UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 33-37587
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 Identification No.)
incorporation or organization)
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 November 16, 1998. Common stock, par value of $10 per share:
250,000 shares outstanding.
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PRUCO LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
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COVER PAGE 1
INDEX 2
PART I -- FINANCIAL INFORMATION
ITEM 1. (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF FINANCIAL POSITION--
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 3
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME--
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1997 4
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY--
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND THE
YEAR ENDED DECEMBER 31, 1997 5
STATEMENTS OF CASH FLOWS--
NINE MONTHS ENDED SEPTEMBER 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 10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURE PAGE 16
2
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PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (IN THOUSANDS)
- -------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
ASSETS
Fixed maturities
<S> <C> <C>
Available for sale, at fair value
(amortized cost, 1998: $2,692,270; 1997: $2,526,554) $ 2,741,656 $ 2,563,852
Held to maturity, at amortized cost
(fair value, 1998: $378,061; 1997: $350,056) 358,741 338,848
Equity securities
available for sale, at fair value
(cost, 1998: $2,796; 1997: $1,289) 3,076 1,982
Mortgage loans on real estate 22,126 22,787
Policy loans 753,342 703,955
Short-term investments 341,945 316,355
Other long-term investments 1,306 1,317
----------- -----------
Total investments 4,222,192 3,949,096
Cash 152,392 71,358
Deferred policy acquisition costs 785,725 655,242
Accrued investment income 66,672 67,000
Other assets 146,824 86,692
Separate Account assets 9,920,797 8,022,079
----------- -----------
TOTAL ASSETS $15,294,602 $12,851,467
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Policyholders' account balances $ 2,641,785 $ 2,380,460
Future policy benefits and other policyholder liabilities 501,340 472,460
Cash collateral for loaned securities 260,312 143,421
Income taxes payable 58,220 101,837
Deferred income tax liability 169,271 138,483
Affiliated notes payable 164,000 --
Payable to affiliate 23,193 70,375
Other liabilities 29,318 90,126
Separate Account liabilities 9,839,535 7,948,788
----------- -----------
TOTAL LIABILITIES 13,686,974 11,345,950
----------- -----------
CONTINGENCIES (SEE NOTE 5)
STOCKHOLDER'S EQUITY
Common stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding at
September 30, 1998 and December 31, 1997 2,500 2,500
Paid-in-capital 439,582 439,582
Retained earnings 1,146,327 1,050,871
Net unrealized investment gains 25,089 17,129
Foreign currency translation adjustments (5,870) (4,565)
----------- -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME 19,219 12,564
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 1,607,628 1,505,517
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $15,294,602 $12,851,467
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED THEE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ----------
REVENUES
<S> <C> <C> <C> <C>
Premiums $ 39,522 $ 38,920 $ 13,838 $ 12,573
Policy charges and fee income 262,686 231,834 95,358 75,193
Net investment income 199,079 193,142 69,112 69,110
Realized investment gains, net 37,645 13,415 24,660 6,442
Other income 30,609 21,648 11,752 8,816
--------- --------- --------- ---------
TOTAL REVENUES 569,541 498,959 214,720 172,134
--------- --------- --------- ---------
BENEFITS AND EXPENSES
Policyholders' benefits 124,401 132,502 48,100 33,957
Interest credited to policyholders' account
balances 86,451 81,104 29,567 28,062
General, administrative and other expenses 211,917 211,348 67,822 112,153
--------- --------- --------- ---------
TOTAL BENEFITS AND EXPENSES 422,769 424,954 145,489 174,172
--------- --------- --------- ---------
Income from operations before income taxes 146,772 74,005 69,231 (2,038)
--------- --------- --------- ---------
Income taxes
Current 24,417 38,114 1,770 17,936
Deferred 26,899 (10,554) 22,439 (17,302)
--------- --------- --------- ---------
Total income taxes 51,316 27,560 24,209 634
--------- --------- --------- ---------
NET INCOME 95,456 46,445 45,022 (2,672)
--------- --------- --------- ---------
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment 7,960 768 13,566 13,996
Foreign currency translation adjustments (1,305) (638) (27) 171
--------- --------- --------- ---------
Other comprehensive income 6,655 130 13,539 14,167
--------- --------- --------- ---------
