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

 

The Prudential Variable Contract Account-2

Exact name of registrant as specified in charter:

 

Gateway Center 3,

100 Mulberry Street,

Newark, New Jersey 07102

Address of principal executive offices:

 

Deborah A. Docs

Gateway Center 3,

100 Mulberry Street,

Newark, New Jersey 07102

Name and address of agent for service:

Registrant’s telephone number, including area code: 973-367-7521

Date of fiscal year end: 12/31/2010

Date of reporting period: 12/31/2010

 

 

 

Item 1 – Reports to Stockholders

LOGO

 

Prudential

 

Long-Term
Growth Account

 

Annual report
to participants

 

December 31, 2010

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.

 

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 800-458-6333 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 800-458-6333.

 

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 800-458-6333.

The Prudential Long Term Growth Program

Table of Contents

   Annual Report   December 31, 2010

 

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, 2010

 

n  

DEAR PARTICIPANT,

 

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

 

Prudential has been building on a heritage of success for more than 130 years. The quality of our businesses and risk diversification has enabled us to manage effectively through volatile markets over time. 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 31, 2011

The Prudential Variable Contract Account-2

Subadvised by: Jennison Associates LLC

   December 31, 2010

 

Investment Manager’s Report - As of December 31, 2010

 

 

Average Annual Total Return Percentages    1-Year   5-Year   10-Year

Account (without sales charges)

        12.00 %       2.80 %       3.69 %

S&P 500 Index

        15.08         2.29         1.42  

 

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 does not include the effect of any sales charge or annual account charge. The returns would be lower if they included the effects of sales charges and an annual account charge.

$10,000 INVESTED OVER 10 YEARS

 

LOGO

 

For the year ended December 31, 2010, the VCA-2 Capital Growth Account rose 12.00%.

 

The S&P 500 Index’s (the Index) ascent since the beginning of September resulted in full-year 2010 gains of 15.08%. Every sector in the Index had positive returns. Nearly every sector in the VCA-2 Account (the Portfolio) advanced, except utilities and healthcare, but, overall, the Portfolio underperformed the Index. Stock selection in energy, materials, consumer staples, and telecommunication services as well as an underweight in healthcare benefited the Portfolio’s relative return. Stock selection in financials, information technology, consumer discretionary, and utilities and an underweight in industrials detracted from returns versus the Index.

 

On an individual security basis, performance was broad based. Key contributors to Portfolio returns included energy holding National Oilwell Varco, consumer discretionary positions Liberty Global and Lear, materials stock Freeport-McMoRan Copper & Gold, and information technology holding IAC/InterActiveCorp. Key detractors included consumer discretionary position H&R Block, energy holding Petrobras, and information technology stocks Dell, Adobe Systems, and Advanced Micro Devices.

 

As 2010 drew to a close, most economists raised their economic growth projections. The current consensus is that the U.S. economy will expand at a rate of 3% or more in 2011. Growth of this magnitude would likely begin to chip away at the unemployment rate, which was 9.8% in November, possibly reducing it to a still-high rate of 8%-plus by the end of 2011. Corporations ended 2010 with record amounts of cash on their balance sheets, which bodes well for increased capital investment, dividends, share buybacks, and mergers and acquisitions. Robust, albeit slower, profits growth is expected for most industries and companies as the markets look toward further gains in 2011.

 

Several elements of uncertainty have receded over the past year. First, the new division of political power in Washington makes new, wide-ranging regulatory reform initiatives, on top of the healthcare and financial legislation of 2010, highly unlikely over the next couple of years. Second, recent clarifications of tax policies will help businesses plan and invest with new tax-saving abilities designed to spur both additional capital spending and hiring as sales recovery continues. Third, declines in the residential real estate market appear to have reached a trough. These factors, combined with the strong two-year recovery in equities, suggest a substantial improvement in the wealth effect and its favorable attendant consequences. A modest reduction in the pace of consumer de-leveraging (paying down debt) would not be an unlikely outcome.

