<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 June 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 IRS Employer Identification No.)
jurisdiction, 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 June 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) -
JUNE 30, 1996 AND DECEMBER 31, 1995 3
STATEMENTS OF OPERATIONS (UNAUDITED) - PERIODS ENDED
JUNE 30, 1996 AND 1995 4
` STATEMENTS OF STOCKHOLDER'S EQUITY (UNAUDITED) - PERIODS
ENDED JUNE 30, 1996 AND DECEMBER 31, 1995 5
STATEMENTS OF CASH FLOWS (UNAUDITED) - PERIODS ENDED
JUNE 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 20
ITEM 2. CHANGE IN SECURITIES 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K 20
SIGNATURE PAGE 22
2
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(000'S)
<S> <C> <C>
ASSETS
Fixed maturities
Held to maturity $ 437,268 $ 437,727
Available for sale 2,190,946 2,144,854
Mortgage loans 62,247 64,464
Policy loans 602,009 569,273
Equity securities 4,048 4,036
Investment real estate 4,070 4,059
Other long term investments 4,854 4,159
Short term investments 339,964 228,016
---------- ----------
Total Invested Assets 3,645,406 3,456,588
Cash 54,663 41,435
Deferred policy acquisition costs 587,249 566,976
Premiums due 7,708 6,367
Accrued investment income 60,900 59,862
Receivable from affiliates 6,849 8,275
Other assets 14,593 12,578
Assets held in Separate Accounts 4,638,580 4,285,268
Federal income tax receivable - 8,875
Reinsurance recoverable on paid losses 27,914 27,914
---------- ----------
TOTAL ASSETS $9,043,862 $8,474,138
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits and claims $2,709,023 $2,705,708
Other policy claims and benefits 14,377 13,822
Other liabilities 192,697 35,269
Federal income tax payable 35,330 -
Deferred federal income tax payable 142,839 151,588
Payable to affiliate 39,310 41,584
Separate Account liabilities 4,605,927 4,263,896
---------- ----------
Total Liabilities 7,739,503 7,211,867
---------- ----------
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 $3,594 & $19,585) 6,140 30,835
Unassigned equity 856,137 789,354
---------- ----------
Total Stockholders' Equity 1,304,359 1,262,271
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,043,862 $8,474,138
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
(000's)
<S> <C> <C> <C> <C>
REVENUE
Premiums $ 24,297 $ 27,154 $ 13,742 $ 17,296
Net investment income 122,204 124,352 61,352 61,560
Realized capital gains/(losses) 4,923 391 (2,252) 2,770
Policy fee income 156,621 154,289 77,817 68,722
Other income 7,807 27,303 5,068 23,643
----------- ----------- ----------- -----------
TOTAL REVENUE 315,852 333,489 155,727 173,991
----------- ----------- ----------- -----------
BENEFITS AND EXPENSES
Interest credited to policyholders'account
balances 60,908 65,446 31,882 35,493
Policyholders' benefits 77,226 80,688 37,621 37,639
Other operating costs and expenses 74,974 68,732 42,923 39,838
----------- ----------- ----------- -----------
TOTAL BENEFITS AND EXPENSES 213,108 214,866 112,426 112,970
----------- ----------- ----------- -----------
Income before income tax provision 102,744 118,623 43,301 61,021
Inome tax provision
Current 27,481 34,533 4,727 13,651
Deferred 8,480 8,861 8,362 10,327
----------- ----------- ----------- -----------
NET INCOME $ 66,783 $ 75,229 $ 30,212 $ 37,043
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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)
<TABLE>
<CAPTION>
SIX MONTHS TWELVE MONTHS
ENDED ENDED
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(000'S)
<S> <C> <C>
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 789,354 626,995
Net income 66,783 162,359
---------- ----------
Balance, end of period 856,137 789,354
---------- ----------
UNREALIZED CAPITAL GAINS
Balance, beginning of period 30,835 -
Net change in unrealized (losses)/gains (34,548) 43,915
Other adjustments (a) 9,853 (13,080)
---------- ----------
Balance, end of period 6,140 30,835
---------- ----------
TOTAL STOCKHOLDERS' EQUITY
$1,304,359 $1,262,271
---------- ----------
---------- ----------
</TABLE>
(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 FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
(000'S)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 66,783 $ 75,229
Adjustments to reconcile net
income to cash flows from
operating activities: 97,443 (97,045)
----------- ---------
CASH FLOWS FROM
OPERATING ACTIVITIES 164,226 (21,816)
----------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale/maturity of:
Fixed maturities 2,300,020 1,028,626
Equity securities 2,015 611
Mortgage loans 2,217 6,807
Investment real estate - 2,925
Other long term investments 4 120
