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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-37587
PRUCO LIFE INSURANCE COMPANY
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(Exact name of Registrant as specified in its charter)
Arizona 22-1944557
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(State or other jurisdiction, (IRS Employer
incorporation or organization) Identification No.)
213 Washington Street, Newark, New Jersey 07102
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(Address of principal executive offices) (Zip Code)
(201) 802-3780
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(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 September 30, 1997. Common stock, par value of
$10 per share: 250,000 shares outstanding
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PRUCO LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
--------
COVER PAGE 1
INDEX 2
PART I - FINANCIAL STATEMENTS
- -----------------------------
ITEM 1. PRUCO LIFE INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS:
STATEMENTS OF FINANCIAL POSITION - SEPTEMBER 30, 1997
(UNAUDITED) AND DECEMBER 31, 1996 3
STATEMENTS OF OPERATIONS (UNAUDITED) - THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 4
STATEMENTS OF CHANGES IN EQUITY - NINE MONTHS ENDED
SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996 5
STATEMENTS OF CASH FLOWS (UNAUDITED) - NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND 1996 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS 10
ITEM 2. CHANGE IN SECURITIES 10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 10
ITEM 5. OTHER INFORMATION 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURE PAGE 12
2
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(000'S)
ASSETS
Fixed maturities
Held to maturity $ 317,107 $ 405,731
Available for sale 2,306,363 2,236,817
Equity securities 4,738 3,748
Mortgage loans 25,780 46,915
Policy loans 687,627 639,782
Other long term investments 2,308 4,528
Short term investments 501,599 169,830
----------- -----------
Total invested assets 3,845,522 3,507,351
----------- -----------
Cash 84,392 73,766
Deferred policy acquisition costs 599,877 633,159
Accrued investment income 68,000 62,110
Federal income tax receivable -- 7,191
Reinsurance recoverable on unpaid losses 27,014 27,014
Other assets 50,646 29,084
Separate Account assets 7,294,440 5,336,851
----------- -----------
TOTAL ASSETS $11,969,891 $ 9,676,526
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Future policy benefits and other
policyholders' liabilities $ 591,472 $ 557,351
Policyholders' account balances 2,246,638 2,188,862
Deferred federal income tax payable 138,476 148,960
Federal income tax payable 29,502 --
Payable to affiliate 92,559 49,828
Cash collateral for loaned securities 81,479 --
Other liabilities 81,431 54,440
Separate Account liabilities 7,262,128 5,277,454
----------- -----------
TOTAL LIABILITIES 10,523,685 8,276,895
----------- -----------
CONTINGENCIES
STOCKHOLDER'S EQUITY
Common Stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding at
September 30, 1997 and December 31, 1996 2,500 2,500
Paid-in-capital 439,582 439,582
Foreign currency translation adjustment (1,376) (1,052)
Net unrealized investment gains 14,558 14,104
Retained earnings 990,942 944,497
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 1,446,206 1,399,631
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $11,969,891 $ 9,676,526
=========== ===========
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
1997 1996 1997 1996
-------- -------- --------- ---------
(000'S)
REVENUES
Premiums $ 38,920 $ 35,318 $ 12,573 $ 11,021
Policy charges and fee income 231,834 229,515 75,193 72,894
Net investment income 193,142 180,756 69,110 58,552
Realized investment gains 13,415 7,252 6,442 2,329
Other income 21,648 15,099 8,816 7,292
--------- --------- --------- ---------
TOTAL REVENUES 498,959 467,940 172,134 152,088
--------- --------- --------- ---------
BENEFITS AND EXPENSES
Policyholders' benefits 132,502 124,415 33,957 41,800
Interest credited to policyholders' account
balances 81,104 84,107 28,062 28,588
Other operating costs and expenses 211,348 72,680 112,153 (2,294)
--------- --------- --------- ---------
