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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 333-37587
PRUCO LIFE INSURANCE COMPANY
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(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
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(Address of principal executive offices) (Zip Code)
(973) 802-2859
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(Registrant's Telephone Number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: NONE
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of August 14, 1998. Common stock, par value of $10
per share: 250,000 shares outstanding
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<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
--------
COVER PAGE 1
INDEX 2
PART I -- FINANCIAL INFORMATION
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ITEM 1. (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF FINANCIAL POSITION -- JUNE 30, 1998
AND DECEMBER 31, 1997 3
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 4
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY --
SIX MONTHS ENDED JUNE 30, 1998 AND THE YEAR
ENDED DECEMBER 31, 1997 5
STATEMENTS OF CASH FLOWS -- SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
PART II -- OTHER INFORMATION
- ----------------------------
ITEM 1. LEGAL PROCEEDINGS 12
ITEM 2. CHANGES IN SECURITIES 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURE PAGE 14
2
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<TABLE>
<CAPTION>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
JUNE 30, 1998 AND DECEMBER 31, 1997 (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 1998: $2,619,520;
1997: $2,526,554) $ 2,649,812 $ 2,563,852
Held to maturity, at amortized cost (fair value, 1998: $338,924; 1997:
$350,056) 326,973 338,848
Equity securities - available for sale, at fair value (cost, 1998: $3,608;
1997: $1,289) 4,691 1,982
Mortgage loans on real estate 22,356 22,787
Policy loans 738,014 703,955
Short-term investments 479,969 316,355
Other long-term investments 1,816 1,317
----------- -----------
Total investments 4,223,631 3,949,096
Cash 93,879 71,358
Deferred policy acquisition costs 712,289 655,242
Accrued investment income 64,797 67,000
Other assets 83,154 86,692
Separate Account assets 10,337,349 8,022,079
----------- -----------
TOTAL ASSETS $15,515,099 $12,851,467
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Policyholders' account balances $ 2,321,063 $ 2,282,191
Future policy benefits and other policyholder liabilities 624,855 570,729
Cash collateral for loaned securities 196,695 143,421
Income taxes payable 24,707 71,703
Deferred income tax liability 138,324 138,483
Payable to affiliate 229,488 70,375
Other liabilities 149,596 120,260
Separate Account liabilities 10,281,306 7,948,788
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TOTAL LIABILITIES 13,966,034 11,345,950
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CONTINGENCIES (SEE NOTE 4)
STOCKHOLDER'S EQUITY
Common stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding at
June 30, 1998 and December 31, 1997 2,500 2,500
Paid-in-capital 439,582 439,582
Retained earnings 1,101,305 1,050,871
Net unrealized investment gains 11,522 17,129
Foreign currency translation adjustments (5,844) (4,565)
----------- -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME 5,678 12,564
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 1,549,065 1,505,517
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $15,515,099 $12,851,467
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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<TABLE>
<CAPTION>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 25,684 $ 26,347 $ 13,977 $ 14,104
Policy charges and fee income 167,328 156,641 85,523 80,308
Net investment income 129,967 124,032 65,852 64,811
Realized investment gains, net 12,985 6,973 7,546 2,054
Other income 18,857 12,832 6,734 6,982
-------- -------- -------- --------
TOTAL REVENUES 354,821 326,825 179,632 168,259
-------- -------- -------- --------
BENEFITS AND EXPENSES
Policyholders' benefits 76,301 98,545 29,590 49,213
Interest credited to policyholders' account
balances 56,884 53,042 31,525 28,338
General, administrative and other expenses 144,095 99,195 93,174 46,890
-------- -------- -------- --------
TOTAL BENEFITS AND EXPENSES 277,280 250,782 154,289 124,441
-------- -------- -------- --------
Income from operations before income taxes 77,541 76,043 25,343 43,818
-------- -------- -------- --------
Income taxes
Current 22,647 20,179 5,637 12,356
Deferred 4,460 6,747 2,412 1,864
-------- -------- -------- --------
Total income taxes 27,107 26,926 8,049 14,220
-------- -------- -------- --------
NET INCOME 50,434 49,117 17,294 29,598
-------- -------- -------- --------
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment (5,607) (13,227) (823) 696
Foreign currency translation adjustments (1,279) (809) (1,160) (1,132)
-------- -------- -------- --------
Other comprehensive income (6,886) (14,036) (1,983) (436)
