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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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 Identification No.)
incorporation or organization)
213 Washington Street, Newark, New Jersey 07102
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(Address of principal executive offices) (Zip Code)
(973) 802-2859
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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 May 15, 1998. 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 INFORMATION
- ------------------------------
ITEM 1. (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF FINANCIAL POSITION - MARCH 31, 1998
AND DECEMBER 31, 1997 3
STATEMENTS OF OPERATIONS - THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 4
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY -
MARCH 31, 1998 AND DECEMBER 31, 1997 5
STATEMENTS OF CASH FLOWS - THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 2. CHANGES IN SECURITIES 11
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
ITEM 5. OTHER INFORMATION 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURE PAGE 13
2
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
MARCH 31, 1998 AND DECEMBER 31, 1997 (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 1998:
$2,398,893; 1997: $2,526,554) $ 2,431,061 $ 2,563,852
Held to maturity, at amortized cost (fair value, 1998:
$333,108; 1997: $350,056) 321,894 338,848
Equity securities - available for sale, at fair value
(cost, 1998: $1,440; 1997: $1,289) 4,411 1,982
Mortgage loans on real estate 22,581 22,787
Policy loans 721,641 703,955
Short-term investments 417,948 316,355
Other long-term investments 1,693 1,317
----------- -----------
Total investments 3,921,229 3,949,096
Cash 87,868 71,358
Deferred policy acquisition costs 687,494 655,242
Accrued investment income 65,543 67,000
Other assets 85,250 86,692
Separate Account assets 9,337,236 8,022,079
----------- -----------
TOTAL ASSETS $14,184,620 $12,851,467
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Policyholders' account balances $ 2,304,126 $ 2,282,191
Future policy benefits and other policyholder liabilities 580,763 570,729
Cash collateral for loaned securities 77,462 143,421
Income taxes payable 87,998 71,703
Deferred income tax liability 137,669 138,483
Payable to affiliate 79,197 70,375
Other liabilities 116,613 120,260
Separate Account liabilities 9,267,038 7,948,788
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TOTAL LIABILITIES $12,650,866 $11,345,950
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CONTINGENCIES (SEE NOTE 4)
STOCKHOLDER'S EQUITY
Common stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding at
March 31, 1998 and December 31, 1997 2,500 2,500
Paid-in-capital 439,582 439,582
Retained earnings 1,084,011 1,050,871
Net unrealized investment gains 12,345 17,129
Foreign currency translation adjustments (4,684) (4,565)
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TOTAL STOCKHOLDER'S EQUITY 1,533,754 1,505,517
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $14,184,620 $12,851,467
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (IN THOUSANDS)
- -------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
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REVENUES
Premiums $ 11,707 $ 12,243
Policy charges and fee income 81,805 76,333
Net investment income 64,115 59,221
Realized investment gains, net 5,439 4,919
Other income 12,123 5,850
-------- --------
TOTAL REVENUES 175,189 158,566
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BENEFITS AND EXPENSES
Policyholders' benefits 46,711 49,332
Interest credited to policyholders' account
balances 25,359 24,704
General, administrative and other expenses 50,921 52,305
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TOTAL BENEFITS AND EXPENSES 122,991 126,341
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Income from operations before income taxes 52,198 32,225
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Income taxes
Current 17,010 7,823
Deferred 2,048 4,883
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Total income taxes 19,058 12,706
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NET INCOME $ 33,140 $ 19,519
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED)
MARCH 31, 1998 AND DECEMBER 31, 1997 (IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
NET FOREIGN
UNREALIZED CURRENCY TOTAL
COMMON PAID-IN- RETAINED INVESTMENT TRANSLATION STOCKHOLDER'S
STOCK CAPITAL EARNINGS GAINS ADJUSTMENTS EQUITY
--------- --------- ---------- --------- ---------- ----------
BALANCE, DECEMBER 31, 1996 $ 2,500 $ 439,582 $ 944,497 $ 14,104 $ (1,702) $1,398,981
Net income - - 106,374 - - 106,374
Change in foreign currency
translation adjustments - - - - (2,863) (2,863)
Change in net unrealized
investment gains - - - 3,025 - 3,025
--------- --------- ---------- --------- ---------- ----------
BALANCE, DECEMBER 31, 1997 2,500 439,582 1,050,871 17,129 (4,565) 1,505,517
Net income - - 33,140 - - 33,140
Change in foreign currency
translation adjustments - - - - (119) (119)
Change in net unrealized - - - (4,784) - (4,784)
investment gains
--------- --------- ---------- --------- ---------- ----------
BALANCE, MARCH 31, 1998 $ 2,500 $ 439,582 $1,084,011 $ 12,345 $ (4,684) $1,533,754
========= ========= ========== ========= =========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (IN THOUSANDS)
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 33,140 $ 19,519
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Policy charges and fee income (13,365) (6,786)
Interest credited to policyholders' account balances 25,312 24,704
Net increase in Separate Accounts 3,093 28,980
Realized investment gains, net (5,439) (4,919)
Amortization and other non-cash items (1,124) 17,756
