485BPOS 1 pruval-regtofile.htm PRU VAL - 2008

As filed with the SEC on ________________

.

Registration No. 33-20000

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-6

 

FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933

 

Post-Effective Amendment No. 32

 

THE PRUDENTIAL VARIABLE

 

APPRECIABLE ACCOUNT

 

(Exact Name of Registrant)

 

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

(Name of Depositor)

 

751 Broad Street

Newark, New Jersey 07102-3777

(800) 778-2255

(Address and telephone number of principal executive offices)

 

Thomas C. Castano

Chief Legal Officer

The Prudential Insurance Company of America

213 Washington Street

Newark, New Jersey 07102-2992

(Name and address of agent for service)

 

Copy to:

Christopher E. Palmer, Esq.

Goodwin Procter LLP

901 New York Avenue, N.W.

Washington, D.C. 20001

 

It is proposed that this filing will become effective (check appropriate space):

 

[ ] immediately upon filing pursuant to paragraph (b) of Rule 485

 

[X] on    May 1, 2009      pursuant to paragraph (b) of Rule 485

                date

 

[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485

 

[ ] on                             pursuant to paragraph (a)(1) of Rule 485

                date

 

[X] This Post-Effective Amendment designates a new effective date for a previously filed Post-Effective Amendment.

 

 

 

 

 

 

 

 

 

 

 

 

PART A:

 

INFORMATION REQUIRED IN THE PROSPECTUS

 

PROSPECTUS

May 1, 2009

 

THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT

 

Variable

APPRECIABLE

LIFE®

INSURANCE CONTRACTS

 

As of November 12, 2001, Prudential no longer offered these Contracts for sale.

 

This prospectus describes two forms of an individual variable life insurance Contract (the “Contract”) offered by The Prudential Insurance Company of America (“Prudential”, “we”, “us”, or “our”) under the name Variable Appreciable Life® Insurance.

 

You may choose to invest your Contract's premiums and its earnings in one or more of the following ways:

 

Invest your Contract’s premiums and its earnings in one or more of 13 available variable investment options of The Prudential Variable Appreciable Account (the “Account”), each of which invests in a corresponding portfolio of The Prudential Series Fund (the “Series Fund”):

 

     Conservative Balanced

     Diversified Bond

     Equity

     Flexible Managed

     Global

     Government Income

     High Yield Bond

     Jennison

     Money Market

 

 

     Natural Resources

     Small Capitalization Stock

     Stock Index

     Value

 

Invest in the fixed rate option, which pays a guaranteed interest rate.

 

Invest in The Prudential Variable Contract Real Property Account (the “Real Property Account”).

 

Please Read this Prospectus. Please read this prospectus and keep it for future reference. A current prospectus for the Real Property Account accompanies this prospectus. These prospectuses contain important information about the available variable investment options. Please read these prospectuses and keep them for future reference.

 

Neither the Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of these securities or determined that this Contract is a good investment, nor has the SEC determined that this prospectus is complete or accurate. It is a criminal offense to state otherwise.

 

The Contract may have been purchased through registered representatives located in banks and other financial institutions. Investment in a variable life insurance Contract is subject to risk, including the possible loss of your money. An investment in The Prudential Variable Appreciable Life is not a bank deposit and is not insured by the Federal Deposit Insurance Corporation (“FDIC”) or any other governmental agency.

 

The Prudential Insurance Company of America

751 Broad Street

Newark, New Jersey 07102-3777

Telephone: (800) 778-2255

 

Appreciable Life is a registered mark of Prudential.


 

TABLE OF CONTENTS

                                                                                                                            PAGE
SUMMARY OF CHARGES AND EXPENSES................................................................................................1
   Expenses other than Portfolio Expenses......................................................................................1
   Portfolio Expenses..........................................................................................................4

SUMMARY OF THE CONTRACT AND CONTRACT BENEFITS..................................................................................4
   Brief Description of the Contract...........................................................................................4
   Types of Death Benefit Available Under the Contract.........................................................................4
   Death Benefit Guarantee.....................................................................................................4
   The Contract Fund...........................................................................................................5
   Tabular Contract Fund.......................................................................................................5
   Premium Payments............................................................................................................5
   Allocation of Premium Payments..............................................................................................5
   Investment Choices..........................................................................................................6
   Transfers Among Investment Options..........................................................................................6
   Increasing or Decreasing the Face Amount....................................................................................6
   Access to Contract Values...................................................................................................6
   Contract Loans..............................................................................................................7
   Canceling the Contract......................................................................................................7

SUMMARY OF CONTRACT RISKS......................................................................................................7
   Contract Values are not Guaranteed..........................................................................................7
   Limitation of Benefits on Certain Riders Concerning War or Armed Forces.....................................................7
   Increase in Charges.........................................................................................................7
   Contract Lapse..............................................................................................................7
   Risks Involved with Using the Contract as a Short-Term Savings Vehicle......................................................8
   Risks of Taking Withdrawals.................................................................................................8
   Limitations on Transfers....................................................................................................8
   Charges on Surrender of the Contract........................................................................................9
   Risks of Taking a Contract Loan.............................................................................................9
   Potential Tax Consequences..................................................................................................9
   Replacement of the Contract................................................................................................10

SUMMARY OF RISKS ASSOCIATED WITH THE VARIABLE INVESTMENT OPTIONS..............................................................10
   Risks Associated with the Variable Investment Options......................................................................10
   Learn More about the Variable Investment Options...........................................................................10

GENERAL DESCRIPTIONS OF THE REGISTRANT, DEPOSITOR, AND PORTFOLIO COMPANY......................................................11
   The Prudential Insurance Company of America................................................................................11
   The Prudential Variable Appreciable Account................................................................................11
   The Prudential Series Fund.................................................................................................11
   Investment Manager.........................................................................................................11
   Investment Subadvisers.....................................................................................................12
   Service Fees Payable to Prudential.........................................................................................13
   Voting Rights..............................................................................................................13
   Substitution of Variable Investment Options................................................................................14
   The Fixed Rate Option......................................................................................................14
   The Prudential Variable Contract Real Property Account.....................................................................14

CHARGES AND EXPENSES..........................................................................................................14
   Taxes Attributable to Premiums.............................................................................................15
   Deduction from Premiums....................................................................................................15
   Sales Load Charges.........................................................................................................15
   Cost of Insurance..........................................................................................................15
   Monthly Deductions from the Contract Fund..................................................................................16
   Daily Deduction from the Variable Investment Options.......................................................................16
   Surrender Charges..........................................................................................................16
   Transaction Charges........................................................................................................17
   Portfolio Charges..........................................................................................................18
   Rider Charges..............................................................................................................18



PERSONS HAVING RIGHTS UNDER THE CONTRACT......................................................................................18
   Contract Owner.............................................................................................................18
   Beneficiary................................................................................................................18

OTHER GENERAL CONTRACT PROVISIONS.............................................................................................18
   Assignment.................................................................................................................18
   Incontestability...........................................................................................................18
   Misstatement of Age or Sex.................................................................................................18
   Settlement Options.........................................................................................................19
   Suicide Exclusion..........................................................................................................19

RIDERS........................................................................................................................19

REQUIREMENTS FOR ISSUANCE OF A CONTRACT.......................................................................................20

PREMIUMS......................................................................................................................20
   Allocation of Premiums.....................................................................................................21
   Transfers/Restrictions on Transfers........................................................................................21
   Dollar Cost Averaging......................................................................................................23

DEATH BENEFITS................................................................................................................23
   Contract Date..............................................................................................................23
   When Proceeds Are Paid.....................................................................................................24
   Death Claim Settlement Options.............................................................................................24
   Types of Death Benefit.....................................................................................................24
   Increases in the Face Amount...............................................................................................25
   Decreases in the Face Amount...............................................................................................26

CONTRACT VALUES...............................................................................................................26
   Surrender of a Contract....................................................................................................26
   How a Contract's Cash Surrender Value Will Vary............................................................................26
   Loans......................................................................................................................27
   Withdrawals................................................................................................................28

LAPSE AND REINSTATEMENT.......................................................................................................29
   Options on Lapse...........................................................................................................29

TAXES.........................................................................................................................30
   Tax Treatment of Contract Benefits.........................................................................................30
   Tax-Qualified Pension Plans................................................................................................31

DISTRIBUTION AND COMPENSATION.................................................................................................32

LEGAL PROCEEDINGS.............................................................................................................33

ADDITIONAL INFORMATION........................................................................................................35

DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS..........................................................................36

TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION..................................................................37



 

 


SUMMARY OF CHARGES AND EXPENSES

 

Capitalized terms used in this prospectus are defined where first used or in the DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS.

 

Expenses other than Portfolio Expenses

 

The following tables describe the maximum fees and expenses that you could pay when buying, owning, and surrendering the Contract. Generally, our current fees and expenses are lower than the maximum fees and expenses reflected in the following tables. For more information about fees and expenses, see CHARGES AND EXPENSES.

 

The first table describes maximum fees and expenses that we deduct from each premium payment, and maximum fees we charge for sales of the Contract and transactions.

 

Transaction and Optional Rider Fees

Charge

When Charge is Deducted

Amount Deducted

Taxes Attributable to Premiums (1)

Deducted from premium payments.

0% to 14.85% depending on state and locality. (3)

Administrative Fee

Deducted from premium payments.

$2

Maximum Sales Charge on Premiums (Load) (2)

Monthly

0.5% of the primary annual premium.

Contingent Deferred Sales Charge (Load) (2)

Upon lapse, surrender or decrease in the face amount.

50.0% of the primary annual premium.

Other Surrender Fee (2)

Upon lapse, surrender or decrease in the face amount.

$5 per $1,000 of coverage amount.

 

Withdrawal Fee

 

Upon withdrawal.

 

The lesser of $15 and 2% of the withdrawal amount.

 

Face amount Change Fee

When there is a change in the face amount.

$15

Living Needs Benefit Fee

When the benefit is paid.

$150

 

 

(1)

For these purposes, “taxes attributable to premiums” shall include any federal, state or local income, premium, excise, business, or any other type of tax (or component thereof) measured by or based upon the amount of premium received by Prudential.

 

(2)

Duration of charge is limited. See CHARGES AND EXPENSES.

 

(3)

The most common charge for taxes attributable to premiums is 3.25%.

 

The second table describes the maximum Contract fees and expenses that you will pay periodically during the time you own the Contract, not including the portfolio fees and expenses.

 

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Periodic Contract and Optional Rider Charges Other Than The Funds’ Operating Expenses

Charge

When Charge is Deducted

Amount Deducted

Cost of Insurance (“COI”) for the face amount. (1)(2)

Minimum and Maximum Charges

_____________

Initial COI for a representative Contract owner, male age 30 in the Preferred underwriting class, no riders.

Monthly

From $0.06 to $83.34 per $1,000 of Net Amount of Risk.

_____________

$0.121 per $1,000 of Net Amount of Risk for a Contract issued after 1998.

 

Mortality and Expense Risk Fee

 

Daily

Effective annual rate of 0.9% of the amount of assets in the variable investment options.

Additional Mortality Fee for risk associated with certain occupation, avocation, or aviation risks.

Monthly

From $0.10 to $2.08 per $1,000 of the face amount.

Fee for the face amount.

Monthly

$3.00 plus up to $0.03 per $1,000 of the face amount.

Net interest on loans (5)

Annually

1.5%

Guaranteed Death Benefit Fee for the face amount or an increase to the face amount.

Monthly

$0.01 per $1,000 of the face amount or increase in the face amount.

Fee for an increase to the face amount.

Monthly

$0.03 per $1,000 of the face amount.

Level Premium Term Rider (1)

Minimum and Maximum Charges

_____________

 

Level Premium Term Rider fee for a representative Contract owner, male age 30 in the Preferred underwriting class. (3)

 

 

 

 

 

Monthly

From $0.03 to $27.00 per $1,000 of coverage.

_____________

 

$0.15 per $1,000 of coverage.

Child Level Premium Term Rider (6)

Monthly

$0.45 per $1,000 of rider coverage amount.

Renewable Premium Term Rider (1)

Minimum and Maximum Charges

_____________

Renewable Premium Term Rider fee for a representative Contract owner, male age 30 in the Preferred underwriting class. (3)

Monthly

From $0.02 to $55.08 per $1,000 of coverage.

_____________

$0.13 per $1,000 of coverage

 

 

 

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Accidental Death Benefit Rider (1)

Minimum and Maximum Charges

_____________

Accidental Death Benefit Rider fee for a representative Contract owner, male age 30 in the Preferred underwriting class. (3)

Monthly

From $0.03 to $0.70 per $1,000 of coverage.

_____________

$0.07 per $1,000 of coverage.

Option to Purchase Addition Insurance Rider (1)

Minimum and Maximum Charges

_____________

Option to Purchase Addition Insurance Rider fee for a representative Contract owner, male age 30 in the Preferred underwriting class. (3)

Monthly

From $0.06 to $0.37 per $1,000 of coverage, depending on issue age.

_____________

$0.23 per $1,000 of coverage.

Waiver of Premium Rider (1)

Minimum and Maximum Charges

_____________

Waiver of Premium Rider Charge fee for a representative Contract owner, male age 30 in the Preferred underwriting class. (3)

Monthly

From $0.01 to $0.31 per $1,000 of coverage.

_____________

$0.07 per $1,000 of coverage.

Applicant Waiver of Premium Rider (1)(4)

Minimum and Maximum Charges

_____________

Applicant Waiver of Premium Rider fee for a representative Contract owner, male age 30 in the Preferred underwriting class. (3)

Monthly

From 0.424% to 3.394% of the Contract’s annual premium but not less than $0.15 per $1,000 of coverage.

_____________

0.679% of the Contract’s annual premium but not less than $0.15 per $1,000 of coverage.

 

Unscheduled Premium Benefit Rider (1)(4)

Minimum and Maximum Charges

_____________

Unscheduled Premium Benefit Rider fee for a representative Contract owner, male age 30 in the Preferred underwriting class. (3)

Monthly

From 0.38% to 1.14% of the current unscheduled premium benefit amount.

_____________

0.42% of the unscheduled premium benefit amount.

 

 

 

(1)

The charge varies based on the individual characteristics of the insured, including such characteristics as: age, sex, and underwriting class. The charges given are representative for issues after 1997. Other rates may apply to earlier issues.

 

(2)

For example, the highest COI rate is for an insured who is a male/female age 99.

 

(3)

You may obtain more information about the particular COI charges that apply to you by contacting your Prudential representative.

 

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(4)

The cost of this rider will provide for an additional benefit amount, above the amount for the waiver of premium rider. The percentage varies based on underwriting class.

 

(5)

The maximum loan rate reflects the net difference between a loan with an effective annual interest rate of 5.5% and an effective annual interest credited equal to 4%. A loan with a variable loan interest rate may be charged a lower effective annual interest rate. See Loans.

 

(6)

Duration of charge is limited. See CHARGES AND EXPENSES.

 

Portfolio Expenses

 

This table describes the portfolio fees and expenses that you will pay periodically during the time you own the Contract. The table shows the minimum and maximum fees and expenses charged by any of the portfolios. More detail concerning portfolio fees and expenses is contained in the prospectus for the Series Fund.

 

Total Annual Fund Operating Expenses (1)

Minimum

Maximum

(expenses that are deducted from the Fund’s assets, including management fees, distribution [and/or service] (12b-1) fees, and other expenses, but not including reductions for any fee waiver or other reimbursements.)

0.37%

0.84%

 

 

(1)

Total Annual operating expense for Real Property Partnership is 8.08% .

 

SUMMARY OF THE CONTRACT

AND CONTRACT BENEFITS

 

Brief Description of the Contract

 

The Contract is a form of variable universal life insurance. Our variable appreciable life insurance policy is a flexible form of variable universal life insurance. It has a death benefit and a Contract Fund, the value of which changes every day according to the investment performance of the investment options to which you have allocated your net premiums. You may invest premiums in one or more of the 13 available variable investment options that invest in portfolios of The Prudential Series Fund, in the fixed rate option, or in the Real Property Account. Although the value of your Contract Fund may increase if there is favorable investment performance in the portfolios you select, investment returns in the portfolios are NOT guaranteed. There is a risk that investment performance will be unfavorable and that the value of your Contract Fund will decrease. The risk will be different, depending upon which investment options you choose. You bear the risk of any decrease. Within certain limits, the Contract will provide you with some flexibility in determining the amount and timing of your premium payments. The Contract has a Tabular Contract Fund that is designed to encourage the payment of premiums and the accumulation of cash value. Some features and/or riders described in this prospectus may not be available in some states.

 

Types of Death Benefit Available Under the Contract

 

The death benefit is an important feature of the Contract. You may choose one of the following two forms of the Contract. They each have a different death benefit amount.

 

Contract Form A, level death benefit: The death benefit will generally be equal to the face amount of insurance. It can never be less than this amount. However, it is possible, that the Contract Fund may grow to the point where we may increase the death benefit to ensure that the Contract will satisfy the Internal Revenue Code's definition of life insurance.

 

Contract Form B, variable death benefit: The death benefit will increase and decrease as the amount of the Contract Fund varies with the investment performance of the selected options. However, the death benefit under Form B, as is true under Form A, will never be less than the initial face amount and it may also be increased to satisfy Internal Revenue Code requirements.

 

Throughout this prospectus the word “Contract” refers to both Form A and B unless specifically stated otherwise. Under both Form A and B Contracts there is no guaranteed minimum cash surrender value.

 

Death Benefit Guarantee

 

The Prudential Variable Appreciable Life Insurance Contract is a form of life insurance that provides much of the flexibility of variable universal life, however, with two important distinctions:

 

We guarantee that if the Scheduled Premiums are paid when due, or received within 61 days after the Scheduled Premiums are due (or missed premiums are paid later with interest), the Contract will not lapse because of

 

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unfavorable investment performance, and the least amount we will pay upon the death of the insured is the face amount of insurance.

 

If all premiums are not paid when due (or not made up later with interest), the Contract will still not lapse as long as the Contract Fund is higher than a stated amount set forth in the Contract. This amount is called the “Tabular Contract Fund”, and it increases each month. In later years it becomes quite high. The Contract lapses when the Contract Fund falls below this stated amount, rather than when it drops to zero. This means that when a Variable Appreciable Life Contract lapses, it may still have considerable value and you may have a substantial incentive to reinstate it. If you choose otherwise, you may take, in one form or another, the cash surrender value. See LAPSE AND REINSTATEMENT.

 

The Contract Fund

 

Your Contract Fund value changes daily, reflecting: (1) increases or decreases in the value of your variable investment options; (2) interest credited on any amounts allocated to the fixed rate option; (3) interest credited on any loan; and (4) the daily asset charge for mortality and expense risks assessed against the variable investment options. The Contract Fund value also changes to reflect the receipt of premium payments and the monthly deductions described under CHARGES AND EXPENSES.

 

Tabular Contract Fund

 

The Tabular Contract Fund is designed to encourage the payment of premiums and the accumulation of cash value. Even if a Scheduled Premium is not paid, the Contract will remain in-force as long as the Contract Fund on any Monthly date is equal to or greater than the Tabular Contract Fund Value on the next Monthly date.

 

The Tabular Contract Fund is a guideline representing the amount that would be in the Contract fund if all scheduled premiums are paid on their due dates, there are no unscheduled premiums paid, there are no withdrawals, the investment options you have chosen earn exactly a uniform rate of return of 4% per year, and we have deducted the maximum mortality, sales load and expense charges.

 

Premium Payments

 

Your Contract sets forth a Scheduled Premium which is payable annually, semi-annually, quarterly or monthly. We guarantee that, if the Scheduled Premiums are paid when due (or if missed premiums are paid later, with interest) and there are no withdrawals, the Contract will not lapse because of unfavorable investment experience. Your Contract may terminate if the Contract debt exceeds what the cash surrender value would be if there was no Contract debt. We will notify you before the Contract is terminated and you may then repay all or enough of the loan to keep the Contract in-force. See Loans.

 

Your Scheduled Premium consists of two amounts:

 

The initial amount is payable from the time you purchase your Contract until the Contract anniversary immediately following your 65th birthday or the Contract's seventh anniversary, whichever is later (the “Premium Change Date”);

The guaranteed maximum amount payable after the Premium Change Date. See PREMIUMS.

 

The payment of premiums in excess of Scheduled Premiums may cause the Contract to become a Modified Endowment Contract for federal income tax purposes. See PREMIUMS, and Tax Treatment of Contract Benefits. Prudential will generally accept any premium payment of at least $25. You may be flexible with your premium payments depending on your Contract’s performance. If the performance of the Contract is less favorable and the Contract Fund is less than the Tabular Contract Fund Value the Contract would go into default.

 

Allocation of Premium Payments

 

When you apply for the Contract, you tell us how to allocate your premiums. You may change the way in which subsequent premiums are allocated by giving written notice to a Service Office, by our website, provided you are enrolled to use Prudential Online® Account Access, or by telephoning a Service Office, provided you are enrolled to use the Telephone Transfer System. See Allocation of Premiums.

 

On the Contract date, we deduct a $2 administrative charge and the charge for taxes attributable to premiums from the initial premium. Then the first monthly charges are deducted. The remainder of the initial premium will be allocated among the variable investment options, the fixed rate option, or the Real Property Account according to the allocations you specified in the application form. The invested portion of any part of the initial premium in excess of the Scheduled Premium is generally placed in the selected investment options on the date of receipt in Good Order at the Payment Office (the address on your bill), but not earlier than the Contract date.

 

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After the Contract date, we deduct a $2 administrative charge and the charge for taxes attributable to premiums from each subsequent premium payment. After the deductions from premiums and the monthly charges are made, the remainder of each subsequent premium payment will be invested as of the end of the valuation period in which it is received in Good Order at the Payment Office, in accordance with the allocation you previously designated.

 

Investment Choices

 

You may choose to invest your Contract’s premiums and its earnings in one or more of the 13 available variable investment options that invest in portfolios of The Prudential Series Fund. You may also invest in the fixed rate option and the Real Property Account. See The Prudential Series Fund, The Fixed Rate Option, and The Prudential Variable Contract Real Property Account. Subsequent net premiums are applied to your Contract as of the date of receipt at the Payment Office.

 

We may add additional variable investment options in the future.

 

Transfers Among Investment Options

 

If the Contract is not in default, you may, up to four times each Contract year, transfer amounts among the variable investment options, to the fixed rate option, or to the Real Property Account. Additional transfers may be made only with our consent. Currently, we allow you to make additional transfers. There is no charge. For the first 20 transfers in a calendar year, you may transfer amounts by proper written notice to a Service Office, by our website, provided you are enrolled to use Prudential Online® Account Access, or by telephone, provided you are enrolled to use the Telephone Transfer System.

 

After you have submitted 20 transfers in a calendar year, we will accept subsequent transfer requests only if they are in a form acceptable to us, bear an original signature in ink, and are sent to us by U.S. regular mail.

 

Multiple transfers that occur during the same day, but prior to the end of the valuation period for that day, will be counted as a single transfer.

 

Certain restrictions may apply to transfers from the fixed rate option and the Real Property Account. We reserve the right to prohibit transfer requests determined to be disruptive to the investment option or to the disadvantage of other Contract owners.

 

Transfer restrictions will be applied in a uniform manner and will not be waived.

 

In addition, you may use our dollar cost averaging feature. See Transfers/Restrictions on Transfers, Dollar Cost Averaging.

 

Increasing or Decreasing the Face Amount

 

Subject to our underwriting requirements determined by us, after the first Contract anniversary you may increase the amount of insurance by increasing the face amount of the Contract. An increase in the face amount is similar to the purchase of a second Contract and must be at least $25,000. Other conditions must be met before we approve of an increase in the face amount. See Increases in the Face Amount.

 

You also have the additional option of decreasing the face amount of your Contract, without withdrawing any surrender value. The minimum permissible decrease is $10,000 and will not be permitted if it causes the face amount of the Contract to drop below the minimum face amount applicable to the Contract.

 

We may decline a reduction if we determine it would cause the Contract to fail to qualify as "life insurance" for purposes of Section 7702 of the Internal Revenue Code. In addition, if the face amount is decreased or a significant premium is paid in conjunction with an increase, there is a possibility that the Contract will be classified as a Modified Endowment Contract. See Tax Treatment of Contract Benefits.

 

Access to Contract Values

 

A Contract may be surrendered for its cash surrender value (the Contract Fund minus any Contract debt and minus any applicable surrender charges) while the insured is living. To surrender a Contract, we may require you to deliver or mail the Contract with a written request in a form that meets our needs, to a Service Office. The cash surrender value of a surrendered Contract will be determined as of the end of the valuation period in which such a request is received in a

 

6

 

 


Service Office. Surrender of a Contract may have tax consequences. See Surrender of a Contract, and Tax Treatment of Contract Benefits.

 

Under certain circumstances, you may withdraw a part of the Contract's cash surrender value without surrendering the Contract. The amount withdrawn must be at least $2,000 under a Form A Contract and at least $500 under a Form B Contract. There is an administrative processing fee for each withdrawal which is the lesser of: (a) $15 and; (b) 2% of the withdrawal amount. Withdrawal of the cash surrender value may have tax consequences. See Withdrawals, and Tax Treatment of Contract Benefits.

 

Contract Loans

 

You may borrow money from us using your Contract as security for the loan. The maximum loan amount is equal to the sum of (1) 90% of the portion of the cash value attributable to the variable investment options and (2) the balance of the cash value. The cash value is equal to the Contract Fund less any surrender charge. The minimum loan amount you may borrow at any one time is $200, unless the loan proceeds are used to pay premiums on your Contract. See Loans.

 

Canceling the Contract

 

Generally, you may return the Contract for a refund within 10 days after you receive it. Some states allow a longer period of time during which a Contract may be returned for a refund. In general, you will receive a refund of all premium payments made, less any applicable federal and/or state income tax withholding. However, if applicable law does not require a refund of all premium payments made, you will receive the greater of (1) the Contract Fund plus the amount of any charges that have been deducted or (2) all premium payments made, less any applicable federal and/or state income tax withholding. A Contract returned according to this provision shall be deemed void from the beginning.

 

SUMMARY OF CONTRACT RISKS

 

Contract Values are not Guaranteed

 

Your benefits (including life insurance) are not guaranteed, but may be entirely dependent on the investment performance of the variable investment options you select. The value of your Contract Fund rises and falls with the performance of the investment options you choose and the charges that we deduct. Poor investment performance could cause your Contract to lapse and you could lose your insurance coverage. However, we guarantee that if Scheduled Premiums are paid when due and there are no withdrawals, the Contract will not lapse because of unfavorable investment experience.

 

The variable investment options you choose may not perform to your expectations. Investing in the Contract involves risks including the possible loss of your entire investment. Only the fixed rate option provides a guaranteed rate of return. See Risks Associated with the Variable Investment Options and The Fixed Rate Option.

 

Limitation of Benefits on Certain Riders Concerning War or Armed Forces

 

We will not pay a benefit on any Accidental Death Benefit type rider or make payments for any disability type rider if the death or injury is caused or contributed to by war or act of war, declared or undeclared, including resistance to armed aggression. This restriction includes service in the armed forces of any country at war.

 

Increase in Charges

 

In several instances we will use the terms “maximum charge” and “current charge.” The “maximum charge,” in each instance, is the highest charge that we are entitled to make under the Contract. The “current charge” is the amount that we are now charging, which may be lower. If circumstances change, we reserve the right to increase each current charge, up to the maximum charge, without giving any advance notice.

 

Contract Lapse

 

If Scheduled Premiums are paid on or before each due date, or received within 61 days after the Scheduled Premiums are due, and there are no withdrawals or outstanding loans, a Contract will remain in-force even if the investment results of that Contract's variable investment option[s] have been so unfavorable that the Contract Fund has decreased to zero or less.

 

In addition, even if a Scheduled Premium is not paid, the Contract will remain in-force as long as the Contract Fund on any Monthly Date is equal to or greater than the Tabular Contract Fund Value on the following Monthly Date. However, if a Scheduled Premium is not paid, and the Contract Fund is insufficient to keep the Contract in-force, the Contract will

 

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go into default. Should this happen, we will notify you of the required payment to prevent your Contract from lapsing. Your payment must be received at the Payment Office within the 61-day grace period after the notice of default is mailed or the Contract will lapse. If your Contract does lapse, it will still provide some benefits. See LAPSE AND REINSTATEMENT. If you have an outstanding loan when your Contract lapses, you may have taxable income as a result. See Tax Treatment of Contract Benefits - Pre-Death Distributions.

 

Risks Involved with Using the Contract as a Short-Term Savings Vehicle

 

Because the Contract provides for an accumulation of a Contract Fund as well as a death benefit, you may wish to use it for various insurance planning purposes. Purchasing the Contract for such purposes may involve certain risks.

 

For example, a life insurance policy could play an important role in helping you to meet the future costs of a child’s education. The Contract’s death benefit could be used to provide for education costs should something happen to you, and its investment features could help you accumulate savings. However, if the variable investment options you choose perform poorly, or if you do not pay sufficient premiums, your Contract may lapse or you may not accumulate the funds you need. Accessing the values in your Contract through withdrawals and Contract loans may significantly affect current and future Contract values or death benefit proceeds and may increase the chance that your Contract will lapse. If you have an outstanding loan when your Contract lapses, you may have taxable income as a result. See Tax Treatment of Contract Benefits - Pre-Death Distributions.

 

The Contract is designed to provide benefits on a long-term basis. Consequently, you should not use the Contract as a short-term investment or savings vehicle. Because of the long-term nature of the Contract, you should consider whether the Contract is consistent with the purpose for which it is being considered.

 

Risks of Taking Withdrawals

 

We may limit you to no more than four withdrawals in a Contract year. The amount withdrawn must be at least $2,000 under a Form A Contract and at least $500 under a Form B Contract. You may make a withdrawal only to the extent that the cash surrender value plus any Contract loan exceeds the applicable tabular cash value. There is an administrative processing fee for each withdrawal which is the lesser of: (a) $15 and; (b) 2% of the withdrawal amount. Withdrawal of the cash surrender value may have tax consequences. See Tax Treatment of Contract Benefits.

 

Whenever a withdrawal is made, the death benefit will immediately be reduced by at least the amount of the withdrawal. Withdrawals under Form B (variable) Contracts, will not change the face amount of insurance. However, under a Type A (fixed) Contract, the withdrawal will cause a reduction in the face amount of insurance by no more than the amount of the withdrawal. A surrender charge may be deducted. See CHARGES AND EXPENSES. It is important to note, that if the face amount of insurance is decreased, there is a possibility that the Contract might be classified as a Modified Endowment Contract. Before making any withdrawal that causes a decrease in the face amount of insurance, you should consult with your tax adviser and your Prudential representative. See Withdrawals and Tax Treatment of Contract Benefits.

 

Limitations on Transfers

 

All or a portion of the amount credited to a variable investment option may be transferred to another variable investment option, the fixed rate option, or the Real Property Account.

 

If the Contract is not in default, you may, up to four times each Contract year, transfer amounts among the variable investment options, to the fixed rate option, or to the Real Property Account. Additional transfers may be made only with our consent. Currently, we allow you to make additional transfers. There is no charge. For the first 20 transfers in a calendar year, you may transfer amounts by proper written notice to a Service Office, by our website, provided you are enrolled to use Prudential Online® Account Access, or by telephone, provided you are enrolled to use the Telephone Transfer System. We use reasonable procedures to confirm that instructions given by telephone are genuine. However, we are not liable for following telephone instructions that we reasonably believe to be genuine. In addition, we cannot guarantee that you will be able to get through to complete a telephone transfer during peak periods such as periods of drastic economic or market change.

 

After you have submitted 20 transfers in a calendar year, we will accept subsequent transfer requests only if they are in a form acceptable to us, bear an original signature in ink, and are sent to us by U.S. regular mail. After you have submitted 20 transfers in a calendar year, a subsequent transfer request by telephone, fax or electronic means will be rejected, even in the event that it is inadvertently processed.

 

Currently, certain transfers affected systematically under the dollar cost averaging program described in this prospectus do not count towards the limit of 20 transfers. In the future, we may count such transfers towards the limit.

 

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Multiple transfers that occur during the same day, but prior to the end of the valuation period for that day, will be counted as a single transfer.

 

Generally, only one transfer from the fixed rate option is permitted during each Contract year and only during the 30-day period beginning on the Contract anniversary. The maximum amount you may transfer out of the fixed rate option each year is the greater of: (a) 25% of the amount in the fixed rate option; and (b) $2,000.

 

Transfers from the Real Property Account to the other investment options available under the Contract are currently permitted only during the 30-day period beginning on the Contract anniversary. The maximum amount that may be transferred out of the Real Property Account each year is the greater of: (a) 50% of the amount invested in the Real Property Account; and (b) $10,000. See the attached Real Property Account Prospectus.

 

We may modify your right to make transfers by restricting the number, timing and/or amount of transfers we find to be disruptive to the investment option or to the disadvantage of other Contract owners. We also reserve the right to prohibit transfer requests made by an individual acting under a power of attorney on behalf of more than one Contract owner. We will immediately notify you at the time of a transfer request if we exercise this right.

 

Transfer restrictions will be applied uniformly and will not be waived. See Transfers/Restrictions on Transfers.

 

Charges on Surrender of the Contract

 

You may surrender your Contract at any time. We deduct a surrender charge from the surrender proceeds. In addition, the surrender of your Contract may have tax consequences. See Tax Treatment of Contract Benefits.

 

A Contract may be surrendered for its cash surrender value while the insured is living. We will assess a surrender charge if, during the first 10 Contract years (or 10 years from an increase in the face amount of insurance), the Contract lapses, is surrendered, or the face amount of insurance is decreased (including as a result of a withdrawal). The surrender charge is determined by the primary annual premium amount. It is calculated as described in Surrender Charges. While the amount of the surrender charge decreases over time, it may be a substantial portion or even equal your Contract Fund. Surrender of a Contract may have tax consequences. See Tax Treatment of Contract Benefits.

 

Risks of Taking a Contract Loan

 

Accessing the values in your Contract through Contract loans may significantly affect current and future Contract values or death benefit proceeds and may increase the chance that your Contract will lapse. Your Contract will be in default if at any time the Contract Fund (which includes the loan) less any applicable surrender charges is less than the Tabular Contract Fund. If the Contract lapses or is surrendered, the amount of unpaid Contract debt will be treated as a distribution and will be immediately taxable to the extent of the gain in the Contract. In addition, if your Contract is a Modified Endowment Contract for tax purposes, taking a Contract loan may have tax consequences. See Tax Treatment of Contract Benefits.

 

If your Contract Fund is less than your Contract debt your Contract will terminate 61 days after we notify you.

 

Potential Tax Consequences

 

Your Policy is structured to meet the definition of life insurance under Section 7702 of the Internal Revenue Code. Consequently, we reserve the right to refuse to accept a premium payment that would, in our opinion, cause this Contract to fail to qualify as life insurance. We also have the right to refuse to accept any payment that increases the death benefit by more than it increases the Contract fund. Although we believe that the Contract should qualify as life insurance for tax purposes, there are some uncertainties, particularly because the Secretary of Treasury has not yet issued permanent regulations that bear on this question. Accordingly, we reserve the right to make changes -- which will be applied uniformly to all Contract owners after advance written notice -- that we deem necessary to insure that the Contract will qualify as life insurance.

 

Current federal tax law generally excludes all death benefits from the gross income of the beneficiary of a life insurance contract. However, your death benefit could be subject to estate tax. In addition, you generally are not subject to taxation on any increase in the policy value until it is withdrawn. Generally, you are taxed on surrender proceeds and the proceeds of any partial withdrawals only if those amounts, when added to all previous distributions, exceed the total premiums paid. Amounts received upon surrender or withdrawal (including any outstanding Contract loans) in excess of premiums paid are treated as ordinary income.

 

Special rules govern the tax treatment of life insurance policies that meet the federal definition of a Modified Endowment Contract. The Contract could be classified as a Modified Endowment Contract if premiums in amounts that are too large are paid or a decrease in the face amount of insurance is made (or a rider removed). The addition of a rider or an

 

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increase in the face amount of insurance may also cause the Contract to be classified as a Modified Endowment Contract. We will notify you if a premium or a reduction in the face amount would cause the Contract to become a Modified Endowment Contract, and advise you of your options.

 

Under current tax law, death benefit payments under Modified Endowment Contracts, like death benefit payments under other life insurance Contracts, generally are excluded from the gross income of the beneficiary. However, amounts you receive under the Contract before the insured's death, including loans and withdrawals, are included in income to the extent that the Contract Fund before surrender charges exceeds the premiums paid for the Contract increased by the amount of any loans previously included in income and reduced by any untaxed amounts previously received other than the amount of any loans excludible from income. An assignment of a Modified Endowment Contract is taxable in the same way. These rules also apply to pre-death distributions, including loans and assignments, made during the two-year period before the time that the Contract became a Modified Endowment Contract.

 

All Modified Endowment Contracts issued by us to you during the same calendar year are treated as a single Contract for purposes of applying these rules. See Tax Treatment of Contract Benefits.

 

Any taxable income on pre-death distributions (including full surrenders) is subject to a penalty of 10% unless the amount is received on or after age 59½, on account of your becoming disabled or as a life annuity. It is presently unclear how the penalty tax provisions apply to Contracts owned by businesses.

 

Replacement of the Contract

 

The replacement of life insurance is generally not in your best interest. In most cases, if you require additional life insurance coverage, the benefits of your existing contract can be protected by increasing the insurance amount of your existing contract, or by purchasing an additional contract. If you are considering replacing a contract, you should compare the benefits and costs of supplementing your existing contract with the benefits and costs of purchasing a new contract and you should consult with a tax adviser.

 

SUMMARY OF RISKS ASSOCIATED WITH

THE VARIABLE INVESTMENT OPTIONS

 

You may choose to invest your Contract’s premiums and its earnings in one or more of 13 available variable investment options. You may also invest in the fixed rate option or the Real Property Account. The fixed rate option is the only investment option that offers a guaranteed rate of return. See The Prudential Series Fund, The Fixed Rate Option, and The Prudential Variable Contract Real Property Account.

 

Risks Associated with the Variable Investment Options

 

The separate account invests in the shares of one or more open-end management investment companies registered under the Investment Company Act of 1940 other than the Real Property Account, which invests in a Real Property Partnership. See the accompanying prospectus for the Prudential Real Property Account. Each variable investment option has its own investment objective and associated risks, which are described in the accompanying Series Fund prospectus. The income, gains, and losses of one variable investment option have no effect on the investment performance of any other variable investment option.

 

We do not promise that the variable investment options will meet their investment objectives. Amounts you allocate to the variable investment options may grow in value, decline in value or grow less than you expect, depending on the investment performance of the variable investment options you choose. You bear the investment risk that the variable investment options may not meet their investment objectives. It is possible to lose your entire investment in the variable investment options. Although the Series Fund Money Market Portfolio is designed to be a stable investment option, it is possible to lose money in that Portfolio. For example, when prevailing short-term interest rates are very low, the yield on the Money Market Portfolio may be so low that, when separate account and Contract charges are deducted, you experience a negative return. See The Prudential Series Fund.

 

Learn More about the Variable Investment Options

 

Before allocating amounts to the variable investment options, you should read the current Series Fund prospectus for detailed information concerning their investment objectives, strategies, and investment risks.

 

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GENERAL DESCRIPTIONS OF THE REGISTRANT, DEPOSITOR, AND PORTFOLIO COMPANY

 

The Prudential Insurance Company of America

 

The Prudential Insurance Company of America (“Prudential”, “us”, “we”, or “our”), a stock life insurance company, founded on October 13, 1875 under the laws of the state of New Jersey. It is licensed to sell life insurance and annuities in the District of Columbia, Guam, U.S. Virgin Islands, and in all states. Prudential’s principal Executive Office is located at 751 Broad Street, Newark, New Jersey 07102.

 

The Prudential Variable Appreciable Account

 

Prudential has established a separate account, the Prudential Variable Appreciable Account (the “Account”), to hold the assets that are associated with the Contracts. The Account was established on August 11, 1987 under New Jersey law and is registered with the Securities and Exchange Commission (“SEC”) under the Investment Company Act of 1940 as a unit investment trust, which is a type of investment company. The Account meets the definition of a "separate account" under the federal securities laws. The Account holds assets that are segregated from all of Prudential's other assets.

 

Prudential is the legal owner of the assets in the Account. Prudential will maintain assets in the Account with a total market value at least equal to the reserve and other liabilities relating to the variable benefits attributable to the Contracts. In addition to these assets, the Account's assets may include funds contributed by Prudential to commence operation of the Account and may include accumulations of the charges we make against the Account. From time to time these additional assets will be transferred to Prudential’s general account. Prudential will consider any possible adverse impact the transfer might have on the Account before making any such transfer.

 

Income, gains and losses credited to, or charged against, the Account reflect the Account’s own investment experience and not the investment experience of Prudential’s other assets. The assets of the Account may not be charged with liabilities that arise from any other business Prudential conducts.

 

The obligations to Contract owners and beneficiaries arising under the Contracts are general corporate obligations of Prudential.

 

Currently, you may invest in one or a combination of 13 available variable investment options. When you choose a variable investment option, we purchase shares of a mutual fund or a separate investment series of a mutual fund that are held as an investment for that option. We hold these shares in the Account. We may remove or add additional variable investment options in the future. The Account’s financial statements are available in the Statement of Additional Information to this prospectus.

 

The Prudential Series Fund

 

The Prudential Series Fund (the “Series Fund”) is registered under the Investment Company Act of 1940 as an open-end diversified management investment company. Its shares are currently sold only to separate accounts of Prudential and certain other insurers that offer variable life insurance and variable annuity contracts.

 

The Account will purchase and redeem shares from the Series Fund at net asset value. Shares will be redeemed to the extent necessary for us to provide benefits under the Contract and to transfer assets from one variable investment option to another, as requested by Contract owners. Any dividend or capital gain distribution received from a portfolio of the Series Fund will be reinvested immediately at net asset value in shares of that portfolio and retained as assets of the corresponding variable investment option.

 

The Series Fund has a separate prospectus that is provided with this prospectus. You should read the Series Fund prospectus before you decide to allocate assets to the Portfolios. There is no assurance that the investment objectives of the Portfolios will be met. There may be Portfolios described in the accompanying Fund prospectus that are not available on this product. Please refer to the list below to see which Portfolios you may choose as your variable investment options.

 

Investment Manager

 

Prudential Investments LLC (“PI”), a wholly-owned subsidiary of Prudential Financial, Inc., serves as the investment manager of the Series Fund Portfolios.

 

The Funds’ Investment Management Agreements, on behalf of each Portfolio, with PI (the “Management Agreements”), provide that PI (the “Investment Manager”) will furnish each applicable Portfolio with investment advice and

 

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administrative services subject to the supervision of the Board of Trustees and in conformity with the stated policies of the applicable Portfolio. The Investment Manager must also provide, or obtain and supervise, the executive, administrative, accounting, custody, transfer agent and shareholder servicing services that are deemed advisable by the Board.

 

The chart below reflects the Portfolios in which the Account invests, their investment objectives, and each Portfolio’s investment subadvisers. The full names of the investment subadvisers are listed immediately following the chart. For Portfolios with multiple subadvisers, each subadviser manages a portion of the assets for that Portfolio.

 

Portfolios

Objectives

Subadvisers

Conservative Balanced

Total investment return consistent with a conservatively managed diversified portfolio.

PIM

QMA

Diversified Bond

High level of income over a longer term while providing reasonable safety of capital.

PIM

Equity

Long-term growth of capital.

Jennison

Clearbridge

Flexible Managed

High total return consistent with an aggressively managed diversified portfolio.

PIM

QMA

Global

Long-term growth of capital.

Jennison

PIM

QMA

LSV

MCM

T. Rowe Price

William Blair

Government Income

High level of income over the longer term consistent with the preservation of capital.

PIM

High Yield Bond

High total return.

PIM

Jennison

Long-term growth of capital.

Jennison

Money Market

Maximum current income consistent with the stability of capital and the maintenance of liquidity.

PIM

Natural Resources

Long-term growth of capital.

Jennison

Small Capitalization Stock

Long-term growth of capital.

QMA

Stock Index

Investment results that generally correspond to the performance of publicly-traded common stocks.

QMA

Value

Capital appreciation.

Jennison

 

Investment Subadvisers

 

 

Jennison Associates LLC (“Jennison”)

 

Prudential Investment Management, Inc. (“PIM”)

 

Quantitative Management Associates LLC (“QMA”)

 

ClearBridge Advisors LLC (“ClearBridge”)

 

LSV Asset Management (“LSV”)

 

Marsico Capital Management, LLC (“MCM”)

 

T. Rowe Price Associates, Inc. (“T. Rowe Price”)

 

William Blair & Company LLC (“William Blair”)

 

As an investment adviser, PI charges the Series Fund a daily investment management fee as compensation for its services. PI pays each subadviser out of the fee that PI receives from the Series Fund.

 

More detailed information is available in the attached Series Fund prospectus.

 

In the future, it may become disadvantageous for separate accounts of variable life insurance and variable annuity contracts to invest in the same underlying funds. Neither the companies that invest in the Series Fund nor the Series

 

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Fund currently foresee any such disadvantage. The Series Fund's Board of Directors intends to monitor events in order to identify any material conflict between variable life insurance and variable annuity contract owners and to determine what action, if any, should be taken. Material conflicts could result from such things as:

 

(1)

changes in state insurance law;

(2)

changes in federal income tax law;

(3)

changes in the investment management of any variable investment option; or

(4)

differences between voting instructions given by variable life insurance and variable annuity contract owners.

 

A fund or portfolio may have a similar name, investment objective, or investment policy resembling those of a mutual fund managed by the same investment adviser or subadviser that is sold directly to the public. Despite such similarities, there can be no assurance that the investment performance of any such fund or portfolio will resemble that of the publicly available mutual fund.

 

Service Fees Payable to Prudential

 

Prudential has entered into agreements with the distributor of the underlying funds. Under the terms of these agreements, Prudential provides administrative and support services to the portfolios for which it receives an annual fee based on the average assets allocated to the portfolio under the Contract from the investment adviser, distributor and/or the Fund. These agreements, including the fees paid and services provided, can vary for each underlying mutual fund whose portfolios are offered as investment options.

 

Prudential and/or our affiliates may receive substantial and varying administrative service payments from certain underlying Portfolios or related parties. These types of payments and fees are sometimes referred to as “revenue sharing” payments. Administrative service payments partially compensate for providing administrative services with respect to Contract owners invested indirectly in the Portfolio, which include duties such as recordkeeping, shareholder services, and the mailing of periodic reports. We receive administrative services fees with respect to both affiliated underlying Portfolios and unaffiliated underlying Portfolios. The administrative services fees we receive from affiliates originate from the assets of the affiliated Portfolio itself and/or the assets of the Portfolio’s investment adviser. In either case, the existence of administrative services fees may tend to increase the overall cost of investing in the Portfolio. In addition, because these fees are paid to us, allocations you make to these affiliated underlying Portfolios may benefit us financially if these fees exceed the costs of the administrative support services.

 

Administrative services fees that we receive may vary among the different fund complexes that are part of our investment platform. Thus, the fees we collect may be greater or smaller, based on the Portfolios that you select. In addition, we may consider these payments and fees, among a number of factors, when deciding to add or keep a Portfolio on the “menu” of Portfolios that we offer through the product. We collect these payments and fees under agreements between us and a Portfolio’s principal underwriter, transfer agent, investment adviser and/or other entities related to the Portfolio. As of May 1, 2009, the administrative service fee we receive is 0.05% of the average assets allocated to the Portfolio.

 

The service fees received from the Prudential Series Fund are 0.05%.

 

In addition to the payments that we receive from underlying funds and/or their affiliates, those same funds and/or their affiliates may make payments to us and/or other insurers within the Prudential Financial group related to the offering of investment options within variable annuities or life insurance offered by different Prudential business units.

 

Voting Rights

 

We are the legal owner of the shares of the Series Fund associated with the variable investment options. However, we vote the shares of the Series Fund according to voting instructions we receive from Contract owners. We will mail you a proxy, which is a form you need to complete and return to us to tell us how you wish us to vote. When we receive those instructions, we will vote all of the shares we own on your behalf in accordance with those instructions. We vote shares for which we do not receive instructions, and any other shares that we own in our own right, in the same proportion as the shares for which instructions are received. We may change the way your voting instructions are calculated if it is required by federal or state regulation. We may also elect to vote shares that we own in our own right if the applicable federal securities laws or regulations, or their current interpretation, change so as to permit us to do so.

 

We may, if required by state insurance regulations, disregard voting instructions if they would require shares to be voted so as to cause a change in the sub-classification or investment objectives of one or more variable investment options or to approve or disapprove an investment advisory contract for the Fund. In addition, we may disregard voting instructions that would require changes in the investment policy or investment adviser of one or more of the variable investment options, provided that we reasonably disapprove such changes in accordance with applicable federal or state regulations. If we disregard Contract owner voting instructions, we will advise Contract owners of our action and the reasons for such action in the next available annual or semi-annual report.

 

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Substitution of Variable Investment Options

 

We may substitute one or more of the variable investment options. We may also cease to allow investments in any existing variable investment options. We do this only if events such as investment policy changes or tax law changes make a variable investment option unsuitable. We would not do this without the approval of the Securities and Exchange Commission and any necessary state insurance departments. You will be given specific notice in advance of any substitution we intend to make.

 

The Fixed Rate Option

 

You may choose to invest, initially or by transfer, all or part of your Contract Fund to the fixed rate option. This amount becomes part of Prudential's general account. The general account consists of all assets owned by Prudential other than those in the Account and in other separate accounts that have been or may be established by Prudential. Subject to applicable law, Prudential has sole discretion over the investment of the general account assets, and Contract owners do not share in the investment experience of those assets. Instead, Prudential guarantees that the part of the Contract Fund allocated to the fixed rate option will accrue interest daily at an effective annual rate that Prudential declares periodically, but not less than an effective annual rate of 4%. Prudential is not obligated to credit interest at a rate higher than an effective annual rate of 4%, although we may do so.

 

Transfers out of the fixed rate option are subject to strict limits. See Transfers/Restrictions on Transfers. The payment of any cash surrender value attributable to the fixed rate option may be delayed up to six months. See When Proceeds Are Paid.

 

Because of exemptive and exclusionary provisions, interests in the fixed rate option under the Contract have not been registered under the Securities Act of 1933 and the general account has not been registered as an investment company under the Investment Company Act of 1940. Accordingly, interests in the fixed rate option are not subject to the provisions of these Acts, and Prudential has been advised that the staff of the SEC has not reviewed the disclosure in this prospectus relating to the fixed rate option. Any inaccurate or misleading disclosure regarding the fixed rate option may, however, be subject to certain generally applicable provisions of federal securities laws.

 

The Prudential Variable Contract Real Property Account

 

The Real Property Account is a separate account of Prudential. This account, through a general partnership formed by Prudential and two of its wholly-owned subsidiaries, Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey, invests primarily in income-producing real property such as office buildings, shopping centers, agricultural land, hotels, apartments or industrial properties. It also invests in mortgage loans and other real estate-related investments, including sale-leaseback transactions. It is not registered as an investment company under the Investment Company Act of 1940 and is therefore not subject to the same regulation as the Series Fund. The objectives of the Real Property Account and the Partnership are to preserve and protect capital, provide for compounding of income as a result of reinvestment of cash flow from investments, and provide for increases over time in the amount of such income through appreciation in asset value.

 

The Partnership has entered into an investment management agreement with Prudential Investment Management, Inc. (“PIM”), under which PIM selects the properties and other investments held by the Partnership. Prudential charges the Partnership a daily fee for investment management, which amounts to 1.25% per year of the average daily gross assets of the Partnership.

 

A full description of the Real Property Account, its management, policies, restrictions, charges and expenses, investment risks, the Partnership's investment objectives, and all other aspects of the Real Property Account's and the Partnership's operations is contained in the attached prospectus for the Real Property Account. It should be read together with this prospectus by any Contract owner considering the real estate investment option. There is no assurance that the investment objectives of the Real Property Account will be met.

 

CHARGES AND EXPENSES

 

The total amount invested in the Contract Fund, at any time, consists of the sum of the amount credited to the variable investment options, the amount allocated to the fixed rate option, plus any interest credited on amounts allocated to the fixed rate option, the amount allocated to the Real Property Account, and the principal amount of any Contract loan plus the amount of interest credited to the Contract upon that loan. See Loans. Most charges, although not all, are made by reducing the Contract Fund.

 

In several instances we use the terms "maximum charge" and "current charge." The "maximum charge", in each instance, is the highest charge that we may make under the Contract. The "current charge", in each instance, is the

 

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amount that we now charge, which may be lower than maximum charges. If circumstances change, we reserve the right to increase each current charge, up to the maximum charge, without giving any advance notice.

 

Current charges deducted from premium payments and the Contract Fund may change from time to time, subject to maximum charges. In deciding whether to change any of these current charges, we will periodically consider factors such as mortality, persistency, expenses, taxes and interest and/or investment experience to see if a change in our assumptions is needed. Charges for taxes attributable to premiums will vary by state and locality. Changes in other charges will be by class. We will not recoup prior losses or distribute prior gains by means of these changes.

 

This section provides a more detailed description of each charge that is described briefly in the SUMMARY OF CHARGES AND EXPENSES, beginning on page 1 of this prospectus.

 

Taxes Attributable to Premiums

 

We deduct a charge for taxes attributable to premiums from each premium payment. That charge is currently made up of two parts.

 

The first part is a charge for state and local premium taxes. Tax rates vary from jurisdiction to jurisdiction and generally range from 0% to 5% (but may exceed 5% in some instances).

 

The second part is a charge for federal income taxes measured by premiums. The current amount for this second part is 1.25% of the premium for Contracts issued on or after June 17, 1991, and 0% for Contracts issued prior to June 17, 1991. We believe that this charge is a reasonable estimate of Prudential’s federal income taxes.

 

Under current law, we may incur state and local taxes (in addition to premium taxes) in several states. Currently, these taxes are not significant and they are not charged against the Account. If there is a material change in the applicable state or local tax laws, we may impose a corresponding charge against the Account.

 

Deduction from Premiums

 

We deduct a charge of $2 from each premium payment to cover the cost of collecting and processing premiums. Thus, if you pay premiums annually, this charge will be $2 per year. If you pay premiums monthly, the charge will be $24 per year. If you pay premiums more frequently, for example under a payroll deduction plan with your employer, the charge may be more than $24 per year.

 

Sales Load Charges

 

A sales charge, often called a “sales load”, is deducted to compensate us for the costs of selling the Contracts, including commissions, advertising, and the printing and distribution of prospectuses and sales literature. The charge is equal to 0.5% of the "primary annual premium”. The primary annual premium is equal to the Scheduled Premium that would be payable if premiums were being paid annually, less the two deductions from premiums (taxes attributable to premiums and the $2 processing charge, see Taxes Attributable to Premiums, and Deduction from Premiums) and less the $3 part of the monthly deduction. See Monthly Deductions from Contract Fund. The sales load is charged whether the Contract owner is paying premiums annually or more frequently. It is lower on Contracts issued on insureds over 60 years of age. At present this sales charge is made only during the first five Contract years or five years after an increase. However, Prudential reserves the right to make this charge in all Contract years. To summarize, for most Contracts, this charge is somewhat less than 6% of the annual Scheduled Premium for each of the first five Contract years and it may, but probably will not, continue to be charged after that.

 

There is a second sales load, which will be charged only if a Contract lapses or is surrendered before the end of the 10th Contract year or 10 years from an increase in the face amount of insurance. It is often described as a contingent deferred sales load (“CDSL”) and is described under Surrender Charges.

 

Cost of Insurance

 

We deduct a monthly COI charge proportionately from the dollar amounts held in each of the chosen investment options. The purpose of this charge is to provide insurance coverage. When an insured dies, the amount payable to the beneficiary (assuming there is no Contract debt) is larger than the Contract Fund - significantly larger if the insured dies in the early years of a Contract. The COI charges collected from all Contract owners enables us to pay this larger death benefit. The maximum COI charge is determined by multiplying the amount by which the Contract’s death benefit exceeds the Contract Fund ("net amount at risk") under a Contract by maximum COI rates.

 

The net amount at risk is affected by factors such as: investment performance, premium payments, and charges. The maximum COI rates are based upon the 1980 Commissioners Standard Ordinary ("CSO") Mortality Tables and an

 

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insured's current attained age, sex (except where unisex rates apply), smoker/nonsmoker status, and extra rating class, if any. At most ages, our current COI rates are lower than the maximum rates. Current COI charges range from $0.06 to $83.34 per $1,000 of net amount at risk.

 

Certain Contracts, for example Contracts issued in connection with tax-qualified pension plans, may be issued on a “guaranteed issue” basis and may have current mortality charges that are different from those mortality charges for Contracts which are individually underwritten. These Contracts with different current mortality charges may be offered to categories of individuals meeting eligibility guidelines determined by Prudential.

 

Monthly Deductions from the Contract Fund

 

We deduct the following monthly charges proportionately from the dollar amounts held in each of the chosen investment option[s].

 

(a)

We deduct an administrative charge based on the face amount of insurance. This charge is intended to compensate us for things like processing claims, keeping records, and communicating with Contract owners. We deduct $3 per Contract and up to $0.03 per $1,000 of the face amount of insurance. This charge also applies to increases in the face amount of insurance. Thus, for a Contract with a $75,000 face amount of insurance, the charge is $3 plus $2.25 for a total of $5.25 per month. The current charge for Contracts with face amounts greater than $100,000 is lower. The $0.03 per $1,000 of the face amount of insurance is reduced to $0.01 per $1,000 for that portion of the face amount that exceeds $100,000 and will not exceed $12.

 

(b)

We also deduct a charge of $0.01 per $1,000 of the face amount of insurance (excluding the automatic increase under Contracts issued on insureds of 14 years of age or less). We deduct this charge for the risk we assume by guaranteeing that, no matter how unfavorable investment experience may be, the death benefit will never be less than the guaranteed minimum death benefit, so long as Scheduled Premiums are paid on or before the due date or during the grace period. This charge and the administrative charge described in (a) above may be calculated together.

 

(c)

You may add one or more riders to the Contract. Some riders are charged for separately. If you add such a rider to the basic Contract, additional charges will be deducted. See Riders.

 

(d)

If an insured is in a substandard risk classification (for example, a person with a health condition), additional charges will be deducted and the Scheduled Premium will be increased.

 

The earnings of the Account are taxed as part of the operations of Prudential. Currently, no charge is being made to the Account for Prudential’s federal income taxes, other than the 1.25% charge for federal income taxes measured by premiums for Contracts issued on or after June 17, 1991. There is no charge for federal income taxes for Contracts issued prior to June 17, 1991. See Taxes Attributable to Premiums. We periodically review the question of a charge to the Account for Prudential’s federal income taxes. We may charge such a fee in the future for any federal income taxes that would be attributable to the Contracts.

 

Daily Deduction from the Variable Investment Options

 

Each day we deduct a charge from the assets of each of the variable investment options in an amount equivalent to an effective annual rate of 0.90%. For Contracts with face amounts of $100,000 or more, the current charge is 0.60%. This charge is intended to compensate us for assuming mortality and expense risks under the Contract. The mortality risk we assume is that insureds may live for shorter periods of time than we estimated when mortality charges were determined. The expense risk we assume is that expenses incurred in issuing and administering the Contract will be greater than we estimated in fixing our administrative charges. This charge is not assessed against amounts allocated to the fixed rate option.

 

Surrender Charges

 

We assess additional sales load, the contingent deferred sales load (“CDSL”), if the Contract lapses or is surrendered during the first 10 Contract years or 10 years from an increase in the face amount of insurance, or if a withdrawal is made under a Form A Contract during that 10 year period. Subject to the additional limitations described below, for Contracts that lapse or are surrendered during the first five Contract years the charge will be equal to 50% of the first year's primary annual premium. The primary annual premium is equal to the Scheduled Premium that would be payable if premiums were being paid annually, less the two deductions from premiums (taxes attributable to premiums and the $2 processing charge, see Taxes Attributable to Premiums, and see Deduction from Premiums), and less the $3 part of the monthly administrative charge. See Monthly Deductions from Contract Fund. In the next five Contract years that percentage is reduced uniformly on a daily basis until it reaches zero on the 10th Contract anniversary. Thus, for Contracts surrendered at the end of the sixth year, the maximum deferred sales charge will be 40% of the first year's

 

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primary annual premium, for Contracts surrendered at the end of year seven, the maximum deferred sales charge will be 30% of the first year's primary annual premium, and so forth.

 

The contingent deferred sales load is also subject to a further limit at older issue ages (approximately above age 67) in order to comply with certain requirements of state law. Specifically, the contingent deferred sales load for such insureds is no more than $32.50 per $1,000 of the face amount.

 

The sales load is subject to a further important limitation that may, particularly for Contracts that lapse or are surrendered within the first five or six years, result in a lower contingent deferred sales load than that described above. (This limitation might also, under unusual circumstances, apply to reduce the monthly sales load deductions described in item (c) under Monthly Deductions from Contract Fund)

 

The limitation is based on a Guideline Annual Premium (“GAP”) that is associated with every Contract. The GAP is an amount, generally larger than the gross annual Scheduled Premium for the Contract, determined actuarially in accordance with a definition set forth in a regulation of the Securities and Exchange Commission. The maximum aggregate sales load that Prudential will charge (that is, the sum of the monthly sales load deduction and the contingent deferred sales charge) will not be more than 30% of the premiums actually paid until those premiums total one GAP plus no more than 9% of the next premiums paid until total premiums are equal to five GAPS, plus no more than 6% of all subsequent premiums. If the sales charges described above would at any time exceed this maximum amount then the charge, to the extent of any excess, will not be made.

 

The following table shows the sales loads that would be paid by a 35 year old man under a Form B Contract with $100,000 face amount of insurance, both through the monthly deductions from the Contract Fund described above and upon the surrender of the Contract. If the Contract is partially surrendered or the face amount is decreased during the first 10 years, a proportionate amount of the contingent deferred sales charge will be deducted from the Contract Fund.

 

Maximum Percentages for Surrender Charges

 

 

Surrender,

Last Day of

Year No.

 

 

Cumulative Scheduled Premiums Paid

 

 

Cumulative

Sales Load Deducted from Contract Fund

 

 

Contingent

Deferred Sales Load

 

 

Total Sales Load

 

Cumulative

Total Sales Load as Percentage of Scheduled Premiums Paid

 

1

2

3

4

5

6

7

8

9

10

 

$ 894.06

1,788.12

2,682.18

3,576.24

4,470.30

5,364.36

6,258.42

7,152.48

8,046.54

8,940.60

 

$ 49.56

99.12

148.68

198.24

247.80

247.80

247.80

247.80

247.80

247.80

 

$218.66

367.64

398.55

414.00

414.00

331.00

248.00

166.00

83.00

0.00

 

$268.22

466.76

547.23

612.24

661.80

578.80

495.80

413.80

330.80

247.80

 

30.00%

26.10%

20.40%

17.12%

14.80%

10.79%

7.92%

5.79%

4.11%

2.77%

 

The percentages shown in the last column will not be appreciably different for insureds of different ages.

 

We deduct a charge of $5 per $1,000 of the face amount of insurance upon lapse or surrender to cover the cost of processing applications, conducting medical examinations, determining insurability and the insured's rating class, and establishing records. However, this charge is reduced beginning on the Contract's fifth anniversary and declines daily at a constant rate until it disappears entirely at the end of the 10th Contract year or 10 years from an increase in the face amount of insurance. If the Contract is partially surrendered or the face amount is decreased during the first 10 years, we will deduct a proportionate amount of the charge from the Contract Fund. We do not deduct a surrender charge from the death benefit if the insured dies during the first 10 Contract years or 10 years from an increase in the face amount of insurance.

 

Transaction Charges

 

(a)

We charge a transaction fee equal to the lesser of $15 or 2% of the withdrawal amount in connection with each withdrawal.

 

(b)

We may charge a transaction fee of up to $15 for any change in the face amount of insurance.

 

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(c)

We charge a transaction fee of up to $150 for Living Needs Benefit payments.

 

Portfolio Charges

 

We deduct charges from and pay expenses out of the variable investment options as described in the Series Fund prospectus.

 

Rider Charges

 

Contract owners may be able to obtain additional benefits, which may increase the Scheduled Premium. These optional insurance benefits are described in what is known as a “rider” to the Contract. We deduct a monthly charge from the Contract Fund if additional benefits cause an increase to your Scheduled Premium.

 

PERSONS HAVING RIGHTS UNDER THE CONTRACT

 

Contract Owner

 

Generally, the Contract owner is the insured. There are circumstances when the Contract owner is not the insured. There may also be more than one Contract owner. If the Contract owner is not the insured or there is more than one Contract owner, they will be named in an endorsement to the Contract. This ownership arrangement will remain in effect unless you ask us to change it.

 

You may change the ownership of the Contract by sending us a request in a form that meets our needs. We may ask you to send us the Contract to be endorsed. If we receive your request in a form that meets our needs, and the Contract if we ask for it, we will file and record the change, and it will take effect as of the date you sign the request.

 

While the insured is living, the Contract owner is entitled to any Contract benefit and value. Only the Contract owner is entitled to exercise any right and privilege granted by the Contract or granted by us. For example, the Contract owner is entitled to surrender the Contract, access Contract values through loans or withdrawals, assign the Contract, and to name or change the beneficiary.

 

Beneficiary

 

The beneficiary is entitled to receive any benefit payable on the death of the insured. You may designate or change a beneficiary by sending us a request in a form that meets our needs. We may ask you to send us the Contract to be endorsed. If we receive your request in a form that meets our needs, and the Contract if we ask for it, we will file and record the change and it will take effect as of the date you sign the request. However, if we make any payment(s) before we receive the request, we will not have to make the payment(s) again. When we are made aware of an assignment, we will recognize the assignee’s rights before any claim payments are made to the beneficiary. When a beneficiary is designated, any relationship shown is to the insured, unless otherwise stated.

 

OTHER GENERAL CONTRACT PROVISIONS

 

Assignment

 

This Contract may not be assigned if the assignment would violate any federal, state or local law or regulation prohibiting sex distinct rates for insurance. Generally, the Contract may not be assigned to an employee benefit plan or program without our consent. We assume no responsibility for the validity or sufficiency of any assignment. We will not be obligated to comply with any assignment unless we receive a copy at a Service Office.

 

Incontestability

 

We will not contest the Contract after it has been in-force during the insured’s lifetime for two years from the issue date, the reinstatement date, or the effective date of any change made to the Contract that requires our approval and would increase our liability.

 

Misstatement of Age or Sex

 

If the insured's stated age or sex or both are incorrect in the Contract, we will adjust the death benefit payable and any amount to be paid, as required by law, to reflect the correct age and sex. If we learn of the inaccuracy after the insured’s death, any such benefit will be based on what the most recent deductions from the Contract Fund would have

 

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provided at the insured's correct age and sex. If we learn of the inaccuracy before the insured’s death, the face amount will be adjusted to what the current scheduled premium would have purchased at the correct age and sex.

 

Settlement Options

 

The Contract grants to most Contract owners, or to the beneficiary, a variety of optional ways of receiving Contract proceeds, other than in a lump sum. A Prudential representative can explain these options upon request.

 

Suicide Exclusion

 

Generally, if the insured, whether sane or insane, dies by suicide within two years from the Contract date, the Contract will end and we will return the premiums paid, less any Contract debt, and less any withdrawals. Generally, if the insured, whether sane or insane, dies by suicide after two years from the issue date, but within two years of the effective date of an increase in the face amount, we will pay, as to the increase in amount, no more than the sum of the premiums paid on and after the effective date of an increase.

 

RIDERS

 

Contract owners may be able to obtain additional benefits, which may increase the Scheduled Premium. If they do cause an increase in the Scheduled Premium, the charge for the additional benefits will be paid by making monthly deductions from the Contract Fund. These optional insurance benefits will be described in what is known as a “rider” to the Contract. One rider pays certain premiums into the Contract if the insured dies in an accident. Others waive certain premiums if the insured is disabled within the meaning of the provision (or, in the case of a Contract issued on an insured under the age of 15, if the applicant dies or becomes disabled within the meaning of the provision). Others pay certain premiums into the Contract if the insured dies within a stated number of years after issue; similar term insurance riders may be available for the insured's spouse or child. The amounts of these benefits are fully guaranteed at issue and do not depend on the performance of the Account. Certain restrictions may apply; they are clearly described in the applicable rider.

 

Under other riders, which provide a fixed amount of term insurance in exchange for increasing total scheduled annual premiums, the amount payable upon death of the insured may be substantially increased for a given total initial annual premium. The rider may be appropriate for Contract owners who reasonably expect their incomes to increase regularly so that they will be able to afford the increasing scheduled annual premiums or who may be willing to rely upon their future Contract Fund values to prevent the Contract from lapsing in later years.

 

We will not pay a benefit on any Accidental Death Benefit type rider or make payments for any disability type rider if the death or injury is caused or contributed to by war or act of war, declared or undeclared, including resistance to armed aggression. This restriction includes service in the armed forces of any country at war.

 

Any Prudential representative can explain these extra benefits further. Samples of the provisions are available from Prudential upon written request.

 

Living Needs Benefit Rider - The Living Needs BenefitSM Rider may be available on your Contract. The benefit may vary by state. There is no charge for adding the benefit to a Contract. However, when a claim is paid under this rider, a reduction for early payment is applied and a processing fee of up to $150 per Contract will be deducted.

 

Subject to state regulatory approval, the Living Needs Benefit allows you to elect to receive an accelerated payment of all or part of the Contract's death benefit, adjusted to reflect current value, at a time when certain special needs exist. The adjusted death benefit will always be less than the death benefit, but will never be lower than the Contract's cash surrender value. One or both of the following options may be available. You should consult with a Prudential representative about whether additional options may be available.

 

The Terminal Illness Option is available on the Living Needs Benefit Rider if the insured is diagnosed as terminally ill with a life expectancy of six months or less. When satisfactory evidence is provided, we will provide an accelerated payment of the portion of the death benefit selected by the Contract owner as a Living Needs Benefit. The Contract owner may (1) elect to receive the benefit in a single sum or (2) receive equal monthly payments for six months. If the insured dies before all the payments have been made, the present value of the remaining payments will be paid to the beneficiary designated in the Living Needs Benefit claim form.