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 43,548 $ 35,081 $ 15,311 $ 29,162
======== ======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
<TABLE>
<CAPTION>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED)
JUNE 30, 1998 AND DECEMBER 31, 1997 (IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL
COMMON PAID-IN- RETAINED COMPREHENSIVE STOCKHOLDER'S
STOCK CAPITAL EARNINGS INCOME EQUITY
------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 2,500 $ 439,582 $ 944,497 $ 12,402 $1,398,981
Net income - - 106,374 - 106,374
Change in foreign
currency translation
adjustments - - - (2,863) (2,863)
Change in net unrealized
investment gains - - - 3,025 3,025
------- --------- ---------- -------- ----------
BALANCE, DECEMBER 31, 1997 2,500 439,582 1,050,871 12,564 1,505,517
Net income - - 50,434 - 50,434
Change in foreign currency
translation adjustments - - - (1,279) (1,279)
Change in net unrealized
investment gains - - - (5,607) (5,607)
------- --------- ---------- -------- ----------
BALANCE, JUNE 30, 1998 $ 2,500 $ 439,582 $1,101,305 $ 5,678 $1,549,065
======= ========= ========== ======== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
<TABLE>
<CAPTION>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 50,434 $ 49,117
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Policy charges and fee income (21,513) (17,424)
Interest credited to policyholders' account balances 56,884 53,042
Net decrease in Separate Accounts 17,248 24,131
Realized investment gains, net (12,985) (6,973)
Amortization and other non-cash items 3,227 (3,849)
Change in:
Future policy benefits and other policyholders' liabilities 54,126 25,725
Accrued investment income 2,203 (2,459)
Payable to affiliate 159,113 8,367
Policy loans (34,059) (28,050)
Deferred policy acquisition costs (57,047) (13,759)
Income taxes payable (46,996) 18,735
Deferred income tax liability (159) 10,192
Other, net 32,874 19,812
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CASH FLOWS FROM OPERATING ACTIVITIES 203,350 136,607
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 2,285,192 1,614,135
Held to maturity 45,826 66,858
Equity securities 2,747 3,773
Mortgage loans on real estate 431 4,080
Other long-term investments -- 2,501
Payments for the purchase of:
Fixed maturities:
Available for sale (2,371,163) (1,705,135)
Held to maturity (33,771) (3,150)
Equity securities (2,703) (3,884)
Other long-term investments (499) (69)
Cash collateral for loaned securities, net 53,274 --
Short-term investments, net (163,664) (74,810)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES (184,330) (95,701)
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 1,578,895 712,561
Withdrawals (1,575,394) (764,214)
----------- -----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES 3,501 (51,653)
----------- -----------
Net increase (decrease) in Cash 22,521 (10,747)
Cash, beginning of year 71,358 73,766
----------- -----------
CASH, END OF PERIOD $ 93,879 $ 63,019
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. BUSINESS
Pruco Life Insurance Company (the Company), a wholly owned subsidiary of The
Prudential Insurance Company of America (Prudential), is a stock life insurance
company, organized in 1971 under the laws of the state of Arizona. The Company
markets individual life insurance, variable life insurance, variable annuities,
and deferred annuities (the Contracts) in all states and territories except New
York, the District of Columbia and Guam. 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 1997 or for the six months ended June 30 1998 and at this time
will not be issuing new business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with the requirements of Form 10-Q and generally
accepted accounting principles (GAAP) for interim financial information. These
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 1997 included in
the Company's Annual Report on Form 10-K for that year.
The accompanying consolidated financial statements have not been audited by
independent accountants in accordance with generally accepted auditing
standards, but in the opinion of management such financial statements include
all adjustments, consisting only of normal recurring accruals and elimination of
intercompany balances and transactions, necessary to summarize fairly the
Company's financial position and results of operations. The results of
operations for the six months ended June 30, 1998 may not be indicative of the
results that may be expected for the year ending December 31, 1998.
NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement No. 130). Statement No. 130 establishes standards for the reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. All items that are required to be
recognized under Statement No. 130 as components of comprehensive income are to
be reported in a financial statement that is displayed with the same prominence
as other financial statements. Statement No. 130 stipulates that comprehensive
income reflect the change in equity of an enterprise during a period from
transactions and other events and circumstances from non-owner sources.
