UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 33-37587
PRUCO LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
Arizona 22-1944557
- ------------------------------------ ---------------------------------
(State or other jurisdiction, (IRS Employer Identification No.)
incorporation or organization)
213 Washington Street, Newark, New Jersey 07102
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(201) 802-6000
----------------------------------------------------
(Registrant's Telephone Number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
State the aggregate market value of the voting stock held by
non-affiliates of the registrant: NONE
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 31, 1996. Common stock, par value of
$10 per share: 250,000 shares outstanding
PRUCO LIFE INSURANCE COMPANY
(Registrant)
INDEX
-----
Item Page
No. No.
- ---- ----
Cover Page -
Index 2
PART I
1. Business 3
2. Properties 3
3. Legal Proceedings 3
4. Submission of Matters to a Vote of Security
Holders 3
PART II
5. Market for the Registrant's Interests and Related
Security Holder Matters 4
6. Selected Financial Data 4
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
8. Financial Statements and Supplementary Data 8
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 8
PART III
10. Directors and Executive Officers of Pruco Life 9
11. Executive Compensation 11
12. Security Ownership of Certain Beneficial Owners
and Management 11
13. Certain Relationships and Related Transactions 11
PART IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 12
Exhibit Index 12
Signatures 14
2
PART I
ITEM 1. BUSINESS
Pruco Life Insurance Company (the Company) is a stock life insurance company,
organized in 1971 under the laws of the state of Arizona. The Company
markets individual life insurance and single pay deferred annuities (the
Contracts) in the District of Columbia, Guam, and in all states except New
York. In addition, the Company markets individual life insurance through its
branch office in Taiwan. The Company has two subsidiaries, Pruco Life
Insurance Company of New Jersey (PLNJ) and The Prudential Life Insurance
Company of Arizona (PLICA). PLNJ is a stock life insurance company organized
in 1982 under the laws of the state of New Jersey. It is licensed to sell
individual life insurance and single pay deferred annuities only in the
states of New Jersey and New York. PLICA is a stock life insurance company
organized in 1989 under the laws of the state of Arizona. PLICA had no new
business sales in 1995 and at this time will not be issuing new business.
The Company is a wholly owned subsidiary of The Prudential Insurance Company
of America (The Prudential), a mutual insurance company founded in 1875 under
the laws of the state of New Jersey. The Prudential had approximately $219
billion of total consolidated assets at the end of 1995. As of December 31,
1995, it had invested over $442 million in the Company in connection with the
Company's organization and operation. The Prudential intends from time to
time to make additional capital contributions to the Company as needed to
enable it to meet its reserve requirements and expenses in connection with
its business. Generally, The Prudential is under no obligation to make such
contributions and its assets do not back the benefits payable under the
Contracts.
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other
entities engaged in marketing insurance products. There are approximately
1,900 stock, mutual and other types of insurers in the life insurance
business in the United States.
In a reorganization of the parent's Individual Insurance Department,
effective January 1, 1993, the corporate staff of the Company was absorbed by
the parent. The costs associated with these employees, which were previously
borne by the Company, are now charged to the Company under service and lease
agreements with the parent.
ITEM 2. PROPERTIES
Not applicable.
ITEM 3. LEGAL PROCEEDINGS
Pruco Life is not involved in any litigation that is expected to have a
material effect.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No actions were taken during the fourth quarter of 1995. However, in an
action in lieu of an annual meeting, The Prudential Insurance Company of
America, the sole shareholder of Pruco Life, elected the following Directors
of Pruco Life, effective as of September 20, 1995:
Esther H. Milnes
Robert P. Hill
E. Michael Caulfield
Garnett L. Keith, Jr.
Ira J. Kleinman
I. Edward Price
William F. Yelverton
3
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S INTERESTS AND RELATED SECURITY HOLDER
MATTERS
Pruco Life is a wholly-owned subsidiary of The Prudential. There is no
public market for Pruco Life's common stock.
ITEM 6. SELECTED FINANCIAL DATA
Pruco Life Insurance Company and Subsidiaries
For The Years Ended December 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
------------ ---------- ---------- ---------- ---------
Revenues
Premiums, annuity fund deposits
And other revenue $ 615,379 $ 603,864 $ 591,660 $ 541,248 521,590
Net investment income 250,386 245,977 260,939 274,037 285,565
------------ ---------- ---------- ---------- ---------
Total revenues 865,765 849,841 852,599 815,285 807,155
------------ ---------- ---------- ---------- ---------
Benefits and expenses
Current and future benefits and
Claims 512,988 559,658 534,354 478,148 501,454
Other expenses 144,563 149,478 157,557 129,701 126,201
------------ ---------- ---------- ---------- ---------
Total benefits and expenses 657,551 709,136 691,911 607,849 627,655
------------ ---------- ---------- ---------- ---------
Income before provision in lieu of
federal income tax and cumulative effect
of a change in accounting principle 208,214 140,705 160,688 207,436 179,500
Provision in lieu of federal
income tax 50,013 87,750 83,640 96,578 75,242
------------ ---------- ---------- ---------- ---------
Net income before cumulative effect of
a change in accounting principle $ 158,201 52,955 77,048 110,858 104,258
------------ ---------- ---------- ---------- ---------
Cumulative effect on prior years
(To December 31, 1990) of change
in reserve basis $ - - - - 140,424
------------ ---------- ---------- ---------- ---------
Net income $ 158,201 $ 52,955 $ 77,048 $110,858 $244,682
------------ ---------- ---------- ---------- ---------
------------ ---------- ---------- ---------- ---------
Assets $7,817,436 $7,090,802 $7,172,104 $6,709,958 $6,369,288
------------ ---------- ---------- ---------- ---------
4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Pruco Life Insurance Company consists of Pruco Life Insurance Company, Pruco
Life Insurance Company of New Jersey and The Prudential Life Insurance
Company of Arizona (collectively, the Company). The Company markets
individual life insurance and single pay deferred annuities primarily through
the Prudential's sales force. The Company held $7.8 billion in assets at
December 31, 1995, $4.3 billion of which were held in Separate Accounts under
variable life insurance policies and variable annuity contracts. The
remaining assets were held in the general account for investment primarily in
bonds, short-term investments and mortgage loans.
Because of the large number of stock and mutual life insurance companies and
other entities engaged in marketing insurance products, the Company is
engaged in a business that is highly competitive. During the past several
years, the insurance industry has suffered setbacks both financially and in
public relations. The Company, however, remains sound.
1. RESULTS OF OPERATIONS
(a) 1995 versus 1994
Net income for 1995 was $158 million, representing a $105 million increase
from the same period in 1994.
Premiums and annuity considerations decreased $42 million in 1995, from $612
million for the year ended December 31, 1994, to $570 million for the same
period in 1995. This decrease is primarily due to the decline in first year
premiums for certain life insurance products.
Net investment income increased $4 million for the twelve months ended
December 31, 1995, from the same period in 1994. This is primarily due to
an increase in income generated by policy loans.
The Company had net realized investment gains of $4 million during 1995
compared to investment losses of $21 million during 1994. This increase is
due to our newly structured portfolio aligned more closely with the company's
liability duration and reduced the portfolio's interest rate risk. Following
statutory Interest Maintenance Reserve (IMR) guidelines, net realized
investment gains of $9 million were deferred for the period ended December 31,
1995. In comparison, $20 million of net realized investment losses were
deferred for the period ending December 31, 1994. Amortized into net
investment income were $4 million and $5 million of IMR for the twelve month
period ended December 31, 1995 and 1994, respectively.
