<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 [FEE REQUIRED]
For the period ended March 31, 1996
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 33-37587
PRUCO LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
ARIZONA 22-944557
- -------------------------------- ---------------------------------
(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) 802-6000
----------------------------------------------------
(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 March 31, 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
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
STATEMENTS OF FINANCIAL POSITION - MARCH 31, 1996 AND
DECEMBER 31, 1995 3
STATEMENTS OF OPERATIONS - PERIODS ENDED MARCH 31, 1996, 1995 4
STATEMENTS OF STOCKHOLDER'S EQUITY - PERIODS
ENDED MARCH 31, 1996 AND DECEMBER 31, 1995 5
STATEMENTS OF CASH FLOWS - PERIOD ENDED MARCH 31, 1996, 1995 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGE IN SECURITIES 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K 19
SIGNATURE PAGE 21
2
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
(000's)
ASSETS
<S> <C> <C>
Fixed maturities
Held to maturity $ 440,966 $ 437,727
Available for sale 2,073,268 2,144,854
Mortgage loans 62,625 64,464
Policy loans 587,023 569,273
Equity securities 7,513 4,036
Investment in real estate 4,066 4,059
Other long-term investments 4,657 4,159
Short term investments 303,546 228,016
----------- -----------
Total Investments 3,483,664 3,456,588
Cash 46,538 41,435
Deferred policy acquisition costs 625,235 617,405
Premiums due and deferred 6,449 6,367
Accrued investment income 57,685 59,862
Receivable form affiliates 7,725 8,275
Other assets 20,099 12,578
Assets held in Separate Accounts 4,477,896 4,285,268
Federal income tax receivable -- 8,875
Reinsurance Recoverable 27,914 27,914
----------- -----------
TOTAL ASSETS $ 8,753,205 $ 8,524,567
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Future policy benefits and claims $ 2,720,314 $ 2,715,892
Other policy claims and benefits 13,610 13,822
Other liabilities 57,610 19,863
Federal income tax payable 13,660 --
Deferred federal income tax payable 161,347 165,673
Payable to affiliate 26,516 41,584
Separate account liabilities 4,449,456 4,263,896
----------- -----------
TOTAL LIABILITIES 7,442,513 7,220,730
----------- -----------
----------- -----------
STOCKHOLDER'S 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 $13,577
& 30,689) 25,217 56,994
Unassigned surplus 843,393 804,761
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 1,310,692 1.303,837
----------- -----------
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 8,753,205 $ 8,524,567
----------- -----------
----------- -----------
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
(000'S)
REVENUE
<S> <C> <C>
Premiums $ 10,555 $ 9,858
Net investment income 60,851 62,792
Realized capital gains/(losses) 7,175 (2,379)
Policy fee income 81,544 89,227
---------- ---------
TOTAL REVENUE 160,125 159,498
---------- ---------
---------- ---------
BENEFITS AND EXPENSES
Interest credited to policyholder's account
balances $ 29,026 $ 29,953
Policyholder's benefits 39,605 43,049
Other operating costs and expenses 32,051 28,894
---------- ---------
TOTAL BENEFITS AND EXPENSES 100,682 101,896
---------- ---------
Income before provision in lieu of federal
income tax 59,443 57,602
Provision in lieu of federal income tax 20,811 19,237
---------- ---------
NET INCOME $ 38,632 $ 38,365
---------- ---------
---------- ---------
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
(000's)
COMMON STOCK
<S> <C> <C>
Balance, beginning of year $ 2,500 $ 2,500
Issued during year -- --
----------- -----------
Balance, end of period 2,500 2,500
----------- -----------
PAID IN CAPITAL
Balance, beginning of year 439,582 439,582
Paid in during year -- --
----------- -----------
Balance, end of period 439,582 439,582
UNASSIGNED SURPLUS
Balance, beginning of year $ 861,755 $ 626,995
Net income 38,632 177,766
Net change in unrealized gains/(losses) (31,777) 56,994
----------- -----------
Balance, end of period 868,610 861,755
----------- -----------
TOTAL STOCKHOLDER'S EQUITY $ 1,310,692 $ 1,303,837
----------- -----------
----------- -----------
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
(000's)
CASH FLOW FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income/(loss) $ 29,733 $ 53,365
Adjustments to reconcile net income
to net cash from operations 19,840 (188,307)
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES 49,573 134,942
----------- -----------
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale/maturity of:
Fixed maturities 915,486 540,378
Equity securities 21 215
Mortgage loans 1,838 6,461
Investment real estate -- 2,925
Other long term investments 3 55
Payments for the purchase of:
Fixed maturities (884,878) (463,750)
Equity securities (840) (313)
Other long term investments (501) (336)
Net proceeds/(payments) of short term
investments (75,599) 55,251
----------- -----------
----------- -----------
CASH FLOW FROM/(USED FOR) INVESTING
ACTIVITIES (44,470) 140,886
----------- -----------
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase/(decrease) in cash 5,103 5,944
Cash, beginning of year 41,435 27,780
----------- -----------
CASH, END OF PERIOD $ 46,538 $ 33,724
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid in lieu of 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
FOR THE PERIODS ENDING MARCH 31, 1996 AND 1995 (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 (The Prudential), a
mutual life insurance company. The Company markets individual life insurance
and single pay deferred annuities primarily through The 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 a
reconciliation of the Company's statutory net income determined in accordance
with accounting practices prescribed or permitted by regulatory authorities in
domiciliary states with net income determined on a GAAP basis.