Statement No. 130 is effective for fiscal years beginning after December 15,
1997. The Company has adopted Statement No. 130, resulting primarily in
reporting unrealized gains and losses on investments in debt and equity
securities; and foreign currency translation adjustments in comprehensive
income.
On June 15, 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement
No. 133). Statement No. 133 is effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999. Statement No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. Management of the Company anticipates that, due to its limited use
of derivative instruments, the adoption of Statement No. 133 will not have a
significant effect on the Company's results of operations or its financial
position.
RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform to current
year presentation.
7
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PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
3. INVESTMENTS
FIXED MATURITIES classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the positive intent and
ability to hold to maturity are stated at amortized cost and are classified as
"held to maturity". The amortized cost of fixed maturities is written down to
estimated fair value when considered impaired and the decline in value is
considered to be other than temporary. Unrealized gains and losses on fixed
maturities "available for sale", net of income tax, the effect on deferred
policy acquisition costs and participating annuity contracts, that would result
from the realization of unrealized gains and losses are included in a separate
component of equity, "Accumulated other comprehensive income."
EQUITY SECURITIES, available for sale, comprised of common and non-redeemable
preferred stock, are carried at estimated fair value. The associated unrealized
gains and losses, net of income tax, the effect on deferred policy acquisition
costs and participating annuity contracts, that would result from the
realization of unrealized gains and losses, are included in a separate component
of equity, "Accumulated other comprehensive income."
The following reconciles the Net unrealized investment gains recorded in
Stockholder's equity at June 30, 1998 and December 31, 1997.
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
(000's)
Fixed maturities - Available for sale:
Fair Value $ 2,649,812 $ 2,563,852
Amortized cost 2,619,520 2,526,554
----------- -----------
Unrealized investment gains 30,292 37,298
Equity securities:
Fair value 4,691 1,982
Cost 3,608 1,289
----------- -----------
Unrealized investment gains 1,083 693
Related adjustments:
Deferred policy acquisition costs (17,789) (16,305)
Policyholders' account balances 2,642 2,529
Deferred federal income tax liability (4,706) (7,086)
----------- -----------
(19,853) (20,862)
----------- -----------
Net unrealized investment gains $ 11,522 $ 17,129
=========== ===========
4. 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.
In the normal course of business, the Company is subject to various claims and
assessments. Management believes the settlement of these matters would not have
a material effect on the financial position or results of operations of the
Company.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company markets individual life insurance, variable life insurance, variable
annuities, and deferred annuities primarily through Prudential's sales force in
the United States and in Taiwan.
The Company markets its products in the life insurance and annuity sectors of
the insurance industry. These markets are faced with an increased tightening of
the regulatory environment with particular emphasis placed on company solvency
and sales practices. The legal barriers which have historically segregated the
markets of the financial services industry are being challenged through both
legislative and judicial processes. 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.
The Company held $15.5 billion in assets at June 30, 1998 compared to $12.9
billion at December 31, 1997, of which $10.3 billion and $8.0 billion were held
in Separate Accounts as of June 30, 1998 and December 31, 1997, respectively,
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.
1. RESULTS OF OPERATIONS
For the six months ended June 30, 1998 versus 1997
Net income for the six months ended June 30, 1998 amounted to $50.4 million, an
increase of $1.3 million or 2.6% compared to the $49.1 million earned in the six
months ended June 30, 1997.
Separate Account activity was a factor in operating results during the first six
months of 1998. Separate Account assets increased 29% as of June 30, 1998, from
$8.0 billion as of December 31, 1997 to $10.3 billion. Approximately 70.9%
($1,641 million) of the increase is due to sales of the Company's variable
products and the remaining 29.1% ($674 million) is a result of portfolio
appreciation. Sales of variable products primarily relate to the Discovery
Select product which was added to the Company's portfolio as of October 1996 and
to PLNJ's portfolio as of January 1997. Separate Account asset based charges,
such as mortality and expense charges, administration fees and Separate Account
gains are the operating results elements effected by this growth.
