audit Services Provided to Other Entities Within the Prudential Fund Complex

Certain non-audit services provided to Prudential Investments LLC or any of its affiliates that also provide ongoing services to the Prudential Mutual Funds will be subject to pre-approval by the Audit Committee. The only non-audit services provided to these entities that will require pre-approval are those related directly to the operations and financial reporting of the Funds. Individual projects that are not presented to the Audit Committee as part of the annual pre-approval process will be subject to pre-approval by the Committee Chair (or any other Committee member on whom this responsibility has been delegated) so long as the estimated fee for those services does not exceed $50,000. Services presented for pre-approval pursuant to this paragraph will be accompanied by a confirmation from both the Treasurer and the independent accountants that the proposed services will not adversely affect the independence of the independent accountants.

Although the Audit Committee will not pre-approve all services provided to Prudential Investments LLC and its affiliates, the Committee will receive an annual report from the Fund’s independent accounting firm showing the aggregate fees for all services provided to Prudential Investments and its affiliates.

(e) (2) Percentage of services referred to in 4(b) – 4(d) that were approved by the audit committee –

Not applicable.

(f) Percentage of hours expended attributable to work performed by other than full time employees of principal accountant if greater than 50%.

The percentage of hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees was 0%.

(g) Non-Audit Fees

Not applicable to Registrant for the fiscal years 2009 and 2008. The aggregate non-audit fees billed by KPMG for services rendered to the registrant’s investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant for the fiscal years 2009 and 2008 was $0 and $0, respectively.

(h) Principal Accountant’s Independence

Not applicable as KPMG has not provided non-audit services to the registrant’s investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to Rule 2-01(c)(7)(ii) of Regulation S-X.

Item 5 – Audit Committee of Listed Registrants – Not applicable.

Item 6 – Schedule of Investments – The schedule is included as part of the report to shareholders filed under Item 1 of this Form.

Item 7 – Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies – Not applicable.

Item 8 – Portfolio Managers of Closed-End Management Investment Companies – Not applicable.

Item 9 – Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers – Not applicable.

Item 10 – Submission of Matters to a Vote of Security Holders – Not applicable.

Item 11 – Controls and Procedures

 

  (a) It is the conclusion of the registrant’s principal executive officer and principal financial officer that the effectiveness of the registrant’s current disclosure controls and procedures (such disclosure controls and procedures having been evaluated within 90 days of the date of this filing) provide reasonable assurance that the information required to be disclosed by the registrant has been recorded, processed, summarized and reported within the time period specified in the Commission’s rules and forms and that the information required to be disclosed by the registrant has been accumulated and communicated to the registrant’s principal executive officer and principal financial officer in order to allow timely decisions regarding required disclosure.

 

  (b) There has been no significant change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter of the period covered by this report that has materially affected, or is likely to materially affect, the registrant’s internal control over financial reporting.

Item 12 – Exhibits

 

  (a) (1) Code of Ethics – Attached hereto as Exhibit EX-99.CODE-ETH

(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act – Attached hereto as Exhibit EX-99.CERT.

(3) Any written solicitation to purchase securities under Rule 23c-1. – Not applicable.

 

  (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act – Attached hereto as Exhibit EX-99.906CERT.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

(Registrant) The Prudential Variable Contract Account-2

   
By (Signature and Title)*   

/S/    DEBORAH A. DOCS        

   
   Deborah A. Docs   
   Secretary   
Date February 22, 2010      

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By (Signature and Title)*   

/S/    JUDY A. RICE        

   
   Judy A. Rice   
   President and Principal Executive Officer   
Date February 22, 2010      
By (Signature and Title)*   

/S/    GRACE C. TORRES        

   
   Grace C. Torres   
  

Treasurer and Principal Financial Officer

   
Date February 22, 2010      

 

* Print the name and title of each signing officer under his or her signature.