<PAGE>
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 period ended September 30, 1996
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
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(201) 802-5898
----------------------------------------------------
(Registrant's Telephone Number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES _X_ NO ___
State the aggregate market value of the voting stock held by
non-affiliates of the registrant: NONE
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of September 30, 1996. Common stock, par
value of $10 per share: 250,000 shares outstanding.
<PAGE>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX
PAGE NO.
COVER PAGE 1
INDEX 2
PART I - FINANCIAL STATEMENTS
ITEM 1. PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS:
STATEMENTS OF FINANCIAL POSITION (UNAUDITED) - 3
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
STATEMENTS OF OPERATIONS (UNAUDITED) - PERIODS ENDED
SEPTEMBER 30, 1996 AND 1995 4
STATEMENTS OF STOCKHOLDER'S EQUITY (UNAUDITED) -
PERIODS ENDED SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 5
STATEMENTS OF CASH FLOWS (UNAUDITED) - PERIODS ENDED
SEPTEMBER 30, 1996 AND 1995 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 2. CHANGE IN SECURITIES 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K 21
SIGNATURE PAGE 23
2
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
(000'S)
ASSETS
Fixed maturities
Held to maturity $ 423,250 $ 437,727
Available for sale 2,096,741 2,144,854
Mortgage loans 54,524 64,464
Policy loans 620,842 569,273
Equity securities 5,072 4,036
Investment real estate - 4,059
Other long term investments 4,635 4,159
Short term investments 275,112 228,016
---------- ----------
Total Invested Assets 3,480,176 3,456,588
---------- ----------
Cash 57,953 41,435
Deferred policy acquisition costs 617,464 566,976
Premiums due 7,954 6,367
Accrued investment income 59,724 59,862
Receivable from affiliates 8,756 8,275
Other assets 12,617 12,578
Federal income tax receivable - 6,375
Reinsurance recoverable on paid losses 27,914 27,914
Assets held in Separate Accounts 4,855,024 4,285,268
---------- ----------
TOTAL ASSETS $9,127,582 $8,471,638
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Future policy benefits and claims $2,717,289 $2,705,708
Other policy claims and benefits 15,188 13,822
Other liabilities 29,016 37,387
Federal income tax payable 16,412 -
Deferred federal income tax payable 130,255 138,123
Payable to affiliate 47,124 41,584
Separate Account liabilities 4,805,282 4,263,896
---------- ----------
TOTAL LIABILITIES 7,760,566 7,200,520
---------- ----------
CONTINGENCIES - NOTE 11
STOCKHOLDERS' EQUITY
Common Stock, $10 par value;
authorized, 1,000,000 shares;
issued & outstanding 250,000
shares 2,500 2,500
Paid in capital 439,582 439,582
Unrealized gains (net of tax of $1,811
& $17,078) 7,860 33,342
Unassigned equity 917,074 795,694
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 1,367,016 1,271,118
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $9,127,582 $8,471,638
---------- ----------
---------- ----------
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-------- -------- -------- --------
(000'S)
<S> <C> <C> <C> <C>
REVENUE
Premiums $ 35,318 $ 30,817 $ 11,021 $ 3,663
Net investment income 180,756 185,790 58,552 61,438
Realized capital gains/(losses) 7,252 8,393 2,329 8,002
Policy fee income 229,515 242,964 72,894 88,675
Other income 15,099 32,100 7,292 4,797
-------- -------- -------- --------
TOTAL REVENUE 467,940 500,064 152,088 166,575
-------- -------- -------- --------
BENEFITS AND EXPENSES
Interest credited to policyholders' account balances 92,627 97,731 31,719 32,285
Policyholders' benefits 115,895 119,587 38,669 38,899
Other operating costs and expenses 72,680 107,867 (2,294) 39,135
-------- -------- -------- --------
TOTAL BENEFITS AND EXPENSES 281,202 325,185 68,094 110,319
-------- -------- -------- --------
Income before income tax provision 186,738 174,879 83,994 56,256
Income tax provision
Current 57,959 55,610 30,478 21,077
Deferred 7,399 5,597 (1,081) (3,264)
-------- -------- -------- --------
NET INCOME $121,380 $113,672 $ 54,597 $ 38,443
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
(000'S)
COMMON STOCK
Balance, beginning of period $ 2,500 $ 2,500
Issued during period - -
---------- ----------
Balance, end of period 2,500 2,500
---------- ----------
PAID IN CAPITAL
Balance, beginning of period 439,582 439,582
Paid in during period - -
---------- ----------
Balance, end of period 439,582 439,582
---------- ----------
UNASSIGNED EQUITY
Balance, beginning of period 795,694 641,282
Net income 121,380 154,412
---------- ----------
Balance, end of period 917,074 795,694
---------- ----------
UNREALIZED CAPITAL GAINS
Balance, beginning of period 33,342 -
Net change in unrealized gains/(losses) (35,899) 46,422
Other adjustments (a) 10,417 (13,080)
---------- ----------
Balance, end of period 7,860 33,342
---------- ----------
TOTAL STOCKHOLDERS' EQUITY $1,367,016 $1,271,118
---------- ----------
---------- ----------
(a) Other adjustments consist of deferred policy acquisition costs and related
deferred income taxes.
