UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 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 22-1944557
- ----------------------------- -------------------
(State or other jurisdiction, (IRS Employer
incorporation or organization) Identification No.)
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, 1997. Common stock, par value of $10
per share: 250,000 shares outstanding.
<PAGE>
PRUCO LIFE INSURANCE COMPANY
(REGISTRANT)
<TABLE>
INDEX
<CAPTION>
Item Page
NO. NO.
- ---- ----
<S> <C>
Cover Page --
Index 2
PART I
1. Business 3
2. Properties 3
3. Legal Proceedings 3
4. Submission of Matters to a Vote of Security Holders 3
PART II
5. Market for the Registrant's Interest and Related Security Holder Matters 4
6. Selected Financial Data 4
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 5
8. Financial Statements and Supplementary Data 7
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 7
PART III
10. Directors and Executive Officers of Pruco Life 8
11. Executive Compensation 10
12. Security Ownership of Certain Beneficial Owners and Management 10
13. Certain Relationships and Related Transactions 10
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 11
Exhibit Index 11
Signatures 13
</TABLE>
2
<PAGE>
PART 1
ITEM 1. BUSINESS
- -----------------
Pruco Life Insurance Company (the Company) is a stock life insurance company,
organized in 1971 under the laws of the state of Arizona. The Company markets
individual life insurance and deferred annuities (the Contracts) in the District
of Colombia, Guam, and in all states except New York. In addition, the Company
markets individual life insurance through its branch office in Taiwan. The
Company has two subsidiaries, Pruco Life Insurance Company of New Jersey (PLNJ)
and The Prudential Life Insurance Company of Arizona (PLICA). PLNJ is a stock
life insurance company organized in 1982 under the laws of the state of New
Jersey. It is licensed to sell individual life insurance and deferred annuities
only in the states of New Jersey and New York. PLICA is a stock life insurance
company organized in 1988 under the laws of the state of Arizona. PLICA had no
new business sales in 1996 and at this time will not be issuing new business.
The Company is a wholly owned subsidiary of The Prudential Insurance Company of
America (Prudential), a mutual insurance company founded in 1875 under the laws
of the state of New Jersey. Prudential intends from time to time to make
additional capital contributions to the Company as needed to enable it to meet
its reserve requirements and expenses in connection with its business.
Generally, Prudential is under no obligation to make such contributions and its
assets do not back the benefits payable under the Contracts.
The Company is engaged in a business that is highly competitive because of the
large number of stock and mutual life insurance companies and other entities
engaged in marketing insurance products. There are approximately 1,900 stock,
mutual and other types of insurers in the life insurance business in the United
States.
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 service and lease agreements with
the parent.
ITEM 2. PROPERTIES
- -------------------
Not applicable.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No actions were taken during the fourth quarter of 1996. However, 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 May 1, 1996.
William M. Bethke
Ira J. Kleinman
Mendel A. Melzer
Esther H. Milnes
I. Edward Price
William F. Yelverton
3
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S INTERESTS AND RELATED SECURITY HOLDER
MATTERS
- --------------------------------------------------------------------------
Pruco Life is a wholly-owned subsidiary of Prudential. There is no public market
for Pruco Life's common stock.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
<TABLE>
<CAPTION>
Pruco Life Insurance Company and Subsidiaries
For the Years Ended December 31,
--------------------------------------------------------------
GAAP Basis | Statutory Basis
1996 1995 1994 | 1993 1992
---------- ---------- ---------- | ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues |
Premiums, and other revenue $ 408,154 $ 401,287 $ 303,627 | $ 591,660 $ 541,248
Net investment income 247,328 246,618 241,132 | 260,939 274,037
-------------------------------------|------------------------
|
Total revenues 655,482 647,905 544,759 | 852,599 815,285
|
Benefits and expenses |
Current and future benefits and |
claims 305,119 280,913 235,660 | 534,354 478,148
Other expenses 122,006 134,790 179,173 | 157,557 129,701
-------------------------------------|------------------------
|
Total benefits and expenses 427,125 415,703 414,833 | 691,911 607,849
-------------------------------------|------------------------
|
Income before income tax provision 228,357 232,202 129,926 | 160,688 207,436
|
Income tax provision 79,135 79,558 48,031 | 83,640 96,578
-------------------------------------|------------------------
|
Net income $ 149,222 $ 152,644 $ 81,895 | $ 77,048 $ 110,858
=====================================|========================
|
Assets $9,678,427 $8,471,638 $7,713,183 | $7,172,104 $6,709,958
--------------------------------------------------------------
</TABLE>
In 1996, the Company retroactively adopted applicable accounting pronouncements
to present its financial statements in conformity with generally accepted
accounting principles. Refer to footnote 1.B. of the Consolidated Financial
Statements included in Item 8 of this Annual Report.
4
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
- -------------------------------------------------------------------------------
Pruco Life Insurance Company consists of Pruco Life Insurance Company and its
subsidiaries (collectively, the Company). Pruco Life Insurance Company is a
wholly owned subsidiary of The Prudential Insurance Company of America
(Prudential). The Company markets individual life insurance primarily through
Prudential's sales force in the United States and in Taiwan. The company held
$9.7 billion in assets at December 31, 1996, $5.3 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 policy loans.
The business climate in the United States was characterized by moderate economic
growth, low inflation, and growing investor confidence that fueled bond and
stock prices. Merger and consolidation activity accelerated, as well as
expansion of US companies into foreign markets. Those economic trends impacted
the insurance industry during the year, prompting them to implement strategies,
including consolidation, and sales of certain lines of business to counter risk,
control expenses and diversify products to remain competitive. Regulatory
changes which opened the insurance industry to other financial institutions,
particularly banks and mutual funds, heightened competition in investment type
products since those institutions were positioned to deliver the same products
through large, stable distribution channels. In addition, the industry has been
beset by negative publicity following the discovery of unacceptable sales
practices that resulted in investigations of most large insurers, including
Prudential. In spite of the difficult operating environment, 1996 was a year of
progress for the Company. It achieved solid performance in core businesses,
instituted significant cost reduction programs, and strategic initiatives which
are expected to place it on a firm course of continued growth.
