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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 33-37587
PRUCO LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
Arizona 22-1944557
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(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) 802-3274
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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, 2000. Common stock, par value
of $10 per share: 250,000 shares outstanding
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PRUCO LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
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Page No.
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Cover Page -
Index 2
PART I - Financial Information
Item 1. (Unaudited) Consolidated Financial Statements
Consolidated Statements of Financial Position
As of June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations and Comprehensive Income
Three and Six months ended June 30, 2000 and 1999 4
Consolidated Statements of Changes in Stockholder's Equity
Periods ended June 30, 2000 and December 31, 1999 and 1998 5
Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II - Other Information
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 15
Signature Page 16
</TABLE>
2
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Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Financial Position
As of June 30, 2000 and December 31, 1999 (In Thousands)
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<CAPTION>
(Unaudited)
June 30, December 31,
2000 1999
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ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 2000: $3,323,662 $ 3,247,348 $ 2,998,362
1999: $3,084,057)
Held to maturity, at amortized cost (fair value, 2000:$356,793 1999: 368,198 388,990
$377,822)
Equity securities - available for sale, at fair value (cost, 2000: 7,302; 9,403 4,532
1999: $3,238)
Mortgage loans on real estate 9,923 10,509
Policy loans 826,122 792,352
Short-term investments 403,229 207,219
Other long-term investments 83,603 77,769
--------------- --------------
Total investments 4,947,826 4,479,733
Cash 81,322 76,396
Deferred policy acquisition costs 1,121,453 1,062,785
Accrued investment income 73,404 68,917
Receivables from affiliate 21,578 -
Other assets 77,614 48,228
Separate Account assets 16,686,214 16,032,449
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TOTAL ASSETS $ 23,009,411 $ 21,768,508
=============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 3,347,335 $ 3,116,261
Future policy benefits and other policyholder liabilities 676,583 635,978
Cash collateral for loaned securities 131,101 87,336
Securities sold under agreement to repurchase 106,595 21,151
Income taxes payable 208,959 145,600
Payables to affiliate - 487
Other liabilities 137,535 59,427
Separate Account liabilities 16,686,214 16,032,449
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Total liabilities 21,294,322 20,098,689
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Contingencies (See Footnote 2)
Stockholder's Equity
Common stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding 2,500 2,500
Paid-in-capital 439,582 439,582
Retained earnings 1,304,550 1,258,428
Accumulated other comprehensive loss
Net unrealized investment losses (27,789) (28,364)
Foreign currency translation adjustments (3,754) (2,327)
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Accumulated other comprehensive loss (31,543) (30,691)
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Total stockholder's equity 1,715,089 1,669,819
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TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 23,009,411 $ 21,768,508
=============== ==============
</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 Six Months Ended June 30, 2000 and 1999 (In Thousands)
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<CAPTION>
Six months ended Three months ended
June 30, June 30,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
REVENUES
Premiums $60,728 $40,902 $ 33,477 $21,706
Policy charges and fee income 229,407 206,366 114,526 112,625
Net investment income 167,975 137,597 83,501 67,784
Realized investment losses, net (13,994) (13,800) (3,683) (8,777)
Asset management fees 34,852 25,516 18,331 14,307
Other income 410 845 207 294
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Total revenues 479,378 397,426 246,359 207,939
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BENEFITS AND EXPENSES
Policyholders' benefits 117,720 106,733 55,388 48,335
Interest credited to policyholders' account balances 79,451 62,249 41,288 30,987
General, administrative and other expenses 212,548 191,658 100,689 122,678
------------ ------------- ------------ ------------
Total benefits and expenses 409,719 360,640 197,365 202,000
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Income from operations before income taxes 69,659 36,786 48,994 5,939
------------ ------------- ------------ ------------
Income tax provision 23,537 12,875 16,305 1,596