Change in:
Future policy benefits and other policyholder liabilities 10,034 2,755
Accrued investment income 1,457 228
Payable to affiliate 8,822 14,401
Policy loans (17,686) (15,169)
Deferred policy acquisition costs (32,252) (15,009)
Income taxes payable 16,295 6,652
Deferred income tax liability (814) 808
Other, net (2,205) 113,707
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CASH FLOWS FROM OPERATING ACTIVITIES 25,268 187,627
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 1,398,316 719,943
Held to maturity 20,878 35,890
Equity securities 27 -
Mortgage loans on real estate 206 3,957
Other long-term investments - 3,148
Payments for the purchase of:
Fixed maturities:
Available for sale (1,266,223) (560,311)
Held to maturity (3,855) (3,150)
Equity securities (146) (4,163)
Other long-term investments (376) (37)
Cash collateral for loaned securities, net (65,959) -
Short-term investments, net (101,614) (245,366)
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CASH FLOWS USED IN INVESTING ACTIVITIES (18,746) (50,089)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 700,997 330,710
Withdrawals (691,009) (355,864)
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CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES 9,988 (25,154)
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Net increase in Cash 16,510 112,384
Cash, beginning of year 71,358 73,766
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CASH, END OF PERIOD $ 87,868 $ 186,150
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. BUSINESS
Pruco Life Insurance Company (the Company),a wholly owned subsidiary of The
Prudential Insurance Company of America (Prudential), is a stock life insurance
company, organized in 1971 under the laws of the state of Arizona. The Company
markets individual life insurance, variable life insurance, variable annuities,
and deferred annuities (the Contracts) in all states except New York, the
District of Columbia and Guam. 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 deferred annuities only in the states of New
Jersey and New York. PLICA is a stock life insurance company organized in 1988
under the laws of the state of Arizona. PLICA had no new business sales in 1997
or for the three months ended March 31, 1998 and at this time will not be
issuing new business.
The only reportable industry segment of the Company is "Life Insurance."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 (GAAP). These statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 1997 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 and eliminations
of intercompany balances and transactions, necessary to summarize fairly the
Company's financial position and results of operations. The results of
operations for the three months ended March 31, 1998 may not be indicative of
the results that may be expected for the year ending December 31, 1998.
RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform to current
year presentation.
3. INVESTMENTS
FIXED MATURITIES classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the positive intent and
ability to hold to maturity are stated at amortized cost and classified as "held
to maturity". The amortized cost of fixed maturities are written down to
estimated fair value when considered impaired and the decline in value is
considered to be other than temporary. Unrealized gains and losses on fixed
maturities "available for sale", net of income tax, the effect on deferred
policy acquisition costs and participating annuity contracts that would result
from the realization of unrealized gains and losses are included in a separate
component of equity, "Net unrealized investment gains."
7
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
3. INVESTMENTS (CONTINUED)
EQUITY SECURITIES, available for sale, comprised of common and non-redeemable
preferred stock, are carried at estimated fair value. The associated unrealized
gains and losses, net of income tax, the effect on deferred policy acquisition
costs and participating annuity contracts that would result from the realization
of unrealized gains and losses, are included in a separate component of equity,
"Net unrealized investment gains."
The following reconciles the Net unrealized investment gains recorded in
Stockholder's equity at March 31, 1998 and December 31, 1997.
MARCH 31, DECEMBER 31,
1998 1997
---------- ----------
(000's)
Fixed maturities Available for sale:
Fair Value $2,431,061 $2,563,852
Amortized cost 2,398,893 2,526,554
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Unrealized investment gains 32,168 37,298
Equity securities:
Fair value 4,411 1,982
Cost 1,440 1,289
---------- ----------
Unrealized investment gains 2,971 693
Related adjustments:
Deferred policy acquisition costs (19,729) (16,305)
Policyholders' account balances 3,002 2,529
Deferred federal income tax liability (6,067) (7,086)
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(22,794) (20,862)
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Net unrealized investment gains $ 12,345 $ 17,129
========== ==========
4. 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 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.
In the normal course of business, the Company is subject to various claims and
assessments. Management believes the settlement of these matters would not have
a material effect on the financial position or results of operations of the
Company.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
- --------------------------------------------------------------------------------
The Company markets individual life insurance, variable life insurance, variable
annuities, and deferred annuities primarily through Prudential's sales force in
the United States and in Taiwan.