Other income increased $28 million for the year ended December 31, 1995 from
the year ended December 31,1994. This increase was partially due to a
reclass of a special provision for non-guaranteed policyholder credits. In
addition, the company share of separate account improved from a loss of $4
million for the year ended December 31, 1994 to a gain of $7 million for the
same period in 1995.
Current and future benefits and claims decreased $47 million for the twelve
months ended December 31, 1995, from the same period in 1994. This was
driven by the decline in premiums during 1995, which reduces the level of
reserves needed to be held.
Total expenses for the year ended December 31, 1995 decreased by $5 million
from the same period in 1994. This is primarily due to a decrease in
commission expenses of $4 million, which correlates with the decrease in sales.
Provision in lieu of federal income taxes decreased $38 million for the year
ended December 31, 1995, as compared to December 31, 1994. Although
operating income for 1995 was higher than the previous year, provision in
lieu of federal income taxes benefited due to federal income taxes applicable
to prior years.
5
(b) 1994 versus 1993
Net income for 1994 was $53 million, representing a $24 million decrease from
the same period in 1993.
Premiums and annuity considerations increased $48 million in 1994, from $564
million for the year ended December 31, 1993, to $612 million for the same
period in 1994. An increase in unscheduled premium payments on two
individual life insurance products together with an increase in renewal
premiums, driven by these two products, account for this increase.
Net investment income decreased $15 million for the twelve months ended
December 31, 1994, from the same period in 1993. Reduced yields on the
Company's fixed rate investment portfolio lead to reduced net investment
income. In addition, net cash outflows to meet policyholder obligations
resulted in a decrease in invested assets which, in turn, contributed to the
lower investment income.
The Company had net realized investment losses of $21 million during 1994
compared to investment gains of $9 million during 1993. Sales of Corporate
and Mortgage-Backed Securities during the twelve months of 1994 generated
realized losses attributable to the increase in interest rates during this
period. However, the expectation is that the newly structured portfolio will
align more closely with the company's liability duration and reduce the
portfolio's interest rate risk. Following statutory Interest Maintenance
Reserve (IMR) guidelines, net realized investment losses of $20 million were
deferred for the period ended December 31, 1994. In comparison, $19 million
of net realized investment gains were deferred for the period ended December
31, 1993. Amortized into net investment income were $5 million and $7
million of IMR for the twelve month period ended December 31, 1994, and 1993,
respectively.
Current and future benefits and claims increased $25 million for the twelve
months ended December 31, 1994, from the same period in 1993. An increase in
benefits paid during 1994 as compared to 1993 combined with high surrender
benefits, which can be attributed to contract maturities of annuity products
as the Company's inforce ages, was more than offset by an increase in
reserves resulting from the 1994 increase in premiums and annuity
considerations.
Total expenses for the year ended December 31, 1994 decreased by $8 million
from the same period in 1993. General, administrative, and other expenses
for the year ended December 31, 1994, decreased $9.8 million due to the
decrease in allocation of costs from The Prudential. Allocations are
primarily based on average compensation over a period of recent years and
inforce. The average compensation and inforce amounts used in 1994 decreased
from 1993 by 48% and 5%, respectively. This can be attributable to a decline
in the sales of certain life insurance products between periods of
allocation. Offsetting this decrease is an increase in commission expense of
$1.8 million from the same period in 1993, which is consistent with the
increase in first year premiums.
Provision in lieu of federal income taxes increased $4 million for the year
ended December 31, 1994, as compared to December 31, 1993. Although
operating income for 1994 was lower than the previous year, provision in lieu
of federal income taxes increased due to federal income taxes applicable to
prior years.
6
2. LIQUIDITY
For an insurance company, cash needs, for the purpose of paying current
benefits, making policy loans, and paying expenses, are met primarily from
premiums and investment income. Benefit expenses incurred in 1995, 1994 and
1993 were respectively, $684 million, $547 million and $584 million. Cash
flows are anticipated to be ample to meet the Company's liquidity needs for
the foreseeable future.
3. INVESTMENTS
The Company maintains a well diversified portfolio consisting of fixed as
well as equity investments. Of the Company's total assets of $7.8 billion as
of December 31, 1995, 32.12% was invested in fixed maturities, 0.05% in
equity securities, 2.92% in short-term investments, 0.82% in mortgage loans,
0.05% in real estate, 54.82% in separate account assets and the remaining
9.22% in other assets.
Fixed Maturities. As of December 31, 1995 and 1994, the Company's
investments in fixed maturities, which are primarily carried at amortized
cost, were $2.5 billion and $2.6 billion, respectively. Included in fixed
maturities are securities classified by the National Association of Insurance
Commissioners (NAIC) as being in the lowest three rating categories. The
lowest three NAIC categories represent, for the most part, high-yield
securities. These approximate 1.0% of the Company's assets at December 31,
1995 and 1.5% at December 31, 1994.
Mortgage Loans. As of December 31, 1995 and 1994, the Company's investments
in mortgage loans were $64 million and $72 million, respectively. Mortgage
loans are carried at the lower of unpaid principal balance or fair value of
the underlying property. The decrease in mortgage loans is due to the
payment of one loan totaling $6.0 million. Currently, the Company has two
loans in the amount of $8.4 million in the process of foreclosure and two
loans with restructured terms in the amount of $6.9 million.
Real Estate. As of December 31, 1995 and 1994, the Company's investment in
real estate was $4 million and $7 million, respectively. Real estate is
carried at the lower of cost or fair value less disposition costs. The
Company sold one property during the first quarter of 1995.
4. EMERGING ACCOUNTING ISSUES
The accompanying audited financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP), which are
considered statutory accounting practices for a wholly owned stock subsidiary
of a mutual life insurance company. The Financial Accounting Standards Board
(the "FASB") issued Interpretation No. 40, "Applicability of Generally
Accepted Accounting Principles to Mutual Life Insurance and Other
Enterprises", which as amended, is effective for fiscal years beginning after
December 15, 1995. Interpretation No. 40 changes the current practice of
mutual life insurance companies, with respect to utilizing statutory basis
financial statements for general purposes, in not allowing such financial
statements to be referred to as having been prepared in accordance with GAAP.
Interpretation No. 40 requires GAAP financial statements of mutual life
insurance companies to apply all GAAP pronouncements, unless specifically
exempted. Implementation of Interpretation No. 40 will require significant
effort and judgement. The company is assessing the impact of Interpretation
No. 40 on its consolidated financial statements, such effort has not been
completed and management currently believes surplus will increase
significantly.
7
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required with respect to this Item 8 regarding Financial
Statements and Supplementary Data is set forth commencing on page F-1 hereof.
See Index to Financial Statements and Schedules elsewhere in this Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 12, 1996, Deloitte & Touche LLP was dismissed as the independent
accountants of the Registrant.
No disagreements exist.
8
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PRUCO LIFE
Name Position Age
- ---- -------- ---
Robert P. Hill Chairman of the Board
and Director 55
I. Edward Price Vice Chairman of the Board 53
and Director
Esther H. Milnes President and Director 45
Beverly R. Barney Senior Vice President 48
Robert W. Earl Senior Vice President 44
Richard F. Lambert Senior Vice President, Chief Actuary 39
Michael R. Shapiro Senior Vice President 48
Lawrence J. Sundram Senior Vice President 49
Stephen P. Tooley Vice President, Comptroller 43
and Chief Accounting Officer
E. Michael Caulfield Director 49
Garnett L. Keith, Jr. Director 60
Ira J. Kleinman Director 48
William F. Yelverton Director 54
- ------------------------------------------------------------------------------
Robert P. Hill, age 55, has been Executive Vice President of The Prudential
since 1990. Prior to 1990, he was Senior Vice President and Actuary of The
Prudential.