 

The Nursing Home Option is available on the Living Needs Benefit Rider after the insured has been confined to an eligible nursing home for six months or more. When satisfactory evidence is provided, including certification by a licensed physician, that the insured is expected to remain in the nursing home until death, we will provide an accelerated payment of the portion of the death benefit selected by the Contract owner as a Living Needs Benefit. The Contract owner may (1) elect to receive the benefit in a single sum or (2) receive equal monthly payments for a specified number

 

19

 

 


of years (not more than 10 nor less than two), depending upon the age of the insured. If the insured dies before all of the payments have been made, the present value of the remaining payments will be paid to the beneficiary designated in the Living Needs Benefit claim form in a single sum.

 

Subject to state approval, all or part of the Contract's death benefit may be accelerated under the Living Needs Benefit. If the benefit is only partially accelerated, a death benefit of at least $25,000 must remain under the Contract. Prudential reserves the right to determine the minimum amount that may be accelerated.

 

No benefit will be payable if you are required to elect it in order to meet the claims of creditors or to obtain a government benefit. We can furnish details about the amount of Living Needs Benefit that is available to an eligible Contract owner, and the effect on the Contract if less than the entire death benefit is accelerated.

 

You should consider whether adding this settlement option is appropriate in your given situation. Adding the Living Needs Benefit to the Contract has no adverse consequences; however, electing to use it could. With the exception of certain business-related Contracts, the Living Needs Benefit is excluded from income if the insured is terminally ill or chronically ill as defined in the tax law (although the exclusion in the latter case may be limited). You should consult a tax adviser before electing to receive this benefit. Receipt of a Living Needs Benefit payment may also affect your eligibility for certain government benefits or entitlements.

 

REQUIREMENTS FOR ISSUANCE OF A CONTRACT

 

As of November 12, 2001, Prudential no longer offered these Contracts for sale. Generally, the Contract was issued on insureds below the age of 81. You could have applied for a minimum initial guaranteed death benefit of $75,000; however, higher minimums applied to insureds over the age of 75. Insureds 14 years of age or less may have applied for a minimum initial guaranteed death benefit of $50,000, which will increase by 50% at age 21. Before issuing any Contract, Prudential required evidence of insurability, which may have included a medical examination. Nonsmokers who met Preferred underwriting requirements were offered the most favorable premium rate. A higher premium is charged if an extra mortality risk is involved. Certain classes of Contracts, for example, a Contract issued in connection with a tax-qualified pension plan, may have been issued on a "guaranteed issue" basis and may have a lower minimum initial death benefit than a Contract that was individually underwritten. These are the current underwriting requirements. We reserve the right to change them on a non-discriminatory basis.

 

PREMIUMS

 

The Contract will not lapse because of unfavorable investment experience if you pay your Scheduled Premiums when due and take no withdrawals and have no outstanding loans. If you pay premiums other than on a monthly basis, you will receive a notice that a premium is due about three weeks before each due date. If you pay premiums monthly, we will send to you each year a book with 12 coupons that will serve as a reminder. You may change the frequency of premium payments with our consent.

 

You may elect to have monthly premiums paid automatically under the “Pru-Matic Premium Plan” by pre-authorized transfers from a bank checking account. You may also be eligible to have monthly premiums paid by pre-authorized deductions from an employer's payroll.

 

Your Contract shows two Scheduled Premium amounts. The first or initial amount is payable from the time you purchase your Contract until the Contract anniversary immediately following your 65th birthday or the Contract's seventh anniversary, whichever is later (the “Premium Change Date”). The second Scheduled Premium Amount will be lower than the maximum amount stated in your Contract if your Contract Fund, net of any excess premiums, on the Premium Change Date is higher than it would have been had: (1) all Scheduled Premiums been paid when due; (2) maximum contractual charges been deducted; and (3) only a net rate of return of 4% been earned. We will tell you what your second Scheduled Premium amount will be.

 

A significant feature of this Contract is that it permits you to pay greater than Scheduled Premiums. You may make unscheduled premium payments occasionally or on a periodic basis. If you wish, you may select a higher contemplated premium than the Scheduled Premium. Prudential will then bill you for the chosen premium. In general, the regular payment of higher premiums will result in higher cash surrender values and, at least under Form B, in higher death benefits. Conversely, a Scheduled Premium does not need to be made if the Contract Fund is large enough to enable the charges due under the Contract to be made without causing the Contract to lapse. See LAPSE AND REINSTATEMENT. The payment of premiums in excess of Scheduled Premiums may cause the Contract to become a Modified Endowment Contract for federal income tax purposes. If this happens, loans and other distributions, which would otherwise not be taxable events, may be subject to federal income taxation. See Tax Treatment of Contract Benefits.

 

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If you choose to add a “rider” to your Contract that provides additional benefits (see RIDERS), the Scheduled Premium may be increased. Some riders provide additional term insurance in a stated amount that does not vary with investment experience. One of these “term riders” also allows you to choose different insurance amounts in different years. For these riders, you may choose to pay a billed premium higher than your initial Scheduled Premium. Under some circumstances, this could result in a higher cash surrender value and death benefit than if the same premium had been paid under a Contract with the same death benefit but without the rider. After several years, however, even if the billed premiums are paid on time, the Contract could lose its guarantee against lapse and could also have lower cash surrender values.

 

You may choose a level premium option. In that case, the Scheduled Premium, (the amount of which can be quoted by your Prudential representative), will be higher and it will not increase at age 65 (or seven years after issue, if later). The Contract will not lapse because of unfavorable investment experience if the level Scheduled Premium is paid within 61 days after the scheduled premiums are due (or missed premiums are paid later with interest) and there are no withdrawals.

 

Prudential will generally accept any premium payment of at least $25. Prudential reserves the right to limit unscheduled premiums to a total of $10,000 in any Contract year, and to refuse to accept premiums that would immediately result in more than a dollar-for-dollar increase in the death benefit. The flexibility of premium payments provides Contract owners with different opportunities under the two Forms of the Contract. Greater than scheduled payments under a Form A Contract increase the Contract Fund. Greater than scheduled payments under a Form B Contract increase both the Contract Fund and the death benefit. Generally, any future increases in the Contract Fund will be less than under a Form A Contract because the monthly mortality charges under the Form B Contract will be higher to compensate for the higher amount of insurance. For all Contracts, the privilege of making large or additional premium payments offers a way of investing amounts, which accumulate without current income taxation.

 

Unless you elect otherwise, your Contract will include a “waiver of premium” provision under which Prudential will pay your Scheduled Premiums if you incur a disability before age 60 that lasts over six months. If the disability begins after you become 60 and before you are 65, premiums will be paid only until the first Contract anniversary following your 65th birthday. The waiver of premium provision does not apply if you become disabled after your 65th birthday.

 

Allocation of Premiums

 

On the Contract date, we deduct a $2 administrative charge and the charge for taxes attributable to premiums from the initial premium. Then the first monthly charges are deducted. The remainder of the initial premium will be allocated among the variable investment options, the fixed rate option, or the Real Property Account according to the allocations you specified in the application form. The invested portion of any part of the initial premium in excess of the Scheduled Premium is generally placed in the selected investment options on the date of receipt in Good Order at the Payment Office, but not earlier than the Contract date.

 

After the Contract date, we deduct a $2 administrative charge and the charge for taxes attributable to premiums from each subsequent premium payment. After the deductions from premiums and the monthly charges are made, the remainder of each subsequent premium payment will be invested as of the end of the valuation period in which it is received in Good Order at the Payment Office, in accordance with the allocation you previously designated. The “valuation period” means the period of time from one determination of the value of the amount invested in a variable investment option to the next. Such determinations are made when the net asset values of the portfolios of the Series Fund are calculated, which is as of the close of regular trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time.)

 

You may change the way in which subsequent premiums are allocated by giving written notice to a Service Office, by our website, provided you are enrolled to use Prudential Online® Account Access, or by telephoning a Service Office, provided the Contract is not in default and you are enrolled to use the Telephone Transfer System. There is no charge for reallocating future premiums among the investment options. If any portion of a premium is allocated to a particular variable investment option, to the fixed rate option or to the Real Property Account, that portion must be at least 10% on the date the allocation takes effect. All percentage allocations must be in whole numbers. For example, 33% can be selected but 33?% cannot. Of course, the total allocation to all selected investment options must equal 100%.

 

Transfers/Restrictions on Transfers

 

If the Contract is not in default, you may, up to four times each Contract year, transfer amounts from one variable investment option to another variable investment option, to the fixed rate option, or to the Real Property Account, without charge. Additional transfers may be made with our consent. Currently, we will allow you to make additional transfers. For the first 20 transfers in a calendar year, you may transfer amounts by proper written notice to a Service Office, by our website, provided you are enrolled to use Prudential Online® Account Access, or by telephone, provided you are enrolled to use the Telephone Transfer System. You will automatically be enrolled to use the Telephone Transfer

 

21

 

 


System unless the Contract is jointly owned or you elect not to have this privilege. Telephone transfers may not be available on Contracts that are assigned, depending on the terms of the assignment. See Assignment.

 

After you have submitted 20 transfers in a calendar year, we will accept subsequent transfer requests only if they are in a form acceptable to us, bear an original signature in ink, and are sent to us by U.S. regular mail. After you have submitted 20 transfers in a calendar year, a subsequent transfer request by telephone, fax or electronic means will be rejected, even in the event that it is inadvertently processed.

 

Multiple transfers that occur during the same day, but prior to the end of the valuation period for that day, will be counted as a single transfer.

 

Currently, certain transfers affected systematically under the dollar cost averaging program do not count towards the limit of four transfers per Contract year or the limit of 20 transfers per calendar year. In the future, we may count such transfers towards the limit.

 

Transfers among investment options will take effect as of the end of the valuation period in which a transfer request is received in Good Order at a Service Office. The request may be in terms of dollars, such as a request to transfer $5,000 from one investment option to another, or may be in terms of a percentage reallocation among investment options. In the latter case, as with premium reallocations, the percentages must be in whole numbers.

 

We will use reasonable procedures, such as asking you to provide certain personal information provided on your application for insurance, to confirm that instructions given by telephone are genuine. We will not be held liable for following telephone instructions that we reasonably believe to be genuine. We cannot guarantee that you will be able to get through to complete a telephone transfer during peak periods such as periods of drastic economic or market change.

 

Only one transfer from the fixed rate option will be permitted during each Contract year and only within 30 days following each Contract anniversary. The maximum amount that may be transferred out of the fixed rate option each year is currently the greater of: (a) 25% of the amount in the fixed rate option; and (b) $2,000. Such transfer requests received prior to the Contract anniversary will take effect on the Contract anniversary. Transfer requests received within the 30-day period beginning on the Contract anniversary will take effect as of the end of the valuation period in which a transfer request is received in Good Order at a Service Office. We may change these limits in the future or waive these restrictions for limited periods of time in a non-discriminatory way, (e.g., when interest rates are declining). Transfers to and from the Real Property Account are subject to restrictions described in the attached prospectus for the Real Property Account.

 

The Contract was not designed for professional market timing organizations, other organizations, or individuals using programmed, large, or frequent transfers. Large or frequent transfers among variable investment options in response to short-term fluctuations in markets, sometimes called “market timing”, can make it very difficult for Fund advisers/sub-advisers to manage the variable investment options. Large or frequent transfers may cause the Fund to hold more cash than otherwise necessary, disrupt management strategies, increase transaction costs, or affect performance to the disadvantage of other Contract owners. If we (in our own discretion) believe that a pattern of transfers or a specific transfer request, or group of transfer requests, may have a detrimental effect on the performance of the variable investment options, or we are informed by a Fund (e.g., by the Fund’s adviser/sub-adviser) that the purchase or redemption of shares in the variable investment option must be restricted because the Fund believes the transfer activity to which such purchase or redemption relates would have a detrimental effect on performance of the affected variable investment option, we may modify your right to make transfers by restricting the number, timing, and amount of transfers. We reserve the right to prohibit transfer requests made by an individual acting under a power of attorney on behalf of more than one Contract owner. We will immediately notify you at the time of a transfer request if we exercise this right.

 

Any restrictions on transfers will be applied in a uniform manner to all persons who own Contracts like this one, and will not be waived, except as described above with respect to transfers from the fixed rate option. However, due to the discretion involved in any decision to exercise our right to restrict transfers, it is possible that some Contract owners may be able to effect transactions that could affect Fund performance to the disadvantage of other Contract owners.

 

In addition, Contract owners who own variable life insurance or variable annuity Contracts that do not impose the transfer restrictions described above, might make more numerous and frequent transfers than Contract owners who are subject to such limitations. Contract owners who are not subject to the same transfer restrictions may have the same underlying variable investment options available to them, and unfavorable consequences associated with such frequent trading within the underlying variable investment option (e.g., greater portfolio turnover, higher transaction costs, or performance or tax issues) may affect all Contract owners.

 

The Funds have adopted their own policies and procedures with respect to excessive trading of their respective shares, and we reserve the right to enforce these policies and procedures. The prospectuses for the Funds describe any such

 

22

 

 


policies and procedures, which may be more or less restrictive than the policies and procedures we have adopted. Under SEC rules, we are required to: (1) enter into a written agreement with each portfolio or its principal underwriter that obligates us to provide to the Fund promptly upon request certain information about the trading activity of individual Contract owners, and (2) execute instructions from the Fund to restrict or prohibit further purchases or transfers by specific Contract owners who violate the excessive trading policies established by the Fund. In addition, you should be aware that some Funds may receive “omnibus” purchase and redemption orders from other insurance companies or intermediaries such as retirement plans. The omnibus orders reflect the aggregation and netting of multiple orders from individual owners of variable insurance contracts and/or individual retirement plan participants. The omnibus nature of these orders may limit the Funds in their ability to apply their excessive trading policies and procedures. In addition, the other insurance companies and/or retirement plans may have different policies and procedures or may not have any such policies and procedures because of contractual limitations. For these reasons, we cannot guarantee that the Funds (and thus Contract owners) will not be harmed by transfer activity relating to other insurance companies and/or retirement plans that may invest in the Funds.

 

A Fund also may assess a short term trading fee in connection with a transfer out of the variable investment option investing in that Fund that occurs within a certain number of days following the date of allocation to the variable investment option. Each Fund determines the amount of the short term trading fee and when the fee is imposed. The fee is retained by or paid to the Fund and is not retained by us. The fee will be deducted from your Contract Value to the extent allowed by law. At present, no Fund has adopted a short-term trading fee.

 

Although our transfer restrictions are designed to prevent excessive transfers, they are not capable of preventing every potential occurrence of excessive transfer activity.

 

Dollar Cost Averaging

 

We offer a feature called Dollar Cost Averaging (“DCA”). Upon your request, premiums will be allocated to the portion of the Money Market subaccount used for this feature (the “DCA account”). Designated dollar amounts will be transferred monthly from the DCA account to other investment options available under the Contract, excluding the Money Market subaccount and the fixed rate option, but including the Real Property Account. Automatic monthly transfers must be at least 3% of the amount allocated to the DCA account (that is, if you designate $5,000, the minimum monthly transfer is $150), with a minimum of $20 transferred into any one investment option. These amounts are subject to change at our discretion. The minimum transfer amount will only be recalculated if the amount designated for transfer is increased.

 

When you establish DCA at issue, you must allocate to the DCA account the greater of $2,000 or 10% of the initial premium payment. When you establish DCA after issue, you must allocate to the DCA account at least $2,000. These minimums are subject to change at our discretion. After DCA has been established and as long as the DCA account has a positive balance, you may allocate or transfer amounts to the DCA account, generally subject to the limitations on premium payments and transfers. In addition, if you pay premiums on an annual or semi-annual basis, and you have already established DCA, your premium allocation instructions may include an allocation of all or a portion of all your premium payments to the DCA account.

 

Each automatic monthly transfer will take effect as of the end of the valuation period on the Monthly Date, provided the New York Stock Exchange (“NYSE”) is open on that date. If the NYSE is not open on the Monthly Date, the transfer will take effect as of the end of the valuation period on the next day that the NYSE is open. If the Monthly Date does not occur in a particular month (e.g., February 30), the transfer will take effect as of the end of the valuation period on the last day of the month that the NYSE is open. Automatic monthly transfers will continue until the balance in the DCA account reaches zero, or until the Contract owner gives notification of a change in allocation or cancellation of the feature. If you have an outstanding premium allocation to the DCA account, but your DCA option has previously been canceled, premiums allocated to the DCA account will be allocated to the Money Market subaccount. Currently there is no charge for using the DCA feature.

 

DEATH BENEFITS

 

Contract Date

 

There is no insurance under this Contract until the minimum initial premium is paid. If a medical examination is required, the Contract date will ordinarily be the date the examination is completed. Under certain circumstances, we may allow the Contract to be backdated up to six months for the purpose of lowering the insured's issue age, but only to a date not earlier than six months prior to the application date. This may be advantageous for some Contract owners as a lower issue age may result in lower current charges.

 

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When Proceeds Are Paid

 

Generally, we will pay any death benefit, cash surrender value, loan proceeds or partial withdrawal within seven days after all the documents required for such a payment are received at the Payment Office. Other than the death benefit, which is determined as of the date of death, the amount will be determined as of the end of the valuation period in which the necessary documents are received at a Service Office. However, we may delay payment of proceeds from the variable investment option[s] and the variable portion of the death benefit due under the Contract if the disposal or valuation of the Account's assets is not reasonably practicable because the New York Stock Exchange is closed for other than a regular holiday or weekend, trading is restricted by the SEC, or the SEC declares that an emergency exists.

 

We have the right to delay payment of the cash surrender value attributable to: (1) the fixed rate option; and (2) Contracts in-force as extended term insurance, for up to six months (or a shorter period if required by applicable law). We will pay interest of at least 3% per year if such a payment is delayed for more than 30 days (or a shorter period if required by applicable law).

 

Death Claim Settlement Options

 

The beneficiary may choose to receive death claim proceeds by any of the settlement options described in the Contract or by payment of a lump sum amount. In addition to the settlement options described in your Contract, the beneficiary may choose the payment of death claim proceeds, by way of Prudential's retained asset settlement option (the "Alliance Account"). Upon verification of a death claim, Prudential will provide a kit to the beneficiary, which includes: (1) an account certificate describing the death claim proceeds, the current interest rate, and the terms of the Alliance Account; (2) a guide that explains how the Alliance Account works; and (3) checks and a checkbook, that the beneficiary can use to access the available amount of death claim proceeds. Any Prudential representative authorized to sell this Contract can explain this option upon request.

 

Types of Death Benefit

 

You may have selected from two types of death benefit at issue. A Contract with a Form A death benefit has a death benefit, which will generally equal the initial face amount. Favorable investment results and additional premium payments will generally increase the cash surrender value and decrease the net amount at risk and result in lower charges. This type of death benefit does not vary with the investment performance of the investment options you selected, except when the premiums you pay or favorable investment performance causes the Contract Fund to grow to the point where we may increase the death benefit to ensure that the Contract will satisfy the Internal Revenue Code’s definition of life insurance. The Scheduled Premium shown in the Contract will be the same for a given insured, regardless of what Contract Form you chose. See How a Contract's Cash Surrender Value Will Vary.

 

A Contract with a Form B death benefit has a death benefit, which will generally equal the face amount plus, if any, excess Contract Fund over the Tabular Contract Fund Value. Favorable investment performance and additional premium payments will generally increase your Contract's death benefit and cash surrender value. However, the increase in the cash surrender value for Form B Contract may be less than the increase in cash surrender value for a Form A Contract because a Form B Contract has a greater cost of insurance charge due to a greater net amount at risk. As long as the Contract is not in default, there have been no withdrawals, and there is no Contract debt, the death benefit may not fall below the face amount stated in the Contract, plus the amount, if any, by which the Contract Fund exceeds the Tabular Contract Fund Value.

 

Both Form A and Form B Contracts covering insureds of 14 years of age or less contain a special provision providing that the face amount of insurance will automatically be increased, on the Contract anniversary after the insured's 21st birthday, to 150% of the initial face amount, so long as the Contract is not then in default. This new face amount becomes the new guaranteed minimum death benefit. The death benefit will also usually increase, at the same time, by the same dollar amount. In certain circumstances, however, it may increase by a smaller amount. This increase in death benefit will also generally increase the net amount at risk under the Contract, thus increasing the mortality charge deducted each month from amounts invested under the Contract. See CHARGES AND EXPENSES. The automatic increase in the face amount of insurance may affect the level of future premium payments you can make without causing the Contract to be classified as a Modified Endowment Contract. See Tax Treatment of Contract Benefits.

 

Contract owners of a Form A Contract should note that any withdrawal may result in a reduction of the face amount and the deduction of any applicable surrender charges. We will not allow you to make a withdrawal that will decrease the face amount below the minimum face amount. For Form B Contracts, withdrawals will not change the face amount, will not incur a surrender charge for a withdrawal, and are not restricted if a minimum size Contract was purchased. See Withdrawals.

 

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Increases in the Face Amount

 

After your first Contract anniversary, you may increase your amount of insurance by increasing the face amount of the Contract (which is also the guaranteed minimum death benefit). The increase will be subject to state approval and the underwriting requirements we determine.

 

The following conditions must be met:

 

 

(1)

you must ask for the change in a form that meets our needs;

 

(2)

the amount of the increase in the face amount must be at least $25,000;

 

(3)

you must prove to us that the insured is insurable for any increase;

 

(4)

the Contract must not be in default;

 

(5)

you must pay an appropriate premium at the time of the increase;

 

(6)

we must not be paying premiums into the Contract as a result of the insured’s total disability; and

 

(7)

if we ask you to do so, you must send us the Contract to be endorsed.

 

If we approve the change, we will send you new Contract Data pages showing the amount and effective date of the change and the recomputed charges, values and limitations. If the insured is not living on the effective date, the change will not take effect. Currently, no transaction charge is being made in connection with an increase in the face amount. However, we reserve the right to deny the increase if we change any of the bases on which benefits and charges are calculated for newly issued Contracts between the Contract Date and the date of your requested increase.

 

An increase in the face amount resulting in a total face amount under the Contract of at least $100,000 may, subject to strict underwriting requirements, render the Contract eligible for a Select Rating for a nonsmoker, which provides lower current cost of insurance rates.

 

Upon an increase in the face amount, we will recompute the Contract's Scheduled Premiums, deferred sales and transaction charges, tabular values, and monthly deductions from the Contract Fund. Requests for increases received within six months after the most recent Contract anniversary will be effective on your choice of the prior or the next Contract anniversary and is limited only by applicable state law. Requests for increases received more than six months after the most recent Contract anniversary will be effective on the following anniversary. A payment will be required on the date of increase, which will depend, in part, on the Contract anniversary you select for the recomputation. We will tell you the amount of the required payment. You should also note that an increase in the face amount may cause the Contract to be classified as a Modified Endowment Contract. See Tax Treatment of Contract Benefits. Therefore, before increasing the face amount, you should consult your own tax adviser and a Prudential representative.

 

If the increase is approved, the new insurance will take effect once we receive the proper forms, any medical evidence necessary to underwrite the additional insurance, and any additional premium amount needed for the increase.

 

In order to determine the sales load that will be charged after the increase and upon any subsequent lapse or surrender, the Contract is treated like two separate Contracts. A “base Contract” representing the Contract before the increase and an “incremental Contract” representing the increase viewed as a separate Contract. At the time of the increase, a certain portion of the Contract Fund may be allocated to the incremental Contract as a prepayment of premiums for purposes of the sales load limit. That portion is equal to the Guideline Annual Premium (“GAP”) of the incremental Contract divided by the GAP of the entire Contract after the increase. Premium payments made after the increase are also allocated between the base Contract and the incremental Contract for purposes of the sales load limit. A portion of each premium payment after the increase is allocated to the increase based on the GAP for the incremental Contract divided by the GAP for the entire Contract. A monthly deduction equal to 0.5% of the primary annual premium for each part of the Contract (i.e., the base and incremental Contracts, respectively) will be made until each part of the Contract has been in-force for five years, although we reserve the right to continue to make this deduction thereafter. Similarly, any amount of sales charges upon lapse or surrender, the application of the overall limitation upon sales load, and the contingent deferred sales load will be determined as if there were two separate Contracts rather than one. Thus, a Contract owner considering an increase in the face amount should be aware that such an increase will incur charges comparable to the purchase of a new Contract.

 

If you elect to increase the face amount of your Contract, you will receive a “free-look” right, which applies only to the increase in the face amount, not the entire Contract. The “free-look” right is comparable to the right afforded to the purchaser of a new Contract. You may exercise the “free-look” right within 45 days after execution of the application for the increase or within 10 days after you receive your Contract with the increase, whichever is later. Some states allow a longer period of time during which a Contract may be returned for a refund. See Canceling the Contract. Charges deducted after the increase will be recomputed as though no increase had been applied.

 

You may transfer the total amount attributable to the increase in the face amount from the variable investment options or the Real Property Account to the fixed rate option at any time within two years after an increase in the face amount.

 

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Decreases in the Face Amount

 

You have the option of decreasing the face amount of insurance of the Contract without withdrawing any cash surrender value. If a change in circumstances causes you to determine that your amount of insurance is greater than needed, a decrease will reduce your insurance protection and the monthly deductions for the cost of insurance.

 

The following conditions must be met:

 

 

(1)

the amount of the decrease must be at least $10,000;

 

(2)

the face amount of insurance after the decrease must be at least equal to the minimum face amount of insurance applicable to your Contract; and

 

(3)

if we ask you to do so, you must send us the Contract to be endorsed.

 

If we approve the decrease, we will send you new Contract Data pages showing the new face amount, tabular values, scheduled premiums, charges, values, and limitations. A Contract is no longer eligible for the Select Rating if the face amount is reduced below $100,000. Currently, a $15 transaction fee is deducted from the Contract Fund in connection with a decrease in the face amount of insurance. We will also reduce your Contract Fund value by deducting a proportionate part of the contingent deferred sales and surrender charges, if any.

 

We may decline a reduction if we determine it would cause the Contract to fail to qualify as "life insurance" for purposes of section 7702 of the Internal Revenue Code. See Tax Treatment of Contract Benefits.

 

It is important to note, however, that if the face amount is decreased there is a possibility that the Contract will be classified as a Modified Endowment Contract. See Tax Treatment of Contract Benefits. You should consult with your tax adviser and your Prudential representative before requesting any decrease in the face amount.

 

CONTRACT VALUES

 

Surrender of a Contract

 

You may surrender your Contract, in whole or in part, for its cash surrender value while the insured is living. A partial surrender involves splitting the Contract into two Contracts. One Contract is surrendered for its cash surrender value; the other is continued in-force on the same terms as the original Contract except that premiums and cash surrender values will be based on the new face amount. You will be given a new Contract document. The cash surrender value and the guaranteed minimum death benefit of the new Contract will be proportionately reduced. The reduction is based upon the face amount of insurance. The face amount of insurance must be at least equal to the minimum face amount applicable to the insured’s Contract. See REQUIREMENTS FOR ISSUANCE OF A CONTRACT. For reduced paid-up Contracts, both the death benefit and the guaranteed minimum death benefit will be reduced.

 

To surrender your Contract, we may require you to deliver or mail the following items, in Good Order to a Service Office: the Contract, a signed request for surrender, and any tax withholding information required under federal or state law. Generally, we will pay your Contract’s cash surrender value within seven days after all the documents required for such a payment are received in Good Order at a Service Office. Surrender of all or part of a Contract may have tax consequences. See Tax Treatment of Contract Benefits.

 

Additional requirements exist if you are exchanging your Contract for a new one at another insurance company. We specifically require a properly signed assignment to change ownership of your Contract to the new insurer and a request for surrender, signed by an authorized officer of the new insurer. The new insurer should submit these documents directly to Prudential by sending them in Good Order to our Customer Value Service Center in Minneapolis. Generally, we will pay your Contract’s cash surrender value to the new insurer within seven days after all the documents required for such a payment are received in Good Order at our Customer Value Service Center.

 

How a Contract’s Cash Surrender Value Will Vary

 

The cash surrender value (taking into account the deferred sales and transaction charges, if any) will be determined as of the end of the valuation period in which a surrender request is received in Good Order at the Customer Value Service Center. The Contract’s cash surrender value on any date will be the Contract Fund less any deferred sales and transaction charges, if any, and less any Contract debt. The Contract Fund value changes daily, reflecting:

 

(1)

increases or decreases in the value of the variable investment option[s];

(2)

increases or decreases in the value of the Real Property Account, if that option has been selected;

(3)

interest credited on any amounts allocated to the fixed rate option; and

(4)

the daily asset charge for mortality and expense risks assessed against the variable investment options.

 

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The Contract Fund value also changes to reflect the receipt of premium payments after any charges are deducted and the monthly deductions described under CHARGES AND EXPENSES. Upon request, we will tell you the cash surrender value of your Contract. It is possible that the cash surrender value of a Contract could decline to zero because of unfavorable investment performance or outstanding Contract debt, even if you continue to pay Scheduled Premiums when due.

 

Loans

 

You may borrow up to the “loan value” of your Contract, using the Contract as the only security for the loan. The loan value is equal to (1) 90% of an amount equal to the portion of the cash value attributable to the variable investment options; plus (2) 100% of an amount equal to the portion of the cash value attributable to the fixed rate option and to prior loan[s] supported by the fixed rate option, minus the portion of any charges attributable to the fixed rate option. The minimum loan amount you may borrow at any one time is $200, unless the proceeds are used to pay premiums on your Contract.

 

If you request a loan you may choose one of two interest rates. You may elect to have interest charges accrued daily at a fixed effective annual rate of 5.5%. Alternatively, you may elect a variable interest rate that changes from time to time. You may switch from the fixed to variable interest loan provision, or vice-versa, with our consent.

 

If you elect the variable loan interest rate provision, interest charged on any loan will accrue daily at an annual rate we determine at the start of each Contract year (instead of at the fixed 5.5% rate). This interest rate will not exceed the greatest of: (1) the “Published Monthly Average” for the calendar month ending two months before the calendar month of the Contract anniversary; (2) 5%; or (3) the rate permitted by law in the state of issue of the Contract. The “Published Monthly Average” means Moody's Corporate Bond Yield Average - Monthly Average Corporate, as published by Moody's Investors Service, Inc. or any successor to that service, or if that average is no longer published, a substantially similar average established by the insurance regulator where the Contract is issued. For example, the Published Monthly Average in 2008 ranged from 5.35% to 5.86%.

 

Interest payments on any loan are due at the end of each Contract year. If interest is not paid when due, it is added to the principal amount of the loan. The Contract debt is the principal amount of all outstanding loans plus any interest accrued to date. If at any time your Contract debt exceeds the Contract fund, we will notify you of its intent to terminate the Contract in 61 days, within which time you may repay all or enough of the loan to keep the Contract in-force. If the policy is terminated for excess Contract debt, it cannot be reinstated.

 

When a loan is made, an amount equal to the loan proceeds is transferred out of the applicable investment options. The reduction is generally made in the same proportions as the value that each investment option bears to the total value of the Contract.

 

While a fixed rate loan is outstanding, the amount that was transferred will continue to be treated as part of the Contract Fund, but it will be credited with the assumed rate of return of 4% rather than with the actual rate of return of the applicable investment options.

 

While a variable rate loan is outstanding, the amount that was transferred will continue to be treated as part of the Contract Fund, but it will be credited with a rate which is less than the variable loan interest rate for the Contract year by no more than 1%, rather than with the actual rate of return of the applicable investment options. Currently, we credit such amounts at a rate that is 1% less than the loan interest rate for the Contract year. If a loan remains outstanding at a time when we fixed a new rate, the new interest rate applies as of the next Contract anniversary.

 

A loan will not affect the amount of the premiums due. If the death benefit becomes payable while a loan is outstanding, or should the Contract be surrendered, any Contract debt will be deducted from the death benefit or the cash surrender value otherwise payable.

 

A loan will have a permanent effect on a Contract's cash surrender value and may have a permanent effect on the death benefit, even if the loan is fully repaid, because the investment results of the selected investment options will apply only to the amount remaining in those investment options. The longer the loan is outstanding, the greater the effect is likely to be. The effect could be favorable or unfavorable. If investment results are greater than the rate being credited upon the amount of the loan balance while the loan is outstanding, the Contract values will not increase as rapidly as they would have if no loan had been made. If investment results are below that rate, Contract values will be higher than they would have been had no loan been made.

 

Loan repayments are applied to reduce the total outstanding Contract debt, which is equal to the principal plus accrued interest. Interest accrues daily on the total outstanding Contract debt, and making a loan repayment will reduce the amount of interest accruing. If your repayment is received within 21 days of the Contract anniversary, it will be applied first to the accrued interest, then to capitalized interest, with any remainder applied to the original loan principal. Most

 

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repayments received prior to this time period will be applied first to capitalized interest, then to accrued interest, then to the original loan principal.

 

The amount of a loan repayment that is applied to the principal loan amount is first allocated based on the same proportion in which it was taken from the fixed rate option and variable investment options, including the Real Property Account. The variable portion is then applied proportionately to the applicable variable investment options, based on the balances in those options, at the time of the loan repayment.

 

If you fail to keep the Contract in-force, the amount of unpaid Contract debt will be treated as a distribution and will be immediately taxable to the extent of gain in the Contract. Reinstatement of the Contract after lapse will not eliminate the taxable income, which we are required to report to the Internal Revenue Service. See LAPSE AND REINSTATEMENT and Tax Treatment of Contract Benefits - Pre-Death Distributions.

 

Loans you take against the Contract are ordinarily treated as debt and are not considered distributions subject to tax. However, you should know that the Internal Revenue Service may take the position that the variable rate loan should be treated as a distribution for tax purposes because of the relatively low differential between the loan interest rate and the Contract’s crediting rate. Distributions are subject to income tax. Were the Internal Revenue Service to take this position, we would take reasonable steps to attempt to avoid this result, including modifying the Contract’s loan provisions, but cannot guarantee that such efforts would be successful.

 

Loans from Modified Endowment Contracts may be treated for tax purposes as distributions of income. See Tax Treatment of Contract Benefits.

 

Withdrawals

 

You may withdraw a portion of the Contract's cash surrender value without surrendering the Contract, subject to the following restrictions:

 

(a)

The Contract Fund after the withdrawal must not be less than the Tabular Contract Fund value. (A Table of Tabular Contract Fund Values is included in the Contract; the values increase with each year the Contract remains in-force.)

(b)

The amount withdrawn may not be larger than an amount sufficient to reduce the cash surrender value to zero.

(c)

The withdrawal amount must be at least $2,000 under a Form A Contract and at least $500 under a Form B Contract.

(d)

You may make no more than four withdrawals in each Contract year.

 

There is a transaction fee for each withdrawal equal to the lesser of: (a) $15 and; (b) 2% of the withdrawal amount. An amount withdrawn may not be repaid except as a scheduled or unscheduled premium subject to the applicable charges. Upon request, we will tell you how much you may withdraw.

 

Under a Form A Contract, the face amount of insurance is reduced by no more than the withdrawal amount. We will not permit a withdrawal if it will result in a new face amount of less than the minimum face amount shown under List of Contract Minimums in your Contract Data pages. If a withdrawal is made before the end of the 10th Contract year, the Contract Fund may also be reduced by a proportionate amount of any surrender charges, based on the percentage reduction in the face amount. Form A Contract owners who make a withdrawal will be sent replacement Contract pages showing the new face amount, Scheduled Premiums, maximum surrender charges, Tabular values, and monthly deductions.

 

It is important to note that if the face amount is decreased, there is a possibility that the Contract might be classified as a Modified Endowment Contract. Before making any withdrawal that causes a decrease in the face amount, you should consult with your tax adviser and your Prudential representative. See Tax Treatment of Contract Benefits.

 

Under a Form B Contract, the cash surrender value and the Contract Fund value are reduced by the amount of the withdrawal, and the death benefit is reduced accordingly. Neither the face amount of insurance nor the amount of Scheduled Premiums will change due to a withdrawal of excess cash surrender value under a Form B Contract. No surrender charges will be assessed for a withdrawal under a Form B Contract. Withdrawal of any portion of the cash surrender value increases the risk that the Contract Fund may be insufficient to provide Contract benefits. If such a withdrawal is followed by unfavorable investment experience, the Contract may go into default, even if Scheduled Premiums continue to be paid when due. Withdrawal of part of the cash surrender value may have tax consequences. See Tax Treatment of Contract Benefits.

 

Generally, we will pay any withdrawal amount within seven days after all the documents required for such a payment are received in Good Order at a Service Office. See When Proceeds Are Paid.

 

A Contract returned during the “free-look” period shall be deemed void from the beginning, and not considered a surrender or withdrawal.

 

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LAPSE AND REINSTATEMENT

 

If Scheduled Premiums are paid on or before each due date or received within 61 days after the Scheduled Premiums are due, (or missed premiums are paid later with interest) and there are no withdrawals, a Contract will remain in-force even if the investment results of that Contract's variable investment option[s] have been so unfavorable that the Contract Fund has decreased to zero or less.

 

In addition, even if a Scheduled Premium is not paid, the Contract will remain in-force as long as the Contract Fund on any Monthly date is equal to or greater than the Tabular Contract Fund Value on the next Monthly date. (A Table of Tabular Contract Fund Values is included in the Contract; the values increase with each year the Contract remains in-force.) This could occur because of such factors as favorable investment experience, deduction of less than the maximum permissible charges, or the previous payment of greater than Scheduled Premiums.

 

However, if a Scheduled Premium is not paid, and the Contract Fund is insufficient to keep the Contract in-force, the Contract will go into default. Should this happen, we will send the Contract owner a notice of default setting forth the payment necessary to keep the Contract in-force on a premium paying basis. This payment must be received at the Payment Office within the 61 day grace period after the notice of default is mailed or the Contract will lapse. A Contract that lapses with an outstanding Contract loan may have tax consequences. See Tax Treatment of Contract Benefits.

 

A Contract that has lapsed may be reinstated within five years after the date of default unless the Contract has been surrendered for its cash surrender value. To reinstate a lapsed Contract, we require renewed evidence of insurability, and submission of certain payments due under the Contract.

 

If a Contract does lapse, it may still provide some benefits. Those benefits are described under Options on Lapse, below.

 

Options on Lapse

 

If your Contract does lapse, it will still provide some benefits. You can receive the cash surrender value by making a request of Prudential’s prior to the end of the 61day grace period. You may also choose one of the three options described below for which no further premiums are payable.

 

1.

Fixed Extended Term Insurance. With two exceptions explained below, if you do not communicate at all with Prudential, life insurance coverage will continue for a length of time that depends on the cash surrender value on the date of default (which reflects the deduction of the deferred sales load, administrative charges, and Contract debt, if any), the amount of insurance, and the age and sex (except where unisex rates apply) of the insured. The insurance amount will be what it would have been on the date of default taking into account any Contract debt on that date. The amount will not change while the insurance stays in-force. This benefit is known as extended term insurance. If you request, we will tell you in writing how long the insurance will be in effect. Extended term insurance has a cash surrender value, but no loan value.

 

Contracts issued on the lives of certain insureds in high risk rating classes and Contracts issued in connection with tax qualified pension plans will include a statement that extended term insurance will not be provided. In those cases, variable reduced paid-up insurance will be the automatic benefit provided on lapse.

 

2.

Variable Reduced Paid-Up Insurance. Variable reduced paid-up insurance provides insurance coverage for the lifetime of the insured. The initial insurance amount will depend upon the cash surrender value on the date of default (which reflects the deduction of the deferred sales load, administrative charges, and Contract debt, if any), and the age and sex of the insured. This will be a new guaranteed minimum death benefit. Aside from this guarantee, the cash surrender value and the amount of insurance will vary with investment performance in the same manner as the paid-up Contract described earlier. Variable reduced paid-up insurance has a loan privilege identical to that available on premium paying Contracts. See Loans. Acquisition of reduced paid-up insurance may result in your Contract becoming a Modified Endowment Contract. See Tax Treatment of Contract Benefits.

 

As explained above, variable reduced paid-up insurance is the automatic benefit on lapse for Contracts issued on certain insureds. Owners of other Contracts who want variable reduced paid-up insurance must ask for it in writing, in a form that meets Prudential’s needs, within three months of the date of default; it will be available to such Contract owners only if the initial amount of variable reduced paid-up insurance would be at least $5,000. This minimum is not applicable to Contracts for which variable reduced paid-up insurance is the automatic benefit upon lapse.

 

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3.

Fixed Reduced Paid-Up Insurance. This insurance continues for the lifetime of the insured but at an insurance amount that is lower than that provided by fixed extended term insurance. It will increase in amount only if dividends are paid and it will decrease only if you take a Contract loan. Upon request, we will tell you what the amount of insurance will be. Fixed paid-up insurance has a cash surrender value and a loan value both of which will gradually increase in value. It is possible for this Contract to be classified as a Modified Endowment Contract if this option is exercised. See Tax Treatment of Contract Benefits.

 

TAXES

 

Tax Treatment of Contract Benefits

 

This summary provides general information on the federal income tax treatment of the Contract. It is not a complete statement of what the federal income taxes will be in all circumstances. It is based on current law and interpretations, which may change. It does not cover state taxes or other taxes. It is not intended as tax advice. You should consult your own tax adviser for complete information and advice.

 

Treatment as Life Insurance. The Contract must meet certain requirements to qualify as life insurance for tax purposes. These requirements include certain definitional tests and rules for diversification of the Contract's investments. For further information on the diversification requirements, see Taxation of the Fund in the statement of additional information for the Series Fund.

 

We believe we have taken adequate steps to insure that the Contract qualifies as life insurance for tax purposes. Generally speaking, this means that:

 

you will not be taxed on the growth of the funds in the Contract, unless you receive a distribution from the Contract, or if the Contract lapses or is surrendered, and

 

the Contract's death benefit will generally be income tax free to your beneficiary. However, your death benefit may be subject to estate taxes.

 

Although we believe that the Contract should qualify as life insurance for tax purposes, there are some uncertainties, particularly because the Secretary of Treasury has not yet issued permanent regulations that bear on this question. Accordingly, we reserve the right to make changes -- which will be applied uniformly to all Contract owners after advance written notice -- that we deem necessary to insure that the Contract will qualify as life insurance.

 

Pre-Death Distributions. The tax treatment of any distribution you receive before the insured's death depends on whether the Contract is classified as a Modified Endowment Contract.

 

Contracts Not Classified as Modified Endowment Contracts

 

 

If you surrender the Contract or allow it to lapse, you will be taxed on the amount you receive in excess of the premiums you paid less the untaxed portion of any prior withdrawals. For this purpose, you will be treated as receiving any portion of the cash surrender value used to repay Contract debt. In other words, you will immediately have taxable income to the extent of gain in the Contract. Reinstatement of the Contract after lapse will not eliminate the taxable income, which we are required to report to the Internal Revenue Service. The tax consequences of a surrender may differ if you take the proceeds under an income payment settlement option.

 

 

Generally, you will be taxed on a withdrawal to the extent the amount you receive exceeds the premiums you paid for the Contract less the untaxed portion of any prior withdrawals. However, under some limited circumstances, in the first 15 Contract years, all or a portion of a withdrawal may be taxed if the Contract Fund exceeds the total premiums paid less the untaxed portions of any prior withdrawals, even if total withdrawals do not exceed total premiums paid.

 

 

Extra premiums for optional benefits and riders generally do not count in computing the premiums paid for the Contract for the purposes of determining whether a withdrawal is taxable.

 

 

Loans you take against the Contract are ordinarily treated as debt and are not considered distributions subject to tax.

 

Modified Endowment Contracts

 

 

The rules change if the Contract is classified as a Modified Endowment Contract. The Contract could be classified as a Modified Endowment Contract if premiums substantially in excess of scheduled premiums are paid or a decrease in the face amount of insurance is made (or a rider removed). The addition of a rider or an

 

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increase in the face amount of insurance may also cause the Contract to be classified as a Modified Endowment Contract if a significant premium is paid in conjunction with an increase or the addition of a rider. We will notify you if a premium or a change in the face amount would cause the Contract to become a Modified Endowment Contract, and advise you of your options. You should first consult a tax adviser and your Prudential representative if you are contemplating any of these steps.

 

 

If the Contract is classified as a Modified Endowment Contract, then amounts you receive under the Contract before the insured's death, including loans and withdrawals, are included in income to the extent that the Contract Fund before surrender charges exceeds the premiums paid for the Contract increased by the amount of any loans previously included in income and reduced by any untaxed amounts previously received other than the amount of any loans excludible from income. An assignment of a Modified Endowment Contract is taxable in the same way. These rules also apply to pre-death distributions, including loans and assignments, made during the two-year period before the time that the Contract became a Modified Endowment Contract.

 

 

Any taxable income on pre-death distributions (including full surrenders) is subject to a penalty of 10 percent unless the amount is received on or after age 59½, on account of your becoming disabled or as a life annuity. It is presently unclear how the penalty tax provisions apply to Contracts owned by businesses.

 

 

All Modified Endowment Contracts issued by us to you during the same calendar year are treated as a single Contract for purposes of applying these rules.

 

Investor Control. Treasury Department regulations do not provide specific guidance concerning the extent to which you may direct your investment in the particular variable investment options without causing you, instead of Prudential, to be considered the owner of the underlying assets. Because of this uncertainty, we reserve the right to make such changes as we deem necessary to assure that the Contract qualifies as life insurance for tax purposes. Any such changes will apply uniformly to affected Contract owners and will be made with such notice to affected Contract owners as is feasible under the circumstances.

 

Withholding. You must affirmatively elect that no taxes be withheld from a pre-death distribution. Otherwise, the taxable portion of any amounts you receive will be subject to withholding. You are not permitted to elect out of withholding if you do not provide a social security number or other taxpayer identification number. You may be subject to penalties under the estimated tax payment rules if your withholding and estimated tax payments are insufficient to cover the tax due.

 

Other Tax Considerations. If you transfer or assign the Contract to someone else, there may be gift, estate and/or income tax consequences. If you transfer the Contract to a person two or more generations younger than you (or designate such a younger person as a beneficiary), there may be Generation Skipping Transfer tax consequences. Deductions for interest paid or accrued on Contract debt or on other loans that are incurred or continued to purchase or carry the Contract may be denied. Your individual situation or that of your beneficiary will determine the federal estate taxes and the state and local estate, inheritance and other taxes due if you or the insured dies.

 

Business-Owned Life Insurance. If a business, rather than an individual, is the owner of the Contract, there are some additional rules. Business Contract owners generally cannot deduct premium payments. Business Contract owners generally cannot take tax deductions for interest on Contract debt paid or accrued after October 13, 1995. An exception permits the deduction of interest on policy loans on Contracts for up to 20 key persons. The interest deduction for Contract debt on these loans is limited to a prescribed interest rate and a maximum aggregate loan amount of $50,000 per key insured person. The corporate alternative minimum tax also applies to business-owned life insurance. This is an indirect tax on additions to the Contract Fund or death benefits received under business-owned life insurance policies.

 

For business-owned life insurance coverage issued after August 17, 2006, death benefits will generally be taxable as ordinary income to the extent it exceeds cost basis. Life insurance death benefits will continue to be generally income tax free if, prior to policy issuance, the employer provided a prescribed notice to the proposed insured/employee, obtained the employee's consent to the life insurance, and one of the following requirements is met: (a) the insured was an employee at any time during the 12-month period prior to his or her death; (b) the insured was a director or highly compensated employee or individual (as defined in the Code) at the time the policy was issued; or (c) the death benefits are paid to the insured's heirs or his or her designated beneficiaries (other than the employer), either directly as a death benefit or received from the purchase of an equity (or capital or profits) interest in the applicable policyholder. Annual reporting and record keeping requirements will apply to employers maintaining such business-owned life insurance.

 

Tax-Qualified Pension Plans

 

You may have acquired the Contract to fund a pension plan that qualifies for tax favored treatment under the Internal Revenue Code. We issued such Contracts with a minimum face amount of $10,000, and with increases and decreases in the face amount in minimum increments of $10,000. The monthly charge for anticipated mortality costs and the

 

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scheduled premiums is the same for male and female insureds of a particular age and underwriting classification, as required for insurance and annuity contracts sold to tax-qualified pension plans. We provided you with illustrations showing premiums and charges if you wished to fund a tax-qualified pension plan. Only certain riders are available for a Contract issued in connection with a tax-qualified pension plan. Fixed reduced paid up insurance, variable reduced paid-up insurance, and payment of the cash surrender value are the only options on lapse available for Contracts issued in connection with a tax-qualified pension plan. See LAPSE AND REINSTATEMENT. Finally, a Contract issued in connection with a tax-qualified pension plan may not invest in the Real Property Account.

 

You should consult a qualified tax advisor before purchasing a Contract in connection with a tax-qualified pension plan to confirm, among other things, the suitability of the Contract for your particular plan.

 

DISTRIBUTION AND COMPENSATION

 

Pruco Securities, LLC (“Prusec”), an indirect wholly-owned subsidiary of Prudential Financial, acts as the principal underwriter of the Contract. Prusec, organized on September 22, 2003 under New Jersey law, is registered as a broker and dealer under the Securities Exchange Act of 1934 and is a registered member of the Financial Industry Regulatory Authority, Inc. (“FINRA”). (Prusec is a successor company to Pruco Securities Corporation, established on February 22, 1971.) Prusec’s principal business address is 751 Broad Street, Newark, New Jersey 07102-3777. Prusec serves as principal underwriter of the variable insurance Contracts issued by Prudential. The Contract was sold by registered representatives of Prusec who are also our appointed insurance agents under state insurance law. The Contract may have also been sold through other broker-dealers authorized by Prusec and applicable law to do so. Prusec received gross distribution revenue for its variable life insurance products of $80,907,743 in 2008, $90,865,268 in 2007, and $91,615,140 in 2006. Prusec passes through the gross distribution revenue it receives to broker-dealers for their sales and does not retain any portion of it in return for its services as distributor for the policies. However, Prusec does retain a portion of compensation it receives with respect to sales by its representatives. Prusec retained compensation of $15,852,244 in 2008, $16,112,532 in 2007, and $11,528,129 in 2006. Prusec offers the Contract on a continuous basis.

 

On July 1, 2003, Prudential Financial combined its retail securities brokerage and clearing operations with those of Wachovia Corporation (“Wachovia”) and formed Wachovia Securities Financial Holdings, LLC (“Wachovia Securities”), a joint venture headquartered in Richmond, Virginia. Currently, Prudential Financial has a minority ownership interest in the joint venture.

 

Wachovia Securities is a national retail brokerage organization providing securities brokerage and financial advisory services to individuals and businesses. Wachovia and Wachovia Securities are key distribution partners for certain products of Prudential Financial affiliates, including life insurance, mutual funds, and individual annuities that are distributed through their financial advisors, bank channel and independent channel. In addition, Prudential Financial is a service provider to the managed account platform and certain wrap-fee programs offered by Wachovia Securities.

 

Wachovia and Wells Fargo & Company (“Wells Fargo”) announced that they entered into an Agreement and Plan of Merger, pursuant to which Wachovia would be merged into Wells Fargo, which would succeed to Wachovia’s rights and obligations under the joint venture arrangements. As reported by Wells Fargo, this merger was completed on December 31, 2008.

 

Compensation (commissions, overrides, and any expense reimbursement allowance) is paid to broker-dealers that are registered under the Exchange Act and/or entities that are exempt from such registration (“firms”) according to one or more schedules. The individual representative will receive all or a portion of the compensation, depending on the practice of the firm. Compensation is based on the scheduled premium. The scheduled Premium will vary by issue age, sex, smoker/non smoker, substandard rating class, and any riders selected by the Contract owner.

 

Broker-dealers will receive compensation of up to 105% of premiums received in the first 12 months following the Contract Date on total premiums received since issue up to the first Scheduled Premium, and up to 8% on premiums received up to the next nine Scheduled Premiums. Moreover, broker-dealers will receive compensation of up to 6% on premiums received to the extent that premiums exceed the first 10 Scheduled Premiums in years two through five, up to 4.5% on premiums received in years six through 10, and up to 3% beyond 10 years.

 

If the face amount is increased, broker-dealers will receive compensation of up to 105% on premiums received up to the first Scheduled Premium for the increase received in the first 12 months following the effective date of the increase and up to 8% of premiums received up to the next nine Scheduled Premiums for the increase. Moreover, broker-dealers will receive compensation of up to 6% on premiums received following the effective date of the increase to the extent that premiums exceed the first 10 Scheduled Premiums in years two through five, up to 4.5% on premiums received in years six through 10, and up to 3% beyond 10 years.

 

Prusec registered representatives who sell the Contract are also our life insurance agents, and may be eligible for various cash bonuses and insurance benefits and non-cash compensation programs that we or our affiliates offer such

 

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as conferences, trips, prizes and awards, subject to applicable regulatory requirements. In some circumstances and to the extent permitted by applicable regulatory requirements, we may also reimburse certain sales and marketing expenses.

 

In addition, in an effort to promote the sale of our variable products (which may include the placement of our Contracts on a preferred or recommended company or product list and/or access to a broker-dealer’s registered representatives), we or Prusec may enter into compensation arrangements with certain broker-dealer firms authorized by Prusec to sell the Contract, or branches of such firms, with respect to certain or all registered representatives of such firms under which such firms may receive separate compensation or reimbursement for, among other things, training of sales personnel, marketing and/or administrative and/or other services they provide to us or our affiliates.

 

To the extent permitted by applicable rules, laws, and regulations, Prusec may pay or allow other promotional incentives or payments in the form of cash or non-cash compensation. These arrangements may not be offered to all firms, and the terms of such arrangements may differ between firms. You should note that firms and individual registered representatives and branch managers within some firms participating in one of these compensation arrangements might receive greater compensation for selling the Contract than for selling a different Contract that is not eligible for these compensation arrangements.

 

While compensation is generally taken into account as an expense in considering the charges applicable to a variable life insurance product, any such compensation will be paid by us, and will not result in any additional charge to you or to the separate account. Your registered representative can provide you with more information about the compensation arrangements that apply upon the sale of the Contract.

 

In addition, we or our affiliates may provide such compensation, payments and/or incentives to firms arising out of the marketing, sale and/or servicing of variable annuities or life insurance offered by different Prudential business units.

 

LEGAL PROCEEDINGS

 

Prudential is subject to legal and regulatory actions in the ordinary course of its businesses. Pending legal and regulatory actions include proceedings specific to Prudential and proceedings generally applicable to business practices in the industries in which Prudential operates, including in both cases businesses that have either been divested or placed in wind-down status. Prudential is subject to class action lawsuits and individual lawsuits involving a variety of issues, including sales practices, underwriting practices, claims payment and procedures, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, return of premiums or excessive premium charges and breaching fiduciary duties to customers. In its investment-related operations, Prudential is subject to litigation involving commercial disputes with counterparties or partners and class action lawsuits and other litigation alleging, among other things, that Prudential has made improper or inadequate disclosures in connection with the sale of assets and annuity and investment products or charged excessive or impermissible fees on these products, recommended unsuitable products to customers, mishandled customer accounts or breached fiduciary duties to customers. Prudential is also subject to litigation arising out of its general business activities, such as its investments, contracts, leases and labor and employment relationships, including claims of discrimination and harassment and could be exposed to claims or litigation concerning certain business or process patents. Regulatory authorities from time to time make inquiries and conduct investigations and examinations relating particularly to Prudential and its businesses and products. In addition, Prudential, along with other participants in the businesses in which Prudential engages, may be subject from time to time to investigations, examinations and inquiries, in some cases industry-wide, concerning issues or matters upon which such regulators have determined to focus. In some of Prudential’s pending legal and regulatory actions, parties are seeking large and/or indeterminate amounts, including punitive or exemplary damages. The outcome of a litigation or regulatory matter, and the amount or range of potential loss at any particular time, is often inherently uncertain. The following is a summary of certain pending proceedings.

In November 2008, a purported nationwide class action, Garcia v. Prudential Insurance Company of America, was filed in the United States District Court for the District of New Jersey. The complaint, which is brought on behalf of beneficiaries of Prudential policies whose death benefits were placed in retained asset accounts, alleges that by investing the death benefits in these accounts, Prudential wrongfully delayed payment and improperly retained undisclosed profits. It alleges claims of breach of the contract of insurance, breach of contract with regard to the retained asset accounts, breach of fiduciary duty and unjust enrichment, and seeks an accounting, disgorgement, injunctive relief, attorneys’ fees and prejudgment and post-judgment interest.

From November 2002 to March 2007, eleven separate complaints were filed and amended against Prudential Financial, Prudential and the law firm of Leeds Morelli & Brown in New Jersey state court. The cases were consolidated for pre-trial proceedings in New Jersey Superior Court, Essex County and captioned Lederman v. Prudential Financial Inc., et al. The complaints allege that an alternative dispute resolution agreement entered into among Prudential, over 350

 

33

 

 


claimants who are current and former employees, and Leeds Morelli & Brown (the law firm representing the claimants) was illegal and that Prudential conspired with Leeds Morelli & Brown to commit fraud, malpractice, breach of contract, and violate racketeering laws by advancing legal fees to the law firm with the purpose of limiting Prudential’s liability to the claimants. In 2004, the Superior Court sealed these lawsuits and compelled them to arbitration. In May 2006, the Appellate Division reversed the trial court’s decisions, held that the cases were improperly sealed, and should be heard in court rather than arbitrated. In March 2007, the court granted plaintiffs’ motion to amend the complaint to add over 200 additional plaintiffs, and a claim under the New Jersey discrimination law, but denied without prejudice plaintiffs’ motion for a joint trial on liability issues. In June 2007, Prudential Financial and Prudential moved to dismiss the complaint. In November 2007, the court granted the motion, in part, and dismissed the commercial bribery and conspiracy to commit malpractice claims, and denied the motion with respect to other claims. In December 2007, the Prudential defendants answered the complaints and asserted counterclaims against each plaintiff for breach of contract and cross-claims against Leeds Morelli & Brown for breach of contract and the covenant of good faith and fair dealing, fraudulent inducement, indemnification and contribution. In January 2008, plaintiffs filed a demand pursuant to New Jersey law stating that they were seeking damages in the amount of $6.5 billion.

 

Prudential, along with a number of other insurance companies, received formal requests for information from the State of New York Attorney General’s Office (“NYAG”), the Securities and Exchange Commission (“SEC”), the Connecticut Attorney General’s Office, the Massachusetts Office of the Attorney General, the Department of Labor, the United States Attorney for the Southern District of California, the District Attorney of the County of San Diego, and various state insurance departments relating to payments to insurance intermediaries and certain other practices that may be viewed as anti-competitive. In December 2006, Prudential reached a resolution of the NYAG investigation. Under the terms of the settlement, Prudential paid a $2.5 million penalty and established a $16.5 million fund for policyholders, adopted business reforms and agreed, among other things, to continue to cooperate with the NYAG in any litigation, ongoing investigations or other proceedings. Prudential also settled the litigation brought by the California Department of Insurance and agreed to business reforms and disclosures as to group insurance contracts insuring customers or residents in California and to pay certain costs of investigation. In addition, in April 2008, Prudential reached a settlement of proceedings regarding these matters with District Attorneys of San Diego, Los Angeles and Alameda counties. Pursuant to this settlement, Prudential paid $350,000 in penalties and costs. These matters are also the subject of litigation brought by private plaintiffs, including purported class actions that have been consolidated in the multidistrict litigation in the United States District Court for the District of New Jersey, In re Employee Benefit Insurance Brokerage Antitrust Litigation. In August and September 2007, the court dismissed the anti-trust and RICO claims. In January and February 2008, the court dismissed the ERISA claims with prejudice and the state law claims without prejudice. Plaintiffs have appealed to the Third Circuit Court of Appeals.

In April 2005, Prudential voluntarily commenced a review of the accounting for its reinsurance arrangements to confirm that it complied with applicable accounting rules. This review included an inventory and examination of current and past arrangements, including those relating to wind-down and divested businesses and discontinued operations. Subsequent to commencing this voluntary review, Prudential received a formal request from the Connecticut Attorney General for information regarding its participation in reinsurance transactions generally and a formal request from the SEC for information regarding certain reinsurance contracts entered into with a single counterparty since 1997 as well as specific contracts entered into with that counterparty in the years 1997 through 2002 relating to Prudential’s property and casualty insurance operations that were sold in 2003. In August 2008, Prudential Financial, Inc. (“PFI”) reached a resolution of the investigations by the SEC. The SEC’s complaint in this matter, filed on August 6, 2008 in the United States District Court for the District of New Jersey, alleges, among other things, that Prudential’s property and casualty insurance operations improperly accounted for the reinsurance contracts resulting in overstatements of PFI’s consolidated results for the years 2000, 2001 and 2002 in certain of PFI’s reports filed with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in violation of the financial reporting, books-and-records and internal control provisions of the Exchange Act. In connection with the settlement, PFI has consented to entry of a final judgment enjoining it from future violations of specified provisions of the Exchange Act and related rules and regulations of the SEC thereunder. The settlement, in which PFI neither admits nor denies the allegations in the complaint, resolves the SEC’s investigations into these matters without the imposition of any monetary fine or penalty. The settlement documents include allegations that may result in litigation, adverse publicity and other potentially adverse impacts to PFI’s businesses.

 

In October 2006, a purported class action lawsuit, Bouder v. Prudential Financial, Inc. and Prudential Insurance Company of America, was filed in the United States District Court for the District of New Jersey, claiming that Prudential failed to pay overtime to insurance agents who were registered representatives in violation of federal and Pennsylvania law, and that improper deductions were made from these agents’ wages in violation of state law. The complaint seeks back overtime pay and statutory damages, recovery of improper deductions, interest and attorneys’ fees. In December 2007, plaintiffs moved to certify the class. In March 2008, the court granted plaintiffs’ motion to conditionally certify a

 

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nationwide class. In March 2008, a purported nationwide class action lawsuit was filed with the United States District Court for the Southern District of California, Wang v. Prudential Financial, Inc. and Prudential Insurance, on behalf of agents who sold Prudential’s financial products. The complaint alleges claims that Prudential failed to pay overtime and provide other benefits in violation of federal and California law and seeks compensatory and punitive damages in unspecified amounts. In September 2008, the Wang matter was transferred to the United States District Court for the District of New Jersey and consolidated with the Bouder lawsuit. In January 2009, an amended complaint was filed in the consolidated matter which adds wage claims based on the laws of thirteen additional states.

 

In October 2007, Prudential Retirement Insurance and Annuity Co. (“PRIAC”), filed an action in the United States District Court for the Southern District of New York, Prudential Retirement Insurance & Annuity Co. v. State Street Global Advisors, in PRIAC’s fiduciary capacity and on behalf of certain defined benefit and defined contribution plan clients of PRIAC, against an unaffiliated asset manager, State Street Global Advisors (“SSgA”) and SSgA’s affiliate, State Street Bank and Trust Company (“State Street”). This action seeks, among other relief, restitution of certain losses attributable to certain investment funds sold by SSgA as to which PRIAC believes SSgA employed investment strategies and practices that were misrepresented by SSgA and failed to exercise the standard of care of a prudent investment manager. PRIAC also intends to vigorously pursue any other available remedies against SSgA and State Street in respect of this matter. Given the unusual circumstances surrounding the management of these SSgA funds and in order to protect the interests of the affected plans and their participants while PRIAC pursues these remedies, PRIAC implemented a process under which affected plan clients that authorized PRIAC to proceed on their behalf have received payments from funds provided by PRIAC for the losses referred to above. Prudential’s financial statements for the year ended December 31, 2007 include a pre-tax charge of $82 million in “Change in net unrealized capital gains (loss)”, reflecting these payments to plan clients and certain related costs. In September 2008, the court denied State Street defendants’ motion to dismiss the claims for damages and other relief under Section 502(a)(2) of ERISA but dismissed the claim for equitable relief under Section 502(a)(3) of ERISA. In October 2008, defendants answered the complaint and asserted counterclaims for contribution and indemnification, defamation and violations of Massachusetts’ unfair and deceptive trade practices law.

 

Prudential’s litigation and regulatory matters are subject to many uncertainties, and given their complexity and scope, their outcomes cannot be predicted. It is possible that results of operations or cash flow in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters depending, in part, upon the results of operations or cash flow for such period. In light of the unpredictability of Prudential’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on its financial position. Management believes, however, that, based on information currently known to it, the ultimate outcome of all pending litigation and regulatory matters, after consideration of applicable reserves and rights to indemnification is not likely to have a material adverse effect on Prudential’s financial position.

 

ADDITIONAL INFORMATION

 

Prudential has filed a registration statement with the SEC under the Securities Act of 1933, relating to the offering described in this prospectus. This prospectus does not include all the information set forth in the registration statement. Certain portions have been omitted pursuant to the rules and regulations of the SEC. The omitted information may, however, be obtained from the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, or by telephoning (202) 551-5850, upon payment of a prescribed fee.

 

To reduce costs, we now generally send only a single copy of prospectuses and shareholder reports to each household ("householding"), in lieu of sending a copy to each Contract owner that resides in the household. You should be aware that you can revoke or "opt out" of householding at any time by calling 1-877-778-5008.

 

You may contact us directly for further information. Our address and telephone number are on the inside front cover of this prospectus.

 

 

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DEFINITIONS OF SPECIAL TERMS

USED IN THIS PROSPECTUS

 

attained age - The insured’s age on the Contract date plus the number of Contract years since then.

 

cash surrender value - The amount payable to the Contract owner upon surrender of the Contract. It is equal to the Contract Fund minus any Contract debt and minus any applicable surrender charges.

 

Contract - The individual variable life insurance Contract described in this prospectus.

 

Contract anniversary - The same date as the Contract date in each later year.

 

Contract date - The date the Contract is issued, as specified in the Contract.

 

Contract debt - The principal amount of all outstanding loans plus any interest accrued thereon.

 

Contract Fund - The total amount at any time credited to the Contract. On any date, it is equal to the sum of the amounts in all variable investment options, the Real Property Account, the fixed rate option, and the principal amount of any Contract debt plus any interest earned thereon.

 

Contract owner - You. Unless a different owner is named in the application, the owner of the Contract is the insured.

 

Contract year - A year that starts on the Contract date or on a Contract anniversary.

 

death benefit - The amount payable upon the death of the insured before the deduction of any outstanding Contract debt.

 

face amount - The amount[s] of life insurance as shown in the Contract's schedule of face amounts.

fixed rate option - An investment option under which interest is accrued daily at a rate that we declare periodically, but not less than an effective annual rate of 4%.

 

Good Order - An instruction received at our Service Office utilizing such forms, signatures, and dating as we require, which is sufficiently clear and complete and for which we do not need to exercise any discretion to follow such instructions.

 

 

 

 

 

issue age - The insured's age as of the Contract date.

 

Monthly date - The Contract date and the same date in each subsequent month.

 

The Prudential Insurance Company of America - Prudential us, we, our. The company offering the Contract.

 

Scheduled Premiums - Your Contract sets forth a Scheduled Premium which is payable annually, semi-annually, quarterly or monthly. If you make this payment on time, it may prevent your policy from lapsing due to unfavorable investment experience.

 

separate account - Amounts under the Contract that are allocated to the variable investment options held by us in a separate account called the Prudential Variable Appreciable Account (the "Account"). The separate account is set apart from all of the general assets of The Prudential Insurance Company of America.

 

subaccount - An investment division of the Account, the assets of which are invested in the shares of the corresponding portfolio of the Series Fund.

 

valuation period - The period of time from one determination of the value of the amount invested in a variable investment option to the next. Such determinations are made when the net asset values of the portfolios of the Series Fund are calculated, which would be as of the close of regular trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time.)

 

variable investment option - Any of the portfolios available in the Series Fund and/or The Prudential Variable Contract Real Property Account.

 

you - The owner of the Contract.

 

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To Learn More About Prudential’s Variable Appreciable Life

 

To learn more about The Prudential Variable Appreciable Life Contract, you can request a copy of the Statement of Additional Information (“SAI”), dated May 1, 2009, or view it online at www.prudential.com. See the Table of Contents of the SAI below.

 

TABLE OF CONTENTS OF THE

STATEMENT OF ADDITIONAL INFORMATION

 

GENERAL INFORMATION AND HISTORY

1

 

Description of The Prudential Insurance Company of America

1

 

Control of The Prudential Insurance Company of America

1

 

State Regulation

1

 

Records

1

 

Services and Third Party Administration Agreements

1

 

INITIAL PREMIUM PROCESSING

2

 

ADDITIONAL INFORMATION ABOUT OPERATION OF CONTRACTS

2

 

Legal Considerations Relating to Sex-Distinct Premiums and Benefits

2

 

Sales to Persons 14 Years of Age or Younger

3

 

How a Form A (Level) Contract's Death Benefit Will Vary

3

 

How a Form B (Variable) Contract's Death Benefit Will Vary

3

 

Paying Premiums by Payroll Deduction

4

 

Reports to Contract Owners

4

 

UNDERWRITING PROCEDURES

4

 

ADDITIONAL INFORMATION ABOUT CHARGES

5

 

Reduction of Charges for Concurrent Sales to Several Individuals

5

 

ADDITIONAL INFORMATION ABOUT CONTRACTS IN DEFAULT

5

 

DISTRIBUTION AND COMPENSATION

5

 

EXPERTS

6

 

PERFORMANCE DATA

6

 

Average Annual Total Return

6

 

Non-Standard Total Return

6

 

Money Market Subaccount Yield

6

 

FINANCIAL STATEMENTS

7

 

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The SAI is legally a part of this prospectus, both of which are filed with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, Registration No. 33-20000. All of these filings can be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the public reference room may be obtained by calling the Commission at (202) 551-5850. The SEC also maintains a Web site (http://www.sec.gov) that contains the The Prudential Variable Appreciable Life SAI, material incorporated by reference, and other information about Prudential. Copies of these materials can also be obtained, upon payment of duplicating fees, from the SEC’s Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549.

 

You can call us at 1-800-778-2255 to ask us questions, request information about the Contract, and obtain copies of the Statement of Additional Information, personalized illustrations, or other documents. You can also view the Statement of Additional Information located with the prospectus at www.prudential.com, or request a copy by writing to us at:

 

The Prudential Insurance Company of America

751 Broad Street

Newark, New Jersey 07102-3777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Company Act of 1940, Registration No. 811-5466.

 

 

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART B:

 

INFORMATION REQUIRED IN THE STATEMENT OF ADDITIONAL INFORMATION

 

 

STATEMENT OF ADDITIONAL INFORMATION

The Prudential’s Variable Appreciable Life Insurance

The Prudential Insurance Company of America

 

Variable Appreciable Life ®

Insurance Contracts

 

This Statement of Additional Information is not a prospectus. Please review the Variable Appreciable Life ® prospectus (the “prospectus”), which contains information concerning the Contracts described above. You may obtain a copy of the prospectus without charge by calling us at 1-800-778-2255. You can also view the Statement of Additional Information located with the prospectus at www.prudential.com, or request a copy by writing to us.

 

The defined terms used in this Statement of Additional Information are as defined in the prospectus.