 

Although the direction the new Congress will take is yet unclear, it seems possible that fiscal restraint and perhaps spending reform will gain the upper hand; a consensus that budget deficits and U.S. debt growth are unsustainable seems to be building.

 

Overall, optimism about the U.S. economy and stock market seems justified. Of course, expectations for solid performance are now somewhat discounted after two years of strong gains. The investment team continues to seek opportunities in companies that can lead the recovery through above-average revenue and profits growth as well as companies that can continue to generate strong free cash flow, maintain strong or improving balance sheets, and grow margins and earnings.

 

The Portfolio no longer holds positions in Petrobras, Dell, Adobe Systems, and Advanced Micro Devices.

 

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.

Jennison Associates is a registered investment advisor and a Prudential Financial company.

Prudential Variable Contract Account-2 (VCA-2)

Presentation of Portfolio Holdings — (unaudited)

   December 31, 2010

 

VCA-2   
Five Largest Holdings     (% of Net Assets ) 
Lear Corp.     2.5%   

Flextronics International, Ltd.

    2.5%   

Occidental Petroleum Corp.

    2.4%   

Wells Fargo & Co.

    2.2%   

JPMorgan Chase & Co.

    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, 2010

 

 

LONG-TERM INVESTMENTS — 99.8%  
COMMON STOCKS — 99.8%   Shares
     Value
(Note 2)
  
                 

Auto Components — 2.5%

  

Lear Corp.(a)

     74,158      $ 7,320,136   
           

Biotechnology — 1.1%

  

Celgene Corp.(a)

     53,605        3,170,200   
           

Capital Markets — 5.9%

  

Bank of New York Mellon Corp. (The)

     188,363        5,688,563   

Goldman, Sachs Group, Inc. (The)

     18,708        3,145,937   

Morgan Stanley

     172,427        4,691,739   

TD Ameritrade Holding Corp.

     203,112        3,857,097   
           
              17,383,336   
           

Chemicals — 2.7%

  

Dow Chemical Co. (The)

     149,562        5,106,047   

Monsanto Co.

     39,950        2,782,118   
           
              7,888,165   
           

Commercial Banks — 2.2%

  

Wells Fargo & Co.

     210,918        6,536,349   
           

Commercial Services & Supplies — 1.4%

  

Waste Management, Inc.

     115,193        4,247,166   
           

Communications Equipment — 1.5%

  

Juniper Networks, Inc.(a)

     117,440        4,335,885   
           

Computers & Peripherals — 1.9%

  

Apple, Inc.(a)

     12,970        4,183,602   

Hewlett-Packard Co.

     37,083        1,561,194   
           
              5,744,796   
           

Diversified Consumer Services — 2.1%

  

Apollo Group, Inc. Cl. A(a)

     68,466        2,703,722   

H & R Block, Inc.

     293,581        3,496,550   
           
              6,200,272   
           

Diversified Financial Services — 3.1%

  

JPMorgan Chase & Co.

     151,344        6,420,012   

Moody’s Corp.

     105,381        2,796,812   
           
              9,216,824   
           

Electronic Equipment & Instruments — 2.5%

  

Flextronics International, Ltd.(a)

     926,277        7,271,274   
           

Energy Equipment & Services — 3.0%

  

Halliburton Co.

     107,613        4,393,839   

National Oilwell Varco, Inc.

     64,710        4,351,748   
           
              8,745,587   
           

Food & Staples Retailing — 4.7%

  

Costco Wholesale Corp.

     49,772        3,594,036   

CVS Caremark Corp.

     178,440        6,204,359   

Wal-Mart Stores, Inc.

     75,870        4,091,669   
           
              13,890,064   
           

Food Products — 7.5%

  

Bunge, Ltd.

     92,647        6,070,231   

ConAgra Foods, Inc.

     170,633        3,852,893   

Kraft Foods, Inc.