I. Edward Price, age 53, has been Senior Vice President and Actuary of
Prudential Individual Insurance since 1995. From 1994 to 1995, he was Chief
Executive Officer of Prudential International Insurance. From 1993 to 1994
he was President of Prudential International Insurance. Prior to 1993, he was
Senior Vice President and Company Actuary of The Prudential.
Esther H. Milnes, age 45, has been Vice President and Actuary of Prudential
Individual Insurance Group since 1996. From 1993 to 1995, she was Senior Vice
President and Chief Actuary of Prudential Insurance and Financial Services.
Prior to 1993, she was Vice President and Associate Actuary of The Prudential.
Beverly R. Barney, age 48, has been Vice President and Re-Engineering Officer
of Prudential Insurance and Financial Services since 1995. From 1993 to 1995,
she was Senior Vice President and Associate Actuary of Prudential Direct.
Prior to 1993, she was Senior Vice President and Actuary of Pruco Life.
Robert W. Earl, age 44, has been Managing Director of the Houston
Financial Services Office for Prudential Preferred Financial Services since
1994. From 1993 to 1994 he was Vice President of Strategic Initiatives
at Prudential Preferred Financial Services. Prior to 1993, he was Vice
President of Regional Marketing for The Prudential.
9
Richard F. Lambert, age 39, has been Vice President and Actuary of Prudential
Individual Insurance Group since 1996. From 1994 to 1995, he was Vice
President and Chief Actuary of Prudential Preferred Financial Services. From
1993 to 1994, he was Vice President and Actuary of Prudential Preferred
Financial Services. Prior to 1993, he was Vice President and Associate
Actuary of The Prudential.
Michael R. Shapiro, age 48, has been Senior Vice President of Prudential
Select Marketing since 1987.
Lawrence J. Sundram, age 49, has been Vice President of Marketing of
Prudential Individual Insurance Group since 1996. From 1994 to 1996, he was
Senior Vice President of Property and Casualty at Prudential Insurance and
Financial Services. From 1993 to 1994, he was Vice President of Prudential
Insurance and Financial Services. Prior to 1993, he was Vice President of
District Agencies Marketing for The Prudential.
Stephen P. Tooley, age 43, has been Vice President, Product Performance of
Prudential Individual Insurance Group since 1996. From 1993 to 1995, he was
Vice President and Comptroller of Prudential Insurance and Financial
Services. Prior to 1993, he was Director of Financial Analysis for The
Prudential.
E. Michael Caulfield, age 49, has been Chief Executive Officer of The
Prudential Money Management Group since 1995. From 1993 to 1995, he was
President of Prudential Preferred Financial Services. From 1992 to 1993, he
was President of Prudential Property and Casualty Insurance Company. Prior to
1992, he was President of Investment Services of The Prudential.
Garnett L. Keith, Jr., age 60, has been Vice Chairman of The Prudential
since 1984.
Ira J. Kleinman, age 48, has been Chief Marketing and Product Development
Officer of Prudential Individual Insurance Group since 1995. From 1993 to
1995, he was President of Prudential Select. From 1992 to 1993, he was Senior
Vice President of The Prudential. Prior to 1992, he was Vice President of
The Prudential.
William F. Yelverton, age 54, has been Chief Executive Officer of The
Prudential Individual Insurance Group since 1995. Prior to 1995, he was
Chief Executive Officer of New York Life Worldwide.
10
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the portion of compensation, paid by The
Prudential, to each named executive officer for services provided to the
Company. The amounts have been determined based on each individual's time
devoted to the duties as an executive of Pruco Life and its subsidiaries
during 1995.
NAME & ALLOCATED CASH
PRINCIPAL COMPENSATION
POSITION YEAR $
- -------- ---- --------------
Esther H. Milnes 1995 $ 17,879
President 1994 $ 14,250
1993 $ 9,846
Beverly R. Barney 1995 $ 9,771
Senior Vice President 1994 $ 0
1993 $ 126,142
Helen M. Galt 1995 $ ------
President 1994 $ ------
1993* $ 13,382
<FN>
* Resigned position as of July, 1993.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
11
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statements and Schedules of registrant
and its subsidiaries are listed in the accompanying "Index to Financial
Statements and Schedules" on page F-2 hereof and are filed as part
of this Report.
(a)(3) EXHIBITS
REGULATION S-K
2. Not applicable.
3. Documents Incorporated by Reference
(I) The Articles of Incorporation of Pruco Life, as amended
October 19, 1993, are incorporated herein by reference to Exhibit
14 (3) of the Pruco Life Insurance Company Form 10-K for the
fiscal year ended December 31, 1993; (ii) Bylaws of Pruco Life,
as amended June 14, 1983, are incorporated herein by reference to
Post-Effective Amendment No. 13 to Form S-6, Registration No.
2-89558, filed March 2, 1989 on behalf of the Pruco Life Variable
Appreciable Account.
4. Exhibits
Modified Guaranteed Annuity Contract, incorporated by reference
to Registrant's Form S-1 Registration Statement, Registration No.
33-37587, filed November 2, 1990.
Market-Value Adjustment Annuity Contract, incorporated by
reference to Registrant's Form S-1 Registration Statement,
Registration No. 33-61143, filed November 17, 1995.
9. None
10. None.
11. Not applicable.
12. Not applicable.
13. Not applicable.
16. Not applicable.
18. None.
21. Pruco Life Insurance Company of New Jersey, a stock life
insurance company organized under the laws of the state of New
Jersey, is a wholly owned subsidiary of Pruco Life. It is
licensed to sell life insurance and annuities only in the States
of New Jersey and New York.
The Prudential Life Insurance Company of Arizona, a stock life
insurance company organized under the laws of the State of
Arizona, is a wholly owned subsidiary of Pruco Life. It is
licensed to sell life insurance and annuities only in the State
of Arizona.
22. None.
23. Not applicable.
12
24. Powers of Attorney, incorporated by reference to Form S-6,
Registration No. 33-38271, filed January 8, 1991, on behalf of
the Pruco Life Variable Universal Account.
27. Exhibit 27, Financial Data Schedule appended to this form in
accordance with EDGAR instructions.
28. Not applicable.
(b) Reports on 8-K
No report on Form 8-K was filed during the last fiscal year ended
December 31, 1995. On March 19, 1996 a report on Form 8-K was
filed with the Securities and Exchange Commission.
99. None.
13
SIGNATURES
Pursuant to the requirements of Section 13, or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf of the undersigned, thereunto duly authorized.
. . . . . . . . . PRUCO LIFE INSURANCE COMPANY
(Registrant)
Date: March 29, 1996 By: /s/ Esther H. Milnes
----------------------------- ---------------------------
Esther H. Milnes
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
* ------------------- Vice Chairman of the Board March 29, 1996
I. Edward Price and Director
/s/ Esther H. Milnes
- --------------------- President and Director March 29, 1996
Esther H. Milnes
/s/ Stephen P. Tooley
- ---------------------- Vice President and Comptroller March 29, 1996
Stephen P. Tooley and Chief Accounting Officer
By: *
/s/ Thomas Loftus
------------------------
Thomas Loftus
(Attorney-in-Fact)
14
SIGNATURE TITLE DATE
- --------- ----- ----
* ------------------- Director March 29, 1996
E. Michael Caulfield
* ------------------- Director March 29, 1996
Garnett L. Keith, Jr.