 

The Prudential Insurance Company of America

751 Broad Street

Newark, New Jersey 07102-3777

 

The Date of this Statement of Additional Information and of the related prospectus is May 1, 2009.

 

TABLE OF CONTENTS

Page

GENERAL INFORMATION AND HISTORY

1

 

Description of The Prudential Insurance Company of America

1

 

Control of The Prudential Insurance Company of America

1

 

State Regulation

1

 

Records

1

 

Services and Third Party Administration Agreements

1

 

INITIAL PREMIUM PROCESSING

2

 

ADDITIONAL INFORMATION ABOUT OPERATION OF CONTRACTS

2

 

Legal Considerations Relating to Sex-Distinct Premiums and Benefits

2

 

Sales to Persons 14 Years of Age or Younger

3

 

How a Form A (Level) Contract's Death Benefit Will Vary

3

 

How a Form B (Variable) Contract's Death Benefit Will Vary

3

 

Paying Premiums by Payroll Deduction

4

 

Reports to Contract Owners

4

 

UNDERWRITING PROCEDURES

4

 

ADDITIONAL INFORMATION ABOUT CHARGES

5

 

Reduction of Charges for Concurrent Sales to Several Individuals

5

 

ADDITIONAL INFORMATION ABOUT CONTRACTS IN DEFAULT

5

 

DISTRIBUTION AND COMPENSATION

5

 

EXPERTS

6

 

PERFORMANCE DATA

6

 

Average Annual Total Return

6

 

Non-Standard Total Return

6

 

Money Market Subaccount Yield

6

 

FINANCIAL STATEMENTS

7

 


GENERAL INFORMATION AND HISTORY

 

Description of The Prudential Insurance Company of America

 

The Prudential Insurance Company of America (“Prudential”, “us”, “we”, or “our”) is a New Jersey stock life insurance company that has been doing business since October 13, 1875. Prudential is licensed to sell life insurance and annuities in the District of Columbia, Guam, U. S. Virgin Islands, and in all states.

 

Control of The Prudential Insurance Company of America

 

Prudential is an indirect wholly-owned subsidiary of Prudential Financial, Inc. (“Prudential Financial”), a New Jersey insurance holding company. Prudential Financial exercises significant influence over the operations and capital structure of Prudential. However, neither Prudential Financial nor any other related company has any legal responsibility to pay amounts that Prudential may owe under the Contract. The principal Executive Office each of Prudential and Prudential Financial is Prudential Plaza, 751 Broad Street, Newark, New Jersey 07102-3777.

 

State Regulation

 

Prudential is subject to regulation and supervision by the Department of Insurance of the State of New Jersey, which periodically examines its operations and financial condition. It is also subject to the insurance laws and regulations of all jurisdictions in which it is authorized to do business.

 

Prudential is required to submit annual statements of its operations, including financial statements, to the insurance departments of the various jurisdictions in which it does business to determine solvency and compliance with local insurance laws and regulations.

 

In addition to the annual statements referred to above, Prudential is required to file with New Jersey and other jurisdictions, a separate statement with respect to the operations of all of its variable contract accounts, in a form promulgated by the National Association of Insurance Commissioners.

 

Records

 

We maintain all records and accounts relating to the Account at our principal Executive Office. As presently required by the Investment Company Act of 1940, as amended, and regulations promulgated thereunder, reports containing such information as may be required under the Act or by any other applicable law or regulation will be sent to you semi-annually at your last address known to us.

 

Services and Third Party Administration Agreements

 

Prudential, Pruco Life, and Pruco Life of New Jersey have entered into an agreement under which Prudential furnishes Pruco Life and Pruco Life of New Jersey the same administrative support services that it provides in the operation of its own business with regard to the payment of death claim proceeds by way of Prudential’s Alliance Account, Prudential’s retained asset settlement option. Pruco Life and Pruco Life of New Jersey transfer to Prudential an amount equal to the amount of the death claim, and Prudential establishes a retained asset settlement option for the beneficiary within its General Account and makes all payments necessary to satisfy such obligations. As soon as the Pruco Life or Pruco Life of New Jersey death claim is processed, the beneficiaries are furnished with an information kit that describes the settlement option and a check book on which they may write checks. Pruco Life and Pruco Life of New Jersey pay no fees or other compensation to Prudential under this agreement.

 

Open Solutions BIS, Inc. is the Administrator of the Prudential Alliance Account Settlement Option, a contractual obligation of The Prudential Insurance Company of America, located at 751 Broad Street, Newark, NJ 07102-3777. Check clearing is provided by JPMorgan Chase Bank, N.A. and processing support is provided by Integrated Payment Systems, Inc. Alliance Account balances are not insured by the Federal Deposit Insurance Corporation (FDIC). Open Solutions BIS, Inc., JPMorgan Chase Bank, N.A., and Integrated Payment Systems, Inc. are not Prudential Financial companies.

 

The Prudential Insurance Company of America (“Prudential”), Pruco Life Insurance Company (“Pruco Life”), a subsidiary of Prudential, and Pruco Life Insurance Company of New Jersey (“Pruco Life of New Jersey”), a subsidiary of Pruco Life, jointly entered into an administrative agreement with First Tennessee Bank National Association (“First

 

1

 


Express”), in which First Express provides remittance processing expertise and research and development capabilities providing Prudential, Pruco Life, and Pruco Life of New Jersey with the benefits of remittance processing, improved quality, increased productivity, decreased costs, and improved service levels. Fees for such services vary monthly, depending on the number of remittances and processing methods used for varying types of remittance. Under this Agreement, First Express received $3,014,514 in 2008, $3,144,953 in 2007, and $3,339,870 in 2006 from Prudential, Pruco Life, and Pruco Life of New Jersey for services rendered. First Tennessee Bank National Association’s principal business address is 165 Madison Avenue, Memphis, Tennessee 38103.

 

INITIAL PREMIUM PROCESSING

 

In general, the invested portion of the minimum initial premium will be placed in the Contract Fund as of the later of the Contract Date and the date we receive the premium.

 

Upon receipt of a request for life insurance from a prospective Contract owner, we will follow certain insurance underwriting (i.e. evaluation of risk) procedures designed to determine whether the proposed insured is insurable. The process may involve such verification procedures as medical examinations and may require that further information be provided by the proposed insured before a determination can be made. A Contract cannot be issued until this underwriting procedure has been completed.

 

These processing procedures are designed to provide temporary life insurance coverage to every prospective owner who pays the minimum initial premium at the time the request for coverage is submitted, subject to the terms of the Limited Insurance Agreement. Since a Contract cannot be issued until after the underwriting process has been completed, we will provide temporary life insurance coverage through use of the Limited Insurance Agreement. This coverage is for the total death benefit applied for, up to the maximum described by the Limited Insurance Agreement.

 

The Contract Date is the date we determine the proposed insured’s issue age. It represents the first day of the Contract year and the commencement of the suicide and contestable periods for purposes of the initial face amount of insurance.

 

If the minimum initial premium is received on or before the Contract is issued, the premium will be applied as of the Contract date. If an unusual delay is encountered in the underwriting procedure (for example, if a request for further information is not met promptly), the Contract Date will be 21 days prior to the date on which the Contract is physically issued. If a medical examination is required, the Contract Date will ordinarily be the date the examination is completed, subject to the same qualification as that noted above.

 

If the initial premium paid is less than the minimum initial premium, the Contract Date will be determined as described above. Upon receipt of the balance of the minimum initial premium, the total premiums received will be applied as of the date that the minimum initial premium was satisfied.

 

If the minimum initial premium is received after the Contract Date, it will be applied as of the date of receipt.

 

There is one principal variation from the foregoing procedure. If permitted by the insurance laws of the state in which the Contract is issued, the Contract may be backdated up to six months.

 

In situations where the Contract Date precedes the date that the minimum initial premium is received, charges due prior to the initial premium receipt date will be deducted from the initial premium.

 

ADDITIONAL INFORMATION ABOUT

OPERATION OF CONTRACTS

 

Legal Considerations Relating to Sex-Distinct Premiums and Benefits

 

The Contract generally employs mortality tables that distinguish between males and females. Thus, premiums and benefits differ under Contracts issued on males and females of the same age. However, in those states that have adopted regulations prohibiting sex-distinct insurance rates, premiums and cost of insurance charges will be based on male rates, whether the insureds are male or female. In addition, employers and employee organizations considering purchase of a Contract should consult their legal advisers to determine whether purchase of a Contract based on sex-distinct actuarial tables is consistent with Title VII of the Civil Rights Act of 1964 or other applicable law.

 

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Sales to Persons 14 Years of Age or Younger

 

Both Form A and Form B Contracts covering insureds of 14 years of age or less contain a special provision providing that the face amount of insurance will automatically be increased on the Contract anniversary after the insured's 21st birthday to 150% of the initial face amount, so long as the Contract is not then in default. The death benefit will also usually increase, at the same time, by the same dollar amount. In certain circumstances, however, it may increase by a smaller amount. See How a Form A (Level) Contract's Death Benefit Will Vary, and How a Form B (Variable) Contract’s Death Benefit Will Vary, below. This increase in death benefit will also generally increase the net amount at risk under the Contract, thus increasing the mortality charge deducted each month from amounts invested under the Contract. The automatic increase in the face amount of insurance may affect the level of future premium payments you can make without causing the Contract to be classified as a Modified Endowment Contract. A Contract owner should consult with a Prudential representative before making unscheduled premium payments.

 

How a Form A (Level) Contract's Death Benefit Will Vary

 

There are two forms of the Contract, Form A and Form B. The death benefit under a Form B Contract varies with investment performance while the death benefit under a Form A Contract does not, unless it must be increased to satisfy tax requirements.

 

Under a Form A Contract, the guaranteed minimum death benefit is equal to the face amount of insurance. However, should the death benefit become payable while a Contract loan is outstanding, the debt will be deducted from the death benefit. If the Contract is kept in-force for several years and if investment performance is reasonably favorable, the Contract Fund may grow to the point where we will increase the death benefit in order to ensure that the Contract will satisfy the Internal Revenue Code's definition of life insurance. Thus, the death benefit under a Form A Contract will always be the greater of:

 

(1)

the guaranteed minimum death benefit; and

(2)

the Contract Fund divided by the “net single premium” per $1 of death benefit at the insured's attained age on that date.

 

The latter provision ensures that the Contract will always have a death benefit large enough so that the Contract will be treated as life insurance for tax purposes under current law. The net single premium is used only in the calculation of the death benefit, not for premium payment purposes. The following is a table of illustrative net single premiums for $1 of death benefit under Contracts issued on insureds in the preferred rating class.

 



----------------- -------------- ----------------------------       --------------- ------------- ----------------------------
                                    Increase in Insurance                                            Increase in Insurance
 Male Attained     Net Single           Amount Per $1                   Female       Net Single          Amount Per $1
      Age            Premium        Increase in Contract               Attained       Premium        Increase in Contract
                                            Fund                         Age                                 Fund
----------------- -------------- ----------------------------       --------------- ------------- ----------------------------
----------------- -------------- ----------------------------       --------------- ------------- ----------------------------

       5             .09151                $10.93                          5           .07919               $12.63
       25            .17000                $ 5.88                         25           .15112               $ 6.62
       35            .23700                $ 4.22                         35           .21127               $ 4.73
       55            .45209                $ 2.21                         55           .40090               $ 2.49
       65            .59468                $ 1.68                         65           .53639               $ 1.86
----------------- -------------- ----------------------------       --------------- ------------- ----------------------------




 

Whenever the death benefit is determined in this way, Prudential reserves the right to limit unscheduled premiums to a total of $10,000 in any Contract year and to refuse to accept premium payments that would immediately result in more than a dollar-for-dollar increase in the death benefit.

 

How a Form B (Variable) Contract's Death Benefit Will Vary

 

Under a Form B Contract, the death benefit will vary with investment experience. Assuming no withdrawals, the death benefit will be equal to the face amount of insurance plus the amount (if any) by which the Contract Fund value exceeds the applicable “Tabular Contract Fund Value” for the Contract (subject to an exception described below under which the death benefit is higher). Each Contract contains a table that sets forth the Tabular Contract Fund Value as of the end of each of the first 20 years of the Contract. The Tabular Contract Fund Value for each Contract year is an amount that is slightly less than the Contract Fund value that would result as of the end of such year if:

 

3

 


(1)

you paid only Scheduled Premiums;

(2)

you paid Scheduled Premiums when due;

(3)

your selected investment options earned a net return at a uniform rate of 4% per year;

(4)

we deducted full mortality charges based upon the 1980 CSO Table;

(5)

we deducted maximum sales load and expense charges; and

(6)

there was no Contract debt.

 

Thus, under a Form B Contract with no withdrawals, the death benefit will equal the face amount if the Contract Fund equals the Tabular Contract Fund Value. If the Contract Fund value is a given amount greater than the Tabular Contract Fund Value, the death benefit will be the face amount plus that excess amount. This may happen if:

 

(1)

investment results are greater than a 4% net return;

(2)

payments are made that are more than the Scheduled Premiums; or

(3)

smaller than maximum charges are assessed.

 

The death benefit under a Form B Contract will not fall below the initial face amount stated in the Contract if, due to investment results less favorable than a 4% net return, the Contract Fund value is less than the Tabular Contract Fund Value. Any unfavorable investment experience must first be offset by favorable performance or additional payments that bring the Contract Fund up to the Tabular level before favorable investment results or additional payments will increase the death benefit. Again, the death benefit will reflect a deduction for the amount of any Contract debt.

 

As is the case under a Form A Contract, the Contract Fund of a Form B Contract could grow to the point where it is necessary to increase the death benefit in order to ensure that the Contract will satisfy the Internal Revenue Code's definition of life insurance. Thus, the death benefit under a Form B Contract will always be the greater of:

 

(1)

the face amount plus the Contract Fund minus the Tabular Contract Fund Value;

(2)

the guaranteed minimum death benefit; and

(3)

the Contract Fund divided by the net single premium per $1 of death benefit at the insured's attained age on that date.

 

You may also increase or decrease the face amount of your Contract, subject to certain conditions.

 

Paying Premiums by Payroll Deduction

 

In addition to the annual, semi-annual, quarterly and monthly premium payment modes, a payroll budget method of paying premiums may also be available under certain Contracts. The employer generally deducts the necessary amounts from employee paychecks and sends premium payments to Prudential monthly. Some Contracts sold using the payroll budget method may be eligible for a guaranteed issue program under which the initial minimum death benefit is $25,000 and the Contracts are based on unisex mortality tables. Any Prudential representative authorized to sell this Contract can provide further details concerning the payroll budget method of paying premiums.

 

Reports to Contract Owners

 

Once each year, we will send you a statement that provides certain information pertinent to your Contract. This statement will detail values, transactions made, and specific Contract data that apply only to your particular Contract.

 

You will also be sent annual and semi-annual reports of the Funds showing the financial condition of the portfolios and the investments held in each portfolio.

 

UNDERWRITING PROCEDURES

 

When you express interest in obtaining insurance from us, you may apply for coverage in one of two ways, via a paper application or through our Worksheet process. When using the paper application, a registered representative completes a full application and submits it to our underwriting unit to commence the underwriting process. A registered representative may be an agent/broker who is a representative of Pruco Securities, LLC (“Prusec”), a broker dealer affiliate of Prudential, or in some cases, a broker dealer not directly affiliated with Prudential.

 

When using the Worksheet process, a registered representative typically collects enough applicant information to start the underwriting process. The representative will submit the information to our New Business Department to begin processing, which includes scheduling a direct call to the applicant to obtain medical information, and to confirm other data.

 

4

 


 

Regardless of which of the two underwriting processes is followed, once we receive the necessary information, which may include doctors’ statements, medical examinations from physicians or paramedical vendors, test results, and other information, we will make a decision regarding our willingness to accept the risk, and the price at which we will accept the risk. We will issue the Contract when the risk has been accepted and priced.

 

ADDITIONAL INFORMATION ABOUT CHARGES

 

Reduction of Charges for Concurrent Sales to Several Individuals

 

Prudential may reduce the sales charges and/or other charges on individual Contracts sold to members of a class of associated individuals, or to a trustee, employer or other entity representing such a class, where it is expected that such multiple sales will result in savings of sales or administrative expenses. Prudential determines both the eligibility for such reduced charges, as well as the amount of such reductions, by considering the following factors:

 

(1)

the number of individuals;

(2)

the total amount of premium payments expected to be received from these Contracts;

(3)

the nature of the association between these individuals, and the expected persistency of the individual Contracts;

(4)

the purpose for which the individual Contracts are purchased and whether that purpose makes it likely that expenses will be reduced; and

(5)

any other circumstances which Prudential believes to be relevant in determining whether reduced sales or administrative expenses may be expected.

 

Some of the reductions in charges for these sales may be contractually guaranteed; other reductions may be withdrawn or modified by Prudential on a uniform basis. Prudential's reductions in charges for these sales will not be unfairly discriminatory to the interests of any individual Contract owners.

 

ADDITIONAL INFORMATION ABOUT CONTRACTS IN DEFAULT

 

When your Contract is in default, you may not change the way in which subsequent premiums are allocated or increase the amount of your insurance by increasing the face amount of the Contract.

 

DISTRIBUTION AND COMPENSATION

 

In an effort to promote the sale of our variable products (which may include the placement of our Contracts on a preferred or recommended company or product list and/or access to a broker-dealer’s registered representatives), we or Prusec may enter into compensation arrangements with certain broker-dealer firms authorized by Prusec to sell the Contract, or branches of such firms, with respect to certain or all registered representatives of such firms under which such firms may receive separate compensation or reimbursement for, among other things, training of sales personnel, marketing and / or administrative and / or other services they provide to us or our affiliates. To the extent permitted by applicable rules, laws, and regulations, Prusec may pay or allow other promotional incentives or payments in the form of cash or non-cash compensation. These arrangements may not be offered to all firms, and the terms of such arrangements may differ between firms. You should note that firms and individual registered representatives and branch managers within some firms participating in one of these compensation arrangements might receive greater compensation for selling the Contract than for selling a different Contract that is not eligible for these compensation arrangements.

 

Prudential makes these promotional payments directly to or in sponsorship of the firm (or its affiliated broker/dealers). Examples of arrangements under which such payments may be made currently include, but are not limited to, sponsorships, conferences (national, regional and top producer), speaker fees, promotional items and reimbursements to firms for marketing activities or services paid by the firms and/or their individual representatives. The amount of these payments varies widely because some payments may encompass only a single event, such as a conference, and others have a much broader scope.

 

Your registered representative can provide you with more information about the compensation arrangements that apply upon the sale of the Contract.

 

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EXPERTS

 

The consolidated financial statements of The Prudential Insurance Company of America and its subsidiaries as of December 31, 2008 and 2007 and for each of the three years in the period ended December 31, 2008 and the financial statements of The Prudential Variable Appreciable Account as of December 31, 2008 and for each of the two years in the period then ended included in this Statement of Additional Information have been so included in reliance on the reports of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. PricewaterhouseCoopers LLP's principal business address is 300 Madison Avenue, New York, New York, 10017.

 

Actuarial matters included in this Statement of Additional Information have been examined by Nancy D. Davis, MAAA, FSA, Vice President and Actuary of Prudential.

 

PERFORMANCE DATA

 

Average Annual Total Return

 

The Account may advertise average annual total return information calculated according to a formula prescribed by the U.S. Securities and Exchange Commission (“SEC”). Average annual total return shows the average annual percentage increase, or decrease, in the value of a hypothetical contribution allocated to a Subaccount from the beginning to the end of each specified period of time. The SEC standardized version of this performance information is based on an assumed contribution of $1,000 allocated to a Subaccount at the beginning of each period and full withdrawal of the value of that amount at the end of each specified period. This method of calculating performance further assumes that (i) a $1,000 contribution was allocated to a Subaccount and (ii) no transfers or additional payments were made. Premium taxes are not included in the term “charges” for purposes of this calculation. Average annual total return is calculated by finding the average annual compounded rates of return of a hypothetical contribution that would compare the Unit Value on the first day of a specified period to the ending redeemable value at the end of the period according to the following formula:

 

P(1+T)n = ERV

 

Where T equals average annual total return, where ERV (the ending redeemable value) is the value at the end of the applicable period of a hypothetical contribution of $1,000 made at the beginning of the applicable period, where P equals a hypothetical contribution of $1,000, and where n equals the number of years.

 

Non-Standard Total Return

 

In addition to the standardized average annual total return information described above, we may present total return information computed on bases different from that standardized method. The Account may also present aggregate total return figures for various periods, reflecting the cumulative change in value of an investment in the Account for the specified period.

 

For the periods prior to the date the Subaccounts commenced operations, non-standard performance information for the Contracts will be calculated based on the performance of the Funds and the assumption that the Subaccounts were in existence for the same periods as those indicated for the Funds, with the level of Contract charges that were in effect at the inception of the Subaccounts (this is referred to as “hypothetical performance data”). Standard and non-standard average annual return calculations include the mortality and expense risk charge under the Contract, but do not reflect other life insurance contract charges (sales, administration, and actual cost of insurance) nor any applicable surrender or lapse charges, which would significantly lower the returns. Information stated for any given period does not indicate or represent future performance.

 

Money Market Subaccount Yield

 

The “total return” figures for the Money Market Subaccount are calculated using historical investment returns of the Money Market Portfolio of The Prudential Series Fund, Inc. as if Prudential’s Variable Appreciable Life had been investing in that subaccount during a specified period. Fees associated with the Series Fund are reflected; however, all fees, expenses, and charges associated with Prudential’s Variable Appreciable Life are not reflected.

 

6

 


The yield is computed by determining the net change, exclusive of capital changes, in the value of a hypothetical pre-existing account having a balance of one accumulation unit of the Money Market Subaccount at the beginning of a specified period, subtracting a hypothetical charge reflecting deductions from Contract owner accounts, and dividing the difference by the value of the subaccount at the beginning of the base period to obtain the base period return, and then multiplying the base period return by (365/7), with the resulting figure carried to the nearest ten-thousandth of 1%. The effective yield is obtained by taking the base period return, adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result, according to the following formula: Effective Yield ([base period return + 1] 365/7)-1.

 

The yields on amounts held in the Money Market Subaccount will fluctuate on a daily basis. Therefore, the stated yields for any given period are not an indication of future yields.

 

FINANCIAL STATEMENTS

 

The financial statements of the Account should be distinguished from the consolidated financial statements of Prudential and its subsidiaries, which should be considered only as bearing upon the ability of Prudential to meet its obligations under the Contracts.

 

 

 

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FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
 
STATEMENT OF NET ASSETS
December 31, 2008
                         
   
SUBACCOUNTS
 
   
Prudential
Money
Market
Portfolio
   
Prudential
Diversified
Bond
Portfolio
   
Prudential
Equity
Portfolio
   
Prudential
Flexible
Managed
Portfolio
 
ASSETS
                       
Investment in the portfolios, at value
  $ 169,450,309     $ 180,269,053     $ 992,251,103     $ 885,349,065  
Net Assets
  $ 169,450,309     $ 180,269,053     $ 992,251,103     $ 885,349,065  
                                 
NET ASSETS, representing:
                               
Accumulation units
  $ 169,450,309     $ 180,269,053     $ 992,251,103     $ 885,349,065  
    $ 169,450,309     $ 180,269,053     $ 992,251,103     $ 885,349,065  
                                 
Units outstanding
    81,375,566       55,975,690       242,180,217       259,855,363  
                                 
Portfolio shares held
    16,945,031       18,227,407       60,503,116       71,746,278  
                                 
Portfolio net asset value per share
  $ 10.00     $ 9.89     $ 16.40     $ 12.34  
Investment in portfolio shares, at cost
  $ 169,450,309     $ 197,628,280     $ 1,399,734,288     $ 1,154,595,403  
 
STATEMENT OF OPERATIONS
For the year ended December 31, 2008
                         
   
SUBACCOUNTS
 
   
Prudential
Money
Market
Portfolio
   
Prudential
Diversified
Bond
Portfolio
   
Prudential
Equity
Portfolio
   
Prudential
Flexible
Managed
Portfolio
 
INVESTMENT INCOME
                       
Dividend income
  $ 4,411,624     $ 9,763,174     $ 20,153,670     $ 31,839,609  
                                 
EXPENSES
                               
Charges to contract owners for assuming mortality risk and expense risk
    1,184,181       1,364,555       10,177,635       8,065,496  
                                 
NET INVESTMENT INCOME (LOSS)
    3,227,443       8,398,619       9,976,035       23,774,113  
                                 
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
                               
Capital gains distributions received
    0       1,749,161       149,751,855       86,420,880  
Realized gain (loss) on shares redeemed
    0       (782,927 )     (19,978,984 )     (11,470,439 )
Net change in unrealized gain (loss) on investments
    0       (17,336,348 )     (774,578,580 )     (405,063,368 )
                                 
NET GAIN (LOSS) ON INVESTMENTS
    0       (16,370,114 )     (644,805,709 )     (330,112,927 )
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
  $ 3,227,443     $ (7,971,495 )   $ (634,829,674 )   $ (306,338,814 )
 
The accompanying notes are an integral part of these financial statements.
 
A1

 
 
   
SUBACCOUNTS (Continued)
 
   
Prudential
Conservative
Balanced
Portfolio
   
Prudential
High Yield
Bond
Portfolio
   
Prudential
Stock
Index
Portfolio
   
Prudential
Value
Portfolio
   
Prudential
Natural
Resources
Portfolio
   
Prudential
Global
Portfolio
 
ASSETS
                                   
Investment in the portfolios, at value
  $ 765,814,269     $ 83,041,374     $ 751,969,519     $ 378,840,491     $ 364,440,135     $ 222,956,608  
Net Assets
  $ 765,814,269     $ 83,041,374     $ 751,969,519     $ 378,840,491     $ 364,440,135     $ 222,956,608  
                                                 
NET ASSETS, representing:
                                               
Accumulation units
  $ 765,814,269     $ 83,041,374     $ 751,969,519     $ 378,840,491     $ 364,440,135     $ 222,956,608  
    $ 765,814,269     $ 83,041,374     $ 751,969,519     $ 378,840,491     $ 364,440,135     $ 222,956,608  
                                                 
Units outstanding
    258,075,423       33,216,519       178,098,891       85,822,383       36,897,557       141,237,662  
                                                 
Portfolio shares held
    60,347,854       23,003,151       33,039,083       34,884,023       15,377,221       17,058,654  
                                                 
Portfolio net asset value per share
  $ 12.69     $ 3.61     $ 22.76     $ 10.86     $ 23.70     $ 13.07  
Investment in portfolio shares, at cost
  $ 874,662,101     $ 130,670,414     $ 768,344,166     $ 617,968,692     $ 422,070,837     $ 304,286,117  
 
   
SUBACCOUNTS (Continued)
 
   
Prudential
Conservative
Balanced
Portfolio
   
Prudential
High Yield
Bond
Portfolio
   
Prudential
Stock
Index
Portfolio
   
Prudential
Value
Portfolio
   
Prudential
Natural
Resources
Portfolio
   
Prudential
Global
Portfolio
 
INVESTMENT INCOME
                                   
Dividend income
  $ 31,110,802     $ 8,987,992     $ 22,789,582     $ 10,523,299     $ 5,604,698     $ 5,832,851  
                                                 
EXPENSES
                                               
Charges to contract owners for assuming mortality risk and expense risk
    6,781,413       752,336       7,017,284       4,014,856       5,154,617       2,170,093  
                                                 
NET INVESTMENT INCOME (LOSS)
    24,329,389       8,235,656       15,772,298       6,508,443       450,081       3,662,758  
                                                 
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
                                               
Capital gains distributions received
    0       0       0       120,603,221       94,363,450       19,689,917  
Realized gain (loss) on shares redeemed
    (4,536,192 )     (5,686,317 )     (9,022,009 )     (16,700,292 )     (24,889,475 )     (10,340,272 )
Net change in unrealized gain (loss) on investments
    (239,509,293 )     (27,593,311 )     (458,647,848 )     (399,737,218 )     (502,074,282 )     (186,705,473 )
                                                 
NET GAIN (LOSS) ON INVESTMENTS
    (244,045,485 )     (33,279,628 )     (467,669,857 )     (295,834,289 )     (432,600,307 )     (177,355,828 )
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
  $ (219,716,096 )   $ (25,043,972 )   $ (451,897,559 )   $ (289,325,846 )   $ (432,150,226 )   $ (173,693,070 )
                                                 
 
The accompanying notes are an integral part of these financial statements.
 
A2

 

FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
 
STATEMENT OF NET ASSETS
December 31, 2008
                         
   
SUBACCOUNTS
 
   
Prudential
Government
Income
Portfolio
   
Prudential
Jennison
Portfolio
   
Prudential
Small
Capitalization
Stock Portfolio
   
T. Rowe Price
International
Stock Portfolio
 
ASSETS
                       
Investment in the portfolios, at value
  $ 106,338,276     $ 315,808,606     $ 199,585,408     $ 1,048,666  
Net Assets
  $ 106,338,276     $ 315,808,606     $ 199,585,408     $ 1,048,666  
                                 
NET ASSETS, representing:
                               
Accumulation units
  $ 106,338,276     $ 315,808,606     $ 199,585,408     $ 1,048,666  
    $ 106,338,276     $ 315,808,606     $ 199,585,408     $ 1,048,666  
                                 
Units outstanding
    32,797,415       174,340,538       76,027,275       1,273,890  
                                 
Portfolio shares held
    9,327,919       21,498,203       15,941,326       127,265  
Portfolio net asset value per share
  $ 11.40     $ 14.69     $ 12.52     $ 8.24  
Investment in portfolio shares, at cost
  $ 106,585,923     $ 452,250,362     $ 245,197,872     $ 1,518,963  
                                 
 
STATEMENT OF OPERATIONS
For the year ended December 31, 2008
                         
   
SUBACCOUNTS
 
   
Prudential
Government
Income
Portfolio
   
Prudential
Jennison
Portfolio
   
Prudential
Small
Capitalization
Stock Portfolio
   
T. Rowe Price
International
Stock Portfolio
 
INVESTMENT INCOME
                       
Dividend income
  $ 4,135,504     $ 2,257,870     $ 3,040,321     $ 33,124  
                                 
EXPENSES
                               
Charges to contract owners for assuming mortality risk and expense risk
    740,915       3,029,939       1,832,424       9,838  
                                 
NET INVESTMENT INCOME (LOSS)
    3,394,589       (772,069 )     1,207,897       23,286  
                                 
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
                               
Capital gains distributions received
    0       0       40,583,580       63,965  
Realized gain (loss) on shares redeemed
    (278,832 )     (17,947,035 )     (5,526,654 )     (60,550 )
Net change in unrealized gain (loss) on investments
    492,995       (176,022,532 )     (130,820,087 )     (1,043,275 )
                                 
NET GAIN (LOSS) ON INVESTMENTS
    214,163       (193,969,567 )     (95,763,161 )     (1,039,860 )
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
  $ 3,608,752     $ (194,741,636 )   $ (94,555,264 )   $ (1,016,574 )
 
The accompanying notes are an integral part of these financial statements.
 
A3

 
 
   
SUBACCOUNTS (Continued)
 
   
Janus Aspen
Large Cap
Growth
Portfolio —
Institutional
Shares
   
MFS Growth
Series
   
American
Century VP
Value Fund
   
Prudential SP
T. Rowe Price
Large-Cap
Growth
Portfolio
   
Prudential SP
Davis Value
Portfolio
   
Prudential SP
Small Cap
Value Portfolio
 
ASSETS
                                   
Investment in the portfolios, at value
  $ 4,540,757     $ 1,831,074     $ 1,946,390     $ 0     $ 1,008,850     $ 1,847,018  
Net Assets
  $ 4,540,757     $ 1,831,074     $ 1,946,390     $ 0     $ 1,008,850     $ 1,847,018  
                                                 
NET ASSETS, representing:
                                               
Accumulation units
  $ 4,540,757     $ 1,831,074     $ 1,946,390     $ 0     $ 1,008,850     $ 1,847,018  
    $ 4,540,757     $ 1,831,074     $ 1,946,390     $ 0     $ 1,008,850     $ 1,847,018  
                                                 
Units outstanding
    4,399,958       1,614,163       1,219,313       0       1,069,099       1,926,678  
                                                 
Portfolio shares held
    287,208       117,226       415,895       0       150,126       243,029  
Portfolio net asset value per share
  $ 15.81     $ 15.62     $ 4.68     $ 0.00     $ 6.72     $ 7.60  
Investment in portfolio shares, at cost
  $ 5,600,499     $ 1,989,666     $ 2,711,217     $ 0     $ 1,238,888     $ 2,655,414  
 
   
SUBACCOUNTS (Continued)
 
   
Janus Aspen
Large Cap
Growth
Portfolio —
Institutional
Shares
   
MFS Growth
Series
   
American
Century VP
Value Fund
   
Prudential SP
T. Rowe Price
Large-Cap
Growth
Portfolio
   
Prudential SP
Davis Value
Portfolio
   
Prudential SP
Small Cap
Value Portfolio
 
INVESTMENT INCOME
                                   
Dividend income
  $ 45,120     $ 5,827     $ 57,926     $ 0     $ 18,444     $ 25,921  
                                                 
EXPENSES
                                               
Charges to contract owners for assuming mortality risk and expense risk
    36,042       15,338       14,149       743       10,724       20,340  
                                                 
NET INVESTMENT INCOME (LOSS)
    9,078       (9,511 )     43,777       (743 )     7,720       5,581  
                                                 
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
                                               
Capital gains distributions received
    0       0       307,529       0       78,558       248,105  
Realized gain (loss) on shares redeemed
    (192,882 )     (66,716 )     (82,180 )     5,352       (23,346 )     (63,167 )
Net change in unrealized gain (loss) on investments
    (2,782,375 )     (1,048,500 )     (991,675 )     (41,929 )     (709,443 )     (1,021,352 )
                                                 
NET GAIN (LOSS) ON INVESTMENTS
    (2,975,257 )     (1,115,216 )     (766,326 )     (36,577 )     (654,231 )     (836,414 )
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
  $ (2,966,179 )   $ (1,124,727 )   $ (722,549 )   $ (37,320 )   $ (646,511 )   $ (830,833 )
 
The accompanying notes are an integral part of these financial statements.
 
A4

 

FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
 
STATEMENT OF NET ASSETS
December 31, 2008
                         
   
SUBACCOUNTS
 
   
Prudential SP
Small-Cap
Growth
Portfolio
   
Prudential SP
PIMCO Total
Return Portfolio
   
Prudential SP
PIMCO High
Yield Portfolio
   
Janus Aspen
Large Cap
Growth
Portfolio —
Service Shares
 
ASSETS
                       
Investment in the portfolios, at value
  $ 0     $ 5,697,724     $ 1,095,188     $ 273,454  
Net Assets
  $ 0     $ 5,697,724     $ 1,095,188     $ 273,454  
                                 
NET ASSETS, representing:
                               
Accumulation units
  $ 0     $ 5,697,724     $ 1,095,188     $ 273,454  
    $ 0     $ 5,697,724     $ 1,095,188     $ 273,454  
                                 
Units outstanding
    0       4,375,090       1,002,511       339,441  
                                 
Portfolio shares held
    0       515,165       163,461       17,540  
Portfolio net asset value per share
  $ 0.00     $ 11.06     $ 6.70     $ 15.59  
Investment in portfolio shares, at cost
  $ 0.00     $ 5,738,333     $ 1,532,024     $ 367,172  
 
STATEMENT OF OPERATIONS
For the year ended December 31, 2008
                         
   
SUBACCOUNTS
 
   
Prudential SP
Small-Cap
Growth
Portfolio
   
Prudential SP
PIMCO Total
Return Portfolio
   
Prudential SP
PIMCO High
Yield Portfolio
   
Janus Aspen
Large Cap
Growth
Portfolio —
Service Shares
 
                         
INVESTMENT INCOME
                       
Dividend income
  $ 0     $ 333,325     $ 113,394     $ 2,133  
                                 
EXPENSES
                               
Charges to contract owners for assuming mortality risk and expense risk
    3,869       58,812       11,979       4,814  
                                 
NET INVESTMENT INCOME (LOSS)
    (3,869 )     274,513       101,415       (2,681 )
                                 
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
                               
Capital gains distributions received
    0       0       1,441       0  
Realized gain (loss) on shares redeemed
    451,012       (100,212 )     (12,081 )     (7,537 )
Net change in unrealized gain (loss) on investments
    (536,820 )     (304,434 )     (481,083 )     (192,572 )
                                 
NET GAIN (LOSS) ON INVESTMENTS
    (85,808 )     (404,646 )     (491,723 )     (200,109 )
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
  $ (89,677 )   $ (130,133 )   $ (390,308 )   $ (202,790 )
 
The accompanying notes are an integral part of these financial statements.
 
A5

 
 
   
SUBACCOUNTS (Continued)
 
   
Prudential SP
Large Cap
Value Portfolio
   
Prudential SP
AIM Core Equity
Portfolio
   
Prudential SP
Strategic Partners
Focused Growth
Portfolio
   
Prudential SP
Mid Cap Growth
Portfolio
   
SP Prudential
U.S. Emerging
Growth Portfolio
   
Prudential SP
Conservative
Asset Allocation
Portfolio
 
ASSETS
                                   
Investment in the portfolios, at value
  $ 0     $ 0     $ 368,603     $ 300,628     $ 2,184,437     $ 692,918  
Net Assets
  $ 0     $ 0     $ 368,603     $ 300,628     $ 2,184,437     $ 692,918  
                                                 
NET ASSETS, representing:
                                               
Accumulation units
  $ 0     $ 0     $ 368,603     $ 300,628     $ 2,184,437     $ 692,918  
    $ 0     $ 0     $ 368,603     $ 300,628     $ 2,184,437     $ 692,918  
                                                 
Units outstanding
    0       0       423,174       399,006       1,826,909       603,180  
                                                 
Portfolio shares held
    0       0       77,114       87,647       476,951       77,944  
Portfolio net asset value per share
  $ 0.00     $ 0.00     $ 4.78     $ 3.43     $ 4.58     $ 8.89  
Investment in portfolio shares, at cost
  $ 0.00     $ 0     $ 552,702     $ 453,832     $ 3,215,763     $ 810,566  
 
   
SUBACCOUNTS (Continued)
 
   
Prudential SP
Large Cap
Value Portfolio
   
Prudential SP
AIM Core Equity
Portfolio
   
Prudential SP
Strategic Partners
Focused Growth
Portfolio
   
Prudential SP
Mid Cap Growth
Portfolio
   
SP Prudential
U.S. Emerging
Growth Portfolio
   
Prudential SP
Conservative
Asset Allocation
Portfolio
 
INVESTMENT INCOME
                                   
Dividend income
  $ 0     $ 0     $ 0     $ 0     $ 10,056     $ 12,441  
                                                 
EXPENSES
                                               
Charges to contract owners for assuming mortality risk and expense risk
    2,081       512       3,945       3,871       29,591       4,239  
                                                 
NET INVESTMENT INCOME (LOSS)
    (2,081 )     (512 )     (3,945 )     (3,871 )     (19,535 )     8,202  
                                                 
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
                                               
Capital gains distributions received
    0       0       34,124       112,474       561,566       20,664  
Realized gain (loss) on shares redeemed
    (23,027 )     36,982       (24,399 )     (119,887 )     (275,422 )     (7,378 )
Net change in unrealized gain (loss) on investments
    (3,455 )     (39,101 )     (225,338 )     (280,106 )     (1,668,732 )     (182,412 )
                                                 
NET GAIN (LOSS) ON INVESTMENTS
    (26,482 )     (2,119 )     (215,613 )     (287,519 )     (1,382,588 )     (169,126 )
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
  $ (28,563 )   $ (2,631 )   $ (219,558 )   $ (291,390 )   $ (1,402,123 )   $ (160,924 )
 
The accompanying notes are an integral part of these financial statements.
 
A6

 

FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
 
STATEMENT OF NET ASSETS
December 31, 2008
                         
   
SUBACCOUNTS
 
   
Prudential SP
Balanced Asset
Allocation
Portfolio
   
Prudential SP
Growth Asset
Allocation
Portfolio
   
Prudential SP
Aggressive
Growth Asset
Allocation
Portfolio
   
Prudential SP
International
Growth Portfolio
 
ASSETS
                       
Investment in the portfolios, at value
  $ 579,838     $ 1,076,437     $ 992,127     $ 2,399,800  
Net Assets
  $ 579,838     $ 1,076,437     $ 992,127     $ 2,399,800  
                                 
NET ASSETS, representing:
                               
Accumulation units
  $ 579,838     $ 1,076,437     $ 992,127     $ 2,399,800  
    $ 579,838     $ 1,076,437     $ 992,127     $ 2,399,800  
                                 
Units outstanding
    532,492       1,070,883       1,077,056       2,405,251  
                                 
Portfolio shares held
    74,148       163,097       178,120       695,594  
Portfolio net asset value per share
  $ 7.82     $ 6.60     $ 5.57     $ 3.45  
Investment in portfolio shares, at cost
  $ 739,402     $ 1,592,863     $ 1,379,729     $ 3,920,026  
 
STATEMENT OF OPERATIONS
For the year ended December 31, 2008
                         
   
SUBACCOUNTS
 
   
Prudential SP
Balanced Asset
Allocation
Portfolio
   
Prudential SP
Growth Asset
Allocation
Portfolio
   
Prudential SP
Aggressive
Growth Asset
Allocation
Portfolio
   
Prudential SP
International
Growth Portfolio
 
INVESTMENT INCOME
                       
Dividend income
  $ 17,182     $ 24,582     $ 15,235     $ 56,710  
                                 
EXPENSES
                               
Charges to contract owners for assuming mortality risk and expense risk
    4,958       10,774       12,272       31,842  
                                 
NET INVESTMENT INCOME (LOSS)
    12,224       13,808       2,963       24,868  
                                 
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
                               
Capital gains distributions received
    52,086       143,986       151,131       689,888  
Realized gain (loss) on shares redeemed
    (11,355 )     (32,433 )     (15,111 )     (1,128,406 )
Net change in unrealized gain (loss) on investments
    (284,509 )     (753,855 )     (880,697 )     (1,981,466 )
                                 
NET GAIN (LOSS) ON INVESTMENTS
    (243,778 )     (642,302 )     (744,677 )     (2,419,984 )
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
  $ (231,554 )   $ (628,494 )   $ (741,714 )   $ (2,395,116 )
 
The accompanying notes are an integral part of these financial statements.
 
A7

 
 
   
SUBACCOUNTS (Continued)
 
       
   
Prudential SP
International
Value Portfolio
   
AST Marsico Capital
Growth Portfolio
   
AST T. Rowe Price
Large-Cap Growth
Portfolio
   
AST Large-Cap
Value Portfolio
   
AST Small-Cap
Growth Portfolio
 
ASSETS
                             
Investment in the portfolios, at value
  $ 2,701,039     $ 182,679     $ 152,248     $ 436,116     $ 870,961  
Net Assets
  $ 2,701,039     $ 182,679     $ 152,248     $ 436,116     $ 870,961  
                                         
                                         
NET ASSETS, representing:
                                       
Accumulation units
  $ 2,701,039     $ 182,679     $ 152,248     $ 436,116     $ 870,961  
    $ 2,701,039     $ 182,679     $ 152,248     $ 436,116     $ 870,961  
                                         
                                         
Units outstanding
    2,418,804       29,985       24,333       71,047       128,368  
                                         
                                         
Portfolio shares held
    545,664       14,441       21,843       42,506       77,764  
Portfolio net asset value per share
  $ 4.95     $ 12.65     $ 6.97     $ 10.26     $ 11.20  
Investment in portfolio shares, at cost
  $ 3,671,821     $ 297,894     $ 241,204     $ 602,290     $ 1,270,543  
 
   
SUBACCOUNTS (Continued)
 
       
   
Prudential SP
International
Value Portfolio
   
AST Marsico Capital
Growth Portfolio
   
AST T. Rowe Price
Large-Cap Growth
Portfolio
   
AST Large-Cap
Value Portfolio
   
AST Small-Cap
Growth Portfolio
 
INVESTMENT INCOME
                             
Dividend income
  $ 126,090     $ 693     $ 260     $ 9,809     $ 0  
                                         
EXPENSES
                                       
Charges to contract owners for assuming mortality risk and expense risk
    37,184       1,300       1,081       3,214       6,588  
                                         
NET INVESTMENT INCOME (LOSS)
    88,906       (607 )     (821 )     6,595       (6,588 )
                                         
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
                                       
Capital gains distributions received
    730,993       7,325       0       36,453       0  
Realized gain (loss) on shares redeemed
    (857,322 )     (12,071 )     (3,151 )     (217,547 )     (13,461 )
Net change in unrealized gain (loss) on investments
    (2,184,774 )     (115,215 )     (88,956 )     (166,174 )     (399,582 )
                                         
NET GAIN (LOSS) ON INVESTMENTS
    (2,311,103 )     (119,961 )     (92,107 )     (347,268 )     (413,043 )
                                         
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
  $ (2,222,197 )   $ (120,568 )   $ (92,928 )   $ (340,673 )   $ (419,631 )
 
The accompanying notes are an integral part of these financial statements.
 
A8

 
 
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A9

 
 
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
 
STATEMENT OF CHANGE IN NET ASSETS
For the years ended December 31, 2008 and 2007
                         
   
SUBACCOUNTS
 
   
Prudential Money
Market Portfolio
   
Prudential Diversified
Bond Portfolio
 
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
 
OPERATIONS
                       
Net investment income (loss)
  $ 3,227,443     $ 6,556,939     $ 8,398,619     $ 8,330,516  
Capital gains distributions received
    0       0       1,749,161       0  
Realized gain (loss) on shares redeemed
    0       0       (782,927 )     (404,159 )
Net change in unrealized gain (loss) on investments
    0       0       (17,336,348 )     1,335,816  
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
    3,227,443       6,556,939       (7,971,495 )     9,262,173  
                                 
CONTRACT OWNER TRANSACTIONS
                               
Contract owner net payments
    14,026,549       13,188,277       17,548,295       15,170,227  
Policy loans
    (5,940,080 )     (4,563,044 )     (4,465,420 )     (3,811,326 )
Policy loan repayments and interest
    4,419,249       3,626,630       3,654,904       2,721,238  
Surrenders, withdrawals and death benefits
    (29,943,239 )     (17,866,656 )     (12,797,713 )     (15,136,749 )
Net transfers between other subaccounts or fixed rate option
    31,118,739       22,971,153       2,572,369       1,301,776  
Withdrawal and other charges
    (8,505,524 )     (7,736,030 )     (9,324,921 )     (8,763,400 )
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS
    5,175,694       9,620,330       (2,812,486 )     (8,518,234 )
                                 
TOTAL INCREASE (DECREASE) IN NET ASSETS
    8,403,137       16,177,269       (10,783,981 )     743,939  
                                 
NET ASSETS
                               
Beginning of period
    161,047,172       144,869,903       191,053,034       190,309,095  
End of period
  $ 169,450,309     $ 161,047,172     $ 180,269,053     $ 191,053,034  
                                 
Beginning units
    78,737,441       74,752,031       57,023,552       59,776,240  
Units issued
    44,242,802       48,667,953       8,872,339       7,851,188  
Units redeemed
    (41,604,677 )     (44,682,543 )     (9,920,201 )     (10,603,876 )
Ending units
    81,375,566       78,737,441       55,975,690       57,023,552  
 
The accompanying notes are an integral part of these financial statements.
 
A10

 
 
   
SUBACCOUNTS (Continued)
 
   
Prudential Equity Portfolio
   
Prudential Flexible
Managed Portfolio
   
Prudential Conservative
Balanced Portfolio
 
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
 
OPERATIONS
                                   
Net investment income (loss)
  $ 9,976,035     $ 5,682,938     $ 23,774,113     $ 20,111,157     $ 24,329,389     $ 22,618,533  
Capital gains distributions received
    149,751,855       1,141,372       86,420,880       47,294,024       0       0  
Realized gain (loss) on shares redeemed
    (19,978,984 )     1,898,253       (11,470,439 )     6,203,572       (4,536,192 )     5,599,654  
Net change in unrealized gain (loss) on investments
    (774,578,580 )     128,687,280       (405,063,368 )     (6,578,549 )     (239,509,293 )     25,082,588  
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
    (634,829,674 )     137,409,843       (306,338,814 )     67,030,204       (219,716,096 )     53,300,775  
                                                 
CONTRACT OWNER TRANSACTIONS
                                               
Contract owner net payments
    145,128,773       119,235,302       114,926,842       92,765,782       98,280,742       76,809,600  
Policy loans
    (39,165,454 )     (40,496,000 )     (27,321,115 )     (27,875,988 )     (19,533,899 )     (19,123,394 )
Policy loan repayments and interest
    35,348,174       29,609,064       25,449,940       21,023,261       19,663,539       15,553,415  
Surrenders, withdrawals and death benefits
    (104,613,924 )     (75,773,226 )     (80,042,025 )     (55,368,058 )     (71,157,129 )     (45,086,469 )
Net transfers between other subaccounts or fixed rate option
    (39,396,408 )     (25,937,617 )     (19,041,882 )     (18,199,942 )     (17,565,965 )     (17,863,515 )
Withdrawal and other charges
    (69,677,604 )     (74,590,581 )     (57,175,859 )     (60,042,781 )     (47,526,125 )     (49,777,391 )
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS
    (72,376,443 )     (67,953,058 )     (43,204,099 )     (47,697,726 )     (37,838,837 )     (39,487,754 )
                                                 
TOTAL INCREASE (DECREASE) IN NET ASSETS
    (707,206,117 )     69,456,785       (349,542,913 )     19,332,478       (257,554,933 )     13,813,021  
                                                 
NET ASSETS
                                               
Beginning of period
    1,699,457,220       1,630,000,435       1,234,891,978       1,215,559,500       1,023,369,202       1,009,556,181  
End of period
  $ 992,251,103     $ 1,699,457,220     $ 885,349,065     $ 1,234,891,978     $ 765,814,269     $ 1,023,369,202  
                                                 
Beginning units
    254,580,280       265,036,665       270,314,947       281,637,365       269,072,223       279,922,659  
Units issued
    32,681,638       24,750,794       32,478,028       26,079,071       31,772,710       25,470,258  
Units redeemed
    (45,081,701 )     (35,207,179 )     (42,937,612 )     (37,401,489 )     (42,769,510 )     (36,320,694 )
Ending units
    242,180,217       254,580,280       259,855,363       270,314,947       258,075,423       269,072,223  
 
The accompanying notes are an integral part of these financial statements.
 
A11

 
 
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
 
STATEMENT OF CHANGE IN NET ASSETS
For the years ended December 31, 2008 and 2007
                         
   
SUBACCOUNTS
 
   
Prudential High Yield
Bond Portfolio
   
Prudential Stock
Index Portfolio
 
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
 
OPERATIONS
                       
Net investment income (loss)
  $ 8,235,656     $ 7,407,304     $ 15,772,298     $ 11,413,598  
Capital gains distributions received
    0       0       0       0  
Realized gain (loss) on shares redeemed
    (5,686,317 )     (2,891,484 )     (9,022,009 )     3,608,684  
Net change in unrealized gain (loss) on investments
    (27,593,311 )     (2,310,389 )     (458,647,848 )     40,071,408  
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
    (25,043,972 )     2,205,431       (451,897,559 )     55,093,690  
                                 
CONTRACT OWNER TRANSACTIONS
                               
Contract owner net payments
    10,809,445       8,895,655       86,930,165       72,369,223  
Policy loans
    (2,919,717 )     (2,651,658 )     (22,318,784 )     (23,727,035 )
Policy loan repayments and interest
    2,295,844       2,062,429       19,428,033       16,914,841  
Surrenders, withdrawals and death benefits
    (7,388,577 )     (5,428,972 )     (64,238,710 )     (71,898,439 )
Net transfers between other subaccounts or fixed rate option
    (3,293,791 )     (1,603,022 )     (2,555,006 )     (21,413,795 )
Withdrawal and other charges
    (5,190,304 )     (5,307,642 )     (40,103,496 )     (44,076,691 )
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS
    (5,687,100 )     (4,033,210 )     (22,857,798 )     (71,831,896 )
                                 
TOTAL INCREASE (DECREASE) IN NET ASSETS
    (30,731,072 )     (1,827,779 )     (474,755,357 )     (16,738,206 )
                                 
NET ASSETS
                               
Beginning of period
    113,772,446       115,600,225       1,226,724,876       1,243,463,082  
End of period
  $ 83,041,374     $ 113,772,446     $ 751,969,519     $ 1,226,724,876  
                                 
Beginning units
    35,121,006       36,309,164       182,659,285       194,210,118  
Units issued
    4,556,832       5,757,240       23,410,048       16,044,861  
Units redeemed
    (6,461,319 )     (6,945,398 )     (27,970,442 )     (27,595,694 )
Ending units
    33,216,519       35,121,006       178,098,891       182,659,285  
 
The accompanying notes are an integral part of these financial statements.
 
A12

 
 
   
SUBACCOUNTS (Continued)
 
   
Prudential Value Portfolio
   
Prudential Natural
Resources Portfolio
   
Prudential Global Portfolio
 
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
 
OPERATIONS
                                   
Net investment income (loss)
  $ 6,508,443     $ 5,037,469     $ 450,081     $ (644,913 )   $ 3,662,758     $ 1,747,414  
Capital gains distributions received
    120,603,221       82,764,934       94,363,450       131,207,283       19,689,917       0  
Realized gain (loss) on shares redeemed
    (16,700,292 )     5,188,969       (24,889,475 )     7,706,034       (10,340,272 )     (420,508 )
Net change in unrealized gain (loss) on investments
    (399,737,218 )     (74,811,923 )     (502,074,282 )     135,230,188       (186,705,473 )     34,376,572  
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
    (289,325,846 )     18,179,449       (432,150,226 )     273,498,592       (173,693,070 )     35,703,478  
                                                 
CONTRACT OWNER TRANSACTIONS
                                               
Contract owner net payments
    52,275,535       41,375,913       27,545,596       20,318,318       26,836,262       21,975,702  
Policy loans
    (15,428,047 )     (16,484,434 )     (20,669,818 )     (18,008,610 )     (7,905,317 )     (7,565,801 )
Policy loan repayments and interest
    11,902,134       10,684,229       12,590,152       9,369,641       5,812,734       4,888,244  
Surrenders, withdrawals and death benefits
    (43,368,639 )     (34,961,097 )     (35,380,423 )     (25,436,008 )     (21,335,985 )     (15,339,574 )
Net transfers between other subaccounts or fixed rate option
    (14,973,299 )     (5,941,090 )     (6,348,028 )     6,879,113       604,485       13,229,242  
Withdrawal and other charges
    (25,215,110 )     (28,526,603 )     (21,747,345 )     (20,608,803 )     (12,542,862 )     (13,538,107 )
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS
    (34,807,426 )     (33,853,082 )     (44,009,866 )     (27,486,349 )     (8,530,683 )     3,649,706  
                                                 
TOTAL INCREASE (DECREASE) IN NET ASSETS
    (324,133,272 )     (15,673,633 )     (476,160,092 )     246,012,243       (182,223,753 )     39,353,184  
                                                 
NET ASSETS
                                               
Beginning of period
    702,973,763       718,647,396       840,600,227       594,587,984       405,180,361       365,827,177  
End of period
  $ 378,840,491     $ 702,973,763     $ 364,440,135     $ 840,600,227     $ 222,956,608     $ 405,180,361  
                                                 
Beginning units
    91,173,845       95,658,291       39,718,865       41,385,868       145,581,906       144,222,798  
Units issued
    11,873,989       9,693,129       5,015,242       4,082,870       21,020,728       19,090,819  
Units redeemed
    (17,225,451 )     (14,177,575 )     (7,836,550 )     (5,749,873 )     (25,364,972 )     (17,731,711 )
Ending units
    85,822,383       91,173,845       36,897,557       39,718,865       141,237,662       145,581,906  
 
The accompanying notes are an integral part of these financial statements.
 
A13

 
 
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
 
STATEMENT OF CHANGE IN NET ASSETS
For the years ended December 31, 2008 and 2007
                         
   
SUBACCOUNTS
 
   
Prudential Government
Income Portfolio
   
Prudential
Jennison Portfolio
 
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
 
OPERATIONS
                       
Net investment income (loss)
  $ 3,394,589     $ 3,689,581     $ (772,069 )   $ (2,078,033 )
Capital gains distributions received
    0       0       0       0  
Realized gain (loss) on shares redeemed
    (278,832 )     (327,017 )     (17,947,035 )     (13,570,257 )
Net change in unrealized gain (loss) on investments
    492,995       1,420,550       (176,022,532 )     69,944,588  
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
    3,608,752       4,783,114       (194,741,636 )     54,296,298  
                                 
CONTRACT OWNER TRANSACTIONS
                               
Contract owner net payments
    9,275,793       8,134,806       56,199,492       51,345,481  
Policy loans
    (2,404,370 )     (2,184,338 )     (13,477,192 )     (13,748,833 )
Policy loan repayments and interest
    2,373,818       1,325,581       13,158,748       9,599,299  
Surrenders, withdrawals and death benefits
    (7,098,125 )     (4,608,380 )     (40,029,781 )     (30,469,825 )
Net transfers between other subaccounts or fixed rate option
    5,423,905       (2,158,331 )     (8,745,979 )     (16,860,788 )
Withdrawal and other charges
    (5,007,254 )     (4,675,838 )     (24,083,134 )     (25,245,754 )
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS
    2,563,767       (4,166,500 )     (16,977,846 )     (25,380,420 )
                                 
TOTAL INCREASE (DECREASE) IN NET ASSETS
    6,172,519       616,614       (211,719,482 )     28,915,878  
                                 
NET ASSETS
                               
Beginning of period
    100,165,757       99,549,143       527,528,088       498,612,210  
End of period
  $ 106,338,276     $ 100,165,757     $ 315,808,606     $ 527,528,088  
                                 
Beginning units
    32,221,732       33,573,391       181,367,996       190,682,512  
Units issued
    7,139,485       3,991,362       32,598,423       25,307,653  
Units redeemed
    (6,563,802 )     (5,343,021 )     (39,625,881 )     (34,622,169 )
Ending units
    32,797,415       32,221,732       174,340,538       181,367,996  
 
The accompanying notes are an integral part of these financial statements.
 
A14

 
 
   
SUBACCOUNTS (Continued)
 
   
Prudential Small
Capitalization Stock Portfolio
   
T. Rowe Price International
Stock Portfolio
   
Janus Aspen Large Cap
Growth Portfolio —
Institutional Shares
 
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
 
OPERATIONS
                                   
Net investment income (loss)
  $ 1,207,897     $ (353,826 )   $ 23,286     $ 16,747     $ 9,078     $ 9,082  
Capital gains distributions received
    40,583,580       22,612,035       63,965       236,235       0       0  
Realized gain (loss) on shares redeemed
    (5,526,654 )     3,192,757       (60,550 )     15,765       (192,882 )     (72,509 )
Net change in unrealized gain (loss) on investments
    (130,820,087 )     (28,643,537 )     (1,043,275 )     (23,186 )     (2,782,375 )     947,382  
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
    (94,555,264 )     (3,192,571 )     (1,016,574 )     245,561       (2,966,179 )     883,955  
                                                 
CONTRACT OWNER TRANSACTIONS
                                               
Contract owner net payments
    23,949,935       22,138,581       219,093       251,099       953,496       1,011,714  
Policy loans
    (7,955,943 )     (8,737,938 )     (42,803 )     (68,863 )     (157,822 )     (123,456 )
Policy loan repayments and interest
    6,280,800       5,174,777       8,563       9,926       21,351       28,534  
Surrenders, withdrawals and death benefits
    (20,829,188 )     (18,002,136 )     (121,166 )     (145,917 )     (176,206 )     (209,878 )
Net transfers between other subaccounts or fixed rate option
    (5,386,179 )     (4,710,418 )     (10,692 )     16,548       (27,928 )     (38,515 )
Withdrawal and other charges
    (12,097,343 )     (13,431,531 )     (126,552 )     (151,480 )     (471,251 )     (474,269 )
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS
    (16,037,918 )     (17,568,665 )     (73,557 )     (88,687 )     141,640       194,130  
                                                 
TOTAL INCREASE (DECREASE) IN NET ASSETS
    (110,593,182 )     (20,761,236 )     (1,090,131 )     156,874       (2,824,539 )     1,078,085  
                                                 
NET ASSETS
                                               
Beginning of period
    310,178,590       330,939,826       2,138,797       1,981,923       7,365,296       6,287,211  
End of period
  $ 199,585,408     $ 310,178,590     $ 1,048,666     $ 2,138,797     $ 4,540,757     $ 7,365,296  
                                                 
                                                 
Beginning units
    80,929,491       85,348,335       1,324,849       1,379,430       4,276,480       4,176,217  
Units issued
    12,482,314       11,289,383       207,779       192,551       711,125       619,874  
Units redeemed
    (17,384,530 )     (15,708,227 )     (258,738 )     (247,132 )     (587,647 )     (519,611 )
Ending units
    76,027,275       80,929,491       1,273,890       1,324,849       4,399,958       4,276,480  
 
The accompanying notes are an integral part of these financial statements.
 
A15

 
 
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
 
STATEMENT OF CHANGE IN NET ASSETS
For the years ended December 31, 2008 and 2007
                         
   
SUBACCOUNTS
 
   
MFS Growth Series
   
American Century
VP Value Fund
 
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
 
OPERATIONS
                       
Net investment income (loss)
  $ (9,511 )   $ (16,959 )   $ 43,777     $ 27,511  
Capital gains distributions received
    0       0       307,529       233,140  
Realized gain (loss) on shares redeemed
    (66,716 )     (56,947 )     (82,180 )     (2,580 )
Net change in unrealized gain (loss) on investments
    (1,048,500 )     597,288       (991,675 )     (420,069 )
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
    (1,124,727 )     523,382       (722,549 )     (161,998 )
                                 
CONTRACT OWNER TRANSACTIONS
                               
Contract owner net payments
    383,302       401,075       343,737       391,237  
Policy loans
    (139,512 )     (158,194 )     (88,049 )     (96,554 )
Policy loan repayments and interest
    23,886       20,168       14,628       16,213  
Surrenders, withdrawals and death benefits
    (120,152 )     (169,592 )     (66,439 )     (93,274 )
Net transfers between other subaccounts or fixed rate option
    (35,969 )     14,534       (66,012 )     15,258  
Withdrawal and other charges
    (193,800 )     (191,190 )     (170,924 )     (180,084 )
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS
    (82,245 )     (83,199 )     (33,059 )     52,796  
                                 
TOTAL INCREASE (DECREASE) IN NET ASSETS
    (1,206,972 )     440,183       (755,608 )     (109,202 )
                                 
NET ASSETS
                               
Beginning of period
    3,038,046       2,597,863       2,701,998       2,811,200  
End of period
  $ 1,831,074     $ 3,038,046     $ 1,946,390     $ 2,701,998  
                                 
                                 
Beginning units
    1,666,052       1,715,950       1,232,090       1,208,676  
Units issued
    279,412       268,865       203,641       185,148  
Units redeemed
    (331,301 )     (318,763 )     (216,418 )     (161,734 )
Ending units
    1,614,163       1,666,052       1,219,313       1,232,090  
 
** Date subaccount was no longer available for investment.
 
The accompanying notes are an integral part of these financial statements.
 
A16

 
 
   
SUBACCOUNTS (Continued)
 
   
Prudential SP T. Rowe
Price Large-Cap
Growth Portfolio
   
Prudential SP Davis
Value Portfolio
   
Prudential SP Small
Cap Value Portfolio
 
   
01/01/2008
to
05/01/2008**
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
 
OPERATIONS
                                   
Net investment income (loss)
  $ (743 )   $ (1,551 )   $ 7,720     $ (620 )   $ 5,581     $ (3,405 )
Capital gains distributions received
    0       0       78,558       50,307       248,105       169,292  
Realized gain (loss) on shares redeemed
    5,352       90,275       (23,346 )     36,131       (63,167 )     27,880  
Net change in unrealized gain (loss) on investments
    (41,929 )     (66,812 )     (709,443 )     (6,990 )     (1,021,352 )     (293,621 )
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
    (37,320 )     21,912       (646,511 )     78,828       (830,833 )     (99,854 )
                                                 
CONTRACT OWNER TRANSACTIONS
                                               
Contract owner net payments
    3,983       14,354       92,028       103,358       107,320       109,539  
Policy loans
    0       (65 )     (7,923 )     (5,042 )     (25,385 )     (6,046 )
Policy loan repayments and interest
    10       708       394       775       1,754       2,151  
Surrenders, withdrawals and death benefits
    (715 )     (471,515 )     (13,897 )     (35,949 )     (21,138 )     (44,944 )
Net transfers between other subaccounts or fixed rate option
    (468,360 )     364,217       156,670       (24,911 )     5,390       (25,051 )
Withdrawal and other charges
    (5,135 )     (6,018 )     (53,621 )     (55,814 )     (63,332 )     (61,274 )
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS
    (470,217 )     (98,319 )     173,651       (17,583 )     4,609       (25,625 )
                                                 
TOTAL INCREASE (DECREASE) IN NET ASSETS
    (507,537 )     (76,407 )     (472,860 )     61,245       (826,224 )     (125,479 )
                                                 
NET ASSETS
                                               
Beginning of period
    507,537       583,944       1,481,710       1,420,465       2,673,242       2,798,721  
End of period
  $ 0     $ 507,537     $ 1,008,850     $ 1,481,710     $ 1,847,018     $ 2,673,242  
                                                 
                                                 
Beginning units
    385,261       475,601       936,502       931,630       1,920,598       1,921,430  
Units issued
    424,809       889,623       218,391       779,073       155,237       835,746  
Units redeemed
    (810,070 )     (979,963 )     (85,794 )     (774,201 )     (149,157 )     (836,578 )
Ending units
    0       385,261       1,069,099       936,502       1,926,678       1,920,598  
 
The accompanying notes are an integral part of these financial statements.
 
A17

 
 
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
 
STATEMENT OF CHANGE IN NET ASSETS
For the years ended December 31, 2008 and 2007
                         
   
SUBACCOUNTS
 
       
   
Prudential SP
Small-Cap Growth Portfolio
   
Prudential SP PIMCO
Total Return Portfolio
 
   
01/01/2008
to
05/01/2008**
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
 
OPERATIONS
                       
Net investment income (loss)
  $ (3,869 )   $ (13,335 )   $ 274,513     $ 210,737  
Capital gains distributions received
    0       52,619       0       0  
Realized gain (loss) on shares redeemed
    451,012       92,205       (100,212 )     (39,100 )
Net change in unrealized gain (loss) on investments
    (536,820 )     (20,524 )     (304,434 )     356,395  
                                 
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
    (89,677 )     110,965       (130,133 )     528,032  
                                 
CONTRACT OWNER TRANSACTIONS
                               
Contract owner net payments
    2,752       40,533       79,861       85,074  
Policy loans
    (5,354 )     (2,535 )     (14,620 )     (5,658 )
Policy loan repayments and interest
    671       416       6,334       1,974  
Surrenders, withdrawals and death benefits
    (1,577 )     (462,753 )     (66,217 )     (2,174,499 )
Net transfers between other subaccounts or fixed rate option
    (1,561,514 )     263,419       (897,251 )     752,286  
Withdrawal and other charges
    (10,718 )     (28,019 )     (171,407 )     (61,947 )
                                 
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS
    (1,575,740 )     (188,939 )     (1,063,300 )     (1,402,770 )
                                 
TOTAL INCREASE (DECREASE) IN NET ASSETS
    (1,665,417 )     (77,974 )     (1,193,433 )     (874,738 )
                                 
NET ASSETS
                               
Beginning of period
    1,665,417       1,743,391       6,891,157       7,765,895  
End of period
  $ 0     $ 1,665,417     $ 5,697,724     $ 6,891,157  
                                 
Beginning units
    1,389,092       1,533,348       5,237,450       6,404,565  
Units issued
    466,629       1,362,139       648,888       808,282  
Units redeemed
    (1,855,721 )     (1,506,395 )     (1,511,248 )     (1,975,397 )
Ending units
    0       1,389,092       4,375,090       5,237,450  
 
** Date subaccount was no longer available for investment.

The accompanying notes are an integral part of these financial statements.
 
A18

 
 
   
SUBACCOUNTS (Continued)
 
   
Prudential SP PIMCO
High Yield Portfolio
   
Janus Aspen Large Cap
Growth Portfolio —
Service Shares
   
Prudential SP Large Cap
Value Portfolio
 
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
05/01/2008**
   
01/01/2007
to
12/31/2007
 
OPERATIONS
                                   
Net investment income (loss)
  $ 101,415     $ 89,217     $ (2,681 )   $ (90 )   $ (2,081 )   $ 7,766  
Capital gains distributions received
    1,441       22,668       0       0       0       52,623  
Realized gain (loss) on shares redeemed
    (12,081 )     147,859       (7,537 )     19       (23,027 )     11,757  
Net change in unrealized gain (loss) on investments
    (481,083 )     (179,691 )     (192,572 )     50,988       (3,455 )     (91,144 )
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
    (390,308 )     80,053       (202,790 )     50,917       (28,563 )     (18,998 )
                                                 
CONTRACT OWNER TRANSACTIONS
                                               
Contract owner net payments
    31,649       36,434       17,122       6,941       2,556       61,639  
Policy loans
    (9,980 )     0       0       0       (365 )     (829 )
Policy loan repayments and interest
    212       399       251       47       15       27  
Surrenders, withdrawals and death benefits
    (14,912 )     (1,913,624 )     0       0       0       (39,492 )
Net transfers between other subaccounts or fixed rate option
    (6,493 )     6,607       (327,485 )     568,602       (756,232 )     167,132  
Withdrawal and other charges
    (21,743 )     (31,146 )     (25,147 )     (6,678 )     (8,948 )     (23,479 )
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS
    (21,267 )     (1,901,330 )     (335,259 )     568,912       (762,974 )     164,998  
                                                 
TOTAL INCREASE (DECREASE) IN NET ASSETS
    (411,575 )     (1,821,277 )     (538,049 )     619,829       (791,537 )     146,000  
                                                 
NET ASSETS
                                               
Beginning of period
    1,506,763       3,328,040       811,503       191,674       791,537       645,537  
End of period
  $ 1,095,188     $ 1,506,763     $ 273,454     $ 811,503     $ 0     $ 791,537  
                                                 
Beginning units
    1,018,359       2,315,431       600,362       161,323       537,688       422,459  
Units issued
    28,766       941,116       68,248       444,121       4,690       746,914  
Units redeemed
    (44,614 )     (2,238,188 )     (329,169 )     (5,082 )     (542,378 )     (631,685 )
Ending units
    1,002,511       1,018,359       339,441       600,362       0       537,688  
 
The accompanying notes are an integral part of these financial statements.
 
