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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2002
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
(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
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(Address of principal executive offices ) (Zip Code)
(973) 802-3274
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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 14, 2002. Common
stock, par value of $10 per share: 250,000 shares outstanding
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1
PRUCO LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page No.
--------
Cover Page -
Index 2
PART I - Financial Information
------------------------------
Item 1. (Unaudited) Financial Statements
Consolidated Statements of Financial Position
As of March 31, 2002 and December 31, 2001 3
Consolidated Statements of Operations and Comprehensive Income
Three months ended March 31, 2002 and 2001 4
Consolidated Statements of Changes in Stockholder's Equity
Periods ended March 31, 2002 and December 31, 2001 and 2000 5
Consolidated Statements of Cash Flows
Three months ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II - Other Information
---------------------------
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
Forward-Looking Statement Disclosure
Certain of the statements included in this Quarterly Report on Form 10-Q,
including but not limited to those in the Management's Discussion and Analysis
of Financial Condition and Results of Operations, constitute forward-looking
statements within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Words such as "expects," "believes," "anticipates," "includes,"
"plans," "assumes," "estimates," "projects," or variations of such words are
generally part of forward-looking statements. Forward-looking statements are
made based on management's current expectations and beliefs concerning future
developments and their potential effects upon Pruco Life Insurance Company ("the
Company"). There can be no assurance that future developments affecting the
Company will be those anticipated by management. These forward-looking
statements are not a guarantee of future performance and involve risks and
uncertainties, and there are certain important factors that could cause actual
results to differ, possibly materially, from expectations or estimates reflected
in such forward-looking statements, including without limitation: general
economic, market and political conditions, including the performance of
financial markets, interest rate fluctuations and the continuing impact of the
events of September 11; volatility in the securities markets; reestimates of our
reserves for future policy benefits and claims; our exposure to contingent
liabilities; catastrophe losses; investment losses and defaults; changes in our
claims-paying or credit ratings; competition in our product lines and for
personnel; fluctuations in foreign currency exchange rates and foreign
securities markets; risks to our international operations; the impact of
changing regulation or accounting practices; adverse litigation results; and
changes in tax law. The Company does not intend, and is under no obligation to,
update any particular forward-looking statement included in this document.
2
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Financial Position (Unaudited)
As of March 31, 2002 and December 31, 2001 (In Thousands)
- -------------------------------------------------------------------------------------------------------------
March 31, December 31,
2002 2001
----------- ------------
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost,
2002: $4,073,284; 2001: $3,935,472) $ 4,112,204 $ 4,024,893
Equity securities - available for sale, at fair value
(cost, 2002: $5,136; 2001: $173) 5,426 375
Commercial loans on real estate 7,910 8,190
Policy loans 878,471 874,065
Short-term investments 104,715 215,610
Other long-term investments 87,444 84,342
----------- ------------
Total investments 5,196,170 5,207,475
Cash and cash equivalents 469,771 374,185
Deferred policy acquisition costs 1,227,984 1,159,830
Accrued investment income 80,576 77,433
Reinsurance recoverable 314,592 300,697
Receivables from affiliates 45,605 33,074
Other assets 35,716 20,134
Separate Account assets 14,990,437 14,920,584
----------- ------------
TOTAL ASSETS $22,360,851 $ 22,093,412
=========== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 4,203,990 $ 3,947,690
Future policy benefits and other policyholder liabilities 816,617 808,230
Cash collateral for loaned securities 229,792 190,022
Securities sold under agreement to repurchase 82,980 80,715
Income taxes payable 262,385 266,096
Other liabilities 122,841 228,596
Separate Account liabilities 14,990,437 14,920,584
----------- ------------
Total liabilities 20,709,042 20,441,933
----------- ------------
Contingencies (See Footnote 2)
Stockholder's Equity
Common stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding 2,500 2,500
Paid-in-capital 466,748 466,748
Retained earnings 1,167,136 1,147,665