Other 59,050 (48,577)
Payments for the purchase of:
Fixed maturities (2,398,679) (951,104)
Equity securities (2,611) (5,248)
Other long term investments (699) (626)
Net payments of short
term investments (112,315) (4,980)
----------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES (150,998) 28,554
----------- ---------
Net increase in cash 13,228 6,738
Cash, beginning of period 41,435 27,780
----------- ---------
CASH, END OF PERIOD $ 54,663 $ 34,518
----------- ---------
----------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for income
taxes $ - $ -
----------- ---------
----------- ---------
</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 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. $4.2 million and $3.6 million of joint venture equity
securities are included in "Other Long Term Investments " as of June 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 these properties for the period ended June 30, 1996 and the year
ended December 31, 1995 was $149 thousand and $106 thousand, respectively.
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 June 30, 1996 and December 31, 1995.
These investments were $718 thousand at June 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 is reported on the equity basis of
accounting. $4.8 million and $4.1 million of non real estate related
interests are included in other long term investments, as of June 30,1996 and
December 31, 1995, respectively. The Company's share of net income from such
entities was $850 thousand and $476 thousand for the periods ended June 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 $2.2 million and $2.0 million
as of June 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
JUNE 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 &
obligations of U.S.
government corporations
and agencies $ 437,268 $ 9,898 $1,296 $ 445,870
Foreign government bonds - - - -
Corporate securities - - - -
Mortgage-backed securities - - - -
Other fixed maturities - - - -
- --------------------------------------------------------------------------------
Total $ 437,268 $ 9,898 $ 1,296 $ 445,870
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
JUNE 30, 1996
- --------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <S> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities &
obligations of U.S.
government corporations
and agencies $ 229,580 $ 1,116 $ 120 $ 230,576
Foreign government bonds 86,719 705 828 86,596
Corporate securities 1,860,386 25,987 13,178 1,873,195
Mortgage-backed securities 565 14 - 579
Other fixed maturities - - - -
- --------------------------------------------------------------------------------
Total $2,177,250 $27,822 $14,126 $2,190,946
- --------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD 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 &
obligations of U.S.
government corporations
and agencies $ - $ - $ - $ -
Foreign government bonds 437,727 18,629 1,805 454,551
Corporate securities - - - -
Mortgage-backed securities - - - -
Other fixed maturities - - - -
- --------------------------------------------------------------------------------
Total $ 437,727 $ 18,629 $ 1,805 $ 454,551
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities &
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 June 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.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1996
- --------------------------------------------------------------------------------
Estimated
Amortized Fair
(000's) Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
HELD TO MATURITY
Due in one year or less $ 22,763 $ 22,926
Due after one year through five years 187,868 189,775
Due after five years through ten years 187,560 194,275
Due after ten years 39,077 38,894
Mortgage-backed securities - -
- --------------------------------------------------------------------------------
Total $437,268 $445,870
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1996
- --------------------------------------------------------------------------------
Estimated
Amortized Fair
(000's) Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
AVAILABLE FOR SALE
Due in one year or less $ 91,207 $ 92,526
Due after one year through five years 1,577,900 1,588,618
Due after five years through ten years 392,482 393,497
Due after ten years 115,096 115,726
Mortgage-backed securities 565 579
- --------------------------------------------------------------------------------
Total $2,177,250 $2,190,946
- --------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
Estimated
Amortized Fair
(000's) Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
Estimated
Amortized Fair