* ------------------- Director March 29, 1996
Ira J. Kleinman
* ------------------- Director March 29, 1996
William F. Yelverton
By: *
/s/ Thomas Loftus
------------------------
Thomas Loftus
(Attorney-in-Fact)
15
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
F-1
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS and FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SCHEDULES PAGE
A. PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT F-3
CONSOLIDATED FINANCIAL STATEMENTS:
STATEMENTS OF FINANCIAL POSITION - DECEMBER 31, 1995 AND
DECEMBER 31, 1994 F-4
STATEMENTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1995,
1994 AND 1993 F-5
STATEMENTS OF STOCKHOLDER'S EQUITY - YEARS ENDED DECEMBER 31,
1995, 1994 AND 1993 F-6
STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31, 1995,
1994 AND 1993 F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993 F-8
SCHEDULES:
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS
IN AFFILIATES - DECEMBER 31, 1995 F-20
SCHEDULE VI - SCHEDULE OF REINSURANCE - FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993 F-21
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Pruco Life Insurance Company
Newark, New Jersey
We have audited the accompanying consolidated statements of financial
position of Pruco Life Insurance Company and Subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholder's equity, and cash flows for each of the three years in the
period ended December 31, 1995. Our audits also included the financial
statement schedules listed in the Index at Item 14. These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Pruco Life Insurance Company and
subsidiaries as of December 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relations to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
Parsippany, New Jersey
March 15, 1996
F-3
CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31,
1995 1994
-------- --------
($000's)
ASSETS
Fixed maturities (market value $2,598,439
and $2,596,172)....................... $2,510,783 $2,647,315
Equity securities (cost$5,317 and $5,434) 4,009 3,326
Mortgage loans........................... 64,464 71,919
Investment in real estate................ 4,059 7,189
Policy loans............................. 569,273 493,862
Other long-term investments.............. 4,159 4,044
Short-term investments................... 228,016 191,455
---------- ----------
Total Investments..................... 3,384,763 3,419,110
Cash..................................... 41,435 27,780
Accrued investment income................ 59,862 59,382
Premiums due and deferred................ 19,521 16,821
Receivable from affiliates............... 8,275 7,517
Federal income taxes-from affiliate...... 8,875 23,306
Other assets............................. 9,436 25,102
Assets held in Separate Accounts......... 4,285,269 3,511,784
---------- ----------
TOTAL ASSETS.................................. $7,817,436 $7,090,802
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Policy liabilities and insurance reserves:
Future policy benefits and claims..... $2,606,856 $2,767,552
Other policy claims and benefits payable 13,822 15,184
Interest Maintenance Reserve (IMR).... 27,282 21,802
Payable to affiliates.................... 41,584 30,257
Other liabilities........................ 52,865 131,695
Asset Valuation Reserve (AVR)............ 37,268 23,690
Liabilities related to Separate Accounts 4,208,737 3,424,535
---------- ----------
TOTAL LIABILITIES 6,988,414 6,414,715
---------- ----------
STOCKHOLDER'S EQUITY:
Common Stock, $10 par value; authorized,
1,000,000 shares; issued and outstanding,
250,000 shares........................ 2,500 2,500
Paid-in capital.......................... 439,582 439,582
Unassigned surplus....................... 386,940 234,005
---------- ----------
TOTAL STOCKHOLDER'S EQUITY..................... 829,022 676,087
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..... $7,817,436 $7,090,802
---------- ----------
---------- ----------
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-4
CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED
DECEMBER 31,
1995 1994 1993
-------- -------- --------
($000's)
REVENUE
Premiums and annuity considerations....... $ 570,440 $ 611,820 $563,900
Net investment income..................... 250,386 245,977 260,939
Net realized investment gains/(losses).... 3,952 (21,215) 8,878
Other income.............................. 40,987 13,259 18,882
--------- --------- --------
TOTAL REVENUE................................... 865,765 849,841 852,599
--------- --------- --------
BENEFITS AND EXPENSES
Current and future benefits and claims.... 512,988 559,658 534,354
Commission expenses....................... 25,755 30,169 28,386
General, administrative and other expenses 118,808 119,309 129,171
--------- --------- --------
TOTAL BENEFITS AND EXPENSES..................... 657,551 709,136 691,911
--------- --------- --------
Income before provision in lieu of federal
income tax.............................. 208,214 140,705 160,688
Provision in lieu of federal
income tax.............................. (50,013) (87,750) (83,640)
--------- --------- --------
NET INCOME...................................... $158,201 $ 52,955 $ 77,048
--------- --------- --------
--------- --------- --------
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-5
CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED
DECEMBER 31,
1995 1994 1993
----------- ----------- -----------
($000's)
COMMON STOCK
Balance, beginning of year...................... $ 2,500 $ 2,500 $ 2,500
Issued during year.............................. - - -
-------- -------- --------
Balance, end of year............................ 2,500 2,500 2,500
-------- -------- --------
PAID-IN CAPITAL
Balance, beginning of year...................... 439,582 439,582 439,582
Paid-in during year............................. - - -
-------- -------- --------
Balance, end of year 439,582 439,582 439,582
-------- -------- --------
UNASSIGNED SURPLUS
Balance, beginning of year...................... 234,005 176,711 162,530
Net income...................................... 158,201 52,955 77,048
Net unrealized investment gains/(losses)........ 8,761 5,814 (9,351)
(Increase) decrease in non-admitted assets...... (449) (477) 575
(Increase) decrease in AVR...................... (13,578) (998) 5,909
Dividends to stockholder........................ - - (60,000)
-------- -------- --------
Balance, end of year............................ 386,940 234,005 176,711
-------- -------- --------
TOTAL STOCKHOLDER'S EQUITY........................... $829,022 $676,087 $618,793
-------- -------- --------
-------- -------- --------
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-6
CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
DECEMBER 31,
1995 1994 1993
----------- ----------- -----------
($000's)
CASH FLOW FROM OPERATING ACTIVITIES
Net income............................... $ 158,201 $ 52,955 $ 77,048
Adjustments to reconcile net income
to net cash from operations:
Increase/(Decrease) in policy
liabilities and insurance reserves..... (162,058) (143,153) (124,602)
Net decrease in Separate Accounts........ 10,717 5,674 12,173
Net realized investment (gains)/losses... (3,952) 21,215 (8,878)
Depreciation, amortization and
Other non-cash items................... (2,854) 314 1,907
(Increase)/decrease in operating assets:
Policy loans........................... (75,411) (73,591) (71,472)
Notes receivable from affiliates....... - 50,000 9,000
Interest receivable from affiliates.... - 23 420
Accrued investment income.............. (480) (2,597) 880
Premiums due and deferred.............. (2,700) (252) (880)
Receivable from affiliates............. (758) (637) 1,970
Federal income taxes-from affiliate.... 14,467 (19,155) 6,879
Other assets........................... 15,666 (9,273) (9,481)
Increase/(decrease) in operating liabilities:
Payable to affiliates.................. 11,327 (24,029) 13,260
Federal income taxes-to affiliate...... (36) - -
Other liabilities...................... (78,830) 27,710 34,632
---------- ----------- ---------
CASH FLOW FROM (USED FOR) OPERATING ACTIVITIES (116,701) (114,796) (57,144)
---------- ----------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from the sale/maturity of:
Fixed maturities....................... 2,031,587 2,710,424 1,687,992
Equity securities...................... 5,557 1,909 4,032
Mortgage loans......................... 7,395 10,821 21,691
Other long-term investments............ 1,559 607 520
Investment in real estate.............. 2,925 8,676 -
Payments for the purchase of:
Fixed maturities....................... (1,876,232) (2,561,081) (1,483,234)
Equity securities...................... (4,279) (2,436) (3,068)
Mortgage loans......................... - (35,276) (918)
Other long-term investments............ (1,674) (1,584) (84)
Investment in real estate.............. - - (20)
Net proceeds (payments) of short-term
investments............................ (36,482) 9,845 (116,735)
---------- ----------- ---------
Cash Flow From Investing Activities............ 130,356 141,905 110,176
---------- ----------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Dividends paid........................... - - (60,000)
---------- ----------- ---------
Net increase (decrease) in Cash.......... 13,655 27,109 (6,968)
Cash, beginning of year.................. 27,780 671 7,639
---------- ----------- ---------
CASH, END OF YEAR.............................. $ 41,435 $ 27,780 $ 671
---------- ----------- ---------
---------- ----------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash financing: Investment in real estate
from foreclosed mortgage loans......... $ - $ 4,139 $ 7,300
---------- ----------- ---------
---------- ----------- ---------
Cash paid in lieu of income taxes........ $ 53,107 $ 73,903 $ 76,760
---------- ----------- ---------
---------- ----------- ---------
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES
A. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Pruco Life Insurance Company (Pruco Life), a stock life insurance
company, and its subsidiaries (collectively, the Company). Pruco Life is a
wholly-owned subsidiary of The Prudential Insurance Company of America (The
Prudential), a mutual life insurance company. The Company markets
individual life insurance and single pay deferred annuities primarily
through The Prudential's sales force. All significant intercompany
balances and transactions have been eliminated in consolidation.