A19

 
 
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
 
STATEMENT OF CHANGE IN NET ASSETS
For the years ended December 31, 2008 and 2007
                         
   
SUBACCOUNTS
 
   
Prudential SP AIM
Core Equity Portfolio
   
Prudential SP Strategic
Partners Focused
Growth Portfolio
 
   
01/01/2008
to
05/01/2008**
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
 
OPERATIONS
                       
Net investment income (loss)
  $ (512 )   $ 770     $ (3,945 )   $ (4,136 )
Capital gains distributions received
    0       1,909       34,124       21,303  
Realized gain (loss) on shares redeemed
    36,982       3,261       (24,399 )     678  
Net change in unrealized gain (loss) on investments
    (39,101 )     4,601       (225,338 )     46,199  
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
    (2,631 )     10,541       (219,558 )     64,044  
                                 
CONTRACT OWNER TRANSACTIONS
                               
Contract owner net payments
    5,141       12,278       56,287       56,950  
Policy loans
    (4,011 )     (9,364 )     (18,324 )     0  
Policy loan repayments and interest
    203       611       173       0  
Surrenders, withdrawals and death benefits
    0       (29,541 )     0       (11,968 )
Net transfers between other subaccounts or fixed rate option
    (193,252 )     63,543       22,070       9,811  
Withdrawal and other charges
    (1,631 )     (4,320 )     (29,965 )     (24,623 )
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS
    (193,550 )     33,207       30,241       30,170  
                                 
TOTAL INCREASE (DECREASE) IN NET ASSETS
    (196,181 )     43,748       (189,317 )     94,214  
                                 
NET ASSETS
                               
Beginning of period
    196,181       152,433       557,920       463,706  
End of period
  $ 0     $ 196,181     $ 368,603     $ 557,920  
                                 
Beginning units
    134,893       112,114       390,783       371,149  
Units issued
    3,756       75,327       85,359       47,612  
Units redeemed
    (138,649 )     (52,548 )     (52,968 )     (27,978 )
Ending units
    0       134,893       423,174       390,783  
 
** Date subaccount was no longer available for investment.
 
The accompanying notes are an integral part of these financial statements.
 
A20

 
 
                                     
   
SUBACCOUNTS (Continued)
 
                   
   
Prudential SP Mid
Cap Growth Portfolio
   
SP Prudential U.S.
Emerging Growth Portfolio
   
Prudential SP Conservative
Asset Allocation Portfolio
 
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
 
OPERATIONS
                                   
Net investment income (loss)
  $ (3,871 )   $ (4,565 )   $ (19,535 )   $ (19,892 )   $ 8,202     $ 10,490  
Capital gains distributions received
    112,474       49,401       561,566       378,658       20,664       9,766  
Realized gain (loss) on shares redeemed
    (119,887 )     114,517       (275,422 )     204,203       (7,378 )     4,989  
Net change in unrealized gain (loss) on investments
    (280,106 )     (29,863 )     (1,668,732 )     (21,234 )     (182,412 )     11,167  
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
    (291,390 )     129,490       (1,402,123 )     541,735       (160,924 )     36,412  
                                                 
CONTRACT OWNER TRANSACTIONS
                                               
Contract owner net payments
    20,863       21,097       246,286       604,323       61,981       45,204  
Policy loans
    (4,029 )     (10,479 )     (7,988 )     (10,310 )     (783 )     (18 )
Policy loan repayments and interest
    333       650       1,388       604       274       17  
Surrenders, withdrawals and death benefits
    (2,910 )     (465,747 )     (19,251 )     (1,063,603 )     0       (40,369 )
Net transfers between other subaccounts or fixed rate option
    (278,502 )     200,916       51,230       490,200       432,484       0  
Withdrawal and other charges
    (15,987 )     (14,408 )     (704,588 )     (557,428 )     (55,348 )     (43,262 )
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS
    (280,232 )     (267,971 )     (432,923 )     (536,214 )     438,608       (38,428 )
                                                 
TOTAL INCREASE (DECREASE) IN NET ASSETS
    (571,622 )     (138,481 )     (1,835,046 )     5,521       277,684       (2,016 )
                                                 
NET ASSETS
                                               
Beginning of period
    872,250       1,010,731       4,019,483       4,013,962       415,234       417,250  
End of period
  $ 300,628     $ 872,250     $ 2,184,437     $ 4,019,483     $ 692,918     $ 415,234  
                                                 
Beginning units
    660,966       883,357       2,125,202       2,457,264       285,028       311,048  
Units issued
    1,277,321       2,765,499       205,459       1,243,237       361,484       32,559  
Units redeemed
    (1,539,281 )     (2,987,890 )     (503,752 )     (1,575,299 )     (43,332 )     (58,579 )
Ending units
    399,006       660,966       1,826,909       2,125,202       603,180       285,028  
 
The accompanying notes are an integral part of these financial statements.
 
A21

 
 
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
 
STATEMENT OF CHANGE IN NET ASSETS
For the years ended December 31, 2008 and 2007
                         
   
SUBACCOUNTS
 
       
   
Prudential SP Balanced
Asset Allocation Portfolio
   
Prudential SP Growth
Asset Allocation Portfolio
 
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
 
OPERATIONS
                       
Net investment income (loss)
  $ 12,224     $ 10,462     $ 13,808     $ 12,399  
Capital gains distributions received
    52,086       20,594       143,986       55,417  
Realized gain (loss) on shares redeemed
    (11,355 )     19,774       (32,433 )     2,155  
Net change in unrealized gain (loss) on investments
    (284,509 )     13,020       (753,855 )     46,176  
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
    (231,554 )     63,850       (628,494 )     116,147  
                                 
CONTRACT OWNER TRANSACTIONS
                               
Contract owner net payments
    59,938       49,420       112,741       136,737  
Policy loans
    (24,078 )     (36,744 )     (817 )     (1,193 )
Policy loan repayments and interest
    3,643       2,861       371       343  
Surrenders, withdrawals and death benefits
    (3,548 )     (149,964 )     (6,163 )     (42,152 )
Net transfers between other subaccounts or fixed rate option
    55,257       51,432       72,194       74,035  
Withdrawal and other charges
    (27,943 )     (24,125 )     (50,382 )     (43,822 )
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS
    63,269       (107,120 )     127,944       123,948  
                                 
TOTAL INCREASE (DECREASE) IN NET ASSETS
    (168,285 )     (43,270 )     (500,550 )     240,095  
                                 
NET ASSETS
                               
Beginning of period
    748,123       791,393       1,576,987       1,336,892  
End of period
  $ 579,838     $ 748,123     $ 1,076,437     $ 1,576,987  
                                 
Beginning units
    487,672       560,944       989,840       909,276  
Units issued
    86,117       169,734       158,344       151,966  
Units redeemed
    (41,297 )     (243,006 )     (77,301 )     (71,402 )
Ending units
    532,492       487,672       1,070,883       989,840  
 
The accompanying notes are an integral part of these financial statements.
 
A22

 
 
   
SUBACCOUNTS (Continued)
 
   
Prudential SP
Aggressive Growth
Asset Allocation Portfolio
   
Prudential SP International
Growth Portfolio
   
Prudential SP International
Value Portfolio
 
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
   
01/01/2008
to
12/31/2008
   
01/01/2007
to
12/31/2007
 
OPERATIONS
                                   
Net investment income (loss)
  $ 2,963     $ 1,288     $ 24,868     $ 181     $ 88,906     $ 62,753  
Capital gains distributions received
    151,131       77,217       689,888       599,076       730,993       1,095,796  
Realized gain (loss) on shares redeemed
    (15,111 )     7,405       (1,128,406 )     9,076       (857,322 )     285,585  
Net change in unrealized gain (loss) on investments
    (880,697 )     48,457       (1,981,466 )     (34,827 )     (2,184,774 )     (519,284 )
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
    (741,714 )     134,367       (2,395,116 )     573,506       (2,222,197 )     924,850  
                                                 
CONTRACT OWNER TRANSACTIONS
                                               
Contract owner net payments
    19,787       26,142       87,439       82,775       104,322       112,851  
Policy loans
    (4,077 )     (1,209 )     (19,234 )     (5,833     (22,934 )     (15,630 )
Policy loan repayments and interest
    369       869       3,011       445       3,535       3,622  
Surrenders, withdrawals and death benefits
    (8,250     (8,750     (37,330 )     (6,079     (117,077     (1,222,514
Net transfers between other subaccounts or fixed rate option
    11,432       (30,802 )     410,273       1,085,965       (681,428 )     (423,764 )
Withdrawal and other charges
    (19,723 )     (19,591 )     (155,825 )     (50,268 )     (179,066 )     (256,770 )
                                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS
    (462 )     (33,341 )     288,334       1,107,005       (892,648 )     (1,802,205 )
                                                 
TOTAL INCREASE (DECREASE) IN NET ASSETS
    (742,176 )     101,026       (2,106,782 )     1,680,511       (3,114,845 )     (877,355 )
                                                 
NET ASSETS
                                               
Beginning of period
    1,734,303       1,633,277       4,506,582       2,826,071       5,815,884       6,693,239  
End of period
  $ 992,127     $ 1,734,303     $ 2,399,800     $ 4,506,582     $ 2,701,039     $ 5,815,884  
                                                 
Beginning units
    1,079,123       1,099,973       2,225,008       1,653,255       2,888,544       3,892,528  
Units issued
    30,242       39,878       941,400       682,835       646,617       258,203  
Units redeemed
    (32,309 )     (60,728 )     (761,157 )     (111,082 )     (1,116,357 )     (1,262,187 )
Ending units
    1,077,056       1,079,123       2,405,251       2,225,008       2,418,804       2,888,544  
 
The accompanying notes are an integral part of these financial statements.
 
A23

 
 
FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
 
STATEMENT OF CHANGE IN NET ASSETS
For the years ended December 31, 2008 and 2007
                         
   
SUBACCOUNTS
 
   
AST Marsico
Capital
Growth
Portfolio
   
AST T. Rowe
Price
Large-Cap
Growth
Portfolio
   
AST
Large-Cap
Value
Portfolio
   
AST
Small-Cap
Growth
Portfolio
 
   
05/01/2008*
to
12/31/2008
   
05/01/2008*
to
12/31/2008
   
05/01/2008*
to
12/31/2008
   
05/01/2008*
to
12/31/2008
 
OPERATIONS
                       
Net investment income (loss)
  $ (607 )   $ (821 )   $ 6,595     $ (6,588 )
Capital gains distributions received
    7,325       0       36,453       0  
Realized gain (loss) on shares redeemed
    (12,071 )     (3,151 )     (217,547 )     (13,461 )
Net change in unrealized gain (loss) on investments
    (115,215 )     (88,956 )     (166,174 )     (399,582 )
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
    (120,568 )     (92,928 )     (340,673 )     (419,631 )
                                 
CONTRACT OWNER TRANSACTIONS
                               
Contract owner net payments
    7,428       11,222       44,609       36,352  
Policy loans
    (2,195 )     (946 )     (14,887 )     (10,930 )
Policy loan repayments and interest
    640       24       102       247  
Surrenders, withdrawals and death benefits
    0       (3,151 )     (924 )     (7,023 )
Net transfers between other subaccounts or fixed rate option
    311,502       242,819       764,534       1,289,563  
Withdrawal and other charges
    (14,128 )     (4,792 )     (16,645 )     (17,617 )
                                 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CONTRACT OWNER TRANSACTIONS
    303,247       245,176       776,789       1,290,592  
                                 
TOTAL INCREASE (DECREASE) IN NET ASSETS
    182,679       152,248       436,116       870,961  
                                 
NET ASSETS
                               
Beginning of period
    0       0       0       0  
End of period
  $ 182,679     $ 152,248     $ 436,116     $ 870,961  
                                 
Beginning units
    0       0       0       0  
Units issued
    37,444       25,847       183,072       138,197  
Units redeemed
    (7,459 )     (1,514 )     (112,025 )     (9,829 )
Ending units
    29,985       24,333       71,047       128,368  
 
* Date subaccount became available for investment.
 
The accompanying notes are an integral part of these financial statements.
 
A24

 
 
NOTES TO FINANCIAL STATEMENTS OF
THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT
December 31, 2008
   
Note 1:
General
   
 
The Prudential Variable Appreciable Account (the “Account”) of The Prudential Insurance Company of America (“Prudential”), which is a wholly owned subsidiary of Prudential Financial, Inc. (“PFI”), was established on August 11, 1987 by a resolution of Prudential’s Board of Directors in conformity with insurance laws of the State of New Jersey. The assets of the Account are segregated from Prudential’s other assets. Proceeds from the purchases of Prudential Variable Appreciable Life (“PVAL”), Prudential Survivorship Preferred (“SVUL”) and Prudential Variable Universal Life (“VUL”) contracts are invested in the Account.
   
 
The Account is registered under the Investment Company act of 1940, as amended, as a unit investment trust. The Account is a funding vehicle for individual variable life insurance contracts. There are thirty-nine subaccounts within the Account. Each contract offers the option to invest in various subaccounts, each of which invests in either a corresponding portfolio of The Prudential Series Fund, Advanced Series Trust, (collectively the “Series fund”) or one of the non-Prudential administered funds (collectively, the “portfolios”). Options available to The Prudential Variable Appreciable Account contracts which invest in a corresponding portfolio of the Series Fund are: Prudential Money Market Portfolio, Prudential Diversified Bond Portfolio, Prudential Equity Portfolio, Prudential Flexible Managed Portfolio, Prudential Conservative Balanced Portfolio, Prudential High Yield Bond Portfolio, Prudential Stock Index Portfolio, Prudential Value Portfolio, Prudential Natural Resources Portfolio, Prudential Global Portfolio, Prudential Government Income Portfolio, Prudential Jennison Portfolio, Prudential Small Capitalization Stock Portfolio, Prudential SP T. Rowe Price Large-Cap Growth Portfolio, Prudential SP Davis Value Portfolio, Prudential SP Small Cap Value Portfolio, Prudential SP Small-Cap Growth Portfolio, Prudential SP PIMCO Total Return Portfolio, Prudential SP PIMCO High Yield Portfolio, Prudential SP Large Cap Value Portfolio, Prudential SP AIM Core Equity Portfolio, Prudential SP Strategic Partners Focused Growth Portfolio, Prudential SP Mid Cap Growth Portfolio, SP Prudential U.S. Emerging Growth Portfolio, Prudential SP Conservative Asset Allocation Portfolio, Prudential SP Balanced Asset Allocation Portfolio, Prudential SP Growth Asset Allocation Portfolio, Prudential SP Aggressive Growth Asset Allocation Portfolio, Prudential SP International Growth Portfolio, Prudential SP International Value Portfolio, AST Marsico Capital Growth Portfolio, AST T. Rowe Price Large-Cap Growth Portfolio, AST Large-Cap Value Portfolio and AST Small-Cap Growth Portfolio. Options available to The Prudential Variable Appreciable Account contracts which invest in a corresponding portfolio of the non-Prudential administered funds are: T. Rowe Price International Stock Portfolio, Janus Aspen Large Cap Growth Portfolio-Institutional Shares, MFS Growth Series, American Century VP Value Fund and Janus Aspen Large Cap Growth Portfolio - Service Shares.
   
 
On May 1, 2008, four Prudential Series Funds were merged into four existing AST funds. The transfers from the old subaccounts to the new subaccounts are reflected in the Statement of Changes in Net Assets for the year ended December 31, 2008 as net transfers between subaccounts. The transfers occurred as follows:
 
 
Transferred From:
   
NAV
 
Transferred To:
   
NAV
 
Balance
Transferred:
 
 
PSF SP Small-Cap Growth Portfolio
 
7.35
 
AST Small-Cap Growth Portfolio
 
16.65
 
$
1,340,619.61
 
 
PSF SP T. Rowe Price Large-Cap Growth Portfolio
 
7.44
 
AST T. Rowe Price Large-Cap Growth Portfolio
 
11.29
 
$
237,715.48
 
 
PSF SP AIM Core Equity Portfolio
 
8.65
 
AST Marsico Capital Growth Portfolio
 
21.81
 
$
188,439.84
 
 
PSF SP Large Cap Value Portfolio
 
11.36
 
AST Large-Cap Value Portfolio
 
18.11
 
$
756,461.83
 

 
A25

 
 
Note 1:
General (Continued)
   
 
Each of the variable investment options of the Account indirectly bears exposure to the market, credit, and liquidity risks of the portfolio in which it invests. These financial statements should be read in conjunction with the financial statements and footnotes of the underlying mutual funds. Additional information on these mutual funds is available upon request to the appropriate companies.
   
Note 2:
Significant Accounting Policies
   
 
The accompanying financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates.
   
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires additional disclosures about fair value measurements. This Statement does not require any new fair value measurements, but the application of this Statement could change current practices in determining fair value. The Account adopted this guidance effective January 1, 2008. For further discussion please refer to Note 3: Fair Value.
   
 
Investments — The investments in shares of the portfolios are stated at the net asset value of the respective portfolio, whose investment securities are stated at fair value.
   
 
Security Transactions — Realized gains and losses on security transactions are determined based upon an average cost. Purchase and sale transactions are recorded as of the trade date of the security being purchased or sold.
   
 
Dividend and Distributions Received — Dividend and capital gain distributions received are reinvested in additional shares of the portfolios and are recorded on the ex distribution date.
   
Note 3:
Fair Value
   
 
SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an ordinary transaction between market participants on the measurement date. SFAS No. 157 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value, and identifies three levels of inputs that may be used to measure fair value:
   
 
Level 1 – Quotes prices for identical instruments in active markets. Level 1 fair values generally are supported by market transactions that occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
   
 
Level 2 – Observable inputs other than Level 1 prices, such as quotes prices for similar instruments, quotes prices in market that are not active, and inputs to model-derived valuations that are not directly observable or can be corroborated by observable market data.
   
 
Level 3 – Unobservable inputs supported by little or no market activity and often requiring significant judgment or estimation, such as an entity’s own assumptions about the cash flows or other significant components of value that market participants would use in pricing the asset or liability.

 
A26

 
 
Note 3:
Fair Value (Continued)
   
 
All investment assets of each subaccount are classified as Level 1. The Account invests in open-ended mutual funds, available to contract holders of variable life insurance policies. Contract holders may, without restriction, transact at the daily Net Asset Value (s) (“NAV”) of the mutual funds. The NAV represents the daily per share value of the portfolio of investments of the mutual funds, at which sufficient volumes of transactions occur.
   
 
As all assets of the account are classified as Level 1, no reconciliation of Level 3 assets and change in unrealized gains (losses) for Level 3 assets still held as of December 31, 2008 are presented.
   
Note 4:
Taxes
   
 
Prudential is taxed as a “life insurance company” as defined by the Internal Revenue Code. The results of operations of the Account form a part of PFI’s consolidated federal tax return. Under current federal law, no federal income taxes are payable by the Account. As such, no provision for tax liability has been recorded in these financial statements. Prudential management will review periodically the status of the policy in the event of changes in the tax law. A charge may be made in future years for any federal income taxes that would be attributable to the contracts.
   
Note 5:
Purchases and Sales of Investments
   
 
The aggregate costs of purchases and proceeds from sales, excluding distributions received and invested, of investments in the portfolios for the year ended December 31, 2008 were as follows:
 
               
     
Purchases
   
Sales
 
 
Prudential Money Market Portfolio
  $ 49,185,169     $ (45,193,657 )
 
Prudential Diversified Bond Portfolio
  $ 7,698,302     $ (11,875,353 )
 
Prudential Equity Portfolio
  $ 20,510,808     $ (103,064,886 )
 
Prudential Flexible Managed Portfolio
  $ 11,833,080     $ (63,102,675 )
 
Prudential Conservative Balanced Portfolio
  $ 11,502,688     $ (56,122,928 )
 
Prudential High Yield Bond Portfolio
  $ 2,244,662     $ (8,684,098 )
 
Prudential Stock Index Portfolio
  $ 30,699,784     $ (60,574,866 )
 
Prudential Value Portfolio
  $ 8,699,447     $ (47,521,727 )
 
Prudential Natural Resources Portfolio
  $ 11,600,725     $ (60,765,207 )
 
Prudential Global Portfolio
  $ 9,188,171     $ (19,888,946 )
 
Prudential Government Income Portfolio
  $ 8,720,680     $ (6,897,827 )
 
Prudential Jennison Portfolio
  $ 12,284,955     $ (32,292,740 )
 
Prudential Small Capitalization Stock Portfolio
  $ 6,828,431     $ (24,698,773 )
 
T. Rowe Price International Stock Portfolio
  $ 142,143     $ (225,538 )
 
Janus Aspen Large Cap Growth Portfolio - Institutional Shares
  $ 720,754     $ (615,157 )
 
MFS Emerging Growth Series
  $ 223,750     $ (321,334 )
 
American Century VP Value Fund
  $ 214,584     $ (261,791 )
 
Prudential SP T. Rowe Price Large-Cap Growth Portfolio
  $ 491,435     $ (962,395 )
 
Prudential SP Davis Value Portfolio
  $ 276,718     $ (113,790 )
 
Prudential SP Small Cap Value Portfolio
  $ 151,260     $ (166,992 )

 
A27

 
 
Note 5:
Purchases and Sales of Investments (Continued)
 
     
Purchases
   
Sales
 
 
Prudential SP Small-Cap Growth Portfolio
  $ 490,276     $ (2,069,885 )
 
Prudential SP PIMCO Total Return Portfolio
  $ 821,787     $ (1,943,899 )
 
Prudential SP PIMCO High Yield Portfolio
  $ 33,602     $ (66,847 )
 
Janus Aspen Large Cap Growth Portfolio - Service Shares
  $ 81,643     $ (421,716 )
 
Prudential SP Large Cap Value Portfolio
  $ 5,580     $ (770,634 )
 
Prudential SP AIM Core Equity Portfolio
  $ 4,826     $ (198,887 )
 
Prudential SP Strategic Partners Focused Growth Portfolio
  $ 83,241     $ (56,945 )
 
Prudential SP Mid Cap Growth Portfolio
  $ 1,440,854     $ (1,724,956 )
 
SP Prudential U.S. Emerging Growth Portfolio
  $ 326,669     $ (789,183 )
 
Prudential SP Conservative Asset Allocation Portfolio
  $ 490,329     $ (55,959 )
 
Prudential SP Balanced Asset Allocation Portfolio
  $ 106,181     $ (47,870 )
 
Prudential SP Growth Asset Allocation Portfolio
  $ 212,748     $ (95,577 )
 
Prudential SP Aggressive Growth Asset Allocation Portfolio
  $ 41,371     $ (54,105 )
 
Prudential SP International Growth Portfolio
  $ 1,055,775     $ (770,634 )
 
Prudential SP International Value Portfolio
  $ 656,186     $ (1,586,018 )
 
AST Marsico Capital Growth Portfolio
  $ 368,134     $ (66,186 )
 
AST T.Rowe Price Large-Cap Growth Portfolio
  $ 255,861     $ (11,767 )
 
AST Large-Cap Value Portfolio
  $ 1,723,875     $ (950,301 )
 
AST Small-Cap Growth Portfolio
  $ 1,375,227     $ (91,222 )
 
Note 6:
Related Party Transactions
   
 
PFI and its affiliates perform various services on behalf of the mutual fund company that manages the portfolios in which the Account invests and may receive fees for the services performed. These services include, among other things, shareholder communications, preparation, postage, fund transfer agency and various other record keeping and customer service functions.
   
 
The Series Fund has a management agreement with Prudential Investment LLC (“PI”), an indirect, wholly-owned subsidiary of PFI. Pursuant to this agreement PI has responsibility for all investment advisory services and supervises the subadvisors’ performance of such services. PI has entered into subadvisory agreements with several subadvisors, including Prudential Investment Management, Inc. and Jennison Associates LLC, which are indirect, wholly-owned subsidiaries of PFI.
   
 
The Series Fund has a distribution agreement with Prudential Investment Management Services LLC (“PIMS”), an indirect, wholly-owned subsidiary of PFl, which acts as the distributor of the Class I and Class II shares of the Series Fund. No distribution or service fees are paid to PIMS as distributor of the Class I shares of the Series Fund.
   
 
PI has agreed to reimburse certain portfolios of the Series Fund the portion of the management fee for that portfolio equal to the amount that the aggregate annual ordinary operating expenses (excluding interest, taxes, and brokerage commissions) exceeds various agreed upon percentages of the portfolio’s average daily net assets.
   
 
Prudential Mutual Fund Services LLC (“PMFS”), an affiliate of PI and an indirect, wholly-owned subsidiary of PFI, serves as the Series Fund’s transfer agent.

 
A28

 

Note 7:
Financial Highlights
   
 
Prudential sells a number of variable life products that are funded by the Account. These products have unique combinations of features and fees that are charged against the contract owner’s account balance. Differences in the fee structures result in a variety of unit values, expense ratios and total returns.
   
 
The following table was developed by determining which products offered by Prudential and funded by the Account have the lowest and highest expense ratio. Only product designs within each subaccount that had units outstanding during the respective periods were considered when determining the lowest and highest expense ratio. The summary may not reflect the minimum and maximum contract charges offered by Prudential as contract owners may not have selected all available and applicable contract options.
 
   
At year ended
 
For year ended
   
Units
(000s)
 
Unit Value
Lowest – Highest
 
Net
Assets
(000s)
 
Investment
Income
Ratio*
 
Expense Ratio**
Lowest – Highest
 
Total Return***
Lowest – Highest
     
   
Prudential Money Market Portfolio
December 31, 2008
 
81,376
 
$1.44687 to $2.18847
 
$
169,450
 
2.60%
 
0.60% to 0.90%
 
1.73% to
 
2.04%
December 31, 2007
 
78,737
 
$1.41813 to $2.14468
 
$
161,047
 
4.93%
 
0.60% to 0.90%
 
4.11% to
 
4.44%
December 31, 2006
 
74,752
 
$1.35814 to $2.05352
 
$
144,870
 
4.64%
 
0.60% to 0.90%
 
3.82% to
 
4.13%
December 31, 2005
 
75,720
 
$1.30433 to $1.97221
 
$
141,384
 
2.88%
 
0.60% to 0.90%
 
1.98% to
 
2.29%
December 31, 2004
 
64,734
 
$1.27517 to $1.92809
 
$
117,396
 
1.01%
 
0.60% to 0.90%
 
0.10% to
 
0.43%
                               
   
Prudential Diversified Bond Portfolio
December 31, 2008
 
55,976
 
$1.69315 to $3.41803
 
$
180,269
 
5.19%
 
0.60% to 0.90%
 
–4.32% to
 
–4.03%
December 31, 2007
 
57,024
 
$1.76433 to $3.56167
 
$
191,053
 
5.06%
 
0.60% to 0.90%
 
4.76% to
 
5.07%
December 31, 2006
 
59,776
 
$1.67919 to $3.38976
 
$
190,309
 
4.91%
 
0.60% to 0.90%
 
4.04% to
 
4.36%
December 31, 2005
 
61,430
 
$1.60922 to $3.24819
 
$
187,655
 
5.32%
 
0.60% to 0.90%
 
2.36% to
 
2.67%
December 31, 2004
 
62,499
 
$1.56767 to $3.16385
 
$
186,272
 
4.46%
 
0.60% to 0.90%
 
4.64% to
 
4.96%
                               
   
Prudential Equity Portfolio
December 31, 2008
 
242,180
 
$1.26021 to $4.32262
 
$
992,251
 
1.44%
 
0.60% to 0.90%
 
–38.71% to
 
–38.53%
December 31, 2007
 
254,580
 
$2.05004 to $7.03187
 
$
1,699,457
 
1.07%
 
0.60% to 0.90%
 
8.34% to
 
8.67%
December 31, 2006
 
265,037
 
$1.88658 to $6.47089
 
$
1,630,000
 
1.10%
 
0.60% to 0.90%
 
11.56% to
 
11.90%
December 31, 2005
 
275,134
 
$1.68604 to $5.78274
 
$
1,514,538
 
0.99%
 
0.60% to 0.90%
 
10.48% to
 
10.81%
December 31, 2004
 
285,086
 
$1.52160 to $5.21868
 
$
1,419,205
 
1.30%
 
0.60% to 0.90%
 
8.95% to
 
9.27%
                               
   
Prudential Flexible Managed Portfolio
December 31, 2008
 
259,855
 
$1.35704 to $3.55724
 
$
885,349
 
2.96%
 
0.60% to 0.90%
 
–25.49% to
 
–25.27%
December 31, 2007
 
270,315
 
$1.81592 to $4.76007
 
$
1,234,892
 
2.37%
 
0.60% to 0.90%
 
5.40% to
 
5.72%
December 31, 2006
 
281,637
 
$1.71765 to $4.50247
 
$
1,215,560
 
1.96%
 
0.60% to 0.90%
 
11.17% to
 
11.50%
December 31, 2005
 
291,077
 
$1.54053 to $4.03794
 
$
1,129,100
 
1.88%
 
0.60% to 0.90%
 
3.23% to
 
3.54%
December 31, 2004
 
368,033
 
$1.48797 to $3.89990
 
$
1,392,012
 
1.42%
 
0.60% to 0.90%
 
9.75% to
 
10.09%
                               
   
Prudential Conservative Balanced Portfolio
December 31, 2008
 
258,075
 
$1.37489 to $3.08922
 
$
765,814
 
3.43%
 
0.60% to 0.90%
 
–22.11% to
 
–21.87%
December 31, 2007
 
269,072
 
$1.75988 to $3.95410
 
$
1,023,369
 
2.95%
 
0.60% to 0.90%
 
5.17% to
 
5.49%
December 31, 2006
 
279,923
 
$1.66835 to $3.74835
 
$
1,009,556
 
2.53%
 
0.60% to 0.90%
 
9.45% to
 
9.78%
December 31, 2005
 
291,401
 
$1.51981 to $3.41452
 
$
959,478
 
2.33%
 
0.60% to 0.90%
 
2.51% to
 
2.82%
December 31, 2004
 
302,417
 
$1.47808 to $3.32097
 
$
970,479
 
1.95%
 
0.60% to 0.90%
 
7.07% to
 
7.40%
                               
   
Prudential High Yield Bond Portfolio
December 31, 2008
 
33,217
 
$1.26883 to $2.65488
 
$
83,041
 
8.70%
 
0.60% to 0.90%
 
–22.97% to
 
–22.74%
December 31, 2007
 
35,121
 
$1.64253 to $3.43647
 
$
113,772
 
7.11%
 
0.60% to 0.90%
 
1.71% to
 
2.00%
December 31, 2006
 
36,309
 
$1.61051 to $3.36918
 
$
115,600
 
7.85%
 
0.60% to 0.90%
 
9.26% to
 
9.61%
December 31, 2005
 
37,335
 
$1.46934 to $3.07393
 
$
108,519
 
6.88%
 
0.60% to 0.90%
 
2.48% to
 
2.82%
December 31, 2004
 
38,283
 
$1.42899 to $2.99029
 
$
108,497
 
7.35%
 
0.60% to 0.90%
 
9.31% to
 
9.66%
                               
   
Prudential Stock Index Portfolio
December 31, 2008
 
178,099
 
$1.35329 to $4.51451
 
$
751,970
 
2.25%
 
0.60% to 0.90%
 
–37.50% to
 
–37.32%
December 31, 2007
 
182,659
 
$2.15890 to $7.20200
 
$
1,226,725
 
1.60%
 
0.60% to 0.90%
 
4.16% to
 
4.47%
December 31, 2006
 
194,210
 
$2.06659 to $6.89400
 
$
1,243,463
 
1.64%
 
0.60% to 0.90%
 
14.52% to
 
14.86%
December 31, 2005
 
200,260
 
$1.79921 to $6.00224
 
$
1,121,090
 
1.56%
 
0.60% to 0.90%
 
3.61% to
 
3.92%
December 31, 2004
 
168,935
 
$1.73146 to $5.77605
 
$
895,659
 
1.65%
 
0.60% to 0.90%
 
9.46% to
 
9.80%
 
 
A29

 
 
Note 7:
Financial Highlights (Continued)
 
   
At year ended
 
For year ended
   
Units
(000s)
 
Unit Value
Lowest – Highest
 
Net
Assets
(000s)
 
Investment
Income
Ratio*
 
Expense Ratio**
Lowest – Highest
 
Total Return***
Lowest – Highest
     
   
Prudential Value Portfolio
December 31, 2008
 
85,822
 
$ 1.56943 to $ 4.70735
 
$
378,840
 
1.86%
 
0.60% to 0.90%
 
–42.81% to
 
–42.64%
December 31, 2007
 
91,174
 
$ 2.73606 to $ 8.20645
 
$
702,974
 
1.40%
 
0.60% to 0.90%
 
2.26% to
 
2.57%
December 31, 2006
 
95,658
 
$ 2.66742 to $ 8.00071
 
$
718,647
 
1.48%
 
0.60% to 0.90%
 
18.87% to
 
19.23%
December 31, 2005
 
96,637
 
$ 2.23726 to $ 6.71072
 
$
614,563
 
1.40%
 
0.60% to 0.90%
 
15.62% to
 
15.97%
December 31, 2004
 
98,649
 
$ 1.92935 to $ 5.78675
 
$
542,125
 
1.40%
 
0.60% to 0.90%
 
15.28% to
 
15.62%
                               
   
Prudential Natural  Resources Portfolio
December 31, 2008
 
36,898
 
$4.17855 to $10.22806
 
$
364,440
 
0.78%
 
0.60% to 0.90%
 
–53.42% to
 
–53.28%
December 31, 2007
 
39,719
 
$8.97121 to $21.89377
 
$
840,600
 
0.63%
 
0.60% to 0.90%
 
46.97% to
 
47.41%
December 31, 2006
 
41,386
 
$6.10429 to $14.85267
 
$
594,588
 
1.88%
 
0.60% to 0.90%
 
21.11% to
 
21.47%
December 31, 2005
 
42,521
 
$5.04033 to $12.22757
 
$
503,399
 
0.00%
 
0.60% to 0.90%
 
54.52% to
 
54.98%
December 31, 2004
 
41,582
 
$ 3.26185 to $ 7.88957
 
$
318,549
 
3.37%
 
0.60% to 0.90%
 
24.06% to
 
24.43%
                               
   
Prudential Global Portfolio
December 31, 2008
 
141,238
 
$ 1.23256 to $ 1.60237
 
$
222,957
 
1.80%
 
0.60% to 0.90%
 
–43.43% to
 
–43.26%
December 31, 2007
 
145,582
 
$ 2.17237 to $ 2.82411
 
$
405,180
 
1.12%
 
0.60% to 0.90%
 
9.49% to
 
9.82%
December 31, 2006
 
144,223
 
$ 1.97822 to $ 2.57168
 
$
365,827
 
0.63%
 
0.60% to 0.90%
 
18.58% to
 
18.94%
December 31, 2005
 
142,096
 
$ 1.66328 to $ 2.16226
 
$
303,278
 
0.61%
 
0.60% to 0.90%
 
15.03% to
 
15.37%
December 31, 2004
 
114,980
 
$ 1.44164 to $ 1.87418
 
$
212,114
 
0.98%
 
0.60% to 0.90%
 
8.61% to
 
8.94%
                               
   
Prudential Government Income Portfolio
December 31, 2008
 
32,797
 
$ 1.80202 to $ 3.32980
 
$
106,338
 
4.02%
 
0.60% to 0.90%
 
3.37% to
 
3.68%
December 31, 2007
 
32,222
 
$ 1.74314 to $ 3.21159
 
$
100,166
 
4.45%
 
0.60% to 0.90%
 
4.75% to
 
5.06%
December 31, 2006
 
33,573
 
$ 1.66408 to $ 3.05682
 
$
99,549
 
4.87%
 
0.60% to 0.90%
 
2.82% to
 
3.12%
December 31, 2005
 
35,758
 
$ 1.61851 to $ 2.96433
 
$
102,669
 
4.60%
 
0.60% to 0.90%
 
1.60% to
 
1.90%
December 31, 2004
 
37,497
 
$ 1.59306 to $ 2.90912
 
$
106,232
 
3.75%
 
0.60% to 0.90%
 
2.20% to
 
2.50%
                               
   
Prudential Jennison Portfolio
December 31, 2008
 
174,341
 
$ 1.28966 to $ 1.85874
 
$
315,809
 
0.52%
 
0.60% to 0.90%
 
–37.84% to
 
–37.65%
December 31, 2007
 
181,368
 
$ 2.06863 to $ 2.98128
 
$
527,528
 
0.30%
 
0.60% to 0.90%
 
11.00% to
 
11.33%
December 31, 2006
 
190,683
 
$ 1.85818 to $ 2.67788
 
$
498,612
 
0.30%
 
0.60% to 0.90%
 
0.88% to
 
1.18%
December 31, 2005
 
197,457
 
$ 1.83649 to $ 2.64664
 
$
510,806
 
0.10%
 
0.60% to 0.90%
 
13.54% to
 
13.88%
December 31, 2004
 
202,106
 
$ 1.61270 to $ 2.32414
 
$
459,943
 
0.47%
 
0.60% to 0.90%
 
8.66% to
 
8.98%
                               
   
Prudential Small Capitalization Stock Portfolio
December 31, 2008
 
76,027
 
$ 2.25989 to $ 2.67299
 
$
199,585
 
1.15%
 
0.60% to 0.90%
 
–31.65% to
 
–31.45%
December 31, 2007
 
80,929
 
$ 3.30649 to $ 3.89928
 
$
310,179
 
0.59%
 
0.60% to 0.90%
 
–1.42% to
 
–1.13%
December 31, 2006
 
85,348
 
$ 3.35417 to $ 3.94365
 
$
330,940
 
0.59%
 
0.60% to 0.90%
 
13.65% to
 
13.99%
December 31, 2005
 
88,351
 
$ 2.95144 to $ 3.45969
 
$
300,796
 
0.61%
 
0.60% to 0.90%
 
6.31% to
 
6.62%
December 31, 2004
 
90,323
 
$ 2.77638 to $ 3.24476
 
$
288,621
 
0.61%
 
0.60% to 0.90%
 
20.95% to
 
21.31%
                               
   
T. Rowe Price International Stock Portfolio
December 31, 2008
 
1,274
 
$ 0.82320 to $ 0.82320
 
$
1,049
 
2.02%
 
0.60% to 0.60%
 
–49.01% to
 
–49.01%
December 31, 2007
 
1,325
 
$ 1.61437 to $ 1.61437
 
$
2,139
 
1.40%
 
0.60% to 0.60%
 
12.36% to
 
12.36%
December 31, 2006
 
1,379
 
$ 1.43677 to $ 1.43677
 
$
1,982
 
1.22%
 
0.60% to 0.60%
 
18.38% to
 
18.38%
December 31, 2005
 
1,364
 
$ 1.21372 to $ 1.21372
 
$
1,656
 
1.69%
 
0.60% to 0.60%
 
15.35% to
 
15.35%
December 31, 2004
 
1,308
 
$ 1.05224 to $ 1.05224
 
$
1,376
 
1.17%
 
0.60% to 0.60%
 
13.10% to
 
13.10%
                               
   
Janus Aspen Large Cap Growth Portfolio - Institutional Shares
December 31, 2008
 
4,400
 
$ 1.03200 to $ 1.03200
 
$
4,541
 
0.75%
 
0.60% to 0.60%
 
–40.08% to
 
–40.08%
December 31, 2007
 
4,276
 
$ 1.72228 to $ 1.72228
 
$
7,365
 
0.73%
 
0.60% to 0.60%
 
14.40% to
 
14.40%
December 31, 2006
 
4,176
 
$ 1.50548 to $ 1.50548
 
$
6,287
 
0.50%
 
0.60% to 0.60%
 
10.72% to
 
10.72%
December 31, 2005
 
4,069
 
$ 1.35970 to $ 1.35970
 
$
5,533
 
0.35%
 
0.60% to 0.60%
 
3.66% to
 
3.66%
December 31, 2004
 
3,762
 
$ 1.31164 to $ 1.31164
 
$
4,935
 
0.16%
 
0.60% to 0.60%
 
3.89% to
 
3.89%
                               
   
MFS Growth Series
December 31, 2008
 
1,614
 
$ 1.13438 to $ 1.13438
 
$
1,831
 
0.23%
 
0.60% to 0.60%
 
–37.79% to
 
–37.79%
December 31, 2007
 
1,666
 
$ 1.82350 to $ 1.82350
 
$
3,038
 
0.00%
 
0.60% to 0.60%
 
20.45% to
 
20.45%
December 31, 2006
 
1,716
 
$ 1.51395 to $ 1.51395
 
$
2,598
 
0.00%
 
0.60% to 0.60%
 
7.25% to
 
7.25%
December 31, 2005
 
1,692
 
$ 1.41158 to $ 1.41158
 
$
2,389
 
0.00%
 
0.60% to 0.60%
 
8.54% to
 
8.54%
December 31, 2004
 
1,613
 
$ 1.30048 to $ 1.30048
 
$
2,098
 
0.00%
 
0.60% to 0.60%
 
12.29% to
 
12.29%
 
 
A30

 
 
Note 7:
Financial Highlights (Continued)
 
   
At year ended
 
For year ended
   
Units
(000s)
 
Unit Value
Lowest – Highest
 
Net
Assets
(000s)
 
Investment
Income
Ratio*
 
Expense Ratio**
Lowest – Highest
 
Total Return***
Lowest – Highest
     
   
American Century VP Value Fund
December 31, 2008
 
1,219
 
$1.59630 to $1.59630
 
$
1,946
 
2.45%
 
0.60% to 0.60%
 
–27.21% to
 
–27.21%
December 31, 2007
 
1,232
 
$2.19302 to $2.19302
 
$
2,702
 
1.55%
 
0.60% to 0.60%
 
–5.71% to
 
–5.71%
December 31, 2006
 
1,209
 
$2.32585 to $2.32585
 
$
2,811
 
1.35%
 
0.60% to 0.60%
 
17.95% to
 
17.95%
December 31, 2005
 
1,220
 
$1.97192 to $1.97192
 
$
2,405
 
0.86%
 
0.60% to 0.60%
 
4.41% to
 
4.41%
December 31, 2004
 
1,201
 
$1.88866 to $1.88866
 
$
2,268
 
0.97%
 
0.60% to 0.60%
 
13.65% to
 
13.65%
                               
   
Prudential SP T. Rowe Price Large-Cap Growth Portfolio (expired May 1, 2008)
December 31, 2008
 
0
 
$0.00000 to $0.00000
 
$
0
 
0.00%
 
0.60% to 0.90%
 
–4.16% to
 
–4.07%
December 31, 2007
 
385
 
$1.31478 to $1.33686
 
$
508
 
0.23%
 
0.60% to 0.90%
 
7.24% to
 
7.56%
December 31, 2006
 
476
 
$1.22605 to $1.24286
 
$
584
 
0.00%
 
0.60% to 0.90%
 
4.96% to
 
5.28%
December 31, 2005
 
452
 
$1.16806 to $1.18057
 
$
527
 
0.00%
 
0.60% to 0.90%
 
15.45% to
 
15.80%
December 31, 2004
 
477
 
$1.01171 to $1.01952
 
$
483
 
0.00%
 
0.60% to 0.90%
 
5.16% to
 
5.45%
                               
   
Prudential SP Davis Value Portfolio
December 31, 2008
 
1,069
 
$0.93864 to $0.95743
 
$
1,009
 
1.41%
 
0.60% to 0.90%
 
–40.42% to
 
–40.24%
December 31, 2007
 
937
 
$1.57535 to $1.60214
 
$
1,482
 
0.79%
 
0.60% to 0.90%
 
3.65% to
 
3.95%
December 31, 2006
 
932
 
$1.51992 to $1.54125
 
$
1,420
 
1.87%
 
0.60% to 0.90%
 
14.00% to
 
14.34%
December 31, 2005
 
3,907
 
$1.33326 to $1.34795
 
$
5,211
 
1.01%
 
0.60% to 0.90%
 
8.54% to
 
8.87%
December 31, 2004
 
4,664
 
$1.22833 to $1.23817
 
$
5,729
 
0.46%
 
0.60% to 0.90%
 
11.53% to
 
11.85%
                               
   
Prudential SP Small Cap Value Portfolio
December 31, 2008
 
1,927
 
$0.95679 to $0.97631
 
$
1,847
 
1.10%
 
0.60% to 0.90%
 
–31.12% to
 
–30.91%
December 31, 2007
 
1,921
 
$1.38908 to $1.41320
 
$
2,673
 
0.75%
 
0.60% to 0.90%
 
–4.48% to
 
–4.21%
December 31, 2006
 
1,921
 
$1.45430 to $1.47528
 
$
2,799
 
0.56%
 
0.60% to 0.90%
 
13.58% to
 
13.93%
December 31, 2005
 
2,150
 
$1.28043 to $1.29493
 
$
2,755
 
0.47%
 
0.60% to 0.90%
 
3.68% to
 
3.98%
December 31, 2004
 
1,981
 
$1.23501 to $1.24532
 
$
2,448
 
0.20%
 
0.60% to 0.90%
 
19.60% to
 
19.97%
                               
   
Prudential SP Small-Cap Growth Portfolio (expired May 1, 2008)
December 31, 2008
 
0
 
$0.00000 to $0.00000
 
$
0
 
0.00%
 
0.60% to 0.90%
 
–3.71% to
 
–3.61%
December 31, 2007
 
1,389
 
$1.19778 to $1.21812
 
$
1,665
 
0.00%
 
0.60% to 0.90%
 
5.42% to
 
5.73%
December 31, 2006
 
1,533
 
$1.13621 to $1.15211
 
$
1,743
 
0.00%
 
0.60% to 0.90%
 
11.38% to
 
11.72%
December 31, 2005
 
1,698
 
$1.02013 to $1.03126
 
$
1,733
 
0.00%
 
0.60% to 0.90%
 
1.58% to
 
1.87%
December 31, 2004
 
1,470
 
$1.00431 to $1.01234
 
$
1,477
 
0.00%
 
0.60% to 0.90%
 
–1.80% to
 
–1.50%
                               
   
Prudential SP PIMCO Total Return Portfolio
December 31, 2008
 
4,375
 
$1.30027 to $1.32681
 
$
5,698
 
4.97%
 
0.60% to 0.90%
 
–1.08% to
 
–0.79%
December 31, 2007
 
5,237
 
$1.31446 to $1.33734
 
$
6,891
 
4.25%
 
0.60% to 0.90%
 
8.46% to
 
8.79%
December 31, 2006
 
6,405
 
$1.21194 to $1.22930
 
$
7,766
 
4.16%
 
0.60% to 0.90%
 
2.74% to
 
3.06%
December 31, 2005
 
6,255
 
$1.17958 to $1.19281
 
$
7,381
 
4.72%
 
0.60% to 0.90%
 
1.47% to
 
1.78%
December 31, 2004
 
5,347
 
$1.16248 to $1.17190
 
$
6,218
 
1.95%
 
0.60% to 0.90%
 
4.33% to
 
4.64%
                               
   
Prudential SP PIMCO High Yield Portfolio
December 31, 2008
 
1,003
 
$1.09087 to $1.11265
 
$
1,095
 
8.27%
 
0.60% to 0.90%
 
–26.17% to
 
–25.95%
December 31, 2007
 
1,018
 
$1.47764 to $1.50250
 
$
1,507
 
5.76%
 
0.60% to 0.90%
 
2.85% to
 
3.19%
December 31, 2006
 
2,315
 
$1.43671 to $1.45604
 
$
3,328
 
7.34%
 
0.60% to 0.90%
 
8.55% to
 
8.85%
December 31, 2005
 
2,214
 
$1.32352 to $1.33759
 
$
2,931
 
6.58%
 
0.60% to 0.90%
 
3.11% to
 
3.41%
December 31, 2004
 
2,993
 
$1.28355 to $1.29345
 
$
3,841
 
6.62%
 
0.60% to 0.90%
 
8.34% to
 
8.67%
                               
   
Janus Aspen Large Cap Growth Portfolio - Service Shares
December 31, 2008
 
339
 
$0.80560 to $0.80560
 
$
273
 
0.40%
 
0.90% to 0.90%
 
–40.40% to
 
–40.40%
December 31, 2007
 
600
 
$1.35169 to $1.35169
 
$
812
 
0.87%
 
0.90% to 0.90%
 
13.77% to
 
13.77%
December 31, 2006
 
161
 
$1.18814 to $1.18814
 
$
192
 
0.29%
 
0.90% to 0.90%
 
10.14% to
 
10.14%
December 31, 2005
 
125
 
$1.07877 to $1.07877
 
$
135
 
0.13%
 
0.90% to 0.90%
 
3.09% to
 
3.09%
December 31, 2004
 
152
 
$1.04647 to $1.04647
 
$
159
 
0.00%
 
0.90% to 0.90%
 
3.28% to
 
3.28%
                               
   
Prudential SP Large Cap Value Portfolio (expired May 1, 2008)
December 31, 2008
 
0
 
$0.00000 to $0.00000
 
$
0
 
0.00%
 
0.60% to 0.90%
 
–4.01% to
 
–3.92%
December 31, 2007
 
538
 
$1.46746 to $1.49266
 
$
792
 
1.91%
 
0.60% to 0.90%
 
–3.70% to
 
–3.41%
December 31, 2006
 
422
 
$1.52386 to $1.54538
 
$
646
 
0.92%
 
0.60% to 0.90%
 
17.42% to
 
17.77%
December 31, 2005
 
233
 
$1.29782 to $1.31225
 
$
303
 
0.24%
 
0.60% to 0.90%
 
5.69% to
 
6.01%
December 31, 2004
 
114
 
$1.22793 to $1.23785
 
$
140
 
0.65%
 
0.60% to 0.90%
 
16.71% to
 
17.05%
 
 
A31

 
 
Note 7:
Financial Highlights (Continued)
 
   
At year ended
 
For year ended
   
Units
(000s)
 
Unit Value
Lowest – Highest
 
Net
Assets
(000s)
 
Investment
Income
Ratio*
 
Expense Ratio**
Lowest–- Highest
 
Total Return***
Lowest – Highest
                         
   
Prudential SP AIM Core Equity Portfolio (expired May 1, 2008)
December 31, 2008
 
0
 
$0.00000 to $0.00000
 
$
0
 
0.00%
 
0.60% to 0.90%
 
–1.32% to
 
–1.23%
December 31, 2007
 
135
 
$1.44874 to $1.47359
 
$
196
 
1.26%
 
0.60% to 0.90%
 
6.86% to
 
7.19%
December 31, 2006
 
112
 
$1.35574 to $1.37480
 
$
152
 
0.78%
 
0.60% to 0.90%
 
15.02% to
 
15.36%
December 31, 2005
 
95
 
$1.17870 to $1.19175
 
$
112
 
1.11%
 
0.60% to 0.90%
 
3.70% to
 
4.00%
December 31, 2004
 
80
 
$1.13668 to $1.14588
 
$
91
 
0.49%
 
0.60% to 0.90%
 
7.80% to
 
8.14%
                               
   
Prudential SP Strategic Partners Focused Growth Portfolio
December 31, 2008
 
423
 
$0.86890 to $0.88645
 
$
369
 
0.00%
 
0.60% to 0.90%
 
–38.97% to
 
–38.78%
December 31, 2007
 
391
 
$1.42362 to $1.44798
 
$
558
 
0.00%
 
0.60% to 0.90%
 
14.21% to
 
14.56%
December 31, 2006
 
371
 
$1.24647 to $1.26395
 
$
464
 
0.00%
 
0.60% to 0.90%
 
–1.54% to
 
–1.25%
December 31, 2005
 
26
 
$1.26599 to $1.27992
 
$
33
 
0.00%
 
0.60% to 0.90%
 
14.11% to
 
14.45%
December 31, 2004
 
4
 
$1.10942 to $1.11828
 
$
4
 
0.00%
 
0.60% to 0.90%
 
9.59% to
 
9.92%
                               
   
Prudential SP Mid Cap Growth Portfolio
December 31, 2008
 
399
 
$0.74827 to $0.76327
 
$
301
 
0.00%
 
0.60% to 0.90%
 
–43.08% to
 
–42.91%
December 31, 2007
 
661
 
$1.31463 to $1.33691
 
$
872
 
0.18%
 
0.60% to 0.90%
 
15.17% to
 
15.51%
December 31, 2006
 
883
 
$1.14151 to $1.15736
 
$
1,011
 
0.00%
 
0.60% to 0.90%
 
–2.81% to
 
–2.53%
December 31, 2005
 
882
 
$1.17452 to $1.18742
 
$
1,038
 
0.00%
 
0.60% to 0.90%
 
4.32% to
 
4.63%
December 31, 2004
 
283
 
$1.12589 to $1.13489
 
$
319
 
0.00%
 
0.60% to 0.90%
 
18.49% to
 
18.83%
                               
   
SP Prudential U.S. Emerging Growth Portfolio
December 31, 2008
 
1,827
 
$1.19460 to $1.21827
 
$
2,184
 
0.30%
 
0.60% to 0.90%
 
–36.80% to
 
–36.61%
December 31, 2007
 
2,125
 
$1.89006 to $1.92190
 
$
4,019
 
0.35%
 
0.60% to 0.90%
 
15.77% to
 
16.12%
December 31, 2006
 
2,457
 
$1.63265 to $1.65517
 
$
4,014
 
0.00%
 
0.60% to 0.90%
 
8.60% to
 
8.93%
December 31, 2005
 
2,583
 
$1.50331 to $1.51950
 
$
3,884
 
0.00%
 
0.60% to 0.90%
 
16.74% to
 
17.07%
December 31, 2004
 
765
 
$1.28779 to $1.29792
 
$
986
 
0.00%
 
0.60% to 0.90%
 
20.30% to
 
20.66%
                               
   
Prudential SP Conservative Asset Allocation Portfolio
December 31, 2008
 
603
 
$1.13924 to $1.16234
 
$
693
 
2.18%
 
0.60% to 0.90%
 
–20.92% to
 
–20.68%
December 31, 2007
 
285
 
$1.44054 to $1.46531
 
$
415
 
3.09%
 
0.60% to 0.90%
 
8.41% to
 
8.74%
December 31, 2006
 
311
 
$1.32877 to $1.34756
 
$
417
 
3.40%
 
0.60% to 0.90%
 
7.70% to
 
8.03%
December 31, 2005
 
339
 
$1.23376 to $1.24740
 
$
421
 
1.33%
 
0.60% to 0.90%
 
4.96% to
 
5.27%
December 31, 2004
 
264
 
$1.17542 to $1.18496
 
$
312
 
1.26%
 
0.60% to 0.90%
 
7.92% to
 
8.24%
                               
   
Prudential SP Balanced Asset Allocation Portfolio
December 31, 2008
 
532
 
$1.07609 to $1.09781
 
$
580
 
2.51%
 
0.60% to 0.90%
 
–29.19% to
 
–28.97%
December 31, 2007
 
488
 
$1.51959 to $1.54560
 
$
748
 
2.09%
 
0.60% to 0.90%
 
8.37% to
 
8.70%
December 31, 2006
 
561
 
$1.40222 to $1.42193
 
$
791
 
2.23%
 
0.60% to 0.90%
 
9.71% to
 
10.03%
December 31, 2005
 
420
 
$1.27817 to $1.29229
 
$
540
 
1.02%
 
0.60% to 0.90%
 
6.65% to
 
6.96%
December 31, 2004
 
341
 
$1.19851 to $1.20821
 
$
410
 
0.64%
 
0.60% to 0.90%
 
10.09% to
 
10.42%
                               
   
Prudential SP Growth Asset Allocation Portfolio
December 31, 2008
 
1,071
 
$0.99745 to $1.01740
 
$
1,076
 
1.76%
 
0.60% to 0.90%
 
–36.92% to
 
–36.74%
December 31, 2007
 
990
 
$1.58136 to $1.60825
 
$
1,577
 
1.61%
 
0.60% to 0.90%
 
8.25% to
 
8.57%
December 31, 2006
 
909
 
$1.46083 to $1.48126
 
$
1,337
 
1.65%
 
0.60% to 0.90%
 
11.88% to
 
12.22%
December 31, 2005
 
692
 
$1.30565 to $1.32000
 
$
907
 
0.53%
 
0.60% to 0.90%
 
8.26% to
 
8.59%
December 31, 2004
 
394
 
$1.20601 to $1.21562
 
$
476
 
0.70%
 
0.60% to 0.90%
 
12.04% to
 
12.37%
                               
   
Prudential SP Aggressive Growth Asset Allocation Portfolio
December 31, 2008
 
1,077
 
$0.91948 to $0.93817
 
$
992
 
1.08%
 
0.60% to 0.90%
 
–42.70% to
 
–42.53%
December 31, 2007
 
1,079
 
$1.60472 to $1.63236
 
$
1,734
 
0.95%
 
0.60% to 0.90%
 
8.22% to
 
8.54%
December 31, 2006
 
1,100
 
$1.48283 to $1.50389
 
$
1,633
 
2.11%
 
0.60% to 0.90%
 
13.26% to
 
13.60%
December 31, 2005
 
1,349
 
$1.30925 to $1.32384
 
$
1,767
 
0.17%
 
0.60% to 0.90%
 
9.50% to
 
9.83%
December 31, 2004
 
1,199
 
$1.19566 to $1.20539
 
$
1,435
 
0.06%
 
0.60% to 0.90%
 
13.73% to
 
14.08%
     
   
Prudential SP International Growth Portfolio
December 31, 2008
 
2,405
 
$0.99677 to $1.01686
 
$
2,400
 
1.57%
 
0.60% to 0.90%
 
–50.74% to
 
–50.59%
December 31, 2007
 
2,225
 
$2.02355 to $2.05803
 
$
4,507
 
0.89%
 
0.60% to 0.90%
 
18.48% to
 
18.83%
December 31, 2006
 
1,653
 
$1.70796 to $1.73186
 
$
2,826
 
0.82%
 
0.60% to 0.90%
 
19.96% to
 
20.33%
December 31, 2005
 
756
 
$1.42375 to $1.43929
 
$
1,077
 
0.99%
 
0.60% to 0.90%
 
15.36% to
 
15.70%
December 31, 2004
 
1,112
 
$1.23423 to $1.24404
 
$
1,372
 
0.22%
 
0.60% to 0.90%
 
15.50% to
 
15.85%
 
 
A32

 

Note 7:
Financial Highlights (Continued)
 
   
At year ended
 
For year ended
   
Units
(000s)
 
Unit Value
Lowest – Highest
 
Net
Assets
(000s)
 
Investment
Income
Ratio*
 
Expense Ratio**
Lowest – Highest
 
Total Return***
Lowest – Highest
     
   
Prudential SP International Value Portfolio
December 31, 2008
 
2,419
 
$1.11505 to $1.13724
 
$
2,701
 
2.98%
 
0.60% to 0.90%
 
–44.56% to
 
–44.39%
December 31, 2007
 
2,889
 
$2.01130 to $2.04511
 
$
5,816
 
1.89%
 
0.60% to 0.90%
 
17.03% to
 
17.38%
December 31, 2006
 
3,893
 
$1.71864 to $1.74236
 
$
6,693
 
1.05%
 
0.60% to 0.90%
 
27.95% to
 
28.32%
December 31, 2005
 
2,274
 
$1.34318 to $1.35783
 
$
3,055
 
0.21%
 
0.60% to 0.90%
 
12.76% to
 
13.08%
December 31, 2004
 
1,074
 
$1.19123 to $1.20073
 
$
1,280
 
0.44%
 
0.60% to 0.90%
 
14.76% to
 
15.11%
     
   
AST Marsico Capital Growth Portfolio (available May 1st 2008)
December 31, 2008
 
30
 
$6.09083 to $6.10302
 
$
183
 
0.31%
 
0.60% to 0.90%
 
–39.73% to
 
–39.61%
     
   
AST T. Rowe Price Large-Cap Growth Portfolio (available May 1st 2008)
December 31, 2008
 
24
 
$6.25402 to $6.26653
 
$
152
 
0.13%
 
0.60% to 0.90%
 
–38.57% to
 
–38.44%
     
   
AST Large-Cap Value Portfolio (available May 1st 2008)
December 31, 2008
 
71
 
$6.13644 to $6.14877
 
$
436
 
1.74%
 
0.60% to 0.90%
 
–39.72% to
 
–39.60%
     
   
AST Small-Cap Growth Portfolio (available May 1st 2008)
December 31, 2008
 
128
 
$6.78407 to $6.79773
 
$
871
 
0.00%
 
0.60% to 0.90%
 
–33.14% to
 
–33.00%
 
   
 
*These amounts represent the dividends, excluding distributions of capital gains, received by the subaccount from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. This ratio is annualized and excludes those expenses, such as mortality and expense charges, that result in direct reductions in the unit values. The recognition of investment income by the subaccount is affected by the timing of the declaration of dividends by the underlying fund in which the subaccounts invest.
   
 
**These ratios represent the annualized contract expenses of the separate account, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying fund are excluded.
   
 
***These amounts represent the total return for the periods indicated, including changes in the value of the underlying fund, and reflect deductions for all items included in the expense ratio. The total return does not include any expenses assessed through the redemption of units; inclusion of these expenses in the calculation would result in a reduction in the total return presented. Investment options with a date notation indicate the effective date of that investment option in the Account, the total return is calculated for each of the five years in the period ended December 31, 2008 or from the effective date of the subaccount through the end of the reporting period. Product designs within a subaccount with an effective date during a period were excluded from the range of total return for that period.
   
 
Charges and Expenses
   
 
A. Mortality Risk and Expense Risk Charges
   
 
The mortality risk and expense risk charges, at an effective annual rate of 0.90%, is applied daily against the net assets of PVAL, SVUL and VUL contract owners held in each subaccount. Mortality risk is that contract owners may not live as long as estimated and expense risk is that the cost of issuing and administering the policies may exceed related charges by Prudential. Prudential currently intends to charge only 0.60% on PVAL contracts with face amounts of $100,000 or more and for VUL contracts but reserves the right to make the full 0.90% charge. The mortality risk and expense risk charges are assessed through reduction in unit values.
 
 
A33

 
 
Note 7:   Financial Highlights (Continued)
   
 
B. Partial Withdrawal Charge
   
 
A charge is imposed by Prudential on partial withdrawals of the cash surrender value. A charge equal to the lesser of $25 or 2% for SVUL and VUL and $15 or 2% for PVAL will be made in connection with each partial withdrawal of the cash surrender value of a contract. The range for withdrawal charges is 0% - 2%. A charge is assessed through the redemption of units.
 
C. Deferred Sales Charge
   
 
A deferred sales charge is imposed upon surrenders of certain variable life insurance contracts to compensate Prudential for sales and other marketing expenses.The amount of any sales charge will depend on the number of years that have elapsed since the contract was issued but will not exceed 50% of the first year’s primary annual premium for PVAL contracts and 26% of the lesser of (a) the target level premium for the contract and (b) the actual premiums paid for VUL contracts. No sales charge will be imposed after the tenth year of the contract. No sales charge will be imposed on death benefits. A deferred sales charge is assessed through the redemption of units.
   
 
D. Cost of Insurance and Other Related Charges
   
 
Contract owner contributions are subject to certain deductions prior to being invested in the Account. The deductions are for (1) transaction costs which are deducted from each premium payment for PVAL and VUL, to cover premium collection and processing costs; (2) state premium taxes; and (3) sales charges which are deducted in order to compensate Prudential for the cost of selling the contract. Sales charges will not exceed 0.5% of the primary annual premium for PVAL contracts, 30% of the premiums paid in the first contract year up to the amount of the target level premium an 4% of premiums paid in excess of the target level premium for SVUL contracts and 4% of premiums paid in each contract year up to the amount of the target level premium for VUL contracts. Contracts are also subject to monthly charges for the costs of administering the contract and to compensate Prudential for the guaranteed minimum death benefit risk. These charges are assessed through the redemption of units.
   
Note 8:   Other
   
 
Contract owner net payments — represent contract owner contributions under the Variable Life Policies reduced by applicable deductions, charges, and state premium taxes.
   
 
Policy loans — represent amounts borrowed by contractholders using the policy as the security for the loan.
   
 
Policy loan repayments and interest — represent payments made by contractholders to reduce the total outstanding policy loan balance.
   
 
Surrenders, withdrawals, and death benefits — are payments to contract owners and beneficiaries made under the terms of the Variable Life Policies, and amounts that contract owners have requested to be withdrawn or paid to them.
   
 
Net transfers between other subaccounts or fixed rate options — are amounts that contract owners have directed to be moved among subaccounts, including permitted transfers to and from the Guaranteed Interest Account and Market Value Adjustment.