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
------------ ------------
(000'S)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 121,380 $ 113,672
Adjustments to reconcile net income to net cash flows from
operating activities (138,194) (191,343)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES (16,814) (77,671)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities 3,193,909 1,523,310
Equity securities 3,498 4,236
Mortgage loans 9,940 7,104
Other long term investments 21 193
Investment real estate 4,829 2,925
Other 59,266 (44,320)
Payments for the purchase of:
Fixed maturities (3,185,012) (1,380,346)
Equity securities (4,560) (7,914)
Mortgage loans - -
Other long term investments (497) (626)
Investment real estate (341) -
Net proceeds/(payments) of short term investments (47,721) (17,532)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES 33,332 87,030
------------ ------------
Net increase/(decrease) in Cash 16,518 9,359
Cash, beginning of period 41,435 27,780
------------ ------------
CASH, END OF PERIOD $ 57,953 $ 37,139
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid in lieu of income taxes $ 45,044 $ -
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES
A. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Pruco Life Insurance Company (Pruco Life), a stock life insurance company,
and its subsidiaries (collectively, the Company). Pruco Life is a
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential), a mutual life insurance company. The Company markets
individual life insurance and single pay deferred annuities primarily through
Prudential's sales force. All significant intercompany balances and
transactions have been eliminated in consolidation.
B. BASIS OF PRESENTATION
The Financial Accounting Standards Board (FASB) issued Interpretation No. 40
"Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises," as amended by Statement of Financial
Accounting Standards (SFAS) No. 120 "Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts", effective for fiscal years beginning after December
15, 1995.
Interpretation No. 40 changed the practice of mutual life insurance companies
with respect to utilizing statutory basis financial statements for general
purposes in that such financial statements are no longer allowed to be
referred to as having been prepared in accordance with Generally Accepted
Accounting Principles (GAAP). As a result of Interpretation No. 40, the
Company has prepared the 1996 consolidated financial statements in accordance
with all applicable GAAP pronouncements. The Company has restated the 1995
and 1994 consolidated financial statements in accordance with GAAP. These
financial statements were previously prepared based on statutory accounting
practices prescribed or permitted by regulatory authorities in the
domiciliary states. See Note 9 for the Company's statutory net income and
surplus determined in accordance with accounting practices prescribed or
permitted by regulatory authorities in domiciliary states.
C. INVESTMENTS
FIXED MATURITIES - Securities held to maturity are those that the Company has
the positive intent and ability to hold to maturity and are principally
reported at amortized cost. Amortized cost is adjusted to estimated fair
value for impairments which are deemed to be other than temporary.
Where the Company may not have the positive intent to hold fixed maturities
until maturity, the securities are classified as "Available for Sale." These
securities are reported at market value based principally on their quoted
market prices. The associated unrealized gains and losses, net of income
taxes and deferred policy acquisition costs, are included as a component of
equity or if deemed to be other than temporary, are included as a realized
loss.
EQUITY SECURITIES consist primarily of common and preferred stocks.
Marketable equity securities are classified as "Available for Sale" and are
reported at market value based principally on their quoted market prices.
Non-marketable equity securities are reported at historical cost adjusted for
other than temporary impairments. The associated unrealized gains and losses
are included as a component of equity. $4.0 million and $3.6 million of
joint venture equity securities are included in "Other Long Term Investments"
as of September 30, 1996 and December 31, 1995, respectively.