B. Basis of Presentation
The consolidated financial statements are presented in conformity with
generally accepted accounting principles ("GAAP"), which for mutual life
insurance companies and their insurance subsidiaries are statutory
accounting practices prescribed or permitted by the National Association
of Insurance Commissioners ("NAIC") and their respective domiciliary home
state insurance departments. Prescribed statutory accounting practices
include publications of the NAIC, state laws, regulations and general
administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed.
The Company, with permission from the Arizona Department of Insurance ("the
Department"), prepares an Annual Report that differs from the Annual
Statement filed with the Department in that subsidiaries are consolidated
and certain financial statement captions are presented differently.
Certain reclassifications have been made to the 1994 and 1993 financial
statements and footnotes to conform to the 1995 presentation. Included in
the Statement of Operations are certain items which, under statutory
accounting practices, are charged or credited directly to surplus.
Management has used estimates and assumptions in the preparation of the
financial statements that affect the reported amounts of assets,
liabilities, revenue and expenses. Actual results could differ from those
estimates.
F-8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The following is a reconciliation of Pruco Life's Statutory Net Income with net
income per the consolidated financial statements.
YEARS ENDED
DECEMBER 31,
1995 1994 1993
------ ------ ------
($000's)
Pruco Life Statutory Net Income including net
gains and losses on sales of investments....... $113,565 $ 49,374 $ 79,405
Adjustments to reconcile to net income
As follows:
Dividends from subsidiary...................... - - (26,000)
Change in General Account Reserve due to
changes in valuation basis................. 8,990 10,853 (2,331)
Provision for future assessments............... 367 377 588
Net gain from operations in Separate Accounts.. (9,775) 8,880 5,114
Gain/(Loss) due to income tax applicable
to other than current year................... 19,752 (33,001) -
Other.......................................... (510) (13) 67
Subsidiaries' Statutory Net Income............. 25,812 16,485 20,205
-------- -------- --------
Consolidated Net Income.......................... $158,201 $ 52,955 $ 77,048
-------- -------- --------
-------- -------- --------
C. FUTURE APPLICATION OF ACCOUNT STANDARDS
The Financial Accounting Standards Board (the "FASB") issued Interpretation
No. 40, "Applicability of Generally Accepted Accounting Principles to
Mutual Life Insurance and Other Enterprises," which, as amended, is
effective for fiscal years beginning after December 15, 1995.
Interpretation No. 40 changes the current practice of mutual life insurance
companies, with respect to utilizing statutory basis financial statements
for general purposes, in not allowing such financial statements to be
referred to as having been prepared in accordance with GAAP. Interpretation
No. 40 requires GAAP financial statements of mutual life insurance
companies to apply all GAAP pronouncements, unless specifically exempted.
Implementation of Interpretation No. 40 will require significant effort and
judgement. The company is assessing the impact of Interpretation No. 40 on
its consolidated financial statements, such effort has not been completed
and management currently believes surplus will increase significantly.
F-9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
D. SELECTED FINANCIAL DATA OF PRUCO LIFE
Pruco Life markets the Future Value Annuity Contract, and individual
deferred annuity contract. Only assets of Pruco Life, shown below, are
available to meet the guarantees under this annuity contract. The
following is the selected financial data of Pruco Life:
DECEMBER 31,
1995 1994
------ ------
($000's)
Assets:
Investments other than subsidiaries........ $2,736,259 $ 2,758,088
Investment in subsidiaries................. 198,601 169,816
Other assets............................... 132,185 135,778
Assets held in Separate Accounts........... 3,495,841 2,869,734
---------- -----------
Total Assets............................... $6,562,886 $ 5,933,416
---------- -----------
---------- -----------
Liabilities:
Policy liabilities and insurance reserves.. $2,187,632 $ 2,296,987
Other liabilities.......................... 115,115 163,322
Liabilities related to Separate Accounts... 3,431,117 2,797,020
---------- -----------
Total Liabilities.......................... $5,733,864 $ 5,257,329
---------- -----------
---------- -----------
YEARS ENDED
DECEMBER 31,
1995 1994 1993
-------- -------- --------
($000's)
Revenues................................... $ 717,990 $ 698,685 $ 716,402
Benefits, expenses and taxes............... 588,812 659,237 633,277
-------- -------- --------
Net Income................................. $ 129,178 $ 39,448 $ 83,125
-------- -------- --------
-------- -------- --------
E. INVESTMENTS
Fixed maturities, which include long-term bonds and redeemable preferred
stock, are stated primarily at amortized cost. Certain investments in this
category were non-income producing at December 31, 1995 and 1994. These
investments amounted to $29 million and $13 million, respectively.
Equity securities, which consist primarily of common stock, are carried at
market value which is based on quoted market prices, where available, or
prices provided by the National Association of Insurance Commissioners'
(NAIC) Securities Valuation Office (SVO).
Mortgage loans are carried at the lower of the fair value of the underlying
property or unpaid principal balance. At December 31, 1995, two loans were
in foreclosure in the amount of $8 million. At December 31, 1994, one loan
was in foreclosure in the amount of $6 million.
F-10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Policy loans are stated primarily at unpaid principal balances.
All the Company's real estate investments were acquired through foreclosure
during 1995 and 1994. These properties are carried at the lower of cost of
fair value less disposition costs. Fair value is considered to be the amount
that could reasonably be expected in a current transaction between willing
parties, other than in forced or liquidation sale. Depreciation on these
properties for the years ended December 31, 1995 and 1994 was $106 thousand
and $456 thousand, respectively.
Other long-term investments, which consist solely of limited partnerships,
are valued at the aggregate net equity in the partnerships. Certain
investments in this category were non-income producing at December 31, 1995.
These investments amounted to $300 thousand. There were no non-income
producing investments at December 31, 1994.
Short-term investments are stated at amortized cost, which approximates fair
value.
Realized investment gains and losses are reported based on specific
identification of the investments sold.