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 surplus 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 surplus. $4.0 million and $3.6 million of equity securities
are included in " Other Equity Investments" as of March 31, 1996 and December
31, 1995, respectively.
MORTGAGE LOANS ON REAL ESTATE 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
FOR THE PERIODS ENDING MARCH 31, 1996 AND 1995 (UNAUDITED)
INVESTMENT IN REAL ESTATE was acquired through foreclosure during 1994. This
property is 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 March 31, 1996 and the
year ended December 31, 1995 was $126 thousand and $106 thousand, respectively.
OTHER LONG-TERM INVESTMENTS, which consist solely of limited partnerships, are
valued at the aggregate net equity in the partnerships. Certain investments in
this category were non-income producing at March 31, 1996 and December 31, 1996.
These investments amounted to $719 thousand at March 31, 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. $ 33 thousand of real estate related interests are included in
equity real estate at March 31, 1996 and December 31, 1995 and $4.6 million and
$4.1 million of non real estate related interests are included in other equity
investments, as of March 31,1996 and December 31, 1995, respectively. The
Company's share of net income from such entities was $653 thousand and $279
thousand for the periods ended March 31, 1996 and 1995 respectively and is
reported in investment income.
D. PROPERTY AND EQUIPMENT
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 $2.1 million and $2.0 million
as of March 31, 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 contractholder's
account balances. Revenues from these contracts consist primarily of amounts
assessed during the period against contractholder's 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 contractholder's account balances.
SHORT DURATION INSURANCE CONTRACTS provide insurance protection for a fixed
period of generally less than five years. Under these contracts the insurer can
cancel or adjust the provisions of the contract. Premium revenue is generally
recognized over the period of the contract in proportion to the amount of
insurance protection provided. For contracts where the period of risk differs
significantly from the contract period, premium revenue is recognized over the
period of risk in proportion to the protection provided. Claim costs, including
estimates of costs for claims relating to insured events that have occurred but
have not been reported to the insurer, are recognized when insured events occur.
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.
8
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE PERIODS ENDING MARCH 31, 1996 AND 1995 (UNAUDITED)
G. FUTURE POLICY BENEFITS AND CONTRACTHOLDER'S FUNDS
Policyholder's 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 contractholder's 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 assigned against
contractholder 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.