MORTGAGE LOANS AND POLICY LOANS are stated primarily at unpaid principal
balances, net of unamortized discounts and valuation allowances for impaired
loans. Impaired loans are those for which management believes that they will
be unable to collect all amounts due according to the contractual terms of
the loan agreement. A valuation allowance is recorded for the difference
between the present value of expected future cash flows discounted at the
loan's effective interest rate or the fair value of the underlying
collateral, and the carrying value of the loan. Interest income on
non-impaired loans is recognized as net investment income earned.
7
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
(UNAUDITED)
INVESTMENT REAL ESTATE was acquired through foreclosure during 1994. This
property was valued at its fair value at the time of foreclosure. Fair value
is considered to be the amount that could reasonably be expected in a current
transaction between willing parties, other than in forced or liquidation
sale. Depreciation on this property for the period ended September 30,
1996 and the year ended December 31, 1995 was $164 thousand and $106
thousand, respectively. As of September 30, 1996 the Company had no
investment real estate holdings. The last property was sold during the third
quarter of 1996.
OTHER LONG TERM INVESTMENTS, which consist of limited partnerships, are
valued at the aggregate net equity in the partnerships. Certain investments
in this category were non-income producing at September 30, 1996 and December
31, 1995. These investments were $244 thousand at September 30, 1996 and $316
thousand at December 31, 1995.
Partnership and joint venture interests in which the Company does not have
control and a majority economic interest are reported on the equity basis of
accounting. $4.6 million and $4.1 million of non real estate related
interests are included in other long term investments, as of September 30,
1996 and December 31, 1995, respectively. The Company's share of net income
from such entities was $1.2 million and $0.5 million for the periods ended
September 30, 1996 and 1995, respectively and is reported in investment
income.
D. OTHER ASSETS
Property and equipment is carried at cost less accumulated depreciation. When
applicable, cost includes interest and real estate taxes incurred during
construction as well as other construction related costs. Depreciation is
calculated primarily on the straight line method based on the estimated
useful lives of the assets. Accumulated depreciation was $2.3 million and
$2.0 million as of September 30, 1996 and December 31, 1995, respectively.
E. REVENUE RECOGNITION AND RELATED EXPENSES
UNIVERSAL LIFE AND INVESTMENT-TYPE CONTRACTS. Universal life contracts are
long duration life insurance contracts that involve significant mortality and
morbidity risk with both fixed and guaranteed terms. Investment contracts are
long duration contracts that do not subject the insurance enterprise to risks
arising from contractholder mortality or morbidity. Amounts received as
payments for these contracts are reported as deposits to contractholders'
account balances. Revenues from these contracts consist primarily of amounts
assessed during the period against contractholders' account balances for
mortality charges, policy administration and surrender charges. Policy
benefits and claims that are charged to expenses include benefit claims
incurred in the period in excess of related contractholders' account balances.
F. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions and other costs which vary with and
are primarily related to the production or acquisition of new business.
Acquisition costs related to universal life products and investment-type
contracts are deferred and amortized in proportion to total estimated gross
profits arising principally from investment results, mortality, expense
margins and surrender charges based on historical and anticipated future
experience. Deferred acquisition costs are reviewed to determine if they are
recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. The effect on the deferred policy acquisition asset that would
result from realization of unrealized gains/(losses) is recognized with an
offset to unrealized gains/(losses) in consolidated stockholders' equity as
of the balance sheet date.
8
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
(UNAUDITED)
G. FUTURE POLICY BENEFITS AND CONTRACTHOLDERS' FUNDS
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account values
represent an accumulation of gross premium payments plus credited interest
less expense and mortality charges and withdrawals.
Benefit liabilities for annuities during the accumulation period are equal to
the accumulated contractholders' fund balances and after annuitization are
equal to the present value of expected future payments.
Interest crediting rates on these life insurance products range from 3.35% to
7%.
When liabilities for future policy benefits plus the present value of
expected future gross premiums are insufficient to provide expected future
policy benefits and expenses, unrecoverable deferred policy acquisition costs
are written off and thereafter, if required, a premium deficiency reserve is
established as a charge to earnings.
H. SEPARATE ACCOUNTS
Separate Accounts represent funds for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the
policyholders, with the exception of the Pruco Life Modified Guaranteed
Annuity Account. The Pruco Life Modified Guaranteed Annuity Account is a
non-unitized separate account, which funds the Modified Guaranteed Annuity
Contract and the Market Value Adjustment Annuity Contract. Owners of the
Pruco Life Modified Guaranteed Annuity and the Market Value Adjustment
Annuity Contracts do not participate in the investment gain or loss from
assets relating to such accounts. Such gain or loss is borne, in total, by
the Company. Assets are carried at market value. Deposits to all Separate
Accounts are reported as increases in Separate Account liabilities. Charges
assessed against contractholders' account balances for mortality, policy
administration and surrender charges are included in revenues. Mortality and
expense risk charges applied against net assets represent contractholder
funds and are also a component of revenue. The assets are legally segregated
and are not subject to claims that arise out of any other business of the
Company.
I. ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
9
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
(UNAUDITED)
2. FIXED MATURITIES AND EQUITY SECURITIES
Gross unrealized gains and losses for securities classified as Held to
Maturity and Available for Sale, by major security type, are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
SEPTEMBER 30, 1996
- -----------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ - $ - $ - $ -
Foreign government bonds - - - -
Corporate securities 423,250 8,433 1,319 430,364
Mortgage-backed securities - - - -
Other fixed maturities - - - -
- -----------------------------------------------------------------------------------------
Total $ 423,250 $ 8,433 $1,319 $ 430,364
- -----------------------------------------------------------------------------------------
FOR THE PERIOD ENDED
SEPTEMBER 30, 1996
- -----------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
AVAILABLE FOR SALE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 81,841 $ 178 $ 43 $ 81,976
Foreign government bonds 83,524 346 498 83,372
Corporate securities 1,919,375 20,528 9,040 1,930,863
Mortgage-backed securities 517 13 - 530
Other fixed maturities - - - -
- -----------------------------------------------------------------------------------------
Total $2,085,257 $21,065 $9,581 $2,096,741
- -----------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ - $ - $ - $ -
Foreign government bonds - - - -
Corporate securities 437,727 18,629 1,805 454,551
Mortgage-backed securities - - - -
Other fixed maturities - - - -
- ------------------------------------------------------------------------------------------
Total $ 437,727 $18,629 $1,805 $ 454,551
- ------------------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------
AVAILABLE FOR SALE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 324,854 $ 6,830 $ 61 $ 331,623
Foreign government bonds 73,042 3,055 - 76,097
Corporate securities 1,506,934 54,859 2,168 1,559,625
Mortgage-backed securities 169,190 8,717 398 177,509
Other fixed maturities - - - -
- ------------------------------------------------------------------------------------------
Total $2,074,020 $73,461 $2,627 $2,144,854
- ------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
(UNAUDITED)
The amortized cost and estimated fair value of fixed maturities at September
30, 1996 and December 31, 1995, categorized by contractual maturity, are
shown below. Actual maturities will differ from contractual maturities
because borrowers may prepay obligations with or without call or prepayment
penalties. Fixed maturities not due at a single maturity date have been
included in the table.
AS OF
SEPTEMBER 30, 1996
- ---------------------------------------------------------------------
Estimated
Amortized Fair
(000's) Cost Value
- ---------------------------------------------------------------------
HELD TO MATURITY
Due in one year or less $ 32,561 $ 32,768
Due after one year through five years 177,491 179,177
Due after five years through ten years 183,238 188,600
Due after ten years 29,960 29,818
Mortgage-backed securities - -
- ---------------------------------------------------------------------
Total $ 423,250 $ 430,364
- ---------------------------------------------------------------------
AS OF
SEPTEMBER 30, 1996
- ---------------------------------------------------------------------
Estimated
Amortized Fair
(000's) Cost Value
- ---------------------------------------------------------------------
AVAILABLE FOR SALE
Due in one year or less $ 107,594 $ 108,914
Due after one year through five years 1,553,606 1,560,357
Due after five years through ten years 328,896 331,740
Due after ten years 94,644 95,200
Mortgage-backed securities 517 530
- ---------------------------------------------------------------------
Total $2,085,257 $2,096,741
- ---------------------------------------------------------------------
12
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
(UNAUDITED)
AS OF
DECEMBER 31, 1995
- ---------------------------------------------------------------------
Estimated
Amortized Fair
(000's) Cost Value
- ---------------------------------------------------------------------
HELD TO MATURITY
Due in one year or less $ 25,982 $ 26,325
Due after one year through five years 184,288 189,354
Due after five years through ten years 194,543 206,331
Due after ten years 32,914 32,541
Mortgage-backed securities - -
- ---------------------------------------------------------------------
Total $ 437,727 $ 454,551
- ---------------------------------------------------------------------
AS OF
DECEMBER 31, 1995
- ---------------------------------------------------------------------
Estimated
Amortized Fair
(000's) Cost Value
- ---------------------------------------------------------------------
AVAILABLE FOR SALE
Due in one year or less $ 135,710 $ 137,304
Due after one year through five years 1,316,881 1,360,878
Due after five years through ten years 335,302 349,961
Due after ten years 116,937 119,202
Mortgage-backed securities 169,190 177,509
- ---------------------------------------------------------------------
Total $2,074,020 $2,144,854
- ---------------------------------------------------------------------
Proceeds from the sale/maturity of fixed maturities during the period ended
September 30, 1996 and the year ended December 31, 1995 were $3.2 billion
and $2.0 billion, respectively. Gross gains of $23.3 million and $28.9
million and gross losses of $16.8 million and $17.3 million were realized
on those sales during the period ended September 30, 1996 and the year ended
December 31, 1995, respectively.