F. FUTURE POLICY BENEFITS, LOSSES AND CLAIMS
Reserves for individual life insurance are calculated using various methods,
interest rates and mortality tables which produce reserves that meet the
aggregate requirements of state laws and regulations. Approximately 7% of
individual life insurance reserves are determined using the net level premium
method, or by using the greater of a net level premium reserve or the policy
cash value. About 93% of individual life insurance reserves are calculated
according to the Commissioner's Reserve Valuation Method ("CRVM"), or methods
which compare CRVM reserves to policy cash values.
Reserves for deferred individual annuity contracts are determined using the
Commissioner's Annuity Reserve Valuation Method.
For life insurance and annuities, unpaid claims include estimates of both the
death benefits on reported claims and those which are incurred but not
reported.
Reserves for other deposit funds or other liabilities with life contingencies
reflect the contract deposit account or experience accumulation for the
contract and any purchased annuity reserves.
G. REVENUE RECOGNITION AND RELATED EXPENSES
Premium revenues are recognized as income over the premium paying period of
the related policies. Annuity considerations are recognized as revenue when
received. Expenses, including new business acquisition costs such as
commissions, are charged to operations as incurred.
H. ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE
The Asset Valuation Reserve (AVR) and the Interest Maintenance Reserve (IMR)
are required for life insurance companites under NAIC regulations. The AVR
is calculated based on a statutory formula and designed to mitigate the
effect of valuation and credit-related losses on unassigned surplus.
F-11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The components of AVR at December 31, 1995 and 1994 are as follows:
($000's)
Fixed Equity Real Estate
Maturities Mortgages Securities & Other Inv. Total
---------- --------- ---------- ------------ --------
Beginning of year 1994 - AVR $ 18,294 $ 3,699 $ 699 $ 0 $ 22,692
Additions 12,062 2,166 348 2,047 16,623
Deductions (10,454) (4,355) (314) (502) (15,625)
---------- --------- ---------- ------------ --------
End of Year 1994 - AVR $ 19,902 $ 1,510 $ 733 $1,545 $ 23,690
---------- --------- ---------- ------------ --------
---------- --------- ---------- ------------ --------
Beginning of Year 1995 - AVR $ 19,902 $ 1,510 $ 733 $1,545 $ 23,690
Additions 14,540 1,007 2,764 272 18,583
Deductions (1,832) (39) (2,627) (507) (5,005)
---------- --------- ---------- ------------ --------
End of Year 1995 - AVR $ 32,610 $ 2,478 $ 870 $1,310 $ 37,268
---------- --------- ---------- ------------ --------
---------- --------- ---------- ------------ --------
The IMR captures net realized capital gains and losses resulting from
changes in the general level of interest rates. These gains and losses are
amortized into investment income over the expected remaining life of the
investment sold. The IMR balance was $27.3 million and $21.8 million at
December 31, 1995 and 1994, respectively. "Net realized investment gains/
(losses)" of $9.2 million and $(19.9) million were deferred in 1995 and
1994, respectively. Amortized into "Net investment income" were $3.8
million and $4.8 million of IMR for the year ended December 31, 1995 and
1994, respectively.
I. FEDERAL INCOME TAXES
The Company is a member of a group of affiliated companies which join in
filing a consolidated federal tax return. Pursuant to a tax allocation
agreement, current tax liabilities are determined for individual companies
based upon their separate return basis taxable income. Members with
taxable income incur an amount in lieu of the separate return basis federal
tax. Members with a loss for tax purposes recognize a current benefit in
proportion to the amount of their losses utilized in computing consolidated
taxable income. Differences between estimated liabilities and actual
payments are included in the current year's operations as an adjustment to
the provision in lieu of income taxes. For the year 1993, the Company was
allocated a portion of the consolidated income tax liability attributable
to Section 809 of the Internal Revenue Code (commonly referred to as
"Equity Tax"). Since 1994, the Company has no longer been allocated this
Equity Tax.
Taxes on the Company are calculated under the Internal Revenue Code of 1986
which provides that life insurance companies be taxed on their gain from
operations after dividends to policyholders. In calculating this tax, the
Code requires the capitalization and amortization of policy acquisition
expenses.
F-12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
J. SEPARATE ACCOUNTS
Separate accounts represent funds for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the
policyholders, with the exception of the Pruco Life Modified Guaranteed
Annuity Account. The Pruco Life Modified Guaranteed Annuity Account is a
non-unitized separate account, which funds the Modified Guaranteed Annuity
Contract and the Market Value Adjustment Annuity Contract. Owners of the
Pruco Life Modified Guaranteed Annuity and the Market Value Adjustment
Annuity contracts do not participate in the investment gain or loss from
assets relating to such accounts. Such gain or loss is borne, in total, by
Pruco Life. Assets are carried at market value. Deposits to such accounts are
included in revenues with a corresponding liability increase included in
benefits and expenses. The assets of each account are legally segregated and
are not subject to claims that arise out of any other business of the
Company. Consequently, management believes that it is appropriate to combine
Separate Account policyholder net investment income and net realized and
unrealized capital gains/(losses)along with benefit payments and change in
reserves in "Current and future benefits and claims". Policyholder net
investment income and net realized and unrealized gains/(losses)for the years
ended December 31, 1995, 1994 and 1993 were $805 million, ($28) million and
$443 million, respectively.
2. FEDERAL INCOME TAXES
The following is a reconciliation of the Company's federal tax provision
as computed at the federal tax rate with that computed at the Company's
effective tax rate. The below amounts include federal income tax
applicable to prior years, where appropriate.
YEARS ENDED
DECEMBER 31,
1995 1994 1993
-------- -------- --------
($000's)
Income before provision in lieu of
federal income taxes..................... $208,214 $140,705 $160,688
Statutory tax rate......................... 35% 35% 35%
-------- -------- --------
Expected federal income taxes.............. $ 72,875 $ 49,247 $ 56,241
Tax effect of:
Statutory/tax policy reserve
difference......................... (14,524) 19,949 14,577
Timing differences in tax/book income
recognition on investments......... (6,980) 11,608 4,055
Timing differences in tax/book income
Recognition-other.................. (7,173) (6,816) (415)
Decrease/(Increase) in life insurance
premiums deferred and uncollected.. (953) (88) (308)
Capitalization of policy acquisition
expenses........................... 6,768 13,850 7,374
Allocated equity tax................. - - 2,116
-------- -------- --------
Federal income taxes..................... $ 50,013 $87,750 $83,640
-------- -------- --------
-------- -------- --------
Effective tax rate....................... 24% 62% 52%
-------- -------- --------
-------- -------- --------
F-13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
3. NET INVESTMENT INCOME
Net investment income consisted of:
YEARS ENDED
DECEMBER 31,
1995 1994 1993
--------- --------- --------
($000's)
Gross investment income
Fixed maturities.......................... $ 194,198 $ 196,909 $216,660
Equity securities......................... 104 14 22
Mortgage loans............................ 7,757 4,041 6,359
Investment in real estate................. 647 2,146 2,066
Policy loans.............................. 29,775 25,692 21,741
Short-term investments.................... 15,092 12,676 9,031
Other..................................... 3,949 5,075 3,945
--------- --------- --------
251,522 246,553 259,824
Investment expenses......................... (4,904) (5,421) (5,570)
--------- --------- --------
Net investment income before IMR............ 246,618 241,132 254,254
Amortization of Interest Maintenance Reserve 3,768 4,845 6,685
--------- --------- --------
Net investment income....................... $ 250,386 $ 245,977 $260,939
--------- --------- --------