 
A34

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Contract Owners of
Prudential Variable Appreciable Account
and the Board of Directors of
The Prudential Insurance Company of America
 
In our opinion, the accompanying statements of net assets and the related statements of operations and of changes in net assets present fairly, in all material respects, the financial position of the subaccounts listed in Note 1 of the Prudential Variable Appreciable Account at December 31, 2008, the results of each of their operations the changes in each of their net assets for each of periods presented in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the management of Prudential Insurance Company of America. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of fund shares owned at December 31, 2008 with the transfer agents of the investee mutual funds, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
New York, New York
April 9, 2009
 
A35

 

 

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Consolidated Statements of Financial Position

December 31, 2008 and 2007 (in millions)

 

 

  

2008

  

2007

 

ASSETS

  

 

 

  

 

 

 

Fixed maturities, available for sale, at fair value (amortized cost: 2008—$107,067; 2007—$114,807)

  

$

97,256

 

$

116,608

 

Trading account assets supporting insurance liabilities, at fair value

 

 

12,717

 

 

13,273

 

Other trading account assets, at fair value

  

 

4,623

 

 

2,664

 

Equity securities, available for sale, at fair value (cost: 2008—$4,378; 2007—$5,019)

  

 

3,630

 

 

5,597

 

Commercial mortgage and other loans

  

 

27,717

 

 

24,972

 

Policy loans

  

 

7,779

 

 

7,831

 

Other long-term investments

  

 

3,513

 

 

3,149

 

Short-term investments and other

  

 

3,659

 

 

3,454

 

 

  

 

 

 

 

 

 

Total investments

  

 

160,894

 

 

177,548

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

  

 

8,123

 

 

4,870

 

Accrued investment income

  

 

1,620

 

 

1,638

 

Deferred policy acquisition costs

  

 

8,538

 

 

6,687

 

Deferred income taxes, net

 

 

1,864

 

 

—  

 

Other assets

  

 

17,289

 

 

15,549

 

Due from parent and affiliates

 

 

5,568

 

 

4,355

 

Separate account assets

  

 

122,735

 

 

153,871

 

 

  

 

 

 

 

 

 

TOTAL ASSETS

  

$

326,631

 

$

364,518

 

 

  

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

  

 

 

  

 

 

 

LIABILITIES

  

 

 

  

 

 

 

Future policy benefits

  

$

76,863

  

$

75,010

 

Policyholders’ account balances

  

 

71,199

  

 

68,358

 

Policyholders’ dividends

  

 

1,132

  

 

3,086

 

Securities sold under agreements to repurchase

  

 

7,501

  

 

10,901

 

Cash collateral for loaned securities

  

 

3,429

  

 

6,063

 

Income taxes

  

 

320

  

 

2,171

 

Short-term debt

  

 

5,655

  

 

8,452

 

Long-term debt

  

 

8,687

  

 

5,570

 

Other liabilities

  

 

11,765

  

 

10,447

 

Due to parent and affiliates

 

 

6,300

 

 

2,519

 

Separate account liabilities

  

 

122,735

  

 

153,871

 

 

  

 

 

  

 

 

 

Total liabilities

  

 

315,586

  

 

346,448

 

 

  

 

 

  

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 21)

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDER’S EQUITY

  

 

 

  

 

 

 

Common Stock ($5.00 par value; 500,000 shares authorized, issued and outstanding at December 31, 2008 and 2007)

 

 

2

 

 

2

 

Additional paid-in capital

 

 

17,819

 

 

15,914

 

Accumulated other comprehensive income (loss)

  

 

(6,590

)

 

174

 

Retained earnings (deficit)

  

 

(186

)

 

1,980

 

 

  

 

 

  

 

 

 

Total stockholder’s equity

  

 

11,045

  

 

18,070

 

 

  

 

 

  

 

 

 

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY

  

$

326,631

  

$

364,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements

B-1

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Consolidated Statements of Operations

Years Ended December 31, 2008, 2007 and 2006 (in millions)

 

 

  

2008

 

  

2007

 

  

2006

 

REVENUES

  

 

 

 

  

 

 

 

  

 

 

 

Premiums

  

$

9,473

 

  

$

8,873

 

  

$

8,480

 

Policy charges and fee income

  

 

2,180

 

  

 

2,139

 

  

 

1,800

 

Net investment income

  

 

9,250

 

  

 

9,825

 

  

 

9,409

 

Realized investment gains (losses), net

  

 

(1,480

)

  

 

453

 

  

 

276

 

Other income

  

 

(113

)

  

 

1,425

 

  

 

1,195

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total revenues

  

 

19,310

 

  

 

22,715

 

  

 

21,160

 

 

  

 

 

 

  

 

 

 

  

 

 

 

BENEFITS AND EXPENSES

  

 

 

 

  

 

 

 

  

 

 

 

Policyholders’ benefits

  

 

11,573

 

  

 

10,445

 

  

 

10,020

 

Interest credited to policyholders’ account balances

  

 

2,203

 

  

 

3,025

 

  

 

2,638

 

Dividends to policyholders

  

 

2,151

 

  

 

2,754

 

  

 

2,538

 

General and administrative expenses

  

 

4,177

 

  

 

4,262

 

  

 

3,706

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total benefits and expenses

  

 

20,104

 

  

 

20,486

 

  

 

18,902

 

 

  

 

 

 

  

 

 

 

  

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF OPERATING JOINT VENTURES

  

 

(794

)

 

 

2,229

 

  

 

2,258

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Income taxes:

  

 

 

 

  

 

 

 

  

 

 

 

Current

  

 

(284

)

  

 

436

 

  

 

151

 

Deferred

  

 

(53

)

  

 

142

 

  

 

388

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total income tax expense (benefit)

  

 

(337

)

  

 

578

 

  

 

539

 

 

  

 

 

 

  

 

 

 

  

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EQUITY IN EARNINGS OF OPERATING JOINT VENTURES

 

 

(457

)

 

 

1,651

 

 

 

1,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of operating joint ventures, net of taxes

 

 

(218

)

 

 

224

 

 

 

177

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

 

 

(675

)

  

 

1,875

 

  

 

1,896

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Income from discontinued operations, net of taxes

  

 

5

 

  

 

64

 

  

 

75

 

 

  

 

 

 

  

 

 

 

  

 

 

 

NET INCOME (LOSS)

  

$

(670

)

  

$

1,939

 

  

$

1,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements

B-2

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Consolidated Statements of Stockholder’s Equity

Years Ended December 31, 2008, 2007 and 2006 (in millions)

 

 

Common Stock

 

Additional Paid-in Capital 

 

Retained Earnings (Deficit)

 

 

Accumulated Other Comprehensive Income (Loss)

 

Total Stockholder’s Equity

 

Balance, December 31, 2005

$

2

 

 

$

15,498

 

 

$

2,485

 

 

 

$

572

 

 

$

18,557

 

 

Dividend to parent

 

—  

 

 

 

—  

 

 

 

(2,469

)

 

 

 

—  

 

 

 

(2,469

)

 

Capital contribution from parent

 

—  

 

 

 

211

 

 

 

—  

 

 

 

 

—  

 

 

 

211

 

 

Long-term stock-based compensation program

 

—  

 

 

 

61

 

 

 

—  

 

 

 

 

—  

 

 

 

61

 

 

Impact of adoption of Statement of Financial Accounting Standards (“SFAS”) No. 158, net of tax

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

 

(547

)

 

 

(547

)

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

—  

 

 

 

—  

 

 

 

1,971

 

 

 

 

—  

 

 

 

1,971

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustments

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

 

29

 

 

 

29

 

 

Change in net unrealized investment gains (losses)

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

 

(186

)

 

 

(186

)

 

Additional pension liability adjustment

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

 

50

 

 

 

50

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(107

)

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,864

 

 

Balance, December 31, 2006

 

2

 

 

 

15,770

 

 

 

1,987

 

 

 

 

(82

)

 

 

17,677

 

 

Dividend to parent

 

—  

 

 

 

—  

 

 

 

(1,887

)

 

 

 

—  

 

 

 

(1,887

)

 

Capital contribution from parent

 

—  

 

 

 

34

 

 

 

—  

 

 

 

 

—  

 

 

 

34

 

 

Purchase of fixed maturities from an affiliate

 

 

 

 

 

3

 

 

 

—  

 

 

 

 

(3

)

 

 

—  

 

 

Recapture of affiliated reinsurance agreement

 

—  

 

 

 

18

 

 

 

—  

 

 

 

 

—  

 

 

 

18

 

 

Long-term stock-based compensation program

 

—  

 

 

 

89

 

 

 

—  

 

 

 

 

—  

 

 

 

89

 

 

Cumulative effect of changes in accounting principles, net of tax

 

—  

 

 

 

—  

 

 

 

(59

)

 

 

 

—  

 

 

 

(59

)

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

—  

 

 

 

—  

 

 

 

1,939

 

 

 

 

—  

 

 

 

1,939

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustments

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

 

8

 

 

 

8

 

 

Change in net unrealized investment gains (losses)

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

 

(270

)

 

 

(270

)

 

Change in pension and postretirement unrecognized net periodic

benefit

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

 

521

 

 

 

521

 

 

Other comprehensive income

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

 

—  

 

 

 

259

 

 

Total comprehensive income

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

 

—  

 

 

 

2,198

 

 

Balance, December 31, 2007

 

2

 

 

 

15,914

 

 

 

1,980

 

 

 

 

174

 

 

 

18,070

 

 

Dividend to parent

 

—  

 

 

 

—  

 

 

 

(1,523

)

 

 

 

—  

 

 

 

(1,523

)

 

Capital contribution from parent

 

—  

 

 

 

785

 

 

 

—  

 

 

 

 

—  

 

 

 

785

 

 

Deferred tax asset contributed to parent

 

—  

 

 

 

(9

)

 

 

—  

 

 

 

 

—  

 

 

 

(9

)

 

Assets purchased/transferred from affiliates

 

—  

 

 

 

81

 

 

 

—  

 

 

 

 

(145 

)

 

 

(64

)

 

Long-term stock-based compensation program

 

—  

 

 

 

7

 

 

 

—  

 

 

 

 

—  

 

 

 

7

 

 

Impact on Company’s investment in Wachovia Securities due to addition of A.G. Edwards business, net of tax

 

—  

 

 

 

1,041

 

 

 

—  

 

 

 

 

—  

 

 

 

1,041

 

 

Cumulative effect of changes in accounting principles, net of taxes

 

—  

 

 

 

—  

 

 

 

27

 

 

 

 

—  

 

 

 

27

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

—  

 

 

 

—  

 

 

 

(670

)

 

 

 

—  

 

 

 

(670

)

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustments

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

 

(24

)

 

 

(24

)

 

Change in net unrealized investment gains (losses)

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

 

(5,888

)

 

 

(5,888

)

 

Pension and postretirement unrecognized net periodic

benefit cost

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

 

(707

)

 

 

(707

)

 

Other comprehensive loss

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

 

—  

 

 

 

(6,619

)

 

Total comprehensive loss

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

 

—  

 

 

 

(7,289

)

 

Balance, December 31, 2008

$

2

 

 

$

17,819

 

 

$

(186

)

 

 

$

(6,590

)

 

$

11,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements

B-3

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Consolidated Statements of Cash Flows

Years Ended December 31, 2008, 2007 and 2006 (in millions)

 

 

  

2008

 

  

2007

 

  

2006

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

  

$

(670

)

  

$

1,939

 

  

$

1,971

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

  

 

 

 

  

 

 

 

  

 

 

 

Realized investment (gains) losses, net

  

 

1,480

 

  

 

(453

)

  

 

(276

)

Policy charges and fee income

  

 

(761

)

  

 

(662

)

  

 

(473

)

Interest credited to policyholders’ account balances

  

 

2,203

 

  

 

3,025

 

  

 

2,638

 

Depreciation and amortization

  

 

620

 

  

 

53

 

  

 

71

 

Losses on trading account assets supporting insurance liabilities, net

 

 

1,364

 

 

 

— 

 

 

 

— 

 

Change in:

  

 

 

 

  

 

 

 

  

 

 

 

Deferred policy acquisition costs

  

 

(259

)

  

 

(537

)

  

 

(636

)

Future policy benefits and other insurance liabilities

  

 

2,430

 

  

 

1,063

 

  

 

962

 

Trading account assets supporting insurance liabilities and other trading account assets

  

 

(2,837

)

  

 

(653

)

  

 

(361

)

Income taxes

  

 

(779

)

  

 

34

 

  

 

916

 

Due to/from parent and affiliates

 

 

3,135

 

 

 

(1,519

)

 

 

1,808

 

Other, net

  

 

74

 

 

 

1,332

 

  

 

(481

)

Cash flows from operating activities

  

 

6,000

 

  

 

3,622

 

  

 

6,139

 

 

  

 

 

 

  

 

 

 

  

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

  

 

 

 

  

 

 

 

  

 

 

 

Proceeds from the sale/maturity/prepayment of:

  

 

 

 

  

 

 

 

  

 

 

 

Fixed maturities, available for sale

  

 

60,931

 

  

 

81,816

 

  

 

83,667

 

Equity securities, available for sale

  

 

2,500

 

  

 

3,303

 

  

 

3,001

 

Trading account assets supporting insurance liabilities and other trading account assets

 

 

26,391

 

 

 

— 

 

 

 

— 

 

Commercial mortgage and other loans

  

 

2,594

 

  

 

4,371

 

  

 

3,714

 

Policy loans

 

 

1,345

 

 

 

778

 

 

 

748

 

Other long-term investments

  

 

1,134

 

  

 

582

 

  

 

978

 

Short-term investments

 

 

17,949

 

 

 

12,970

 

 

 

6,882

 

Payments for the purchase/origination of:

  

 

 

 

  

 

 

 

  

 

 

 

Fixed maturities, available for sale

  

 

(55,223

)

  

 

(79,976

)

  

 

(88,521

)

Equity securities, available for sale

  

 

(2,594

)

 

 

(3,298

)

  

 

(3,051

)

Trading account assets supporting insurance liabilities and other trading account assets

 

 

(27,176

)

 

 

— 

 

 

 

— 

 

Commercial mortgage and other loans

  

 

(4,770

)

 

 

(6,848

)

  

 

(5,134

)

Policy loans

 

 

(968

)

 

 

(701

)

 

 

(815

)

Other long-term investments

  

 

(904

)

 

 

(1,137

)

  

 

(920

)

Short-term investments

 

 

(17,854

)

 

 

(12,179

)

 

 

(7,682

)

Acquisitions, net of cash acquired.

  

 

(147

)

 

 

(100

)

  

 

724

 

Due to/from parent and affiliates

 

 

(344

)

 

 

(610

)

 

 

(334

)

Other, net

 

 

(414

)

 

 

(151

)

 

 

(94

)

Cash flows from (used in) investing activities

  

 

2,450

 

 

 

(1,180

)

  

 

(6,837

)

 

  

 

 

 

 

 

 

 

  

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

  

 

 

 

 

 

 

 

  

 

 

 

Policyholders’ account deposits

  

 

20,187

 

 

 

17,871

 

  

 

20,323

 

Policyholders’ account withdrawals

  

 

(18,956

)

 

 

(17,824

)

  

 

(19,741

)

Net change in securities sold under agreements to repurchase and cash collateral for loaned securities

  

 

(5,944

)

 

 

(1,786

)

  

 

575

 

Net change in financing arrangements (maturities of 90 days or less)

  

 

(3,410

)

 

 

(745

)

  

 

436

 

Proceeds from the issuance of debt (maturities longer than 90 days)

  

 

7,534

 

 

 

3,463

 

  

 

3,851

 

Repayments of debt (maturities longer than 90 days)

 

 

(3,636

)

 

 

(2,429

)

 

 

(2,122

)

Excess tax benefits from share-based payment arrangements

 

 

9

 

 

 

40

 

 

 

39 

 

Capital contribution from parent

 

 

594

 

 

 

— 

 

 

 

143

 

Dividend to parent

 

 

(1,523

)

 

 

(1,870

)

 

 

(2,488

)

Other, net

 

 

(52

)

 

 

(18

)

 

 

— 

 

Cash flows from (used in) financing activities

  

 

(5,197

)

 

 

(3,298

)

  

 

1,016

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Effect of foreign exchange rate changes on cash balances

 

 

— 

 

 

 

(6

)

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  

 

3,253

 

  

 

(862

)

  

 

320

 

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

  

 

4,870

 

  

 

5,732

 

  

 

5,412

 

 

  

 

 

 

  

 

 

 

  

 

 

 

CASH AND CASH EQUIVALENTS, END OF YEAR

  

$

8,123

 

  

$

4,870

 

  

$

5,732

 

 

  

 

 

 

  

 

 

 

  

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

  

 

 

 

  

 

 

 

  

 

 

 

Income taxes (received) paid

  

$

379

 

  

$

57

 

  

$

(487

)

 

  

 

 

 

  

 

 

 

  

 

 

 

Interest paid

  

$

631

 

  

$

974

 

  

$

796

 

 

  

 

 

 

  

 

 

 

  

 

 

 

NON-CASH TRANSACTIONS DURING THE YEAR

 

 

 

 

 

 

 

 

 

 

 

 

Impact on Company’s investment in Wachovia Securities due to addition of AG Edwards business, net of tax

 

$

1,041

 

 

$

— 

 

 

$

— 

 

 

See Notes to Consolidated Financial Statements

B-4

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

 

1.  

BUSINESS

 

The Prudential Insurance Company of America (“Prudential Insurance”), together with its subsidiaries (collectively, the “Company”), is a wholly owned subsidiary of Prudential Holdings, LLC (“Prudential Holdings”), which is a wholly owned subsidiary of Prudential Financial, Inc. (“Prudential Financial”). The Company has organized its operations into the Closed Block Business and the Financial Services Businesses. The Closed Block Business consists principally of the Closed Block (see Note 11); assets held outside the Closed Block that Prudential Insurance needs to hold to meet capital requirements related to the Closed Block policies and invested assets held outside the Closed Block that represent the difference between the Closed Block Assets and Closed Block Liabilities and the interest maintenance reserve (collectively, “Surplus and Related Assets”); deferred policy acquisition costs related to Closed Block policies; and certain other related assets and liabilities. Its Financial Services Businesses consist primarily of non-participating individual life insurance, annuities, group insurance, retirement-related services and global commodities sales and trading. The Company also holds an equity method investment in the retail securities brokerage joint venture Wachovia Securities Financial Holdings, LLC (“Wachovia Securities”).

 

Current Market Conditions

 

Some of the Company’s operations have been materially adversely affected by the adverse conditions in the global financial markets and economic conditions generally. The Company’s results of operations and financial condition may be further adversely affected, possibly materially, if these conditions persist and deteriorate. These economic conditions include, but are not limited to:

A period of extreme volatility and limited market liquidity, particularly in the global fixed-income markets, which has lead to decreased liquidity, increased price volatility, credit downgrade events, depressed valuations and increased probability of default;

Markets in the United States and elsewhere have experienced extreme and unprecedented volatility and disruption which has adversely impacted Prudential Financial’s and the Company’s liquidity, access to capital and cost of capital. A continuation or further deterioration in these conditions may further impact Prudential Financial’s and the Company’s liquidity, access to capital or cost of capital;

Current market conditions have impacted the Company’s businesses and profitability and a continuation or further deterioration of these conditions would further affect the Company businesses and profitability. These impacts may include:

 

o

Profitability of many of the Company’s insurance products which are dependent in part on the value of the separate accounts supporting these products;

 

o

Guaranteed minimum benefits contained in many of the Company’s variable annuity products may be higher than the current account value or pricing assumptions would support requiring further material increases to reserves for such products and may cause customers to retain contracts in force in order to benefit from the guarantees, thereby increasing the cost to the Company;

 

o

The Company impaired value of business acquired (“VOBA”) of $234 million during 2008, reflective of market conditions. Market conditions also impacted the amortization of deferred policy acquisition costs, or DAC. Continued or further market deterioration could result in additional acceleration of amortization of DAC or VOBA, as well as an impairment of goodwill.

 

o

Prudential Financial, Prudential Insurance and Prudential Funding, the commercial paper subsidiary of Prudential Insurance, have experienced downgrades in their insurance claims-paying rating and credit ratings issued by rating agencies, including most recently a downgrade of Prudential Insurance’s insurance claims-paying ratings to “A2” from “Aa3,” by Moody’s on March 18, 2009. Prudential Financial, Prudential Insurance or Prudential Funding may experience further ratings downgrades. Credit and claims-paying ratings are important factors in Prudential Financial’s, Prudential Insurance’s or Prudential Funding’s ability to issue debt and the cost of such financing,

 

 

B-5

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

potential collateral posting requirements, ability to market products and may impact the level of surrender activity on products Prudential Insurance has issued.

 

Demutualization and Destacking

 

On December 18, 2001 (the “date of demutualization”), the Company converted from a mutual life insurance company to a stock life insurance company and became a direct, wholly owned subsidiary of Prudential Holdings, which became a direct, wholly owned subsidiary of Prudential Financial.

 

Concurrent with the demutualization, the Company completed a corporate reorganization (the “destacking”) whereby various subsidiaries (and certain related assets and liabilities) of the Company were dividended so that they became wholly owned subsidiaries of Prudential Financial rather than of the Company.

 

Contribution of Prudential Securities Group, LLC

 

During the fourth quarter of 2008, Prudential Financial contributed Prudential Securities Group, LLC to the Company. Prudential Securities Group, LLC holds the investment in the Wachovia Securities joint venture as well as wholly owned subsidiaries, principally global commodities sales and trading operations. These financial statements have been restated to reflect this contribution retrospectively for all periods presented. The following tables provide the impact on Net Income and Total Stockholders’ Equity of this contribution.

 

 

 

Year Ended December 31,

 

 

 

 

2007

 

 

 

2006

 

 

 

 

 

(in millions)

 

Net Income:

 

 

 

 

 

 

 

 

 

 

As originally reported

  

$

1,657

 

 

$

1,797

 

 

 

Restated to reflect contribution

 

1,939

 

 

$

1,971

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

2007

 

 

 

2006

 

 

 

2005

 

 

 

 

(in millions)

 

Total Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

As originally reported

  

$

17,165

 

 

$

16,520

 

 

$

17,699

 

 

Restated to reflect contribution

 

$

18,070

 

 

$

17,677

 

 

$

18,557

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.  

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The Consolidated Financial Statements include the accounts of Prudential Insurance, entities over which the Company exercises control, including majority-owned subsidiaries and minority-owned entities such as limited partnerships in which the Company is the general partner, and variable interest entities in which the Company is considered the primary beneficiary. See Note 5 for more information on the Company’s consolidated variable interest entities. The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Intercompany balances and transactions have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

The most significant estimates include those used in determining deferred policy acquisition costs and related amortization; measurement of goodwill and any related impairment; valuation of business acquired and its amortization; valuation of

 

 

B-6

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

investments including derivatives (in the absence of quoted market values) and the recognition of other-than-temporary impairments; future policy benefits including guarantees; pension and other postretirement benefits; provision for income taxes and valuation of deferred tax assets; and reserves for contingent liabilities, including reserves for losses in connection with unresolved legal matters. 

 

Investments and Investment-Related Liabilities

 

The Company’s principal investments are fixed maturities; trading account assets; equity securities; commercial mortgage and other loans; policy loans; other long-term investments, including joint ventures (other than operating joint ventures), limited partnerships, and real estate; and short-term investments. Investments and investment-related liabilities also include securities repurchase and resale agreements and securities lending transactions. The accounting policies related to each are as follows:

 

Fixed maturities are comprised of bonds, notes and redeemable preferred stock. Fixed maturities classified as “available for sale” are carried at fair value. See Note 19 for additional information regarding fair value. The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest income, as well as the related amortization of premium and accretion of discount is included in “Net investment income” under the effective yield method. For mortgage-backed and asset-backed securities, the effective yield is based on estimated cash flows, including prepayment assumptions based on data from widely accepted third-party data sources or internal estimates. For high credit quality mortgage-backed and asset-backed securities (those rated AA or above), cash flows are provided quarterly, and the amortized cost and effective yield of the security are adjusted as necessary to reflect historical prepayment experience and changes in estimated future prepayments. The adjustments to amortized cost are recorded as a charge or credit to net investment income in accordance with the retrospective method. For asset-backed and mortgage-backed securities rated below AA, the effective yield is adjusted prospectively for any changes in estimated cash flows. The amortized cost of fixed maturities is written down to fair value when a decline in value is considered to be other-than-temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Unrealized gains and losses on fixed maturities classified as “available for sale,” net of tax, and the effect on deferred policy acquisition costs, valuation of business acquired, future policy benefits and policyholders’ dividends that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss).”

 

“Trading account assets supporting insurance liabilities, at fair value” includes invested assets that support certain products which are experience rated, meaning that the investment results associated with these products are expected to ultimately accrue to contractholders. Realized and unrealized gains and losses for these investments are reported in “Other income.” Interest and dividend income from these investments is reported in “Net investment income.”

 

“Other trading account assets, at fair value” consist primarily of investments and certain derivatives used by the Company either in its capacity as a broker-dealer or for asset and liability management activities. These instruments are carried at fair value. Realized and unrealized gains and losses on other trading account assets are reported in “Other income.” Interest and dividend income from these investments is reported in “Net investment income.”

 

Equity securities available for sale are comprised of common stock, mutual fund shares, non-redeemable preferred stock, and perpetual preferred stock, and are carried at fair value. The associated unrealized gains and losses, net of tax and the effect on deferred policy acquisition costs, valuation of business acquired, future policy benefits and policyholders’ dividends that would result from the realization of unrealized gains and losses, are included in “Accumulated other comprehensive income (loss).” The cost of equity securities is written down to fair value when a decline in value is considered to be other-than-temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Dividends from these investments are recognized in “Net investment income” when declared.

 

Commercial mortgage and other loans originated and held for investment are generally carried at unpaid principal balances, net of an allowance for losses. Commercial mortgage and other loans acquired, including those related to the acquisition of a business, are recorded at fair value when purchased, reflecting any premiums or discounts to unpaid principal balances. Interest income, as well as prepayment fees and the amortization of the related premiums or discounts, is included in “Net investment income.” The allowance for losses provides for the risk of credit losses inherent in the lending process and includes a loan specific reserve for each non-performing loan that has a specifically identified loss and a portfolio reserve for probable incurred but not specifically identified losses. Non-performing loans include those loans for which it is probable that amounts due according to the contractual terms of the loan agreement will not all be collected. These loans are measured at the present value

 

 

B-7

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

of expected future cash flows discounted at the loan’s effective interest rate, or at the fair value of the collateral if the loan is collateral dependent. Interest received on non-performing loans, including loans that were previously modified in a troubled debt restructuring, is either applied against the principal or reported as net investment income, based on the Company’s assessment as to the collectibility of the principal. The Company discontinues accruing interest on non-performing loans after the loans are 90 days delinquent as to principal or interest, or earlier when the Company has doubts about collectibility. When a loan is deemed non-performing, any accrued but uncollectible interest is charged to interest income in the period the loan is deemed non-performing. Generally, a loan is restored to accrual status only after all delinquent interest and principal are brought current and, in the case of loans where the payment of interest has been interrupted for a substantial period, a regular payment performance has been established. The portfolio reserve for incurred but not specifically identified losses considers the Company’s past loan loss experience, the current credit composition of the portfolio, historical credit migration, property type diversification, default and loss severity statistics and other relevant factors. The gains and losses from the sale of loans, which are recognized when the Company relinquishes control over the loans, as well as changes in the allowance for loan losses, are reported in “Realized investment gains (losses), net.”

 

Policy loans are carried at unpaid principal balances. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned.

 

Securities repurchase and resale agreements and securities loaned transactions are used to earn spread income, to borrow funds, or to facilitate trading activity. Securities repurchase and resale agreements are generally short-term in nature, and therefore, the carrying amounts of these instruments approximate fair value. Securities repurchase and resale agreements are collateralized by cash, U.S. government and government agency securities. Securities loaned are collateralized principally by cash and U.S. government securities. For securities repurchase agreements and securities loaned transactions used to earn spread income, the cash received is typically invested in cash equivalents, short-term investments or fixed maturities.

 

Securities repurchase and resale agreements that satisfy certain criteria are treated as collateralized financing arrangements. These agreements are carried at the amounts at which the securities will be subsequently resold or reacquired, as specified in the respective agreements. For securities purchased under agreements to resell, the Company’s policy is to take possession or control of the securities and to value the securities daily. Securities to be resold are the same, or substantially the same, as the securities received. For securities sold under agreements to repurchase, the market value of the securities to be repurchased is monitored, and additional collateral is obtained where appropriate, to protect against credit exposure. Securities to be repurchased are the same, or substantially the same, as those sold. Income and expenses related to these transactions executed within the insurance companies and broker-dealer subsidiaries used to earn spread income are reported as “Net investment income;” however, for transactions used to borrow funds, the associated borrowing cost is reported as interest expense (included in “General and administrative expenses”). Income and expenses related to these transactions executed within the Company’s derivative dealer operations are reported in “Other income.”

 

Securities loaned transactions are treated as financing arrangements and are recorded at the amount of cash received. The Company obtains collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. The Company monitors the market value of the securities loaned on a daily basis with additional collateral obtained as necessary. Substantially all of the Company’s securities loaned transactions are with large brokerage firms. Income and expenses associated with securities loaned transactions used to earn spread income are reported as “Net investment income;” however, for securities loaned transactions used for funding purposes the associated rebate is reported as interest expense (included in “General and administrative expenses”).

 

Other long-term investments consist of the Company’s investments in joint ventures and limited partnerships, other than operating joint ventures, as well as wholly-owned investment real estate and other investments. Joint venture and partnership interests are generally accounted for using the equity method of accounting. In certain instances in which the Company’s partnership interest is so minor (generally less than 3%) that it exercises virtually no influence over operating and financial policies, the Company applies the cost method of accounting. The Company’s income from investments in joint ventures and partnerships accounted for using the equity method or the cost method, other than the Company’s investment in operating joint ventures, is included in “Net investment income.” The carrying value of these investments is written down, or impaired, to fair value when a decline in value is considered to be other-than-temporary. In applying the equity method or the cost method (including assessment for other-than-temporary impairment), the Company uses financial information provided by the investee, which is generally received on a one quarter lag. The Company consolidates joint ventures and limited partnerships in certain other instances where it is deemed to exercise control, or is considered the primary beneficiary of a variable interest entity. The

 

 

B-8

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Company’s net income from consolidated joint ventures and limited partnerships is included in the respective revenue and expense line items depending on the activity of the consolidated entity.

 

The Company’s wholly-owned investment real estate consists of real estate which the Company has the intent to hold for the production of income as well as real estate held for sale. Real estate which the Company has the intent to hold for the production of income is carried at depreciated cost less any writedowns to fair value for impairment losses and is reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. Real estate held for sale is carried at the lower of depreciated cost or fair value less estimated selling costs and is not further depreciated once classified as such. An impairment loss is recognized when the carrying value of the investment real estate exceeds the estimated undiscounted future cash flows (excluding interest charges) from the investment. At that time, the carrying value of the investment real estate is written down to fair value. Decreases in the carrying value of investment real estate held for the production of income due to other-than-temporary impairments are recorded in “Realized investment gains (losses), net.” Depreciation on real estate held for the production of income is computed using the straight-line method over the estimated lives of the properties, and is included in “Net investment income.” In the period a real estate investment is deemed held for sale and meets all of the discontinued operation criteria, the Company reports all related net investment income and any resulting investment gains and losses as discontinued operations for all periods presented.

 

Short-term investments primarily consist of investments in certain money market funds as well as highly liquid debt instruments with a maturity of greater than three months and less than twelve months when purchased, other than those debt instruments meeting this definition that are included in “Trading account assets supporting insurance liabilities, at fair value.” These investments are generally carried at fair value.

 

Realized investment gains (losses) are computed using the specific identification method. Realized investment gains and losses are generated from numerous sources, including the sale of fixed maturity securities, equity securities, investments in joint ventures and limited partnerships and other types of investments, as well as adjustments to the cost basis of investments for other than temporary impairments. Realized investment gains and losses are also generated from prepayment premiums received on private fixed maturity securities, recoveries of principal on previously impaired securities, provisions for losses on commercial mortgage and other loans, fair value changes on embedded derivatives and derivatives that do not qualify for hedge accounting treatment, except those derivatives used in the Company’s capacity as a broker or dealer.

 

The Company’s available-for-sale securities with unrealized losses are reviewed quarterly to identify other-than-temporary impairments in value. In evaluating whether a decline in value is other-than-temporary, the Company considers several factors including, but not limited to the following: (1) the extent and the duration of the decline; (2) the reasons for the decline in value (credit event, currency or interest rate related, including general credit spread widening); (3) the Company’s ability and intent to hold the investment for a period of time to allow for a recovery of value; and (4) the financial condition of and near-term prospects of the issuer. In addition, for its impairment review of asset-backed fixed maturity securities with a credit rating below AA, the Company forecasts its best estimate of the prospective future cash flows of the security to determine if the present value of those cash flows, discounted using the effective yield of the most recent interest accrual rate, has decreased from the previous reporting period. When a decrease from the prior reporting period has occurred and the security’s fair value is less than its carrying value, the carrying value of the security is reduced to its fair value, with a corresponding charge to earnings. The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. In periods subsequent to the recognition of an other-than-temporary impairment, the impaired security is accounted for as if it had been purchased on the measurement date of the impairment. Accordingly, the discount (or reduced premium) based on the new cost basis is accreted into net investment income in future periods based upon the amount and timing of expected future cash flows of the security, if the recoverable value of the investment based upon reasonably estimable cash flow is greater than the carrying value of the investment after the impairment.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand, amounts due from banks, money market instruments and other debt instruments with maturities of three months or less when purchased, other than cash equivalents that are included in “Trading account assets supporting insurance liabilities, at fair value.”

 

Deferred Policy Acquisition Costs

 

 

B-9

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Costs that vary with and that are related primarily to the production of new insurance and annuity business are deferred to the extent such costs are deemed recoverable from future profits. Such deferred policy acquisition costs (“DAC”) include commissions, costs of policy issuance and underwriting, and variable field office expenses. In each reporting period, capitalized DAC is amortized to “General and administrative expense,” net of the accrual of imputed interest on DAC balances. DAC is subject to recoverability testing at the end of each reporting period to ensure that the capitalized amounts do not exceed the present value of anticipated gross profits. DAC, for applicable products, is adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding credits or charges included in “Accumulated other comprehensive income (loss).”

 

For traditional participating life insurance included in the Closed Block, DAC is amortized over the expected life of the contracts (up to 45 years) in proportion to gross margins based on historical and anticipated future experience, which is evaluated regularly. The effect of changes in estimated gross margins on unamortized deferred acquisition costs is reflected in “General and administrative expenses” in the period such estimated gross margins are revised. Policy acquisition costs related to interest-sensitive and variable life products and fixed and variable deferred annuity products are deferred and amortized over the expected life of the contracts (periods ranging from 25 to 99 years) in proportion to gross profits arising principally from investment results, mortality and expense margins, surrender charges and the performance of hedging programs based on historical and anticipated future experience, which is updated periodically. The Company uses a reversion to the mean approach to derive the future rate of return assumptions. However, if the projected future rate of return calculated using this approach is greater than the maximum future rate of return assumption, the maximum future rate of return is utilized. The effect of changes to estimated gross profits on unamortized deferred acquisition costs is reflected in “General and administrative expenses” in the period such estimated gross profits are revised. DAC related to non-participating traditional individual life insurance is amortized in proportion to gross premiums.

 

For group annuity contracts and group corporate- and trust-owned life insurance contracts, acquisition expenses are deferred and amortized over the expected life of the contracts in proportion to gross profits. For group and individual long-term care contracts, acquisition expenses are deferred and amortized in proportion to gross premiums. For single premium immediate annuities with life contingencies, and single premium group annuities and single premium structured settlements with life contingencies, all acquisition costs are charged to expense immediately because generally all premiums are received at the inception of the contract. For funding agreement notes contracts, single premium structured settlement contracts without life contingencies, and single premium immediate annuities without life contingencies, acquisition expenses are deferred and amortized over the expected life of the contracts using the interest method. For other group life and disability insurance contracts and guaranteed investment contracts, acquisition costs are expensed as incurred.

 

For some products, policyholders can elect to modify product benefits, features, rights or coverages by exchanging a contract for a new contract or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. These transactions are known as internal replacements. If policyholders surrender traditional life insurance policies in exchange for life insurance policies that do not have fixed and guaranteed terms, the Company immediately charges to expense the remaining unamortized DAC on the surrendered policies. For other internal replacement transactions, except those that involve the addition of a nonintegrated contract feature that does not change the existing base contract, the unamortized DAC is immediately charged to expense if the terms of the new policies are not substantially similar to those of the former policies. If the new terms are substantially similar to those of the earlier policies, the DAC is retained with respect to the new policies and amortized over the expected life of the new policies.

 

Separate Account Assets and Liabilities

 

Separate account assets are reported at fair value and represent segregated funds that are invested for certain policyholders, pension funds and other customers. The assets consist primarily of equity securities, fixed maturities, real estate related investments, real estate mortgage loans, short-term investments and derivative instruments. The assets of each account are legally segregated and are generally not subject to claims that arise out of any other business of the Company. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities primarily represent the contractholder’s account balance in separate account assets and to a lesser extent borrowings of the separate account. See Note 10 for additional information regarding separate account arrangements with contractual guarantees. The investment income and realized investment gains or losses from separate account assets accrue to the policyholders and are not included in the Company’s results of operations.

 

 

B-10

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Mortality, policy administration and surrender charges assessed against the accounts are included in “Policy charges and fee income.” Asset management fees charged to the accounts are included in “Other income.”

 

 

Other Assets and Other Liabilities

 

Other assets consist primarily of prepaid benefit costs, property and equipment, certain restricted assets, broker-dealer related receivables, trade receivables, goodwill, valuation of business acquired, reinsurance recoverables and the Company’s investments in operating joint ventures, which include the Company’s investment in Wachovia Securities and its indirect investment in China Pacific Insurance (Group) Co., Ltd. (“China Pacific Group”). Other liabilities consist primarily of employee benefit liabilities, broker-dealer related payables, trade payables and reinsurance payables.

 

Property and equipment are carried at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets, which generally range from 3 to 40 years.

 

As a result of certain acquisitions and the application of purchase accounting, the Company reports a financial asset representing the valuation of business acquired (“VOBA”). VOBA is determined by estimating the net present value of future cash flows from contracts in force in the acquired business at the date of acquisition. VOBA balances are subject to recoverability testing, in the manner in which it was acquired, at the end of each reporting period to ensure that the capitalized amounts do not exceed the present value of anticipated gross profits. The Company has established a VOBA asset primarily for its acquired deferred annuity, defined contribution and defined benefit businesses. For acquired annuity contracts, future positive cash flows generally include fees and other charges assessed to the contracts as long as they remain in force as well as fees collected upon surrender, if applicable, while future negative cash flows include costs to administer contracts and benefit payments. In addition, future cash flows with respect to acquired annuity business include the impact of future cash flows expected from the guaranteed minimum death and living benefit provisions, including the performance of hedging programs. For acquired defined contribution and defined benefits businesses, contract balances are projected using assumptions for add-on deposits, participant withdrawals, contract surrenders, and investment returns. Gross profits are then determined based on investment spreads and the excess of fees and other charges over the costs to administer the contracts. VOBA is further explicitly adjusted to reflect the cost associated with the capital invested in the business. The Company amortizes VOBA over the effective life of the acquired contracts in “General and administrative expenses.” For acquired annuity contracts, VOBA is amortized in proportion to estimated gross profits arising from the contracts and anticipated future experience, which is evaluated regularly. For acquired defined contribution and defined benefit businesses, the majority of VOBA is amortized in proportion to estimated gross profits arising principally from investment spreads and fees in excess of actual expense based upon historical and estimated future experience, which is updated periodically. The remainder of VOBA is amortized based on estimated gross revenues, fees, or the change in policyholders’ account balances, as applicable. The effect of changes in estimated gross profits on unamortized VOBA is reflected in the period such estimates of expected future profits are revised. See Note 8 for additional information regarding VOBA.

 

As a result of certain acquisitions, the Company recognizes an asset for goodwill representing the excess of cost over the net fair value of the assets acquired and liabilities assumed. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within the reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.

 

The Company tests goodwill for impairment annually as of December 31. The Company’s reporting units are the Financial Services Businesses and the Closed Block Business. The goodwill impairment analysis is a two-step test that is performed at the reporting unit level. The first step, used to identify potential impairment, involves comparing each reporting unit’s fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, the applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of a potential impairment and the second step of the test is performed to measure the amount of impairment.

 

The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the

 

 

B-11

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

aggregate fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill in the “pro forma” business combination accounting as described above exceeds the goodwill assigned to a reporting unit, there is no impairment. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded in “General and administrative expenses” for the excess. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. Management is required to make significant estimates in determining the fair value of a reporting unit including, but not limited to: projected earnings, comparative market multiples, and the risk rate at which future net cash flows are discounted.

 

See Note 8 for additional information regarding goodwill.

 

The Company offers various types of sales inducements to policyholders. The Company defers sales inducements and amortizes them over the anticipated life of the policy using the same methodology and assumptions used to amortize deferred policy acquisition costs. Sales inducements balances are subject to recoverability testing at the end of each reporting period to ensure that the capitalized amounts do not exceed the present value of anticipated gross profits. The Company records amortization of deferred sales inducements in “Interest credited to policyholders’ account balances.” See Note 10 for additional information regarding sales inducements.

 

Reinsurance recoverables and payables primarily include receivables and corresponding payables associated with the reinsurance arrangements used to effect the Company’s acquisition of the retirement businesses of CIGNA. The remaining amounts relate to other reinsurance arrangements entered into by the Company. For each of its reinsurance contracts, the Company determines if the contract provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. The Company reviews all contractual features, particularly those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims. See Note 12 for additional information about the Company’s reinsurance arrangements.

 

Investments in operating joint ventures, including the Company's investment in Wachovia Securities, are generally accounted for under the equity method. The carrying value of these investments is written down, or impaired, to fair value when a decline in value is considered to be other-than-temporary. The carrying value of the Company's ownership interest in Wachovia Securities includes the carrying value of the Company's "lookback" option, which is discussed further in Note 6. This option is treated as a financial instrument that is neither a derivative instrument nor a security, and is therefore recorded at cost and is subject to review for impairment at the end of each reporting period. See Note 6 for additional information on investments in operating joint ventures.

 

Future Policy Benefits

 

The Company’s liability for future policy benefits is primarily comprised of the present value of estimated future payments to or on behalf of policyholders, where the timing and amount of payment depends on policyholder mortality or morbidity, less the present value of future net premiums. For individual traditional participating life insurance products, the mortality and interest rate assumptions applied are those used to calculate the policies’ guaranteed cash surrender values. For life insurance, other than individual traditional participating life insurance, and annuity and disability products, expected mortality and morbidity is generally based on the Company’s historical experience or standard industry tables including a provision for the risk of adverse deviation. Interest rate assumptions are based on factors such as market conditions and expected investment returns. Although mortality and morbidity and interest rate assumptions are “locked-in” upon the issuance of new insurance or annuity business with fixed and guaranteed terms, significant changes in experience or assumptions may require the Company to provide for expected future losses on a product by establishing premium deficiency reserves. Premium deficiency reserves, if required, are determined based on assumptions at the time the premium deficiency reserve is established and do not include a provision for the risk of adverse deviation. See Note 9 for additional information regarding future policy benefits.

 

The Company’s liability for future policy benefits also includes a liability for unpaid claims and claim adjustment expenses. The Company does not establish claim liabilities until a loss has occurred. However, unpaid claims and claim adjustment expenses includes estimates of claims that the Company believes have been incurred but have not yet been reported as of the balance sheet date. The Company’s liability for future policy benefits also includes net liabilities for guarantee benefits related to certain nontraditional long-duration life and annuity contracts, which are discussed more fully in Note 10, and certain unearned revenues.

 

 

B-12

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

 

 

Policyholders’ Account Balances

 

The Company’s liability for policyholders’ account balances represents the contract value that has accrued to the benefit of the policyholder as of the balance sheet date. This liability is generally equal to the accumulated account deposits, plus interest credited, less policyholder withdrawals and other charges assessed against the account balance. These policyholders’ account balances also include provision for benefits under non-life contingent payout annuities and certain unearned revenues. See Note 9 for additional information regarding policyholders’ account balances.

 

Policyholders’ Dividends

 

The Company’s liability for policyholders’ dividends includes its dividends payable to policyholders and its policyholder dividend obligation associated with the participating policies included in the Closed Block. The dividends payable for participating policies included in the Closed Block are determined at the end of each year for the following year by the Board of Directors of Prudential Insurance based on its statutory results, capital position, ratings, and the emerging experience of the Closed Block. The policyholder dividend obligation represents amounts to be paid to Closed Block policyholders as an additional policyholder dividend unless otherwise offset by future Closed Block performance that is less favorable than originally expected, the components of which are discussed more fully in Note 11.

 

Contingent Liabilities

 

Amounts related to contingent liabilities are accrued if it is probable that a liability has been incurred and an amount is reasonably estimable. Management evaluates whether there are incremental legal or other costs directly associated with the ultimate resolution of the matter that are reasonably estimable and, if so, they are included in the accrual.

 

Insurance Revenue and Expense Recognition

 

Premiums from individual life products, other than interest-sensitive life contracts, and health insurance and long-term care products are recognized when due. When premiums are due over a significantly shorter period than the period over which benefits are provided, any gross premium in excess of the net premium (i.e., the portion of the gross premium required to provide for all expected future benefits and expenses) is deferred and recognized into revenue in a constant relationship to insurance in force. Benefits are recorded as an expense when they are incurred. A liability for future policy benefits is recorded when premiums are recognized using the net level premium method.

 

Premiums from non-participating group annuities with life contingencies, single premium structured settlements with life contingencies and single premium immediate annuities with life contingencies are recognized when due. When premiums are due over a significantly shorter period than the period over which benefits are provided, any gross premium in excess of the net premium is deferred and recognized into revenue in a constant relationship to the amount of expected future benefit payments. Benefits are recorded as an expense when they are incurred. A liability for future policy benefits is recorded when premiums are recognized using the net level premium method.

 

Certain individual annuity contracts provide the holder a guarantee that the benefit received upon death or annuitization will be no less than a minimum prescribed amount. These benefits are accounted for as insurance contracts and are discussed in further detail in Note 10. The Company also provides contracts with certain living benefits which are considered embedded derivatives. These contracts are discussed in further detail in Note 10.

 

Amounts received as payment for interest-sensitive group and individual life contracts, deferred fixed annuities, structured settlements and other contracts without life contingencies, and participating group annuities are reported as deposits to “Policyholders’ account balances.” Revenues from these contracts are reflected in “Policy charges and fee income” consisting primarily of fees assessed during the period against the policyholders’ account balances for mortality charges, policy administration charges and surrender charges. In addition to fees, the Company earns investment income from the investment of policyholders’ deposits in the Company’s general account portfolio. Fees assessed that represent compensation to the Company

 

 

B-13

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

for services to be provided in future periods and certain other fees are deferred and amortized into revenue over the life of the related contracts in proportion to estimated gross profits. Benefits and expenses for these products include claims in excess of related account balances, expenses of contract administration, interest credited to policyholders’ account balances and amortization of DAC.

 

For group life, other than interest-sensitive group life contracts, and disability insurance, premiums are recognized over the period to which the premiums relate in proportion to the amount of insurance protection provided. Claim and claim adjustment expenses are recognized when incurred.

 

Premiums, benefits and expenses are stated net of reinsurance ceded to other companies, except for amounts associated with certain modified coinsurance contracts which are reflected in the Company’s financial statements based on the application of the deposit method of accounting. Estimated reinsurance recoverables and the cost of reinsurance are recognized over the life of the reinsured policies using assumptions consistent with those used to account for the underlying policies.

 

Other Income

 

Other income includes asset management fees, which are recognized in the period in which the services are performed, interest earned on affiliated notes receivable, and realized and unrealized gains and losses from investments classified as “trading” such as “Trading account assets supporting insurance liabilities” and “Other trading account assets.”

 

Foreign Currency

 

Assets and liabilities of foreign operations and subsidiaries reported in currencies other than U.S. dollars are translated at the exchange rate in effect at the end of the period. Revenues, benefits and other expenses are translated at the average rate prevailing during the period. The effects of translating the statements of financial position of non-U.S. entities with functional currencies other than the U.S. dollar are included, net of related qualifying hedge gains and losses and income taxes, in “Accumulated other comprehensive income (loss).” Gains and losses from foreign currency transactions are reported in either “Accumulated other comprehensive income (loss)” or current earnings in “Other income” depending on the nature of the related foreign currency denominated asset or liability.

 

Derivative Financial Instruments

 

Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or the values of securities or commodities. Derivative financial instruments generally used by the Company include swaps, futures, forwards and options and may be exchange-traded or contracted in the over-the-counter market. Derivative positions are carried at fair value, generally by obtaining quoted market prices or through the use of valuation models. Values can be affected by changes in interest rates, foreign exchange rates, financial indices, values of securities or commodities, credit spreads, market volatility, expected returns and liquidity. Values can also be affected by changes in estimates and assumptions, including those related to counterparty behavior, used in valuation models.

 

Derivatives are used in a non-dealer capacity in insurance and treasury operations to manage the characteristics of the Company’s asset/liability mix, to manage the interest rate and currency characteristics of assets or liabilities and to mitigate the risk of a diminution, upon translation to U.S. dollars, of net investments in foreign operations resulting from unfavorable changes in currency exchange rates. Additionally, derivatives may be used to seek to reduce exposure to interest rate, credit, foreign currency and equity risks associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be incurred. As discussed in detail below and in Note 20, all realized and unrealized changes in fair value of non-dealer related derivatives, with the exception of the effective portion of cash flow hedges and effective hedges of net investments in foreign operations, are recorded in current earnings. Cash flows from these derivatives are reported in the operating, investing, or financing activities sections in the Consolidated Statements of Cash Flows.

 

Derivatives are also used in a derivative dealer or broker capacity in the Company’s securities operations to meet the needs of clients by structuring transactions that allow clients to manage their exposure to interest rates, foreign exchange rates, indices or prices of securities and commodities and similarly in a dealer or broker capacity through the operation of certain hedge portfolios. Realized and unrealized changes in fair value of derivatives used in these dealer related operations are included in

 

 

B-14

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

“Other income” in the periods in which the changes occur. Cash flows from such derivatives are reported in the operating activities section of the Consolidated Statements of Cash Flows.

 

Derivatives are recorded either as assets, within “Other trading account assets,” or “Other long-term investments,” or as liabilities, within “Other liabilities,” in the Consolidated Statements of Financial Position, except for embedded derivatives which are recorded in the Consolidated Statements of Financial Position with the associated host contract. The Company nets the fair value of all derivative financial instruments with counterparties for which a master netting arrangement has been executed pursuant to Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 39 and FASB Staff Position (“FSP”) No. 39-1.

 

For non-dealer related derivatives the Company designates derivatives as either (1) a hedge of the fair value of a recognized asset or liability or unrecognized firm commitment (“fair value” hedge); (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge); (3) a foreign-currency fair value or cash flow hedge (“foreign currency” hedge); (4) a hedge of a net investment in a foreign operation; or (5) a derivative that does not qualify for hedge accounting.

 

To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated risk of the hedged item. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a derivative qualifies for hedge accounting treatment, there may be an element of ineffectiveness of the hedge. Under such circumstances, the ineffective portion is recorded in “Realized investment gains (losses), net.”

 

The Company formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as fair value, cash flow, or foreign currency, hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. Hedges of a net investment in a foreign operation are linked to the specific foreign operation.

 

When a derivative is designated as a fair value hedge and is determined to be highly effective, changes in its fair value, along with changes in the fair value of the hedged asset or liability (including losses or gains on firm commitments), are reported on a net basis in the income statement, generally in “Realized investment gains (losses), net.” When swaps are used in hedge accounting relationships, periodic settlements are recorded in the same income statement line as the related settlements of the hedged items.

 

When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its fair value are recorded in “Accumulated other comprehensive income (loss)” until earnings are affected by the variability of cash flows being hedged (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). At that time, the related portion of deferred gains or losses on the derivative instrument is reclassified and reported in the income statement line item associated with the hedged item.

 

When a derivative is designated as a foreign currency hedge and is determined to be highly effective, changes in its fair value are recorded in either current period earnings or “Accumulated other comprehensive income (loss),” depending on whether the hedge transaction is a fair value hedge (e.g., a hedge of a recognized foreign currency asset or liability) or a cash flow hedge (e.g., a foreign currency denominated forecasted transaction). When a derivative is used as a hedge of a net investment in a foreign operation, its change in fair value, to the extent effective as a hedge, is recorded in the cumulative translation adjustment account within “Accumulated other comprehensive income (loss).”

 

If it is determined that a derivative no longer qualifies as an effective fair value or cash flow hedge or management removes the hedge designation, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net.” The asset or liability under a fair value hedge will no longer be adjusted for changes in fair value and the existing basis adjustment is amortized to the income statement line associated with the asset or liability. The component of “Accumulated other comprehensive income (loss)” related to discontinued cash flow hedges is amortized to the income statement line associated with the hedged cash flows consistent with the earnings impact of the original hedged cash flows.

 

 

B-15

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, or because it is probable that the forecasted transaction will not occur by the end of the specified time period, the derivative will continue to be carried on the balance sheet at its fair value, with changes in fair value recognized currently in “Realized investment gains (losses), net.” Any asset or liability that was recorded pursuant to recognition of the firm commitment is removed from the balance sheet and recognized currently in “Realized investment gains (losses), net.” Gains and losses that were in “Accumulated other comprehensive income (loss)” pursuant to the hedge of a forecasted transaction are recognized immediately in “Realized investment gains (losses), net.”

 

If a derivative does not qualify for hedge accounting, all changes in its fair value, including net receipts and payments, are included in “Realized investment gains (losses), net” without considering changes in the fair value of the economically associated assets or liabilities.

 

The Company is a party to financial instruments that contain derivative instruments that are “embedded” in the financial instruments. At inception, the Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and changes in its fair value are included in “Realized investment gains (losses), net.” For certain financial instruments that contain an embedded derivative that otherwise would need to be bifurcated and reported at fair value, the Company may elect to classify the entire instrument as a trading account asset and report it within “Other trading account assets,” at fair value.

 

Short-Term and Long-Term Debt

 

Liabilities for short-term and long-term debt are carried at an amount equal to unpaid principal balance, net of unamortized discount or premium. Original-issue discount or premium and debt-issue costs are recognized as a component of interest expense over the period the debt is expected to be outstanding, using the interest method of amortization. Short-term debt is debt coming due in the next twelve months, including that portion of debt otherwise classified as long-term. The short-term debt caption may exclude short-term items the Company intends to refinance on a long-term basis in the near term. See Note 13 for additional information regarding short-term and long-term debt.

 

Income Taxes

 

The Company and its eligible domestic subsidiaries file a consolidated federal income tax return with Prudential Financial that includes both life insurance companies and non-life insurance companies. Subsidiaries operating outside the U.S. are taxed, and income tax expense is recorded, based on applicable foreign statutes.

 

Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. A valuation allowance is recorded to reduce a deferred tax asset to the amount expected to be realized.

 

New Accounting Pronouncements

 

In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20.” This FSP revises other-than-temporary-impairment guidance for beneficial interests in securitized financial assets that are within the scope of Issue 99-20. This FSP is effective for interim and annual reporting periods ending after December 15, 2008. Accordingly, the Company adopted this guidance effective December 31, 2008. The Company’s adoption of this guidance did not have a material effect on the Company’s consolidated financial position or results of operations.

 

In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” This FSP requires enhanced disclosures about transfers of financial assets and interests in variable interest entities. This FSP is effective for interim and annual reporting periods ending after December 15, 2008. Accordingly, the Company adopted this guidance effective December 31, 2008. Since this FSP requires only additional disclosures concerning transfers of financial assets and interests in variable interest entities, adoption of

 

 

B-16

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

the FSP did not affect the Company’s consolidated financial position or results of operations. The disclosures required by this FSP are provided in Note 5.

 

In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” This FSP clarifies the application of SFAS No. 157 in a market that is not active and applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with SFAS No. 157. The FSP is effective upon issuance, including prior periods for which financial statements have not been issued. Accordingly, the Company adopted this guidance effective September 30, 2008. The Company’s adoption of this guidance did not have a material effect on the Company’s consolidated financial position or results of operations.

 

In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees” an amendment of FASB Statement No. 133 and FASB Interpretation No. 45. This FSP requires sellers of credit derivatives and certain guarantees to disclose (a) the nature of the credit derivative, the reason(s) for entering into the credit derivative, approximate term, performance triggers, and the current status of the performance risk; (b) the undiscounted maximum potential amount of future payments the seller could be required to make before considering any recoveries from recourse provisions or collateral; (c) the credit derivative’s fair value; (d) the nature of any recourse provisions and any collateral assets held to ensure performance. This FSP also requires the above disclosures for hybrid instruments that contain embedded derivatives and amends paragraph 13 of FIN 45 to require disclosure of the current status of the guarantee’s performance risk. This FSP is effective for interim and annual reporting periods ending after December 15, 2008. Accordingly, the Company adopted this guidance effective December 31, 2008. The Company’s adoption of this guidance did not have a material effect on the Company’s consolidated financial position or results of operations. The disclosures required by this FSP are provided in Note 20.

 

In September 2008, the FASB EITF reached consensus on EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement.” The consensus concluded that (a) the issuer of a liability (including debt) with a third-party credit enhancement that is inseparable from the liability, shall not include the effect of the credit enhancement in the fair value measurement of the liability; (b) the issuer shall disclose the existence of any third-party credit enhancement on such liabilities, and (c) in the period of adoption the issuer shall disclose the valuation techniques used to measure the fair value of such liabilities and disclose any changes from valuation techniques used in prior periods. This guidance is effective for the Company on a prospective basis on January 1, 2009. The Company’s adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

 

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the list of factors an entity should consider in developing renewal or extension assumptions used to determine the useful life of recognized intangible assets under SFAS No. 142. The new guidance applies to (1) intangible assets that are acquired individually or with a group of other assets and (2) intangible assets acquired in both business combinations and asset acquisitions. This FSP is effective for fiscal years and interim periods beginning after December 15, 2008, with the guidance for determining the useful life of a recognized intangible asset being applied prospectively to intangible assets acquired after the effective date and the disclosure requirements being applied prospectively to all intangible assets recognized as of, and after, the effective date. The Company’s adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” an amendment of SFAS No. 133. This statement amends and expands the disclosure requirements for derivative instruments and hedging activities by requiring companies to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The Company will adopt this guidance effective January 1, 2009. The Company’s adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

 

In February 2008, the FASB issued FSP FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” The FSP provides recognition and derecognition guidance for a repurchase financing transaction, which is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties, that is entered into contemporaneously with or in contemplation of, the initial transfer. The FSP is effective for fiscal years beginning after

 

 

B-17

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

November 15, 2008. The FSP is to be applied prospectively to new transactions entered into after the adoption date. The Company will adopt this guidance effective January 1, 2009. The Company is currently assessing the impact of this FSP on the Company’s consolidated financial position and results of operations.

 

In February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157.” This FSP applies to nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP FAS 157-2 delays the effective date of SFAS No. 157 for these items to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company will adopt this guidance effective January 1, 2009. The Company’s adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

 

In January 2008, the FASB issued Statement No. 133 Implementation Issue No. E23, “Hedging—General: Issues Involving the Application of the Shortcut Method under Paragraph 68.” Implementation Issue No. E23 amends Statement No. 133, paragraph 68 with respect to the conditions that must be met in order to apply the shortcut method for assessing hedge effectiveness. This implementation guidance was effective for hedging relationships designated on or after January 1, 2008. The Company’s adoption of this guidance effective January 1, 2008 did not have a material effect on the Company’s consolidated financial position or results of operations.

 

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” This statement, which addresses the accounting for business acquisitions, is effective for fiscal years beginning on or after December 15, 2008, with early adoption prohibited, and generally applies to business acquisitions completed after December 31, 2008. Among other things, the new standard requires that all acquisition-related costs be expensed as incurred, and that all restructuring costs related to acquired operations be expensed as incurred. This new standard also addresses the current and subsequent accounting for assets and liabilities arising from contingencies acquired or assumed and, for acquisitions both prior and subsequent to December 31, 2008, requires the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. The Company’s adoption of this guidance did not have a material effect on the Company’s consolidated financial position or results of operations, but may have an effect on the accounting for future business combinations.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” SFAS No. 160 will change the accounting for minority interests, which will be recharacterized as noncontrolling interests and classified by the parent company as a component of equity. The Company will adopt this guidance effective January 1, 2009. Upon adoption, SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests and prospective adoption for all other requirements. The Company’s adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial position or results of operations, but will affect financial statement presentation and disclosure.

 

In April 2007, the FASB issued FSP FIN 39-1, “Amendment of FASB Interpretation No. 39.” FSP FIN 39-1 modifies FIN No. 39, “Offsetting of Amounts Related to Certain Contracts,” and permits companies to offset cash collateral receivables or payables with net derivative positions under certain circumstances. This FSP is effective for fiscal years beginning after November 15, 2007 and is required to be applied retrospectively to financial statements for all periods presented. The Company’s adoption of this guidance effective January 1, 2008 did not have a material effect on the Company’s consolidated financial position or results of operations.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement provides companies with an option to report selected financial assets and liabilities at fair value, with the associated changes in fair value reflected in the Consolidated Statements of Operations. The Company’s adoption of this guidance effective January 1, 2008 did not have a material effect on the Company’s consolidated financial position or results of operations.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement does not change which assets and liabilities are required to be recorded at fair value, but the application of this statement could change practices

 

 

B-18

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

in determining fair value. The Company adopted this guidance effective January 1, 2008. See Note 19 for more information on SFAS No. 157.

 

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” an amendment of FASB Statements No. 87, 88, 106 and 132(R). This statement requires an employer on a prospective basis to recognize the overfunded or underfunded status of its defined benefit pension and postretirement plans as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. The Company adopted this requirement, along with the required disclosures, on December 31, 2006. SFAS No. 158 also requires an employer on a prospective basis to measure the funded status of its plans as of its fiscal year-end. This requirement is effective for fiscal years ending after December 15, 2008. The Company adopted this guidance on December 31, 2008 and the impact of changing from a September 30 measurement date to a December 31 measurement date was a net after-tax increase to retained earnings of $27 million.

 

In July 2006, the FASB issued FSP SFAS 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,” an amendment of FASB Statement No. 13. FSP SFAS 13-2 indicates that a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease would require a recalculation of cumulative and prospective income recognition associated with the transaction. FSP SFAS 13-2 is effective for fiscal years beginning after December 15, 2006. The Company adopted FSP SFAS 13-2 on January 1, 2007 and the adoption resulted in a net after-tax reduction to retained earnings of $84 million, as of January 1, 2007.

 

In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes,” an Interpretation of FASB Statement No. 109. See Note 16 for details regarding the adoption of this pronouncement on January 1, 2007.

 

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments.” This statement eliminates an exception from the requirement to bifurcate an embedded derivative feature from beneficial interests in securitized financial assets. The Company has used this exception for investments the Company has made in securitized financial assets in the normal course of operations, and thus previous to the adoption of this standard has not had to consider whether such investments contain an embedded derivative. The new requirement to identify embedded derivatives in beneficial interests will be applied on a prospective basis only to beneficial interests acquired, issued, or subject to certain remeasurement conditions after the adoption of the guidance. This statement also provides an election, on an instrument by instrument basis, to measure at fair value an entire hybrid financial instrument that contains an embedded derivative requiring bifurcation, rather than measuring only the embedded derivative on a fair value basis. If the fair value election is chosen, changes in unrealized gains and losses are reflected in the Consolidated Statements of Operations. The Company adopted this guidance effective January 1, 2007. The Company’s adoption of this guidance did not have a material effect on the Company’s consolidated financial position or results of operations.

 

In September 2005, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts.” SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs, including deferred policy acquisition costs, valuation of business acquired and deferred sales inducements, on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract, and was effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The Company adopted SOP 05-1 on January 1, 2007, which resulted in a net after-tax reduction to retained earnings of $10 million.

 

Reclassifications

 

Certain amounts in prior years have been reclassified to conform to the current year presentation.

 

 

B-19

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

3.    DISCONTINUED OPERATIONS

 

Results of operations of discontinued businesses, including charges upon disposition, for the years ended December 31, are as follows:

 

 

 

 

2008

 

 

 

2007

 

 

 

2006

 

 

 

 

(in millions)

 

Real estate investments sold or held for sale (1)

 

$

2

 

 

$

40

 

 

$

97

 

 

Equity sales, trading and research operations

  

 

—  

 

  

 

—  

 

  

 

6

 

 

Canadian IWP and IH operations (2)

 

 

—  

 

 

 

—  

 

 

 

(10

)

 

International securities operations

 

 

(1

)

 

 

8

 

 

 

(8

)

 

Healthcare operations (3)

  

 

2

 

  

 

14

 

  

 

29

 

  

Other

 

 

—  

 

 

 

—  

 

 

 

(4

)

 

Income from discontinued operations before income taxes

  

 

3

 

  

 

62

 

  

 

110

 

  

Income tax expense (benefit)

  

 

(2

)

  

 

(2

)

  

 

35

 

  

Income from discontinued operations, net of taxes

  

$

5

 

  

$

64

 

  

$

75

 

  

 

  

 

 

 

  

 

 

 

  

 

 

 

 

The Company’s Consolidated Statements of Financial Position include total assets and total liabilities related to discontinued businesses of $45 million and $8 million, respectively, at December 31, 2008, and $234 million and $57 million, respectively, at December 31, 2007.

 

 

(1)

Reflects the income or loss from discontinued real estate investments, primarily related to gains recognized on the sale of real estate properties.  

 

 

(2)

In the third quarter of 2006, the Company entered into a reinsurance transaction related to its Canadian Intermediate Weekly Premium (“IWP”) and Individual Health (“IH”) operations, which resulted in these operations being accounted for as discontinued operations.

 

 

(3)

The sale of the Company’s healthcare business to Aetna was completed in 1999. The loss the Company previously recorded upon the disposal of its healthcare business was reduced in each of the years ended December 31, 2008, 2007 and 2006. The reductions were primarily the result of favorable resolution of certain legal, regulatory and contractual matters.

 

Charges recorded in connection with the disposals of businesses include estimates that are subject to subsequent adjustment. It is possible that such adjustments might be material to future results of operations of a particular annual period.

 

 

4.  

ACQUISITIONS

 

Acquisition of a portion of Union Bank of California’s Retirement Business

 

On December 31, 2007, the Company acquired a portion of the Union Bank of California, N.A’s retirement business for $100 million of cash consideration. In recording the transaction, the entire purchase price was allocated to other intangibles, which are reflected in “Other assets.”

 

Acquisition of The Allstate Corporation’s Variable Annuity Business

 

On June 1, 2006 (the “date of acquisition”), the Company acquired the variable annuity business of The Allstate Corporation (“Allstate”) through a reinsurance transaction for $635 million of total consideration, consisting primarily of a $628 million ceding commission. The reinsurance arrangements with Allstate include a coinsurance arrangement associated with the general account liabilities assumed and a modified coinsurance arrangement associated with the separate account liabilities assumed. The assets acquired and liabilities assumed have been included in the Company’s Consolidated Financial Statements as of the date of acquisition. The Company’s results of operations include the results of the acquired variable annuity business beginning from the date of acquisition. The assets acquired included primarily cash of $1.4 billion that was subsequently used to purchase investments; VOBA of $648 million that represents the present value of future profits embedded in the acquired contracts; and $97 million of goodwill. The liabilities assumed included primarily a liability for variable annuity contractholders’ account balances of $1.5 billion associated with the coinsurance agreement. The assets acquired and liabilities assumed also included a reinsurance receivable from Allstate and a reinsurance payable to Allstate, each in the amount of $14.8 billion. The reinsurance payable, which represents the Company’s obligation under the modified coinsurance arrangement, is netted with the reinsurance

 

 

B-20

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

receivable in the Company’s Consolidated Statement of Financial Position. Pro forma information for this acquisition is omitted as the impact is not material.

 

See Note 8 for information regarding VOBA impairments recorded during 2008.

 

Acquisition of CIGNA Corporation’s Retirement Business

 

On April 1, 2004, the Company acquired the retirement business of CIGNA for cash consideration of $2.1 billion. Concurrent with the acquisition, the Company entered into reinsurance arrangements with CIGNA to effect the transfer of the business included in the transaction.

 

The Company has assumed the liabilities and received the related assets associated with the coinsurance-with-assumption arrangement related to the acquired general account defined contribution and defined benefit plan contracts and the modified-coinsurance-with-assumption arrangement related to the majority of the acquired separate account contracts. The Company has substantially completed the process of requesting customers to agree to substitute CIGNA with a wholly owned subsidiary of the Company in these contracts.

 

CIGNA retained the assets and liabilities associated with the modified-coinsurance-without-assumption arrangement related to the remaining acquired separate account contracts, but has ceded the net profits or losses and the associated net cash flows to the Company for the remaining lives of the contracts. The reinsurance recoverable and reinsurance payable associated with this arrangement are discussed in more detail in Note 12.

 

In addition, as an element of the acquisition, the Company had the right, beginning two years after the acquisition, to commute the modified-coinsurance-with-assumption arrangement related to the acquired defined benefit guaranteed-cost contracts in exchange for cash consideration from CIGNA. Effective April 1, 2006, the Company reached an agreement with CIGNA to convert the modified-coinsurance-with-assumption arrangement to an indemnity coinsurance arrangement, effectively retaining the economics of the defined benefit guaranteed-cost contracts for the life of the block of business. Upon conversion, the Company extinguished its reinsurance recoverable and reinsurance payable with CIGNA related to the modified-coinsurance-with-assumption arrangement. Concurrently, the Company assumed $1.7 billion of liabilities from CIGNA under the indemnity coinsurance arrangement and received the related assets.

 

 

5.  

INVESTMENTS

 

Fixed Maturities and Equity Securities

 

The following tables provide information relating to fixed maturities and equity securities (excluding investments classified as trading) at December 31:

  

  

2008

 

  

Amortized Cost

  

Gross Unrealized Gains

  

Gross Unrealized Losses

  

Fair

Value

 

  

(in millions)

Fixed maturities, available for sale

  

 

 

  

 

 

  

 

 

  

 

 

U.S. Treasury securities and obligations of U.S. government authorities and agencies

  

$

5,470

 

$

1,329

 

$

2

 

$

6,797

Obligations of U.S. states and their political subdivisions

  

 

803

 

 

26

 

 

12

 

 

817

Foreign government bonds

  

 

1,812

 

 

351

 

 

61

 

 

2,102

Corporate securities

  

 

66,941

 

 

1,285

 

 

7,295

 

 

60,931

Asset-backed securities (1)

 

 

14,172

 

 

99

 

 

3,885

 

 

10,386

Commercial mortgage-backed securities

 

 

10,206

 

 

4

 

 

1,835

 

 

8,375

Residential mortgage-backed securities (2)

  

 

7,663

 

 

315

 

 

130

 

 

7,848

 

  

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities, available for sale

  

$

107,067

 

$

3,409

 

$

13,220

 

$

97,256

 

  

 

 

  

 

 

  

 

 

  

 

 

Equity securities, available for sale

  

$

4,378

  

$

239

  

$

987

  

$

3,630

 

(1)

Includes credit tranched securities collateralized by sub-prime mortgages, auto loans, credit cards, education loans, and other asset types.

(2)

Includes publicly traded agency pass-through securities and collateralized mortgage obligations.

 

 

 

B-21

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

 

  

  

2007

 

  

Amortized Cost

  

Gross Unrealized Gains

  

Gross Unrealized Losses

  

Fair

Value

 

  

(in millions)

Fixed maturities, available for sale

  

 

 

  

 

 

  

 

 

  

 

 

U.S. Treasury securities and obligations of U.S. government authorities and agencies

  

$

5,428

 

$

667

 

$

2

 

$

6,093

Obligations of U.S. states and their political subdivisions

  

 

750

 

 

55

 

 

1

 

 

804

Foreign government bonds

  

 

1,848

 

 

321

 

 

4

 

 

2,165

Corporate securities

  

 

68,464

 

 

2,584

 

 

1,042

 

 

70,006

Asset-backed securities

 

 

18,667

 

 

62

 

 

1,082

 

 

17,647

Commercial mortgage-backed securities

 

 

9,972

 

 

142

 

 

30

 

 

10,084

Residential mortgage-backed securities

  

 

9,678

 

 

151

 

 

20

 

 

9,809

 

  

 

 

 

 

 

 

 

 

 

 

 

Total fixed maturities, available for sale

  

$

114,807

 

$

3,982

 

$

2,181

 

$

116,608

 

  

 

 

  

 

 

  

 

 

  

 

 

Equity securities, available for sale

  

$

5,019

  

$

826

  

$

248

  

$

5,597

 

The amortized cost and fair value of fixed maturities by contractual maturities at December 31, 2008, is as follows:

 

 

  

Available for Sale

    

 

  

Amortized Cost

  

Fair

Value

    

 

  

(in millions)

    

Due in one year or less

  

$

4,279

 

$

4,241

    

Due after one year through five years

  

 

21,755

 

 

20,292

    

Due after five years through ten years

  

 

23,107

 

 

20,893

    

Due after ten years

  

 

25,885

 

 

25,221

    

Asset-backed securities

 

 

14,172

 

 

10,386

 

Commercial mortgage-backed securities

 

 

10,206

 

 

8,375

 

Residential mortgage-backed securities

  

 

7,663

 

 

7,848

    

 

  

 

 

 

 

 

    

Total

  

$

107,067

 

$

97,256

    

 

  

 

 

  

 

 

    

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Asset-backed, commercial mortgage-backed, and residential mortgage-backed securities are shown separately in the table above, as they are not due at a single maturity date.

 

The following table depicts the sources of fixed maturity proceeds and related gross investment gains (losses), as well as losses on impairments of both fixed maturities and equity securities:

 

 

 

 

2008

 

2007

 

2006

 

  

(in millions)

Fixed maturities, available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sales

  

$

50,208

 

  

$

72,029

 

  

$

73,457

 

Proceeds from maturities/repayments

  

 

9,753

 

  

 

8,746

 

  

 

10,162

 

Gross investment gains from sales, prepayments and maturities

 

 

715

 

 

 

715

 

 

 

701

 

Gross investment losses from sales and maturities

  

 

(524

)

  

 

(428

)

  

 

(659

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity and equity security impairments:

 

 

 

 

 

 

 

 

 

 

 

 

Writedowns for impairments of fixed maturities

  

$

(2,060

)

  

$

(149

)

  

$

(52

)

Writedowns for impairments of equity securities

 

 

(717

)

 

 

(35

)

 

 

(25

)

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

B-22

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Trading Account Assets Supporting Insurance Liabilities

 

The following table sets forth the composition of “Trading account assets supporting insurance liabilities” at December 31:

 

 

  

2008

    

2007

 

  

Amortized Cost

  

Fair

Value

    

Amortized

Cost

  

Fair

Value

 

  

(in millions)

    

(in millions)

Short-term investments and cash equivalents

$

1,232

 

  

$

1,232

    

$

554

  

$

554

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities:

  

 

 

  

 

 

    

 

 

  

 

 

U.S. government authorities and agencies and obligations of U.S. states

  

34

 

  

 

35

    

 

23

  

 

23

Foreign government bonds

  

8

 

  

 

8

    

 

23

  

 

23

Corporate securities

  

8,803

 

  

 

7,963

    

 

7,526

  

 

7,490

Asset-backed securities

 

915

 

 

 

635

 

 

1,266

 

 

1,207

Commercial mortgage-backed securities

 

2,335

 

 

 

2,092

 

 

2,625

 

 

2,644

Residential mortgage-backed securities

 

708

 

 

 

684

 

 

1,148

 

 

1,136

Total fixed maturities

 

12,803

 

 

 

11,417

 

 

12,611

 

 

12,523

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

163

 

 

 

68

 

 

227

 

 

196

 

 

 

 

 

 

,

 

 

 

 

 

 

Total trading account assets supporting insurance liabilities

$

14,198

 

 

$

12,717

 

$

13,392

 

$

13,273

 

  

 

 

  

 

 

    

 

 

  

 

 

Net change in unrealized gains (losses) from trading account assets supporting insurance liabilities still held at period end, recorded within “Other income” were $(1,362) million, $139 million and $58 million during the years ended December 31, 2008, 2007 and 2006 respectively.