13
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
(UNAUDITED)
3. NET INVESTMENT INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
Net investment income consisted of: 1996 1995 1996 1995
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Gross investment income (000's) (000's)
Fixed maturities $138,564 $147,217 $46,605 $ 48,385
Equity securities 44 96 44 128
Mortgage loans 4,321 6,164 2,008 1,605
Investment real estate 613 437 125 124
Policy loans 24,694 21,701 8,734 7,520
Short term investments 11,272 9,208 2,678 3,455
Other 6,486 4,689 1,738 1,424
-------- -------- ------- --------
185,994 189,512 61,932 62,641
Investment expenses 5,238 3,722 3,380 1,203
-------- -------- ------- --------
Net investment income $180,756 $185,790 $58,552 $ 61,438
-------- -------- ------- --------
-------- -------- ------- --------
</TABLE>
4. INVESTMENT GAINS/(LOSSES)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-------- -------- ------- --------
(000's) (000's)
<S> <C> <C> <C> <C>
Realized gains/(losses)
Fixed maturities $ 6,157 $ 6,700 $ 1,214 $ 6,328
Equity securities 589 1,752 629 1,682
Mortgage loans - - - -
Investment real estate 487 (69) 487 -
Other 19 10 (1) (8)
-------- -------- ------- --------
Realized investment gains/(losses) $ 7,252 $ 8,393 $ 2,329 $ 8,002
-------- -------- ------- --------
-------- -------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-------- -------- ------- --------
(000's) (000's)
<S> <C> <C> <C> <C>
Unrealized gains/(losses)
Fixed maturities - Available for sale $(56,749) $ 45,320 $ 304 $ (7,364)
Equity securities (27) 9 - (44)
-------- -------- ------- --------
(56,776) 45,329 304 (7,408)
Other adjustments (a) 16,026 (30,888) (368) (16,328)
Federal income tax provision/(benefit) 15,268 (2,636) (723) 9,270
-------- -------- ------- --------
Net change in unrealized gains/(losses) (25,482) 11,805 (787) (14,466)
Net unrealized gains/(losses), beg of period 33,342 - - -
-------- -------- ------- --------
Net unrealized gains/(losses) $ 7,860 $ 11,805 $ (787) $(14,466)
-------- -------- ------- --------
-------- -------- ------- --------
</TABLE>
(a) Other adjustments consist of deferred policy acquisition costs.
14
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
(UNAUDITED)
5. MORTGAGE LOANS
Mortgage loans at September 30, 1996 and December 31, 1995 are as follows:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------- -------
(000's)
Commercial loans $51,482 $59,659
Agricultural loans 3,042 4,805
------- -------
Total mortgage loans $54,524 $64,464
------- -------
------- -------
6. FAIR VALUE INFORMATION
The fair value amounts have been determined by the Company using available
information and reasonable valuation methodologies for only those accounts
for which fair value disclosures are required. Considerable judgment is
applied, as necessary, in interpreting data to develop the estimates of fair
value. Accordingly, the estimates presented may not be realized in a current
market exchange. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair values.
The following methods and assumptions were used in calculating the fair
values.
FIXED MATURITIES - Fair values for fixed maturities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. Fair values for private placement securities
are estimated using a discounted cash flow model which considers the current
market spreads between the U.S. Treasury yield curve and corporate bond yield
curve adjusted for the type of issue, its current quality and its remaining
average life. The fair value of certain non-performing private placement
securities is based on amounts provided by state regulatory authorities.
EQUITY SECURITIES - Fair value is based on quoted market prices, where
available, or prices provided by state regulatory authorities.