Accumulated other comprehensive income:
Net unrealized investment gains 15,572 34,718
Foreign currency translation adjustments (147) (152)
----------- ------------
Accumulated other comprehensive income 15,425 34,566
----------- ------------
Total stockholder's equity 1,651,809 1,651,479
----------- ------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $22,360,851 $ 22,093,412
=========== ============
See Notes to Consolidated Financial Statements
3
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Three Months Ended March 31, 2002 and 2001 (In Thousands)
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Three months ended
March 31,
2002 2001
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REVENUES
Premiums $ 18,298 $ 23,418
Policy charges and fee income 127,033 119,104
Net investment income 81,471 90,310
Realized investment (losses) gains, net (6,226) 10,877
Asset management fees 2,252 2,153
Other income 1,208 670
--------- ---------
Total revenues 224,036 246,532
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BENEFITS AND EXPENSES
Policyholders' benefits 57,813 56,905
Interest credited to policyholders' account balances 47,186 48,808
General, administrative and other expenses 94,356 103,539
--------- ---------
Total benefits and expenses 199,355 209,252
--------- ---------
Income from operations before income taxes 24,681 37,280
--------- ---------
Income tax provision 5,210 8,641
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NET INCOME 19,471 28,639
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Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on securities, net of
Reclassification adjustment (19,146) 16,610
Foreign currency translation adjustments 5 3,320
--------- ---------
Other comprehensive (loss) income (19,141) 19,930
--------- ---------
TOTAL COMPREHENSIVE INCOME $ 330 $ 48,569
========= =========
See Notes to Consolidated Financial Statements
4
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Changes in Stockholder's Equity (Unaudited)
Periods Ended March 31, 2002 and December 31, 2001 and 2000 (In Thousands)
- ------------------------------------------------------------------------------------------------------------------
Accumulated
other Total
Common Paid-in- Retained comprehensive stockholder's
stock capital earnings income (loss) equity
----------- --------- ----------- ------------- -------------
Balance, January 1, 2000 $ 2,500 $ 439,582 $ 1,258,428 $ (30,691) $ 1,669,819
Net income - - 103,496 - 103,496
Contribution from Parent - 27,166 - - 27,166
Change in foreign currency
translation adjustments, net of taxes - - - (993) (993)
Change in net unrealized investment
losses, net of reclassification
adjustment and taxes - - - 33,094 33,094
----------- --------- ----------- ----------- -------------
Balance, December 31, 2000 2,500 466,748 1,361,924 1,410 1,832,582
Net income - - 67,582 - 67,582
Dividends to Parent - - (153,816) - (153,816)
Policy credits issued to eligible
policyholders - - (128,025) - (128,025)
Change in foreign currency
translation adjustments, net of taxes - - - 3,168 3,168
Change in net unrealized investment
gains, net of reclassification
adjustment and taxes - - - 29,988 29,988
----------- --------- ----------- ----------- -------------
Balance, December 31, 2001 2,500 466,748 1,147,665 34,566 1,651,479
Net income - - 19,471 - 19,471
Change in foreign currency
translation adjustments, net of taxes - - - 5 5
Change in net unrealized investment
gains, net of reclassification
adjustment and taxes - - - (19,146) (19,146)
----------- --------- ----------- ----------- -------------
Balance, March 31, 2002 $ 2,500 $ 466,748 $ 1,167,136 $ 15,425 $ 1,651,809
=========== ========= =========== =========== =============
See Notes to Consolidated Financial Statements
5
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2002 and 2001 (In Thousands)
- -------------------------------------------------------------------------------------------------
2002 2001
----------- -----------
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES:
Net income $ 19,471 $ 28,639
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Policy charges and fee income (15,451) (19,687)
Interest credited to policyholders' account balances 47,186 48,808
Realized investment losses (gains), net 6,226 (10,877)
Amortization and other non-cash items 33,345 (28,103)
Change in:
Future policy benefits and other policyholders' 8,387 14,211
liabilities
Accrued investment income (3,143) 3,291
Receivables from affiliates (12,531) 5,312
Policy loans (4,406) (13,129)
Deferred policy acquisition costs (68,154) (5,031)
Income taxes payable/receivable (3,711) 23,487
Other, net (20,477) (23,270)
----------- -----------
Cash Flows (Used in) From Operating Activities (13,258) 23,651
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 582,868 1,132,680
Equity securities -- 204
Commercial loans on real estate 280 256
Payments for the purchase of:
Fixed maturities:
Available for sale (733,030) (1,209,152)
Equity securities (4) (106)
Cash collateral for loaned securities, net 39,770 39,165