TOTAL BENEFITS AND EXPENSES 424,954 281,202 174,172 68,094
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAX PROVISION 74,005 186,738 (2,038) 83,994
Income tax provision 27,560 65,358 634 29,397
--------- --------- --------- ---------
NET INCOME (LOSS) $ 46,445 $ 121,380 $ (2,672) $ 54,597
========= ========= ========= =========
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
FOREIGN NET
CURRENCY UNREALIZED TOTAL
COMMON PAID-IN- TRANSLATION INVESTMENT RETAINED STOCKHOLDER'S
STOCK CAPITAL ADJUSTMENT (LOSSES) GAINS EARNINGS EQUITY
------ -------- ----------- -------------- -------- -------------
(000'S)
BALANCE, JANUARY 1, 1996 $2,500 $439,582 $ (570) $32,056 $795,275 $1,268,843
Net income -- -- -- -- 149,222 149,222
Foreign currency translation
adjustment -- -- (482) -- -- (482)
Change in net unrealized
investment (losses) gains
during year -- -- -- (17,952) -- (17,952)
------ -------- ------- ------- -------- ----------
BALANCE, DECEMBER 31, 1996 2,500 439,582 (1,052) 14,104 944,497 1,399,631
Net income -- -- -- -- 46,445 46,445
Foreign currency translation
adjustment -- -- (324) -- -- (324)
Change in net unrealized
investment (losses)
gains during period -- -- -- 454 -- 454
------ -------- ------- ------- -------- ----------
BALANCE, SEPTEMBER 30, 1997 $2,500 $439,582 $(1,376) $14,558 $990,942 $1,446,206
====== ======== ======= ======= ======== ==========
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
-------- ----------
(000'S)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 46,445 $ 121,380
Adjustments to reconcile net income to net cash from
operating activities:
Increase in future policy benefits and other
policyholders' liabilities 34,121 43,389
General account policy fee income (32,488) (23,933)
Interest credited to policyholders' account balances 81,104 84,107
Net decrease (increase) in Separate Accounts 27,085 (28,370)
Net realized investment gains (13,415) (7,252)
Policy loans (47,845) (51,569)
Amortization and other non-cash items (2,630) 38,610
Change in:
Accrued investment income (5,890) 138
Deferred policy acquisition costs 33,282 (50,488)
Other assets (21,562) (1,627)
Payable to affiliate 42,731 5,059
Federal income tax payable / receivable 36,693 22,787
Deferred federal income tax payable (10,484) (10,793)
Other liabilities 26,991 (8,370)
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CASH FLOWS FROM OPERATING ACTIVITIES 194,138 133,068
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Held to maturity 110,865 89,764
Available for sale 2,370,205 3,104,145
Equity securities 8,348 3,498
Mortgage loans 21,932 9,940
Other long term investments 2,285 21
Investment real estate -- 4,829
Payments for the purchase of:
Fixed maturities:
Held to maturity (21,610) (74,899)
Available for sale (2,425,849) (3,110,113)
Equity securities (8,158) (4,560)
Other long term investments (51) (497)
Investment real estate -- (341)
Net cash collateral for securities loaned 81,479 --
Net payments for short term investments (332,118) (47,721)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES (192,672) (25,934)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 1,199,372 329,910
Withdrawals (net of transfers to/from separate accounts) (1,190,212) (420,526)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES 9,160 (90,616)
----------- -----------
Net increase in Cash 10,626 16,518
Cash, beginning of year 73,766 41,435
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CASH, END OF PERIOD $ 84,392 $ 57,953
=========== ===========
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
SEPTEMBER 30, 1997
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES
A. PRINCIPLES OF CONSOLIDATION
The accompanying unaudited 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 has two
subsidiaries, Pruco Life Insurance Company of New Jersey and The Prudential Life
Insurance Company of Arizona. Pruco Life is a wholly-owned subsidiary of The
Prudential Insurance Company of America (Prudential), a mutual life insurance
company. The Company markets individual life insurance and deferred annuities
primarily through Prudential's sales force in the United States, and in Taiwan.
All significant intercompany balances and transactions have been eliminated in
consolidation.
B. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with the instructions to Form 10-Q and do not
include all of the other information and disclosures required by generally
accepted accounting principles. These statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 1996 included in the Company's Annual Report on Form 10-K for that
year.
The accompanying consolidated financial statements have not been audited by
independent accountants in accordance with generally accepted auditing
standards, but in the opinion of management such financial statements include
all adjustments, consisting only of normal recurring accruals, necessary to
summarize fairly the Company's financial position and results of operations. The
results of operations for the nine months ended September 30, 1997 may not be
indicative of the results that may be expected for the year ending December 31,
1997.
C. INVESTMENTS
Fixed Maturities--Securities held to maturity are those that the Company has the
positive intent and ability to hold to maturity and are principally reported at
amortized cost. Amortized cost is adjusted to estimated fair value for
impairments which are deemed to be other than temporary.
Where the Company may not have the positive intent to hold fixed maturities
until maturity, the securities are classified as "Available for Sale." These
securities are reported at market value based principally on their quoted market
prices. The associated unrealized gains and losses, net of income taxes and
deferred policy acquisition costs, are included as a component of equity or if
deemed to be other than temporary, are included as a realized loss. These
securities may be sold prior to maturity as part of the Company's
asset/liability management strategy in response to changes in interest rates,
resultant prepayments risk, and similar factors.
Equity Securities consist primarily of common and preferred stocks. Marketable
equity securities are reported at market value based principally on their quoted
market prices. The associated unrealized gains and losses are included as a
component of equity.
Short-term investments are fixed maturities that mature within one year, and are
reported at estimated fair value.
Securities lending--The Company has instituted a securities lending program
during the third quarter of 1997, whereby large blocks of securities are loaned
to third parties, primarily brokerage firms. As of September 30, 1997, the
estimated fair values of loaned securities were $80.6 million. Company policy
and statutory regulations both require a minimum of 102% of the fair value of
the domestic loaned securities to be separately maintained as collateral for the
loans. Cash collateral received is invested in short-term investments and is
recorded in Cash collateral for loaned securities in the amount of $81.5
million at September 30, 1997. Non-cash collateral is not reflected in the
consolidated financial statements.
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
SEPTEMBER 30, 1997
(UNAUDITED)
The following reconciles the Net unrealized investment gains recorded in
Stockholder's equity at September 30, 1997 and December 31, 1996.
SEPT. 30, 1997 DEC. 31, 1996
-------------- -------------
(000's)
Fixed maturities Available for sale:
Fair Value $2,306,363 $2,236,817
Amortized cost 2,272,749 2,210,150
---------- ----------
Unrealized investment gains 33,614 26,667
Equity securities:
Fair value 4,738 3,748
Cost 4,510 3,626
---------- ----------
Unrealized investment gains 228 122
Related adjustments:
Deferred policy acquisition costs (16,128) (7,893)
Policyholders' account balances 2,654 1,237
Deferred federal income tax liability (5,810) (6,029)
---------- ----------
(19,284) (12,685)
---------- ----------
Net unrealized investment gains $ 14,558 $ 14,104
========== ==========
D. RECLASSIFICATIONS
To facilitate comparisons with the current year, certain amounts in the prior
years have been reclassified.
2. CONTINGENCIES
Several actions have been brought against the Company on behalf of those persons
who purchased life insurance policies and are based on complaints about sales
practices engaged in by Prudential, the Company and agents appointed by
Prudential and the Company. Prudential has agreed to indemnify the Company for
any and all losses resulting from such litigation.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Pruco Life Insurance Company consists of Pruco Life Insurance Company and its
subsidiaries (collectively, the Company). Pruco Life Insurance Company is a
wholly owned subsidiary of The Prudential Insurance Company of America
(Prudential). The Company markets individual life insurance and annuities
primarily through Prudential's sales force in the United States and in Taiwan.
The company had $12.0 billion in assets at September 30, 1997, $7.3 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 policy
loans.
The Company's assets were $12.0 billion at September 30, 1997 compared to $9.7
billion at December 31, 1996. For the period ended September 30, 1997, net
income amounted to $46.4 million, a decrease of $75.0 million compared to the
$121.4 million earned in the same period in 1996.