MORTGAGE LOANS - The fair value of the commercial mortgage and agricultural
loan portfolio is primarily based upon the present value of the scheduled
cash flows discounted at the appropriate U.S. Treasury rate, adjusted for the
current market spread for a similar quality mortgage. For certain
non-performing and other loans, fair value is based upon the value of the
underlying collateral.
POLICY LOANS - The estimated fair value is calculated using a discounted cash
flow model based upon current U.S. Treasury rates and historical loan
repayments.
INVESTMENT-TYPE INSURANCE CONTRACT LIABILITIES - Fair values for the
Company's investment-type insurance contract liabilities are estimated using
a discounted cash flow model, based on interest rates currently being offered
for similar contracts.
7. INSURANCE
The benefit reserve liabilities for single premium universal life contracts
and investment-type contracts such as deferred annuities are the
contractholders' funds.
The benefit reserve liabilities for payout annuities such as matured deferred
annuities and supplementary contracts are the present values of estimated
future benefits payments and related expenses. Present values for these
contracts are computed using interest rates ranging from 6.5% to 11%. The
mortality assumption for these contracts is the 83 IAM tables. Reserves for
supplementary benefits are stated at interest rates that vary from 4% to 6.5%
using mortality and morbidity assumptions either from company experience or
various actuarial tables.
15
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
(UNAUDITED)
8. INCOME TAXES
The Company is a member of a group of affiliated companies which join in
filing a consolidated federal tax return. Pursuant to a tax allocation
agreement, current tax liabilities are determined for individual companies
based upon their separate return basis taxable income. Members with a loss
for tax purposes recognize a current benefit in proportion to the amount of
their losses utilized in computing consolidated taxable income.
The Company has not established a valuation allowance for its deferred tax
assets. Management believes that based on its historical pattern of taxable
income, the Company will produce sufficient income in the future to realize
its deferred tax asset.
Net unrealized gains and losses are presented in equity net of deferred
taxes. The tax provision attributable to these items amounted to $1,811
thousand and $17,078 thousand at September 30, 1996 and December 31, 1995,
respectively.
The Internal Revenue Service (the "Service") has conducted examinations of
the federal income tax returns of the Company through 1992. Discussions are
being held with the Service with respect to proposed adjustments. However,
management believes there are adequate defenses against, or sufficient
reserves to provide for, such challenges.
The components of the income tax provisions are as follows:
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ -------------------
(000's)
Current U.S. income tax $57,959 $55,610
Deferred U.S. income tax 7,399 5,597
------------------ -------------------
Total income taxes $65,358 $61,607
------------------ -------------------
------------------ -------------------
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are presented below.
DEFERRED TAX ASSETS SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -------------------
(000's)
Insurance reserves $40,334 $42,601
Other 1,932 -
------------------ -------------------
Total deferred tax assets $42,226 $42,601
------------------ -------------------
------------------ -------------------
DEFERRED TAX LIABILITIES
Deferred acquisition costs $166,285 $153,526
Net capital gains 6,235 27,102
Other - 96
------------------ -------------------
Total deferred tax liabilities $172,521 $180,724
------------------ -------------------
Net deferred liability $130,255 $138,123
------------------ -------------------
------------------ -------------------
The differences between the U.S. statutory federal income tax and the
effective income tax as reflected in the accompanying statement of income are:
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ -------------------
(000's)
Tax at statutory rate $65,358 $61,208
True-up - -
Other items, net - (1)
------------------ -------------------
Total tax provision $65,358 $61,207
------------------ -------------------
------------------ -------------------
16
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
(UNAUDITED)
9. STOCKHOLDERS' EQUITY
The amounts of statutory net income for the periods ended, and surplus as of
September 30, 1996 and 1995 were as follows:
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
(000's)
Net income $ 69,875 $108,091
AS OF AS OF
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -------------------
(000's)
Surplus $899,128 $829,021
10. RELATED PARTY TRANSACTIONS
A. SERVICE AGREEMENTS
The Company, Prudential, Pruco Life of New Jersey and Pruco Securities
Corporation, an indirect wholly-owned subsidiary of Prudential, operate under
service and lease agreements whereby services of officers and employees,
supplies, use of equipment and office space are provided. The net cost of
these services allocated to the Company were $72.7 million as of September
30, 1996 and $98 million for the year ended December 31, 1995.
B. PENSION PLANS
The Company is a wholly-owned subsidiary of Prudential which sponsors several
defined benefit pension plans that cover substantially all of its employees.