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
MARCH 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(000's) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HELD TO MATURITY
US Treasury sec &
oblig. Of US gov't
corp agencies $ 0 $ $ 0 $ 0
Foreign Gov't Bonds 0 0 0 0
Corporate Securities 440,966 12,545 773 452,737
Mortgage Backed Sec 0 0 0 0
Other Fixed Maturities 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 440,966 $ 12,545 $ 773 $ 452,737
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE PERIODS ENDING MARCH 31, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
MARCH 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(000's) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
US Treasury sec &
Oblig of US gov't
Corp and agencies $ 324,432 $ 1,470 $1,627 $ 324,274
Foreign Gov't Bonds 61,414 900 233 62,080
Corporate Securities 1,495,904 31,850 9,354 1,518,399
Mortgage Backed Sec. 163,450 6,260 1,196 168,515
Other Fixed Maturities 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total $2,045,199 $40,480 $12,410 $2,073,268
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<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
US Treasury sec &
oblig. Of US gov't
corp agencies $0 $0 $0 $0
Foreign Gov't Bonds 0 0 0 0
Corporate Securities 437,728 18,629 1,805 454,551
Mortgage Backed Sec 0 0 0 0
Other Fixed Maturities 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total $437,728 $18,629 $1,805 $454,551
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(000's) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
US Treasury sec &
Oblig of US gov't
Corp and agencies $ 324,854 $ 6,830 $ 61 $ 331,623
Foreign Gov't Bonds 73,042 3,055 0 76,097
Corporate Securities 1,506,934 54,859 2,168 1,559,625
Mortgage Backed Sec. 169,190 8,717 398 177,509
Other Fixed Maturities 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total $2,074,020 $73,461 $2,628 $2,144,854
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE PERIODS ENDING MARCH 31, 1996 AND 1995 (UNAUDITED)
The amortized cost and estimated fair value of fixed maturities at March 31,
1996, 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
MARCH 31, 1996
- --------------------------------------------------------------------------------
ESTIMATED
AMORTIZED FAIR
(000's) COST VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
HELD TO MATURITY
Due in one year or less $ 27,901 $ 28,187
Due after one year through five years 179,381 182,444
Due after five years through ten years 191,921 199,817
Due after ten years 41,763 42,290
Mortgage Backed Securities 0 0
- --------------------------------------------------------------------------------
Total $440,966 $452,738
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1996
- --------------------------------------------------------------------------------
ESTIMATED
AMORTIZED FAIR
(000's) COST VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
AVAILABLE FOR SALE
Due in one year or less $ 89,890 $ 90,357
Due after one year through five years 1,334,409 1,353,607
Due after five years through ten years 359,697 362,080
Due after ten years 97,752 98,709
Mortgage Backed Securities 163,451 168,515
- --------------------------------------------------------------------------------
Total $2,045,199 $2,073,268
- --------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE PERIODS ENDING MARCH 31, 1996 AND 1995 (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 194,543 206,332
Due after ten years 32,914 32,541
Mortgage Backed Securities 0 0
- --------------------------------------------------------------------------------
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
March 31, 1996 and the year ended December 31, 1995 were $.9 billion and $2.0
billion, respectively . Gross gains of $11.5 million and $3.3 million and gross
losses of $4.2 million and $5.6 million were realized on those sales during the
period ended March 31, 1996 and the year ended December 31, 1995 respectively.
The Company invests in both investment grade and non-investment grade
securities. The SVO of the NAIC rates fixed maturities held by insurers (SVO
rated securities accounted for approximately 86.92% and 87.12% of the Company's
total fixed maturities balances at March 31, 1996 and December 31, 1995,
respectively) for regulatory purposes and groups investments into six categories
ranging from highest quality bonds to those in or near default. The lowest
three NAIC categories represent, for the most part, high-yield securities and
are defined by the NAIC as including any security with a public agency rating of
B+ or B1 or less.
Included in "fixed maturities" are securities that are classified by the NAIC as
being in the lowest three rating categories. These approximated 1.0% of the
Company's assets at both March 31, 1996 and December 31,1995. The amount by
which the market value of these securities exceeded the carrying value was
approximately $2.0 million and $1.8 million at March 31, 1996 and
December 31, 1995, respectively.
12
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE PERIODS ENDING MARCH 31, 1996 AND 1995 (UNAUDITED)
3. NET INVESTMENT INCOME
<TABLE>
<CAPTION>
Net investment income consisted of: PERIOD ENDED
(000'S)
MARCH 31, MARCH 31,
1996 1995
---- ----
<S> <C> <C>
Gross investment income
Fixed maturities . . . . . . . . . . . . $45,901 $49,517
Equity securities. . . . . . . . . . . . 0 23
Mortgage loans . . . . . . . . . . . . . 1,375 2,956
Investment in real estate. . . . . . . . 175 146
Policy loans . . . . . . . . . . . . . . 7,794 6,879
Short-term investments . . . . . . . . . 4,190 2,776
Other. . . . . . . . . . . . . . . . . . 2,176 1,578
----- -----
60,611 63,875
Investment expenses . . . . . . . . . . . . . 759 1,082
------- -------
Net investment income . . . . . . . . . . . . $60,851 $62,792
------- -------
------- -------
</TABLE>
4. INVESTMENT AND INVESTMENT GAINS/(LOSSES)
<TABLE>
<CAPTION>
MARCH 31 MARCH 31
1996 1995
---- ----
<S> <C> <C>
Realized gains (losses)
Fixed maturities . . . . . . . . . . . . $7,142 $(2,371)
Equity securities. . . . . . . . . . . . 12 (15)
Mortgage loans . . . . . . . . . . . . . 0 0
Investment in real estate. . . . . . . . 0 0
Other. . . . . . . . . . . . . . . . . . 21 6
Net realized investment gains (losses) $7,175 $(2,379)
MARCH 31 MARCH 31
1996 1995
---- ----
Unrealized gains (losses)
Fixed maturities . . . . . . . . . . . . $39,840 $87,657
Equity securities. . . . . . . . . . . . (1,046) 27
------- -------
Net unrealized investment gains (losses) $38,794 $87,684
Tax effect 13,577 30,689
------- -------
Unrealized gains net of tax $25,217 $56,994
------- -------
------- -------
</TABLE>
13
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE PERIODS ENDING MARCH 31, 1996 AND 1995 (UNAUDITED)
5. MORTGAGE LOANS ON REAL ESTATE
Mortgage loans on real estate at March 31, 1996 and December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial loans $59,374,412 $59,658,423
Agricultural loans 3,250,744 4,805,282
Total Mortgage loans on real estate $62,625,156 $64,463,705
- --------------------------------------------------------------------------------
</TABLE>
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.