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NET INCOME $46,122 $23,911 $32,689 $4,343
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Other comprehensive (loss), net of tax:
Unrealized gains (losses) on securities, net
of Reclassification adjustment 575 (19,498) (5,914) (9,628)
Foreign currency translation adjustments (1,427) 530 (1,461) 641
------------ ------------- ------------ ------------
Other comprehensive (loss), net of tax (852) (18,968) (7,375) (8,987)
------------ ------------- ------------ ------------
TOTAL COMPREHENSIVE INCOME (LOSS) $45,270 $ 4,943 $ 25,314 $ (4,644)
============ ============= ============ ============
</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)
Periods Ended June 30, 2000 and December 31, 1999 and 1998 (In Thousands)
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Accumulated
other Total
Common Paid-in- Retained comprehensive stockholder's
stock capital earnings income (loss) equity
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<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 2,500 $ 439,582 $ 1,050,871 $ 12,564 $ 1,505,517
Net income - - 151,962 - 151,962
Change in foreign currency
translation adjustments, - - - 2,980 2,980
net of taxes
Change in net unrealized
investment losses, net of
reclassification adjustment
and taxes ............ - - - (7,227) (7,227)
----------- ----------- ---------- ------------- -------------
Balance, December 31, 1998 $ 2,500 $ 439,582 $ 1,202,833 $ 8,317 $ 1,653,232
Net income - - 55,595 - 55,595
Change in foreign currency
translation adjustments, - - - (742) (742)
net of taxes
Change in net unrealized
investment losses,
net of reclassification
adjustment
and taxes - - - (38,266) (38,266)
----------- ----------- ---------- ------------- -------------
Balance, December 31, 1999 $ 2,500 $ 439,582 $ 1,258,428 $ (30,691) $1,669,819
Net income - - 46,122 46,122
Change in foreign currency (1,427) (1,427)
translation adjustments, - -
net of taxes
Change in net unrealized 575 575
investment gains, net - -
of reclassification
adjustment and taxes
----------- ----------- ---------- ------------- -------------
Balance, June 30, 2000 $ 2,500 $ 439,582 $1,304,550 $ (31,543) $1,715,089
=========== =========== ========== ============= ==============
</TABLE>
See Notes to Consolidated Financial Statements
5
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Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2000 and 1999 (In Thousands)
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2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 46,122 $ 23,911
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Policy charges and fee income (33,040) (39,520)
Interest credited to policyholders' account balances 79,486 62,249
Realized investment (gains) losses, net 13,994 13,800
Amortization and other non-cash items 4,426 38,830
Change in:
Future policy benefits and other policyholders' 40,605 15,085
liabilities
Accrued investment income (4,487) 53
Payables to/Receivables from affiliate, net (22,065) 1,483
Policy loans (33,770) (22,524)
Deferred policy acquisition costs (58,669) (90,092)
Income taxes payable 63,359 (32,241)
Other, net 48,725 27,840
--------------- ---------------
Cash Flows From (Used In) Operating Activities 144,686 (1,126)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 1,065,356 2,095,979
Held to maturity 20,871 25,206
Equity securities 251 2,452
Mortgage loans on real estate 585 466
Other long-term investments 1,830 318
Payments for the purchase of:
Fixed maturities:
Available for sale (1,327,324) (1,988,779)
Held to maturity - (24,170)
Equity securities (4,155) (1,989)
Other long-term investments (3,128) (33)
Cash collateral for loaned securities, net 43,765 (39,201)
Securities sold under agreement to repurchase, net 85,444 (1,993)
Other long-term investments (4,536) (4,723)
Short-term investments, net (195,991) (118,819)
--------------- ---------------
Cash Flows (Used In) Investing Activities (317,032) (55,286)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 1,432,001 1,671,054
Withdrawals (1,254,729) (1,603,191)
--------------- ---------------
Cash Flows From Financing Activities 177,272 67,863
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Net increase in Cash 4,926 11,451
Cash, beginning of year 76,396 89,679
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CASH, END OF PERIOD $ 81,322 $ 101,130
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements
6
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Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
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1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q on the basis of
accounting principles generally accepted in the United States. These interim
financial statements are unaudited but reflect all adjustments which, in the
opinion of management, are necessary to provide a fair presentation of the
consolidated results of operations and financial condition of the Pruco Life
Insurance Company ("the Company"), a wholly owned subsidiary of The Prudential
Insurance Company of America ("Prudential"), for the interim periods presented.