Policy charges and fee income increased $10.7 million from $156.6 million for
the six months ended June 30, 1997 to $167.3 million for the six months ended
June 30, 1998. This variance is driven by an increase in charges for assuming
mortality and expense risks due to the growth in separate accounts assets. In
addition, fee income increased due to a large Prudential Corporate Owned Life
Insurance (COLI) transaction and is partially offset by a reduced fee structure.
The Company's net investment income increased $6.0 million for the period ended
June 30, 1998 to $130.0 million from $124.0 million for the period ended June
30, 1997. The increase in net investment income is a result of higher beginning
of year portfolio assets partially offset by declining interest rates and lower
net cash flows from insurance operations.
The Company's net realized investment gains increased $6.0 million for the
period ended June 30, 1998 to $13.0 million from $7.0 million for the period
ended June 30, 1997. The increase in net realized investment gains is a result
of sales activity during a declining interest rate environment.
Other income increased $6.1 million from $12.8 million for the six months ended
June 30, 1997 to $18.9 million for the six months ended June 30, 1998. This is
primarily attributable to the increase in investment management fees which are
received by the Company for services Prudential provides to The Prudential
Series Funds, an underlying investment option of the Separate Accounts.
Policyholder's benefits decreased $22.2 million from $98.5 million for the six
months ended June 30, 1997 to $76.3 million for the six months ended June 30,
1998. The decrease is attributable to two factors. 1998 death benefits have
declined slightly from 1997 levels and policyholders' benefits in 1997 include
the effect of a valuation modeling change.
General, administrative and other expenses increased $44.9 million from $99.2
million for the six months ended June 30, 1997 to $144.1 million for the six
months ended June 30, 1998. An exchange program, which allows investors to
exchange
9
<PAGE>
their current contract for a new Discovery Select policy, has led to an increase
in the sales activity of Discovery Select. This increased sales volume resulted
in a corresponding increase in expenses. In addition, the COLI transaction has
also had a significant impact on the increased revenue resulting in an
acceleration of Deferred policy acquisition cost (DAC) amortization.
For the three months ended June 30, 1998 versus 1997
Net income for the three months ended June 30, 1998 amounted to $17.3 million, a
decrease of $12.3 million or 41.6% compared to the $29.6 million earned in the
three months ended June 30, 1997.
Policy charges and fee income increased $5.2 million from $80.3 million for the
three months ended June 30, 1997 to $85.5 million for the three months ended
June 30, 1998. This variance is driven by an increase in charges for assuming
mortality and expense risks due to the growth in separate accounts assets. In
addition, fee income increased due to a large Prudential Corporate Owned Life
Insurance (COLI) transaction and is partially offset by a reduced fee structure.
The Company's net realized investment gains increased $5.4 million for the
period ended June 30, 1998 to $7.5 million from $2.1 million for the period
ended June 30, 1997. The increase in net realized investment gains is a result
of sales activity during a declining interest rate environment.
Policyholder's benefits decreased $19.6 million from $49.2 million for the three
months ended June 30, 1997 to $29.6 million for the three months ended June 30,
1998. The decrease is attributable to two factors. 1998 death benefits have
declined slightly from 1997 levels and policyholders' benefits in 1997 include
the effect of a valuation modeling change.
General, administrative and other expenses increased $46.3 million from $46.9
million for the three months ended June 30, 1997 to $93.2 million for the three
months ended June 30, 1998. An exchange program, which allows investors to
exchange their current contract for a new Discovery Select policy, has led to an
increase in the sales activity of Discovery Select. This increased sales volume
resulted in a corresponding increase in expenses. In addition, the COLI
transaction has also had a significant impact on the increased revenue resulting
in an acceleration of Deferred policy acquisition cost (DAC) amortization.
2. LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements include the payment of sales commissions
and other underwriting expenses and the funding of its contractual obligations
for the life insurance and annuity contracts it has in-force. The Company has
developed and utilizes a cash flow projection system and regularly performs
asset/liability duration matching in the management of its asset and liability
portfolios. The Company anticipates funding all its cash requirements utilizing
cash from operations, normal investment maturities and anticipated calls and
repayments, consistent with prior years. As of June 30, 1998, the Company's
assets included $2.5 billion of cash, short-term investments and investment
grade publicly traded fixed maturity securities that could be liquidated if
funds were required.