The Company markets its products in the life insurance and annuity sectors of
the insurance industry. These markets are faced with an increased tightening of
the regulatory environment with particular emphasis placed on company solvency
and sales practices. The legal barriers which have historically segregated the
markets of the financial services industry are being challenged through both
legislative and judicial processes. Regulatory changes which opened the
insurance industry to other financial institutions, particularly banks and
mutual funds, heightened competition in investment type products since those
institutions were positioned to deliver the same products through large, stable
distribution channels.
The Company held $14.2 billion in assets at March 31, 1998 compared to $12.9
billion at December 31, 1997, of which $9.3 billion and $8.0 billion were held
in Separate Accounts as of March 31, 1998 and December 31, 1997, respectively,
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.
1. RESULTS OF OPERATIONS
Net income for the three months ended March 31, 1998 amounted to $33.1 million,
an increase of $13.6 million or 69.7% compared to the $19.5 million earned in
the three months ended March 31, 1997.
1998 versus 1997
Separate Account activity was a major contributor to the increase in operating
income during the first quarter of 1998. Separate Account assets increased 16.4%
as of March 31, 1998, from $8,022 million as of December 31, 1997 to $9,337
million. Approximately 57% ($750 million) of the increase is due to sales of the
Company's variable products and the remaining 43% ($565 million) is a result of
portfolio appreciation due to the strong market conditions during the first
quarter of 1998. Premiums from sales of variable products primarily relate to
the Discovery Select product which was added to the Company's portfolio as of
October 1996 and to PLNJ's portfolio as of January 1997. Separate Account asset
based charges, such as mortality and expense charges, administration fees and
Separate Account gains, are the elements primarily attributable to these
variances.
Policy charges and fee income increased $5.5 million from $76.3 million for the
three months ended March 31, 1997 to $81.8 million for the three months ended
March 31, 1998. This is primarily attributed to mortality and expense charges on
increased balances, which are deductions made from the assets of each of the
variable investment options.
Net investment income increased $4.9 million from $59.2 million for the three
months ended March 31, 1997 to $64.1 million for the three months ended March
31, 1998. This increase is primarily driven by Separate Account gains which are
gains from market appreciation on the Company's investment in the Separate
Accounts.
Other income increased $6.2 million from $5.9 million for the three months ended
March 31, 1997 to $12.1 million for the three months ended March 31, 1998. This
is primarily attributable to the increase in investment management fees which
are received by the Company for services Prudential provides to The Prudential
Series Funds, an underlying investment option of the Separate Accounts.
2. LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements include the payment of sales commissions
and other underwriting expenses and the funding of its contractual obligations
for the life insurance and annuity contracts it has in-force. The Company has
developed and utilizes a cash flow projection system and regularly performs
asset/liability duration matching in the
9
management of its asset and liability portfolios. The Company anticipates
funding all its cash requirements utilizing cash from operations, normal
investment maturities and anticipated calls and repayments, consistent with
prior years. As of March 31, 1998, the Company's assets included $2.4 billion of
cash, short-term investments and investment grade publicly traded fixed maturity
securities that could be liquidated if funds were required.
The Company conducts a thorough review of the adequacy of statutory insurance
reserves and other actuarial liabilities. The review is performed to ensure that
the Company's statutory reserves are computed in accordance with accepted
actuarial standards, reflect all contractual obligations, meet the requirements
of state laws and regulations and include adequate provisions for any other
actuarial liabilities that need to be established. All significant reserve
changes are reviewed by the Board of Directors and are subject to approval by
the Arizona Department of Banking and Insurance. The Company believes that its
statutory capital is adequate for its currently anticipated levels of risk as
measured by regulatory guidelines.
3. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in Management's Discussion and Analysis may
be considered forward-looking statements. Words such as "expects," "believes,"
"anticipates," "intends," "plans," or variations of such words are generally
part of forward-looking statements. Forward-looking statements are made based
upon management's current expectations and beliefs concerning future
developments and their potential effects upon the Company. There can be no
assurance that future developments affecting the Company will be those
anticipated by management. There are certain important factors that could cause
actual results to differ materially from estimates or expectations reflected in
such forward-looking statements including without limitation, changes in general
economic conditions, including the performance of financial markets and interest
rates; market acceptance of new products and distribution channels; competitive,
regulatory or tax changes that affect the cost or demand for the Company's
products; and adverse litigation results. While the Company reassesses material
trends and uncertainties affecting its financial condition and results of
operations, it does not intend to review or revise any particular
forward-looking statement referenced in this Management's Discussion and
Analysis in light of future events. The information referred to above should be
considered by readers when reviewing any forward-looking statements contained in
this Management's Discussion and Analysis.
10
PART II
ITEM 1 LEGAL PROCEEDINGS
- ------------------------
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. There
have been no 8-K's filed during the first quarter of 1998.
(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.
11
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
12
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 May 15, 1998
Esther H. Milnes
/s/ JAMES M. SCHLOMANN
- ---------------------- Vice President and Comptroller May 15, 1998
James M. Schlomann and Chief Accounting Officer
13