Securities sold under agreement to repurchase, net 2,265 (78,926)
Other long-term investments (2,293) (5,540)
Short-term investments, net 110,891 180,428
----------- -----------
Cash Flows From Investing Activities 747 59,009
----------- -----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 495,828 370,993
Withdrawals (272,976) (307,878)
Cash payments to eligible policyholders (114,755) --
Cash provided to affiliate -- (74,492)
----------- -----------
Cash Flows From (Used in) Financing Activities 108,097 (11,377)
----------- -----------
Net increase in Cash and cash equivalents 95,586 71,283
Cash and cash equivalents, beginning of year 374,185 453,071
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 469,771 $ 524,354
=========== ===========
See Notes to Consolidated Financial Statements
6
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
- ------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q on the basis of
accounting principles generally accepted in the United States. These interim
financial statements are unaudited but reflect all adjustments which, in the
opinion of management, are necessary to provide a fair presentation of the
consolidated results of operations and financial condition of the Pruco Life
Insurance Company ("the Company") for the interim periods presented. The Company
is a wholly owned subsidiary of The Prudential Insurance Company of America
("Prudential"), which in turn is a wholly owned subsidiary of Prudential
Financial, Inc. All such adjustments are of a normal recurring nature. The
results of operations for any interim period are not necessarily indicative of
results for a full year. Certain amounts in the Company's prior year
consolidated financial statements have been reclassified to conform with the
2002 presentation. These financial statements should be read in conjunction with
the consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
2. CONTINGENCIES AND LITIGATION
Prudential and the Company are subject to legal and regulatory actions in the
ordinary course of their businesses, including class actions. Pending legal and
regulatory actions include proceedings relating to aspects of the businesses and
operations that are specific to the Company and Prudential and that are typical
of the businesses in which the Company and Prudential operate. Some of these
proceedings have been brought on behalf of various alleged classes of
complainants. In certain of these matters, the plaintiffs are seeking large
and/or indeterminate amounts, including punitive or exemplary damages.
Beginning in 1995, regulatory authorities and customers brought significant
regulatory actions and civil litigation against the Company and Prudential
involving individual life insurance sales practices. In 1996, Prudential, on
behalf of itself and many of its life insurance subsidiaries including the
Company entered into settlement agreements with relevant insurance regulatory
authorities and plaintiffs in the principal life insurance sales practices class
action lawsuit covering policyholders of individual permanent life insurance
policies issued in the United States from 1982 to 1995. Pursuant to the
settlements, the companies agreed to various changes to their sales and business
practices controls, to a series of fines, and to provide specific forms of
relief to eligible class members. Virtually all claims by class members filed in
connection with the settlements have been resolved and virtually all aspects of
the remediation program have been satisfied. While the approval of the class
action settlement is now final, Prudential and the Company remain subject to
oversight and review by insurance regulators and other regulatory authorities
with respect to its sales practices and the conduct of the remediation program.
The U.S. District Court has also retained jurisdiction as to all matters
relating to the administration, consummation, enforcement and interpretation of
the settlements.
As of March 31, 2002, Prudential and/or the Company remained a party to
approximately 42 individual sales practices actions filed by policyholders who
"opted out" of the class action settlement relating to permanent life insurance
policies issued in the United States between 1982 and 1995. In addition, there
were 18 sales practices actions pending that were filed by policyholders who
were members of the class and who failed to "opt out" of the class action
settlement. Prudential and the Company believe that those actions are governed
by the class settlement release and expects them to be enjoined and/or
dismissed. Additional suits may be filed by class members who "opted out" of the
class settlements or who failed to "opt out" but nevertheless seek to proceed
against Prudential and/or the Company. A number of the plaintiffs in these cases
seek large and/or indeterminate amounts, including punitive or exemplary
damages. Some of these actions are brought on behalf of multiple plaintiffs. It
is possible that substantial punitive damages might be awarded in any of these
actions and particularly in an action involving multiple plaintiffs.