The Company's assets were $9.7 billion at December 31, 1996 compare to $8.5
billion at December 31, 1995. Net income amounted to $149.2 million, a decrease
of $3.4 million or 2.2% compared to the $152.6 million earned in 1995.
1. RESULTS OF OPERATIONS
(a) 1996 versus 1995
Premiums increased by $9.4 million in 1996 from $42.1 million in 1995 to $51.5
million for the same period in 1996. This change is primarily due to increased
sales of $6.2 million related to traditional life insurance products in our
Taiwan branch which continued to expand its business throughout 1996.
Policy charges and fee income increased approximately $5.9 million during the
current year as compared to 1995. This is primarily attributable to the
increased sales of new variable annuity products and fees earned on policyholder
withdrawal and surrender activity.
Other income decreased $6.2 million for the year ended December 31, 1996 from
the year ended December 31, 1995. This decrease is due to a reduction in
separate account net gains.
Policyholders' benefits increased $32.9 million during the current year to
$186.9 million. Approximately $10 million of this increase is attributable to
the mortality costs associated with the Company's products. The additional $22
million results from the increase in reserves associated with new and existing
contracts at December 31, 1996.
Interest credited to policyholders' account balances decreased by $8.7 million.
This decrease is primarily attributable to the decrease in policyholder's
account balances due to the Company experiencing increased policyholder
withdrawals and slightly lower interest rates.
Other operating expenses decreased $12.8 million for the year ended December 31,
1996 compared to the same period for 1995. This is attributable to a decrease in
the amortization of deferred policy acquisition costs, and a company wide
initiative to reduce expenses resulting in a decrease in general expenses.
5
<PAGE>
(b) 1995 versus 1994
The Company recorded net income of $152.6 million and $81.9 million for 1995 and
1994, respectively.
Premiums increased by $19.4 million from $22.7 million for the year ended
December 31, 1994 to $42.1 million for the same period in 1995, stemming from
increased sales of life insurance in the Taiwan branch and a steady flow of
renewals in the US.
Policy charges and fee income increased approximately $10.3 million from $308.8
million for the year ended December 31, 1994, to $319.1 million for the same
period in 1995. This is primarily attributable to the increased sales of new
variable annuity products and fees earned on policyholder withdrawal and
surrender activity.
Net investment income increased $5.5 million for the twelve months ended
December 31, 1995, from the same period in 1994. Policy loans increased $75.4
million, which resulted in additional policy loan interest income of $2.4
million. Secondly, the Company's income from equity securities increased $2.0
million as a result of favorable stock market conditions.
Net realized investment gains increased $54.3 million, to $13.2 million for the
year ended December 31,1995 from a loss of $41.1 million for the same period in
1994. The Company restructured its investment portfolio to more closely align
with the liability duration and to reduce the portfolio's interest rate risk.
Sales activity of the Company's fixed maturities produced favorable gains as a
result of falling interest rates during 1995.
Policyholders' benefits increased $32.0 million to $154.0 million in 1995, from
$122.0 million in 1994. This change is primarily attributable to the increase in
reserves for new and existing policies.
Interest credited to policyholders' account balances increased $13.2 million for
the twelve months ended December 31, 1995, from the same period in 1994. This
change was a result of increased interest rates offset with decreasing
policyholder account balances.
Other operating costs and expenses decreased $44.4 million for the year ended
December 31, 1995 due a decrease in the allocation of costs from Prudential, a
decrease in the amortization of deferred policy acquisition costs, and a company
wide initiative to reduce expenses resulting in a decrease in general 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 in 1996, 1995, and
1994 were $186.9 million, $154.0 million, and $122.0 million, respectively. Cash
flows are anticipated to be sufficient to meet the Company's liquidity needs for
the foreseeable future.
3. CAPITAL RESOURCES
The primary components of the Company's total assets of $9.7 billion at December
31, 1996 are as follows (as a percentage of total assets): fixed income
securities 27.3%, separate account assets (fixed income and equity securities)
55.1%, policy loans 6.6%, and other assets 11.0%.
6
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Information required with respect to this Item 8 regarding Financial Statements
and Supplementary Data is set forth commencing on page F-3 hereof. See Index to
Financial Statements and Schedules elsewhere in this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- -----------------------------------------------------------------------
On March 12, 1996, The Board of Directors of Prudential approved the
recommendation of the Auditing Committee to dismiss Deloitte & Touche LLP as the
independent accountants of The Prudential and its subsidiaries, including the
Company.
In connection with its audits for the two most recent fiscal years, there have
been no disagreements with Deloitte & Touche LLP on any matter of accounting
principles, financial statement disclosure or auditing scope or procedure, which
if not resolved to the satisfaction of the accountant, would have caused them to
make a reference to the matter in their report.
On May 14, 1996, The Board of Directors of Prudential approved the
recommendation of the Auditing Committee to engage Price Waterhouse LLP as the
independent accountants of The Prudential and its subsidiaries, including the
Company.
7
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF PRUCO LIFE
- --------------------------------------------------------
NAME POSITION AGE
- ---- -------- ---
William F. Yelverton Chairman of the Board
and Director 56
I. Edward Price Vice Chairman of the Board
and Director 54
Esther H. Milnes President and Director 46
James Drozanowski Senior Vice President 54
Frank Marino Senior Vice President 52
Mario A. Mosse Senior Vice President 44
Hwei-Chung Shao Senior Vice President and
and Chief Actuary 42
Karen L. Shapiro Senior Vice President 41
Linda S. Dougherty Vice President, Comptroller
and Chief Accounting Officer 48
William M. Bethke Director 49
Ira J. Kleinman Director 49
Mendel M. Melzer Director 36
Kiyofumi Sakaguchi Director 53
- --------------------------------------------------------------------------------
William F. Yelverton, age 56, has been Chief Executive Officer of The Prudential
Individual Insurance Group since 1995. Prior to 1995, he was Chief Executive
Officer of New York Worldwide.