 

Commercial Mortgage and Other Loans

 

The Company’s commercial mortgage and other loans are comprised as follows at December 31:

 

 

  

2008

 

  

2007

 

  

Amount (in millions)

 

  

% of Total

 

  

Amount (in millions)

 

  

% of Total

Commercial mortgage loans by property type

  

 

 

 

  

 

 

  

 

 

 

  

 

Office buildings

$

5,593

 

 

  

20.2

%

  

$

5,144

 

  

20.5

Retail stores

  

5,102

 

 

  

18.5

%

  

 

3,787

 

  

15.1

Apartment complexes

  

5,065

 

 

  

18.3

%

  

 

4,869

 

  

19.5

Industrial buildings

  

6,255

 

 

  

22.6

%

  

 

5,952

 

  

23.8

Agricultural properties

  

1,967

 

 

  

7.1

%

  

 

2,136

 

  

8.5

Hospitality

 

1,528

 

 

 

5.5

%

 

 

1,615

 

 

6.5

Other

  

2,143

 

 

  

7.8

%

  

 

1,537

 

  

6.1

 

  

 

 

 

  

 

 

  

 

 

 

  

 

Total commercial mortgage loans

  

27,653

 

 

  

100.0

%

  

 

25,040

 

  

100.0

 

  

 

 

 

  

 

 

  

 

 

 

  

 

Valuation allowance

  

(168

)

 

  

 

 

  

 

(84

)

  

 

 

  

 

 

 

  

 

 

  

 

 

 

  

 

Total net commercial mortgage loans

  

27,485

 

 

  

 

 

  

 

24,956

 

  

 

 

  

 

 

 

  

 

 

  

 

 

 

  

 

Other loans

  

 

 

 

  

 

 

  

 

 

 

  

 

Uncollateralized loans

  

220

 

 

  

 

 

  

 

3/4

 

  

 

Collateralized by residential properties

 

12

 

 

 

 

 

 

 

16

 

 

 

Other collateralized loans

 

3/4

 

 

 

 

 

 

 

3/4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other loans

 

232

 

 

 

 

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Valuation allowance

  

3/4

 

 

  

 

 

  

 

3/4

 

  

 

 

  

 

 

 

  

 

 

  

 

 

 

  

 

Total net other loans

  

232

 

 

  

 

 

  

 

16

 

  

 

 

  

 

 

 

  

 

 

  

 

 

 

  

 

Total commercial mortgage and other loans

$

27,717

 

 

  

 

 

  

$

24,972

 

  

 

 

  

 

 

 

  

 

 

  

 

 

 

  

 

The commercial mortgage and other loans are geographically dispersed throughout the United States and Canada with the largest concentrations in California (24%) and New York (9%) at December 31, 2008.

 

 

 

B-23

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Activity in the allowance for losses for all commercial mortgage and other loans, for the years ended December 31, is as follows:

 

 

  

2008

 

  

2007

 

  

2006

 

 

  

(in millions)

 

Allowance for losses, beginning of year

  

$

84

 

  

$

97

 

  

$

94

 

Addition to/(Release of) allowance for losses

  

 

84

 

  

 

(13

)

  

 

5

 

Charge-offs, net of recoveries

  

 

3/4-

 

  

 

3/4

 

  

 

(2

)

 

  

 

 

 

  

 

 

 

  

 

 

 

Allowance for losses, end of year

  

$

168

 

  

$

84

 

  

$

97

 

 

  

 

—  

 

  

 

 

 

  

 

 

 

 

Non-performing commercial mortgage and other loans identified in management’s specific review of probable loan losses and the related allowance for losses at December 31, are as follows:

 

 

  

2008

 

  

2007

 

 

  

(in millions)

 

Non-performing commercial mortgage and other loans with allowance for losses

  

$

17

 

  

$

3/4

 

Non-performing commercial mortgage and other loans with no allowance for losses

  

 

364

 

  

 

19

 

Allowance for losses, end of year

  

 

(6)

 

  

 

3/4

 

 

  

 

 

 

  

 

 

 

Net carrying value of non-performing commercial mortgage and other loans

  

$

375

 

  

$

19

 

 

  

 

 

 

  

 

 

 

Non-performing commercial mortgage and other loans with no allowance for losses are loans in which the fair value of the collateral or the net present value of the loans’ expected future cash flows equals or exceeds the recorded investment. The average recorded investment in non-performing loans before allowance for losses was $208 million, $17 million and $19 million for 2008, 2007 and 2006, respectively. Net investment income recognized on these loans totaled $23 million, $1 million and $3 million for the years ended December 31, 2008, 2007 and 2006, respectively.

 

Other Long-term Investments

 

“Other long-term investments” are comprised as follows at December 31:

 

  

2008

  

2007

 

  

(in millions)

Joint ventures and limited partnerships:

  

 

 

  

 

 

Real estate related

  

$

664

  

$

642

Non real estate related

  

 

1,899

  

 

1,755

Total joint ventures and limited partnerships

  

 

2,563

  

 

2,397

 

 

 

 

 

 

 

Other

 

 

950

 

 

752

 

 

 

 

 

 

 

Total other long-term investments

  

$

3,513

  

$

3,149

 

 

 

B-24

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Equity Method Investments

 

The following tables set forth summarized combined financial information for significant joint ventures and limited partnership interests accounted for under the equity method, including the Company’s investment in operating joint ventures that are discussed in more detail in Note 6. The amounts in the tables below reflect changes in the activities within the joint ventures and limited partnerships, as well as changes in the Company’s level of investment in such entities.

 

 

  

At December 31,

 

  

2008

  

2007

 

  

(in millions)

STATEMENTS OF FINANCIAL POSITION

  

 

 

  

 

 

Investments in real estate

  

$

3,083

  

$

4,551

Investments in securities

  

 

14,447

  

 

11,409

Cash and cash equivalents

  

 

569

  

 

576

Receivables

  

 

8,474

  

 

8,216

Property and equipment

  

 

136

  

 

107

Other assets(1)

  

 

2,095

  

 

2,746

 

  

 

 

  

 

 

Total assets

  

$

28,804

  

$

27,605

 

  

 

 

  

 

 

Borrowed funds-third party

  

$

2,864

  

$

2,760

Borrowed funds-Prudential Insurance

  

 

417

  

 

417

Payables

  

 

6,399

  

 

6,534

Other liabilities(2)

  

 

1,841

  

 

1,599

 

  

 

 

  

 

 

Total liabilities

  

 

11,521

  

 

11,310

Partners’ capital

  

 

17,283

  

 

16,295

 

  

 

 

  

 

 

Total liabilities and partners’ capital

  

$

28,804

  

$

27,605

 

  

 

 

  

 

 

Equity in partners’ capital included above

  

$

3,793

  

$

3,422

Equity in limited partnership interests not included above

  

 

217

  

 

347

 

  

 

 

  

 

 

Carrying value

  

$

4,010

  

$

3,769

 

 

  

 

 

  

 

 

(1) Other assets consist of goodwill, intangible assets and other miscellaneous assets.

 

 

 

 

 

 

(2) Other liabilities consist of securities repurchase agreements and other miscellaneous liabilities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

2008

 

  

2007

 

  

2006

 

 

  

(in millions)

 

STATEMENTS OF OPERATIONS

  

 

 

 

 

 

 

 

 

 

 

 

Income from real estate investments

  

$

54

 

  

$

75

 

  

$

10

 

Income from securities investments

  

 

2,980

 

  

 

5,430

 

  

 

5,122

 

Income from other

  

 

12

 

  

 

7

 

  

 

27

 

Interest expense-third party

  

 

(510

)

  

 

(360

)

  

 

(395

)

Depreciation

  

 

(10

)

  

 

(1

)

  

 

(14

)

Management fees/salary expenses

  

 

(2,790

)

  

 

(2,378

)

  

 

(2,191

)

Other expenses

  

 

(1,699

)

  

 

(1,418

)

  

 

(1,483

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (losses)

  

$

(1,963

)

  

$

1,355

 

  

$

1,076

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Equity in net earnings (losses) included above

  

 

(398

)

  

 

451

 

  

 

346

 

Equity in net earnings (losses) of limited partnership interests not included above

 

 

(18

)

 

 

39

 

 

 

62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity in net earnings (losses)

  

$

(416

)

  

$

490

 

  

$

408

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

B-25

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Net Investment Income

 

Net investment income for the years ended December 31, was from the following sources:

 

 

 

  

2008

 

  

2007

 

  

2006

 

 

  

(in millions)

 

Fixed maturities, available for sale

  

$

6,600

 

  

$

7,331

 

  

$

7,054

 

Equity securities, available for sale

  

 

227

 

  

 

215

 

  

 

200

 

Trading account assets

  

 

741

 

  

 

708

 

  

 

642

 

Commercial mortgage and other loans

  

 

1,670

 

 

 

1,504

 

 

 

1,432

 

Policy loans

 

 

464

 

 

 

455

 

 

 

437

 

Short-term investments and cash equivalents

  

 

277

 

 

 

464

 

 

 

446

 

Other long-term investments

  

 

(10)

 

 

 

459

 

 

 

426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross investment income

 

 

9,969

 

 

 

11,136

 

 

 

10,637

 

Less investment expenses

 

 

(719

)

 

 

(1,311)

 

 

 

(1,228)

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Net investment income

  

$

9,250

 

  

$

9,825

 

  

$

9,409

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying value for non-income producing assets included in fixed maturities totaled $243 million at December 31, 2008. Non-income producing assets represent investments that have not produced income for the twelve months preceding December 31, 2008.

 

Realized Investment Gains (Losses), Net

 

Realized investment gains (losses), net, for the years ended December 31, were from the following sources:

 

 

  

2008

 

  

2007

 

  

2006

 

 

  

(in millions)

 

Fixed maturities

  

$

(1,869

)

  

$

138

 

  

$

(10

)

Equity securities

  

 

(754

)

  

 

342

 

  

 

198

 

Commercial mortgage and other loans

  

 

(85

)

  

 

2

 

  

 

(18

)

Investment real estate

  

 

3/4

 

  

 

1

 

  

 

2

 

Joint ventures and limited partnerships

  

 

(45

)

  

 

78

 

  

 

117

 

Derivatives

  

 

1,262

 

  

 

(103

)

  

 

(54

)

Other

  

 

11

 

  

 

(5

)

  

 

41

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Realized investment gains (losses), net

  

$

(1,480

)

  

$

453

 

  

$

276

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

B-26

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Net Unrealized Investment Gains (Losses)

 

Net unrealized investment gains and losses on securities classified as “available for sale” and certain other long-term investments and other assets are included in the Consolidated Statements of Financial Position as a component of “Accumulated other comprehensive income (loss).” Changes in these amounts include reclassification adjustments to exclude from “Other comprehensive income (loss)” those items that are included as part of “Net income” for a period that had been part of “Other comprehensive income (loss)” in earlier periods. The amounts for the years ended December 31, are as follows:

 

 

  

Net Unrealized Gains (Losses) On Investments(1)

 

  

Deferred Policy Acquisition Costs

 

  

Future Policy Benefits

 

 

Policyholders’

Dividends

 

Deferred Income Tax (Liability) Benefit

 

 

Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)

 

 

 

  

(in millions)

 

 

Balance, December 31, 2005

  

$

5,156

 

  

$

(163

)

  

$

(1,654

)

 

$

(2,302

)

 

$

(366

)

    

$

671

 

Net investment gains (losses) on investments arising during the period

  

 

(825

)

  

 

 

  

 

 

 

 

 

  

 

297

 

    

 

(528

)

Reclassification adjustment for (gains) losses included in net income

  

 

(258

)

  

 

 

  

 

 

 

 

 

  

 

93

 

    

 

(165

)

Impact of net unrealized investment (gains) losses on deferred policy acquisition costs

 

 

—  

 

  

 

32

 

  

 

 

 

 

 

  

 

(11

)

    

 

21

 

Impact of net unrealized investment (gains) losses on future policy benefits

 

 

—  

 

  

 

 

  

 

311

 

 

 

 

 

 

(109

)

    

 

202

 

Impact of net unrealized investment (gains) losses on policyholders’ dividends

  

 

—  

 

  

 

 

  

 

 

 

 

437

 

 

 

(153

)

    

 

284

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

  

  

 

 

 

    

 

 

 

Balance, December 31, 2006

  

 

4,073

 

  

 

(131

)

  

 

(1,343

)

 

 

(1,865

)

 

 

(249

)

    

 

485

 

Net investment gains (losses) on investments arising during the period

  

 

(827

)

 

 

 

 

 

 

 

 

 

 

 

277

 

 

 

(550

)

Reclassification adjustment for (gains) losses included in net income

  

 

(494

)

 

 

 

 

 

 

 

 

 

 

 

165

 

 

 

(329

)

Impact of net unrealized investment (gains) losses on deferred policy acquisition costs

 

 

—  

 

 

 

27

 

 

 

 

 

 

 

 

 

(10

)

 

 

17

 

Impact of net unrealized investment (gains) losses on future policy benefits

 

 

—  

 

 

 

 

 

 

93

 

 

 

 

 

 

(32

)

 

 

61

 

Impact of net unrealized investment (gains) losses on policyholders’ dividends

 

 

—  

 

 

 

 

 

 

 

 

 

817

 

 

 

(286

)

 

 

531

 

Purchase of fixed maturities from an affiliate

 

 

(3

  

 

 

  

 

 

 

 

  

  

 

 

    

 

(3

)

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

    

 

 

 

Balance, December 31, 2007

  

 

2,749

 

  

 

(104

)

  

 

(1,250

)

 

 

(1,048

)

 

 

(135

)

    

 

212

 

Net investment gains (losses) on investments arising during the period

  

 

(15,572

)

 

 

 

 

 

 

 

 

—  

 

 

 

5,427

 

 

 

(10,145

)

Reclassification adjustment for (gains) losses included in net income

  

 

2,574

 

 

 

 

 

 

 

 

 

—  

 

 

 

(897

)

 

 

1,677 

 

Impact of net unrealized investment (gains) losses on deferred policy acquisition costs

  

 

—  

 

 

 

1,591

 

 

 

 

 

 

—  

 

 

 

(557

)

 

 

1,034

 

Impact of net unrealized investment (gains) losses on future policy benefits

 

 

—  

 

 

 

 

 

 

899

 

 

 

—  

 

 

 

(315

)

 

 

584

 

Impact of net unrealized investment (gains) losses on policyholders’ dividends

  

 

—  

 

 

 

 

 

 

 

 

 

1,480

 

 

 

(518

)

 

 

962

 

Purchase of fixed maturities from an affiliate

  

 

(222

)

 

 

 

 

 

 

 

 

—  

 

 

 

77

 

 

 

(145

)

Balance, December 31, 2008

  

$

(10,471

)

  

$

1,487

 

  

$

(351

)

 

$

432

 

 

$

3,082

 

    

$

(5,821

)

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

  

  

 

 

 

    

 

 

 

(1) Includes cash flow hedges. See Note 20 for information on cash flow hedges.

 

 

B-27

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

The table below presents unrealized gains (losses) on investments by asset class at December 31:

 

 

  

2008

 

  

2007

 

  

2006

 

 

  

(in millions)

 

Fixed maturities

  

$

(9,811

)

  

$

1,801

 

  

$

3,353

 

Equity securities

  

 

(748

)

  

 

578

 

  

 

852

 

Derivatives designated as cash flow hedges(1)

 

 

(115

)

 

 

(211

)

 

 

(153

)

Other investments

  

 

203

 

  

 

581

 

  

 

21

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Net unrealized gains on investments

  

$

(10,471

)

  

$

2,749

 

  

$

4,073

 

(1) See Note 20 for more information on cash flow hedges.

  

 

 

 

  

 

 

 

  

 

 

 

 

Duration of Gross Unrealized Loss Positions for Fixed Maturities

 

The following table shows the fair value and gross unrealized losses aggregated by investment category and length of time that individual fixed maturity securities have been in a continuous unrealized loss position, at December 31:

 

 

 

 

 

2008

 

 

 

 

Less than twelve months

 

Twelve months or more

 

Total

 

 

 

Fair Value

 

Unrealized Losses

 

 

Fair Value

 

Unrealized Losses

 

 

Fair Value

 

Unrealized Losses

 

 

 

(in millions)

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. government authorities and agencies

 

$

631

 

$

2

 

$

 

$

  

$

631

 

$

2

 

Obligations of U.S. states and their political subdivisions

 

 

296

 

 

11

 

 

7

 

 

1

  

 

303

 

 

12

 

Foreign government bonds

 

 

467

 

 

50

 

 

26

 

 

11

  

 

493

 

 

61

 

Corporate securities

 

 

30,309

 

 

3,708

 

 

12,974

 

 

3,587

 

 

43,283

 

 

7,295

 

Commercial mortgage-backed securities

 

 

5,305

 

 

1,056

 

 

3,001

 

 

779

 

 

8,306

 

 

1,835

 

Asset-backed securities

 

 

4,027

 

 

1,664

 

 

5,531

 

 

2,221

 

 

9,558

 

 

3,885

 

Residential mortgage-backed securities

 

 

433

 

 

93

 

 

353

 

 

37

  

 

786

 

 

130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

41,468

 

$

6,584

 

$

21,892

 

$

6,636

  

$

63,360

 

$

13,220

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

 

 

2007

 

 

 

 

Less than twelve months

 

Twelve months or more

 

Total

 

 

 

Fair Value

 

Unrealized Losses

 

 

Fair Value

 

Unrealized Losses

 

 

Fair Value

 

Unrealized Losses

 

 

 

(in millions)

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. government authorities and agencies

 

$

5,359

 

$

2

 

$

22

 

$

  

$

5,381

 

$

2

 

Obligations of U.S. states and their political subdivisions

 

 

431

 

 

 

 

5

 

 

  

 

436

 

 

 

Foreign government bonds

 

 

1,787

 

 

4

 

 

6

 

 

  

 

1,793

 

 

4

 

Corporate securities

 

 

58,989

 

 

711

 

 

7,275

 

 

332

 

 

66,264

 

 

1,043

 

Commercial mortgage-backed securities

 

 

8,012

 

 

11

 

 

1,467

 

 

19

 

 

9,479

 

 

30

 

Asset-backed securities

 

 

14,634

 

 

888

 

 

2,819

 

 

193

 

 

17,453

 

 

1,081

 

Residential mortgage-backed securities

 

 

8,699

 

 

5

 

 

897

 

 

16

  

 

9,596

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

97,911

 

$

1,621

 

$

12,491

 

$

560

  

$

110,402

 

$

2,181

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

 

  

 

 

 

The gross unrealized losses at December 31, 2008 and 2007 are comprised of $9,995 million and $1,857 million related to investment grade securities and $3,225 million and $324 million related to below investment grade securities, respectively. At December 31, 2008, $8,912 million of the gross unrealized losses represented declines in value of greater than 20%, $8,129 million of which had been in that position for less than six months, as compared to $346 million at December 31, 2007 that represented declines in value of greater than 20%, substantially all of which had been in that position for less than six months. At December 31, 2008, the $6,636 million of gross unrealized losses of twelve months or more were mainly concentrated in asset-backed securities, manufacturing sector of the Company’s corporate securities, and in commercial mortgage-backed securities. At December 31, 2007, the $560 million of gross unrealized losses of twelve months or more were concentrated in asset-backed securities, and in the manufacturing, and utilities sectors of the Company’s corporate securities. In accordance with its policy described in Note 2, the Company concluded that an adjustment for other than temporary impairments for these

 

 

B-28

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

securities was not warranted at December 31, 2008 or 2007. Each security is current on its contractual payments, and a detailed analysis of the underlying credit resulted in the determination that there is no evidence of probable credit deterioration that would indicate they would be unable to meet their contractual obligations. The declines in fair value were primarily due to credit spread widening and increased liquidity discounts. In each case, the Company has the ability and intent to hold the security for a period of time to allow for a recovery of value.

 

Duration of Gross Unrealized Loss Positions for Equity Securities

 

The following table shows the fair value and gross unrealized losses aggregated by length of time that individual equity securities have been in a continuous unrealized loss position, at December 31:

 

 

 

 

 

2008

 

 

 

 

Less than twelve months

 

Twelve months or more

 

Total

 

 

 

Fair Value

 

Unrealized Losses

 

 

Fair Value

 

Unrealized Losses

 

 

Fair Value

 

Unrealized Losses

 

 

 

(in millions)

 

Equity securities, available for sale

 

$

2,182

 

$

971

 

$

29

 

$

16

  

$

2,211

 

$

987

 

 

 

 

 

 

2007

 

 

 

 

Less than twelve months

 

Twelve months or more

 

Total

 

 

 

Fair Value

 

Unrealized Losses

 

 

Fair Value

 

Unrealized Losses

 

 

Fair Value

 

Unrealized Losses

 

 

 

(in millions)

 

Equity securities, available for sale

 

$

4,429

 

$

248

 

$

3

 

$

  

$

4,432

 

$

248

 

 

At December 31, 2008, $878 million of the gross unrealized losses represented declines of greater than 20%, $738 million of which had been in that position for less than six months. At December 31, 2007, $85 million of the gross unrealized losses represented declines of greater than 20%, substantially all of which had been in that position for less than six months. Securities with a fair value of $29 million and gross unrealized losses of $16 million that have been in a continuous unrealized loss position for twelve months or more as of December 31, 2008 represent perpetual preferred securities, which have characteristics of both debt and equity securities. In accordance with its policy described in Note 2, the Company concluded that an adjustment for other than temporary impairments for these securities was not warranted at December 31, 2008 or 2007.

 

Duration of Gross Unrealized Loss Positions for Cost Method Investments

 

The following table shows the fair value and gross unrealized losses aggregated by length of time that individual cost method investments have been in a continuous unrealized loss position, at December 31:

 

 

 

 

 

2008

 

 

 

 

Less than twelve months

 

Twelve months or more

 

Total

 

 

 

Fair Value

 

Unrealized Losses

 

 

Fair Value

 

Unrealized Losses

 

 

Fair Value

 

Unrealized Losses

 

 

 

(in millions)

 

Cost Method Investments

 

$

150

 

$

16

 

$

63

 

$

5

  

$

213

 

$

21

 

 

 

 

 

 

2007

 

 

 

 

Less than twelve months

 

Twelve months or more

 

Total

 

 

 

Fair Value

 

Unrealized Losses

 

 

Fair Value

 

Unrealized Losses

 

 

Fair Value

 

Unrealized Losses

 

 

 

(in millions)

 

Cost Method Investments

 

$

36

 

$

2

 

$

31

 

$

2

  

$

67

 

$

4

 

 

The aggregate cost of the Company’s cost method investments included in “Other long-term investments” totaled $464 million and $353 million at December 31, 2008 and 2007, respectively. In accordance with its policy described in Note 2, the Company concluded that an adjustment for other than temporary impairments for these securities was not warranted at December 31, 2008 or 2007.

 

 

B-29

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Variable Interest Entities

 

In the normal course of its activities, the Company enters into relationships with various special purpose entities and other entities that are deemed to be variable interest entities (“VIEs”), in accordance with FIN No. 46(R), “Consolidation of Variable Interest Entities.” A VIE is an entity that either (1) has equity investors that lack certain essential characteristics of a controlling financial interest (including the ability to control the entity, the obligation to absorb the entity’s expected losses and the right to receive the entity’s expected residual returns) or (2) lacks sufficient equity to finance its own activities without financial support provided by other entities, which in turn would be expected to absorb at least some of the expected losses of the VIE. If the Company determines that it stands to absorb a majority of the VIE’s expected losses or to receive a majority of the VIE’s expected residual returns, the Company would be deemed to be the VIE’s “primary beneficiary” and would be required to consolidate the VIE.

 

Consolidated Variable Interest Entities

 

The Company is the primary beneficiary of certain VIEs in which the Company has invested, as part of its investment activities, but over which the Company does not exercise control. The Company’s position in the capital structure and/or relative size indicates that the Company is the primary beneficiary. The Company has not provided material financial or other support that was not contractually required to these VIEs. These VIEs are consolidated and reflected in the table below. The table below reflects the carrying amount and balance sheet caption in which the assets of these consolidated VIEs are reported. The liabilities of these consolidated VIEs are included in “Separate account liabilities” and “Other liabilities” and are also reflected in the table below. The creditors of each consolidated VIE have recourse only to the assets of that VIE.

 

 

At December 31,

 

2008

 

 

2007

 

 

(in millions)

Other long-term investments

 

6

 

 

 

 

Cash and cash equivalents

 

4

 

 

 

 

Separate account assets

 

91

 

 

 

135

 

Total assets of consolidated VIEs

$

101

 

 

$

135

 

Total liabilities of consolidated VIEs

$

95

 

 

$

135

 

 

In addition, not reflected in the table above, the Company has created a trust that is a VIE, to facilitate Prudential Insurance’s Funding Agreement Notes Issuance Program (“FANIP”). The trust issues medium-term notes secured by funding agreements issued to the trust by Prudential Insurance with the proceeds of such notes. The trust is the beneficiary of an indemnity agreement with the Company that provides that the Company is responsible for any and all costs related to the notes issued with limited exception. As a result, the Company has determined that it is the primary beneficiary of the trust, which is therefore consolidated.

 

The funding agreements represent an intercompany transaction that is eliminated upon consolidation. However, in recognition of the security interest in such funding agreements, the trust’s medium-term note liability of $7,130 million and $8,535 million at December 31, 2008 and 2007, respectively, is classified on the Consolidated Statements of Financial Position within “Policyholders’ account balances.” Creditors of the trust do have recourse to the Company if the trust fails to make contractual payments on the medium-term notes. The Company has not provided material financial or other support that was not contractually required to the trust.

 

Significant Variable Interests in Unconsolidated Variable Interest Entities

 

The Company may invest in debt or equity securities issued by certain asset-backed investment vehicles (commonly referred to as collateralized debt obligations, or “CDOs”) that are managed by an affiliated company. CDOs raise capital by issuing debt securities, and use the proceeds to purchase investments, typically interest-bearing financial instruments. The Company’s maximum exposure to loss resulting from its relationship with unconsolidated CDOs managed by affiliates is limited to its investment in the CDOs, which was $384 million and $44 million at December 31, 2008 and 2007, respectively. These investments are reflected in “Fixed maturities, available for sale.” The fair value of assets held within these unconsolidated VIEs was $3,053 million as of December 31, 2008. There are no liabilities associated with these unconsolidated VIEs on the Company’s balance sheet.

 

 

B-30

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

In addition, in the normal course of its activities, the Company will invest in structured investments including VIEs. These structured investments typically invest in fixed income investments and are managed by third parties and include Asset-backed securities, Commercial mortgage-backed securities and Residential mortgage-backed securities. The Company’s maximum exposure to loss on these structured investments, both VIEs and non-VIEs, is limited to the amount of its investment. The Company has not provided material financial or other support that was not contractually required to these structures. The Company has determined that it is not the primary beneficiary of these structures due to its relative size and position in the capital structure of these entities.

 

Included among these structured investments are asset-backed securities issued by VIEs that manage investments in the European market. In addition to a stated coupon, each investment provides a return based on the VIE’s portfolio of assets and related investment activity. The market value of these VIEs was approximately $7 billion as of December 31, 2008 and these VIEs were financed primarily through the issuance of notes similar to those purchased by the Company. The Company accounts for these investments as available for sale fixed maturities containing embedded derivatives that are bifurcated and marked-to-market through “Realized investment gains (losses), net,” based upon the change in value of the underlying portfolio. The Company’s variable interest in each of these VIEs represents less than 50% of the only class of variable interests issued by the VIE. The Company’s maximum exposure to loss from these interests was $528 million and $908 million at December 31, 2008 and 2007, respectively, which includes the fair value of the embedded derivatives.

 

Securities Pledged, Restricted Assets and Special Deposits

 

The Company pledges as collateral investment securities it owns to unaffiliated parties through certain transactions, including securities lending, securities sold under agreements to repurchase and collateralized borrowings. At December 31, the carrying value of investments pledged to third parties as reported in the Consolidated Statements of Financial Position included the following:

 

 

 

  

2008

  

2007

 

  

(in millions)

Fixed maturities available for sale

  

$

14,693

  

$

15,829

Trading account assets supporting insurance liabilities

 

 

455

 

 

527

Other trading account assets

  

 

487

  

 

542

Separate account assets

  

 

4,550

  

 

5,372

 

  

 

 

  

 

 

Total securities pledged

  

$

20,185

  

$

22,270

 

  

 

 

  

 

 

 

As of December 31, 2008, the carrying amount of the associated liabilities supported by the pledged collateral was $18,571 million. Of this amount, $7,501 million was “Securities sold under agreements to repurchase”, $4,641 million was “Separate account liabilities”, $3,429 million was “Cash collateral for loaned securities”, $2,000 million was “Long-term debt”, and $1,000 million was “Short-term debt”.

 

In the normal course of its business activities, the Company accepts collateral that can be sold or repledged. The primary sources of this collateral are securities in customer accounts and securities purchased under agreements to resell. The fair value of this collateral was approximately $1,701 million and $704 million at December 31, 2008 and 2007, respectively, all of which for both periods had either been sold or repledged.

 

Assets of $45 million and $50 million at December 31, 2008 and 2007, respectively, were on deposit with governmental authorities or trustees. Additionally, assets carried at $696 million and $692 million at December 31, 2008 and 2007, respectively, were held in voluntary trusts established primarily to fund guaranteed dividends to certain policyholders and to fund certain employee benefits. Securities restricted as to sale amounted to $200 million and $154 million at December 31, 2008 and 2007, respectively. These amounts include member and activity based stock associated with membership in the Federal Home Loan Bank of New York. Restricted cash and securities of $4,382 million and $3,068 million at December 31, 2008 and 2007, respectively, were included in “Other assets.” The restricted cash and securities primarily represent funds deposited by clients and funds accruing to clients as a result of trades or contracts.

 

 

 

B-31

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

 

6.

INVESTMENTS IN OPERATING JOINT VENTURES

 

The Company has made investments in certain joint ventures that are strategic in nature and made other than for the sole purpose of generating investment income. These investments are accounted for under the equity method of accounting and are included in “Other assets” in the Company’s Consolidated Statements of Financial Position. The earnings from these investments are included on an after-tax basis in “Equity in earnings of operating joint ventures, net of taxes” in the Company’s Consolidated Statements of Operations. Investments in operating joint ventures include the Company’s investment in Wachovia Securities, as well as an indirect investment in China Pacific Group. The summarized financial information for the Company’s operating joint ventures has been included in the summarized combined financial information for all significant equity method investments shown in Note 5.

 

Investment in Wachovia Securities

 

On July 1, 2003, the Company combined its retail securities brokerage and clearing operations with those of Wachovia Corporation (“Wachovia”) and formed Wachovia Securities, a joint venture currently headquartered in St. Louis, Missouri. The transaction included the contribution of certain assets and liabilities of the Company’s securities brokerage operations; however, the Company retained certain assets and liabilities related to the contributed operations, including liabilities for certain litigation and regulatory matters. The Company and Wachovia have each agreed to indemnify the other for certain losses, including losses resulting from litigation and regulatory matters relating to certain events arising from the operations of their respective contributed businesses prior to March 31, 2004.

 

On October 1, 2007, Wachovia completed the acquisition of A.G. Edwards, Inc. (“A.G. Edwards”) and on January 1, 2008 contributed the retail securities brokerage business of A.G. Edwards to the joint venture. Wachovia’s contribution of this business entitled the Company to elect a “lookback” option (which the Company elected) that permits the Company to delay for a period of two years ending on January 1, 2010, the decision on whether or not to make payments to avoid or limit dilution of its 38% ownership interest in the joint venture. During this “lookback” period, the Company’s share in the earnings of the joint venture and one-time costs associated with the combination of the A.G. Edwards business with Wachovia Securities is based on the Company’s diluted ownership level, which is in the process of being determined. At the end of the “lookback” period, the Company may “put” its joint venture interests to Wachovia based on the appraised value of the joint venture excluding the A.G. Edwards business, as of January 1, 2008, the date of the combination of the A.G. Edwards business with Wachovia Securities. Based upon the existing agreements and the Company’s estimates of the values of the A.G. Edwards business and the joint venture excluding the A.G. Edwards business, the Company adjusted the carrying value of its ownership interest in the joint venture effective as of January 1, 2008 to reflect the addition of the A.G. Edwards business and the dilution of the Company’s 38% ownership interest and to record the value of the above described rights under the “lookback” option. As a result, the Company recognized an increase to “Additional paid-in capital” of $1.041 billion, net of tax. The Company’s recorded share of pre-tax losses from the joint venture of $331 million for the year ended December 31, 2008 reflects its estimated diluted ownership level based upon the existing agreements and its estimates of the values of the A.G. Edwards business and the joint venture excluding the A.G. Edwards business. Establishment of definitive agreed or appraised values for the A.G. Edwards business and the joint venture excluding the A.G. Edwards business will result in an adjustment to the credit to equity and a true-up to the Company’s earnings from the joint venture for any difference between the diluted ownership percentage used to record earnings for the year ended December 31, 2008 and the finally determined diluted ownership percentage. The Company does not anticipate any such adjustment to have a material effect on its reported results of operations.

 

On October 3, 2008, Wachovia and Wells Fargo & Company (“Wells Fargo”) announced that they had entered into an Agreement and Plan of Merger, pursuant to which Wachovia would be merged into Wells Fargo, which would succeed to Wachovia’s rights and obligations under the joint venture arrangements. As reported by Wells Fargo, this merger was completed on December 31, 2008.

 

On December 4, 2008, the Company announced its intention, assuming completion of the merger of Wachovia into Wells Fargo, to exercise its right under the “lookback” option to put its joint venture interests to Wells Fargo. Under the terms of the joint venture agreements, closing of the put transaction would occur on or about January 1, 2010.

 

 

B-32

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Earnings of the joint venture are subject to certain risks pertaining to the joint venture operations, including customer claims, litigation and regulatory investigations affecting Wachovia Securities’ businesses. Such customer claims, litigation and regulatory matters include matters typical for retail securities brokerage and clearing operations and matters unique to the joint venture operations. In recent months, following the failure in early 2008 of the auctions which set the rates for most auction rate securities, Wachovia Securities has become the subject of customer complaints, legal actions, including a putative class action, and investigations by securities regulators and agencies relating to Wachovia Securities’ role in the underwriting, sale and auction of auction rate securities. On August 15, 2008, Wachovia announced that it had reached an agreement in principle for a global settlement of investigations concerning the underwriting, sale and subsequent auction of certain auction rate securities by subsidiaries of Wachovia Securities and had recorded an increase to legal reserves. The Company’s recorded share of pre-tax losses from the joint venture for the year ended December 31, 2008 includes $355 million, which is the Company’s share of this charge.

 

The Company’s investment in Wachovia Securities, excluding the value of the “lookback” option, was $1.812 billion and $1.220 billion as of December 31, 2008 and 2007, respectively. The Company recognized pre-tax losses from Wachovia Securities of $331 million for the year ended December 31, 2008, and pre-tax equity earnings of $370 million and $294 million for the years ended December 31, 2007 and 2006, respectively. The income tax benefit associated with these losses was $110 million for the year ended December 31, 2008, and the income tax expense associated with these earnings was $146 million and $117 million for the years ended December 31, 2007 and 2006, respectively. Dividends received from the investment in Wachovia Securities were $104 million, $366 million and $277 million for the years ended December 31, 2008, 2007 and 2006, respectively.

 

Investment in China Pacific Group

 

The Company has made an indirect investment in China Pacific Group, a Chinese insurance operation. The carrying value of this operating joint venture was $217 million and $633 million, as of December 31, 2008 and December 31, 2007, respectively. The indirect investment in China Pacific Group includes unrealized changes in market value, which are included in accumulated other comprehensive income and relate to the market price of China Pacific Group’s publicly traded shares, which began trading on the Shanghai Exchange in 2007. The Company recognized combined after-tax equity earnings from this operating joint venture of $3 million for the year ended December 31, 2008. There were no earnings recognized by the Company for this joint venture for the years ended December 31, 2007 and 2006. Dividends received from this investment were $4 million for the year ended December 31, 2008. No dividends were received from this investment for the years ended December 31, 2007 and 2006.

 

 

7.  

DEFERRED POLICY ACQUISITION COSTS

 

The balances of and changes in deferred policy acquisition costs as of and for the years ended December 31, are as follows:

 

 

  

2008

 

  

2007

 

  

2006

 

 

  

(in millions)

 

Balance, beginning of year

  

$

6,687

 

  

$

6,129

 

  

$

5,462

 

Capitalization of commissions, sales and issue expenses

  

 

914

 

  

 

954

 

  

 

854

 

Amortization

  

 

(654

)

  

 

(417

)

  

 

(219

)

Change in unrealized investment gains and losses

  

 

1,591

 

  

 

27

 

  

 

32

 

Impact of adoption of SOP 05-1

 

 

— 

 

 

 

(6

)

 

 

— 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Balance, end of year

  

$

8,538

 

  

$

6,687

 

  

$

6,129

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

B-33

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

8.    VALUATION OF BUSINESS ACQUIRED, GOODWILL AND OTHER INTANGIBLES

 

Valuation of Business Acquired

 

The balance of and changes in VOBA as of and for the years ended December 31, are as follows:

 

 

 

 

2008

 

 

 

2007

 

 

 

2006

 

 

 

(in millions)

Balance, beginning of year

  

$

765

 

 

$

898

 

 

$

302

 

Acquisitions

  

 

— 

 

 

 

— 

 

 

 

647

 

Amortization (1)

 

 

(369

)

 

 

(173

)

 

 

(95

)

Interest (2)

 

 

41

 

 

 

49

 

 

 

44

 

Impact of adoption of SOP 05-1

 

 

— 

 

 

 

(9

)

 

 

— 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of year

  

$

437

 

 

$

765

 

 

$

898

 

 

  

 

 

 

 

 

 

 

 

 

 

 

(1)

The weighted average remaining expected life of VOBA varies by product. The weighted average remaining expected lives were approximately 5 and 17 years for the VOBA related to the insurance transactions associated with Allstate and CIGNA, respectively. The VOBA balances at December 31, 2008 were $140 million and $297 million related to Allstate and CIGNA, respectively.

(2)

The interest accrual rates vary by product. The interest rates were 5.42% and 7.30% for the VOBA related to Allstate and CIGNA, respectively.

 

During 2008, the Company recognized an impairment of $234 million, included on the Amortization line in the table above, related to the VOBA associated with the Allstate acquisition. This impairment is reflective of the continued deterioration in the financial markets, which resulted in additional market depreciation within the separate account assets and corresponding decreases in fee income and overall expected future earnings for this business. The impairment was determined using discounted present value of future estimated gross profits.

 

The following table provides estimated future amortization, net of interest, for the periods indicated.

 

 

 

VOBA Amortization

 

 

(in millions)

2009

  

$

26

  

2010

  

 

24

  

2011

 

 

23

  

2012

 

 

20

  

2013

 

 

18

  

2014 and thereafter

  

 

326

  

 

  

 

 

  

Total

  

$

437

  

 

  

 

 

  

Goodwill

 

The changes in the book value of goodwill are as follows:

 

 

  

2008

 

  

2007

 

  

      

 

 

  

(in millions)

 

Balance, beginning of year

  

$

620

 

  

$

619

 

  

 

Acquisitions

  

 

106

 

  

 

—  

 

  

 

Other (1)

 

 

(1

)

 

 

1

 

 

 

 

  

 

 

 

  

 

 

 

  

 

Balance, end of year

  

$

725

 

  

$

620

 

  

 

 

  

 

 

 

  

 

 

 

  

 

(1)

Other represents foreign currency translation and purchase price adjustments.

 

The Company tests goodwill for impairment annually as of December 31 as discussed in further detail in Note 2. The Company performed goodwill impairment testing for the entire goodwill balance at December 31, 2008, all of which is in the Financial Services Businesses reporting unit. There were no goodwill impairment charges during 2008, 2007 or 2006.

 

 

B-34

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Other Intangibles

 

Other intangible balances at December 31, are as follows:

 

 

2008

 

2007

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

 

Gross Carrying Amount

 

Accumulated Amortization

 

Net Carrying Amount

 

 

(in millions)

Subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

$

175

 

 

$

(10

)

 

$

165

 

 

$

136

 

 

$

(6

)

 

$

130

 

Other

 

22

 

 

 

(16

)

 

 

6

 

 

 

18

 

 

 

(14

)

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

197

 

 

$

(26

)

 

$

171

 

 

$

154

 

 

$

(20

)

 

$

134

 

 

Amortization expense for other intangibles was $7 million, $6 million and $5 million for the years ended December 31, 2008, 2007 and 2006, respectively. Amortization expense for other intangibles is expected to be approximately $20 million in 2009 and 2010, $17 million in 2011, $16 million in 2012, and $15 million in 2013.

 

 

9.  

POLICYHOLDERS’ LIABILITIES

 

Future Policy Benefits

 

Future policy benefits at December 31, are as follows:

 

 

 

  

2008

  

2007

 

  

(in millions)

Life insurance

  

$

56,060

  

$

55,068

Individual and group annuities and supplementary contracts

  

 

14,217

  

 

15,140

Other contract liabilities

  

 

4,513

  

 

2,781

 

 

 

 

 

 

 

Subtotal future policy benefits excluding unpaid claims and claim adjustment expenses

 

 

74,790

 

 

72,989

 

 

 

 

 

 

 

Unpaid claims and claim adjustment expenses

 

 

2,073

 

 

2,021

 

  

 

 

  

 

 

Total future policy benefits

  

$

76,863

  

$

75,010

 

  

 

 

  

 

 

Life insurance liabilities include reserves for death and endowment policy benefits, terminal dividends and certain health benefits. Individual and group annuities and supplementary contracts liabilities include reserves for life contingent immediate annuities and life contingent group annuities. Other contract liabilities include unearned revenue and certain other reserves for group life, annuities and individual life and health products.

 

Future policy benefits for individual participating traditional life insurance are based on the net level premium method, calculated using the guaranteed mortality and nonforfeiture interest rates which range from 2.5% to 7.5%. Participating insurance represented 15% and 17% of domestic individual life insurance in force at December 31, 2008 and 2007, respectively, and 85%, 87% and 89% of domestic individual life insurance premiums for 2008, 2007 and 2006, respectively.

 

Future policy benefits for individual non-participating traditional life insurance policies, group and individual long-term care policies and individual health insurance policies are generally equal to the aggregate of (1) the present value of future benefit payments and related expenses, less the present value of future net premiums, and (2) any premium deficiency reserves. Assumptions as to mortality, morbidity and persistency are based on the Company’s experience, and in certain instances, industry experience, when the basis of the reserve is established. Interest rates used in the determination of the present values range from 1.7% to 8.3%; less than 1% of the reserves are based on an interest rate in excess of 8%.

 

Future policy benefits for individual and group annuities and supplementary contracts are generally equal to the aggregate of (1) the present value of expected future payments, and (2) any premium deficiency reserves. Assumptions as to mortality are based on the Company’s experience, and in certain instances, industry experience, when the basis of the reserve is established. The interest rates used in the determination of the present values range from 1.1% to 14.8%; less than 2% of the reserves are based on an interest rate in excess of 8%.

 

 

B-35

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Future policy benefits for other contract liabilities are generally equal to the present value of expected future payments based on the Company’s experience, except, for example, certain group insurance coverages for which future policy benefits are equal to gross unearned premium reserves. The interest rates used in the determination of the present values range from 1.2% to 6.1%.

 

Premium deficiency reserves are established, if necessary, when the liability for future policy benefits plus the present value of expected future gross premiums are determined to be insufficient to provide for expected future policy benefits and expenses and to recover any unamortized policy acquisition costs. Premium deficiency reserves have been recorded for the group single premium annuity business, which consists of limited-payment, long-duration traditional and non-participating annuities; structured settlements and single premium immediate annuities with life contingencies; and for certain individual health policies. Liabilities of $1,451 million and $2,464 million as of December 31, 2008 and 2007, respectively, are included in “Future policy benefits” with respect to these deficiencies, of which $200 million and $1,160 million as of December 31, 2008 and 2007, respectively, relate to net unrealized gains on securities classified as available for sale.

 

The Company’s liability for future policy benefits is also inclusive of liabilities for guarantee benefits related to certain nontraditional long-duration life and annuity contracts, which are discussed more fully in Note 10 and are primarily reflected in Other contract liabilities in the table above.

 

Unpaid claims and claim adjustment expenses primarily reflect the Company’s estimate of future disability claim payments and expenses as well as estimates of claims incurred but not yet reported as of the balance sheet dates related to group disability products. Unpaid claim liabilities are discounted using interest rates ranging from 0% to 6.35%.

 

Policyholders’ Account Balances

 

Policyholders’ account balances at December 31, are as follows:

 

 

  

2008

  

2007

 

  

(in millions)

Individual annuities

  

$

8,735

  

$

7,685

Group annuities

  

 

18,942

  

 

18,293

Guaranteed investment contracts and guaranteed interest accounts

  

 

13,152

  

 

12,289

Funding agreements

 

 

10,787

 

 

11,453

Interest-sensitive life contracts

  

 

6,674

  

 

5,990

Dividend accumulations and other

  

 

12,909

  

 

12,648

 

  

 

 

  

 

 

Policyholders’ account balances

  

$

71,199

  

$

68,358

 

  

 

 

  

 

 

Policyholders’ account balances represent an accumulation of account deposits plus credited interest less withdrawals, expenses and mortality charges, if applicable. These policyholders’ account balances also include provisions for benefits under non-life contingent payout annuities. Included in “Funding agreements” at December 31, 2008 and 2007, are $7,234 million and $8,557 million, respectively, related to the Company’s FANIP product which is carried at amortized cost, adjusted for the effective portion of changes in fair value of qualifying derivative financial instruments. For additional details on the FANIP product see Note 5. The interest rates associated with such notes range from 1.3% to 5.7%. Also included in funding agreements at December 31, 2008 and 2007 are $3,496 million and $2,851 million, respectively, of affiliated funding agreements with Prudential Financial in support of a retail note issuance program to financial wholesalers. Interest crediting rates range from 0% to 6.6% for interest-sensitive life contracts and from 0% to 13.4% for contracts other than interest-sensitive life. Less than 2% of policyholders’ account balances have interest crediting rates in excess of 8%.

 

As discussed in Note 13, in February 2009, the Company issued $1 billion in funding agreements to the Federal Home Loan Bank of New York, which will be reflected within “Policyholders’ account balances.”

 

In March 2009, the Company settled $1,015 million of its obligation related to the affiliated funding agreements mentioned above for $730 million, which will result in an increase in “Additional paid-in capital.”

 

 

10.  

CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS

 

The Company issues traditional variable annuity contracts through its separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholder. The Company also issues

 

 

B-36

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

variable annuity contracts with general and separate account options where the Company contractually guarantees to the contractholder a return of no less than (1) total deposits made to the contract less any partial withdrawals (“return of net deposits”), (2) total deposits made to the contract less any partial withdrawals plus a minimum return (“minimum return”), or (3) the highest contract value on a specified date minus any withdrawals (“contract value”). These guarantees include benefits that are payable in the event of death, annuitization or at specified dates during the accumulation period and withdrawal and income benefits payable during specified periods.

 

The Company also issues annuity contracts with market value adjusted investment options (“MVAs”), which provide for a return of principal plus a fixed rate of return if held to maturity, or, alternatively, a “market adjusted value” if surrendered prior to maturity or if funds are reallocated to other investment options. The market value adjustment may result in a gain or loss to the Company, depending on crediting rates or an indexed rate at surrender, as applicable.

 

In addition, the Company issues variable life, variable universal life and universal life contracts where the Company contractually guarantees to the contractholder a death benefit even when there is insufficient value to cover monthly mortality and expense charges, whereas otherwise the contract would typically lapse (“no lapse guarantee”). Variable life and variable universal life contracts are offered with general and separate account options.

 

The assets supporting the variable portion of both traditional variable annuities and certain variable contracts with guarantees are carried at fair value and reported as “Separate account assets” with an equivalent amount reported as “Separate account liabilities.” Amounts assessed against the contractholders for mortality, administration, and other services are included within revenue in “Policy charges and fee income” and changes in liabilities for minimum guarantees are generally included in “Policyholders’ benefits.” In 2008 and 2007, there were no gains or losses on transfers of assets from the general account to a separate account. 

 

For those guarantees of benefits that are payable in the event of death, the net amount at risk is generally defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date. The Company’s primary risk exposures for these contracts relates to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including equity market returns, contract lapses and contractholder mortality.

 

For guarantees of benefits that are payable at annuitization, the net amount at risk is generally defined as the present value of the minimum guaranteed annuity payments available to the contractholder determined in accordance with the terms of the contract in excess of the current account balance. The Company’s primary risk exposures for these contracts relates to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including equity market returns, timing of annuitization, contract lapses and contractholder mortality.

 

For guarantees of benefits that are payable at withdrawal, the net amount at risk is generally defined as the present value of the minimum guaranteed withdrawal payments available to the contractholder determined in accordance with the terms of the contract in excess of the current account balance. For guarantees of accumulation balances, the net amount at risk is generally defined as the guaranteed minimum accumulation balance minus the current account balance. The Company’s primary risk exposures for these contracts relates to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including equity market returns, interest rates, market volatility or contractholder behavior used in the original pricing of these products.

 

 

B-37

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

The Company’s contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed may not be mutually exclusive. As of December 31, 2008 and 2007, the Company had the following guarantees associated with these contracts, by product and guarantee type:

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

In the Event of Death

 

At Annuitization/ Accumulation(1)

 

In the Event of Death

 

At Annuitization/ Accumulation(1)

 

Variable Annuity Contracts

 

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return of net deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Account value

 

$

7,064

 

 

$

23

 

 

$

8,572

 

 

$

47

 

 

Net amount at risk

 

$

1,314

 

 

$

6

 

 

$

7

 

 

$

4

 

 

Average attained age of contractholders

 

 

62 years

 

 

 

65 years

 

 

 

62 years

 

 

 

65 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum return or contract value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Account value

 

$

15,369

 

 

$

10,281

 

 

$

24,511

 

 

$

13,326

 

 

Net amount at risk

 

$

7,174

 

 

$

3,157

 

 

$

1,768

 

 

$

819

 

 

Average attained age of contractholders

 

 

65 years

 

 

 

62 years

 

 

 

64 years

 

 

 

61 years

 

 

Average period remaining until earliest expected annuitization

 

 

N/A

 

 

 

3 years

 

 

 

N/A

 

 

 

5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)    Includes income and withdrawal benefits as described herein.

 

 

 

 

 

 

Unadjusted Value

 

 

 

Adjusted Value

 

 

 

Unadjusted Value

 

 

 

Adjusted Value

 

Variable Annuity Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market value adjusted annuities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Account value

 

$

408

 

 

$

409

 

 

$

466

 

 

$

469

 

 

 

 

 

December 31, 2008

 

December 31, 2007

 

 

 

In the Event of Death

Variable Life, Variable Universal Life and Universal Life Contracts

 

 

(dollars in millions)

No lapse guarantees

 

 

 

 

 

 

Separate account value

 

$

1,603

 

$

2,195

General account value

 

$

1,216

 

$

977

Net amount at risk

 

$

45,408

 

$

43,310

Average attained age of contractholders

 

 

50 years

 

 

48 years

 

 

 

 

 

 

 

Account balances of variable annuity contracts with guarantees were invested in separate account investment options as follows:

 

 

 

December 31, 2008

 

December 31, 2007

 

 

(in millions)

Equity funds

 

$

10,180

 

$

19,515

Bond funds

 

 

2,715

 

 

2,583

Balanced funds

 

 

4,491

 

 

6,305

Money market funds

 

 

1,232

 

 

1,022

Other

 

 

394

 

 

814

Total

 

$

19,012

 

$

30,239

 

 

 

 

 

 

 

In addition to the amounts invested in separate account investment options above, $3,421 million at December 31, 2008 and $2,843 million at December 31, 2007 of account balances of variable annuity contracts with guarantees, inclusive of contracts with MVA features, were invested in general account investment options.

 

Liabilities For Guarantee Benefits

 

The table below summarizes the changes in general account liabilities either written directly by the Company or assumed by the Company via reinsurance for guarantees on variable contracts. The liabilities for guaranteed minimum death benefits (“GMDB”) and guaranteed minimum income benefits (“GMIB”) are included in “Future policy benefits” and the related changes in the liabilities are included in “Policyholders’ benefits.” Guaranteed minimum accumulation benefits (“GMAB”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum income and withdrawal benefits (“GMIWB”) features are considered to be bifurcated embedded derivatives under SFAS No. 133, and are recorded at fair value . Changes in the fair value of these derivatives, along with any fees attributed or payments made relating to the derivative, are recorded in “Realized investment gains (losses), net.” The liabilities for GMAB, GMWB and GMIWB are included in “Future policy benefits.” As discussed above, the Company maintains a portfolio of derivative investments that serve as a partial economic hedge of the risks associated with these products, for which the changes in fair value are also recorded in “Realized investment

 

 

B-38

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

gains (losses), net.” This portfolio of derivatives investments does not qualify for hedge accounting treatment under U.S. GAAP.

 

 

GMDB

 

GMIB

 

GMAB/GMWB/GMIWB

 

 

Variable Life, Variable Universal Life and Universal Life

 

Variable Annuity

 

Variable Annuity

 

Variable Annuity

 

 

(in millions)

Balance at January 1, 2006

 

$

12

 

 

$

42

 

 

$

12

 

 

$

 

Acquisition

 

 

 

 

 

 

 

 

 

 

 

2

 

Incurred guarantee benefits (1)

 

 

15

 

 

 

19

 

 

 

12

 

 

 

(11

)

Paid guarantee benefits and other

 

 

(1

)

 

 

(15

)

 

 

 

 

 

 

Balance at December 31, 2006

 

 

26

 

 

 

46

 

 

 

24

 

 

 

(9

)

Incurred guarantee benefits (1)

 

 

29

 

 

 

31

 

 

 

26

 

 

 

78

 

Paid guarantee benefits and other

 

 

 

 

 

(35

)

 

 

 

 

 

 

Impact of adoption of SOP 05-1

 

 

 

 

 

 

 

 

 

 

 

2

 

Balance at December 31, 2007

 

 

55

 

 

 

42

 

 

 

50

 

 

 

71

 

Incurred guarantee benefits (1)

 

 

32

 

 

 

329

 

 

 

197

 

 

 

1,101

 

Paid guarantee benefits and other

 

 

(1

)

 

 

(87

)

 

 

 

 

 

 

Balance at December 31, 2008

 

$

86

 

 

$

284

 

 

$

247

 

 

$

1,172

 

 

 

(1)

Incurred guarantee benefits include the portion of assessments established as additions to reserves as well as changes in estimates affecting the reserves. Also includes changes in the fair value of features considered to be derivatives.

 

The GMDB liability is determined each period end by estimating the accumulated value of a portion of the total assessments to date less the accumulated value of the death benefits in excess of the account balance. The GMIB liability is determined each period by estimating the accumulated value of a portion of the total assessments to date less the accumulated value of the projected income benefits in excess of the account balance. The portion of assessments used is chosen such that, at issue (or, in the case of acquired contracts, at the acquisition date), the present value of expected death benefits or expected income benefits in excess of the projected account balance and the portion of the present value of total expected assessments over the lifetime of the contracts are equal. The Company regularly evaluates the estimates used and adjusts the GMDB and GMIB liability balances, with an associated charge or credit to earnings, if actual experience or other evidence suggests that earlier assumptions should be revised.

 

The GMAB features provide the contractholder with a guaranteed return of initial account value or an enhanced value if applicable. The GMAB liability is calculated as the present value of future expected payments to customers less the present value of assessed rider fees attributable to the embedded derivative feature.

 

The GMWB features provide the contractholder with a guaranteed remaining balance if the account value is reduced to zero through a combination of market declines and withdrawals. The guaranteed remaining balance is generally equal to the protected value under the contract, which is initially established as the greater of the account value or cumulative deposits when withdrawals commence, less cumulative withdrawals. The contractholder also has the option, after a specified time period, to reset the guaranteed remaining balance to the then-current account value, if greater. The GMWB liability is calculated as the present value of future expected payments to customers less the present value of assessed rider fees attributable to the embedded derivative feature.

 

The GMIWB features predominantly present a benefit that provides a contractholder two optional methods to receive guaranteed minimum payments over time, a “withdrawal” option or an “income” option. The withdrawal option guarantees that, upon the election of such benefit, a contract holder can withdraw an amount each year until the cumulative withdrawals reach a total guaranteed balance. The guaranteed remaining balance is generally equal to the protected value under the contract, which is initially established as the greater of: (1) the account value on the date of first withdrawal; (2) cumulative deposits when withdrawals commence, less cumulative withdrawals plus a minimum return; or (3) the highest contract value on a specified date minus any withdrawals. The income option guarantees that a contract holder can, upon the election of this benefit, withdraw a lesser amount each year for the annuitant’s life based on the total guaranteed balance. The withdrawal or income benefit can be elected by the contract holder upon issuance of an appropriate deferred variable annuity contract or at any time following contract issue prior to annuitization. Certain GMIWB features include an automatic rebalancing element that

 

 

B-39

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

reduces the Company’s exposure to these guarantees. The GMIWB liability is calculated as the present value of future expected payments to customers less the present value of assessed rider fees attributable to the embedded derivative feature.

 

Liabilities for guaranteed benefits include amounts assumed from affiliates of $58 million and $7 million as of December 31, 2008 and 2007, respectively. See Note 12 for amounts recoverable from reinsurers related to the ceding of certain embedded derivative liabilities associated with these guaranteed benefits, which are not reflected in the table above.

 

As part of risk management strategy, the Company hedges or limits exposure to these risks, excluding those risks that have been deemed suitable to retain, through a combination of product design elements, such as an automatic rebalancing element, and externally purchased hedging instruments, such as equity options and interest rate swaps. The automatic rebalancing element included in the design of certain variable annuity products transfers assets between contractholder sub-accounts depending on a number of factors, including the investment performance of the sub-accounts. Negative investment performance may result in transfer to either a fixed-rate general account option or a separate account bond portfolio. In certain situations, assets may transfer back when investment performance improves. Other product design elements utilized for certain products to manage these risks include asset allocation and minimum purchase age requirements. For risk management purposes the Company segregates the variable annuity living benefit features into four broad categories, (1) those that utilize both an automatic rebalancing element and capital markets hedging, such as for certain GMIWB riders; (2) those that utilize only an automatic rebalancing element, such as for certain GMAB riders; (3) those that utilize only capital markets hedging , such as for certain legacy GMIWB, GMWB and GMAB riders; and (4) those with risks that have been deemed suitable to retain, such as for GMDB and GMIB riders. Riders in categories 1 and 2 from above also include GMDB riders, and as such the GMDB risk in these riders benefits from the automatic rebalancing element.

 

Sales Inducements

 

The Company defers sales inducements and amortizes them over the anticipated life of the policy using the same methodology and assumptions used to amortize deferred policy acquisition costs. These deferred sales inducements are included in “Other assets.” The Company offers various types of sales inducements. These inducements include: (1) a bonus whereby the policyholder’s initial account balance is increased by an amount equal to a specified percentage of the customer’s initial deposit, (2) additional credits after a certain number of years a contract is held and (3) enhanced interest crediting rates that are higher than the normal general account interest rate credited in certain product lines. Changes in deferred sales inducements, reported as “Interest credited to policyholders’ account balances,” are as follows:

 

 

Sales

Inducements

 

(in millions)

Balance at January 1, 2006

$

154

 

Capitalization

 

65

 

Amortization

 

(16

)

Balance at December 31, 2006

 

203

 

Capitalization

 

62

 

Amortization

 

(25

)

Impact of adoption of SOP 05-1

 

(1

)

Balance at December 31, 2007

 

239

 

Capitalization

 

74

 

Amortization

 

(16

)

Balance at December 31, 2008

$

297

 

 

 

 

 

 

11.  

CLOSED BLOCK

 

On the date of demutualization, Prudential Insurance established a Closed Block for certain individual life insurance policies and annuities issued by Prudential Insurance in the U.S. The recorded assets and liabilities were allocated to the Closed Block at their historical carrying amounts. The Closed Block forms the principal component of the Closed Block Business.

 

The policies included in the Closed Block are specified individual life insurance policies and individual annuity contracts that were in force on the effective date of the Plan of Reorganization and for which Prudential Insurance is currently paying or expects to pay experience-based policy dividends. Assets have been allocated to the Closed Block in an amount that has been determined to produce cash flows which, together with revenues from policies included in the Closed Block, are expected to be

 

 

B-40

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

sufficient to support obligations and liabilities relating to these policies, including provision for payment of benefits, certain expenses, and taxes and to provide for continuation of the policyholder dividend scales in effect in 2000, assuming experience underlying such scales continues. To the extent that, over time, cash flows from the assets allocated to the Closed Block and claims and other experience related to the Closed Block are, in the aggregate, more or less favorable than what was assumed when the Closed Block was established, total dividends paid to Closed Block policyholders in the future may be greater than or less than the total dividends that would have been paid to these policyholders if the policyholder dividend scales in effect in 2000 had been continued. Any cash flows in excess of amounts assumed will be available for distribution over time to Closed Block policyholders and will not be available to stockholders. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside of the Closed Block. The Closed Block will continue in effect as long as any policy in the Closed Block remains in force unless, with the consent of the New Jersey insurance regulator, it is terminated earlier.

 

The excess of Closed Block Liabilities over Closed Block Assets at the date of the demutualization (adjusted to eliminate the impact of related amounts in “Accumulated other comprehensive income (loss)”) represented the estimated maximum future earnings at that date from the Closed Block expected to result from operations attributed to the Closed Block after income taxes. In establishing the Closed Block, the Company developed an actuarial calculation of the timing of such maximum future earnings. If actual cumulative earnings of the Closed Block from inception through the end of any given period are greater than the expected cumulative earnings, only the expected earnings will be recognized in income. Any excess of actual cumulative earnings over expected cumulative earnings will represent undistributed accumulated earnings attributable to policyholders, which are recorded as a policyholder dividend obligation. The policyholder dividend obligation represents amounts to be paid to Closed Block policyholders as an additional policyholder dividend unless otherwise offset by future Closed Block performance that is less favorable than originally expected. If the actual cumulative earnings of the Closed Block from its inception through the end of any given period are less than the expected cumulative earnings of the Closed Block, the Company will recognize only the actual earnings in income. However, the Company may reduce policyholder dividend scales in the future, which would be intended to increase future actual earnings until the actual cumulative earnings equaled the expected cumulative earnings. The Company recognized a policyholder dividend obligation of $433 million at December 31, 2008, to Closed Block policyholders for the excess of actual cumulative earnings over the expected cumulative earnings. However, due to the accumulation of net unrealized investment losses that have arisen subsequent to the establishment of the Closed Block, the policyholder dividend obligation balance as of December 31, 2008 was reduced to zero through “Accumulated other comprehensive income (loss).” At December 31, 2007, the Company recognized a policyholder dividend obligation of $732 million for the excess of actual cumulative earnings over the expected cumulative earnings. Additionally, accumulated net unrealized investment gains of $1.047 billion were reflected as an adjustment to the policyholder dividend obligation, with an offsetting amount reported in “Accumulated other comprehensive income (loss)” at December 31, 2007. See the table below for changes in the components of the policyholder dividend obligation for the years ended December 31, 2008 and 2007.

 

On December 19, 2008, Prudential Insurance’s Board of Directors acted to reduce the dividends payable in 2009 on Closed Block policies. This decrease reflects the deterioration in investment results and resulted in a $187 million reduction of the liability for policyholder dividends recognized in the year ended December 31, 2008. On December 11, 2007, Prudential Insurance’s Board of Directors acted to increase the dividends payable in 2008 on Closed Block policies. This increase reflected improved mortality as well as investment gains. These actions resulted in an $89 million increase in the liability for policyholder dividends recognized in the year ended December 31, 2007.

 

 

B-41

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Closed Block Liabilities and Assets designated to the Closed Block at December 31, as well as maximum future earnings to be recognized from Closed Block Liabilities and Closed Block Assets, are as follows:

 

 

2008

 

2007

 

 

    

(in millions)

 

Closed Block Liabilities

 

 

 

 

 

 

 

Future policy benefits

$

51,763

 

 

$

51,208

 

Policyholders’ dividends payable

 

1,036

 

 

 

1,212

 

Policyholder dividend obligation

 

— 

 

 

 

1,779

 

Policyholders’ account balances

 

5,622

 

 

 

5,555

 

Other Closed Block liabilities

 

5,724

 

 

 

10,649

 

 

 

 

 

 

 

 

 

Total Closed Block Liabilities

 

64,145

 

 

 

70,403

 

 

 

 

 

 

 

 

 

Closed Block Assets

 

 

 

 

 

 

 

Fixed maturities, available for sale, at fair value

 

35,345

 

 

 

45,459

 

Other trading account assets, at fair value

 

120

 

 

 

142

 

Equity securities, available for sale, at fair value

 

2,354

 

 

 

3,858

 

Commercial mortgage and other loans

 

8,129

 

 

 

7,353

 

Policy loans

 

5,423

 

 

 

5,395

 

Other long-term investments

 

1,676

 

 

 

1,311

 

Short-term investments

 

1,340

 

 

 

1,326

 

Total investments

 

54,387

 

 

 

64,844

 

Cash and cash equivalents

 

1,779

 

 

 

1,310

 

Accrued investment income

 

615

 

 

 

630

 

Other Closed Block assets

 

409

 

 

 

581

 

 

 

 

 

 

 

 

 

Total Closed Block Assets

 

57,190

 

 

 

67,365

 

 

 

 

 

 

 

 

 

Excess of reported Closed Block Liabilities over Closed Block Assets

 

6,955

 

 

 

3,038

 

Portion of above representing accumulated other comprehensive income:

 

 

 

 

 

 

 

Net unrealized investment gains (losses)

 

(4,371)

 

 

 

1,006

 

Allocated to policyholder dividend obligation

 

433

 

 

 

(1,047

)

 

 

 

 

 

 

 

 

Future earnings to be recognized from Closed Block Assets and Closed Block Liabilities

$

3,017

 

 

$

2,997

 

 

 

 

 

 

 

 

 

Information regarding the policyholder dividend obligation is as follows:

 

2008

 

2007

 

(in millions)

Balance, January 1

$

1,779

 

 

$

2,348

 

Impact from earnings allocable to policyholder dividend obligation

 

(299)

 

 

 

249

 

Change in net unrealized investment gains (losses) allocated to policyholder dividend obligation

 

(1,480)

 

 

 

(818

)

Balance, December 31

$

— 

 

 

$

1,779

 

 

Closed Block revenues and benefits and expenses for the years ended December 31, 2008, 2007 and 2006 were as follows:

 

 

 

2008

 

 

 

2007

 

 

2006

 

(in millions)

Revenues

 

 

 

 

 

 

 

    

 

 

 

Premiums

$

3,608

 

 

$

3,552

 

 

$

3,599

 

Net investment income

 

3,154

 

 

 

3,499

 

 

 

3,401

 

Realized investment gains (losses), net

 

(8)

 

 

 

584

 

 

 

490

 

Other income

 

15

 

 

 

51

 

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Closed Block revenues

 

6,769

 

 

 

7,686

 

 

 

7,540

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefits and Expenses

 

 

 

 

 

 

 

 

 

 

 

Policyholders’ benefits

 

4,087

 

 

 

4,021

 

 

 

3,967

 

Interest credited to policyholders’ account balances

 

141

 

 

 

139

 

 

 

139

 

Dividends to policyholders

 

2,122

 

 

 

2,731

 

 

 

2,518

 

General and administrative expenses

 

632

 

 

 

729

 

 

 

725

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Closed Block benefits and expenses

 

6,982

 

 

 

7,620

 

 

 

7,349

 

 

 

 

 

 

 

 

 

 

 

 

 

Closed Block revenues, net of Closed Block benefits and expenses, before income taxes and discontinued operations

 

(213)

 

 

 

66

 

 

 

191

 

Income tax expense (benefit)

 

(193)

 

 

 

64

 

 

 

77

 

Closed Block revenues, net of Closed Block benefits and expenses and income taxes, before discontinued operations

 

(20)

 

 

 

2

 

 

 

114

 

Income from discontinued operations, net of taxes

 

 

 

 

2

 

 

 

—  

 

Closed Block revenues, net of Closed Block benefits and expenses, income taxes and discontinued operations

$

(20

)

 

$

4

 

 

$

114

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

B-42

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

 

12.  

REINSURANCE

 

The Company participates in reinsurance in order to provide additional capacity for future growth, to limit the maximum net loss potential arising from large risks and in acquiring or disposing of businesses. On June 1, 2006, the Company acquired the variable annuity business of Allstate through a reinsurance transaction. The reinsurance arrangements with Allstate include a coinsurance arrangement and a modified coinsurance arrangement which are more fully described in Note 4. The acquisition of the retirement business of CIGNA on April 1, 2004, required the Company through a wholly owned subsidiary to enter into certain reinsurance arrangements with CIGNA to effect the transfer of the retirement business included in the transaction. These reinsurance arrangements are more fully described in Note 4.

 

Life and disability reinsurance is accomplished through various plans of reinsurance, primarily yearly renewable term, per person excess and coinsurance. In addition, the Company entered into reinsurance agreements covering 90% of the Closed Block policies, including 17% with an affiliate through various modified coinsurance arrangements. The Company accounts for these modified coinsurance arrangements under the deposit method of accounting. Reinsurance ceded arrangements do not discharge the Company as the primary insurer. Ceded balances would represent a liability of the Company in the event the reinsurers were unable to meet their obligations to the Company under the terms of the reinsurance agreements. Reinsurance premiums, commissions, expense reimbursements, benefits and reserves related to reinsured long-duration contracts are accounted for over the life of the underlying reinsured contracts using assumptions consistent with those used to account for the underlying contracts. The cost of reinsurance related to short-duration contracts is accounted for over the reinsurance contract period. Amounts recoverable from reinsurers, for both short-and long-duration reinsurance arrangements, are estimated in a manner consistent with the claim liabilities and policy benefits associated with the reinsured policies. The Company also participates in reinsurance of Liabilities for Guaranteed Benefits, which are more fully disclosed in Note 10.