Benefits are generally based on career average earnings and credited length
of service. Prudential's funding policy is to contribute annually the amount
necessary to satisfy the Internal Revenue Service contribution guidelines.
No pension expense for contributions to the plan was allocated to the Company
in 1996 or 1995 because the plan was subject to the full funding limitation
under the Internal Revenue Code.
C. POSTRETIREMENT LIFE AND HEALTH BENEFITS
Prudential also sponsors certain life insurance and health care benefits for
its retired employees. Substantially all employees may become eligible to
receive a benefit if they retire after age 55 with at least 10 years of
service. Prudential elected to amortize its obligation over twenty years. A
provision for contributions to the postretirement fund is included in the net
cost of services allocated to the Company discussed above for the period
ended September 30, 1996 and the year ended December 31, 1995.
17
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
(UNAUDITED)
D. REINSURANCE
The Company currently has three reinsurance agreements in place with
Prudential (the reinsurer). Specifically: 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, and 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. These agreements had no material
effect on net income for the periods ended September 30, 1996 and 1995.
11. 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.
12. DIVIDENDS
The Company is subject to Arizona law which limits the amount of dividends
that insurance companies can pay to stockholders. The maximum dividend which
may be paid in any 12 month period without notification or approval is
limited to the lesser of 10% of surplus as of December 31 of the preceding
year or the net gain from operations of the preceding calendar year. Cash
dividends may only be paid out of surplus derived from realized net profits.
Based on these limitations and the Company's surplus position at December 31,
1995, the Company would be permitted a maximum of $83 million in dividend
distribution in 1996, all of which could be paid in cash, without approval
from The State of Arizona Department of Insurance.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pruco Life Insurance Company consists of Pruco Life Insurance Company (Pruco
Life), Pruco Life Insurance Company of New Jersey and The Prudential Life
Insurance Company of Arizona (collectively, the Company). Pruco Life is a
wholly owned subsidiary of Prudential Insurance Company of America
(Prudential), a mutual life insurance company. The Company markets
individual life insurance and single pay deferred annuities primarily through
Prudential's sales force. The Company held over $9.1 billion in assets at
September 30, 1996. $4.9 billion of which were held in Separate Accounts
under variable life insurance policies and variable annuity contracts. The
remaining assets were held in the general account for investment primarily in
bonds, short term investments and mortgage loans.
1. RESULTS OF OPERATIONS (FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1995.)
Net income for the nine month period ended September 30, 1996 was $121.4
million. This represents a $7.7 million increase over the same period in
1995.
Policy Fee Income primarily consists of amounts assessed during the period
against contractholders' account balances for mortality, policy
administration and surrender charges. Policy Fee Income decreased $13.5
million from $243.0 million for the nine months ended September 30, 1995 to
$229.5 million for the same period in 1996.
Net investment income declined from $185.8 million for the nine month period
ended September 30, 1995 to $180.8 million for the same period ending
September 30, 1996. Realized capital gains decreased to $7.3 million for the
nine months ended September 30, 1996 from a realized gain of $8.4 million for
the same period in 1995. The decrease stems from corporate bonds which are
generating lower gains due to increases in interest rates.
Policyholders' benefits decreased $3.7 million for the nine months ended
September 30, 1996, from the same period in 1995. This is primarily due to a
decline in the level of reserves held for Minimum Death Benefit guarantees.
Other operating costs and expenses for the nine month period ended September
30, 1996 decreased $35.2 million over the same period in 1995. An adjustment
to true-up the beginning balance of deferred policy acquisition costs was
run through the deferred policy acquisition costs amortization account which
resulted in a $29 million decrease in other operating costs and expenses.
The additional decrease of approximately $5 million is due to decreases in
salaries, rent, employee benefit chargebacks, and depreciation.
2. LIQUIDITY
For an insurance company, cash needs, for the purpose of paying current
benefits, making policy loans, and paying expenses are met primarily from
premiums and investment income. Benefit expenses incurred were $61.7 million
and $64.4 million for the nine months ended September 30, 1996 and September
30, 1995 respectively. Cash flows are anticipated to be ample to meet the
Company's liquidity needs for the foreseeable future.
3. INVESTMENTS
The Company maintains a well diversified portfolio consisting of fixed as
well as equity investments. Of the Company's total assets of approximately
$9.1 billion as of September 30, 1996, 53.2% was invested in Separate Account
assets, 27.6% in fixed maturities, 3.0% in short term investments, .6% in
mortgage loans and the remaining 15.6% in other assets.