I. Edward Price, age 54, has been Senior Vice President and Actuary of
Prudential Individual Insurance since 1995. From 1994 to 1995, he was Chief
Executive Officer of Prudential International Insurance. From 1993 to 1994 he
was President of Prudential International Insurance. Prior to 1993, he was
Senior Vice President and Company Actuary of Prudential.
Esther H. Milnes, age 46, has been Vice President and Actuary of Prudential
Individual Insurance Group since 1996. From 1993 to 1995, she was Senior Vice
President and Chief Actuary of Prudential Insurance and Financial Services.
Prior to 1993, she was Vice President and Associate Actuary of Prudential.
James C. Drozanowski, age 54, has been Vice President and Operations Executive,
Prudential Individual Insurance Group since 1996; 1995 to 1996: President and
Chief Executive Officer of Chase Manhattan Bank; 1993 to 1995: Vice President,
North America Customer Services, Chase Manhattan Bank; Prior to 1993: Operations
Executive, Global Securities Services, Chase Manhattan Bank.
Frank P. Marino, age 52, has been Vice President, Policyowner Relations
Department, Prudential Individual Insurance Group since 1996; Prior to 1996:
Senior Vice President, Prudential Mutual Fund Services.
Mario A. Mosse, age 44, has been Vice President, Annuity Services, Prudential
Investments since 1996; Prior to 1996: Vice President, Chase Manhattan Bank.
Hwei-Chung Shao, age 42, has been Vice President and Associate Actuary,
Prudential.
8
<PAGE>
Karen L. Shapiro, age 41, has been Vice President, Prudential Individual
Insurance Group since 1996; Vice President and Associate General Counsel,
Prudential Securities Incorporated 1993 to 1996; Prior to 1993: Senior Associate
with Shaw, Pittman, Potts and Trowbridge.
Linda S. Dougherty, age 48, has been Vice President and Comptroller, Prudential
Individual Insurance Group since 1997; Prior to 1997: Vice President,
Accounting, Prudential.
William M. Bethke, age 49, has been President, Prudential Capital Markets Group
since 1992.
Ira J. Kleinman, age 49, has been Chief Marketing and Product Development
Officer of Prudential Individual Insurance Group since 1995. From 1993 to 1995,
he was President of Prudential Select. From 1992 to 1993, he was Senior Vice
President of Prudential. Prior to 1992, he was Vice President of Prudential.
Mendel A. Melzer, age 36, has been Chief Investment Officer, Mutual Funds and
Annuities, Prudential Investments since 1996; 1995 to 1996: Chief Financial
Officer of the Money Management Group of Prudential; 1993 to 1995: Senior Vice
President and Chief Financial Officer of Prudential Preferred Financial
Services; Prior to 1993: Managing Director, Prudential Investment Corporation.
Kiyofumi Sakaguchi, age 53, has been President, Prudential International
Insurance Group since 1995; 1994 to 1995: Chairman and Chief Executive Officer,
The Prudential Life Insurance Co., Ltd.; Prior to 1994: President and Chief
Executive Officer, Asia Pacific Region-Prudential International Insurance, and
President, The Prudential Life Insurance Co., Ltd.
9
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The following table shows the portion of compensation, paid by Prudential, to
each named executive officer for services provided to the Company. The amounts
have been determined based on each individual's time devoted to the duties as an
executive of Pruco Life and its subsidiaries during 1996.
NAME AND ALLOCATED CASH
PRINCIPAL COMPENSATION
POSITION YEAR $
- --------- ---- -------
Esther H. Milnes 1996 $21,136
President 1995 $14,250
1994 $ 9,846
Linda S. Dougherty 1996 $55,931
Vice President and Comptroller 1995 $ 0
1994 $ 0
Hwei-Chung S. Shao 1996 $21,048
Chief Actuary 1995 $ 0
1994 $ 0
Clifford E. Kirsch 1996 $54,190
Chief Legal Counsel 1995 $30,962
1994 $ 0
Frank P. Marino 1996 $12,076
Senior Vice President 1995 $ 0
1994 $ 0
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
None.
10
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) (1) and (2) Financial Statements and Schedules of registrant and its
subsidiaries are listed in the accompanying "Index to Financial Statements and
Schedules" on page F-1 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 19, 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
Appreciable Account.
4. Exhibits
Modified Guaranteed Annuity Contract, incorporated by reference
to Registrant's Form S-1 Registration Statement, Registration No.
33-37587, filed November 2, 1990.
Market-Value Adjustment Annuity Contract, incorporated by
reference to Registrant's Form S-1 Registration Statement,
Registration No. 33-61143, filed November 17, 1995.
9. None.
10. None.
11. Not applicable.
12. Not applicable.
13. Not applicable.
16. Not applicable.
18. None.
21. Pruco Life Insurance Company of New Jersey, a stock life
insurance company organized under the laws of the state of New
Jersey, is a wholly owned subsidiary of Pruco Life. It is
licensed to sell life insurance and annuities only in the States
of New Jersey and New York.
The Prudential Life Insurance Company of Arizona, a stock life
insurance company organized under the laws of the State of
Arizona, is a wholly owned subsidiary of Pruco Life. It is
licensed to sell life insurance and annuities only in the State
of Arizona.
22. None.
23. Not applicable.
11
<PAGE>
24. Powers of Attorney, incorporated by reference to Form 10-K,
Registration No. 33-86780, filed March 28, 1997, on behalf of
Pruco Life Variable Contract Real Property Account.
27. Exhibit 27, Financial Data Schedule appended to this form in
accordance with EDGAR instructions.