 

The Company participates in reinsurance transactions with the following subsidiaries of Prudential Financial: Prudential Life Insurance Company of Taiwan Inc., The Prudential Life Insurance Company of Korea, Ltd., The Prudential Life Insurance Company, Ltd., Pramerica Life S.p.A., Prudential Seguros, S.A., Pramerica Zycie Towarzystwo Ubezpieczen i Reasekuracji S.A., Prudential Holdings of Japan, Inc., Pruco Reinsurance Ltd., Prudential Annuities Life Assurance Corporation, Prudential Seguros Mexico, S.A., and Pramerica of Bermuda Life Assurance Company, Ltd.

 

The tables presented below exclude amounts pertaining to the Company’s discontinued operations.

 

Reinsurance amounts included in the Consolidated Statements of Operations for premiums and policyholders’ benefits for the years ended December 31, were as follows:

 

 

 

 

2008

 

 

 

2007

 

 

 

2006

 

 

 

(in millions)

Direct premiums

  

$

9,787

 

  

$

9,447

 

  

$

9,204

 

Reinsurance assumed

  

 

987

 

  

 

862

 

  

 

732

 

Reinsurance ceded

  

 

(1,301

)

  

 

(1,436

)

  

 

(1,456

)

Premiums

  

$

9,473

 

  

$

8,873

 

  

$

8,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct policyholders’ benefits

 

$

11,695

 

 

$

11,057

 

 

$

10,775

 

Reinsurance assumed

 

 

1,169

 

 

 

785

 

 

 

619

 

Reinsurance ceded

 

 

(1,291

)

 

 

(1,397

)

 

 

(1,374

)

Policyholders’ benefits

  

$

11,573

 

  

$

10,445

 

  

$

10,020

 

 

  

 

 

 

  

 

 

 

  

 

 

 

“Premiums” includes affiliated reinsurance assumed of $974 million, $847 million and $674 million and affiliated reinsurance ceded of $(114) million, $(102) million and $(177) million for the years ended December 31, 2008, 2007 and 2006, respectively.

 

“Policyholders’ benefits” includes affiliated reinsurance assumed of $139 million, $125 million and $81 million and affiliated reinsurance ceded of $(67) million, $(55) million and $(61) million for the years ended December 31, 2008, 2007, and 2006, respectively. Changes in reserves due to affiliated reinsurance were $609 million, $520 million and $400 million for the years ended December 31, 2008, 2007 and 2006, respectively, and are also reflected within “Policyholders’ benefits.”

 

“General and administrative expenses” include affiliated assumed expenses of $91 million, $82 million and $74 million for the years ended December 31, 2008, 2007 and 2006, respectively.

 

 

B-43

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Reinsurance recoverables at December 31, are as follows:

 

 

  

2008

  

2007

 

  

(in millions)

Individual and group annuities (1)

  

$

856

 

$

1,378

Life insurance

 

 

1,367

  

 

1,289

Other reinsurance

  

 

113

  

 

135

 

  

 

 

  

 

 

Total reinsurance recoverable

  

$

2,336

  

$

2,802

 

  

 

 

  

 

 

                

(1)

Primarily represents reinsurance recoverables established under the reinsurance arrangements associated with the acquisition of the retirement business of CIGNA. The Company has recorded related reinsurance payables of $856 million and $1,377 million at December 31, 2008 and 2007, respectively.

 

Reinsurance recoverable above include affiliated receivables of $853 million and $796 million at December 31, 2008 and 2007, respectively. Excluding both the reinsurance recoverable associated with the acquisition of the retirement business of CIGNA and affiliated reinsurance recoverables, four major reinsurance companies account for approximately 64% of the reinsurance recoverable at December 31, 2008. The Company periodically reviews the financial condition of its reinsurers and amounts recoverable therefrom in order to minimize its exposure to loss from reinsurer insolvencies, recording an allowance when necessary for uncollectible reinsurance.

 

Amounts “Due from parent and affiliates” include affiliated reinsurance recoverables referenced above as well as $833 million and $35 million at December 31, 2008 and 2007, respectively, related to the ceding of certain embedded derivative liabilities associated with the Company’s guaranteed benefits. “Realized investment gains (losses), net” includes a gain of $768 million, a gain of $22 million, and a loss of $14 million for the years ended December 31, 2008, 2007, and 2006, respectively, related to the change in the fair value of these ceded embedded derivative liabilities.

 

“Deferred policy acquisition costs” includes affiliated amounts of $652 million and $528 million at December 31, 2008 and 2007, respectively.

 

“Reinsurance payables” includes affiliated payables of $2,237 million and $1,607 million at December 31, 2008 and 2007, respectively.

 

During 2007, an affiliated reinsurance agreement with Prudential Holdings of Japan, Inc., accounted for under the deposit method of accounting was recaptured resulting in an increase in paid in capital of $18 million to the Company. “Other income” includes losses of $48 million and $54 million for the years ended December 31, 2007 and 2006, respectively, related to this agreement. There was no income related to this agreement in 2008.

 

 

13.  

SHORT-TERM AND LONG-TERM DEBT

 

Short-term Debt

 

Short-term debt at December 31, is as follows:

 

 

  

2008

  

2007

 

  

(in millions)

Commercial paper

  

$

4,343

  

$

7,147

Notes payable (1) (2)

  

 

1,248

  

 

684

Current portion of long-term debt

  

 

64

  

 

683

Total short-term debt

  

$

5,655

  

$

8,514

 

  

 

 

  

 

 

(1)

Includes collateralized borrowings from the Federal Home Loan Bank of New York of $1 billion in 2008, which are discussed in more detail below.

(2)

Includes notes due to related parties of $70 million and $406 million at December 31, 2008 and 2007, respectively. At December 31, 2007, $292 million of the related party notes were Euro denominated loans. At December 31, 2008 and 2007, $12 million and $15 million, respectively, of the related party notes payable were variable rate notes where the payments on these loans were based on the performance of certain separate accounts held by a subsidiary of the Company, resulting in effective interest rates on these loans ranging from -74.9% to 12.4% in 2008 and 12.7% to 23.1% in 2007. The remaining related party notes payable have variable interest rates ranging from 1.8% to 3.5% in 2008 and 4.1% to 5.7% in 2007.

 

 

B-44

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

The weighted average interest rate on outstanding short-term debt, excluding the current portion of long-term debt, was 1.5% and 4.4% at December 31, 2008 and 2007, respectively. At December 31, 2008 and 2007, the Company was in compliance with all covenants related to the above debt.

 

At December 31, 2008, the Company had $4,568 million in committed lines of credit from numerous financial institutions, substantially all of which were unused. These lines of credit generally have terms ranging from one to four years. The Company also has access to uncommitted lines of credit from financial institutions. In addition, the Company, as part of its real estate separate account activities, had outstanding lines of credit of $1,160 million at December 31, 2008, of which $498 million was used.

 

The Company issues commercial paper primarily to manage operating cash flows and existing commitments, to meet working capital needs and to take advantage of current investment opportunities. Prudential Funding, LLC, a wholly owned subsidiary of Prudential Insurance, has a commercial paper program, rated A-1+ by Standard & Poor’s Rating Services (“S&P”), P-1 by Moody’s Investor Service, Inc. (“Moody’s”) and F1+ by Fitch Ratings Ltd. (“Fitch”) at December 31, 2008. Prudential Funding’s outstanding commercial paper borrowings were $4,343 million and $7,147 million at December 31, 2008 and December 31, 2007, respectively. On February 19, 2009, the commercial paper credit rating of Prudential Funding was downgraded by Fitch from F1+ to F1.

 

At December 31, 2008 and 2007, the weighted average maturity of commercial paper outstanding was 27 and 23 days, respectively. The outstanding commercial paper as of December 31, 2008 includes $450 million under the Commercial Paper Funding Facility sponsored by the Federal Reserve.

 

At December 31, 2008 and 2007, a portion of commercial paper borrowings were supported by $4,500 million and $5,000 million of the Company’s existing lines of credit, respectively. The Company’s ability to borrow under these line of credit facilities is conditioned on the continued satisfaction of customary conditions, including the absence of defaults (as defined in these facility agreements) and the maintenance at all times by Prudential Insurance of total adjusted capital of at least $5.5 billion based on statutory accounting principles prescribed under New Jersey law and Prudential Financial’s maintenance of consolidated net worth of at least $12.5 billion, which for this purpose is based on GAAP stockholders’ equity, excluding net unrealized gains and losses on investments. The Company’s ability to borrow under these facilities is not contingent on its credit ratings or subject to material adverse change clauses. Prudential Insurance’s total adjusted capital was $9.1 billion and $11.0 billion at December 31, 2008 and December 31, 2007, respectively. Prudential Financial’s consolidated GAAP stockholders’ equity, excluding net unrealized gains and losses on investments, was $20.2 billion and $23.1 billion at December 31, 2008 and December 31, 2007, respectively.

 

In June 2008, Prudential Insurance became a member of the Federal Home Loan Bank of New York (“FHLBNY”), which provides Prudential Insurance access to collateralized borrowings, collateralized funding agreements, and other FHLBNY products. Collateralized borrowings from the FHLBNY will be classified in “Short-term debt” or “Long-term debt,” depending on the maturity date of the obligation. Collateralized funding agreements issued to the FHLBNY will be classified in “Policyholders’ account balances.” These funding agreements have priority claim status above debt holders of Prudential Insurance. Prudential Insurance’s membership in FHLBNY requires the ownership of member stock and borrowings from FHLBNY require the purchase of FHLBNY activity based stock in an amount equal to 4.5% of the outstanding borrowings. All FHLBNY stock purchased by Prudential Insurance is classified as restricted general account investments within “Other long term investments,” and the carrying value of these investments was $199 million as of December 31, 2008. Under guidance of the New Jersey Department of Banking and Insurance, the total amount of qualifying mortgage-related assets and U.S. Treasury securities that can be pledged as collateral by Prudential Insurance to FHLBNY is limited to 5% of the admitted assets of Prudential Insurance on a statutory basis, exclusive of separate account assets, as of the prior year end, which equates to $7.7 billion based on admitted assets as of December 31, 2007. Based upon this guidance and on the fair value of qualifying assets owned by Prudential Insurance within the Financial Services Businesses at December 31, 2008 (including assets on loan and assets pledged to the FHLBNY at that date and taking into account applicable required collateralization levels and required purchases of activity based FHLBNY stock), the estimated total borrowing capacity with the FHLBNY was approximately $6.5 billion at December 31, 2008. The fair value of the qualifying assets pledged as collateral by Prudential Insurance must be maintained at certain specified levels of the borrowed amount, which can vary, depending on the nature of the assets pledged. As of December 31, 2008, Prudential Insurance had pledged qualifying assets with a fair value of $4,075 million, which is above the minimum level required by the FHLBNY, and had outstanding borrowings of $3 billion, of which $1 billion is reflected in “Short-term debt” and $2 billion in “Long-term debt.”

 

 

B-45

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

In February 2009, the FHLBNY advanced the Company an additional $1 billion for which the Company issued funding agreements. These funding agreements will be reflected in “Policyholders’ account balances.”

 

In March 2009, the Company borrowed an additional $500 million from the FHLBNY, which will be reflected in “Long-term debt.”

 

Long-term Debt

 

Long-term debt at December 31, is as follows:

 

 

  

Maturity Dates

 

  

Rate

 

 

2008

  

2007

 

  

 

 

  

 

 

  

(in millions)

Fixed rate notes:

  

 

 

  

 

 

  

 

 

  

 

 

Surplus notes (1)

 

2014-2036

 

 

4.75%-8.30

%

 

$

2,687

 

 

2,686

Other fixed rate notes(2) (3)

 

2009-2023

 

 

3.30%-7.30

%

 

 

1,281

 

 

965

Floating rate notes:

 

 

 

 

 

 

 

 

 

 

 

 

Surplus notes (4)

  

2016-2052

 

  

(5)

 

  

 

3,200

  

 

1,600

Other floating rate notes (2) (6)

 

2010-2013

 

 

(7)

 

 

 

1,519

 

 

261

Total long-term debt

  

 

 

  

 

 

  

$

8,687

  

$

5,512

 

  

 

 

  

 

 

  

 

 

  

 

 

(1)

Fixed rate surplus notes at December 31, 2008 and 2007 includes $2,243 million and $2,242 million, respectively, due to a related party. Maturities of these notes range from 2014 through 2036. The interest rates ranged from 4.75% to 6.1% in 2008 and 2007.

(2)

Includes collateralized borrowings from the Federal Home Loan Bank of New York in 2008, of which $500 million are fixed rate notes and $1,500 million are floating rate notes. These borrowings are discussed in more detail above.

(3)

Other fixed rate notes at December 31, 2008 and 2007 includes $540 million and $610 million, respectively, due to related parties. Maturities of these notes range from 2009 through 2015 and interest rates ranged from 4.88% to 5.29% in 2008 and 4.88% to 5.36% in 2007.

(4)

During 2007, floating rate surplus notes of $150 million maturing in 2037, were issued to a related party. This note was prepaid prior to December 31, 2007. The interest rate on this note ranged from 5.78% to 6.12%.

(5)

The interest rates on the floating rate surplus notes are based on LIBOR. The interest rate ranged from 1.51% to 5.93% in 2008 and 5.42% to 6.12% in 2007.

(6)

Other floating rate notes at December 31, 2008 and 2007 includes $19 million and $261 million, respectively, due to related parties. Maturities on these notes range from 2009 through 2013 and interest rates on these notes ranged from 8.89% to 15.46% in 2008 and 4.45% to 5.43% in 2007. At December 31, 2008, the related party notes were Mexican peso denominated loans.

(7)

The interest rates on other floating rate notes are based on LIBOR. Interest rates ranged from 3.33% to 15.46% in 2008 and 4.45% to 5.43% in 2007.

 

Several long-term debt agreements related to the above debt have restrictive covenants related to the total amount of debt, net tangible assets and other matters. At December 31, 2008 and 2007, the Company was in compliance with all such debt covenants.

 

The fixed rate surplus notes issued by Prudential Insurance to non-affiliates are subordinated to other Prudential Insurance borrowings and policyholder obligations, and the payment of interest and principal may only be made with the prior approval of the Commissioner of Banking and Insurance of the State of New Jersey (the “Commissioner”). The Commissioner could prohibit the payment of the interest and principal on the surplus notes if certain statutory capital requirements are not met. At December 31, 2008 and 2007, the Company met these statutory capital requirements. At December 31, 2008 and 2007, $444 million of fixed rate surplus notes were outstanding to non-affiliates.

 

During 2006, a subsidiary of Prudential Insurance entered into a surplus note purchase agreement with an unaffiliated financial institution that provides for the issuance of up to $3 billion of ten-year floating rate surplus notes. As of December 31, 2008 and 2007, $2,700 million and $1,100 million, respectively, were outstanding under this agreement. Concurrent with the issuance of each surplus note, Prudential Financial enters into arrangements with the buyer, which are accounted for as derivative instruments that may result in payments by, or to, Prudential Financial over the term of the surplus notes, to the extent there are significant changes in the value of the surplus notes. Surplus notes issued under this facility are subordinated to policyholder obligations, and the payment of interest and principal on them may only be made by the issuer with the prior approval of the Arizona Department of Insurance. As of December 31, 2008 and 2007, these derivative instruments had no material value to Prudential Financial.

 

During 2007, a subsidiary of Prudential Insurance issued $500 million of 45-year floating rate surplus notes to an unaffiliated financial institution. Surplus notes issued under this facility are subordinated to policyholder obligations, and the payment of interest and principal on them may only be made by the issuer with the prior approval of the Arizona Department of Insurance. Concurrent with the issuance of these surplus notes, Prudential Financial entered into a credit derivative that will require

 

 

B-46

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Prudential Financial to make certain payments in the event of deterioration in the value of the surplus notes. As of December 31, 2008, the credit derivative was a liability to Prudential Financial of $16 million, net of $125 million in collateral that had been pledged by Prudential Financial. As of December 31, 2007, the credit derivative had no material value to Prudential Financial.

 

In order to modify exposure to interest rate and currency exchange rate movements, the Company utilizes derivative instruments, primarily interest rate swaps, in conjunction with some of its debt issues. The impact of these derivative instruments are not reflected in the rates presented in the tables above. For those derivative instruments that qualify for hedge accounting treatment, interest expense was decreased by $10 million and $29 million for years ended December 31, 2008 and 2007, respectively. See Note 20 for additional information on the Company’s use of derivative instruments.

 

Interest expense for short-term and long-term debt, including interest on affiliated debt, was $539 million, $798 million and $696 million, for the years ended December 31, 2008, 2007 and 2006, respectively. Interest expense related to affiliated debt was $177 million, $191 million and $160 million for the years ended December 31, 2008, 2007 and 2006, respectively. “Due to parent and affiliates” included $23 million and $24 million associated with the affiliated long-term interest payable at December 31, 2008 and 2007, respectively.

 

Included in “Policyholders’ account balances” are additional debt obligations of the Company. See Note 9 for further discussion.

 

 

14.  

STOCK-BASED COMPENSATION

 

In 2008 and prior, Prudential Financial issued stock-based compensation awards to employees of the Company, including stock options, restricted stock units, restricted stock awards, and performance shares, under a plan authorized by Prudential Financial’s Board of Directors.

 

Prudential Financial recognizes the cost resulting from all share-based payments in the financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” and applies the fair value based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans.

 

In connection with its adoption of SFAS No. 123(R), Prudential Financial revised its approach to the recognition of compensation costs for awards granted to retirement-eligible employees and awards that vest when an employee becomes retirement-eligible to apply the non-substantive vesting period approach to all new share-based compensation awards granted after January 1, 2006. Under this approach, all compensation cost is recognized on the date of grant for awards issued to retirement-eligible employees, or over the period from the grant date to the date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period (generally three years). The Company accounts for those awards granted between (a) the adoption of the fair value recognition provisions of SFAS No. 123 “Accounting for Stock Based Compensation” on January 1, 2003, and (b) the adoption on January 1, 2006 of SFAS No. 123(R) which specify that an employee vests in the award upon retirement using the nominal vesting period approach. Under this approach, the Company records compensation expense over the nominal vesting period. If the employee retires before the end of the nominal vesting period, any remaining unrecognized compensation expense is recorded at the date of retirement.

 

The results of operations of the Company for the years ended December 31, 2008, 2007 and 2006, include costs of $20 million, $24 million and $22 million, respectively, associated with employee stock options and $27 million, $46 million, and $42 million, respectively, associated with employee restricted stock shares, restricted stock units, and performance shares issued by Prudential Financial to certain employees of the Company.

 

 

15.  

EMPLOYEE BENEFIT PLANS

 

Pension and Other Postretirement Plans

 

The Company has funded and non-funded contributory and non-contributory defined benefit pension plans, which cover substantially all of its employees as well as employees of certain destacked subsidiaries. For some employees, benefits are based on final average earnings and length of service, while benefits for other employees are based on an account balance that takes into consideration age, service and earnings during their career.

 

 

B-47

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

The Company provides certain health care and life insurance benefits for its retired employees (including those of certain destacked subsidiaries), their beneficiaries and covered dependents (“other postretirement benefits”). The health care plan is contributory; the life insurance plan is non-contributory. Substantially all of the Company’s U.S. employees may become eligible to receive other postretirement benefits if they retire after age 55 with at least 10 years of service or under certain circumstances after age 50 with at least 20 years of continuous service. The Company has elected to amortize its transition obligation for other postretirement benefits over 20 years.

 

As discussed in Note 2, SFAS No. 158 eliminated the provisions that allowed plan assets and obligations to be measured as of a date not more than three months prior to the reporting entity’s balance sheet date. SFAS No. 158 requires an employer on a prospective basis to measure the funded status of its plans as of its fiscal year-end. The Company adopted this guidance on December 31, 2008 and the impact of changing from a September 30 measurement date to a December 31 measurement date was a net after-tax increase to “Retained earnings” of $27 million.

 

The impact of applying a FAS 157 framework for measuring fair value to the fair value of plan assets did not have a material impact.

 

On April 30, 2007, the Company transferred $1 billion of assets within the qualified pension plan under Section 420 of the Internal Revenue Code from assets supporting pension benefits to assets supporting retiree medical benefits. The transfer resulted in a reduction to the prepaid benefit cost for the qualified pension plan and an offsetting decrease in the accrued benefit liability for the postretirement plan with no net effect on stockholders’ equity on the Company’s consolidated financial position. The transfer had no impact on the Company’s consolidated results of operations, but will reduce the future cash contributions required to be made to the postretirement plan.

 

 

B-48

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Prepaid benefits costs and accrued benefit liabilities are included in “Other assets” and “Other liabilities,” respectively, in the Company’s Consolidated Statements of Financial Position. The status of these plans as of September 30, 2007, adjusted for activity in the fourth-quarter of 2007, and as of December 31 for 2008, is summarized below:

 

 

  

Pension Benefits

 

  

Other Postretirement Benefits

 

 

  

2008

 

 

2007

 

  

2008

 

  

2007

 

 

 

  

(in millions)

 

 

Change in benefit obligation

  

 

Benefit obligation at end of prior year period

  

$

(7,248

)

  

$

(7,387

)

  

$

(2,164

)

  

$

(2,459

)

 

Effect of measurement date change

 

 

(22

)

 

 

 

 

 

13

 

 

 

 

 

Benefit obligation at the beginning of period

  

 

(7,270

)

  

 

(7,387

)

 

 

(2,151

)

  

 

(2,459

)

 

Service cost

  

 

(116

)

  

 

(130

)

  

 

(10

)

  

 

(12

)

 

Interest cost

  

 

(445

)

  

 

(417

)

  

 

(124

)

  

 

(136

)

 

Plan participants’ contributions

  

 

 

  

 

 

  

 

(18

)

  

 

(18

)

 

Medicare Part D subsidy receipts

 

 

 

 

 

 

 

 

(11

)

 

 

(10

)

 

Amendments

  

 

 

  

 

(3

)

  

 

3

 

  

 

69

 

 

Annuity purchase

  

 

2

 

  

 

2

 

  

 

 

  

 

 

 

Actuarial gains/(losses), net

  

 

(223

)

  

 

198

 

  

 

93

 

  

 

136

 

 

Settlements

 

 

 

 

 

3

 

 

 

 

 

 

 

 

Curtailments

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual termination benefits

  

 

 

  

 

 

  

 

 

  

 

 

 

Special termination benefits

 

 

(2

)

 

 

(4

)

 

 

 

 

 

 

 

Benefits paid

  

 

519

 

  

 

496

 

  

 

218

 

  

 

272

 

 

Foreign currency changes and other

  

 

54

 

  

 

(6

)

  

 

6

 

  

 

(6

)

 

Benefit obligation at end of period (December 31, 2008 and September 30, 2007, respectively)

  

$

(7,481

)

  

$

(7,248

)

  

$

(1,994

)

  

$

(2,164

)

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

Change in plan assets

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

Fair value of plan assets at end of prior year period

 

$

9,992

 

  

$

10,408

 

  

$

2,104

 

  

$

1,030

 

 

Effect of measurement date change

 

 

72

 

 

 

 

 

 

(4

)

 

 

 

 

Fair value of plan assets at beginning of period

 

 

10,064

 

 

 

10,408

 

  

 

2,100

 

  

 

1,030

 

 

Actual return on plan assets

  

 

334

 

  

 

1,034

 

  

 

(463

)

  

 

192

 

 

Annuity purchase

  

 

(2

)

  

 

(2

)

  

 

 

  

 

 

 

Employer contributions

  

 

78

 

  

 

49

 

  

 

18

 

  

 

136

 

 

Plan participants’ contributions

  

 

 

  

 

 

  

 

18

 

  

 

18

 

 

Contributions for settlements

 

 

 

 

 

 

 

 

 

 

 

 

 

Disbursement for settlements

 

 

 

 

 

(4)

 

 

 

 

 

 

 

 

Benefits paid

  

 

(519

)

  

 

(496

)

  

 

(218

)

  

 

(272

)

 

Foreign currency changes and other

 

 

(55

)

 

 

3

 

 

 

(38

)

 

 

 

 

Effect of Section 420 transfer  

  

 

 

  

 

(1,000

)

  

 

 

  

 

1,000

 

 

Fair value of plan assets at end of period (December 31, 2008 and September 30, 2007, respectively)

  

$

9,900

 

  

$

9,992

 

  

$

1,417

 

  

$

2,104

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

Funded status

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

Funded status at end of period

  

$

2,419

 

  

$

2,744

 

  

$

(577

)

  

$

(60

)

 

Effects of fourth quarter activity

  

 

 

  

 

11

 

  

 

 

  

 

1

 

 

Net amount recognized

  

$

2,419

 

  

$

2,755

 

  

$

(577

)

  

$

(59

)

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

Amounts recognized in the Statements of Financial Position

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

Prepaid benefit cost

  

$

3,230

 

  

$

3,502

 

  

$

 

  

$

 

 

Accrued benefit liability

  

 

(811

)

  

 

(747

)

  

 

(577

)

  

 

(59

)

 

Net amount recognized

  

$

2,419

 

  

$

2,755

 

  

$

(577

)

  

$

(59

)

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

Items recorded in “Accumulated other comprehensive income” not yet recognized as a component of net periodic (benefit) cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transition obligation

 

$

 

 

$

 

 

$

2

 

 

$

2

 

 

Prior service cost

 

 

131

 

 

 

166

 

 

 

(76

)

 

 

(88

)

 

Net actuarial loss

 

 

661

 

 

 

84

 

 

 

700

 

 

 

172

 

 

Net amount not recognized

 

$

792

 

 

$

250

 

 

$

626

 

 

$

86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated benefit obligation

 

$

(7,260

)

 

$

(6,949

)

 

$

(1,994

)

 

$

(2,164

)

 

 

In addition to the plan assets above, the Company in 2007 established an irrevocable trust, commonly referred to as a “rabbi trust,” for the purpose of holding assets of the Company to be used to satisfy its obligations with respect to certain non-qualified retirement plans ($711 million and $652 million benefit obligation at December 31, 2008 and 2007, respectively). Assets held in the rabbi trust are available to the general creditors of the Company in the event of insolvency or bankruptcy. The Company may from time to time in its discretion make contributions to the trust to fund accrued benefits payable to participants in one or more of the plans, and, in the case of a change in control of the Company, as defined in the trust agreement, the Company will

 

 

B-49

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

be required to make contributions to the plans to fund the accrued benefits, vested and unvested, payable on a pretax basis to participants in the plans. The Company made a discretionary payment of $95 million to the trust during both 2008 and 2007. As of December 31, 2008 and 2007, the assets in these trusts had a carrying value of $169 million and $90 million and are included in “Equity securities.”

 

The Company also maintains a separate rabbi trust established at the time of the combination of its retail securities brokerage and clearing operations with those of Wachovia for the purpose of holding assets of the Company to be used to satisfy its obligations with respect to certain non-qualified retirement plans ($75 million and $77 million benefit obligation at December 31, 2008 and 2007, respectively), as well as certain cash-based deferred compensation arrangements. As of December 31, 2008 and 2007, the assets in the trust had a carrying value of $157 million and $139 million, respectively, and are included in “Other long-term investments.”

 

Pension benefits for foreign plans comprised 2% and 3% of the ending benefit obligation for 2008 and 2007, respectively. Foreign pension plans comprised 2% of the ending fair value of plan assets for 2008 and 2007. There are no material foreign postretirement plans.

 

The projected benefit obligations and fair value of plan assets for the pension plans with projected benefit obligations in excess of plan assets were $811 million and zero million, respectively, at December 31, 2008 and $960 million and $202 million, respectively, at September 30, 2007.

 

The accumulated benefit obligations and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $740 million and zero million, respectively, at December 31, 2008 and $679 million and zero million, respectively, at September 30, 2007.

 

In 2008 and 2007, the pension plan purchased annuity contracts from Prudential Insurance for $2 million and $2 million, respectively. The approximate future annual benefit payment payable by Prudential Insurance for all annuity contracts was $16 million and $26 million as of December 31, 2008 and 2007, respectively.

 

There were no pension plan amendments in 2008. The benefit obligation for pension benefits increased by $3 million in 2007 related to plan amendments, as a result of the immediate vesting of plan participants due to the Section 420 transfer discussed above. The benefit obligation for other postretirement benefits decreased by $3 million in 2008 related to plan amendments, primarily due to cost sharing changes. The benefit obligation for other postretirement benefits decreased by $69 million in 2007 related to plan amendments, due primarily to changes in the prescription drug plan design.

 

Net periodic (benefit) cost included in “General and administrative expenses” in the Company’s Consolidated Statements of Operations for the years ended December 31, includes the following components:

 

 

  

Pension Benefits

 

  

Other Postretirement Benefits

 

 

  

2008

 

  

2007

 

  

2006

 

  

2008

 

  

2007

 

  

2006

 

 

  

(in millions)

 

Components of net periodic (benefit) cost

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Service cost

  

$

116

 

 

$

130

 

 

$

127

 

  

$

10

 

 

$

12

 

 

$

10

 

Interest cost

  

 

445

 

 

 

417

 

 

 

403

 

  

 

124

 

 

 

136

 

 

 

128

 

Expected return on plan assets

  

 

(717

)

 

 

(769

)

 

 

(741

)

  

 

(161

)

 

 

(93

)

 

 

(89

)

Amortization of transition obligation

  

 

 

 

 

 

 

 

— 

 

  

 

1

 

 

 

1

 

 

 

1

 

Amortization of prior service cost

  

 

28

 

 

 

29

 

 

 

20

 

  

 

(11

)

 

 

(6

)

 

 

(9

)

Amortization of actuarial (gain) loss, net

  

 

17

 

 

 

20

 

 

 

39

 

  

 

1

 

 

 

15

 

 

 

18

 

Settlements

 

 

 

 

 

 

 

 

— 

 

 

 

 

 

 

— 

 

 

 

— 

 

Curtailments

 

 

 

 

 

 

 

 

— 

 

 

 

 

 

 

— 

 

 

 

— 

 

Contractual termination benefits

 

 

 

 

 

 

 

 

— 

 

 

 

 

 

 

— 

 

 

 

— 

 

Special termination benefits

  

 

2

 

 

 

4

 

 

 

3

 

  

 

 

 

 

— 

 

 

 

— 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Net periodic (benefit) cost

  

$

(109

)

 

$

(169

)

 

$

(149

)

  

$

(36

)

 

$

65

 

 

$

59

 

 

Certain employees were provided special termination benefits under non-qualified plans in the form of unreduced early retirement benefits as a result of their involuntary termination.

 

 

B-50

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

The amounts recorded in “Accumulated other comprehensive income” as of the end of the period, which have not yet been recognized as a component of net periodic (benefit) cost, and the related changes in these items during the period that are recognized in “Other Comprehensive Income” are as follows:

 

 

  

Pension Benefits

 

  

Other Postretirement Benefits

 

 

  

Transition Obligation

 

  

Prior Service Cost

 

  

Net Actuarial (Gain) Loss

 

  

Transition Obligation

 

  

Prior Service Cost

 

  

Net Actuarial (Gain) Loss

 

 

  

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2006

  

$

 

 

$

192

 

  

$

565

 

  

$

3

 

 

$

(25

)

  

$

422

 

Amortization for the period

 

 

 

 

 

(29

)

 

 

(20

)

  

 

(1

)

 

 

6

 

  

 

(15

)

Deferrals for the period

 

 

 

 

 

3

 

 

 

(463

)

  

 

 

 

 

(69

)

  

 

(235

)

Impact of foreign currency changes and other

 

 

 

 

 

 

 

 

3

 

  

 

 

 

 

 

  

 

 

Balance, December 31, 2007

 

 

 

 

 

166

 

  

 

85

 

  

 

2

 

 

 

(88

)

  

 

172

 

Effect of measurement date change

  

 

 

 

 

(7

)

 

 

(4

)

 

 

1

 

 

 

3

 

 

 

 

Amortization for the period

 

 

 

 

 

(28

)

 

 

(17

)

 

 

(1

)

 

 

11

 

 

 

(1

)

Deferrals for the period

  

 

 

 

 

 

 

 

606

 

 

 

 

 

 

(3

)

 

 

531

 

Impact of foreign currency changes and other

  

 

 

 

 

 

 

 

(9

)

 

 

 

 

 

1

 

 

 

(2

)

Balance, December 31, 2008

  

$

 

 

$

131

 

 

$

661

 

  

$

2

 

 

$

(76

)

  

$

700

 

 

The amounts included in “Accumulated other comprehensive income” expected to be recognized as components of net periodic (benefit) cost in 2009 are as follows:

 

 

 

 

Pension Benefits

 

 

 

Other Postretirement Benefits

 

 

 

 

(in millions)

 

Amortization of transition obligation

 

$

—  

 

 

$

1

 

Amortization of prior service cost

 

 

26

 

 

 

(11

)

Amortization of actuarial (gain) loss, net

 

 

20

 

 

 

42

 

Total

 

$

46

 

 

$

32

 

 

 

 

 

The Company’s assumptions related to the calculation of the domestic benefit obligation and the determination of net periodic (benefit) cost are presented in the table below. The assumptions for 2007 and 2006 are as of September 30. The assumptions for 2008 uses September 30, 2007 for beginning of period and December 31, 2008 for end of period:

 

 

  

Pension Benefits

  

Other Postretirement Benefits

 

  

2008

  

2007

  

2006

  

2008

  

2007

  

2006

Weighted-average assumptions

  

 

  

 

  

 

  

 

  

 

  

 

Discount rate (beginning of period)

  

6.25%

 

5.75%

  

5.50%

  

6.00%

  

5.75%

  

5.50%

Discount rate (end of period)

  

6.00%

  

6.25%

  

5.75%

  

6.00%

  

6.00%

  

5.75%

Rate of increase in compensation levels (beginning of period)

  

4.50%

  

4.50%

  

4.50%

  

4.50%

  

4.50%

  

4.50%

Rate of increase in compensation levels (end of period)

  

4.50%

  

4.50%

  

4.50%

  

4.50%

  

4.50%

  

4.50%

Expected return on plan assets (beginning of period)

  

7.75%

  

8.00%

  

8.00%

  

8.00%

  

9.25%

  

9.25%

Health care cost trend rates (beginning of period)

 

—    

  

—    

  

—    

 

5.00-8.75%

  

5.00-8.75%

  

5.09–9.06%

Health care cost trend rates (end of period)

  

—    

  

—    

  

—    

  

5.00-8.00%

  

5.00-8.75%

  

5.00-8.75%

For 2008, 2007 and 2006, the ultimate health care cost trend rate after gradual decrease until: 2012, 2009, 2009 (beginning of period)

 

—    

  

—    

  

—    

 

5.00%

  

5.00%

  

5.00%

For 2008, 2007 and 2006, the ultimate health care cost trend rate after gradual decrease until: 2014, 2012, 2009 (end of period)

  

—    

  

—    

  

—    

  

5.00%

  

5.00%

  

5.00%

 

The domestic discount rate used to value the pension and postretirement benefit obligations is based upon rates commensurate with current yields on high quality corporate bonds. The first step in determining the discount rate is the compilation of approximately 300 Aa-rated bonds across the full range of maturities. Since yields can vary widely at each maturity point, the Company generally avoids using the highest and lowest yielding bonds at the maturity points, so as to avoid relying on bonds that might be mispriced or misrated. This refinement process generally results in having a distribution from the 10th to 90th percentile. A spot yield curve is developed from this data that is then used to determine the present value of the expected disbursements associated with the pension and postretirement obligations, respectively. This results in the present value for each respective benefit obligation. A single discount rate is calculated that results in the same present value. The rate is then rounded to the nearest 25 basis points.

 

The pension and postretirement expected long-term rates of return on plan assets for 2009 were determined based upon an approach that considered an expectation of the allocation of plan assets during the measurement period of 2009. Expected

 

 

B-51

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

returns are estimated by asset class as noted in the discussion of investment policies and strategies below. Expected returns on asset classes are developed using a building-block approach that is forward looking and are not strictly based upon historical returns. The building blocks for equity returns include inflation, real return, a term premium, an equity risk premium, capital appreciation and the effect of active management, expenses and the effect of rebalancing. The building blocks for bond returns include inflation, real return, a term premium, credit spread, capital appreciation and the effect of active management, expenses and the effect of rebalancing.

 

The Company applied the same approach to the determination of the expected long-term rate of return on plan assets in 2008. The expected long-term rate of return for 2009 is 7.50% and 8.00%, respectively, for the pension and postretirement plans.

 

The Company, with respect to pension benefits, uses market related value to determine the components of net periodic (benefit) cost. Market related value is a measure of asset value that reflects the difference between actual and expected return on assets over a five-year period.

 

The assumptions for foreign pension plans are based on local markets. There are no material foreign postretirement plans.

 

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point increase and decrease in assumed health care cost trend rates would have the following effects:

                                                                                                                                                                                             

  

    

Other

Postretirement 

Benefits

 

 

 

 

2008

 

 

    

(in millions)

 

One percentage point increase

 

 

 

 

Increase in total service and interest costs

 

$

8

 

Increase in postretirement benefit obligation

 

 

108

 

 

 

 

 

 

One percentage point decrease

 

 

 

 

Decrease in total service and interest costs

 

$

7

 

Decrease in postretirement benefit obligation

 

 

95

 

 

Pension and postretirement plan asset allocation as of December 31, 2008 and September 30, 2007, are as follows:

 

 

 

Pension Percentage

of Plan Assets

 

Postretirement Percentage of Plan Assets

 

Asset category

 

2008

 

2007

 

2008

 

2007

 

U.S. Stocks

 

8%

 

13%

 

37%

 

47%

 

International Stocks

 

2%

 

1%

 

4%

 

6%

 

Bonds

 

76%

 

72%

 

58%

 

46%

 

Short-term Investments

 

1%

 

1%

 

1%

 

1%

 

Real Estate

 

4%

 

5%

 

0%

 

0%

 

Other

 

9%

 

8%

 

0%

 

0%

 

Total

 

100%

 

100%

 

100%

 

100%

 

 

The Company, for its domestic pension and postretirement plans, has developed guidelines for asset allocations. As of the December 31, 2008 measurement date the range of target percentages are as follows:

 

 

 

Pension Investment Policy Guidelines as of

December 31, 2008

 

Postretirement Investment Policy Guidelines as of December 31, 2008

 

Asset category

 

Minimum

 

Maximum

 

Minimum

 

Maximum

 

U.S. Stocks

 

5%

 

15%

 

30%

 

41%

 

International Stocks

 

1%

 

4%

 

1%

 

7%

 

Bonds

 

56%

 

79%

 

1%

 

63%

 

Short-term Investments

 

0%

 

14%

 

0%

 

65%

 

Real Estate

 

1%

 

12%

 

0%

 

0%

 

Other

 

0%

 

9%

 

0%

 

0%

 

 

Management reviews its investment strategy on an annual basis.

 

The investment goal of the domestic pension plan assets is to generate an above benchmark return on a diversified portfolio of stocks, bonds and other investments, while meeting the cash requirements for a pension obligation that includes a traditional

 

 

B-52

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

formula principally representing payments to annuitants and a cash balance formula that allows lump sum payments and annuity payments. The pension plan risk management practices include guidelines for asset concentration, credit rating and liquidity. The pension plan does not invest in leveraged derivatives. Derivatives such as futures contracts are used to reduce transaction costs and change asset concentration.

 

The investment goal of the domestic postretirement plan assets is to generate an above benchmark return on a diversified portfolio of stocks, bonds, and other investments, while meeting the cash requirements for the postretirement obligations that includes a medical benefit including prescription drugs, a dental benefit and a life benefit. Stocks are used to provide expected growth in assets. Bonds provide liquidity and income. Short-term investments provide liquidity and allow for defensive asset mixes. The postretirement plans risk management practices include guidelines for asset concentration, credit rating, liquidity, and tax efficiency. The postretirement plan does not invest in leveraged derivatives. Derivatives such as futures contracts are used to reduce transaction costs and change asset concentration.

 

There were no investments in Prudential Financial Common Stock as of December 31, 2008 and September 30, 2007 for either the pension or postretirement plans. Pension plan assets of $6,299 million and $7,185 million are included in the Company’s separate account assets and liabilities as of December 31, 2008 and September 30, 2007, respectively.

 

The expected benefit payments for the Company’s pension and postretirement plans, as well as the expected Medicare Part D subsidy receipts related to the Company’s postretirement plan, for the years indicated are as follows:

 

 

 

Pension

 

Other Postretirement Benefits

 

Other Postretirement Benefits – Medicare Part D Subsidy Receipts

 

(in millions)

2009

 

528

 

 

$

202

 

 

$

17

  

2010

 

 

486

 

 

 

205

 

 

 

17

 

2011

 

  

491

 

 

 

204

 

 

 

18

  

2012

 

  

486

 

 

 

200

 

 

 

19

  

2013

 

 

491

 

 

 

197

 

 

 

19

 

2014-2018

 

 

2,550

 

 

 

931

 

 

 

103

 

Total

 

$

5,032

 

 

$

1,939

 

 

$

193

 

 

The Company anticipates that it will make cash contributions in 2009 of approximately $55 million to the pension plans and approximately $10 million to the postretirement plans.

 

Postemployment Benefits

 

The Company accrues postemployment benefits primarily for health and life benefits provided to former or inactive employees who are not retirees. The net accumulated liability for these benefits at December 31, 2008 and 2007 was $39 million and $47 million, respectively, and is included in “Other liabilities.”

 

Other Employee Benefits

 

The Company sponsors voluntary savings plans for employees (401(k) plans). The plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary. The matching contributions by the Company included in “General and administrative expenses” were $51 million, $51 million and $44 million for the years ended December 31, 2008, 2007 and 2006, respectively.

 

 

B-53

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

16.    INCOME TAXES

 

The components of income tax expense (benefit) for the years ended December 31, were as follows:

 

 

  

2008

 

  

2007

 

  

2006

 

 

  

(in millions)

 

Current tax expense (benefit)

  

 

 

 

  

 

 

 

  

 

 

 

U.S.

  

$

(309

)

  

$

387

 

  

$

143

 

State and local

  

 

5

 

  

 

(10

)

  

 

(29

)

Foreign

  

 

20

 

  

 

59

 

  

 

37

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total

  

 

(284

)

  

 

436

 

  

 

151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax expense (benefit)

  

 

 

 

  

 

 

 

  

 

 

 

U.S.

  

 

(61

)

  

 

148

 

  

 

386

 

State and local

  

 

3

 

  

 

(3

)

  

 

21

 

Foreign

  

 

5

 

  

 

(3

)

  

 

(19

)

 

  

 

 

 

  

 

 

 

  

 

 

 

Total

  

 

(53)

 

 

 

142

 

  

 

388

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total income tax expense (benefit) on continuing operations before equity in earnings of operating joint ventures

 

$

(337

)

 

$

578

 

 

$

539

 

Income tax expense (benefit) on equity in earnings of operating joint ventures

 

 

(109

)

 

 

145

 

 

 

117

 

Income tax expense (benefit) on discontinued operations

 

 

(2

)

 

 

(2

)

 

 

35

 

Income tax expense (benefit) reported in stockholders’ equity related to:

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

(3,594

)

 

 

195

 

 

 

(82

)

Impact on Company’s investment in Wachovia Securities due to addition of A.G. Edwards business

 

 

561

 

 

 

— 

 

 

 

— 

 

Stock-based compensation programs

 

 

(8

)

 

 

(59

)

 

 

(64

)

Cumulative effect of changes in accounting principles

 

 

10

 

 

 

(87

)

 

 

— 

 

Other

 

 

 

 

 

18

 

 

 

— 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total income taxes

 

$

(3,479

)

 

$

788

 

 

$

545

 

 

The Company’s actual income tax expense on continuing operations before equity in earnings of operating joint ventures for the years ended December 31, differs from the expected amount computed by applying the statutory federal income tax rate of 35% to income from continuing operations before income taxes and equity in earnings of operating joint ventures for the following reasons:

 

 

 

2008

 

2007

 

2006

 

 

 

(in millions)

 

Expected federal income tax expense (benefit)

 

$

(278

)

 

$

780

 

 

$

790

 

 

Non-taxable investment income

  

 

(22

)

 

 

(178

)

 

 

(203

)

 

Low income housing and other tax credits

 

 

(79

)

 

 

(67

)

 

 

(60

)

 

Valuation allowance

 

 

 

 

 

— 

 

 

 

(1

)

 

Other

  

 

42

 

 

 

43

 

 

 

13

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Total income tax expense (benefit) on continuing operations before equity in earnings of operating joint ventures

  

$

(337

)

 

$

578

 

 

$

539

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B-54

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Deferred tax assets and liabilities at December 31, resulted from the items listed in the following table:

 

 

 

2008

 

2007

 

 

(in millions)

Deferred tax assets

 

 

 

 

 

 

 

 

Policyholder dividends

 

$

402

 

 

$

1,061

 

Insurance reserves

 

 

 

 

 

257

 

Net operating and capital loss carryforward

 

 

46

 

 

 

122

 

Net unrealized investment losses

 

 

3,591

 

 

 

 

Investments

 

 

630

 

 

 

470

 

Other

 

 

318

 

 

 

326

 

 

 

 

 

 

 

 

 

 

Deferred tax assets before valuation allowance

 

 

4,987

 

 

 

2,236

 

Valuation allowance

 

 

(18

)

 

 

(98

)

 

 

 

 

 

 

 

 

 

Deferred tax assets after valuation allowance

 

 

4,969

 

 

 

2,138

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

 

 

 

 

 

 

Insurance reserves

 

 

686

 

 

 

 

Net unrealized investment gains

 

 

 

 

 

1,048

 

Deferred policy acquisition costs

 

 

2,059

 

 

 

1,426

 

Employee benefits

 

 

95

 

 

 

357

 

Other

 

 

265

 

 

 

444

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

3,105

 

 

 

3,275

 

 

 

 

 

 

 

 

 

 

Net deferred tax asset (liability)

 

$

1,864

 

 

$

(1,137

)

 

 

 

 

 

 

 

 

 

The application of U.S. GAAP requires the Company to evaluate the recoverability of deferred tax assets and establish a valuation allowance if necessary to reduce the deferred tax asset to an amount that is more likely than not to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance the Company considers many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital; (3) in which tax jurisdictions they were generated and the timing of their reversal; (4) taxable income in prior carryback years as well as projected taxable earnings exclusive of reversing temporary differences and carryforwards; (5) the length of time that carryovers can be utilized in the various taxing jurisdictions; (6) any unique tax rules that would impact the utilization of the deferred tax assets; and (7) any tax planning strategies that the Company would employ to avoid a tax benefit from expiring unused. Although realization is not assured, management believes it is more likely than not that the deferred tax assets, net of valuation allowances, will be realized.

 

A valuation allowance has been recorded primarily related to tax benefits associated with federal net operating losses and state and local deferred tax assets. The valuation allowance as of December 31, 2008 and 2007, respectively, includes $1 million and $98 million recorded in connection with state deferred tax assets and $17 million and $0 million recorded in connection with foreign deferred tax assets. Adjustments to the valuation allowance will be made if there is a change in management’s assessment of the amount of the deferred tax asset that is realizable.

 

At December 31, 2008 and 2007, respectively, the Company had federal net operating and capital loss carryforwards of $130 million and $190 million, which expire between 2010 and 2024. At December 31, 2008 and 2007, respectively, the Company had state net operating and capital loss carryforwards for tax purposes approximating $5 million and $1,421 million, which expire between 2009 and 2029. As discussed in Note 1, Prudential Securities Group, LLC (“PSG”) was contributed to the Company by Prudential Financial during the fourth quarter of 2008. As of December 31, 2007, PSG had state net operating and capital loss carryforwards of $1,378 million. As a result of the contribution PSG is no longer subject to state taxes. At December 31, 2007, PSG had a full valuation allowance against all deferred taxes related to state net operating and capital loss carryforwards. The 2008 financial results reflect the removal of deferred tax assets related to state net operating and capital loss carryforwards and corresponding valuation allowance.

 

The Company does not provide U.S. income taxes on unremitted foreign earnings of its non-U.S. operations, other than its Taiwan investment management subsidiary. During 2006, the Company determined that the earnings from its Taiwan investment management subsidiary would be repatriated to the U.S. Accordingly, earnings from its Taiwan investment management subsidiary were no longer considered permanently reinvested. A U.S. income tax benefit of $18 million associated with the assumed repatriation of those earnings was recognized in 2006. During 2007 and 2008, the Company made no changes with respect to its repatriation assumptions. The Company had undistributed earnings of foreign subsidiaries, where it assumes permanent reinvestment, of $166 million at December 2008, $130 million at December 2007 and $256 million at December

 

 

B-55

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

2006, for which U.S. deferred taxes have not been provided. Determining the tax liability that would arise if these earnings were remitted is not practicable.

 

On January 1, 2007, the Company adopted FIN No. 48, “Accounting for Uncertainty in Income Taxes,” an Interpretation of FASB Statement No. 109. This interpretation prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. Adoption of FIN No. 48 resulted in a decrease to the Company’s income tax liability and an increase to retained earnings of $35 million as of January 1, 2007.

 

The Company’s unrecognized tax benefits as of the date of adoption of FIN No. 48 and as of December 31, 2007 and 2008 are as follows:

 

 

 

 

Unrecognized tax benefits prior to 2002

 

 

 

Unrecognized tax benefits 2002 and forward

 

 

 

Total unrecognized tax benefits all years

 

 

 

(in millions)

Amounts as of January 1, 2007

 

$

389

 

 

$

124

 

 

$

513

 

 

Increases in unrecognized tax benefits taken in prior period

 

 

— 

 

 

 

17

 

 

 

17

 

 

(Decreases) in unrecognized tax benefits taken in prior period

  

 

(3

)

 

 

(6

)

 

 

(9

)

 

Amounts as of December 31, 2007

 

$

386

 

 

$

135

 

 

$

521

 

 

Increases in unrecognized tax benefits taken in prior period

 

 

 

 

 

98

 

 

 

98

 

 

(Decreases) in unrecognized tax benefits taken in prior period

 

 

 

 

 

(27

)

 

 

(27

)

 

Amounts as of December 31, 2008

 

$

386

 

 

$

206

 

 

$

592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized tax benefits that, if recognized, would favorably impact the effective rate as of December 31, 2007

 

$

386

 

 

$

82

 

 

$

468

 

 

Unrecognized tax benefits that, if recognized, would favorably impact the effective rate as of December 31, 2008

 

$

386

 

 

$

88

 

 

$

474

 

 

 

The Company classifies all interest and penalties related to tax uncertainties as income tax expense. In 2008 and 2007, the Company recognized $52 million and $59 million in the consolidated statement of operations and recognized $190 million and $138 million in liabilities in the consolidated statement of financial position for tax-related interest and penalties.

 

The Company's liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which relate to tax years still subject to review by the Internal Revenue Service (“IRS”) or other taxing jurisdictions. Audit periods remain open for review until the statute of limitations has passed. Generally, for tax years which produce net operating losses, capital losses or tax credit carryforwards (“tax attributes”), the statute of limitations does not close, to the extent of these tax attributes, until the expiration of the statute of limitations for the tax year in which they are fully utilized. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the liability for income taxes. The statute of limitations for the 2002 and 2003 tax years is set to expire in 2009. The Company does not anticipate any significant changes to its total unrecognized tax benefits within the next 12 months. Taxable years 2004 through 2008 are still open for IRS examination.

 

On January 26, 2006, the IRS officially closed the audit of the Company’s consolidated federal income tax returns for the 1997 to 2001 periods. The statute of limitations has closed for these tax years; however, there were tax attributes which were utilized in subsequent tax years for which the statute of limitations remains open.

 

In August 2007, the IRS issued Revenue Ruling 2007-54, which included, among other items, guidance on the methodology to be followed in calculating the dividends received deduction (“DRD”) related to variable life insurance and annuity contracts. In September 2007, the IRS released Revenue Ruling 2007-61. Revenue Ruling 2007-61 suspends Revenue Ruling 2007-54 and informs taxpayers that the U.S. Treasury Department and the IRS intend to address through new regulations the issues considered in Revenue Ruling 2007-54, including the methodology to be followed in determining the DRD related to variable life insurance and annuity contracts. A change in the DRD, including the possible retroactive or prospective elimination of this deduction through regulations or legislation, could increase actual tax expense and reduce the Company’s consolidated net income. These activities had no impact on the Company’s 2007 or 2008 results.

 

In December 2006, the IRS completed all fieldwork with regard to its examination of the consolidated federal income tax returns for tax years 2002 and 2003. The final report was initially submitted to the Joint Committee on Taxation for their review in April 2007. The final report was resubmitted in March 2008 and again in April 2008. The Joint Committee returned the report

 

 

B-56

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

to the IRS for additional review of an industry issue regarding the methodology for calculating the DRD related to variable life insurance and annuity contracts. Within the table above, reconciling the Company’s effective tax rate to the expected amount determined using the federal statutory rate of 35%, the DRD was the primary component of the non-taxable investment income in recent years. The IRS completed its review of the issue and proposed an adjustment with respect to the calculation of the DRD. In order to expedite receipt of an income tax refund related to the 2002 and 2003 years, the Company has agreed to such adjustment. Nevertheless, the Company believes that its return position is technically correct. Therefore, the Company intends to file a protective refund claim to recover the taxes associated with the agreed upon adjustment and to pursue such other actions as appropriate. The report, with the adjustment, was submitted to the Joint Committee on Taxation in October 2008. The Company was advised on January 2, 2009 that the Joint Committee completed its consideration of the report and has taken no exception to the conclusions reached by the IRS. Accordingly, the final report was processed and a refund was received. The statute of limitations for these years will close on December 31, 2009. These activities had no impact on the Company’s 2007 or 2008 results.

 

In January 2007, the IRS began an examination of the consolidated U.S. federal income tax years 2004 through 2006. For the consolidated U.S. federal income tax years 2007 and 2008, the Company participated in the IRS’s Compliance Assurance Program (“CAP”). Under CAP, the IRS assigns an examination team to review completed transactions contemporaneously during the 2007 and 2008 tax years in order to reach agreement with the Company on how they should be reported in the tax return. If disagreements arise, accelerated resolutions programs are available to resolve the disagreements in a timely manner before the tax return is filed. It is management’s expectation this program will shorten the time period between the Company’s filing of its federal income tax return and the IRS’s completion of its examination of the return.

 

 

17.  

STOCKHOLDER’S EQUITY

 

Comprehensive Income

 

The components of comprehensive income (loss) for the years ended December 31, are as follows:

 

 

  

2008

  

2007

    

2006

 

 

 

  

(in millions)

 

Net income (loss)

  

$

(670

)

$

1,939

 

$

1,971

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustments

  

 

(24

)

 

8

 

 

29

 

 

Change in net unrealized investments gains (losses)(1)

 

 

(5,888

)

 

(270)

 

 

(186

)

 

Additional minimum pension liability adjustment

 

 

 

 

 

 

50

 

 

Change in pension and postretirement unrecognized net periodic benefit (cost)

 

 

(707

)

 

521

 

 

 

 

Other comprehensive income (loss), net of tax expense (benefit) of $(3,517), $195, $(82)

  

 

(6,619

)

 

259

 

 

(107

)

 

Comprehensive income (loss)

  

$

(7,289

)

$

2,198

 

$

1,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Includes cash flow hedges. See Note 20 for information on cash flow hedges.

 

 

B-57

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

The balance of and changes in each component of “Accumulated other comprehensive income (loss)” for the years ended December 31, are as follows (net of taxes):

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Foreign

Currency

Translation

Adjustments

 

Net

Unrealized

Investment

Gains

(Losses)(1)

 

Additional Minimum

Pension

Liability

Adjustment

 

Pension and Postretirement Unrecognized Net Periodic Benefit (Cost)

 

Total

Accumulated

Other

Comprehensive

Income (Loss)

 

 

(in millions)

Balance, December 31, 2005

  

$

86

 

 

$

671

 

 

$

(185

)

 

$

 

 

$

572

 

Change in component during year

  

 

29

 

 

 

(186

)

 

 

50

 

 

 

 

 

 

(107

)

Impact of adoption of SFAS 158 (3)

 

 

 

 

 

 

 

 

135

 

 

 

(682

)

 

 

(547

)

Balance, December 31, 2006

 

 

115

 

 

 

485

 

 

 

 

 

 

(682

)

 

 

(82

)

Change in component during year (2)

 

 

8

 

 

 

(273

)

 

 

 

 

 

521

 

 

 

256

 

Balance, December 31, 2007

 

 

123

 

 

 

212

 

 

 

 

 

 

(161

)

 

 

174

 

Change in component during year (2)

 

 

(24

)

 

 

(6,033

)

 

 

 

 

 

(707

)

 

 

(6,764

)

Balance, December 31, 2008

 

$

99

 

 

$

(5,821

)

 

$

 

 

$

(868

)

 

$

(6,590

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Includes cash flow hedges. See Note 20 for information on cash flow hedges.

(2)

Net unrealized investment gains (losses) for 2008 and 2007 includes the purchase of fixed maturities from an affiliate of $(145) million and $(3) million, respectively.

(3)

See Note 15 for additional information on the adoption of SFAS 158.

 

Dividend Restrictions

 

New Jersey insurance law provides that dividends or distributions may be declared or paid by Prudential Insurance without prior regulatory approval only from unassigned surplus, as determined pursuant to statutory accounting principles, less unrealized investment gains and losses and revaluation of assets. Unassigned surplus of Prudential Insurance was $2,781 million at December 31, 2008. There were applicable adjustments for cumulative unrealized gains of $283 million at December 31, 2008. In addition, Prudential Insurance must obtain non-disapproval from the New Jersey insurance regulator before paying a dividend or distribution if the dividend or distribution, together with other dividends or distributions made within the preceding twelve months, would exceed the greater of 10% of Prudential Insurance’s surplus as of the preceding December 31 ($6,432 million as of December 31, 2008) or its statutory net gain from operations for the twelve month period ending on the preceding December 31, excluding realized investment gains and losses ($498 million for the year ended December 31, 2008). The laws regulating dividends of Prudential Insurance’s other insurance subsidiaries domiciled in other states are similar, but not identical, to New Jersey’s.

 

Statutory Net Income and Surplus

 

Prudential Insurance and its U.S. insurance subsidiaries are required to prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the insurance department of the state of domicile. Statutory accounting practices primarily differ from U.S. GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis. Statutory net income of Prudential Insurance amounted to $(808) million, $1,274 million and $444 million for the years ended December 31, 2008, 2007 and 2006, respectively. Statutory capital and surplus of Prudential Insurance amounted to $6,432 million and $6,981 million at December 31, 2008 and 2007, respectively. The December 31, 2008 statutory capital and surplus for Prudential Insurance reflects the contribution of Prudential Securities Group, LLC that occurred during the fourth quarter of 2008. Prudential Securities Group, LLC owns the Company’s investment in the Wachovia Securities joint venture. This contribution increased Prudential Insurance’s net admitted assets by $2.2 billion.

 

The New York State Insurance Department recognizes only statutory accounting practices for determining and reporting the financial condition and results of operations of an insurance company for determining its solvency under the New York Insurance Law and for determining whether its financial condition warrants the payment of a dividend to its policyholders. No consideration is given by the New York State Insurance Department to financial statements prepared in accordance with GAAP in making such determinations.

 

 

B-58

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

18.    RELATED PARTY TRANSACTIONS

 

Service Agreements – Services Provided

 

The Company has service agreements with Prudential Financial and certain of its subsidiaries. These companies, along with their subsidiaries, include PRUCO, Inc. (includes Prudential Capital & Investment Services, LLC and Prudential P&C Holdings, Inc.), Prudential Asset Management Holding Company, Prudential International Insurance Holdings, Ltd., Prudential International Insurance Service Company, LLC, Prudential IBH Holdco, Inc., Prudential Real Estate and Relocation Services, Inc., Prudential International Investments Corporation, Prudential International Investments, LLC, Prudential Annuities Holding Company, Inc. and Prudential Japan Holdings, LLC. Under these agreements, the Company provides general and administrative services and, accordingly, charges these companies for such services. These charges totaled $424 million, $458 million and $383 million for the years ended December 31, 2008, 2007, and 2006, respectively, and are recorded as a reduction to the Company’s “General and administrative expenses.”

 

The Company also engages in other transactions with affiliates in the normal course of business. Affiliated revenues in “Other income” were $22 million, $67 million and $81 million for the years ended December 31, 2008, 2007 and 2006, respectively, related primarily to royalties and compensation for the sale of affiliates’ products through the Company’s distribution network.

 

“Due from parent and affiliates” includes $119 million and $159 million at December 31, 2008 and 2007, respectively, due primarily to these agreements.

 

Service Agreements – Services Received

 

Prudential Financial and certain of its subsidiaries have service agreements with the Company. Under the agreements, the Company primarily receives the services of the officers and employees of Prudential Financial, asset management services from Prudential Asset Management Holding Company and subsidiaries and consulting services from Pramerica Systems Ireland Limited. The Company is charged based on the level of service received. Affiliated expenses for services received were $275 million, $253 million and $239 million in “Net investment income” and $129 million, $108 million and $167 million in “General and administrative expenses” for the years ended December 31, 2008, 2007 and 2006, respectively. “Due to parent and affiliates” includes $26 million and $51 million at December 31, 2008 and 2007, respectively, due primarily to these agreements.

 

Notes Receivable and Other Lending Activities

 

Affiliated notes receivable included in “Due from parent and affiliates” at December 31, are as follows:

 

Description

  

Maturity Dates

 

  

Rate

 

  

2008

  

2007

 

  

 

 

  

 

 

  

(in millions)

U.S. Dollar floating rate notes (1)

  

2008-2013

 

  

1.39% - 11.63%

 

  

$

1,216

  

$

180

 

U.S. Dollar fixed rate notes (2)

  

2009-2013

 

  

5.04% - 12.40%

 

  

 

777

  

 

474

 

Japanese Yen fixed rate notes (3)

  

2008-2015

 

  

0.09% - 2.17%

 

  

 

160

  

 

792

 

Total long-term notes receivable – affiliated (4)

  

 

 

  

 

 

  

 

2,153

  

 

1,446

 

Short-term notes receivable – affiliated (5)

  

 

 

  

 

 

  

 

1,599

  

 

1,913

 

Total notes receivable - affiliated

  

 

 

  

 

 

  

3,752

  

3,359

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)

Included within floating rate notes is the current portion of the long-term notes receivable, which was $75 million and $180 million at December 31, 2008 and 2007, respectively.

(2)

Included within fixed rate notes is the current portion of the long-term notes receivable, which was $404 million at December 31, 2008.

(3)

Included within Japanese Yen notes is the current portion of the long-term notes receivable, which was $59 million and $662 million at December 31, 2008 and 2007, respectively.

(4)

All long-term notes receivable may be called for prepayment prior to the respective maturity dates under specified circumstances.

(5)

Short-term notes receivable have variable rates, which averaged 3.62% at December 31, 2008 and 5.37% at December 31, 2007. Short-term notes receivable are payable on demand.

 

Accrued interest receivable related to these loans was $12 million and $11 million at December 31, 2008 and 2007, respectively, and is included in “Due from parent and affiliates.” Revenues related to these loans were $97 million, $142 million and $129 million for the years ended December 31, 2008, 2007 and 2006, respectively, and is included in “Other income.”

 

The Company also engages in overnight borrowing and lending of funds with Prudential Financial and affiliates. “Cash and cash equivalents” included $55 million and $110 million, associated with these transactions at December 31, 2008 and 2007,

 

 

B-59

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

respectively. Revenues related to this lending activity were $3 million, $14 million and $18 million for the years ended December 31, 2008, 2007 and 2006, respectively, and is included in “Net investment income.”

 

Sales of Fixed Maturities and Commercial Mortgage & Agricultural Mortgage Loans between Affiliates

 

In April, June and December 2008, the Company purchased fixed maturity investments from affiliates for a total of $374 million, the fair value on the date of the transfer plus accrued interest. The Company recorded the investments at the historic amortized cost of the affiliate. The difference of $147 million between the historic amortized cost and the fair value, net of taxes, was recorded as an increase to additional paid-in capital. The fixed maturity investments are categorized in the Company’s consolidated statement of financial position as available-for-sale debt securities, and are therefore carried at fair value, with the difference between amortized cost and fair value reflected in accumulated other comprehensive income.

 

In February, March and April 2008, the Company purchased commercial mortgage loans from an affiliate for a total of $180 million, the fair value on the date of the transfer plus accrued interest, less reserves. The Company recorded the investments at the affiliate’s carrying amount, and no adjustment was necessary to additional paid-in capital as the fair value and carrying amount were equal. The commercial mortgage loans are categorized in the Company’s consolidated statement of financial position as commercial mortgage and other loans.

 

In December 2008, the Company sold fixed maturity investments to an affiliate for a total of $822 million, the fair value on the date of the transfer plus accrued interest. The affiliate recorded the investments at the historic amortized cost of the Company. The difference of $51 million between the historic amortized cost and the fair value, net of taxes, was recorded by the Company as a reduction to additional paid-in capital.

 

In December 2008, the Company sold commercial mortgage and agricultural mortgage loans to an affiliate for a total of $311 million, the fair value on the date of the transfer plus accrued interest, less reserves. The affiliate recorded the investments at the Company’s carrying amount. The difference of $15 million between the carrying amount and the fair value, net of taxes, was recorded by the Company as a reduction to additional paid-in capital.

 

In November and December 2007, the Company purchased fixed maturity investments from an affiliate for a total of $969 million, the fair value on the date of the transfer plus accrued interest. The Company recorded the investments at the historic amortized cost of the affiliate. The difference of $3 million between the historic amortized cost and the fair value, net of taxes, was recorded as an increase to additional paid-in capital. The fixed maturity investments are categorized in the Company’s consolidated statement of financial position as available-for-sale debt securities, and are therefore carried at fair value, with the difference between amortized cost and fair value reflected in accumulated other comprehensive income.

 

Transfer of Duration Lengthening Swaps between Affiliates

 

In November 2008, the Company received duration lengthening swaps from a direct subsidiary of Prudential Financial. The Company recorded these items at a fair value of $211 million, net of taxes, which also represented the affiliate’s carrying value. The offset was recorded as a capital contribution. These swaps were terminated in December 2008.

 

Derivatives

 

Prudential Global Funding, Inc., an indirect, wholly owned consolidated subsidiary of the Company enters into derivative contracts with Prudential Financial and certain of its subsidiaries. Affiliated derivative assets included in “Other trading account assets” were $1,097 million and $288 million at December 31, 2008 and 2007, respectively. Affiliated derivative liabilities included in “Due to parent and affiliates” were $3,957 million and $740 million at December 31, 2008 and 2007, respectively.

 

Retail Medium Term Notes Program

 

The Company has sold funding agreements (“agreements”) to Prudential Financial as part of a retail note issuance program to financial wholesalers. As discussed in Note 9, “Policyholders’ account balances” include $3,496 million and $2,851 million related to these agreements at December 31, 2008 and 2007, respectively. In March 2009, the Company settled $1,015 million of its obligation related to the affiliated funding agreements mentioned above for $730 million, which will result in an increase in “Additional paid-in capital.” In addition, “Deferred policy acquisition costs” includes affiliated amounts of $58 million and $50 million related to these agreements at December 31, 2008 and 2007, respectively. The affiliated interest credited on these agreements is included in “Interest credited to policyholders’ account balances” and was $192 million, $126 million and $77 million for the years ended December 31, 2008, 2007 and 2006, respectively.

 

 

B-60

 

 


THE PRUDENTIAL INSURANCE COMPANY OF AMERICA

 

Notes to Consolidated Financial Statements

 

 

Joint Ventures

 

The Company has made investments in joint ventures with certain subsidiaries of Prudential Financial. “Other long term investments” includes $27 million and $89 million at December 31, 2008 and 2007, respectively. “Net investment income” includes a loss of $3 million for the year ended December 31, 2008 and gains of $21 million and $3 million for the years ended December 31, 2007 and 2006, respectively, related to these ventures.

 

Reinsurance

 

As discussed in Notes 10 and 12, the Company participates in reinsurance transactions with certain subsidiaries of Prudential Financial.

 

Short-term and Long-term Debt

 

As discussed in Note 13, the Company participates in debt transactions with certain subsidiaries of Prudential Financial.

 

 

19.  

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Transition Impact – As discussed in Note 2, the Company adopted SFAS No. 157 and SFAS No. 159 effective January 1, 2008. The adoption of these two standards did not affect the Company’s consolidated financial position or results of operations. SFAS No. 159 requires entities to classify cash receipts and cash payments related to items measured at fair value according to their nature and purpose on the Statement of Cash Flows. As a result, cash flows related to trading account assets supporting insurance liabilities and certain other assets are classified as investing rather than operating as of the adoption date of this guidance.

 

Fair Value Measurement – Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

 

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. These generally provide the most reliable evidence and are used to measure fair value whenever available. Active markets are defined as having the following for the measured asset/liability: (i) many transactions, (ii) current prices, (iii) price quotes not varying substantially among market makers, (iv) narrow bid/ask spreads and (v) most information publicly available. The Company’s Level 1 assets and liabilities primarily include certain cash equivalents and short term investments, equity securities and derivative contracts that are traded in an active exchange market. Prices are obtained from readily available sources for market transactions involving identical assets or liabilities.

 

Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities and other market observable inputs. The Company’s Level 2 assets and liabilities include: fixed maturities (corporate public and private bonds, most government securities, certain asset-backed and mortgage-backed securities, etc., including amounts due from parent and affiliates), certain equity securities, short-term investments and certain cash equivalents (primarily commercial paper), and certain over-the-counter derivatives. Valuations are generally obtained from third party pricing services for identical or comparable assets or liabilities or through the use of valuation methodologies using observable market inputs.

 

Prices from pricing services are sourced from multiple vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company generally receives prices from multiple pricing services for each security, but ultimately use the price from the pricing service highest in the vendor hierarchy based on the respective asset type. In order to validate reasonability, prices are reviewed by internal asset managers through comparison with directly observed recent market trades and internal estimates of current fair value, developed using market observable inputs and economic indicators.

 

 

B-61

 

 


 

 

The use of valuation methodologies using observable inputs for private fixed maturities are primarily determined using a discounted cash flow model, which utilizes a discount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions, and takes into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Private fixed maturities also include debt investments in funds that, in addition to a stated coupon, pay a return based upon the results of the underlying portfolios. The fair values of these securities are determined by reference to the funds’ net asset value (NAV). Any restrictions on the ability to redeem interests in these funds at NAV are considered to have a de minimis effect on the fair value.

 

The fair values of common stock mutual fund shares that transact regularly (but do not trade in active markets because they are not publicly available) are based on transaction prices of identical fund shares and are classified within Level 2 in the fair value hierarchy. The fair values of preferred equity securities are based on prices obtained from independent pricing services and, in order to validate reasonability, are compared with directly observed recent market trades. Accordingly, these securities are generally classified within Level 2 in the fair value hierarchy.