--------- --------- --------
4. INVESTMENT AND INVESTMENT GAINS (LOSSES)
YEARS ENDED
DECEMBER 31,
1995 1994 1993
--------- --------- --------
($000's)
Realized Gains (Losses)
Fixed maturities.......................... $ 11,359 $ (38,180) $ 32,471
Equity securities......................... 2,020 503 607
Mortgage loans............................ (90) (4,581) (2,592)
Investment in real estate................. (99) 1,184 (2,004)
Other..................................... 10 (1) (411)
Tax effected amounts transferred to Interest
Maintenance Reserve....................... (9,248) 19,860 (19,193)
--------- --------- --------
Net realized investment gains............... $ 3,952 $ (21,215) $ 8,878
--------- --------- --------
--------- --------- --------
Unrealized Gains (Losses)
Fixed maturities.......................... 9,192 5,430 (9,380)
Equity securities......................... 799 (490) 260
Other..................................... (1,229) 874 (231)
--------- --------- --------
Net unrealized investment gains (losses) 8,762 5,814 (9,351)
Balance beginning of year................... (12,352) (18,166) (8,815)
--------- --------- --------
Balance end of year......................... $ (3,590)$ (12,352) $(18,166)
--------- --------- --------
--------- --------- --------
F-14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
EQUITY SECURITIES AT DECEMBER 31,
---------------------------------
($000's)
GROSS UNREALIZED
COST GAINS LOSSES FAIR MARKET VALUE
---- ----- ------ -----------------
1995 ........... $ 5,317 $ 581 $ 1,889 $4,009
1994 ........... 5,434 386 2,493 3,327
1993 ........... 4,405 742 2,359 2,788
FIXED MATURITIES
----------------
($000's)
AT DECEMBER 31,
INCREASE (DECREASE) IN
AMORTIZED MARKET DIFFERENCE BETWEEN MARKET VALUE
COST VALUE AND AMORTIZED COST DURING THE YEAR
---- ----- ----------------------------------
1995 .. $2,510,782 $2,598,439 $ 138,800
1994 .. 2,647,315 2,596,172 (167,494)
1993 .. 2,835,251 2,951,602 10,453
The amortized cost and estimated market value of fixed maturities at
December 31, 1995 and 1994 are as follows:
Gross Gross Estimated
1995 Amortized unrealized unrealized market
---- Cost Gains Losses value
($000's) ($000's) ($000's) ($000's)
U.S. Treasury securities
and obligations of
U.S. government corporations
and agencies . . . . . . . . . . $ 324,854 $ 6,829 $ 61 $ 331,622
Obligations of U.S. and
political subdivisions . . . . . _ _ - -
Debt securities issued by
foreign governments and
their agencies . . . . . . . . . 73,042 3,055 - 76,097
Corporate securities . . . . . . 1,943,696 73,489 3,974 2,013,211
Mortgage backed
securities . . . . . . . . . . . 169,190 8,717 398 177,509
---------- -------- ------- ----------
Total . . . . . . . . . . . . . $2,510,782 $ 92,090 $ 4,433 $2,598,439
---------- -------- ------- ----------
---------- -------- ------- ----------
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
Gross Gross Estimated
1994 Amortized unrealized unrealized market
---- Cost Gains Losses value
($000's) ($000's) ($000's) ($000's)
U.S. Treasury securities
and obligations of
U.S. government corporations
and agencies . . . . . . . . . . $ 409,678 $ 224 $ 20,259 $ 389,643
Obligations of U.S. and
political subdivisions . . . . . - - - -
Debt securities issued by
foreign governments and
their agencies . . . . . . . . . 86,026 2,075 2,310 85,791
Corporate securities . . . . . . 1,960,296 17,005 43,521 1,933,780
Mortgage-backed
securities . . . . . . . . . . . 191,315 1,429 5,786 186,958
---------- ---------- ---------- ----------
Total . . . . . . . . . . . . . $2,647,315 $ 20,733 $ 71,876 $2,596,172
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The amortized cost and estimated market value of fixed maturities at December
31, 1995 by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
($000's) ($000's)
----------- ----------
Due in one year or less . . . . . . . . . . . . $ 161,693 $ 163,629
Due after one year through five years . . . . . 1,500,204 1,549,264
Due after five years through ten years . . . . 529,845 556,294
Due after ten years . . . . . . . . . . . . . . 149,850 151,743
---------- ----------
2,341,592 2,420,930
Mortgage-backed securities . . . . . . . . . . 169,190 177,509
---------- ----------
Total . . . . . . . . . . . . . . . . . . . . $2,510,782 $2,598,439
---------- ----------
---------- ----------
Proceeds from the sale/maturity of fixed maturities during 1995, 1994, and
1993 were $2.0 billion, $2.7 billion and $1.7 billion, respectively. Gross
gains of $28.8 million, $16.8 million and $44.5 million and gross losses of
$17.5 million, $49.8 million and $12.0 million were realized on those sales
during 1995, 1994, and 1993, respectively.
The Company invests in both investment grade and non-investment grade
securities. The SVO of the NAIC rates fixed maturities held by insurers (SVO
rated securities accounted for approximately 87.2% and 93.6% of the Company's
total fixed maturities balances at both December 31, 1995 and 1994) for
regulatory purposes and groups investments into six categories ranging from
highest quality bonds to those in or near default. The lowest three NAIC
categories represent, for the most part, high-yield securities and are
defined by the NAIC as including any security with a public agency rating of
B+ or B1 or less.
Included in "fixed maturities" are securities that are classified by the NAIC
as being in the lowest three rating categories. These approximated 1.0% and
1.5% of the Company's assets at December 31, 1995 and 1994, respectively.
The amount by which the market value of these securities exceeded the
carrying value was approximately $1.8 million and $(0.9) million at December
31, 1995 and 1994, respectively.
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
5. RELATED PARTY TRANSACTIONS
A. SERVICE AGREEMENTS
The Company, The Prudential, Pruco Life of New Jersey and Pruco Securities
Corporation, an indirect wholly-owned subsidiary of The Prudential, operate
under service and lease agreements whereby services of officers and
employees, supplies, use of equipment and office space are provided. The
net cost of these services allocated to the Company were $98 million, $78
million, and $98 million for the years ended December 31, 1995, 1994,
and 1993, respectively.
In a reorganization of the parent's Individual Insurance Department,
effective January 1, 1993, the corporate staff of the Company was absorbed
by the parent. The costs associated with these employees, which were
previously borne by the Company, are now charged to the Company under the
service and lease agreements with the parent.
B. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company is a wholly-owned subsidiary of The Prudential which
sponsors several defined benefit pension plans that cover substanially
all of its employees. Benefits are generally based on career average
earnings and credited length of service. The Prudential's funding
policy is to contribute annually the amount necessary to satisfy the
Internal Revenue Service contribution guidelines.
No pension expense for contributions to the plan was allocated to the
Company in 1995, 1994 or 1993 because the plan was subject to the full
funding limitation under the Internal Revenue Code.
POSTRETIREMENT LIFE AND HEALTH BENEFITS
The Prudential also sponsors certain life insurance and health care
benefits for its retired employees. Substantially all employees may
become eligible to receive a benefit if they retire after age 55 with at
least 10 years of service. Postretirement benefits, with respect to The
Prudential, are recognized in accordance with the prescribed NAIC
policy. The Prudential elected to amortize its obligation over twenty
years. A provision for contributions to the postretirement fund is
included in the net cost of services allocated to the Company discussed
above for the years ended December 31, 1995, 1994, and 1993.
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
C. REINSURANCE
The Company currently has three reinsurance agreements in place with The
Prudential (the reinsurer). Specifically: reinsurance of a Group
Annuity Contract, whereby the reinsurer, in consideration for a single
premium payment by the Company, provides Reinsurance equal to 100% of
all payments due under the contact; and, two Yearly Renewable Term
agreement in which the Company may offer and the reinsurer may accept
reinsurance on any life in excess of the Company's maximum limit of
retention ($2.5 million). These agreements had no material effect on
net income for the years ended December 1995, 1994, and 1993.