28. Not applicable.
99. None.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13, or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PRUCO LIFE INSURANCE COMPANY
(Registrant)
Date: March 31, 1997 By: /s/
------------------ --------------------------------
Esther H. Milnes
Prudential
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Chairman of the Board March 31, 1997
- ------------------------
William F. Yelverton
/s/ Vice Chairman of the Board March 31, 1997
- ------------------------ and Director
I. Edward Price
/s/ President and Director March 31, 1997
- ------------------------
Esther H. Milnes
/s/ Vice President and Comptroller March 31, 1997
- ------------------------ and Chief Accounting Officer
Linda S. Dougherty
/s/ Director March 31, 1997
- ------------------------
William M. Bethke
/s/ Director March 31, 1997
- ------------------------
Ira J. Kleinman
/s/ Director March 31, 1997
- ------------------------
Mendel A. Melzer
/s/ Director March 31, 1997
- ------------------------
Kiyofumi Sakaguchi
By: /s/ THOMAS C. CASTANO
---------------------------------
Thomas C. Castano
(Attorney-in-Fact)
13
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
DECEMBER 31, 1996, 1995, AND 1994
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
<PAGE>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
----------------------------------------------------------------------------
<CAPTION>
FINANCIAL STATEMENTS AND SCHEDULES PAGE
- ----------------------------------
<S> <C>
A. PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
STATEMENTS OF FINANCIAL POSITION - DECEMBER 31, 1996 AND DECEMBER 31, 1995 F-4
STATEMENTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 F-5
STATEMENTS OF STOCKHOLDER'S EQUITY - YEARS ENDED DECEMBER 31, 1996, 1995,
AND 1994 F-6
STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - DECEMBER 31, 1996, 1995, AND 1994 F-8
SCHEDULES:
SCHEDULE IV - SCHEDULE OF REINSURANCE - FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995, AND 1994 F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Pruco Life Insurance Company
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Pruco
Life Insurance Company and its subsidiaries at December 31, 1996, and the
results of their operations and their cash flows for the year in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
- --------------------------
PRICE WATERHOUSE LLP
New York, New York
March 21, 1997
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
Pruco Life Insurance Company
Newark, New Jersey
We have audited the accompanying consolidated statement of financial position of
Pruco Life Insurance Company and subsidiaries as of December 31, 1995, and the
related consolidated statements of operations, stockholder's equity and cash
flows for the years ended December 31, 1995 and 1994. Our audits also included
the financial statement schedules listed in the Index at Item 14 for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying financial statements presents fairly, in all
material respects, the consolidated financial position of Pruco Life Insurance
Company and subsidiaries as of December 31, 1995, and the consolidated results
of operations and cash flows for the years ended December 31, 1995 and 1994 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company has
retroactively adopted all applicable generally accepted accounting principles
relating to stock life insurance subsidiaries of mutual life insurance companies
and has changed, as of January 1, 1995, the method of accounting for fixed
maturity investments.
/s/ DELOITTE & TOUCHE LLP
Parsippany, N.J.
December 19, 1996
F-3
<PAGE>
<TABLE>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<CAPTION>
DECEMBER 31,
1996 1995
----------- ------------
(000'S)
ASSETS
<S> <C> <C>
Fixed maturities
Held to maturity $ 405,731 $ 437,727
Available for sale 2,236,817 2,144,854
Equity securities 3,748 4,036
Mortgage loans 46,915 64,464
Investment real estate - 4,059
Policy loans 639,782 569,273
Other long term investments 4,528 4,159
Short term investments 169,830 228,016
----------- ------------
Total invested assets 3,507,351 3,456,588
----------- ------------
Cash 73,766 41,435
Deferred policy acquisition costs 633,159 566,976
Premiums due 9,084 6,367
Accrued investment income 62,110 59,862
Receivable from affiliates 1,901 8,275
Federal income tax receivable 7,191 6,375
Reinsurance recoverable on unpaid losses 27,014 27,914
Other assets 20,000 12,578
Separate Account assets 5,336,851 4,285,268
----------- ------------
TOTAL ASSETS $9,678,427 $8,471,638
=========== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Future policy benefits and other policyholders'
liabilities $ 557,351 $ 501,200
Policyholders' account balances 2,188,862 2,218,330
Deferred federal income tax payable 148,960 141,048
Payable to affiliate 51,729 41,584
Other liabilities 55,090 37,387
Separate Account liabilities 5,277,454 4,263,896
----------- ------------
Total Liabilities 8,279,446 7,203,445
----------- ------------
Contingencies - Note 9
Stockholder's Equity
Common Stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding at
December 31, 1996 and 1995 2,500 2,500
Paid-in-capital 439,582 439,582
Net unrealized investment gains (less deferred
income tax) 12,402 30,836
Retained earnings 944,497 795,275
----------- ------------
Total Stockholder's Equity 1,398,981 1,268,193
----------- ------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $9,678,427 $8,471,638
=========== ============
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
<TABLE>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-----------------------------------
(000'S)
REVENUES
<S> <C> <C> <C>
Premiums $ 51,525 $ 42,089 $ 22,689
Policy charges and fee income 324,976 319,012 308,753
Net investment income 247,328 246,618 241,132
Realized investment gains (losses) 10,835 13,200 (41,074)
Other income 20,818 26,986 13,259
-----------------------------------
Total Revenues 655,482 647,905 544,759
-----------------------------------
BENEFITS AND EXPENSES
Policyholders' benefits 186,873 153,987 121,949
Interest credited to policyholders' account
balances 118,246 126,926 113,711
Other operating costs and expenses 122,006 134,790 179,173
-----------------------------------
Total Benefits and Expenses 427,125 415,703 414,833
-----------------------------------
Income before income tax provision 228,357 232,202 129,926
-----------------------------------
Income tax provision 79,135 79,558 48,031
-----------------------------------
NET INCOME $ 149,222 $ 152,644 $ 81,895
===================================
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-----------------------------------
(000'S)
Common Stock
<S> <C> <C> <C>
Balance, beginning of year $ 2,500 $ 2,500 $ 2,500