     144,962        4,567,753   
COMMON STOCKS
(continued)		   Shares
     Value
(Note 2)
  
                 

Food Products (continued)

  

Smithfield Foods, Inc.(a)

     191,181      $ 3,944,064   

Tyson Foods, Inc. Cl. A

     215,164        3,705,124   
           
              22,140,065   
           

Health Care Providers & Services — 1.6%

  

Express Scripts, Inc. Cl. A(a)

     86,448        4,672,514   
           

Hotels, Restaurants & Leisure — 0.8%

  

International Game Technology

     140,755        2,489,956   
           

Independent Power Producers & Energy Traders — 1.4%

  

Calpine Corp.(a)

     301,510        4,022,143   
           

Insurance — 2.7%

  

Axis Capital Holdings, Ltd.

     103,535        3,714,836   

MetLife, Inc.

     92,931        4,129,854   
           
              7,844,690   
           

Internet Software & Services — 4.4%

  

Baidu, Inc.(a) ADR (China)

     37,814        3,650,185   

Google, Inc. Cl. A(a)

     9,731        5,779,922   

IAC/InterActiveCorp.(a)

     124,650        3,577,455   
           
              13,007,562   
           

IT Services — 1.4%

  

International Business Machines Corp.

     27,848        4,086,972   
           

Machinery — 1.7%

  

Ingersoll-Rand PLC

     108,980        5,131,868   
           

Media — 6.3%

  

Comcast Corp.

     271,349        5,961,538   

Liberty Global, Inc. Ser. C(a)

     115,195        3,903,959   

Viacom, Inc.

     137,270        5,437,265   

Walt Disney Co. (The)

     90,422        3,391,729   
           
              18,694,491   
           

Metals & Mining — 4.8%

  

Freeport-McMoRan Copper & Gold, Inc.

     53,321        6,403,319   

Goldcorp, Inc.

     61,800        2,841,564   

Kinross Gold Corp.

     263,095        4,988,281   
           
              14,233,164   
           

Multi-Utilities — 1.9%

  

CenterPoint Energy, Inc.

     172,232        2,707,487   

Sempra Energy

     56,599        2,970,316   
           
              5,677,803   
           

Oil, Gas & Consumable Fuels — 16.7%

  

Anadarko Petroleum Corp.

     79,918        6,086,555   

Apache Corp.

     53,055        6,325,748   

Canadian Natural Resources, Ltd.

     128,281        5,698,242   

Hess Corp.

     36,304        2,778,708   

Noble Energy, Inc.

     66,440        5,719,155   

Occidental Petroleum Corp.

     71,725        7,036,223   

Suncor Energy, Inc.

     148,275        5,677,450   

 

SEE NOTES TO FINANCIAL STATEMENTS.

 

A1

FINANCIAL STATEMENTS OF VCA-2

 

     STATEMENT OF NET ASSETS    

December 31, 2010

 

 

COMMON STOCKS
(continued)		   Shares
     Value
(Note 2)
  
                 

Oil, Gas & Consumable Fuels (continued)

  

Trident Resources Corp.,
Private Placement
(original cost: $2,642,248)(a)(b)(c)

     6,553      $ 3,650,876   

Williams Cos, Inc. (The)

     254,681        6,295,714   
           
              49,268,671   
           

Pharmaceuticals — 4.4%

  

Merck & Co., Inc.

     90,863        3,274,703   

Pfizer, Inc.

     226,274        3,962,058   

Shire PLC ADR (Ireland)

     38,493        2,786,123   

Teva Pharmaceutical Industries, Ltd. ADR (Israel)

     55,264        2,880,912   
           
              12,903,796   
           

Road & Rail — 1.5%

  

CSX Corp.

     71,269        4,604,690   
           

Software — 6.3%

  

CA, Inc.

     251,514        6,147,002   

Oracle Corp.

     139,941        4,380,153   

Symantec Corp.(a)

     241,071        4,035,529   

VMware, Inc. Cl. A(a)

     45,801        4,072,167   
           
              18,634,851   
           

Specialty Retail — 0.5%

  

Staples, Inc.