D. OTHER TRANSACTIONS
The Company has issued approximately 375 variable universal life
contracts to The Prudential for the purpose of funding non-qualified
pension benefits for certain employees. Included in insurance premiums
and annuity considerations for the years ended December 31, 1995, 1994
and 1993 are respectively, $12 million, $12 million and $12 million,
which are attributable to these contracts.
6. DIVIDENDS
The Company is subject to Arizona law which limits the amount of
dividends that insurance companies can pay to stockholders. The maximum
dividend which may be paid in any 12 month period without notification
or approval is limited to the lesser of 10% of surplus as of December 31
of the preceding year or the net gain from operations of the preceding
calendar year. Cash dividends may only be paid out of surplus derived
from realized net profits. Based on these limitations and the Company's
surplus position at December 31, 1995, the Company would be permitted a
maximum of $83 million in dividend distributions in 1996, all of which
could be paid in cash, without approval from The State of Arizona
Department of Insurance.
7. FAIR VALUE INFORMATION
The fair value amounts have been determined by the Company using
available information and reasonable valuation methodologies for only
those accounts for which fair value disclosures are required.
Considerable judgement is necessarily applied in interpreting data to
develop the estimates of fair value. Accordingly, the estimates
presented may not be realized in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have
a material effect on the estimated fair values.
F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
The following methods and assumptions were used in calculating the fair
values. For all other financial instruments presented in the table, the
carrying value is a reasonable estimate of fair value.
FIXED MATURITIES. Fair values for fixed maturities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. Fair values for private placement securities
are estimated using a discounted cash flow model which considers the current
market spreads between the U.S. Treasury yield curve and corporate bond yield
curve adjusted for the type of issue, its current quality and its remaining
average life. The fair value of certain non-performing private placement
securities is based on amounts provided by state regulatory authorities.
EQUITY SECURITIES. Fair value is based on quoted market prices, where
available, or prices provided by state regulatory authorities.
MORTGAGE LOANS. The fair value of the commercial mortgage and agricultural
loan portfolio is primarily based upon the present value of the scheduled
cash flows discounted at the appropriate U.S. Treasury rate, adjusted for the
current market spread for a similar quality mortgage. For certain
non-performing and other loans, fair value is based upon the value of the
underlying collateral.
POLICY LOANS. The estimated fair value is calculated using a discounted cash
flow model based upon current U.S. Treasury rates and historical loan
repayments.
INVESTMENT-TYPE INSURANCE CONTRACT LIABILITIES. Fair values for the
Company's investment-type insurance contract liabilities are estimated using
a discounted cash flow model, based on interest rates currently being offered
for similar contracts.
The following table discloses the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1995 and 1994.
(000's) (000's)
1995 1994
----------------------- ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- --------- ---------- -----------
Financial Assets:
Fixed maturities $2,510,782 $2,598,438 $2,647,315 $2,596,172
Equity securities 4,009 4,036 3,326 3,326
Mortgage Loans 64,464 63,635 71,919 71,805
Policy Loans 569,273 577,975 493,862 448,617
Other Long term investments 4,159 4,159 4,044 4,044
Short term investments 228,016 228,016 191,455 191,455
Financial Liabilities:
Investment type
insurance contracts $ 536,963 $ 537,241 $ 794,691 $ 761,324
8. CONTINGENCIES
Several actions have been brought against the Company on behalf of those
persons who purchased life insurance policies based on complaints about sales
practices engaged in by The Prudential, the Company and agents appointed by
The Prudential and the Company. The Prudential has agreed to indemnify the
Company for any and all losses resulting from such litigation.
F-19
Pruco Life Insurance Company and Subsidiaries
Schedule I - Summary of Investments - Other than Investments in Affiliates
December 31, 1995
( $000's )
Amount
at which
shown on
Market the Balance
Type of investment Cost Value Sheet
-------------------------- -------------- ----------- ----------------
Fixed Maturities:
Bonds:
United States Government and government
agencies and authorities . . . . . . . . . . . . $ 494,044 $ 509,131 $ 494,044
Foreign governments . . . . . . . . . . . . . . . . 73,042 76,097 73,042
Public Utilities. . . . . . . . . . . . . . . . . . 172,358 180,019 172,358
All other corporate bonds . . . . . . . . . . . . . 1,771,222 1,833,075 1,771,222
Redeemable preferred stock. . . . . . . . . . . . . 117 117 117
-------------- ------------- --------------
Total fixed maturities . . . . . . . . . . . . 2,510,783 2,598,439 2,510,783
-------------- ------------- --------------
Equity Securities:
Common Stock. . . . . . . . . . . . . . . . . . . . . . 3,247 2,978 2,978
Nonredeemable preferred stock . . . . . . . . . . . . . 2,070 1,058 1,032
-------------- ------------- ---------------
Total equity securities . . . . . . . . . . . . . 5,317 4,036 4,009
Mortgage loans on real estate. . . . . . . . . . . . . . . 64,464 63,635 64,464
Real Estate. . . . . . . . . . . . . . . . . . . . . . . . 4,059 4,800 4,059
Policy Loans . . . . . . . . . . . . . . . . . . . . . . . 569,273 577,975 569,273
Other long-term investments. . . . . . . . . . . . . . . . 4,159 0 4,159
Short-term investments . . . . . . . . . . . . . . . . . . 228,016 0 228,016
-------------- ------------- ---------------
Total investments. . . . . . . . . . . . . . . . $ 3,386,070 $ 3,248,885 $ 3,384,763
============== ============= ===============
F-20
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE VI - SCHEDULE OF REINSURANCE
FOR YEAR ENDED DECEMBER 31, 1995
( $000's )
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
------------- ------------ ------------ ----------- ------------
Life insurance in force. . . . . . . $ 47,822,892 $ 822,619 $ 0 $47,000,273 N/A
------------- ------------ ------------ ----------- ------------
------------- ------------ ------------ ----------- ------------
Life insurance premiums and. . . . . $ 572,255 $ 2,268 $ 453 $ 570,440 0.080%
annuity considerations
------------- ------------ ------------ ----------- ------------
------------- ------------ ------------ ----------- ------------
F-21
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE VI - SCHEDULE OF REINSURANCE
FOR YEAR ENDED DECEMBER 31, 1994
( $000's )
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
------------- ------------ ------------ ----------- ------------
Life insurance in force. . . . . . . $48,003,675 $531,166 $ 0 $47,472,509 N/A
------------- ------------ ------------ ----------- ------------
------------- ------------ ------------ ----------- ------------
Life insurance premiums and
annuity considerations . . . . $ 613,237 $ 1,476 $ 59 $ 611,820 .010%
------------- ------------ ------------ ----------- ------------
------------- ------------ ------------ ----------- ------------
F-22
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE VI - SCHEDULE OF REINSURANCE
FOR YEAR ENDED DECEMBER 31, 1993
( $000's )
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
------------- ------------ ------------ ----------- ------------
Life insurance in force. . . . . . . $48,837,477 $ 290,386 $ 0 $48,547,091 N/A
------------- ------------ ------------ ----------- ------------
------------- ------------ ------------ ----------- ------------
Life insurance premiums and
annuity considerations . . . . . $ 564,747 $ 847 $ 0 $ 563,900 N/A
------------- ------------ ------------ ----------- ------------
------------- ------------ ------------ ----------- ------------
F-23