All such adjustments are of a normal recurring nature, with the exception of
certain related party transactions, as described in Footnote 3. The results of
operations for any interim period are not necessarily indicative of results for
a full year. Certain amounts in the Company's prior year consolidated financial
statements have been reclassified to conform with the 2000 presentation. These
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1999.
2. CONTINGENCIES
Various lawsuits against the Company have arisen in the course of the Company's
business. In certain of these matters, large and/or indeterminate amounts are
sought.
On October 28, 1996, the Company entered into a Stipulation of Settlement with
attorneys for the plaintiffs in a consolidated class action lawsuit pending in a
Multi-District Litigation proceeding in the U.S. District Court for the District
of New Jersey. The class action suit involved alleged improprieties in
connection with the sale, servicing and operation of permanent life insurance
policies from 1982 through 1995. Pursuant to the settlement, the Company has
participated in a remediation program pursuant to which relief was offered to
policyowners who were misled when they purchased permanent life insurance
policies in the United States from 1982 to 1995. Prudential has agreed to
indemnify the Company for any liability incurred in connection with that
litigation.
The balance of the Company's litigation is subject to many uncertainties, and
given the complexity and scope, the outcomes cannot be predicted with precision.
Management believes that any ultimate liability that could result from such
litigation would not have a material adverse effect on the Company's financial
position.
3. RELATED PARTY TRANSACTIONS
The Company has extensive transactions and relationships with Prudential and
other affiliates. It is possible that the terms of these transactions are not
the same as those that would result from transactions among wholly unrelated
parties.
Expense Charges and Allocations
All of the Company's expenses are allocations or charges from Prudential or
other affiliates. These expenses can be grouped into the following categories:
general and administrative expenses, retail distribution expenses and asset
management fees.
The Company's general and administrative expenses are charged to the Company
using allocation methodologies based on business processes. Management believes
that the methodology is reasonable and reflects costs incurred by Prudential to
process transactions on behalf of the Company. Prudential and the Company
operate under service and lease agreements whereby services of officers and
employees (except for those agents employed directly by the Company in Taiwan),
supplies, use of equipment and office space are provided by Prudential.
7
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Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
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3. RELATED PARTY TRANSACTIONS (continued)
Late in 1998, Prudential undertook a review of its expense allocation
methodology. This review resulted in increased allocations to the Company
compared with 1998 levels, reflecting higher expense allocations to products
requiring more complex business processes and more transactions, such as
variable products which allow policyholders to make changes in their investment
portfolio. Implementation of the revised allocation methodology was
substantially completed in the second quarter of 1999.
The Company is allocated estimated distribution expenses from Prudential's
retail agency network for both its domestic life and annuity products. The
Company has capitalized the majority of these distribution expenses as deferred
policy acquisition costs ("DAC"). At April 1, 2000 Prudential and the Company
agreed to revise the estimate of allocated distribution expenses to reflect a
market based pricing arrangement.
The Company is charged an asset management fee by Prudential Global Asset
Management ("PGAM") for managing the Separate Account investment portfolio.
These fees are a component of general, administrative and other expenses.
In addition, the Company receives fee income from policyholder account balances
invested in the Prudential Series Fund ("PSF"). These amounts are recorded as
"Asset management fees" in the Consolidated Statements of Operations. The
Company also collects these fees on behalf of Prudential and records a Payable
to affiliate in the Consolidated Statements of Financial Position.