     63,548        1,446,988   
           

Wireless Telecommunication Services — 1.3%

  

NII Holdings, Inc.(a)

     88,103        3,934,680   
           

TOTAL COMMON STOCKS
(Cost: $229,281,110)

   

     294,744,958   
           
RIGHT
    		   Units
     Value
(Note 2)
  
                 

Oil, Gas & Consumable Fuels

  

Trident Resources Corp.,
Private Placement,
expiring 6/30/15(a)(b)(c)
(Cost: $0)

     2,436      $ —   
           

TOTAL LONG-TERM INVESTMENTS
(Cost: $229,281,110)

   

   $ 294,744,958   
           
SHORT-TERM INVESTMENTS — 0.3%   
    Shares
        

AFFILIATED MONEY MARKET MUTUAL FUND

  

Prudential Investment Portfolios 2 — Prudential Core Taxable Money Market Fund(e)
(Cost: $882,409)

     882,409      $ 882,409   
           

TOTAL INVESTMENTS(d) — 100.1%
(Cost: $230,163,519)

   

   $ 295,627,367   
           

LIABILITIES, LESS OTHER ASSETS

  

        

Dividends Receivable

  

     308,771   

Receivable for Pending Capital Transactions

  

     28,802   

Payable for Securities Purchased

  

     (771,664 ) 
           

LIABILITIES IN EXCESS OF OTHER
ASSETS — (0.1)%

   

     (434,091 ) 
           

NET ASSETS — 100%

  

   $ 295,193,276   
           

NET ASSETS, representing:

                

Equity of Participants — 7,270,888 Accumulation Units at an Accumulation
Unit Value of $39.3895

    

   $ 286,396,558   

Equity Of Annuitants

  

     7,792,603   

Equity of The Prudential Insurance Company of America

   

     1,004,115   
           
            $ 295,193,276   
           

(a) Non-income producing security.

 

(b) Indicates an illiquid security.

 

(c) Indicates a security restricted to resale. The aggregate cost of such securities is $2,642,248. The aggregate value of $3,650,876 is approximately 1.2% of net assets.

 

(d) As of December 31, 2010, two securities valued at $3,650,876 and representing 1.2% of the total market value of the portfolio were fair valued in accordance with the policies adopted by the Committee Members.

 

(e) Prudential Investments LLC, the Manager of the Fund, also serves as Manager of the Prudential Investment Portfolios 2—Prudential Core Taxable Money Market Fund.

 

ADR   American Depository Receipt

 

SEE NOTES TO FINANCIAL STATEMENTS.

 

A2

FINANCIAL STATEMENTS OF VCA-2

 

     STATEMENT OF NET ASSETS    

December 31, 2010

 

 

 

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 generally for stocks, exchange traded funds, options and futures traded in active markets for identical securities, and mutual funds which trade at daily net asset value.
Level 2— other significant observable inputs ( including, but not limited to quoted prices for similar securities, interest rates, prepayment speeds, foreign currency exchange rates and amortized cost) generally for debt securities, swaps, forward foreign currency contracts and for foreign stocks priced using vendor modeling tool.
Level 3— significant unobservable inputs valued in accordance with Committee approved fair valuation procedures.

 

The following is a summary of the inputs used as of December 31, 2010 in valuing such portfolio securities:

 

Investments in Securities

   

Level 1

     

Level 2

     

Level 3

  

Common Stocks

    $ 291,094,082       $     —       $ 3,650,876   

Right

      —         —         —   

Affiliated Mutual Funds

      882,409         —         —   
    
  
  

Total

    $ 291,976,491       $ —       $ 3,650,876   
    
  
  

 

The industry classification of portfolio holdings and liabilities in excess of other assets shown as a percentage of net assets as of December 31, 2010 were as follows:

 

