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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 June 30, 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
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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) 802-3274
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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 August 14, 2002. 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 -
Index 2
PART I - Financial Information
------------------------------
Item 1. (Unaudited) Financial Statements
Consolidated Statements of Financial Position
As of June 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations and Comprehensive Income
Three and Six months ended June 30, 2002 and 2001 4
Consolidated Statements of Changes in Stockholder's Equity
Periods ended June 30, 2002 and December 31, 2001 and 2000 5
Consolidated Statements of Cash Flows
Six months ended June 30, 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 June 30, 2002 and December 31, 2001 (In Thousands)
- --------------------------------------------------------------------------------
June 30, December 31,
2002 2001
-----------------------------------
ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 2002: $4,304,687;
2001: $3,935,472) $ 4,414,108 $ 4,024,893
Equity securities - available for sale, at fair value (cost, 2002: $5,138;
2001: $173) 5,331 375
Commercial loans on real estate 7,582 8,190
Policy loans 878,540 874,065
Short-term investments 125,059 215,610
Other long-term investments 87,594 84,342
-----------------------------------
Total investments 5,518,214 5,207,475
Cash and cash equivalents 525,136 374,185
Deferred policy acquisition costs 1,210,029 1,159,830
Accrued investment income 80,960 77,433
Reinsurance recoverable 381,512 300,697
Receivables from affiliates 45,054 33,074
Other assets 39,140 20,134
Separate Account assets 13,723,881 14,920,584
-----------------------------------
TOTAL ASSETS $ 21,523,926 $ 22,093,412
===================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 4,363,024 $ 3,947,690
Future policy benefits and other policyholder liabilities 851,693 808,230
Cash collateral for loaned securities 220,278 190,022
Securities sold under agreement to repurchase 268,055 80,715
Income taxes payable 273,526 266,096
Other liabilities 157,782 228,596
Separate Account liabilities 13,723,881 14,920,584
-----------------------------------
Total liabilities 19,858,239 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 1,149,867 1,147,665
Accumulated other comprehensive income:
Net unrealized investment gains 46,500 34,718
Foreign currency translation adjustments 72 (152)
-----------------------------------
Accumulated other comprehensive income 46,572 34,566
-----------------------------------
Total stockholder's equity 1,665,687 1,651,479
-----------------------------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 21,523,926 $ 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 and Six Months Ended June 30, 2002 and 2001 (In Thousands)
- --------------------------------------------------------------------------------
Six months ended Three months ended
June 30, June 30,
2002 2001 2002 2001
------------ ------------- -------------- -------------
REVENUES
Premiums $ 41,266 $ 47,354 $ 22,968 $ 23,936
Policy charges and fee income 258,748 240,330 131,715 121,226
Net investment income 163,796 174,803 82,325 84,493
Realized investment (losses) gains, net (32,306) 307 (26,080) (10,570)
Asset management fees 5,132 3,869 2,880 1,716
Other income 7,633 740 6,425 70
------------ ------------- -------------- -------------
Total revenues 444,269 467,403 220,233 220,871
------------ ------------- -------------- -------------
BENEFITS AND EXPENSES
Policyholders' benefits 116,929 115,490 59,116 58,585
Interest credited to policyholders'
account balances 96,672 98,033 49,486 49,225
General, administrative and other
expenses 231,577 201,061 137,221 97,522
------------ ------------- -------------- -------------
Total benefits and expenses 445,178 414,584 245,823 205,332
------------ ------------- -------------- -------------
(Loss) Income from operations before
income taxes (909) 52,819 (25,590) 15,539
------------ ------------- -------------- -------------
Income tax (benefit) provision (3,116) 11,286 (8,326) 2,645
------------ ------------- -------------- -------------
NET INCOME (LOSS) 2,207 41,533 (17,264) 12,894
------------ ------------- -------------- -------------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities,
net of reclassification adjustment 11,782 9,396 30,928 (7,215)
Foreign currency translation adjustments 224 3,320 219 -
------------ ------------- -------------- -------------
Other comprehensive income (loss) 12,006 12,716 31,147 (7,215)
------------ ------------- -------------- -------------
TOTAL COMPREHENSIVE INCOME $ 14,213 $ 54,249 $ 13,883 $ 5,679
============ ============= ============== =============
See Notes to Consolidated Financial Statements
4
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Changes in Stockholder's Equity (Unaudited)
Periods Ended June 30, 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 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 - - 2,207 - 2,207
Policy credits to eligible Policyholders - - (5) - (5)
Change in foreign currency translation