1. RESULTS OF OPERATIONS
(a) 1997 versus 1996
Premiums increased by $3.6 million for the period ended September 30, 1997, from
$35.3 million in 1996 to $38.9 million. This change is primarily due to
increased sales related to traditional life insurance products in our Taiwan
branch which continued to expand its business throughout 1997.
Net investment income increased $12.3 million from $180.8 million for the period
ended September 30, 1996 to $193.1 million for the same period in 1997. This
increase is primarily due to overall growth of the investment portfolio as a
result of additional cash flows from operating activities along with a reduction
in expenses.
Realized investment gains increased by $6.2 million from $7.2 million for the
period ended September 30, 1996 to $13.4 million for the same period in 1997.
This increase is primarily driven by the sale of fixed maturities as a result
of normal investing activities during a period of declining interest rates.
Other income increased $6.5 million for the period ended September 30, 1997 from
the same period in 1996. This increase is due to increased advisory fees
attributable to growth of Separate Account products and the introduction of
Discovery Select.
Policyholders' benefits increased $8.1 million for the period ended September
30, 1997 to $132.5 million, as compared to $124.4 million in 1996. This increase
is attributable to increased mortality costs associated with the aging book of
business.
Other operating costs and expenses increased $138.7 million for the period ended
September 30, 1997 compared to the same period for 1996. The increase relects
factors including the refinement of estimated gross profit margins used to
amortize deferred policy acquisition costs (DAC). Favorable mortality experience
and reduction in cost of insurance charges contributed to a change in net
amortization. Favorable sales in 1997 were a partial offset. The net change in
amortization of DAC was $25.3 million and $(30.1) million in 1997 and 1996,
respectively. Also, increased operating costs resulted from higher sales
activity of Discovery Select and Discovery Preferred annuity products, and
technological advancements made in annuity processing, customer service, and
product development.
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. Benefits and expenses incurred in the nine
months ended September 30, 1997, and 1996 were $425.0 million, and $281.2
million, respectively. Cash flows are anticipated to be sufficient to meet the
Company's liquidity needs for the foreseeable future.
3. CAPITAL RESOURCES
The primary components of the Company's total assets of $12.0 billion at
September 30, 1997 are as follows (as a percentage of total assets): fixed
income securities 21.9%, separate account assets (fixed income and equity
securities) 60.9%, policy loans 5.7%, and other assets 11.5%.
9
PART II
ITEM 1 LEGAL PROCEEDING
- -----------------------
Pruco Life Insurance Company is not involved in any litigation that is expected
to have a material effect.
ITEM 2 CHANGES IN SECURITIES
- ----------------------------
Not Applicable
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
- --------------------------------------
Not Applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ----------------------------------------------------------
Not Applicable
ITEM 5 OTHER INFORMATION
- ------------------------
Not Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
- ---------------------------------------
(a) (1) and (2) financial Statements of registrant and subsidiaries are
listed on pages 3-6 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 Form S-6, Registration No.
333-07451, filed July 2, 1996 on behalf of the Pruco Life Variable
Appreciable Account; (ii) Bylaws of Pruco Life, as amended May 6, 1997 are
incorporated herein by reference to Form 10-Q, Registration No. 33-37587,
filed August 15, 1997 on behalf of Pruco Life Insurance Company.
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.
10. None.
11. Not Applicable.
15. Not Applicable.
10
18. None.
19. Not Applicable.
20. Not Applicable.
22. None.
23. None.
24. Not Applicable.
25. Not Applicable.
27. Exhibit 27, Financial Data Schedule appended to this form in
accordance with EDGAR instructions.
99. None
11
SIGNATURES
Pursuant to the requirements 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)
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ ESTHER H. MILNES
- ------------------------------- President and Director November 14, 1997
Esther H. Milnes
/s/ LINDA S. DOUGHERTY
- ------------------------------- Vice President and Comptroller November 14, 1997
Linda S. Dougherty and Chief Accounting Officer
12