Oil, Gas & Consumable Fuels

      16.7 % 

Food Products

      7.5   

Media

      6.3   

Software

      6.3   

Capital Markets

      5.9   

Metals & Mining

      4.8   

Food & Staples Retailing

      4.7   

Internet Software & Services

      4.4   

Pharmaceuticals

      4.4   

Diversified Financial Services

      3.1   

Energy Equipment & Services

      3.0   

Chemicals

      2.7   

Insurance

      2.7   

Auto Components

      2.5   

Energy Equipment & Instruments

      2.5   

Commercial Banks

      2.2   

Diversified Consumer Services

      2.1   

Computers and Peripherals

      1.9   

Multi-Utilities

      1.9   

Machinery

      1.7   

Health Care Providers & Services

      1.6   

Communications Equipment

      1.5   

Road & Rail

      1.5   

Commercial Services & Supplies

      1.4   

Independent Power Producers & Energy Traders

      1.4   

IT Services

      1.4   

Wireless Telecommunication Services

      1.3   

Biotechnology

      1.1   

Hotels, Restaurants & Leisure

      0.8   

Specialty Retail

      0.5   

Affiliated Money Market Mutual Fund

      0.3   
    
       100.1   

Liabilities in Excess of Other Assets

      (0.1 ) 
    
       100.0 % 
    

 

SEE NOTES TO FINANCIAL STATEMENTS.

 

A3

FINANCIAL STATEMENTS OF VCA-2

 

     STATEMENT OF NET ASSETS    

December 31, 2010

 

 

 

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 Net Assets and Statement of Operations is presented in the summary below.

 

Fair values of derivative instruments as of December 31, 2010 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, 2010, the Account did not have any realized gain or (loss) on derivatives recognized in income.

 

For the year ended December 31, 2010, 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, 2010

 

        

INVESTMENT INCOME

         

Unaffiliated Dividend Income (net of $61,745 foreign withholding tax)

    $ 4,570,271   

Affiliated Dividend Income

      9,102   

Total Income

      4,579,373   

EXPENSES

         

Fees Charged to Participants and Annuitants for Investment Management Services

      (344,129 ) 

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

      (1,007,720 ) 

Total Expenses

      (1,351,849 ) 

NET INVESTMENT INCOME

      3,227,524   

REALIZED AND UNREALIZED GAIN ON INVESTMENTS

         

Net Realized Gain on Investment Transactions

      14,836,157   

Net Change in Unrealized Appreciation (Depreciation) on Investments

      13,809,332   

NET GAIN ON INVESTMENTS

      28,645,489   

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

    $ 31,873,013   

 

     STATEMENT OF CHANGES IN NET ASSETS    

 

       Year Ended December 31,
  
      

2010

     

2009

  

OPERATIONS

                    

Net Investment Income

      $ 3,227,524       $ 2,754,539   

Net Realized Gain (Loss) on Investment Transactions

        14,836,157         (29,976,356 ) 

Net Change In Unrealized Appreciation (Depreciation) on Investments

        13,809,332         124,768,959   

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

        31,873,013         97,547,142   

CAPITAL TRANSACTIONS

                    

Purchase Payments and Transfers In

        7,416,365         8,742,398   

Withdrawals and Transfers Out

        (35,873,518 )       (28,158,196 ) 

Annual Administration Charges Deducted from Participants’ Accumulation Accounts

        (6,469 )       (7,183 ) 

Mortality and Expense Risk Charges Deducted from Annuitants’ Accounts

        (24,668 )       (23,432 ) 

Variable Annuity Payments

        (1,138,278 )       (1,053,759 ) 

NET DECREASE IN NET ASSETS RESULTING FROM CAPITAL TRANSACTIONS

        (29,626,568 )       (20,500,172 ) 

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SURPLUS TRANSFERS

        4,859         (99,155 ) 

TOTAL INCREASE IN NET ASSETS

        2,251,304         76,947,815   

NET ASSETS

                    

Beginning of year

        292,941,972         215,994,157   

End of year

      $ 295,193,276       $ 292,941,972   

 

SEE NOTES TO FINANCIAL STATEMENTS.