Corporate Owned Life Insurance
The Company has sold three Corporate Owned Life Insurance ("COLI") policies to
Prudential. The cash surrender value included in Separate Accounts was $728.0
million and $725.3 million at June 30, 2000 and December 31, 1999, respectively.
The fees received related to the COLI policies were $2.7 million for the six
months ending June 30, 2000.
Reinsurance
The Company currently has three reinsurance agreements in place with Prudential
(the reinsurer). Specifically a 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 periods ended June 30, 2000 and
December 31, 1999.
Debt Agreements
In July 1998, the Company established a revolving line of credit facility of up
to $500 million with Prudential Funding Corporation, a wholly owned subsidiary
of Prudential. There is no outstanding debt relating to this credit facility as
of June 30, 2000 or December 31, 1999.
8
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Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
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4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires that companies recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 does not apply to most traditional
insurance contracts. However, certain hybrid contracts that contain features
which may affect settlement amounts similarly to derivatives may require
separate accounting for the "host contract" and the underlying "embedded
derivative" provisions. The latter provisions would be accounted for as
derivatives as specified by the statement.
SFAS No. 133 provides, if certain conditions are met, that a derivative may be
specifically designated as (1) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment
(fair value hedge), (2) a hedge of the exposure to variable cash flows of a
forecasted transaction (cash flow hedge), or (3) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security or a foreign-currency-denominated
forecasted transaction (foreign currency hedge).
Under SFAS No. 133, the accounting for changes in fair value of a derivative
depends on its intended use and designation. For a fair value hedge, the gain or
loss is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item. For a cash flow hedge, the effective
portion of the derivative's gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into earnings when the
forecasted transaction affects earnings. For a foreign currency hedge, the gain
or loss is reported in other comprehensive income as part of the foreign
currency translation adjustment. For all other derivatives not designated as
hedging instruments, the gain or loss is recognized in earnings in the period of
change. The Company is required to adopt this Statement, as amended, as of
January 1, 2001 and is currently assessing the effect of the new standard.
9
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis should be read in conjunction with the Notes to
Consolidated Financial Statements.
The Company markets interest-sensitive individual life insurance and variable
life insurance, individual variable and fixed annuities, and guaranteed interest
contracts ("GICs") by utilizing Prudential's sales force in the United States.
These markets are subject to regulatory oversight with particular emphasis
placed on company solvency and sales practices. These markets are also subject
to increasing competitive pressures as the legal barriers that have historically
segregated the markets of the financial services industry have changed through
both legislative and judicial processes. Regulatory changes have opened the
insurance industry to competition from other financial institutions,
particularly banks and mutual funds companies that are positioned to deliver
competing investment products through large, stable distribution channels. The
Company also markets traditional individual life insurance through its branch
office in Taiwan.
The Company's Analysis of Financial Condition and Results of Operations are
described below.
1. Analysis of Financial Condition
From December 31, 1999 to June 30, 2000 there was an increase of $1.2 billion in
total assets from $21.8 billion to $23.0 billion, the majority of which relates
to a $654 million increase in Separate Accounts from net cash inflows as
described below. General Account invested assets increased by $468 million,
mainly due to net purchases and appreciation of fixed maturities of $228
million, net purchases of short-term investments of $196 million from increased
securities lending activity and increased policy loan lending of $34 million.
Other assets increased by $29 million due to timing on the cash collection of
receivables for securities sold and asset management fees earned.
During this six-month period, liabilities also increased by $1.2 billion from
$20.1 billion to $21.3 billion. Corresponding with the asset change, Separate
Account liabilities increased by $654 million due to cash inflows to the
Separate Accounts of $1,461 million, net investment losses (including unrealized
losses of $457 million) of $20 million, and surrenders, withdrawals and
disbursements of $787 million. General account policyholder balances increased
by $231 million during this period mainly from new sales of GICs of $97 million,
and Discovery Select ("Discovery Select") annuity product sales. Net sales
(sales less withdrawals) and exchanges of Discovery Select were approximately
$900 million in the first six months of 2000. This represents a decrease of $400
million in net sales from the first six months of 1999, due to lower sales from
the exchange program which was discontinued in 2000, an increase in surrenders,
offset somewhat by an increase in new sales. The remaining increases in
liabilities relate to increases in securities lending, taxes payable and other
liabilities. Other liabilities increased by $78 million mainly due to timing on
the cash payment for purchases of securities.