COMPREHENSIVE INCOME $ 102,111 $ 46,575 $ 58,561 $ 11,495
========= ========= ========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED)
SEPTEMBER 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, net of
reclassification adjustment -- -- -- 3,025 3,025
------ -------- ---------- ------- ----------
BALANCE, DECEMBER 31, 1997 2,500 439,582 1,050,871 12,564 1,505,517
Net income -- -- 95,456 -- 95,456
Change in foreign currency
translation adjustments -- -- -- (1,305) (1,305)
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- 7,960 7,960
------ -------- ---------- ------- ----------
BALANCE, SEPTEMBER 30, 1998 $2,500 $439,582 $1,146,327 $19,219 $1,607,628
====== ======== ========== ======= ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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<TABLE>
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PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------
1998 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 95,456 $ 46,445
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Policy charges and fee income (31,102) (32,488)
Interest credited to policyholders' account balances 86,451 81,104
Net (increse) decrease in Separate Accounts (7,971) 27,085
Realized investment gains, net (37,645) (13,415)
Amortization and other non-cash items 7,309 (19,183)
Change in:
Future policy benefits and other policyholders' liabilities 28,879 50,674
Accrued investment income 328 (5,890)
Payable to affiliate (47,182) 42,731
Policy loans (49,387) (47,845)
Deferred policy acquisition costs (130,483) 33,282
Income taxes payable (43,617) 37,688
Deferred income tax liability 30,788 (10,484)
Other, net (120,941) 4,434
----------- -----------
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES (219,117) 194,138
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 3,881,574 2,370,205
Held to maturity 58,412 110,865
Equity securities 2,830 8,348
Mortgage loans on real estate 661 21,932
Other long-term investments 510 2,285
Payments for the purchase of:
Fixed maturities:
Available for sale (4,029,692) (2,425,849)
Held to maturity (77,914) (21,610)
Equity securities (2,097) (8,158)
Other long-term investments (499) (51)
Cash collateral for loaned securities, net 116,891 81,479
Short-term investments, net (25,856) (332,118)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES (75,180) (192,672)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 2,482,453 1,199,372
Withdrawals (2,271,122) (1,190,212)
Proceeds from issuance of affiliated notes payable 164,000 --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES 375,331 9,160
----------- -----------
Net increase in Cash 81,034 10,626
Cash, beginning of year 71,358 73,766
----------- -----------
CASH, END OF PERIOD $ 152,392 $ 84,392
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
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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 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, variable life insurance, deferred annuities, and
variable 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 nine months ended
September 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 nine months ended September 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 is currently evaluating the impact of the
adoption of Statement No. 133 on the Company's results of operations and its
financial position.
RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform to current
year presentation.
7
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RUCO LIFE INSURANCE COMPANY AND SUBSIDIARIE
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 the asset is 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 September 30, 1998 and December 31, 1997.
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
(000's)
Fixed maturities - Available for sale:
Fair Value $2,741,656 $2,563,852
Amortized cost 2,692,270 2,526,554
---------- ----------
Unrealized investment gains 49,386 37,298
Equity securities:
Fair value 3,076 1,982
Cost 2,796 1,289
---------- ----------
Unrealized investment gains 280 693
Related adjustments:
Deferred policy acquisition costs (15,282) (16,305)
Policyholders' account balances 1,846 2,529
Deferred federal income tax liability (11,141) (7,086)
---------- ----------
(24,577) (20,862)
---------- ----------
Net unrealized investment gains $ 25,089 $ 17,129
========== ==========
8
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PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
4. RELATED PARTY TRANSACTIONS
In July 1998, the Company established a revolving line of credit facility of up
to $300 million with Prudential Funding Corporation, a wholly owned subsidiary
of Prudential. Notes payable to affiliates includes amounts which mature at
various dates throughout 1998 with interest rates ranging from 5.2% to 6.0%.