14
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE PERIODS ENDING MARCH 31, 1996 AND 1995 (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.
As of January 1, 1996, The Prudential adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (FAS No. 109). Under SFAS No.
109, the Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in their financial
statements.
The Company has not established a valuation allowance for its deferred tax
assets as it is more likely than not that the Company will produce sufficient
income in the future to realize the deferred tax asset. Realization of the
deferred tax asset is based upon the historical pattern of income. In addition,
the Company has previously demonstrated its ability to employ prudent and
feasible tax planning strategies, which would prevent tax benefits from
expiring.
Taxes on the Company are calculated under the Internal Revenue Code of 1986 (the
Code) which provides that life insurance companies be taxed on their gain from
operations after dividends to policyholders. In calculating this tax, the Code
requires the capitalization and amortization of policy acquisition expenses.
9. SURPLUS
A. RECONCILIATION TO STATUTORY NET INCOME
Accounting practices used to prepare statutory financial statements for
regulatory filings differ in certain instances from GAAP. The following
reconciles the Company's statutory net income determined in accordance with
accounting practices prescribed or permitted by regulatory authorities in
domiciliary states with net income determined on a GAAP basis.
<TABLE>
<CAPTION>
For the Quarters Ended March 31,
1996 1995
(In millions)
<S> <C> <C>
Net income statutory basis 25.8 35.0
Adjustments to reconcile to Net
Income -GAAP Basis
Future policy benefits and
contractholders' funds 4.5 8.2
Deferred policy acquisition costs 2.8 (4.4)
Due and deferred premiums (.9) (.5)
Deferred federal income taxes 2.8 1.6
Valuation of invested assets 3.5 (2.0)
Other non admitted assets .1 .5
- --------------------------------------------------------------------------------
Net Income GAAP Basis 38.6 38.4
- --------------------------------------------------------------------------------
</TABLE>
10. RELATED PARTY TRANSACTIONS
A. SERVICE AGREEMENTS
The Company, The Prudential, Pruco Life of New Jersey and Pruco Securities
Corporation, an indirect wholly-owned subsidiary of The 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 $18 million as of March 31, 1996 and $98
million for the year ended December 31, 1995.
In a reorganization of the parent's Individual Insurance Department, effective
January 1, 1993, the corporate staff of the Company was absorbed by the parent.
The costs associated with these employees, which were previously borne by the
Company, are now charged to the Company under the service and lease agreements
with the parent.
15
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
FOR THE PERIODS ENDING MARCH 31, 1996 AND 1995 (UNAUDITED)
B. PENSION PLANS
The Company is a wholly-owned subsidiary of The 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. The 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
The 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 The Prudential, are recognized in
accordance with the prescribed NAIC policy. The 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.
D. REINSURANCE
The Company currently has three reinsurance agreements in place with The
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. There agreements had no material effect
on net income for the period ended March 31, 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 The Prudential, the Company and agents appointed by The Prudential
and the Company. The 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.
16
<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 The Prudential Insurance Company of America (The
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 $8.7 billion in assets at March
31, 1996, $4.4 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 THREE MONTHS ENDED MARCH 31, 1996 COMPARED
WITH THE THREE MONTHS ENDED MARCH 31, 1995.)
Net income for the three month period ended March 31, 1996 was $38.6 million.
This represents a $.3 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 $7.7 million, from $89.2
million for the three months ended March 31, 1995 to $81.5 million for the same
period in 1996. This is primarily due to a decline in life inforce.