From June 30, 1999 to June 30, 2000 total assets increased by $3.6 billion, the
largest component of this increase was in Separate Account assets of $2.7
billion to support the increase in contractholder liabilities which is described
later. General Account invested assets increased by approximately $737 million
due to purchases of fixed maturities to support the GIC and general account
annuity businesses. The remaining increase to assets was mainly in deferred
acquisition costs ("DAC"), which increased by $170 million due to growth in the
business and consequently, deferrable costs.
Similarly, total liabilities increased by $3.6 billion from June 30, 1999 to
June 30, 2000, primarily from the increase in Separate Account liabilities,
which represent contractholder fund balances. Separate Account fund balances
grew from $14.0 billion to $16.7 billion, an increase of $2.7 billion. Most of
the increase was in annuity Separate Accounts which grew by $2.6 billion as a
result of net sales (sales less withdrawals) and exchanges of Discovery Select
as well as appreciation on equity funds. The domestic life business had higher
Separate Account fund balances of approximately $73 million due to sales of
Variable Universal Life ("VUL") and equity fund appreciation. There was also an
increase in General Account policyholder balances of $554 million, mainly due to
sales and interest credited on GICs of $404 million , and an increase of
approximately $128 million on annuity fund balances due to sales of Discovery
Select. Future policy benefits and other policyholder liabilities also increased
by $133 million due to business growth for Taiwan and domestic life. Securities
lending also increased by $155 million since June 30,1999.
10
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2. Results of Operations
For the six months ended June 30, 2000 versus 1999
Consolidated net income of $46.1 million for the first six months of 2000 was
$22.2 million more than for the first six months of 1999. Revenues grew by $82.0
million, an increase of 20.6% from the prior year, while benefits and expenses
grew by $49.1 million, or 13.6% from the prior year. Taxes also increased
corresponding with the income increase.
Consolidated total revenues increased by $82.0 million, from $397.4 million to
$479.4 million. Insurance revenues, which include premiums from the Taiwan
traditional life business and policy charges and fee income from the individual
annuity and domestic life businesses, increased by $42.9 million to $290.1
million in 2000. Policy charges and fee income, consisting primarily of
mortality and expense ("M&E"), loading and other insurance charges assessed on
General and Separate Account policyholder fund balances, increased by $23.6
million for the individual annuity business primarily a result of the growth
since June 30, 1999 in the policyholder account balances upon which these fees
are assessed, as described in the "Analysis of Financial Condition". Offsetting
this increase in policy charges and fee income was a slight decline of $.6
million in the domestic life business as increases in M&E charges were offset by
non-recurring loading charges received in the prior year. The increase in
premiums of $19.8 million is primarily from Taiwan premiums which grew $13.3
million due to increased persistency rates and growth in the in force business
of 17%. Premiums from annuitizations of Discovery Select contracts and from
extended term insurance also contributed to the growth in premiums.
Asset management fees, which are charged on policyholder accounts invested in
the Prudential Series Fund ("PSF"), increased by $9.3 million, also due to the
growth in the Separate Account fund balances.
Net investment income increased by $30.4 million from the prior year, as total
fixed maturities and short-term investments increased $664 million since June 30
1999, mainly due to cash inflows from GIC sales as described in the "Analysis of
Financial Condition". There were also realized losses recognized on sales of
fixed maturities of $15 million, permanent impairment writedowns on fixed
maturities of $5 million, and derivative gains of $6 million in 2000. This
compares to realized losses of $14 million in 1999 primarily from sales of fixed
maturities, and permanent impairment writedowns on fixed maturities of $3.3
million.