Prudential and Pruco Life have an agreement with respect to administrative
services for the Prudential Series Fund. The Company invests in the various
portfolios of the Series Fund through the Separate Accounts. Under this
agreement, Prudential pays compensation to Pruco Life in the amount equal to a
portion of the gross investment advisory fees paid by the Prudential Series
Fund. The Company received from Prudential its allocable share of such
compensation in the amount of $29 million and $20 million during 1998 and 1997,
respectively, recorded in other income.
5. 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.
9
<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 $15.3 billion in assets at September 30, 1998 compared to $12.9
billion at December 31, 1997, of which $9.9 billion and $8.0 billion were held
in Separate Accounts as of September 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, policy loans and short-term investments.
1. RESULTS OF OPERATIONS
For the nine months ended September 30, 1998 versus 1997
Net income for the nine months ended September 30, 1998 amounted to $95.5
million, an increase of $49.0 million compared to the $46.5 million earned in
the nine months ended September 30, 1997.
Separate Account activity was a factor in operating results during the first
nine months of 1998. Separate Account assets increased 23% as of September 30,
1998, from $8.0 billion as of December 31, 1997 to $9.9 billion. An increase of
approximately $2.0 billion is due to sales of the Company's variable products
and is offset by a $99 million reduction as a result of portfolio depreciation.
Increased sales 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 affected by this growth.
Policy charges and fee income increased $30.9 million from $231.8 million for
the nine months ended September 30, 1997 to $262.7 million for the nine months
ended September 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.
The Company's consolidated net investment income increased $6.0 million for the
period ended September 30, 1998 to $199.1 million from $193.1 million for the
period ended September 30, 1997. The increase in net investment income is
primarily the result of a larger portfolio of assets offset by declining
interest rates and new business strain.
The Company's consolidated net realized investment gains for the period ended
September 30, 1998 was $37.6 million an increase of $24.2 million compared to
the same period ended September 30, 1997. This increase was primarily due to net
sales of fixed maturities during a period of declining interest rates. Also
contributing to this increase were gains recognized on futures contracts used to
hedge the insurance and annuity liabilities.
Other income increased $9.0 million from $21.6 million for the nine months ended
September 30, 1997 to $30.6 million for the nine months ended September 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 $8.1 million from $132.5 million for the nine
months ended September 30, 1997 to $124.4 million for the nine months ended
September 30, 1998. This decrease is driven by favorable experience in the life
business.
General, administrative and other expenses increased $.6 million from $211.3
million for the nine months ended September 30, 1997 to $211.9 million for the
nine months ended September 30, 1998. An exchange program, which allows
investors
10
<PAGE>
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 to the
increased sales volume, the Parent company's allocation methodology for expenses
billed to its subsidiaries in 1998 changed, resulting in increased expenses in
Pruco Life. Offsetting this increase was a 1997 refinement of estimated gross
profit margins which led to an overall increase in DAC amortization during 1997.
For the three months ended September 30, 1998 versus 1997
Net income for the three months ended September 30, 1998 amounted to $45.0
million, a increase of $47.7 million compared to the $2.7 million loss in the
three months ended September 30, 1997.
Policy charges and fee income increased $20.2 million from $75.2 million for the
three months ended September 30, 1997 to $95.4 million for the three months
ended September 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.
The Company's net realized investment gains increased $18.3 million for the
period ended September 30, 1998 to $24.7 million from $6.4 million for the
period ended September 30, 1997. The increase in net realized investment gains
is a result of sales activity during a declining interest rate environment.
Policyholder's benefits increased $14.1 million from $34.0 million for the three
months ended September 30, 1997 to $48.1 million for the three months ended
September 30, 1998. The increase is driven by modeling changes in the third
quarter of 1998 and do not have a material impact on the year to date results.