Prudential has indemnified the Company for any liabilities incurred in
connection with sales practices litigation covering policyholders of individual
permanent life insurance policies issued in the United States from 1982 to 1995.
The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted. It is possible that the
results of operations or the cash flow of the Company in a particular quarterly
or annual period could be materially affected by an ultimate unfavorable
resolution of pending litigation and regulatory matters. Management believes,
however, that the ultimate outcome of all pending litigation and regulatory
matters should not have a material adverse effect on the Company's financial
position.
7
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
- ------------------------------------------------------
3. RELATED PARTY TRANSACTIONS
The Company has extensive transactions and relationships with Prudential and
other affiliates. It is possible that the terms of these transactions are not
the same as those that would result from transactions among wholly unrelated
parties.
Expense Charges and Allocations
All of the Company's expenses are allocations or charges from Prudential or
other affiliates. These expenses can be grouped into the following categories:
general and administrative expenses and retail distribution expenses.
The Company's general and administrative expenses are charged to the Company
using allocation methodologies based on business processes. Management believes
that the methodology is reasonable and reflects costs incurred by Prudential to
process transactions on behalf of the Company. Prudential and the Company
operate under service and lease agreements whereby services of officers and
employees, supplies, use of equipment and office space are provided by
Prudential.
The Company is allocated estimated distribution expenses from Prudential's
retail agency network for both its domestic life and annuity products. The
estimate of allocated distribution expenses is intended to reflect a market
based pricing arrangement. The Company has capitalized the majority of these
distribution expenses as deferred policy acquisition costs.
Corporate Owned Life Insurance
The Company has sold three Corporate Owned Life Insurance ("COLI") policies to
Prudential. The cash surrender value included in Separate Accounts was $652.7
million and $647.2 million at March 31, 2002 and December 31, 2001,
respectively.
8
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
- ------------------------------------------------------
Reinsurance
The Company currently has four reinsurance agreements in place with Prudential
and affiliates. Specifically, the Company has a reinsurance 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
contract. In addition, there are two yearly renewable term agreements 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. The Company is not relieved
of its primary obligation to the policyholder as a result of these reinsurance
transactions. These agreements had no material effect on net income for the
periods ended March 31, 2002 or 2001. The fourth agreement is described below.
On January 31, 2001, the Company transferred all of its assets and liabilities
associated with the Company's Taiwan branch including Taiwan's insurance book of
business to an affiliated Company, Prudential Life Insurance Company of Taiwan
Inc. ("Prudential of Taiwan"), a wholly owned subsidiary of Prudential
Financial, Inc.
The mechanism used to transfer this block of business in Taiwan is referred to
as a "full acquisition and assumption" transaction. Under this mechanism, the
Company is jointly liable with Prudential of Taiwan for two years from the
giving of notice to all obligees for all matured obligations and for two years
after the maturity date of not-yet-matured obligations. Prudential of Taiwan is
also contractually liable, under indemnification provisions of the transaction,
for any liabilities that may be asserted against the Company. The transfer of
the insurance related assets and liabilities was accounted for as a
long-duration coinsurance transaction under accounting principles generally
accepted in the United States. Under this accounting treatment, the insurance
related liabilities remain on the books of the Company and an offsetting
reinsurance recoverable is established.
As part of this transaction, the Company made a capital contribution to
Prudential of Taiwan in the amount of the net equity of the Company's Taiwan
branch as of the date of transfer. In July 2001, the Company dividended its
interest in Prudential of Taiwan to Prudential.
Premiums ceded for the periods ending March 31, 2002 and 2001 from the Taiwan
coinsurance agreement were $17.6 million and $20.1 million, respectively.
Benefits ceded for the periods ending March 31, 2002 and 2001 from the Taiwan
coinsurance agreement were $3.2 million and $2.9 million, respectively.