Policyholder benefits, including changes to reserves, increased by $11 million.
Reserves increased due to higher Taiwan life insurance sales and premiums from
Discovery Select annuitizations in the amount of $10.1 million and $5.3 million,
respectively. Domestic life had a decrease of $4.4 million due to a reduction in
death claims and in the reserve for disabled insureds. Interest credited to
policyholder account balances increased by $17.2 million mainly due to the
increase in GIC policyholder account balances from sales as mentioned above.
General, administrative, and other expenses increased by $20.9 million from the
prior year. As of April 1 2000, there was a change in the allocation of
estimated distribution expenses from Prudential's retail agency network which
decreased year over year expenses by $5.1 million. Offsetting this decrease is
higher DAC amortization of $14.2 million due to growth in profitability of the
annuity business, changes made in late 1999 to the assumptions used in the
amortization model, and release of DAC due to Discovery Select lapse experience.
There was also an additional $9.4 million in non-deferrable expenses due to
growth in trail commissions on Discovery Select exchanges, which are not subject
to capitalization. In addition, asset management fees paid to Prudential Global
Asset Management ("PGAM") for managing the Separate Account portfolios increased
by $3.4 million as the Separate Account portfolios upon which these fees are
assessed have grown.
11
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For the three months ended June 30, 2000 versus 1999
Net income for the three months ended June 30, 2000 was $32.7 million, an
increase of $28.4 million from $4.3 million earned in the three months ended
June 30, 1999.
Consolidated total revenues increased by $38.4 million, from $207.9 million to
$246.3 million. Insurance revenues, which include premiums from the Taiwan
traditional life business and policy charges and fee income from the individual
annuity and domestic life businesses, increased by $13.7 million to $148.0
million in 2000. Policy charges and fee income, consisting primarily of
mortality and expense, loading and other insurance charges assessed on General
and Separate Account policyholder fund balances, increased by $10.1 million for
the individual annuity business primarily a result of the growth in the
policyholder account balances upon which these fees are assessed as described in
the "Analysis of Financial Condition". Offsetting this increase in policy
charges and fee income was a decline of $8.2 million in the domestic life
business due to large non-recurring loading charges received in the second
quarter of 1999. The increase in premiums of $11.8 million is primarily from
Taiwan premiums which grew $7.0 million due to increased persistency rates and
growth in the in force business. Increases in annuitizations from Discovery
Select and extended term insurance also increased premiums.
Asset management fees, which are charged on policyholder accounts invested in
the Prudential Series Fund ("PSF"), increased by $4.0 million, also due to the
growth in the Separate Account fund balances.
Net investment income increased by $15.7 million from the prior year, as total
fixed maturities and short-term investments increased $664 million since June 30
1999, mainly due to GIC sales as described in the "Analysis of Financial
Condition".
Policyholder benefits, including changes to reserves, increased by $7.1 million.
Reserves increased due to higher Taiwan life insurance sales and premiums from
Discovery Select annuitizations in the amount of $5.2 million and $2.3 million,
respectively. Interest credited to policyholder account balances increased by
$10.3 million mainly due to the increase in GIC policyholder account balances
from sales as mentioned above.
General, administrative, and other expenses decreased by $22.0 million from the
prior year. As of April 1, 2000, there was a change in the allocation of
estimated distribution expenses from Prudential's retail agency network, this
change decreased quarter over quarter expenses by $10.3 million. In addition,
the second quarter of 1999 reflected the impact of fully implementing the
expense allocation methodology that was introduced in late 1998. This
methodology allocated higher expenses to products requiring more complex
business processes and transactions. The estimated effect of this allocation
change in second quarter 1999 was an increase to expenses of $17.6 million,
causing a positive variance when comparing current quarter results to prior year
quarter results. Offsetting these decreases is increased DAC amortization of
$5.5 million due to changes in the amortization model and Discovery Select lapse
experience. An increase in trail commissions on Discovery Select, which are not
subject to capitalizaton , increased expenses by $4.2 million.