General, administrative and other expenses decreased $44.4 million from $112.2
million for the three months ended September 30, 1997 to $67.8 million for the
three months ended September 30, 1998. A 1997 refinement of estimated gross
profit margins led to a significant increase in DAC amortization during 1997.
Partially offsetting this is an exchange program, allowing investors to exchange
their current contract for a new Discovery Select policy, which 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 to the increased
sales volume, the Parent company's allocation methodology for expenses billed to
its subsidiaries in 1998 changed, resulting in increased expenses in Pruco Life.
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 or through short term lending from its affiliate Prudential Funding
Corporation (see Related Party Transactions). As of September 30, 1998, the
Company's assets included $3.0 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
Pruco Life as a wholly-owned subsidiary of Prudential utilizes many of the same
business applications, infrastructure and business partners as Prudential.
Prudential has addressed the Year 2000 issue on an enterprise-wide basis.
Therefore, it is not possible to differentiate Pruco Life's Year 2000 issue from
that of Prudential. The accompanying discussion of the Year 2000 issue reflects
steps taken by Prudential to mitigate the Year 2000 risks.
11
<PAGE>
Many computer systems are programmed to recognize only the last two digits in a
date. As a result, any computer system that has date-sensitive programming may
recognize a date using "00" as the year 1900 rather than the year 2000. This
problem can affect non-information technology systems that include embedded
technology, such as microprocessors included in "infrastructure" equipment used
for telecommunications and other services as well as computer systems. 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.
Prudential established a Company-wide Program Office (CPO) to develop and
coordinate an operating framework for the Year 2000 compliance activities.
Prudential's CPO structured the Year 2000 program into three major components:
Business Applications, Infrastructure and Business Partners. The CPO also
established quality assurance procedures including a certification process to
monitor and evaluate enterprise-wide progress of each component of Prudential's
program for conversion and upgrading of systems for Year 2000 compliance.
Business Applications
The scope of the Business Applications component includes a wide range of
computer systems that directly support Prudential's business operations and
accounting systems. The entire application portfolio was analyzed in 1996 to
determine appropriate Year 2000 readiness strategies (i.e., renovate, replace or
retire). Rigorous testing standards have been employed for all applications that
will not be retired, including those that are newly developed or purchased.
Application replacement and renovation projects follow a similar path toward
Year 2000 compliance. The key project phases include Year 2000 analysis and
design, programming activities, testing, and implementation. Replacement
projects are also tracked until the existing applications are removed from
production. Business application projects are grouped by applications undergoing
renovations, replacements or retirements. At September 30, 1998, the percentage
of business applications (based on application count) in the implementation
phase for Year 2000 compliance for renovation, replacement and retirement are
91%, 62% and 87%,respectively. The interim target date for completing
renovations and retirements is December 1998, with an overall completion date
for Business Applications of June 1999.
Infrastructure
The scope of Prudential's Year 2000 Infrastructure initiatives include mainframe
computer system hardware and operating system software, mid-range systems and
servers, telecommunications equipment, buildings and facilities systems,
personal computers, and vendor hardware and software.
Although there are minor differences among these various components, the
approach to Year 2000 readiness for Infrastructure generally involves phases
identified as inventory, assessment, remediation activities (e.g., upgrading
hardware or software), testing and implementation. The interim target date for
completion of infrastructure initiatives is December 1998 with an overall
completion date for Infrastructure of June 1999.
Business Partners
Prudential's approach to business partner readiness includes classification of
each partner's status as "critical" or "less critical" and the development of
contingency plans to address the potential that a business partner could
experience a Year 2000 failure. Project phases include inventory, risk
assessment, and contingency planning activities. The interim target date for
highly critical business partner readiness is December 1998 with an overall
completion date for business partner readiness of June 1999.