The Company conducts a thorough review of the adequacy of statutory insurance
reserves and other actuarial liabilities. The review is performed to ensure that
the Company's statutory reserves are computed in accordance with accepted
actuarial standards, reflect all contractual obligations, meet the requirements
of state laws and regulations and include adequate provisions for any other
actuarial liabilities that need to be established. All significant reserve
changes are reviewed by the Board of Directors and are subject to approval by
the Arizona Department of Banking and Insurance. The Company believes that its
statutory capital is adequate for its currently anticipated levels of risk as
measured by regulatory guidelines.
3. THE YEAR 2000 ISSUE
The Company is a direct subsidiary of Prudential; therefore, is impacted by the
enterprise focus on the Year 2000 Issue. The Year 2000 issue is best understood
as a computer hardware and software problem involving the way dates are stored
and processed in computers. Many computer systems are programmed to recognize
only the last two digits in a date. As a result, any computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
10
<PAGE>
than the year 2000. If this anomaly is not corrected, the year "00" could cause
systems to perform date comparisons and calculations incorrectly which could in
turn affect the accuracy and compromise the integrity of business records.
Business operations could be interrupted when companies are unable to process
transactions, send invoices, or engage in similar normal business activities.
The Year 2000 issue presents critical business risks for public and private
sector entities across the globe.
Prudential identified the Year 2000 issue as a critical priority in 1995 and
established a Company-wide Program Office (CPO) to develop and coordinate an
operating framework for the Year 2000 compliance activities. The CPO assessed
potential business impact, identified software and hardware components that will
require upgrading, renovating, or replacing, and developed a strategy for
renovation, replacement or retirement of all affected business applications. The
initial assessment, completed in 1995, provided an estimate of the magnitude of
the project and necessary resources. Prudential's CPO has established quality
assurance procedures including a certification process to monitor and evaluate
enterprise-wide conversion and upgrading of systems for Year 2000 compliance.
Prudential is utilizing both internal and external resources to reprogram or
replace and test software. Prudential plans to complete its adaptation, testing
and certification of software for Year 2000 compliance by December 31, 1998 and
to conduct additional testing pertaining to the securities industry (in a
scheduled industry-wide effort) as well as complete its "business partner"
analysis and contingency planning during 1999. Prudential believes that it is
well positioned to achieve the necessary modifications and mitigate the Year
2000 risks.
Prudential has commenced contacting and communicating formally with major
suppliers and customers, including brokers, vendors, health care providers, and
institutions that pass electronic information to Prudential, to determine the
significance of the potential exposure that could result from their failure to
achieve Year 2000 compliance on a timely basis.
While, as indicated above, Prudential believes that it is well positioned to
mitigate its Year 2000 issue, this issue by its nature carries the risk of
unforeseen problems of internal or external origin. There can be no assurance
that the required systems modifications will be completed in accordance with
current estimates of timing and cost, or that the systems of other companies
with which some of Prudential's systems interface will be converted on a timely
and compatible basis. In the event that the required adaptations to mitigate the
Year 2000 issue are not completed on a timely basis, this issue could have a
material adverse impact on the Company's operations. The discussion of the Year
2000 issue herein, and in particular the Company's plans to remediate this issue
and estimated costs thereof, are forward-looking in nature. See cautionary
statement below relating to forward-looking statements.
4. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in Management's Discussion and Analysis may
be considered forward-looking statements. Words such as "expects," "believes,"
"anticipates," "intends," "plans," or variations of such words are generally
part of forward-looking statements. Forward-looking statements are made based
upon management's current expectations and beliefs concerning future
developments and their potential effects upon the Company. There can be no
assurance that future developments affecting the Company will be those
anticipated by management. There are certain important factors that could cause
actual results to differ materially from estimates or expectations reflected in
such forward-looking statements including without limitation, changes in general
economic conditions, including the performance of financial markets and interest
rates; market acceptance of new products and distribution channels; competitive,
regulatory or tax changes that affect the cost or demand for the Company's
products; and adverse litigation results. While the Company reassesses material
trends and uncertainties affecting its financial condition and results of
operations, it does not intend to review or revise any particular
forward-looking statement referenced in this Management's Discussion and
Analysis in light of future events. The information referred to above should be
considered by readers when reviewing any forward-looking statements contained in
this Management's Discussion and Analysis.