Included in the reinsurance recoverable balances were affiliated reinsurance
recoverables of $297.8 million and $285.8 million at March 31, 2002 and December
31, 2001, respectively.
Debt Agreements
In July 1998, the Company established a revolving line of credit facility of up
to $500 million with Prudential Funding LLC, a wholly owned subsidiary of
Prudential. There was no outstanding debt relating to this credit facility as of
March 31, 2002 or December 31, 2001.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis should be read in conjunction with the Notes to
Consolidated Financial Statements.
The Company sells interest-sensitive individual life insurance and variable life
insurance, term life insurance, individual variable and fixed annuities, and a
non-participating guaranteed interest contract ("GIC") called Prudential Credit
Enhanced GIC ("PACE") primarily through Prudential's sales force in the United
States. These markets are subject to regulatory oversight with particular
emphasis placed on company solvency and sales practices. These markets are also
subject to increasing competitive pressure as the legal barriers which have
historically segregated the markets of the financial services industry have been
changed through both legislative and judicial processes. Regulatory changes have
opened the insurance industry to competition from other financial institutions,
particularly banks and mutual funds that are positioned to deliver competing
investment products through large, stable distribution channels. The Company
also had marketed individual life insurance through its branch office in Taiwan.
The Taiwan branch was transferred to an affiliated Company on January 31, 2001,
as described in the Notes to the Financial Statements. Beginning February 1,
2001, Taiwan's net income is not included in the Company's results of
operations.
Generally, policyholders who purchase the Company's products have the option of
investing in the Separate Accounts, segregated funds for which investment risks
are borne by the customer, or the Company's portfolio, referred to as the
General Account. The Company earns its profits through policy fees charged to
Separate Account annuity and life policyholders and through the interest spread
for the GIC and General Account annuity and life products. Policy charges and
fee income consist mainly of three types, sales charges or loading fees on new
sales, mortality and expense charges ("M&E") assessed on fund balances, and
mortality and related charges based on total life insurance in-force business.
Policyholder fund values are affected by net sales (sales less withdrawals),
changes in interest rates and investment returns. The interest spread represents
the difference between the investment income earned by the Company on its
investment portfolio and the amount of interest credited to the policyholders'
accounts. Products that generate spread income primarily include the GIC
product, general account life insurance products, fixed annuities and the
fixed-rate option of variable annuities. The majority of the fund balances and
new sales, except for the GIC product, are in the Separate Accounts.
The Company's Changes in Financial Position and Results of Operations are
described below.
1. Analysis of Financial Condition
From December 31, 2001 to March 31, 2002 there was an increase of $268 million
in total assets from $22,093 million to $22,361 million. Cash and cash
equivalents are $96 million higher than December 31, 2001 as a result of
increased securities lending activities and a higher investment allocation in
cash and cash equivalents rather than short-term investments when compared to
December 31, 2001. Separate Account assets increased by $70 million primarily
from the payment of policy credits to Separate Account policyholders. Deferred
acquisition costs ("DAC") increased by $68 million from capitalization of
commissions from new sales. Reinsurance recoverable is $14 million higher as a
result of growth in the transferred business of the Taiwan branch. The transfer
of the Company's Taiwan branch accounted for using coinsurance accounting
requires the establishment of a reinsurance recoverable and the inclusion of the
Taiwan branch future policy reserve liabilities on the Company's balance sheet.
Other assets increased $16 million mainly from an increase in receivables
resulting from sales of securities that had not settled at the balance sheet
date and increases to prepaid expenses.
During this three-month period, liabilities increased by $267 million from
$20,442 million to $20,709 million. Corresponding with the asset change,
Separate Account liabilities increased by $70 million primarily from the payment
of policy credits to Separate Account policyholders. Policyholder account
balances increased by $256 million due to positive cash inflows from the Pace
GIC and sales of annuity products with fixed rate options. An increased level of
securities lending activity increased liabilities by $42 million. Other
liabilities decreased by $106 million mainly due to the payment of policy
credits to the Separate Account policyholders, which had been accrued in other
liabilities at December 31, 2001.