The Cost of Year 2000 Readiness
Prudential is funding the Year 2000 program from operating cash flows. Some of
the expenses of Prudential's Year 2000 readiness are allocated across its
various businesses and subsidiaries, including Pruco Life. Expenses related to
the Year 2000 initiatives allocated to Pruco Life are part of systems overhead
costs to date and are included in Pruco Life's general and administrative
expenses. The Year 2000 costs
12
<PAGE>
allocated to Pruco Life to date are not material to its operations and financial
condition. Moreover, the forecasted allocated Year 2000 costs are not expected
to have a material impact on Pruco Life's ability to meet its contractual
commitments.
Year 2000 Risks and Contingency Planning
The major portion of the Prudential's transactions are of such volume that they
can only be effectively processed through the use of automated systems.
Therefore, substantially all of Prudential's contingency plans include the
ultimate resolution of any causative technology failures that may be
encountered.
Prudential believes that the Business Application, Infrastructure and Business
Partners components of the Year 2000 project are substantially on schedule.
While management expects that a small number of the projects slated for
completion as of the end of 1998 will not meet this target date, it is
anticipated that these projects will be completed by mid-1999 so that these
delays, if experienced, would not have a significant impact on the timing of the
project as a whole. During the course of the Year 2000 program, some
discretionary technology projects have been delayed in favor of the completion
of Year 2000 projects. However, this impact has been minimized by Prudential's
strategic decision to outsource most of the Year 2000 renovation work.
While Prudential and its subsidiaries believe that they are well positioned to
mitigate its Year 2000 issue, this issue, by its nature contains inherent
uncertainties, including the uncertainty of Year 2000 readiness of third
parties. Consequently, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material adverse effect on
the Company's results of operations, liquidity or financial condition. In the
worst case, it is possible that any technology failure, including an internal or
external Year 2000 failure, could have a material impact on the Company's
results of operations, liquidity, or financial position.
Prudential is enhancing existing business contingency plans to mitigate Year
2000 risk. Current contingency plans include planned responses to the failure of
specific business applications or infrastructure components. These responses are
being reviewed and expected to be finalized by June 1999 to ensure that they are
workable under the special conditions of a Year 2000 failure. The plans are also
being updated to reduce the level of uncertainty about the Year 2000 problem
including readiness of Prudential's Business Partners.
The discussion of the Year 2000 Issue herein, and in particular Prudential's
plans to remediate this issue and the 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.
13
<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 statement (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 $184,374 $9,977
Underwriting discounts and commissions ** (6,453)
Other expenses *** (8,894)
--------
Total (15,347)
--------
Net offering proceeds $169,027
========
</TABLE>
* Securities are not issued or sold in predetermined units.
** Amount represents estimated 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
14
<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 three quarters 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
15
<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 November 16, 1998
Esther H. Milnes
/s/ JAMES M. SCHLOMANN
- ----------------------- Vice President and Comptroller November 16, 1998
James M. Schlomann and Chief Accounting Officer
16
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000777917
<NAME> PRUCO LIFE INSURANCE COMPANY
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 2,741,656
<DEBT-CARRYING-VALUE> 358,741
<DEBT-MARKET-VALUE> 378,061
<EQUITIES> 3,076
<MORTGAGE> 22,126
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,222,192
<CASH> 152,392
<RECOVER-REINSURE> 25,882
<DEFERRED-ACQUISITION> 785,725
<TOTAL-ASSETS> 15,294,602
<POLICY-LOSSES> 2,641,785
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 501,340
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 164,000
0
0
<COMMON> 2,500
<OTHER-SE> 1,605,128
<TOTAL-LIABILITY-AND-EQUITY> 15,294,602
39,522
<INVESTMENT-INCOME> 199,079
<INVESTMENT-GAINS> 37,645
<OTHER-INCOME> 30,609
<BENEFITS> 204,823
<UNDERWRITING-AMORTIZATION> 73,410
<UNDERWRITING-OTHER> 138,507
<INCOME-PRETAX> 146,772
<INCOME-TAX> 51,316
<INCOME-CONTINUING> 95,456
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,456
<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>