11
<PAGE>
PART II
ITEM 1 LEGAL PROCEEDINGS
Pruco Life Insurance Company is not involved in any litigation that is expected
to have a material effect.
ITEM 2 CHANGES IN SECURITIES
The following table presents sales and related expenses of the Flexible
Premium Variable Annuity Account since July 19, 1995, the effective date of the
registration (SEC file number 3331-61143).
<TABLE>
<CAPTION>
FOR THE ACCOUNT(S) OF THE
FOR THE ACCOUNT OF THE COMPANY CONTRACTHOLDER(S)
------------------------------ ------------------------------
AGGREGATE
OFFERING PRICE
OF AMOUNT
REGISTERED AMOUNT SOLD AMOUNT SOLD
-------------- -------------- ---------------
(000's)
<S> <C> <C> <C>
Flexible Premium Variable Annuity Account* $500,000 $172,798 $7,669
Underwriter discounts and commissions** (6,048)
Other expenses*** (5,729)
--------
Total (11,777)
--------
Net offering proceeds $161,021
========
</TABLE>
* Securities are not issued or sold in predetermined units.
** Amount represents estimated general commissions paid to affiliated parties.
*** Amount represents estimated general administrative expenses paid to the
parent under service and lease agreement.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the stockholders held on June 9, 1998, the sole
stockholder of the Company elected the Board of Directors of the Company. The
following are the elected Board of Directors: James J. Avery, Jr. (Chairman of
the Board); I. Edward Price (Vice Chairman of the Board); William Bethke; Ira J.
Kleinman; Esther H. Milnes; Mendel Melzer; and Kiyo Sakaguchi.
ITEM 5 OTHER INFORMATION
Not Applicable
12
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(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. There
have been no 8-K's filed during the first or second quarter of 1998.
(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 Form S-6, Registration No.
333-07451, filed July 2, 1996 on behalf of the Pruco Life Variable
Appreciable Account; (ii) Bylaws of Pruco Life, as amended May 6, 1997
are incorporated herein by reference to Form 10-Q, Registration No.
33-37587, filed August 15, 1997 on behalf of Pruco Life Insurance
Company.
4. Exhibits
Modified Guaranteed Annuity Contract, incorporated by reference to
Registrant's Form S-1 Registration Statement, Registration No.
33-37587, filed November 2, 1990.
Market-Value Adjustment Annuity Contract, incorporated by reference to
Registrant's Form S-1 Registration Statement, Registration No.
33-61143, filed November 17, 1995.
10. None.
11. Not Applicable.
15. Not Applicable.
18. None.
19. Not Applicable.
20. Not Applicable.
22. None.
23. None.
24. Not Applicable.
25. Not Applicable.
27. Exhibit 27, Financial Data Schedule appended to this form in
accordance with EDGAR instructions.
99. None
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
PRUCO LIFE INSURANCE COMPANY
(Registrant)
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ ESTHER H. MILNES President and Director August 14, 199
- -------------------------
Esther H. Milnes
/s/ JAMES M. SCHLOMANN Vice President and Comptroller August 14, 1998
- ------------------------- and Chief Accounting Officer
James M. Schlomann
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
FINANCIAL DATA SCHEDULE
Article 7 of Regulation S-X
Pruco Life Insurance Company
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 2,649,812
<DEBT-CARRYING-VALUE> 326,973
<DEBT-MARKET-VALUE> 338,924
<EQUITIES> 4,691
<MORTGAGE> 22,356
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,223,631
<CASH> 93,879
<RECOVER-REINSURE> 25,882
<DEFERRED-ACQUISITION> 712,289
<TOTAL-ASSETS> 15,515,099
<POLICY-LOSSES> 2,321,063
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 625,855
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,500
<OTHER-SE> 1,546,565
<TOTAL-LIABILITY-AND-EQUITY> 15,515,099
25,684
<INVESTMENT-INCOME> 129,967
<INVESTMENT-GAINS> 12,985
<OTHER-INCOME> 18,857
<BENEFITS> 133,185
<UNDERWRITING-AMORTIZATION> 46,547
<UNDERWRITING-OTHER> 97,548
<INCOME-PRETAX> 77,541
<INCOME-TAX> 27,107
<INCOME-CONTINUING> 50,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,434
<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>