Net investment income slightly declined from $62.7 million for the three month
period ended March 31, 1995 to $60.8 million for the same period ending March
31, 1996. Capital gains, on the other hand, increased to $7.1 million in
realized gains for the three months ended March 31, 1996 from a realized loss of
$2.3 million for same period in 1995. This is due to sale of long term bonds and
equity securities.
Current and future benefits and claims decreased $3.4 million for the three
months ended March 31, 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 three month period ended March 31, 1996 increased $3.1
million over the same period in 1995. The increase was mainly attributable to
amortization of deferred acquisition costs, partially offset by a decrease in
general, administrative and other 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 $23.1 and $20.7
for the three months ended March 31, 1996 and March 31, 1995 respectively. Cash
flows are anticipated to be ample to meet the Company's liquidity needs for the
foreseeable future.
17
<PAGE>
3. INVESTMENTS
The Company maintains a well diversified portfolio consisting of fixed as well
as equity investments. Of the Company's total assets of $8.8 billion as of
March 31, 1996, 29.0% was invested in fixed maturities, 7% in mortgage loans,
.1% in equity securities, 3.4% in short-term investments, 50.7% in separate
account assets and the remaining 16.1% in other assets.
Fixed Maturities. As of March 31, 1996 and December 31, 1995, the Company's
investments in fixed maturities, which are primarily carried at amortized cost,
were $2.5 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 March 31, 1996 and
December 31, 1996, respectively.
Mortgage Loans. As of March 31, 1996 and December 31, 1995, the Company's
investments in mortgage loans were $62.6 million and $64.4 million,
respectively. Mortgage loans are carried at the lower of unpaid principal
balance or fair value of the underlying property. The decrease in mortgage
loans of $1.8 is due to a payment of a loan. Currently, the Company has tow
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.
18
<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
As previously reported on Form 10-K, in an action in lieu of an annual meeting,
The Prudential Insurance Company of America, the sole shareholder of Pruco Life,
elected the following Directors of Pruco Life, effective as of September 20,
1995:
Esther H. Milnes
Robert P. Hill
E.Michael Caulfield
Garnett L. Keith, Jr.
Ira J. Kleinman
I. Edward Price
William F. Yelverton
ITEM 5 OTHER INFORMATION
New Independent Accountants
I. The Registrant engaged Price Waterhouse LLP as its new independent
accountants as of May 14, 1996. During the two most recent fiscal
years and through May 14, 1996, the Registrant has not consulted with
Price Waterhouse LLP on items which 1) were or should have been
subject to SAS 50 or 2) concerned the subject matter of a disagreement
or reportable event with the former auditor, (as described in
Regulation S-K Item 304(a)(2)).
II. The Board of Directors of The Prudential Insurance Company of America
approved the recommendation by its auditing committee to engage Price
Waterhouse LLP as independent accountants. The Auditing Committee of
The Prudential Insurance Company of America supervises the audit
activities in respect to affiliates, including the Registrant.
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.
19
<PAGE>
4. Exhibits
Modified Guarantee 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.
22. None.
23. None.
24. Not Applicable.
27. Exhibit 27, Financial Data Schedule appended to this form in
accordance with EDGAR instructions.
28. None.
(b) Reports on 8-K
We filed an 8-K report regarding the dismissal of Deloitte &
Touche LLP as independent accountants during first quarter of
1996.
99. None
20
<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 May 15, 1996
- -----------------------
Esther H. Milnes
/s/ Stephen P. Tooley Vice President and Comptroller May 15, 1996
- -----------------------
Stephen P.Tooley and Chief Accounting Officer
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 440,966
<DEBT-CARRYING-VALUE> 2,073,268
<DEBT-MARKET-VALUE> 2,073,268
<EQUITIES> 7,513
<MORTGAGE> 62,625
<REAL-ESTATE> 4,066
<TOTAL-INVEST> 3,483,664
<CASH> 46,538
<RECOVER-REINSURE> 27,914
<DEFERRED-ACQUISITION> 625,235
<TOTAL-ASSETS> 8,753,205
<POLICY-LOSSES> 2,720,314
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 13,610
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,500
<OTHER-SE> 1,308,192
<TOTAL-LIABILITY-AND-EQUITY> 8,753,205
10,555
<INVESTMENT-INCOME> 60,851
<INVESTMENT-GAINS> 7,175
<OTHER-INCOME> 81,544
<BENEFITS> 39,605
<UNDERWRITING-AMORTIZATION> 2,808
<UNDERWRITING-OTHER> 29,243
<INCOME-PRETAX> 59,443
<INCOME-TAX> 20,811
<INCOME-CONTINUING> 38,632
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,632
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