Issued during year - - -
-----------------------------------
Balance, end of year 2,500 2,500 2,500
-----------------------------------
Paid in Capital
Balance, beginning of year 439,582 439,582 439,582
Paid in during year - - -
-----------------------------------
Balance, end of year 439,582 439,582 439,582
-----------------------------------
Net Unrealized Investment Gains (Losses)
(Less Deferred Income Tax)
Balance, beginning of year 30,836 (1,349) -
Adoption of SFAS 115 - (39,762) -
Net change in unrealized investment
gains (losses) (18,434) 71,947 (1,349)
-----------------------------------
Balance, end of year 12,402 30,836 (1,349)
-----------------------------------
RETAINED EARNINGS
Balance, beginning of year 795,275 642,631 560,736
Net income 149,222 152,644 81,895
-----------------------------------
Balance, end of year 944,497 795,275 642,631
-----------------------------------
TOTAL STOCKHOLDER'S EQUITY $1,398,981 $1,268,193 $1,083,364
===================================
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
------------------------------------------
(000'S)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 149,222 $ 152,644 $ 81,895
Adjustments to reconcile net income to net cash from
operating activities:
Increase in future policy benefits and other policyholders'
liabilities 56,151 22,877 31,932
General account policy fee income (50,286) (56,637) (48,401)
Interest credited to policyholders' account balances 118,246 126,926 113,711
Net decrease (increase) in Separate Accounts (38,025) (3,520) (4,121)
Net realized investment (gains) losses (10,835) (13,200) 41,074
Amortization and other non-cash items 26,709 (8,106) 6,228
Change in:
Accrued investment income (2,248) (480) (2,597)
Premiums due (2,717) (1,957) (1,374)
Receivable from affiliates 6,374 (758) (637)
Note receivable from affiliate -- -- 50,000
Deferred policy acquisition costs (66,183) 31,318 34,124
Federal income tax receivable (816) 12,031 (28,908)
Other assets (6,522) (12,689) (11,121)
Payable to affiliate 10,145 11,327 (24,029)
Deferred federal income tax payable 7,912 30,779 --
Other liabilities 17,703 (61,306) (5,293)
-----------------------------------------
Cash Flows From Operating Activities 214,830 229,249 232,483
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Held to maturity 138,127 144,898 2,710,423
Available for sale 3,886,254 1,886,687 --
Equity securities 7,527 5,557 1,910
Mortgage loans 19,226 7,395 10,821
Other long term investments 288 1,559 607
Investment real estate 4,488 2,926 8,677
Payments for the purchase of:
Fixed maturities:
Held to maturity (114,494) (135,092) (2,561,082)
Available for sale (4,008,810) (1,741,139) --
Equity securities (4,697) (4,279) (2,436)
Mortgage loans -- -- (35,276)
Other long term investments (657) (1,674) (1,584)
Policy loans (70,509) (75,411) (73,591)
Net proceeds (payments) of short term investments 58,186 (36,482) 9,845
-----------------------------------------
Cash Flows From Investing Activities (85,071) 54,945 68,314
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 536,370 95,039 114,105
Withdrawals (net of transfers to/from separate accounts) (633,798) (365,578) (387,793)
-----------------------------------------
Cash Flows From Financing Activities (97,428) (270,539) (273,688)
-----------------------------------------
Net increase in Cash 32,331 13,655 27,109
Cash, beginning of year 41,435 27,780 671
-----------------------------------------
CASH, END OF YEAR $ 73,766 $ 41,435 $ 27,780
=========================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 61,760 $ 53,107 $ 56,089
=========================================
</TABLE>
SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-7
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
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 deferred annuities primarily through
Prudential's sales force in the United States, and in Taiwan. 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. Financial statements of mutual life insurance companies,
and their wholly owned stock life insurance subsidiaries, for periods
beginning after December 15, 1995 which are prepared on the basis of
statutory accounting practices will no longer be characterized as in
conformity with generally accepted accounting principles (GAAP). As a
result, the Company has prepared its 1996 consolidated financial statements
in accordance with all applicable GAAP pronouncements. The 1995 and 1994
consolidated financial statements, which were previously prepared on the
statutory basis of accounting, have been restated in accordance with GAAP.
The cumulative effect of adopting GAAP as of January 1, 1994 was an increase
in retained earnings of $378.3 million. See Note 7 for a reconciliation of
the Company's surplus and net income determined in accordance with statutory
accounting practices with equity and net income determined on a GAAP basis.
On January 1, 1995, the Company adopted SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," which expanded the use of fair
value accounting for those securities that a company does not have positive
intent and ability to hold to maturity. Implementation of this statement
decreased stockholder's equity by $39.8 million net of deferred income tax
benefit of $21.4 million. In 1994 prior to the adoption of SFAS 115, all
fixed maturities were carried at amortized cost.
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 reported at market value based principally
on their quoted market prices. Cost basis of the equity securities is $3.9
million and $5.3 million as of December 31, 1996 and 1995, respectively. The
associated unrealized gains and losses are included as a component of
equity.
Mortgage Loans and Policy Loans are stated primarily at unpaid principal
balances, net of unamortized discounts. Interest income is recognized as net
investment income earned.
F-8
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
Investment Real Estate acquired through foreclosure during 1994 was sold in
1996 for $4.5 million.
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 December 31, 1995. These
investments were $.3 million at December 31, 1995. There were no non-income
producing investments at December 31, 1996 and 1994.
Partnership and joint venture interests in which the Company does not have
control and a majority economic interest are reported on the equity basis of
accounting. Non real estate related interests of $4.5 million and $4.1
million are included in other long term investments, at December 31, 1996
and 1995, respectively. The Company's share of net income from such entities
was $1.4 million, $.3 million, and $1.9 million for the years ended December
31, 1996, 1995, and 1994, respectively, and is reported in net investment
income.