adjustments, net of taxes - - - 224 224
Change in net unrealized investment losses,
net of reclassification adjustment and taxes - - - 11,782 11,782
--------------- ------------- --------------- ------------------ -----------------
Balance, June 30, 2002 $ 2,500 $ 466,748 $ 1,149,867 $ 46,572 $ 1,665,687
=============== ============= =============== ================== =================
See Notes to Consolidated Financial Statements
5
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2001 and 2000 (In Thousands)
- --------------------------------------------------------------------------------
2002 2001
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,207 $ 41,533
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Policy charges and fee income (34,645) (39,033)
Interest credited to policyholders' account balances 96,672 98,033
Realized investment (gains) losses, net 32,306 (307)
Amortization and other non-cash items (5,284) (12,227)
Change in:
Future policy benefits and other policyholders'
liabilities 43,463 33,903
Accrued investment income (3,527) 5,434
Receivables from affiliates (11,980) 24,651
Policy loans (4,475) (25,851)
Deferred policy acquisition costs (50,199) 19,863
Income taxes payable/receivable 7,430 38,364
Other, net (54,661) (54,544)
--------------- ----------------
Cash Flows From Operating Activities 17,307 129,819
--------------- ----------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 932,838 1,767,648
Equity securities - 274
Commercial loans on real estate 608 536
Payments for the purchase of:
Fixed maturities:
Available for sale (1,332,737) (1,980,148)
Equity securities (4) (176)
Cash collateral for loaned securities, net 30,256 44,630
Securities sold under agreement to repurchase, net 187,340 (39,988)
Other long-term investments (11,787) (2,717)
Short-term investments, net 90,536 103,855
--------------- ----------------
Cash Flows Used In Investing Activities (102,950) (106,086)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 936,679 731,505
Withdrawals (584,106) (647,426)
Cash payments to eligible policyholders (115,979) -
Cash provided to affiliate - (65,636)
--------------- ----------------
Cash Flows From Financing Activities 236,594 18,443
--------------- ----------------
Net increase in Cash and cash equivalents 150,951 42,176
Cash and cash equivalents, beginning of year 374,185 453,071
--------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 525,136 $ 495,247
=============== ================
Notes to Consolidated Financial Statements
6
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
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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 Life 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
current year 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
Contingencies
On an ongoing basis, our internal supervisory and control functions review the
quality of our sales, marketing and other customer interface procedures and
practices and may recommend modifications or enhancements. In certain cases, if
appropriate, we may offer customers remediation and may incur charges, including
the cost of such remediation, administrative costs and regulatory fines.
It is possible that the results of operations or the cash flow of the Company in
a particular quarterly or annual period could be materially affected as a result
of payments in connection with the matters discussed above depending, in part,
upon the results of operations or cash flow for such period. Management
believes, however, that the ultimate payments in connection with these matters
should not have a material adverse effect on the Company's financial position.
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
complaintants. 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 June 30, 2002, Prudential and/or the Company remained a party to
approximately 40 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 17 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.
7
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
2. CONTINGENCIES AND LITIGATION (continued)
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 effected 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.
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, retail distribution expenses and asset
management fees.
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.
In accordance with a revenue sharing agreement with Prudential Investments LLC,
which began on February 1, 2002, the Company receives fee income from
policyholder account balances invested in the Prudential Series Funds ("PSF").
These revenues were recorded as "Asset management fees" in the Consolidated
Statements of Operations and Comprehensive Income.
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 $626.7
million and $647.2 million at June 30, 2002 and December 31, 2001, respectively.
The fees received related to the COLI policies were $4.4 million for both the
periods ending June 30, 2002 and 2001.
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 June 30, 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 June 30, 2002 and 2001 from the Taiwan
coinsurance agreement were $37.6 million and $41.3 million, respectively.
Benefits ceded for the periods ending June 30, 2002 and 2001 from the Taiwan
coinsurance agreement were $7.1 million and $6.0 million, respectively.