10
2. Results of Operations
Net Income
Consolidated net income of $19.5 million for the first quarter of 2002 was $9.2
million lower than for the first quarter of 2001. The decrease in net income was
caused primarily by a $17.1 million change in realized investment (losses)/gains
between the two periods. This resulted from the realization of losses on sales
of fixed maturities in 2002 due to credit related sales compared to gains on
sales in the prior year comparable quarter as interest rates were declining
during 2001. Partially offsetting this was a decrease in general, administrative
and other expenses of $9.2 million, mainly from lower DAC amortization. DAC
amortization was $10.8 million lower due to lower gross profits for annuity
products in 2002 and a $6 million charge recorded in the prior year to reflect a
decline in estimated future gross profits resulting from a decline in Separate
Account liabilities. Variances by income statement line item are described in
the following paragraphs.
Revenues
Consolidated revenues decreased by $22.5 million, from $246.5 million to $224.0
million. As discussed above, realized losses on investments, particularly fixed
maturities, decreased revenues by $17.1 million. Net investment income is lower
by $8.8 million due to lower yields available on the reinvestment of fixed
maturities and lower interest rates for short-term investments. The fixed
maturity portfolio yield declined from 7.30% for the year ended December 31,
2001 to 6.67% for the period ending March 31, 2002. Premiums decreased by $5.1
million mainly due to the transfer of the Taiwan branch as of January 31, 2001,
and the subsequent ceding of premiums which caused a $7.4 million decline in
premiums. There was a decrease of $6.7 million reflecting decreased domestic
life premiums on term insurance the Company issued, under policy provisions to
customers who previously had lapsing variable life insurance with the Company.
There were also decreased premiums from fewer annuitizations of $1.8 million.
Partially offsetting these declines were higher term insurance sales and
renewals of the Term Essential and Term Elite products of $11.2 million.
These decreases were partially offset by increases in policy charges and fee
income. Policy charges and fee income, consisting primarily of mortality and
expense ("M&E"), loading and other insurance charges assessed on General and
Separate Account policyholder fund balances, increased by $7.9 million. The
increase was a result of an $11.7 million increase for domestic individual life
products offset by a $3.7 million decrease for annuity products. Mortality and
sales based loading charges for life products increased as a result of growth in
the in-force business. The in-force business (excluding term insurance) grew to
$60.0 billion at March 31, 2002 from $54.2 billion at March 31, 2001 and $58.7
billion at December 31, 2001. In contrast, annuity fees are mainly asset based
fees which are dependent on the fund balances which are affected by net sales as
well as asset depreciation or appreciation on the underlying investment funds in
which the customer has the option to invest. Annuity fund balances have declined
as a result of unfavorable valuation changes in the securities market over the
past two years.
Benefits and Expenses
Policyholder benefits increased by $.9 million from increased death and
surrender benefits offset by decreases in reserve provisions for the Taiwan
branch and domestic life insurance reserves. Death benefits were higher by $8.9
million due to higher death claims of $4.4 million consistent with the increase
in the life insurance in force business and higher guaranteed minimum death
benefits for annuity products of $4.5 million. There were also increased
benefits paid on surrenders of reduced paid up policies of $3.3 million. Taiwan
benefits and reserves were $5.9 million lower due to the transfer of the branch
as of January 31, 2001. Domestic life reserves decreased $5.2 million primarily
as a result of the lower amount of term insurance the Company issued in the 2002
period under policy provisions to customers who previously had lapsing variable
life insurance with the Company. This was partially offset by increases for term
insurance reserves due to sales and renewals of the Term Essential and Term
Elite products.
Interest credited to policyholder account balances decreased by $1.6 million
despite growth in policyholder account balances as interest crediting rates were
decreased in reaction to the declining investment portfolio yields.
General, administrative, and other expenses decreased $9.2 million from the
prior year. The primary reason for the decline is a decrease in DAC amortization
of $10.8 million, as described above. Partially offsetting this decline is an
increase of $1.6 million mainly from increased commission and distribution
expenses.
11
3. Liquidity and Capital Resources
Principal cash flow sources are investment and fee income, investment maturities
and sales, and premiums and fund deposits. These cash inflows may be
supplemented by financing activities through other Prudential affiliates.