Fixed Maturities. As of September 30, 1996 and December 31, 1995, the
Company's investments in fixed maturities, which are primarily carried at
market value, were $2.5 billion and $2.6 billion, respectively. Included in
fixed maturities are securities that are classified by the National
Association of Insurance Commissioners (NAIC) as being in the lowest three
rating categories. The lowest three NAIC categories represent, for the most
part, high-yield securities. These approximated 1.0% and 1.0% of the
Company's assets at September 30, 1996 and December 31, 1995, respectively.
Mortgage Loans. As of September 30, 1996 and December 31, 1995, the
Company's investments in mortgage loans were $54.5 million and $64.4 million,
respectively. Mortgage loans are carried at the lower of unpaid principal
balance or fair value. The decrease in mortgage loans is due to a $7 million
settlement payment.
19
<PAGE>
Currently, the Company has no loans in the process of foreclosure and two
loans with restructured terms in the amount of $6.9 million.
Investment Real Estate. As of September 30, 1996, the Company has no
investment real estate. The last property was sold during the third quarter of
1996. The disposition of $4.3 million resulted in capital gains of $0.5
million.
PART II
ITEM 1 LEGAL PROCEEDING
Pruco Life 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
Pruco Life's sole shareholder, The Prudential Insurance Company of America,
acting by consent in lieu of an annual meeting on May 1, 1996, elected six
directors, comprising the entire board of directors of Pruco Life Insurance
Company, by unanimous consent. The directors so elected were:
Garnett L. Keith, Jr.
Ira J. Kleinman
Mendel Melzer
Esther H. Milnes
I. Edward Price
William F. Yelverton.
On June 18, 1996 Pruco Life accepted Garnett L. Keith, Jr.'s resignation.
William Bethke and Kiyo Sakaguchi were elected, by unanimous consent.
Therefore, at the end of second quarter, 1996, the board was comprised of the
following seven directors:
William Bethke
Ira J. Kleinman
Mendel Melzer
Esther H. Milnes
I. Edward Price
Kiyo Sakaguchi
William F. Yelverton.
ITEM 5 OTHER INFORMATION
Not Applicable.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8K
(a) (1) and (2) financial Statements of registrant and subsidiaries are
listed on pages 3-6 hereof and are filed as part of this Report.
(a) (3) EXHIBITS
REGULATION S-K
2. Not Applicable
3. Documents Incorporated by Reference
(i) The Articles of Incorporation of Pruco Life, as amended October 13,
1993, are incorporated herein by reference to Exhibit 14 (3) of the
Pruco Life Insurance Company Form 10-K for the fiscal year ended December
31, 1993; (ii) Bylaws of Pruco Life, as amended June 14, 1983, are
incorporated herein by reference to Post-Effective Amendment
20
<PAGE>
No. 13 to Form S-6, Registration No. 2-89558, filed March 2, 1989 on
behalf of the Pruco Life Variable Annuity Account.
4. Exhibits
Modified Guaranteed Annuity Contract, incorporated by reference to
Registrant's Form S-1 Registration Statement, Registration No.
33-37587, filed November 2, 1990.
Market-Value Adjustment Annutiy 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.
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.
28. None
(b) Reports on 8-K
No reports on form 8-K were filed during the second quarter of 1996.
99. None
21
<PAGE>
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
________________________ President and Director November 14, 1996
Esther H. Milnes
________________________ Vice President and Comptroller November 14, 1996
Linda S. Dougherty and Chief Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 2,096,471
<DEBT-CARRYING-VALUE> 423,250
<DEBT-MARKET-VALUE> 430,364
<EQUITIES> 5,072
<MORTGAGE> 54,524
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,480,176
<CASH> 57,953
<RECOVER-REINSURE> 27,914
<DEFERRED-ACQUISITION> 617,464
<TOTAL-ASSETS> 9,127,582
<POLICY-LOSSES> 2,717,289
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 15,188
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,500
<OTHER-SE> 1,364,516
<TOTAL-LIABILITY-AND-EQUITY> 9,127,582
35,318
<INVESTMENT-INCOME> 180,756
<INVESTMENT-GAINS> 7,252
<OTHER-INCOME> 244,614
<BENEFITS> 208,522
<UNDERWRITING-AMORTIZATION> 6,164
<UNDERWRITING-OTHER> 66,516
<INCOME-PRETAX> 186,738
<INCOME-TAX> 65,358
<INCOME-CONTINUING> 121,380
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 121,380
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
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</TABLE>