 

The majority of the Company’s derivative positions is traded in the over-the-counter (OTC) derivative market and is classified within Level 2 in the fair value hierarchy. OTC derivatives classified within Level 2 are valued using models generally accepted in the financial services industry that use actively quoted or observable market input values from external market data providers, non-binding broker-dealer quotations, third-party pricing vendors and/or recent trading activity. The fair values of most OTC derivatives, including forward rate agreements, interest rate and cross currency swaps, commodity swaps, commodity forward contracts, single name credit default swaps and to-be-announced forward contracts on highly rated mortgage-backed securities issued by U.S. government sponsored entities are determined using discounted cash flow models. The fair values of European style option contracts are determined using Black-Scholes option pricing models. These models’ key assumptions include the contractual terms of the respective contract, along with significant observable inputs, including interest rates, currency rates, credit spreads, yield curves, equity prices, index dividend yields, nonperformance risk and volatility. OTC derivative contracts are executed under master netting agreements with counterparties with a Credit Support Annex, or CSA, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties, should either party suffer a credit rating deterioration. The vast majority of the Company’s derivative agreements are with highly rated major international financial institutions. Consistent with the practice of major international financial institutions, the Company uses the credit spread embedded in the LIBOR interest rate curve to reflect nonperformance risk when determining the fair value of derivative assets and liabilities. The Company believes this credit spread is an appropriate estimate of the nonperformance risk for derivative related assets and liabilities between highly rated institutions. Most OTC derivative contracts have bid and ask prices that can be readily observed in the market place. The Company’s policy is to use mid-market pricing in determining its best estimate of fair value.

 

Level 3 – Fair value is based on at least one or more significant unobservable inputs for the asset or liability. These inputs reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability. The Company’s Level 3 assets and liabilities primarily include: certain private fixed maturities and equity securities, certain manually priced public equity securities and fixed maturities, certain highly structured over-the-counter derivative contracts, and embedded derivatives resulting from certain products with guaranteed benefits and associated reinsurance. In circumstances where vendor pricing is not available, internally developed valuations or non-binding broker quotes are used to determine fair value. Non-binding broker quotes are reviewed for reasonableness, based on the Company’s understanding of the market. These estimates may use significant unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset. Circumstances where observable market data is not available may include events such as market illiquidity and credit events related to the security. Under certain conditions, the Company may conclude the prices received from independent third party pricing services or brokers are not reasonable or reflective of market activity. In those instances, the Company may choose to over-ride the third-party pricing information or quotes received and apply internally developed values to the related assets or liabilities. In such cases, the valuations are generally classified as Level 3. As of December 31, 2008, such over-rides on a net basis were not material.

 

For certain private fixed maturities, including those that are distressed, the discounted cash flow model may also incorporate significant unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset. Certain public fixed maturities and private fixed maturities priced internally are based on observable and unobservable inputs. Significant unobservable inputs used include: issue specific credit adjustments, material non-public financial information, management judgment, estimation of future earnings and cashflows, default rate assumptions, liquidity assumptions and non-binding quotes from market makers. These inputs are usually considered unobservable, as not all market participants will have access to this data.

 

 

B-62

 

 


 

 

Estimated fair values for most privately traded equity securities are determined using valuation and discounted cash flow models that require a substantial level of judgment. In determining the fair value of certain privately traded equity securities the discounted cash flow model may also use unobservable inputs, which reflect the Company’s assumptions about the inputs market participants would use in pricing the asset.

 

The fair values of the GMAB, GMWB and GMIWB liabilities and associated reinsurance, are calculated as the present value of future expected benefit payments to customers less the present value of assessed rider fees attributable to the embedded derivative feature. The expected cash flows are discounted using LIBOR interest rates, which are commonly viewed as being consistent with the Company’s claims-paying ratings of AA quality. Since there is no observable active market for the transfer of these obligations, the valuations are calculated using internally developed models with option pricing techniques. The models calculate a risk neutral valuation, generally using the same interest rate assumptions to both project and discount future rider fees and benefit payments, and incorporate premiums for risks inherent in valuation techniques, inputs, and the general uncertainty around the timing and amount of future cash flows. Significant inputs to these models include capital market assumptions, such as interest rate and implied volatility assumptions, as well as various policyholder behavior assumptions that are actuarially determined, including lapse rates, benefit utilization rates, mortality rates and withdrawal rates. These assumptions are reviewed at least annually, and updated based upon historical experience and give consideration to any observable market data, including market transactions such as acquisitions and reinsurance transactions.

 

Level 3 includes OTC derivatives where the bid-ask spreads are generally wider than derivatives classified within Level 2 thus requiring more judgment in estimating the mid-market price of such derivatives.

 

Derivatives that are valued based upon models with unobservable market input values or input values from less actively traded or less-developed markets are classified within Level 3 in the fair value hierarchy. Derivatives classified as Level 3 include first-to-default credit basket swaps, look-back equity options and other structured options. The fair values of first-to-default credit basket swaps are derived from relevant observable inputs such as: individual credit default spreads, interest rates, recovery rates and unobservable model-specific input values such as correlation between different credits within the same basket. Look-back equity options and other structured options and derivatives are valued using simulation models such as the Monte Carlo technique. The input values for look-back equity options are derived from observable market indices such as interest rates, dividend yields, equity indices as well as unobservable model-specific input values such as certain volatility parameters. Level 3 methodologies are validated through periodic comparison of the Company’s fair values to broker-dealer’s values.

 

 

B-63

 

 


 

 

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis, as of December 31, 2008.

 

 

As of December 31, 2008

 

 

Level 1

 

 

 

Level 2

 

 

 

Level 3

 

 

 

Netting (2)

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

Fixed maturities, available for sale

$

—  

 

 

$

95,333

 

 

$

1,923

 

 

$

—  

 

 

$

97,256

 

Trading account assets supporting insurance liabilities

 

196

 

 

 

12,376

 

 

 

145

 

 

 

—  

 

 

 

12,717

 

Other trading account assets

 

20

 

 

 

10,337

 

 

 

1,351

 

 

 

(7,085

)

 

 

4,623

 

Equity securities, available for sale

 

2,404

 

 

 

1,153

 

 

 

73

 

 

 

—  

 

 

 

3,630

 

Other long-term investments

 

15

 

 

 

199

 

 

 

—  

 

 

 

—  

 

 

 

214

 

Short-term investments

 

1,913

 

 

 

1,177

 

 

 

—  

 

 

 

—  

 

 

 

3,090

 

Cash and cash equivalents

 

2,099

 

 

 

5,344

 

 

 

—  

 

 

 

—  

 

 

 

7,443

 

Other assets

 

1,247

 

 

 

2,500

 

 

 

—  

 

 

 

—  

 

 

 

3,747

 

Due from parent and affiliates

 

—  

 

 

 

1,752

 

 

 

833

 

 

 

—  

 

 

 

2,585

 

Sub-total excluding separate account assets

 

7,894

 

 

 

130,171

 

 

 

4,325

 

 

 

(7,085

)

 

 

135,305

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Separate account assets (1)

 

42,391

 

 

 

60,564

 

 

 

19,780

 

 

 

—  

 

 

 

122,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

50,285

 

 

$

190,735

 

 

$

24,105

 

 

$

(7,085

)

 

$

258,040

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits

 

—  

 

 

 

—  

 

 

 

1,172

 

 

 

—  

 

 

 

1,172

 

Other liabilities

 

1

 

 

 

6,509

 

 

 

139

 

 

 

(5,948

)

 

 

701

 

Due to parent and affiliates

 

—  

 

 

 

2,696

 

 

 

1,260

 

 

 

—  

 

 

 

3,956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

$

1

 

 

$

9,205

 

 

$

2,571

 

 

$

(5,948

)

 

$

5,829

 

                        

1.

Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account assets classified as Level 3 consist primarily of real estate and real estate investment funds. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Consolidated Statement of Financial Position.

2.

“Netting” amounts represent cash collateral and the impact of offsetting asset and liability positions held with the same counterparty as permitted by FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts and FSP FIN 39-1, Amendment of FASB Interpretation No. 39.

 

The following tables provide a summary of the changes in fair value of Level 3 assets and liabilities for the year ended December 31, 2008, as well as the portion of gains or losses included in income for the year ended December 31, 2008 attributable to unrealized gains or losses related to those assets and liabilities still held at December 31, 2008.

 

 

Year Ended December 31, 2008

 

 

Fixed Maturities, Available For Sale

 

 

Trading Account Assets Supporting Insurance Liabilities

 

 

 

Other Trading Account Assets

 

 

 

Equity Securities, Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Fair value, beginning of period

$

2,787

 

 

$

291

 

 

$

469

 

 

$

164

 

 

 

Total gains or (losses) (realized/unrealized):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized investment gains (losses), net

 

(347

)

 

 

—  

 

 

 

628

 

 

 

(5

)

 

 

Asset management fees and other income

 

—  

 

 

 

(39

)

 

 

(5

)

 

 

—  

 

 

 

Included in other comprehensive income (loss)

 

(346

)

 

 

—  

 

 

 

—  

 

 

 

(24

)

 

 

Net investment income

 

11

 

 

 

(1

)

 

 

—  

 

 

 

—  

 

 

 

Purchases, sales, issuances, and settlements

 

(305

)

 

 

(32

)

 

 

259

 

 

 

(12

)

 

 

Transfers into (out of) Level 3 (1)

 

123

 

 

 

(74

)

 

 

—  

 

 

 

(50

)

 

 

Fair value, end of period

$

1,923

 

 

$

145

 

 

$

1,351

 

 

$

73

 

 

 

Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the period(2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized investment gains (losses), net

$

(363

)

 

$

—  

 

 

$

628

 

 

$

(5)

 

 

 

Asset management fees and other income

$

—  

 

 

$

(46

)

 

$

(5

)

 

$

—  

 

 

 

Included in other comprehensive income (loss)

$

(327

)

 

$

—  

 

 

$

—  

 

 

$

(21)

 

 

 

 

 

 

 

 

B-64

 

 


 

 

 

 

Year Ended December 31, 2008

 

Due from Parent and Affiliates

 

 

Separate Account Assets (3)

 

 

 

Future Policy Benefits

 

 

Other

Liabilities

 

Due to Parent and Affiliates

 

(in millions)

Fair value, beginning of period

$

35

 

 

$

21,815

 

 

$

(71

)

 

$

(77

)

 

$

(395

)

Total gains or (losses) (realized/unrealized):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized investment gains (losses), net

 

777

 

 

 

—  

 

 

 

(1,079

)

 

 

(101

)

 

 

(650

)

Asset management fees and other income

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

Interest credited to policyholders’ account balances

 

—  

 

 

 

(2,983

)

 

 

—  

 

 

 

—  

 

 

 

—  

 

Included in other comprehensive income (loss)

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

Net investment income

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

Purchases, sales, issuances, and settlements

 

21

 

 

 

1,555

 

 

 

(22

)

 

 

39

 

 

 

(215

)

Transfers into (out of) Level 3 (1)

 

—  

 

 

 

(607

)

 

 

—  

 

 

 

—  

 

 

 

—  

 

Fair value, end of period

$

833

 

 

$

19,780

 

 

$

(1,172

)

 

$

(139

)

 

$

(1,260

)

Unrealized gains (losses) for the period relating to those Level 3 assets and liabilities that were still held by the Company at the end of the period (2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized investment gains (losses), net

$

777  

 

 

$

—  

 

 

$

(1,079

)

 

$

(101

)

 

$

(650

)

Asset management fees and other income

$

—  

 

 

$

—  

 

 

$

—  

 

 

$

—  

 

 

$

—  

 

Interest credited to policyholder’s account balances

$

—  

 

 

$

(3,733

)

 

$

 

 

 

$

—  

 

 

$

—  

 

 

(1)

Transfers into or out of Level 3 are generally reported as the value as of the beginning of the quarter in which the transfer occurs.

(2)

Unrealized gains or losses related to assets still held at the end of the period do not include amortization or accretion of premiums and discounts.

(3)

Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Consolidated Statement of Financial Position.

 

Transfers – Net transfers into Level 3 for Fixed Maturities Available for Sale totaled $123 million during the year ended December 31, 2008. Transfers into Level 3 for these investments was primarily the result of unobservable inputs utilized within valuation methodologies and the use of broker quotes when previously information from third party pricing services was utilized. Partially offsetting these transfers into Level 3 were transfers out of Level 3 due to the use of observable inputs in valuation methodologies as well as the utilization of pricing service information for certain assets that the Company was able to validate.

 

The net amount of transfers out of level 3 for Trading Account Assets Supporting Insurance Liabilities of $74 million during the year ended December 31, 2008 is due primarily to the use of observable inputs in valuation methodologies as well as pricing service information for certain assets that the Company was able to validate. Partially offsetting these transfers out of Level 3 were transfers into Level 3 due to the use of unobservable inputs within the valuation methodologies and broker quotes, when previously information from third party pricing services was utilized.

 

The net amount of Separate Account Assets transferred out of Level 3 for the year ended December 31, 2008 was $607 million. This resulted from the use of vendor pricing information that the Company was able to validate that was previously unavailable. Partially offsetting the transfers out for this activity were transfers into Level 3 as a result of further review of valuation methodologies for certain assets that had been previously classified as Level 2.

 

Nonrecurring Fair Value Measurements - Certain assets and liabilities are measured at fair value on a nonrecurring basis. During the year ended December 31, 2008 the Company recorded losses of $27 million on cost method investments that had been written down to fair value. These fair value measurements were classified as Level 3 in the valuation hierarchy. The inputs used were primarily discounted estimated future cash flows and valuations provided by the general partners taken into consideration with deal and management fee expenses. The carrying value of these investments as of December 31, 2008 was $122 million.

 

Fair Value of Financial Instruments – Under SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” the Company is required to disclose the fair value of certain financial instruments. For the following financial instruments the carrying amount equals or approximates fair value: fixed maturities classified as available for sale, trading account assets supporting insurance liabilities, other trading account assets, equity securities, short-term investments and other, cash and cash equivalents, accrued investment income, separate account assets, securities sold under agreements to repurchase, and cash

 

 

B-65

 

 


 

 

collateral for loaned securities, as well as certain items recorded within other assets and other liabilities such as broker-dealer related receivables and payables. See Note 20 for a discussion of derivative instruments.

 

The fair values presented below for those financial instruments where the carrying amounts and fair values may differ have been determined by using available market information and by applying market valuation methodologies. The fair values presented below at December 31, 2008 are in compliance with the framework for measuring fair value established by SFAS No. 157, and therefore may differ from the fair values methodologies applied at December 31, 2007.

 

Commercial Mortgage and Other Loans

 

The fair value of commercial mortgage and other loans is primarily based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate, adjusted for the current market spread for similar quality loans.

 

Policy Loans

 

The fair value of insurance policy loans is calculated using a discounted cash flow model based upon current U.S. Treasury rates and historical loan repayment patterns. For group corporate- and trust-owned life insurance contracts and group universal life contracts, the fair value of the policy loans is the amount due as of the reporting date.

 

Wachovia Securities “lookback” Option

 

As described in Note 6, the Company intends to elect to exercise its rights under the “lookback” option as it relates to its interest in the Wachovia Securities joint venture. The fair value of the “lookback” option is determined internally by using an approach that employs both Black-Scholes and binominal option pricing models, which includes inputs such as equity market volatilities, risk-free rates and dividend yields. The carrying value of the “lookback” option is reflected within “Other assets.”

 

Notes Receivable - Affiliated

 

The fair value of affiliated notes receivable is determined using a discounted cash flow model, which utilizes a discount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions and takes into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Affiliated notes receivable are reflected within “Due from parent and affiliates.”

 

Investment Contracts – Policyholders’ Account Balances & Separate Account Liabilities

 

Only the portion of policyholders’ account balances and separate account liabilities related to products that are investment contracts (those without significant mortality or morbidity risk) are reflected in the table below. For fixed deferred annuities, single premium endowments, payout annuities and other similar contracts without life contingencies, fair values are derived using discounted projected cash flows based on LIBOR interest rates or other similar local indices, which are commonly viewed as being consistent with the Company’s claims paying ratings. For guaranteed investment contracts, funding agreements, structured settlements without life contingencies and other similar products, fair values are derived using discounted projected cash flows based on interest rates being offered for similar contracts with maturities consistent with those of the contracts being valued. For those balances that can be withdrawn by the customer at any time without prior notice or penalty, the fair value is the amount estimated to be payable to the customer as of the reporting date, which is generally the carrying value. For defined contribution and defined benefit contracts and certain other products the fair value is the market value of the assets supporting the liabilities.

 

Debt

 

The fair value of short-term and long-term debt is generally determined by either prices obtained from independent pricing services, which are validated by the Company, or discounted cash flow models. Discounted cash flow models predominately use market observable inputs such as the borrowing rates currently available to the Company for debt and financial instruments with similar terms and remaining maturities. For commercial paper issuances and other debt with a maturity of less than 90 days, the carrying value approximates fair value.

 

The following table discloses the Company’s financial instruments where the carrying amounts and fair values may differ:

 

 

 

B-66

 

 


 

 

 

 

2008

 

2007

 

Carrying Amount

 

Fair

Value

 

Carrying Amount

 

Fair

Value

 

(in millions)

Commercial mortgage and other loans

$

27,717

 

$

25,345

 

$

24,972

 

$

25,420

Policy loans

 

7,779

 

 

9,669

 

 

7,831

 

 

9,116

Wachovia Securities “lookback” option

 

580

 

 

2,280

 

 

—  

 

 

—  

Notes receivable – affiliated

 

3,752

 

 

3,724

 

 

3,359

 

 

3,359

Policyholders account balance - Investment contracts

 

58,143

 

 

57,708

 

 

56,211

 

 

56,347

Short-term and long-term debt

 

14,342

 

 

12,919

 

 

14,022

 

 

14,036

Separate account liabilities - Investment contracts

 

78,283

 

 

78,283

 

 

97,158

 

 

97,158

 

 

20.  

DERIVATIVE INSTRUMENTS

 

Types of Derivative Instruments and Derivative Strategies used in a non-dealer or broker capacity

 

Interest rate swaps are used by the Company to manage interest rate exposures arising from mismatches between assets and liabilities (including duration mismatches) and to hedge against changes in the value of assets it anticipates acquiring and other anticipated transactions and commitments. Swaps may be attributed to specific assets or liabilities or may be used on a portfolio basis. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to an agreed upon notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty at each due date.

 

Exchange-traded futures and options are used by the Company to reduce risks from changes in interest rates, to alter mismatches between the duration of assets in a portfolio and the duration of liabilities supported by those assets, and to hedge against changes in the value of securities it owns or anticipates acquiring or selling. In exchange-traded futures transactions, the Company agrees to purchase or sell a specified number of contracts, the values of which are determined by the values of underlying referenced investments, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. The Company enters into exchange-traded futures and options with regulated futures commission’s merchants who are members of a trading exchange.

 

Currency derivatives, including exchange-traded currency futures and options, currency forwards and currency swaps, are used by the Company to reduce risks from changes in currency exchange rates with respect to investments denominated in foreign currencies that the Company either holds or intends to acquire or sell. The Company also uses currency forwards to hedge the currency risk associated with net investments in foreign operations.

 

Under currency forwards, the Company agrees with other parties to deliver a specified amount of an identified currency at a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date.

 

Under currency swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between one currency and another at an exchange rate and calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty for payments made in the same currency at each due date.

 

Credit derivatives are used by the Company to enhance the return on the Company’s investment portfolio by creating credit exposure similar to an investment in public fixed maturity cash instruments. With credit derivatives the Company sells credit protection on an identified name, or a basket of names in a first to default structure, and in return receive a quarterly premium. With single name credit default derivatives, this premium or credit spread generally corresponds to the difference between the yield on the referenced name’s public fixed maturity cash instruments and swap rates, at the time the agreement is executed. With first to default baskets, the premium generally corresponds to a high proportion of the sum of the credit spreads of the names in the basket. If there is an event of default by the referenced name or one of the referenced names in a basket, as defined by the agreement, then the Company is obligated to pay the counterparty the referenced amount of the contract and receive in return the referenced defaulted security or similar security. See Note 21 for a discussion of guarantees related to these credit

 

 

B-67

 

 


 

 

derivatives. In addition to selling credit protection, in limited instances the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio.

 

The Company uses “to be announced” (“TBA”) forward contracts to gain exposure to the investment risk and return of mortgage-backed securities. TBA transactions can help the Company to achieve better diversification and to enhance the return on its investment portfolio. TBAs provide a more liquid and cost effective method of achieving these goals than purchasing or selling individual mortgage-backed pools. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date.

 

As further described in Note 10, the Company sells variable annuity products, which contain embedded derivatives. These embedded derivatives are marked to market through “Realized investment gains (losses), net” based on the change in value of the underlying contractual guarantees, which are determined using valuation models. The Company maintains a portfolio of derivative instruments that is intended to economically hedge the risks related to the above products’ features. The derivatives may include, but are not limited to equity options, total return swaps, interest rate swap options, caps, floors, and other instruments. In addition, some variable annuity products feature an automatic rebalancing element to minimize risks inherent in the Company’s guarantees which reduces the need for hedges.

 

The Company invests in fixed maturities that, in addition to a stated coupon, provide a return based upon the results of an underlying portfolio of fixed income investments and related investment activity. The Company accounts for these investments as available for sale fixed maturities containing embedded derivatives. Such embedded derivatives are marked to market through “Realized investment gains (losses), net,” based upon the change in value of the underlying portfolio. 

 

Cash Flow, Fair Value and Net Investment Hedges

 

The primary derivative instruments used by the Company in its fair value, cash flow, and net investment hedge accounting relationships are interest rate swaps, currency swaps and currency forwards. These instruments are only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, equity or embedded derivatives in any of its fair value, cash flow or net investment hedge accounting relationships. 

 

The ineffective portion of derivatives accounted for using hedge accounting in the years ended December 31, 2008, 2007 and 2006 was not material to the results of operations of the Company. In addition, there were no material amounts reclassified into earnings relating to discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by SFAS No. 133. 

 

 

B-68

 

 


 

 

Presented below is a roll forward of current period cash flow hedges in “Accumulated other comprehensive income (loss)” before taxes:

 

 

 

 

 

 

 

 

  

(in millions)

 

Balance, December 31, 2005                                                                               ............................................

  

$

(77

)

Net deferred losses on cash flow hedges from January 1 to December 31, 2006

  

 

(57

)

Amount reclassified into current period earnings                                                                                                     .

  

 

(19

)

 

 

 

 

Balance, December 31, 2006

(153

)

Net deferred losses on cash flow hedges from January 1 to December 31, 2007

  

 

(53

)

Amount reclassified into current period earnings

 

(6

)

 

  

 

 

 

Balance, December 31, 2007

  

 

(212

)

Net deferred gains on cash flow hedges from January 1 to December 31, 2008

  

 

138

 

Amount reclassified into current period earnings

(41

)

 

 

 

 

Balance, December 31, 2008

  

$

(115

)

 

 

 

 

 

 

  

 

 

 

 

It is anticipated that a pre-tax loss of approximately $11 million will be reclassified from “Accumulated other comprehensive income (loss)” to earnings during the year ended December 31, 2009, offset by amounts pertaining to the hedged items. As of December 31, 2008, the Company does not have any qualifying cash flow hedges of forecasted transactions other than those related to the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments. The maximum length of time for which these variable cash flows are hedged is 15 years. Income amounts deferred in “Accumulated other comprehensive income (loss)” as a result of cash flow hedges are included in “Net unrealized investment gains (losses)” in the Consolidated Statements of Stockholder’s Equity.

 

For effective net investment hedges, the amounts, before applicable taxes, recorded in the cumulative translation adjustment account within “Accumulated other comprehensive income (loss)” were gains of $14 million in 2008, losses of $6 million in 2007, and gains of $61 million in 2006.

 

For the years ended December 31, 2008, 2007 and 2006, there were no derivative reclassifications to earnings due to hedged firm commitments no longer deemed probable or due to hedged forecasted transactions that had not occurred by the end of the originally specified time period.

 

Credit Derivatives Written

 

The following tables set forth the Company’s exposure from credit derivatives where the Company has written credit protection excluding credit protection written on the Company’s own credit and embedded derivatives contained in European managed investments, by NAIC rating of the underlying credits as of the dates indicated.

 

 

 

 

 

December 31, 2008

 

 

 

 

Single Name

 

First to Default Basket

 

Total

 

NAIC Designation (1)

 

Rating Agency Equivalent

 

Notional

 

Fair Value

 

Notional

 

Fair Value

 

Notional

 

Fair Value

 

 

 

 

 

 

(in millions)

1

 

Aaa, Aa, A

 

$

20 

 

$

 

$

192

 

$

(17

)

$

212

 

$

(17

)

 

2

 

Baa

 

 

 

 

 

 

417

 

 

(63

)

 

422

 

 

(63

)

 

 

 

Subtotal Investment

Grade

 

 

25 

 

 

 

 

609

 

 

(80

)

 

634

 

 

(80

)

 

3

 

Ba

 

 

 

 

 

 

15

 

 

(2

)

 

15

 

 

(2

)

 

4

 

B

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

C and lower

 

 

 

 

 

 

93

 

 

(26

)

 

98

 

 

(26

)

 

6

 

In or near default

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal Below Investment Grade

 

 

 

 

 

 

108

 

 

(28

)

 

113

 

 

(28

)

 

Total

 

$

30 

 

$

 

$

717

 

$

(108

)

$

747

 

$

(108

)

 

 

 

 

 

B-69

 

 


 

 

 

 

 

 

 

December 31, 2007

 

 

 

 

Single Name

 

First to Default Basket

 

Total

 

NAIC Designation

 

Rating Agency Equivalent

 

Notional

 

Fair Value

 

Notional

 

Fair Value

 

Notional

 

Fair Value

 

 

 

 

 

 

(in millions)

1

 

Aaa, Aa, A

 

$

40 

 

$

 

$

575

 

$

(5

)

$

615

 

$

(5

)

 

2

 

Baa

 

 

15 

 

 

 

 

537

 

 

(37

)

 

552

 

 

(37

)

 

 

 

Subtotal Investment

Grade

 

 

55 

 

 

 

 

1,112

 

 

(42

)

 

1,167

 

 

(42

)

 

3

 

Ba

 

 

 

 

 

 

20

 

 

(1

)

 

20

 

 

(1

)

 

4

 

B

 

 

 

 

 

 

28

 

 

(2

)

 

28

 

 

(2

)

 

5

 

C and lower

 

 

 

 

(1

)

 

20

 

 

(2

)

 

25

 

 

(3

)

 

6

 

In or near default

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal Below Investment Grade

 

 

 

 

(1

)

 

68

 

 

(5

)

 

73

 

 

(6

)

 

Total

 

$

60 

 

$

(1

)

$

1,180

 

$

(47

)

$

1,240

 

$

(48

)

 

 

 

(1)

First-to-default credit swap baskets, which may include credits of varying qualities, are grouped above based on the lowest credit in the basket. However, such basket swaps may entail greater credit risk than the rating level of the lowest credit.

 

The following table sets forth the composition of the Company’s credit derivatives where the Company has written credit protection excluding credit protection written on the Company’s own credit and embedded derivatives contained in European managed investments, by industry category as of the dates indicated.

 

 

December 31, 2008

 

December 31, 2007

Industry

 

Notional

 

Fair Value

 

Notional

 

Fair Value

 

 

 

 

(in millions)

 

 

Corporate Securities:

 

 

 

 

 

 

 

 

Manufacturing .............

 

$               5

 

$              —

 

$               5

 

$              —

Utilities .....................

 

5

 

 

5

 

Finance .....................

 

 

 

 

Services .....................

 

5

 

 

5

 

(1)

Energy .......................

 

 

 

 

Transportation ..............

 

 

 

10

 

Retail and Wholesale ......

 

10

 

 

20

 

Other ........................

 

5

 

 

15

 

First to Default Baskets(1)

 

717

 

(108)

 

1,180

 

(47)

Total Corporate Securities ......

 

$          747

 

$           (108)

 

$          1,240

 

$            (48)

Total ................................

 

$          747

 

$          (108)

 

$         1,240

 

$           (48)

 

(1) Credit default baskets may include various industry categories.

 

 

The Company holds certain externally managed investments in the European market which contain embedded derivatives whose fair value are primarily driven by changes in credit spreads. These investments are medium term notes that are collateralized by investment portfolios primarily consisting of investment grade European fixed income securities, including corporate bonds and asset-backed securities, and derivatives, as well as varying degrees of leverage. The notes have a stated coupon and provide a return based on the performance of the underlying portfolios and the level of leverage. The Company invests in these notes to earn a coupon through maturity, consistent with its investment purpose for other debt securities. The notes are accounted for under U.S. GAAP as available for sale fixed maturity securities with bifurcated embedded derivatives (total return swaps). Changes in the value of the fixed maturity securities are reported in Stockholders’ Equity under the heading “Accumulated Other Comprehensive Income” and changes in the market value of the embedded total return swaps are included in current period earnings in “Realized investment gains (losses), net.” The Company’s maximum exposure to loss from these interests was $528 million and $908 million at December 31, 2008 and 2007, respectively.

 

In addition to selling credit protection, the Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. As of December 31, 2008 and December 31, 2007, the Company had $781 million and $405 million of outstanding notional amounts, reported at fair value as a $196 million asset and a $6 million asset, respectively.

 

 

Credit Risk

 

 

B-70

 

 


 

 

The Company is exposed to credit-related losses in the event of nonperformance by counterparties to financial derivative transactions. The Company manages credit risk by entering into derivative transactions with major international financial institutions and other creditworthy counterparties, and by obtaining collateral where appropriate. Additionally, limits are set on single party credit exposures which are subject to periodic management review.

 

The credit exposure of the Company’s over-the-counter (OTC) derivative transactions is represented by the contracts with a positive fair value (market value) at the reporting date. To reduce credit exposures, the Company seeks to (i) enter into OTC derivative transactions pursuant to master agreements that provide for a netting of payments and receipts with a single counterparty (ii) enter into agreements that allow the use of credit support annexes (CSAs), which are bilateral rating-sensitive agreements that require collateral postings at established threshold levels. Likewise, the Company effects exchange-traded futures and options transactions through regulated exchanges and these transactions are settled on a daily basis, thereby reducing credit risk exposure in the event of nonperformance by counterparties to such financial instruments.

 

The vast majority of the Company’s OTC derivative agreements are with highly rated major international financial institutions. Consistent with the practice of major international financial institutions, the Company utilizes the credit spread embedded in the London Interbank Offered Rate (LIBOR) curve to reflect nonperformance risk when determining the fair value of OTC derivative assets and liabilities. This credit spread is an appropriate estimate of the nonperformance risk of the Company’s OTC derivative related assets and liabilities.

 

21. 

COMMITMENTS AND GUARANTEES, CONTINGENT LIABILITIES AND LITIGATION AND REGULATORY MATTERS

 

Commitments and Guarantees

 

The Company occupies leased office space in many locations under various long-term leases and has entered into numerous leases covering the long-term use of computers and other equipment. Rental expense, net of sub-lease income, incurred for the years ended December 31, 2008, 2007 and 2006 was $62 million, $67 million and $68 million, respectively.

 

The following table presents, at December 31, 2008, the Company’s contractual maturities on long-term debt, as more fully described in Note 13, and future minimum lease payments under non-cancelable operating leases along with associated sub-lease income:

 

 

  

Long-term

Debt

 

Operating Leases

 

Sub-lease Income

 

  

(in millions)

2009

  

$

—  

    

$

92

    

 

$

(22

)

2010

  

 

2,041

    

 

73

    

 

 

(11

)   

2011

  

 

11

    

 

62

    

 

 

(5

2012

  

 

3

    

 

52

    

 

 

(5

)   

2013

  

 

22

 

 

41

 

 

 

(4

)   

2014 and thereafter

  

 

6,610

 

 

67

 

 

 

(4

 

  

 

 

    

 

 

    

 

 

 

    

Total

  

$

8,687

    

$

387

    

 

$

(51

)

 

  

 

 

    

 

 

    

 

 

 

    

Occasionally, for business reasons, the Company may exit certain non-cancelable operating leases prior to their expiration. In these instances, the Company’s policy is to accrue, at the time it ceases to use the property being leased, the future rental expense and any sub-lease income, and to release this reserve over the remaining commitment period. Of the $387 million in total non-cancelable operating leases and $51 million in total sub-lease income, $31 million and $40 million, respectively, has been accrued at December 31, 2008.

 

In connection with the Company’s origination of commercial mortgage loans, it had outstanding commercial mortgage loan commitments with borrowers of $909 million at December 31, 2008.

 

The Company also has other commitments, some of which are contingent upon events or circumstances not under the Company’s control, including those at the discretion of the Company’s counterparties. These other commitments amounted to $9,441 million at December 31, 2008. Reflected in these other commitments are $9,298 million of commitments to purchase or fund investments, including $7,443 million that the Company anticipates will ultimately be funded from the assets of its separate accounts. Of these separate account commitments, $3,255 million have recourse to Prudential Insurance if the separate accounts are unable to fund the amounts when due.

 

 

B-71

 

 


 

 

In the course of the Company’s business, it provides certain guarantees and indemnities to third parties pursuant to which it may be contingently required to make payments now or in the future.

 

A number of guarantees provided by the Company relate to real estate investments held in its separate accounts, in which the separate account has borrowed funds, and the Company has guaranteed their obligation to their lender. The Company provides these guarantees to assist the separate account in obtaining financing for the transaction. The Company’s maximum potential exposure under these guarantees was $2,508 million at December 31, 2008. Any payments that may become required of the Company under these guarantees would either first be reduced by proceeds received by the creditor on a sale of the underlying collateral, or would provide the Company with rights to obtain the underlying collateral. Recourse for $2,025 million of the maximum potential exposure is limited to the assets of the separate account. The remaining exposure primarily relates to guarantees limited to fraud, criminal activity or other bad acts. These guarantees generally expire at various times over the next ten years. At December 31, 2008, no amounts were accrued as a result of the Company’s assessment that it is unlikely payments will be required.

 

As discussed in Note 20, the Company writes credit derivatives under which the Company is obligated to pay the counterparty the referenced amount of the contract and receive in return the defaulted security or similar security. The Company’s maximum amount at risk under these credit derivatives, assuming the value of the underlying referenced securities become worthless, is $747 million at December 31, 2008. These credit derivatives generally have maturities of five years or less.

 

Certain contracts underwritten by the Retirement segment include guarantees related to financial assets owned by the guaranteed party. These contracts are accounted for as derivatives, at fair value, in accordance with SFAS No. 133. At December 31, 2008, such contracts in force carried a total guaranteed value of $5,152 million. These guarantees are supported by collateral that is not reflected on our balance sheet. This collateral had a fair value of $5,124 million at December 31, 2008.

 

In connection with certain acquisitions, the Company has agreed to pay additional consideration in future periods, based upon the attainment by the acquired entity of defined operating objectives. In accordance with U.S. GAAP, the Company does not accrue contingent consideration obligations prior to the attainment of the objectives. At December 31, 2008, maximum potential future consideration pursuant to such arrangements, to be resolved over the following three years, is $65 million. Any such payments would result in increases in intangible assets, including goodwill.

 

The Company is also subject to other financial guarantees and indemnity arrangements. The Company has provided indemnities and guarantees related to acquisitions, dispositions, investments and other transactions that are triggered by, among other things, breaches of representations, warranties or covenants provided by the Company. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or applicable. Since certain of these obligations are not subject to limitations, it is not possible to determine the maximum potential amount due under these guarantees. At December 31, 2008, the Company has accrued liabilities of $4 million associated with all other financial guarantees and indemnity arrangements, which does not include retained liabilities associated with sold businesses.

 

Contingent Liabilities

 

On an ongoing basis, the Company’s internal supervisory and control functions review the quality of sales, marketing and other customer interface procedures and practices and may recommend modifications or enhancements. From time to time, this review process results in the discovery of product administration, servicing or other errors, including errors relating to the timing or amount of payments or contract values due to customers. In certain cases, if appropriate, the Company may offer customers remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.

 

It is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be materially affected as a result of payments in connection with the matters discussed above or other matters depending, in part, upon the results of operations or cash flow for such period. Management believes, however, that ultimate payments in connection with these matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on the Company’s financial position.

 

Litigation and Regulatory Matters

 

The Company is subject to legal and regulatory actions in the ordinary course of its businesses. The Company’s legal and regulatory actions include proceedings specific to it and proceedings generally applicable to business practices in the industries

 

 

B-72

 

 


 

 

in which it operates, including in both cases businesses that have either been divested or placed in wind-down status. The Company is subject to class action lawsuits and individual lawsuits involving a variety of issues, including sales practices, underwriting practices, claims payment and procedures, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, return of premiums or excessive premium charges and breaching fiduciary duties to customers. In its investment-related operations, the Company is subject to litigation involving commercial disputes with counterparties or partners and class action lawsuits and other litigation alleging, among other things, that the Company has made improper or inadequate disclosures in connection with the sale of assets and annuity and investment products or charged excessive or impermissible fees on these products, recommended unsuitable products to customers, mishandled customer accounts or breached fiduciary duties to customers. The Company is also subject to litigation arising out of its general business activities, such as its investments, contracts, leases and labor and employment relationships, including claims of discrimination and harassment and could be exposed to claims or litigation concerning certain business or process patents. Regulatory authorities from time to time make inquiries and conduct investigations and examinations relating particularly to the Company and its businesses and products. In addition, the Company, along with other participants in the businesses in which it engages, may be subject from time to time to investigations, examinations and inquiries, in some cases industry-wide, concerning issues or matters upon which such regulators have determined to focus. In some of the Company’s pending legal and regulatory actions, parties are seeking large and/or indeterminate amounts, including punitive or exemplary damages. The outcome of a litigation or regulatory matter, and the amount or range of potential loss at any particular time, is often inherently uncertain. The following is a summary of certain pending proceedings.

 

In November 2008, a purported nationwide class action, Garcia v. Prudential Insurance Company of America, was filed in the United States District Court for the District of New Jersey. The complaint, which is brought on behalf of beneficiaries of Prudential Insurance policies whose death benefits were placed in retained asset accounts, alleges that by investing the death benefits in these accounts, Prudential Insurance wrongfully delayed payment and improperly retained undisclosed profits. It alleges claims of breach of the contract of insurance, breach of contract with regard to the retained asset accounts, breach of fiduciary duty and unjust enrichment, and seeks an accounting, disgorgement, injunctive relief, attorneys’ fees, and prejudgment and post-judgment interest.

 

From November 2002 to March 2005, eleven separate complaints were filed against Prudential Financial, the Company and the law firm of Leeds Morelli & Brown in New Jersey state court. The cases were consolidated for pre-trial proceedings in New Jersey Superior Court, Essex County and captioned Lederman v. Prudential Financial, Inc., et al. The complaints allege that an alternative dispute resolution agreement entered into among Prudential Insurance, over 350 claimants who are current and former Prudential Insurance employees, and Leeds Morelli & Brown (the law firm representing the claimants) was illegal and that Prudential Insurance conspired with Leeds Morelli & Brown to commit fraud, malpractice, breach of contract, and violate racketeering laws by advancing legal fees to the law firm with the purpose of limiting Prudential Insurance’s liability to the claimants. In 2004, the Superior Court sealed these lawsuits and compelled them to arbitration. In May 2006, the Appellate Division reversed the trial court’s decisions, held that the cases were improperly sealed, and should be heard in court rather than arbitrated. In March 2007, the court granted plaintiffs’ motion to amend the complaint to add over 200 additional plaintiffs, and a claim under the New Jersey discrimination law, but denied without prejudice plaintiffs’ motion for a joint trial on liability issues. In June 2007, Prudential Financial and Prudential Insurance moved to dismiss the complaint. In November 2007, the court granted the motion, in part, and dismissed the commercial bribery and conspiracy to commit malpractice claims, and denied the motion with respect to other claims. In December 2007, the Prudential defendants answered the complaints and asserted counterclaims against each plaintiff for breach of contract and cross-claims against Leeds Morelli & Brown for breach of contract and the covenant of good faith and fair dealing, fraudulent inducement, indemnification and contribution. In January 2008, plaintiffs filed a demand pursuant to New Jersey law stating that they were seeking damages in the amount of $6.5 billion.

 

The Company, along with a number of other insurance companies, received formal requests for information from the State of New York Attorney General’s Office (“NYAG”), the Securities and Exchange Commission (“SEC”), the Connecticut Attorney General’s Office, the Massachusetts Office of the Attorney General, the Department of Labor, the United States Attorney for the Southern District of California, the District Attorney of the County of San Diego, and various state insurance departments relating to payments to insurance intermediaries and certain other practices that may be viewed as anti-competitive. In December 2006, Prudential Insurance reached a resolution of the NYAG investigation. Under the terms of the settlement, Prudential Insurance paid a $2.5 million penalty and established a $16.5 million fund for policyholders, adopted business reforms and agreed, among other things, to continue to cooperate with the NYAG in any litigation, ongoing investigations or other proceedings. Prudential Insurance also settled the litigation brought by the California Department of Insurance and agreed to business reforms and disclosures as to group insurance contracts insuring customers or residents in California and to pay certain costs of investigation. In April 2008, Prudential Insurance reached a settlement of proceedings relating to payments to insurance intermediaries and certain other practices with the District Attorneys of San Diego, Los Angeles and Alameda counties. Pursuant to this settlement, Prudential Insurance paid $350,000 in penalties and costs. These matters are also the

 

 

B-73

 

 


 

 

subject of litigation brought by private plaintiffs, including purported class actions that have been consolidated in the multidistrict litigation in the United States District Court for the District of New Jersey, In re Employee Benefit Insurance Brokerage Antitrust Litigation. In August and September 2007, the court dismissed the anti-trust and RICO claims. In January and February 2008, the court dismissed the ERISA claims with prejudice and the state law claims without prejudice. Plaintiffs have appealed to the Third Circuit Court of Appeals.

 

In April 2005, the Company voluntarily commenced a review of the accounting for its reinsurance arrangements to confirm that it complied with applicable accounting rules. This review included an inventory and examination of current and past arrangements, including those relating to the Company’s wind-down and divested businesses and discontinued operations. Subsequent to commencing this voluntary review, the Company received a formal request from the Connecticut Attorney General for information regarding its participation in reinsurance transactions generally and a formal request from the SEC for information regarding certain reinsurance contracts entered into with a single counterparty since 1997 as well as specific contracts entered into with that counterparty in the years 1997 through 2002 relating to the Company’s property and casualty insurance operations that were sold in 2003. In August 2008, Prudential Financial reached a resolution of this matter. The SEC’s complaint, filed on August 6, 2008 in the United States District Court for the District of New Jersey, alleges, among other things, that the Company improperly accounted for the reinsurance contracts resulting in overstatements of Prudential Financial’s consolidated results for the years 2000, 2001 and 2002 in certain of Prudential Financial’s reports filed with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in violation of the financial reporting, books-and-records and internal control provisions of the Exchange Act. In connection with the settlement, Prudential Financial has consented to entry of a final judgment enjoining it from future violations of specified provisions of the Exchange Act and related rules and regulations of the SEC thereunder. The settlement, in which Prudential Financial neither admits nor denies the allegations in the complaint, resolves the SEC’s investigations into these matters without the imposition of any monetary fine or penalty. The settlement documents include allegations that may result in litigation, adverse publicity and other potentially adverse impacts to Prudential Financial’s businesses.

 

In October 2007, Prudential Retirement Insurance and Annuity Co. (“PRIAC”) filed an action in the United States District Court for the Southern District of New York, Prudential Retirement Insurance & Annuity Co. v. State Street Global Advisors, in PRIAC’s fiduciary capacity and on behalf of certain defined benefit and defined contribution plan clients of PRIAC, against an unaffiliated asset manager, State Street Global Advisors (“SSgA”) and SSgA’s affiliate, State Street Bank and Trust Company (“State Street”). This action seeks, among other relief, restitution of certain losses attributable to certain investment funds sold by SSgA as to which PRIAC believes SSgA employed investment strategies and practices that were misrepresented by SSgA and failed to exercise the standard of care of a prudent investment manager. PRIAC also intends to vigorously pursue any other available remedies against SSgA and State Street in respect of this matter. Given the unusual circumstances surrounding the management of these SSgA funds and in order to protect the interests of the affected plans and their participants while PRIAC pursues these remedies, PRIAC implemented a process under which affected plan clients that authorized PRIAC to proceed on their behalf have received payments from funds provided by PRIAC for the losses referred to above. The Company’s consolidated financial statements for the year ended December 31, 2007 include a pre-tax charge of $82 million, reflecting these payments to plan clients and certain related costs. In September 2008, the United States District Court for the Southern District of New York denied the State Street defendants’ motion to dismiss claims for damages and other relief under Section 502(a)(2) of ERISA, but dismissed the claims for equitable relief under Section 502(a)(3) of ERISA. In October 2008, defendants answered the complaint and asserted counterclaims for contribution and indemnification, defamation and violations of Massachusetts’ unfair and deceptive trade practices law.

 

In October 2006, a purported class action lawsuit, Bouder v. Prudential Financial, Inc. and Prudential Insurance Company of America, was filed in the United States District Court for the District of New Jersey, claiming that the Company failed to pay overtime to insurance agents who were registered representatives in violation of federal and Pennsylvania law, and that improper deductions were made from these agents’ wages in violation of state law. The complaint seeks back overtime pay and statutory damages, recovery of improper deductions, interest and attorneys’ fees. In December 2007, plaintiffs moved to certify the class. In March 2008, the court granted plaintiffs’ motion to conditionally certify a nationwide class. In March 2008, a purported nationwide class action lawsuit was filed with the United States District Court for the Southern District of California, Wang v. Prudential Financial, Inc. and Prudential Insurance, on behalf of agents who sold the Company’s financial products. The complaint alleges claims that the Company failed to pay overtime and provide other benefits in violation of federal and California law and seeks compensatory and punitive damages in unspecified amounts. In September 2008, the Wang matter was transferred to the United States District Court for the District of New Jersey and consolidated with the Bouder lawsuit. In January 2009, an amended complaint was filed in the consolidated matter which adds wage claims based on the laws of thirteen additional states.

 

 

B-74

 

 


 

 

The Company’s litigation and regulatory matters are subject to many uncertainties, and given their complexity and scope, their outcome cannot be predicted. It is possible that the Company’s results of operations or cash flow in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters depending, in part, upon the results of operations or cash flow for such period. In light of the unpredictability of the Company’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on the Company’s financial position. Management believes, however, that, based on information currently known to it, the ultimate outcome of all pending litigation and regulatory matters, after consideration of applicable reserves and rights to indemnification, is not likely to have a material adverse effect on the Company’s financial position.

 

 

B-75

 

 


 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholder of

The Prudential Insurance Company of America:

 

In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of operations, of stockholder's equity and of cash flows present fairly, in all material respects, the financial position of The Prudential Insurance Company of America (a wholly owned subsidiary of Prudential Holdings, LLC, which is a wholly owned subsidiary of Prudential Financial, Inc), and its subsidiaries (collectively , the "Company") at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

As described in Note 1 of the consolidated financial statements, during 2008 Prudential Financial, Inc. contributed Prudential Securities Group, LLC, including its investment in the Wachovia Securities joint venture, to the Company. The consolidated financial statements for the periods ended December 31, 2007 and 2006 have been retrospectively adjusted to reflect this contribution for all periods presented.

 

As described in Note 2 of the consolidated financial statements, the Company adopted a framework for measuring fair value on January 1, 2008. Also, the Company changed its method of accounting for uncertainty in income taxes, for deferred acquisition costs in connection with modifications or exchanges of insurance contracts, and for income tax-related cash flows generated by a leveraged lease transaction on January 1, 2007 and for defined benefit pension and other postretirement plans on December 31, 2006.

 

/S/ PRICEWATERHOUSECOOPERS LLP

 

New York, New York

April 3, 2009

 

 

 

B-76

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

PART C:

 

OTHER INFORMATION

 

 


Item 26. EXHIBITS

 

 

Exhibit number

Description of Exhibit

 

 

(a)

Board of Directors Resolution:

 

(i)

Resolution of Board of Directors of The Prudential Insurance Company of America establishing The Prudential Variable Appreciable Account. (Note 1)

 

 

(b)

Not Applicable.

 

 

(c)

Underwriting Contracts:

 

(i)

Distribution Agreement between Pruco Securities LLC and The Prudential Insurance Company of America. (Note 1)

 

(ii)

Proposed form of Agreement between Pruco Securities LLC and independent brokers with respect to the Sale of the Contracts. (Note 1)

 

(iii)

Schedules of Sales Commissions. (Note 1)

 

 

(d)

Contracts:

 

(i)

Variable Appreciable Life Insurance Contracts: (Note 1)

 

(a)

With fixed death benefit for use in New Jersey and domicile approval states.

 

(b)

With variable death benefit for use in New Jersey and domicile approval states.

 

(c)

With fixed death benefit for use in non-domicile approval states.

 

(d)

With variable death benefit for use in non-domicile approval states.

 

(ii)

Rider for Insured's Waiver of Premium Benefit. (Note 1)

 

(iii)

Rider for Applicant's Waiver of Premium Benefit. (Note 1)

 

(iv)

Rider for Insured's Accidental Death Benefit. (Note 1)

 

(v)

Rider for Level Term Insurance Benefit on Life of Insured. (Note 1)

 

(vi)

Rider for Decreasing Term Insurance Benefit on Life of Insured. (Note 1)

 

(vii)

Rider for Interim Term Insurance Benefit. (Note 1)

 

(viii)

Rider for Option to Purchase Additional Insurance on Life of Insured. (Note 1)

 

(ix)

Rider for Decreasing Term Insurance Benefit on Life of Insured Spouse. (Note 1)

 

(x)

Rider for Level Term Insurance Benefit on Dependent Children. (Note 1)

 

(xi)

Rider for Level Term Insurance Benefit on Dependent Children-from Term Conversions. (Note 1)

 

(xii)

Rider for Level Term Insurance Benefit on Dependent Children-from Term Conversions or Attained Age Change. (Note 1)

 

(xiii)

Endorsement defining Insured Spouse. (Note 1)

 

(xiv)

Rider covering lack of Evidence of Insurability on a Child. (Note 1)

 

(xv)

Rider modifying Waiver of Premium Benefit. (Note 1)

 

(xvi)

Rider to terminate a Supplementary Benefit. (Note 1)

 

(xvii)

Rider providing for election of Variable Reduced Paid-up Insurance. (Note 1)

 

(xviii)

Rider to provide for exclusion of Aviation Risk. (Note 1)

 

(xix)

Rider to provide for exclusion of Military Aviation Risk. (Note 1)

 

(xx)

Rider to provide for exclusion for War Risk. (Note 1)

 

(xxi)

Rider to provide for Reduced Paid-up Insurance. (Note 1)

 

(xxii)

Rider providing for Option to Exchange Policy. (Note 1)

 

(xxiii)

Endorsement defining Ownership and Control of the Contract. (Note 1)

 

(xxiv)

Rider providing for Modification of Incontestability and Suicide Provisions. (Note 1)

 

(xxv)

Endorsement issued in connection with Non-Smoker Qualified Contracts. (Note 1)

 

(xxvi)

Endorsement issued in connection with Smoker Qualified Contracts. (Note 1)

 

(xxvii)

Home Office Endorsement. (Note 1)

 

(xxviii)

Endorsement showing Basis of Computation for Non-Smoker Contracts. (Note 1)

 

(xxix)

Endorsement showing Basis of Computation for Smoker Contracts. (Note 1)

 

(xxx)

Rider for Term Insurance Benefit on Life of Insured-Decreasing Amount After Three Years. (Note 1)

 

(xxxi)

Rider for Renewable Term Insurance Benefit on Life of Insured. (Note 1)

 

(xxxii)

Rider for Level Term Insurance Benefit on Life of Insured Spouse. (Note 1)

 

(xxxiii)

Living Needs Benefit Rider:

 

(a)

for use in Florida. (Note 1)

 

(b)

for use in all approved jurisdictions except Florida and New York. (Note 1)

 

(c)

for use in New York. (Note 1)

 

(xxxiv)

Rider for Renewable Term Insurance Benefit on Life of Insured Spouse. (Note 1)

 

(xxxv)

Rider for Level Term Insurance Benefit on Life of Insured-Premium Increases Annually. (Note 1)

 

(xxxvi)

Rider for Term Insurance Benefit on Life of Insured-Decreasing Amount. (Note 1)

 

(xxxvii)

Rider for a Level Premium Option. (Note 1)

 

(xxxviii)

Payment of Unscheduled Premium Benefit (Note 1)

 

(xxxix)

Rider for Scheduled Term Insurance Benefit on Life of Insured. (Note 1)

 

(xl)

Endorsement altering the Assignment provision. (Note 1)

 

(xli)

Rider for Non-Convertible Term Insurance Benefit on Life of Insured Spouse.

(Note 1)

 

(xlii)

Rider for Convertible Term Insurance Benefit on Life of Insured Spouse. (Note 1)

 

(xliii)

Rider for Level Term Insurance Benefit on Life of Insured-Premium Increases Annually (Note 1)

 

(xliv)

Rider for Non-Convertible Term Insurance Benefit on Life of Insured. (Note 1)

 

(xlv)

Rider for Convertible Term Insurance Benefit on Life of Insured. (Note 1)

 

(xlvi)

Endorsement for altering List of Investment Options. (Note 1)

 

 

(e)

Application:

 

(i)

Application Form. (Note 1)

 

(ii)

Supplement to the Application for Variable Appreciable Life Insurance Contract. (Note 1)

 

 

(f)

Depositor’s Certificate of Incorporation and By-Laws:

 

(i)

Charter of The Prudential Insurance Company of America, as amended July 19, 2004. (Note 3)

 

(ii)

By-laws of The Prudential Insurance Company of America, as amended December 9, 2008. (Note 1)

 

 

(g)

None

 

 

(h)

Participation Agreements:

 

(i)

Form of 22c-2 Agreement(Note 4)

 

 

(i)

Administrative Contracts:

 

(i)

Service Agreement between Prudential and First Tennessee Bank National Association. (Note 5)

 

 

(j)

Powers of Attorneys (Note 1):

 

T. Baltimore, F. Becker, G. Bethune, W. Caperton, III, R. Carbone,

G. Casellas, J. Cullen, W. Gray, III, M. Grier, J. Hanson,

C. Horner, K. Krapek, C. Poon, P. Sayre, J. Strangfeld, Jr., J. Unruh

 

 

(k)

Opinion and Consent of Thomas C. Castano, Esq., as to the legality of the securities being registered. (Note 1)

 

 

(l)

Not applicable.

 

 

(m)

Not applicable.

 

 

(n)

Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm. (Note 1)

 

 

(o)

None.

 

 

(p)

Not applicable.

 

 

(q)

Redeemability Exemption:

 

(i)

Memorandum describing Prudential's issuance, transfer, and redemption procedures for the Contracts pursuant to Rule 6e-3(T)(b)(12)(iii) and method of computing adjustments in payments and cash surrender values upon conversion to fixed-benefit policies pursuant to Rule 6e-3(T)(b)(13)(v)(B). (Note 2)

 

---------------------------------------------------------

 

 

(Note

1)

Filed herewith.

 

(Note

2)

Incorporated by reference to Post-Effective Amendment No. 28 to this Registration Statement, filed April 26, 2005 on behalf of The Prudential Variable Appreciable Account.

 

(Note

3)

Incorporated by reference to Post-Effective Amendment No. 18 to Form S-1, Registration No. 33-20083-01, filed April 14, 2005 on behalf of The Prudential Variable Contract Real Property Account.

 

(Note

4)

Incorporated by reference to Post-Effective Amendment No. 30 to this Registration Statement, filed April 18, 2007 on behalf of The Prudential Variable Appreciable Account

 

(Note

5)

Incorporated by reference to Post-Effective Amendment No. 31 to this Registration Statement, filed April 17, 2008 on behalf of The Prudential Variable Appreciable Account

 

Item 27.

Directors and Major Officers of Prudential

 

The directors and major officers of Prudential, listed with their principal occupations, are shown below. The Principal business address of the directors and officers listed below is 751 Broad Street, Newark, New Jersey 07102.

 

DIRECTORS OF PRUDENTIAL

 

THOMAS J.  BALTIMORE - Director.  Co-Founder  and  President  of RLJ  Development,  LLC.  Mr.  Baltimore  is also a
director of Duke Realty Corporation and Integra LifeSciences Holdings Corporation.

FREDERIC  K. BECKER -  Director.  Chairman,  Audit  Committee;  Member,  Executive  Committee.  President,  Wilentz
Goldman & Spitzer, P.A. (law firm).

GORDON M. BETHUNE - Director.  Member,  Corporate  Governance and Business Ethics Committee;  Member,  Compensation
Committee;  Retired,  Chairman  and Chief  Executive  Officer  Continental  Airlines,  Inc.  Mr.  Bethune is also a
director of Honeywell International, Inc. and Sprint Nextel Corporation.

W. GASTON  CAPERTON,  III - Director.  Member,  Finance and  Dividends  Committee;  Member,  Investment  Committee;
President,  The  College  Board.  Governor  Caperton  is also a director of Energy  Corporation  of America,  Owens
Corning.

GILBERT F. CASELLAS - Director.  Member, Audit Committee;  Vice President,  Corporate  Responsibility of Dell, Inc.
Mr. Casella is also a director of The Swarthmore Group, Inc.

JAMES G.  CULLEN  -  Director.  Chairman,  Compensation  Committee;  Member,  Audit  Committee;  Member,  Executive
Committee;  Retired,  President  and Chief  Operating  Officer  Bell  Atlantic  Corporation.  Mr.  Cullen is also a
director of Agilient Technologies, Inc., Johnson & Johnson, and NeuStar, Inc.

WILLIAM H. GRAY, III - Director.  Chairman,  Corporate Governance and Business Ethics Committee;  Member, Executive
Committee.  Mr.  Gray is the  Chairman  of The Amani  Group,  LLC.  Mr.  Gray is also a director  of Dell Inc.,  JP
Morgan Chase & Co., Pfizer, Inc., and Visteon Corporation.

MARK B. GRIER - Director.  Vice Chairman of the Board of Prudential Insurance.

JON F.  HANSON -  Director.  Chairman,  Executive  Committee,  Finance  and  Dividends  Committee,  and  Investment
Committee.  Chairman  of The  Hampshire  Companies.  Chairman  of The  Hampshire  Companies.  Mr.  Hanson is also a
director of HealthSouth  Corp.,  James E. Hanson  Management  Company,  Pascack  Community  Bank, and Yankee Global
Enterprises.

CONSTANCE J. HORNER - Director.  Member,  Compensation Committee;  Member, Corporate Governance and Business Ethics
Committee.  Former  Assistant  to  the  President  of  the  United  States.  Ms.  Horner  is  also  a  director  of
Ingersoll-Rand Company, Ltd., and Pfizer, Inc.

KARL J.  KRAPEK  -  Director.  Member,  Financeand  Dividends  Committee;  Member,  Investment  Committee.  Retired
President and Chief Operating Officer,  United  Technologies  Corporation.  Mr. Krapek is also a director of Lucent
Technologies, Inc., Connecticut Bank and Trust Company, Northrup Grunman Corporation, and Visteon Corporation.

CHRISTINE A. POON - Director.  Member,  Finance and Dividends Committee;  Member,  Investment  Committee.  Ms. Poon
is also retired Vice Chairman, Board of Directors and Worldwide Chairman of Johnson & Johnson.

JOHN R. STRANGFELD, JR. - Chairman, Chief Executive Officer, and President of Prudential.

JAMES A. UNRUH - Director.  Member,  Audit Committee.  Founding  Principal,  Alerion Capital Group,  LLC. Mr. Unruh
is also a director  of CSG  Systems  International,  Inc.,  Qwest  Communications  International,  Inc.,  and Tenet
Healthcare Corporation.

 

PRINCIPAL OFFICERS

 


EDWARD P. BAIRD - Executive Vice President, International Businesses, Prudential.

SUSAN L. BLOUNT - Senior Vice President and General Counsel, Prudential.

RICHARD J. CARBONE - Executive Vice President and Chief Financial Officer, Prudential.

BERNARD J. JACOB - Senior Vice President and Treasurer, Prudential.

HELEN M. GALT - Senior Vice President, Company Actuary and Chief Risk Officer, Prudential.

KATHLEEN M. GIBSON - Vice President, Secretary and Corporate Governance Officer, Prudential.

ROBERT C. GOLDEN - Executive Vice President, Prudential.

MARK B. GRIER - Vice Chairman, Prudential.

JOHN R. STRANGFELD, JR. - Chairman, Chief Executive Officer, and President, Prudential.

PETER B. SAYRE - Senior Vice President and Controller, Prudential.

SHARON C. TAYLOR - Senior Vice President, Corporate Human Resources, Prudential.

BERNARD B. WINOGRAD - Executive Vice President, U.S. Businesses, Prudential.

 

 

Item 28.

Persons Controlled by or Under Common Control with the Depositor or the Registrant

 

See Annual Report on Form 10-K of Prudential Financial, Inc., File No. 001-16707, filed February 27, 2009.

 

Item 29.

Indemnification

 

The Registrant, in connection with certain affiliates, maintains various insurance coverages under which the underwriter and certain affiliated persons may be insured against liability, which may be incurred in such capacity, subject to the terms, conditions, and exclusions of the insurance policies.

 

New Jersey, being the state of organization of Prudential, permits entities organized under its jurisdiction to indemnify directors and officers with certain limitations. The relevant provisions of New Jersey law permitting indemnification can be found in Section 14A:3-5 of the New Jersey Statutes Annotated. The text of Prudential's By-law Article VII, Section 1, which relates to indemnification of officers and directors, is filed as exhibit Item 26(f)(ii) to this registration statement on behalf of The Prudential Variable Appreciable Account

 

Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Act”) may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

Item 30.

Principal Underwriters

 

Pruco Securities, LLC ("Prusec"), an indirect wholly-owned subsidiary of Prudential Financial, acts as the principal underwriter of the Contract. Prusec, organized on September 22, 2003 under New Jersey law, is registered as a broker and dealer under the Securities Exchange Act of 1934 and is a registered member of the Financial Industry Regulatory Authority, Inc. ("FINRA"). (Prusec is a successor company to Pruco Securities Corporation, established on February 22, 1971.) Prusec's principal business address is 751 Broad Street, Newark, New Jersey 07102-3777.

 

The Contract is sold by registered representatives of Prusec who are also authorized by state insurance departments to do so. The Contract may also be sold through other broker-dealers authorized by Prusec and applicable law to do so.

 

 

                                          MANAGERS AND OFFICERS OF PRUCO SECURITIES, LLC
                                                            ("Prusec")

Name and Principal
Business Address                                                         Position and Office With Depositor
--------------------------------------------------                       ---------------------------------------------
John W. Greene  (Note 1)                                                 Chairman of the Board, Manager
John G. Gordon  (Note 1)                                                 President, Manager, Chief Operating Officer
Margaret R. Horn (Note 1)                                                Controller, Chief Financial Officer
Andrew M. Shainberg (Note 1)                                             Vice President, Chief Compliance Officer
Noreen M. Fierro (Note 2)                                                Vice President, Anti-Money Laundering Officer
Sandra Cassidy (Note 1)                                                  Secretary, Chief Legal Officer
Joan H. Cleveland (Note 1)                                               Vice President
Thomas H. Harris   (Note 1)                                              Vice President
Yolanda M. Doganay (Note 1)                                              Vice President
Mark A. Hug  (Note 1)                                                    Vice President, Manager
Patrick L. Hynes  (Note 5)                                               Vice President
Michele Talafha  (Note 4)                                                Assistant Vice President
James J. Avery, Jr (Note 1)                                              Manager
Stephen Pelletier (Note 7)                                               Manager
Judy A. Rice (Note 3)                                                    Manager
Matthew J. Voelker (Note 6)                                              Manager
David Campen  (Note 1)                                                   Assistant Controller
Robert Szuhany  (Note 1)                                                 Assistant Controller
Janice Pavlou  (Note 1)                                                  Assistant Controller
Mary Ellen Yourth (Note 1)                                               Assistant Controller
Bernard J. Jacob (Note 2)                                                Treasurer
Paul F. Blinn   (Note 1)                                                 Assistant Treasurer
Kathleen C. Hoffman  (Note 2)                                            Assistant Treasurer
Laura J. Delaney (Note 2)                                                Assistant Treasurer
Kathleen Gibson  (Note 2)                                                Vice President, Assistant Secretary
Thomas C. Castano  (Note 1)                                              Assistant Secretary
Patricia Christian  (Note 1)                                             Assistant Secretary
Mary Jo Reich  (Note 1)                                                  Assistant Secretary

(Note 1) 213 Washington Street, Newark, NJ 07102
(Note 2) 751 Broad Street, Newark, NJ 07102
(Note 3) Three Gateway Center, Newark, New Jersey  07102
(Note 4) One New York Plaza, New York, NY 10292
(Note 5) 200 Wood Avenue South, Iselin, NJ  08830
(Note 6) 2998 Douglas Boulevard, Suite 220, Roseville, California  95661
(Note 7) One Corporate Drive, Shelton, CT 06484

 

 

Prusec serves as principal underwriter of the variable insurance Contracts issued by Prudential. Prusec received gross distribution revenue for its variable life products of $80,907,743 in 2008, $90,865,268 in 2007, and $91,615,140 in 2006. Prusec passes through the gross distribution revenue it receives to broker-dealers for their sales and does not retain any portion of it in return for its services as distributor for the policies. However, Prusec does retain a portion of compensation it receives with respect to sales by its representatives. Prusec retained compensation of $15,852,244 in 2008, $16,112,532 in 2007, and $11,528,129 in 2006. Prusec offers the Contract on a continuous basis.

 

Because Prusec registered representatives who sell the Contracts are also our life insurance agents, they may be eligible for various cash bonuses and insurance benefits and non-cash compensation programs that we or our affiliates offer, such as conferences, trips, prizes, and awards, subject to applicable regulatory requirements. In some circumstances and to the extent permitted by applicable regulatory requirements, we may also reimburse certain sales and marketing expenses.

 

Item 31.

Location of Accounts and Records

 

The Depositor, The Prudential Insurance Company of America, is located at 751 Broad Street, Newark, New Jersey 07102-3777.

 

The Principal Underwriter, Pruco Securities, LLC, is located at 751 Broad Street, Newark, New Jersey 07102-3777.

 

Each company maintains those accounts and records required to be maintained pursuant to Section 31(a) of the Investment Company Act and the rules promulgated thereunder.

 

Item 32.

Management Services

 

 

Not Applicable.

 

 

Item 33.

Representation of Reasonableness of Fees

 

The Prudential Insurance Company of America (“Prudential”) represents that the fees and charges deducted under the Variable Appreciable Life Insurance Contracts registered by this registration statement, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by Prudential.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, the Registrant, The Prudential Variable Appreciable Account, certifies that this Amendment is filed solely for one or more of the purposes specified in Rule 485(b)(1) under the Securities Act of 1933 and that no material event requiring disclosure in the prospectus, other than one listed in Rule 485(b)(1), has occurred since the effective date of the most recent Post-Effective Amendment to the Registration Statement which included a prospectus, and has caused this Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized, and its seal hereunto affixed and attested, all in the city of Newark and the State of New Jersey, on this 16th day of April, 2009.

 

 

(Seal)

The Prudential Variable Appreciable Account

 

(Registrant)

 

 

By: The Prudential Insurance Company of America

 

(Depositor)

 


Attest:      /s/  Thomas C. Castano                            By:    /s/ Scott D. Kaplan            
                  Thomas C. Castano                                       Scott D. Kaplan
                  Secretary                                               Vice President, Finance



 

Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 32 to the Registration Statement has been signed below by the following persons in the capacities indicated on this 16th day of April, 2009.

 



               Signature and Title


/s/ *                                   
John R. Strangfeld, Jr.
President, Chairman of the Board, and
Chief Executive Officer

/s/ *                                    
Peter B. Sayre
Senior Vice President and Corporate Controller                        *By:   /s/ Thomas C. Castano
                                                                             Thomas C. Castano
                                                                             (Attorney-in-Fact)
/s/*                                     
Richard J. Carbone
Executive Vice President and Chief Financial Officer

/s/*                                      
Thomas J. Baltimore
Director

/s/*                                      
Frederic K. Becker
Director

/s/*                                      
Gordon M. Bethune
Director

/s/*                                      
W. Gaston Caperton, III
Director

/s/*                                      
Gilbert F. Casellas
Director

/s/*                                      
James G. Cullen
Director

/s/*                                      
William H. Gray, III
Director

/s/*                                      
Mark B. Grier
Director

/s/*                                      
Jon F. Hanson
Director

/s/*                                      
Constance J. Horner
Director

/s/*                                      
Karl J. Krapek
Director                                                               *By:   /s/ Thomas C. Castano
                                                                             Thomas C. Castano
                                                                             (Attorney-in-Fact)

/s/*                                      
Christine A. Poon
Director

/s/*                                      
James A. Unruh
Director

 

 

EXHIBIT INDEX

 

      Item 26.

   (a) Board of Directors                (i) Resolution of Board of Directors of The Prudential Insurance Company of  C-
      Resolution:                        America establishing The Prudential Variable Appreciable Account.

   (c) Underwriting Contracts:           (i) Distribution Agreement between Pruco Securities LLC and The Prudential   C-
                                         Insurance Company of America.
                                         (ii) Proposed form of Agreement between Pruco Securities LLC and             C-
                                         independent brokers with respect to the Sale of the Contracts.
                                         (iii) Schedules of Sales Commissions.                                        C-

   (d) Contracts:                        All Contracts, Riders, and Endorsements: (d)(i) through (d)(xlvi)            C-

   (e) Application:                      (i) Application Form.                                                        C-
                                         (ii) Supplement to the Application for Variable Appreciable Life Insurance   C-
                                         Contract.

   (f) Depositor's Certificate of        (ii) By-laws of The Prudential Insurance Company of America, as amended      C-
      Incorporation and By-Laws:         December 9, 2008.

   (j) Powers of Attorneys:               T. Baltimore, F. Becker, G. Bethune, W. Caperton, III, R. Carbone,          C-
                                          G. Casellas, J. Cullen, W. Gray, III, M. Grier, J. Hanson,
                                          C. Horner, K. Krapek, C. Poon, P. Sayre, J. Strangfeld, Jr.,  J. Unruh

   (k) Legal Opinion and Consent:        Opinion and Consent of Thomas C. Castano, Esq., as to the legality of the    C-
                                         securities being registered.

   (n) Auditor Consent:                  Consent of PricewaterhouseCoopers LLP, Independent Registered    Public      C-
                                        Accounting Firm.