Realized investment gains and losses are reported based on specific
identification of the investments sold.
Short-term investments are fixed maturities that mature within one year, and
are reported at estimated fair value.
D. Revenue Recognition and Related Expenses
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 policyholder
mortality or morbidity. Amounts received as payments for these contracts are
reported as deposits to policyholders' account balances. Revenues from these
contracts consist primarily of amounts assessed during the period against
policyholders' account balances for mortality charges, policy administration
fees and surrender charges. Policy benefits and claims that are charged to
expenses include benefit claims incurred in the period in excess of related
policyholders' account balances.
Premiums, policy benefits and claims from traditional life and annuity
policies, generally are recognized in operations when due.
E. 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. Amortization of deferred policy acquisition costs was $9.3
million, $54.4 million, and $76.0 million for the years ended December 31,
1996, 1995, and 1994, respectively. Deferred policy acquisition costs are
analyzed 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
investment gains (losses) is recognized with an offset to unrealized
investment gains (losses) in consolidated stockholder's equity.
F-9
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
F. Future Policy Benefits and Policyholders' Account Balances
Benefit reserve liabilities for payout annuities such as matured deferred
annuities and supplementary contracts represent 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.
When liabilities for future policy benefits plus the present value of
expected future gross deposits 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 income.
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 deposits plus interest credited less
expense and mortality charges and withdrawals.
Interest crediting rates on life insurance products range from 3.35% to 7%.
G. 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.
All Separate Account assets are carried at market value. Deposits to all
Separate Accounts are reported as increases in Separate Account liabilities,
which equal the Separate Account policy account fund values. Charges
assessed against Policyholders' account balances for mortality, policy
administration and surrender charges are included in policy charges and fee
income. Mortality and expense risk charges are applied against the
Policyholders' account balance. The Separate Account assets are legally
segregated and are not subject to claims that arise out of any other
business of the Company.
H. Estimates
The preparation of financial statements 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.
F-10
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
2. FIXED MATURITIES
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>
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ - $ - $ - $ -
Foreign government bonds - - - -
Corporate securities 405,731 10,947 576 416,102
Mortgage-backed securities - - - -
Other fixed maturities - - - -
- ---------------------------------------------------------------------------------------------------
Total $ 405,731 $ 10,947 $ 576 $ 416,102
- ---------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available For Sale
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 32,055 $ 30 $ 174 $ 31,911
Foreign government bonds 90,447 857 205 91,099
Corporate securities 2,087,250 30,365 4,206 2,113,409
Mortgage-backed securities 398 - - 398
Other fixed maturities - - - -
- ---------------------------------------------------------------------------------------------------
Total $ 2,210,150 $ 31,252 $ 4,585 $ 2,236,817
- ---------------------------------------------------------------------------------------------------
</TABLE>
F-11
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000's) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ - $ - $ - $ -
Foreign government bonds - - - -
Corporate securities 437,727 18,629 1,805 454,551
Mortgage-backed securities - - - -
Other fixed maturities - - - -
- ---------------------------------------------------------------------------------------------------
Total $ 437,727 $ 18,629 $ 1,805 $ 454,551
- ---------------------------------------------------------------------------------------------------
<CAPTION>
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 and
obligations of U.S. government
corporations and agencies $ 324,854 $ 6,830 $ 61 $ 331,623
Foreign government bonds 73,042 3,055 - 76,097
Corporate securities 1,507,248 54,545 2,168 1,559,625
Mortgage-backed securities 169,190 8,717 398 177,509
Other fixed maturities - - - -
- ---------------------------------------------------------------------------------------------------
Total $ 2,074,334 $ 73,147 $ 2,627 $ 2,144,854
- ---------------------------------------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
The amortized cost and estimated fair value of fixed maturities at December 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.
DECEMBER 31, 1996
- ------------------------------------------------------------------------------
Estimated
Amortized Fair
(000's) Cost Value
- ------------------------------------------------------------------------------
Held to Maturity
Due in one year or less $ 28,653 $ 28,762
Due after one year through five years 156,013 158,183
Due after five years through ten years 194,765 202,766
Due after ten years 26,300 26,391
Mortgage-backed securities -- --
- ------------------------------------------------------------------------------
Total $ 405,731 $ 416,102
- ------------------------------------------------------------------------------
DECEMBER 31, 1996
- ------------------------------------------------------------------------------
Estimated
Amortized Fair
(000's) Cost Value
- ------------------------------------------------------------------------------
Available For Sale
Due in one year or less $ 130,400 $ 131,301
Due after one year through five years 1,561,854 1,578,979
Due after five years through ten years 398,090 404,920
Due after ten years 119,408 121,219
Mortgage-backed securities 398 398
- ------------------------------------------------------------------------------
Total $2,210,150 $2,236,817
- ------------------------------------------------------------------------------
Proceeds from the sale of fixed maturities during 1996, 1995, and 1994 were $3.8
billion, $1.8 billion, and $2.6 billion, respectively. Gross gains of $28.7
million, $28.8 million, and $16.8 million and gross losses of $19.7 million,
$17.5 million, and $49.8 million were realized on those sales during 1996, 1995,
and 1994, respectively.