FINANCIAL HIGHLIGHTS FOR VCA-2

 

     INCOME AND CAPITAL CHANGES PER ACCUMULATION  UNIT*    

(For an Accumulation Unit outstanding throughout the year)

 

     Year Ended December 31,
  
     2010      2009      2008     2007      2006  

Investment Income

    $ .5760       $ .4604       $ .6104      $ .6673       $ .5815   

Expenses

                                            

Investment management fee

      (.0440 )       (.0360 )       (.0435 )      (.0526 )       (.0453 ) 

Assuming mortality and expense risks

      (.1320 )       (.1080 )       (.1305 )      (.1576 )       (.1357 ) 

Net Investment Income

      .4000         .3164         .4364        .4571         .4005   

Capital Changes

                                            

Net realized gain (loss) on investment transactions

      1.8654         (3.3879 )       (5.9689 )      6.6673         5.8433   

Net change in unrealized appreciation (depreciation) of investments

      1.9544         14.5145         (12.6906 )      (4.6697 )       (1.0553 ) 

Net Increase (Decrease) in Accumulation Unit Value

      4.2198         11.4430         (18.2231 )      2.4547         5.1885   

Accumulation Unit Value

                                            

Beginning of year

      35.1697         23.7267         41.9498        39.4951         34.3066   

End of year

    $ 39.3895       $ 35.1697       $ 23.7267      $ 41.9498       $ 39.4951   

Total Return**

      12.00 %       48.23 %       (43.44 )%      6.22 %       15.12 % 

Ratio of Expenses To Average Net Assets***

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

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

      1.14 %       1.10 %       1.24 %      1.09 %       1.10 % 

Portfolio Turnover Rate

      70 %       63 %       81 %      63 %       55 % 

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

      7,271         8,074         8,807        10,240         11,081   

 

* 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 open end, non exchange-traded 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 debt securities of sufficient credit quality, which mature in 60 days or less, are valued at amortized cost, which approximates fair value. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter to assuming a constant amortization to maturity of the difference between the principal amount due at maturity and cost. Short-term debt securities, which mature in more than 60 days, are valued at fair value.

 

Rights:    The Account may hold rights acquired either through a direct purchase, including as part of private placement, or pursuant to corporate actions. Rights entitle the holder to buy a proportionate amount of common stock at a specific price and time through the expiration dates. Such rights are held as long positions by the Account until exercised, sold or expired. 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, 2010, 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, 2010, the aggregate cost of purchases and the proceeds from sales of securities, excluding short-term investments, were $192,218,906 and $196,457,120, respectively.

 

Investment in the Core Fund:    The Account invests in the Prudential Core Taxable Money Market Fund (formerly Taxable Money Market Series) (the “Portfolio”), a portfolio of Prudential Investment Portfolios 2 (formerly Dryden Core Investment Fund). The Portfolio is a money market mutual fund registered under the Investment Company Act of 1940, as amended, and managed by PI. For the year ended December 31, 2010, the Account earned $9,102 by investing its excess cash in the Portfolio.

 

Note 5:   Unit Transactions

 

The number of Accumulation Units issued and redeemed for the years ended December 31, 2010 and December 31, 2009, respectively, are as follows:

 

     Year Ended December 31,
  
     2010        2009  

Units issued

      211,888           303,841   

Units redeemed

      (1,014,833 )         (1,036,636 ) 

Net decrease

      (802,945 )         (732,795 ) 

 

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, 2010 and December 31, 2009, $6,610 and $5,245 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.

 

 

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, 2010, 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, 2010, 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, 2010, 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 18, 2011

 

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 (58)

Board Member

Portfolios Overseen: 58

    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 (58)

Board Member

Portfolios Overseen: 58

    President and Chief Executive Officer (since March 1995) and formerly Chief Operating Officer (December 1989-February 1995) of Telemat Ltd. (management consulting); formerly Vice President (January 1985-June 1989) at Morgan Stanley & Co (broker-dealer).    Director of Simon Property Group, Inc. (retail real estate) (since May 2003); Director of Anixter International, Inc. (communication products distributor) (since January 2006); Director of Northern Trust Corporation (financial services) (since April 2006); Trustee of Equity Residential (residential real estate) (since December 2009); formerly Director of Dynegy Inc. (power generation) (September 2002-May 2006).