Included in the reinsurance recoverable balances were affiliated reinsurance
recoverables of $322.6 million and $285.8 million at June 30, 2002 and December
31, 2001, respectively. Of these affiliated amounts, the reinsurance recoverable
related to the Taiwan coinsurance agreement was $297.5 million and $ 260.6
million at June 30, 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
June 30, 2002 or December 31, 2001.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the consolidated financial condition of Pruco Life
Insurance Company as of June 30, 2002, compared with December 31, 2001, and its
consolidated results of operations for the six month and three month periods
ended June 30, 2002 and June 30, 2001. You should read the following analysis of
our consolidated financial condition and results of operations in conjunction
with the Company's MD&A and audited Consolidated Financial statements included
in the Company's Report on Form 10-K for the year ended December 31, 2001.
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
primarily to Separate Account annuity and life policyholders and through the
interest spread for the GIC and certain annuity and individual 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
on the Company's investment portfolio that supports the products and the amount
of interest credited to the policyholders' accounts. Products that generate
spread income primarily include the GIC product, general account individual life
insurance products, fixed annuities and the fixed-rate option of variable
annuities.
The Company's Changes in Financial Position and Results of Operations are
described below.
1. Analysis of Financial Condition
From December 31, 2001 to June 30, 2002 there was a decrease of $569 million in
total assets from $22,093 million to $21,524 million. Separate Account assets
declined $1,197 million mainly from market value declines. Fixed maturities
increased by $389 from investing policyholder deposits. Cash and cash
equivalents are $151 million higher than December 31, 2001 as a result of
increased securities lending activities. Reinsurance recoverable increased by
$81 million primarily as a result of a $37 million increase in reserves of the
transferred business of the Taiwan branch and an increase of $40 million
associated with a new reinsurance agreement that reinsures the variable life
insurance policies. The transfer of the Company's Taiwan branch accounted for
using coinsurance accounting requires the establishment of reinsurance
recoverable and the inclusion of the Taiwan branch future policy reserve
liabilities on the Company's statement of financial position.
During this six-month period, liabilities decreased by $584 million from $20,442
million to $19,858 million. Corresponding with the asset change, Separate
Account liabilities decreased by $1,197 million primarily from market value
declines. Other liabilities decreased by $71 million mainly due to the funding
of policy credits to the Separate Account policyholders, which had been accrued
in other liabilities at December 31, 2001. This decrease was partially offset by
an increase in reinsurance payables of $35 million primarily related to the new
variable life reinsurance contract. Policyholder account balances increased by
$415 million primarily from positive net sales (sales less withdrawals) of
annuity products with fixed rate options and the funding of policy credits. A
higher level of securities lending activity increased liabilities by $218
million. Future policy benefits increased $43 million mainly due to an increase
in reserves of the transferred Taiwan business.
10
2. Results of Operations
For the six months ended June 30, 2002 versus 2001
- ---------------------------------------------------
Net Income
Consolidated net income of $2.2 million for the first six months of 2002 was
$39.3 million lower than for the first six months of 2001. The decrease in net
income was caused primarily by an increase in the amortization of deferred
acquisition costs ("DAC") of $34.5 million contained in "General, Administrative
and Other Expenses". The decline in our Separate Account assets resulting from
unfavorable market conditions contributed to the increased amortization of DAC
reflecting a decrease in expected future gross profits. Continued deterioration
in market conditions may result in further increases in the amortization of DAC.
In addition, there was a $32.6 million change in realized investment
(losses)/gains resulting from the realization of losses on fixed maturities and
derivatives. During 2002, there were losses on sales and impairments of fixed
maturities due to credit related issues compared to gains on sales in the prior
year due to the favorable impact of declining interest rates. These items were
partially offset by lower taxes and higher policy charges and fee income, as
described below.
Revenues
Consolidated revenues decreased by $23.1 million, from $467.4 million to $444.3
million. As discussed above, realized losses on investments decreased revenues
by $32.6 million. The decrease consists of $20.3 million of increased credit
related losses on fixed maturities from sales and impairments and $12.3 million
in derivative and other losses. The derivative losses were mainly from Treasury
futures as the Company is in a net short position in a declining interest rate
environment. Net investment income is lower by $11.0 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 7.22%
for the period ended June 30, 2001 to 6.63% for the period ended June 30, 2002.