F-13
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
3. Net Investment Income YEAR ENDED
DECEMBER 31,
1996 1995 1994
-------------------------------------------
(000'S)
<S> <C> <C> <C>
Net investment income consists of:
Gross investment income
Fixed maturities
Held to maturity $ 33,419 $ 33,458 $ 196,909
Available for sale 152,445 160,740 --
Equity securities 44 104 14
Mortgage loans 5,669 7,757 4,041
Investment real estate 613 647 2,146
Policy loans 33,449 29,775 25,692
Short term investments 16,780 15,092 12,676
Other 9,438 3,949 5,075
-------------------------------------------
251,857 251,522 246,553
Investment expenses (4,529) (4,904) (5,421)
===========================================
Net investment income $ 247,328 $ 246,618 $ 241,132
===========================================
4. Investment Gains (Losses)
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-------------------------------------------
(000'S)
<S> <C> <C> <C>
Realized investment gains (losses)
Fixed maturities - Available for sale $ 9,036 $ 11,359 $ (38,180)
Equity securities 781 2,020 503
Mortgage loans 1,677 (90) (4,581)
Investment real estate 487 (99) 1,184
Other (1,146) 10 --
-------------------------------------------
Realized investment gains (losses) $ 10,835 $ 13,200 $ (41,074)
===========================================
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-------------------------------------------
(000'S)
<S> <C> <C> <C>
Net unrealized investment gains
(losses), beginning of period $ 30,836 $ (1,349) $ --
Net unrealized investment gains (losses)
Fixed maturities - Available for sale (43,853) 131,712 --
Equity securities 1,403 827 (2,108)
-------------------------------------------
(42,450) 132,539 (2,108)
Deferred income tax benefit (provision) 15,398 (47,714) 759
Deferred policy acquisition costs
(net of deferred income taxes) 8,618 (12,878) --
-------------------------------------------
Net change in unrealized
investment gains (losses) (18,434) 71,947 (1,349)
Adoption of SFAS 115 -- (39,762) --
-------------------------------------------
Net unrealized investment gains
(losses), end of period $ 12,402 $ 30,836 (1,349)
===========================================
</TABLE>
F-14
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
5. Fair Value Information
The fair value amounts have been determined by the Company using available
information and reasonable valuation methodologies. Considerable judgment is
applied, as necessary, in interpreting data to develop the estimates of fair
value. Accordingly, the estimates presented may not be realized in a current
market exchange. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair values.
The following methods and assumptions were used in calculating the fair values.
Fixed Maturities - Fair values for fixed maturities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. Fair values for private placement securities are
estimated using a discounted cash flow model which considers the current market
spreads between the U.S. Treasury yield curve and corporate bond yield curve
adjusted for the type of issue, its current quality and its remaining average
life.
Equity Securities - Fair value is based on quoted market prices.
Mortgage Loans - The fair value of the mortgage 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.
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.
Policyholders' Account Balances - Fair values for policyholders' account
balances are equal to the policy account values.
Short-term Investments - Fair values for short-term investments are based on
quoted market prices or estimates from independent pricing services.
The following table discloses the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
(000'S)
<S> <C> <C> <C> <C>
Financial Assets:
Fixed maturities:
Held to maturity $ 405,731 $ 416,102 $ 437,727 $ 454,551
Available for sale 2,236,817 2,236,817 2,144,854 2,144,854
Mortgage loans 46,915 46,692 64,464 63,635
Policy loans 639,782 623,218 569,273 577,975
Equity securities 3,748 3,748 4,036 4,036
Short-term investments 169,830 169,830 228,016 228,016
Financial Liabilities:
Policyholders'
account balances $ 2,188,862 $ 2,188,862 $ 2,218,330 $ 2,218,330
</TABLE>
F-15
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
6. Income Taxes
The Company is a member of a group of affiliated companies which join in filing
a consolidated federal income tax return in addition to separate company state
and local tax returns. The Internal Revenue Code limits the amount of nonlife
insurance losses that may offset life insurance company taxable income.
Companies operating outside the United States are taxed under applicable foreign
statutes.
Pursuant to the tax allocation arrangement, total federal income tax expense is
determined on a separate company basis. Members with losses record tax benefits
to the extent such losses are recognized in the consolidated federal tax
provision. The Company has a net receivable from Prudential of $7.2 million and
$6.4 million as of December 31, 1996 and 1995, respectively.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes.
The components of income taxes are as follows:
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-------------------------------------
(000'S)
Current income tax provision:
Federal income tax $ 59,489 $ 65,131 $ 59,641
State and local income tax 703 1,876 3,036
Foreign income tax 4 7 7
-------------------------------------
Total current income tax 60,196 67,014 62,684
Deferred income tax provision
(benefit):
Federal income tax 18,413 12,196 (14,246)
State and local income tax 526 348 (407)
-------------------------------------
Total deferred income tax 18,939 12,544 (14,653)
-------------------------------------
Total income tax provision $ 79,135 $ 79,558 $ 48,031
=====================================
The income tax provision is different from the amount computed using the
expected federal income tax rate of 35% for the following reasons:
YEAR ENDED
DECEMBER 31,
1996 1995 1994
-------------------------------------
(000'S)
Expected federal income tax expense $ 79,926 $ 81,271 $ 45,474
State income taxes 1,229 2,224 2,629
Other (2,020) (3,937) (72)
=====================================
Total income tax provision $ 79,135 $ 79,558 $ 48,031
=====================================
F-16
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
The components of net deferred income taxes payable are as follows:
YEAR ENDED
DECEMBER 31,
Deferred Income Tax Assets 1996 1995
------------------------------
(000'S)
Insurance liabilities $ 38,532 $ 40,732
Other -- --
------------------------------
Total deferred income tax assets $ 38,532 $ 40,732
==============================
Deferred Income Tax Liabilities
Deferred acquisition costs $ 173,785 $ 153,526
Net investment gains 12,502 28,157
Other 1,205 97
------------------------------
Total deferred income tax liabilities 187,492 181,780
------------------------------
Deferred federal income tax payable $ 148,960 $ 141,048
==============================
The Internal Revenue Service (the "Service") has completed examinations of the
consolidated federal income tax returns through 1989. The Service is examining
the years 1990 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 adjustments.