Michael S. Hyland, CFA (65)

Board Member

Portfolios Overseen: 58

    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 of Salomon Brothers Asset Management (1989-1999).    None.

Douglas H. McCorkindale (71)

Board Member

Portfolios Overseen: 58

    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 (68)

Board Member

Portfolios Overseen: 58

    Lead Director (since 2007) and formerly Chairman (1993-2007) of Carlisle Companies Incorporated (manufacturer of industrial products).    Lead Director (since 2007) of Carlisle Companies Incorporated (manufacturer of industrial products).

Richard A. Redeker (67)

Board Member & Independent Chair    

Portfolios Overseen: 58

    Retired Mutual Fund Senior Executive (43 years); Management Consultant; Independent Directors Council (organization of 2,800 Independent Mutual Fund Directors)-Executive Committee, Chair of Policy Steering Committee, Governing Council.    None.

Robin B. Smith (71)

Board Member

Portfolios Overseen: 58

    Chairman of the Board (since January 2003) of Publishers Clearing House (direct marketing); Member of the Board of Directors of ADLPartner (since December 2010); 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 (67)

Board Member

Portfolios Overseen: 58

    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 Members (1)     

Name, Address, Age

Position(s)

Portfolios Overseen

    Principal Occupation(s) During Past Five Years    Other Directorships Held

Judy A. Rice (63)

Board Member & President

Portfolios Overseen: 58

    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; Member of the Board of Directors of Jennison Associates LLC (since November 2010); 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.

Scott E. Benjamin (37)

Board Member & Vice President

Portfolios Overseen: 58

    Executive Vice President (since June 2009) of Prudential Investments LLC and Prudential Investment Management Services LLC; Executive Vice President (since September 2009) of AST Investment Services, Inc.; Senior Vice President of Product Development and Marketing, Prudential Investments (since February 2006); Vice President of Product Development and Product Management, Prudential Investments (2003-2006).    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; Scott E. Benjamin, Board Member since 2010 and Vice President since 2009.

 

Fund Officers (a)(1)     

Name, Address and Age

Position with Fund

    Principal Occupation(s) During Past Five Years

Kathryn L. Quirk (58)

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 (53)

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 (52)

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 (36)

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 (39)

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 (48)

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 (52)

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 (52)

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 (48)

Deputy Chief Compliance Officer

    Vice President, Compliance, PI (since April 2004); and Director, Compliance, PI (2001-2004).

Noreen M. Fierro (46)

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 (51)

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 (47)

Assistant Treasurer

    Vice President (since 2005) of Prudential Investments LLC.

 

E2

Peter Parrella (52)

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 and Mr. Benjamin, interested Board Members who also serve as President and Vice President, respectively.

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

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.

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

8 a.m. — 8 p.m. Eastern time

LOGO

 

The Prudential Insurance Company of America

751 Broad Street

Newark NJ 07102-3777

 

Presorted

Standard

U.S. Postage

PAID

Prudential

 

 

 

Prudential Retirement, Prudential, the Prudential logo and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.

 

0172937-00003-00        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, 2010 and December 31, 2009, KPMG LLP (“KPMG”), the Registrant’s principal accountant, billed the Registrant $18,500 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 2010 and 2009. 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 2010 and 2009 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:  

/s/ Deborah A. Docs

  Deborah A. Docs
  Secretary
Date:   February 17, 2011

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:  

/s/ Judy A. Rice

  Judy A. Rice
  President and Principal Executive Officer
Date:   February 17, 2011
By:  

/s/ Grace C. Torres

  Grace C. Torres
  Treasurer and Principal Financial Officer
Date:   February 17, 2011