Premiums decreased by $6.1 million mainly due to the transfer of the Taiwan
branch as of January 31, 2001, and the subsequent ceding of premiums which
caused a $7.5 million decline in premiums. This was partially offset by an
increase in domestic life insurance premiums of $2.1 million. The increase in
domestic life premiums was a result of higher term insurance sales and renewals
of the Term Essential and Term Elite products of $21.6 million partially offset
by lower extended term premiums. Extended term policies represent term insurance
the Company issued, under policy provisions to customers who previously had
lapsing variable life insurance with the Company.
These decreases were partially offset by increases in policy charges and fee
income and other 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 $18.4
million. The increase was a result of a $24.6 million increase for domestic
individual life products offset by a $6.2 million decrease for annuity products.
Mortality and sales based loading charges for life products increased as a
result of growth of the in-force business. The in-force business (excluding term
insurance) grew to $61.7 billion at June 30, 2002 from $56.1 billion at June 30,
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. Other income increased $6.9
million primarily from expense allowance recoveries from the new variable life
reinsurance contract.
Benefits and Expenses
Policyholder benefits increased by $1.4 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 $18.2
million due to higher death claims of $11.8 million consistent with the increase
of the life insurance in-force business and higher guaranteed minimum death
benefits for annuity products of $6.4 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 $14.7 million primarily
as a result of the lower amount of extended term insurance. 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 $1.4 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 increased $30.5 million from the
prior year. The primary reason for the increase is an increase in DAC
amortization of $34.5 million, as described above.
11
For the three months ended June 30, 2002 versus 2001
- ----------------------------------------------------
Net income
Consolidated net income for the three months ended June 30, 2002 is $30.2
million lower than the prior year comparable three-month period. The largest
factor in this decrease is higher DAC amortization of $45.2 million ($29 million
after tax) attributable to unfavorable market conditions.
Revenues
Consolidated revenues of $220.2 are comparable to the prior year as decreases in
realized gains were offset by increases in policy charges and other income.
Realized losses on investments increased by $15.5 million as a result of
increased derivative losses of $11.6 million and credit related sales and
impairments of fixed maturities of $3.9 million. The derivative losses were
mainly from Treasury futures as the Company is in a net short futures position
in a declining interest rate environment. Policy charges and fee income
increased $10.5 million due to an increase from domestic individual life
products of $13.0 million from continued growth of the in-force business
partially offset by a decrease in individual annuity charges due to declining
fund values as a result of the securities market. Other income increased $6.4
million as a result of expense allowance recoveries on the new reinsurance
contract.
Benefits and Expenses
Policyholder benefits are $0.5 million higher due to higher death claims of $8.1
million from growth in the life insurance in-force business and higher minimum
death benefit guarantees for annuity products of $2.1 million. Offsetting this
is a decrease in reserves of $9.7 million from decreases to extended term
premium reserves partially offset by increases for term insurance reserves.
General, administrative and other expenses increased $39.7 million. As mentioned
above, the largest factor was the increase in DAC amortization of $45.2 million.
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 $21.5 billion of assets at June 30, 2002 compared to $22.1
billion at December 31, 2001, of which $13.7 billion and $14.9 billion were held
in Separate Accounts at June 30, 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
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*: $ 383,729,442
Aggregate offering price of amount sold to date: $ 383,729,442
* 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** $ 11,312,451
Other expenses** $ 22,610,603
-------------
Total $ 33,923,054
** Amounts are estimated and are paid to affiliated parties.
(vi) Net offering proceeds: $ 349,806,388
(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 incorporated by
reference to the Company's Registration Statement on Form S-1,
Registration No. 33-37587 as filed November 2, 1990.
4(b) Market-Value Adjustment Annuity Contract is incorporated by
reference to the Company's registration statement on Form S-3,
Registration No. 33-61143, as filed on April 12, 2002.
(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
- --------- ----- ----
/s/ Andrew J. Mako Executive Vice President August 14, 2002
- ------------------------------- (Authorized Signatory)
Andrew J. Mako
/s/ William J. Eckert, IV Vice President and August 14, 2002
- ------------------------------- Chief Accounting Officer
William J. Eckert, IV (Principal Accounting Officer)
15