F-17
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
7. Stockholder's Equity Reconciliation
The reconciliation of statutory net income to GAAP net income, and statutory
surplus to GAAP equity as of December 31, 1996, 1995, and 1994 are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------
(000'S)
<S> <C> <C> <C>
Statutory net income $ 73,847 $ 157,751 $ 52,955
Deferred acquisition costs 48,862 (6,103) (34,124)
Deferred premium 1,295 (743) 1,122
Insurance liabilities 10,211 22,890 31,780
Income taxes (7,780) (27,669) 42,755
Interest maintenance reserve 365 5,480 (24,704)
Separate accounts and other 22,422 1,038 12,111
---------------------------------------------------------
GAAP net income $ 149,222 $ 152,644 $ 81,895
=========================================================
Statutory surplus $ 901,645 $ 829,022 $ 676,087
Investment valuation 26,678 70,776 -
Deferred acquisition costs 633,159 566,976 598,294
Deferred premium (11,859) (13,154) (12,412)
Insurance liabilities (124,781) (153,995) (71,076)
Income taxes (124,823) (128,070) (82,167)
Asset valuation reserve and interest
maintenance reserve 68,733 64,551 23,690
Other 30,229 32,087 (49,052)
---------------------------------------------------------
GAAP stockholder's equity $ 1,398,981 $ 1,268,193 $ 1,083,364
=========================================================
</TABLE>
The New York State Insurance Department ("Department") recognizes only
statutory accounting for determining and reporting the financial condition
and results of operations of an insurance company, for determining its
solvency under the New York Insurance Law, and for determining whether its
financial condition warrants the payment of a dividend to its stockholders.
No consideration is given by the Department to financial statements prepared
in accordance with generally accepted accounting principles in making such
determinations.
F-18
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1996, 1995, AND 1994
8. Related Party Transactions
A. Service Agreements
The Company, Prudential, 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 $102 million, $98 million and $78 million for
the years ended December 31, 1996, 1995, and 1994, respectively.
B. Pension Plans
The Company is a wholly-owned subsidiary of Prudential which sponsors
several defined benefit pension plans that cover substantially all of its
employees. Benefits are generally based on career average earnings and
credited length of service. Prudential's funding policy is to contribute
annually the amount necessary to satisfy the Internal Revenue Service
contribution guidelines.
No pension expense for contributions to the plan was allocated to the
Company in 1996, 1995, or 1994 because the plan was subject to the full
funding limitation under the Internal Revenue Code.
C. Postretirement Life and Health Benefits
Prudential also sponsors certain life insurance and health care benefits for
its retired employees. Substantially all employees may become eligible to
receive a benefit if they retire after age 55 with at least 10 years of
service. Prudential elected to amortize its obligation over twenty years. A
provision for contributions to the postretirement fund is included in the
net cost of services allocated to the Company discussed above for the years
ended December 31, 1996, 1995, and 1994.
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. The Company is not
relieved of its primary obligation to the policyholder as a result of these
reinsurance transactions. These agreements had no material effect on net
income for the years ended December 31, 1996, 1995, and 1994.
9. 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.
10. 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 twelve 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, 1996, the Company would be permitted a maximum of $48 million in
dividend distribution in 1997, all of which could be paid in cash, without
approval from The State of Arizona Department of Insurance.
F-19
<TABLE>
Pruco Life Insurance Company and Subsidiaries
Schedule IV - Schedule of Reinsurance
For Year Ended December 31, 1996
<CAPTION>
(000's)
Percentage of
Ceded to other Assumed from amount
Gross Amount companies other companies Net amount assumed to net
------------ --------------- --------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Life insurance in force ... $ 47,430,580 $ 1,172,449 $ 0 $ 46,258,131 N/A
=====================================================================================
Life insurance premiums ... $ 54,904 $ 3,379 $ 0 $ 51,525 N/A
=====================================================================================
</TABLE>
F-20
<PAGE>
<TABLE>
Pruco Life Insurance Company and Subsidiaries
Schedule IV - Schedule of Reinsurance
For Year Ended December 31, 1995
<CAPTION>
(000's)
Percentage of
Ceded to other Assumed from amount
Gross Amount companies other companies Net amount assumed to net
------------ --------------- --------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Life insurance in force ... $ 47,822,892 $ 822,619 $ 0 $ 47,000,273 N/A
=====================================================================================
Life insurance premiums ... $ 44,357 $ 2,268 $ 0 $ 42,089 N/A
=====================================================================================
</TABLE>
F-21
<PAGE>
<TABLE>
Pruco Life Insurance Company and Subsidiaries
Schedule IV - Schedule of Reinsurance
For Year Ended December 31, 1994
<CAPTION>
(000's)
Percentage of
Ceded to other Assumed from amount
Gross Amount companies other companies Net amount assumed to net
------------ --------------- --------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Life insurance in force ... $ 48,003,675 $ 531,166 $ 0 $ 47,472,509 N/A
=====================================================================================
Life insurance premiums ... $ 24,165 $ 1,476 $ 0 $ 22,689 N/A
=====================================================================================
</TABLE>
F-22
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
FINANCIAL DATA SCHEDULE
Article 7 of Regulation S-X
Pruco Life Insurance Company
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 2,236,817
<DEBT-CARRYING-VALUE> 405,731
<DEBT-MARKET-VALUE> 416,102
<EQUITIES> 3,748
<MORTGAGE> 46,915
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,507,351
<CASH> 73,766
<RECOVER-REINSURE> 27,014
<DEFERRED-ACQUISITION> 633,159
<TOTAL-ASSETS> 9,678,427
<POLICY-LOSSES> 2,188,862
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 557,351
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,500
<OTHER-SE> 1,396,481
<TOTAL-LIABILITY-AND-EQUITY> 9,678,427
51,525
<INVESTMENT-INCOME> 247,328
<INVESTMENT-GAINS> 10,835
<OTHER-INCOME> 20,818
<BENEFITS> 305,119
<UNDERWRITING-AMORTIZATION> 9,309
<UNDERWRITING-OTHER> 112,697
<INCOME-PRETAX> 228,357
<INCOME-TAX> 79,135
<INCOME-CONTINUING> 149,222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 149,222
<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>