Cash outflows consist principally of benefits, claims and amounts paid to
policyholders in connection with policy surrenders, withdrawals and net policy
loan activity. Uses of cash also include commissions, general and administrative
expenses, and purchases of investments. Liquidity requirements associated with
policyholder obligations are monitored regularly so that the Company can manage
cash inflows to match anticipated cash outflow requirements.
The Company believes that cash flow from operations together with proceeds from
scheduled maturities and sales of fixed maturity investments, are adequate to
satisfy liquidity requirements based on the Company's current liability
structure.
The Company had $22.4 billion of assets at March 31, 2002 compared to $22.1
billion at December 31, 2001, of which $15.0 billion and $14.9 billion were held
in Separate Accounts at March 31, 2002 and December 31, 2001, respectively,
under variable life insurance policies and variable annuity contracts. The
remaining assets consisted primarily of investments and deferred policy
acquisition costs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
The Company's exposure to market risks and the way these risks are managed, are
summarized in Item 7a of the 2001 Form 10K.
12
PART II
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Item 2. Changes in Securities and Use of Proceeds.
- --------------------------------------------------
(d) Information required by Item 701(f) of Regulation S-K:
The information below pertains to modified guaranteed annuity contracts
issued by the Company in two distinct variable annuity products,
Discovery Preferred Variable Annuity and Discovery Select Variable
Annuity. However, because the modified guaranteed annuity option of
each of these products is identical, the Company has aggregated the
registration of these securities.
(1) The original effective date of the Registration Statement of
the Company for the Discovery Preferred Variable Annuity on
Form S-1 was declared effective on November 27, 1995
(Registration No. 33-61143). The Discovery Select prospectus
was added through filings under Rule 424 of the Securities Act
of 1993. The registration statement continues to be effective
through annual amendments, the most recent filed April 24,
2001 and declared effective May 1, 2001.
(2) Offering commenced immediately upon effectiveness of the
registration statement.
(3) Not applicable.
(4) (i) The offering has not been terminated.
(ii) The managing underwriter of the offering is Prudential
Investment Management Services LLC.
(iii) Market-Value Adjustment Annuity Contracts (also known as
modified guaranteed annuity contracts).
(iv) Securities registered and sold for the account of the
Company:
Amount registered*: $ 500,000,000
Aggregate price of the offering amount
registered: $ 500,000,000
Amount sold*: $ 378,338,956
Aggregate offering price of amount sold
to date: $ 378,338,956
* Securities not issued in predetermined units
No securities have been registered for the account of
any selling security holder.
(v) Expenses associated with the issuance of the securities:
Underwriting discounts and
commissions** $ 11,012,407
Other expenses** $ 21,943,484
Total $ 32,955,891
** Amounts are estimated and are paid to
affiliated parties.
(vi) Net offering proceeds: $345,383,065
(vii) Not applicable.
(viii) Not applicable.
13
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
--------
3(i)(a) The Articles of Incorporation of Pruco Life Insurance Company
(as amended through October 19, 1993) are incorporated by
reference to the initial Registration Statement on Form S-6 of
Pruco Life Variable Appreciable Account as filed July 2, 1996,
Registration No. 333-07451.
3(ii) By-Laws of Pruco Life Insurance Company (as amended through
May 6, 1997) are incorporated by reference to Form 10-Q as
filed by the Company on August 15, 1997.
4(a) Modified Guaranteed Annuity Contract is filed herewith
(previously filed as an exhibit to the Company's Registration
Statement on Form S-1 as filed November 2, 1990, Registration
No. 33-37587).
4(b) Market-Value Adjustment Annuity Contract is incorporated by
reference to the Company's registration statement on Form S-1,
Registration No. 333-18053, as filed November 17, 1995.
(b) Reports on Form 8K
------------------
None
14
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
- --------- ----- ----
_______________________________ Executive Vice President May 14, 2002
Andrew J. Mako
_______________________________ Vice President and May 14, 2002
William J. Eckert, IV Chief Accounting Officer
15