(000's) Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
Proceeds from the sale/maturity of fixed maturities during the period ended June
30, 1996 and the year ended December 31, 1995 were $2.3 billion and $2.0
billion, respectively. Gross gains of $18.8 million and $3.3 million and gross
losses of $13.7 million and $5.6 million were realized on those sales during the
period ended June 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>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
(000'S) (000'S)
<S> <C> <C> <C> <C>
Net investment income
consisted of:
Gross investment income
Fixed maturities $ 91,959 $ 98,832 $ 46,058 $ 49,315
Equity securities - (32) - (55)
Mortgage loans 2,313 4,559 938 1,603
Investment real estate 488 313 313 167
Policy loans 15,960 14,181 8,166 7,302
Short term investments 8,594 5,753 4,404 2,977
Other 4,748 3,265 2,572 1,687
-------- -------- -------- --------
124,062 126,871 62,451 62,996
Investment expenses 1,858 2,519 1,099 1,436
-------- -------- -------- --------
Net investment income $122,204 $124,352 $ 61,352 $ 61,560
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
4. INVESTMENT GAINS/(LOSSES)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
(000'S) (000'S)
Realized gains/(losses):
Fixed maturities $4,943 $ 372 $(2,199) $2,743
Equity securities (40) 70 (52) 85
Mortgage loans - - - -
Investment real estate - (69) - (69)
Other 20 18 (1) 11
-------- -------- -------- --------
Realized investment gains/(losses) $4,923 $ 391 $(2,252) $2,770
-------- -------- -------- --------
-------- -------- -------- --------
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
(000'S) (000'S)
Unrealized gains/(losses):
Fixed maturities -
Available for sale $(57,053) $ 52,684 $(14,940) $ 51,879
Equity securities (27) 53 (1,046) 48
-------- -------- -------- --------
(57,080) 52,737 (15,986) 51,927
Other adjustments (a) 16,394 (14,560) 4,803 (14,658)
Federal income tax (provision)/
benefit 15,991 (11,906) 3,388 (11,906)
-------- -------- -------- --------
Net change in unrealized gains/
(losses) (24,695) 26,271 (7,795) 25,363
Net unrealized gains/(losses),
beg of period 30,835 - 13,935 908
-------- -------- -------- --------
Net unrealized gains/(losses) $ 6,140 $ 26,271 $ 6,140 $(26,271)
-------- -------- -------- --------
-------- -------- -------- --------
(a) Other adjustments consist of deferred policy acquisition costs and deferred
income taxes.
14
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
(UNAUDITED)
5. MORTGAGE LOANS
Mortgage loans at June 30, 1996 and December 31, 1995 are as follows:
June 30, December 31,
1996 1995
---- ----
(000's)
Commercial loans $59,205 $59,659
Agricultural loans 3,042 4,805
------- -------
Total mortgage loans $62,247 $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 judgement 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 contractholder's
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 3.6 and 19.6
million at June 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:
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
(000'S)
Current U.S. income tax $27,481 $ 34,533
Deferred U.S. income tax $ 8,480 $ 8,861
--------- ---------
Total income taxes $35,961 $ 43,394
--------- ---------
--------- ---------
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are presented below.
DEFERRED TAX ASSETS JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(000'S)
Insurance reserves $24,646 $ 29,738
Other - -
--------- ---------
Total deferred tax assets $24,646 $ 29,738
--------- ---------
--------- ---------
DEFERRED TAX LIABILITIES
Deferred acquisition costs $152,717 $149,223
Net capital gains 7,411 27,715
Other 7,357 4,388
--------- ---------
--------- ---------
Total deferred tax liabilities $167,485 $181,326
--------- ---------
Net deferred liability $ 142,839 $ 151,588
--------- ---------
--------- ---------
The differences between the U.S. statutory federal income tax and the effective
income tax as reflected in the accompanying statement of income are:
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995
(000'S)
Tax at statutory rate $ 35,961 $ 41,518
True-up of 1994 provision - -
Other items, net - 1,876
--------- ---------
Total tax provision $ 35,961 $ 43,394
--------- ---------
--------- ---------
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 equity as of June
30, 1996 and 1995 were as follows:
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
(000's)
Net income $39,552 $42,579
Surplus 872,141 742,463
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 $47 million as of June 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
1995, 1994 or 1993 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.
Postretirement benefits, with respect to Prudential, are recognized in
accordance with the prescribed NAIC policy. 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 years ended December 31, 1995, 1994, and 1993.
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 period ended June 30, 1996 and for the year ended December 31,1995.
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 The Prudential's sales
force. The Company held over $9.0 billion in assets at June 30, 1996, 4.6
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 SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH
THE SIX MONTHS ENDED JUNE 30, 1995.)
Net income for the six month period ended June 30, 1996 was $74.2 million. This
represents a $1.0 million decrease 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 increased $2.3 million from $154.3
million for the six months ended June 30, 1995 to $156.6 million for the same
period in 1996. This is primarily attributable to the introduction of the
Discovery Preferred Product in November 1995.
Net investment income slightly declined from $124.4 million for the six month
period ended June 30, 1995 to $122.2 million for the same period ending June
30, 1996. Realized capital gains increase to $4.9 million gains for the six
months ended June 30, 1996 from a realized gain of $0.4 million for the same
period in 1995. This is the result of a significant sale of mortgage backed
securities during the second quarter of 1996.
Policyholders' benefits decreased $3.5 million for the six months ended June 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.
Total expenses for the six month period ended June 30, 1996 increased $6.3
million over the same period in 1995. The increase was attributable to general
and administrative expenses.
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 $46.8 million
and $41.4 million for the six months ended June 30, 1996 and June 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 $9.0
billion as of June 30, 1996, 51.2% was invested in separate account assets,
29.0% in fixed maturities, 3.8% in short term investments, .7% in mortgage
loans and the remaining 15.3% in other assets.
Fixed Maturities. As of June 30, 1996 and December 31, 1995, the Company's
investments in fixed maturities, which are primarily carried at market value,
were $2.6 billion and $2.5 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 June 30, 1996 and
December 31, 1995, respectively.
Mortgage Loans. As of June 30, 1996 and December 31, 1995, the Company's
investments in mortgage loans were $62.2 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 primarily a result of
a $1.8 million loan payment. Currently, the Company has two loans in the amount
of $8.4 million in the process of foreclosure and two loans with restructured
terms in the amount of $6.9 million.
19
<PAGE>
PART II
ITEM 1 LEGAL PROCEEDINGS
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 No. 13 to Form S-6,
Registration No. 2-89558, filed March 2, 1989 on behalf of the Pruco Life
Variable Annuity Account.
20
<PAGE>
4. Exhibits
Modified Guaranteed Annuity Contract, incorporated by reference to
Registrant's Form S-1 Registration Statement, Registration
No. 33-37587, filed November 2, 1990.
Market-Value Adjustment Annuity Contract, incorporated by reference to
Registrant's Form S-1 Registration Statement, Registration
No. 33-61143, filed November 17, 1995.
10. None.
11. Not Applicable.
15. Not Applicable.
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
/s/ Esther H. Milnes
__________________________ President and Director August 19, 1996
Esther H. Milnes
/s/ Linda S. Dougherty
__________________________ Vice President and Comptroller August 19, 1996
Linda S. Dougherty and Chief Accounting Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 2,190,946
<DEBT-CARRYING-VALUE> 437,268
<DEBT-MARKET-VALUE> 445,870
<EQUITIES> 4,048
<MORTGAGE> 62,247
<REAL-ESTATE> 4,070
<TOTAL-INVEST> 3,645,406
<CASH> 54,663
<RECOVER-REINSURE> 27,914
<DEFERRED-ACQUISITION> 587,249
<TOTAL-ASSETS> 9,043,862
<POLICY-LOSSES> 2,709,023
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 14,377
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,500
<OTHER-SE> 1,309,276
<TOTAL-LIABILITY-AND-EQUITY> 9,043,862
24,297
<INVESTMENT-INCOME> 122,204
<INVESTMENT-GAINS> 4,923
<OTHER-INCOME> 164,428
<BENEFITS> 138,134
<UNDERWRITING-AMORTIZATION> 22,060
<UNDERWRITING-OTHER> 52,914
<INCOME-PRETAX> 102,744
<INCOME-TAX> 28,544
<INCOME-CONTINUING> 74,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,200
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
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</TABLE>