12
<PAGE>
3. Liquidity and Capital Resources
Principal cash flow sources are investment and fee income, investment maturities
and sales, and premiums and fund deposits. These cash inflows may be
complemented by financing activities through other Prudential affiliates.
Cash outflows consist principally of benefits, claims and amounts paid to
policyholders in connection with policy surrenders, withdrawals and net policy
loan activity. Uses of cash also include commissions, general and administrative
expenses, and purchases of investments. Liquidity requirements associated with
policyholder obligations are monitored regularly so that the Company can manage
cash inflows to match anticipated cash outflow requirements.
The Company believes that cash flow from operations together with proceeds from
scheduled maturities and sales of fixed maturity investments, are adequate to
satisfy liquidity requirements based on the Company's current liability
structure.
The Company had $23.0 billion of assets at June 30, 2000 compared to $21.8
billion at December 31, 1999, of which $16.7 billion and $16.0 billion were held
in Separate Accounts at June 30, 2000 and December 31, 1999, respectively, under
variable life insurance policies and variable annuity contracts. The remaining
assets consisted primarily of investments and deferred policy acquisition costs.
4. The Year 2000 Issue
The Company utilizes many of the same business applications, infrastructure and
business partners as Prudential. Prudential addressed the Year 2000 issue on an
enterprise-wide basis. Therefore, it is not possible to differentiate the
Company's Year 2000 issue from that of Prudential. To date, neither Prudential
nor the Company has experienced material Year 2000 related problems in any of
their operations. Prudential believes that it has mitigated the Year 2000 risk,
however Prudential cannot guarantee that it will not experience a Year 2000
failure that has thus far been undetected. In the worst case, it is possible
that an as yet unknown Year 2000 failure, whether internal or external, could
have a material impact on Prudential or the Company's results of operations,
liquidity or financial condition. Where necessary, we have enhanced our general
business continuation contingency plans to ensure that they would be effective
in responding to a Year 2000 failure. Substantially all of these plans, as they
related to Year 2000 issues, include the ultimate resolution of any technology
failure that we may encounter.
5. Information Concerning Forward-Looking Statements
Some of the statements contained in Management's Discussion and Analysis,
including those words such as "believes", "expects", "intends", "estimates",
"assumes", "anticipates" and "seeks", are forward-looking statements. These
forward-looking statements involve risk and uncertainties. Actual results may
differ materially from those suggested by the forward-looking statements for
various reasons. In particular, statements contained in Management's Discussion
and Analysis regarding the Company's business strategies involve risks and
uncertainties, and we can provide no assurance that we will be able to execute
our strategies effectively or achieve our financial and other objectives.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risks and the way these risks are managed, are
summarized in Item 7a of the 1999 Form 10K.
13
<PAGE>
PART II
Item 2. Changes in Securities and Use of Proceeds.
(d) Information required by Item 701(f) of Regulation S-K:
The information below pertains to modified guaranteed annuity contracts
issued by the Company in two distinct variable annuity products,
Discovery Preferred Variable Annuity and Discovery Select Variable
Annuity. However, because the modified guaranteed annuity option of
each of these products is identical, the Company has aggregated the
registration of these securities.
(1) The original effective date of the Registration Statement of
the Company for the Discovery Preferred Variable Annuity on
Form S-1 was declared effective on November 27, 1995
(Registration No. 33-61143). The Discovery Select prospectus
was added through filings under Rule 424 of the Securities Act
of 1993. The registration statement continues to be effective
through annual amendments, the most recent filed April 16,
1999 and declared effective April 30, 1999.
(2) Offering commenced immediately upon effectiveness of the
registration statement.
(3) Not applicable.
(4) (i) The offering has not been terminated.
(ii) The managing underwriter of the offering is
Prudential Investment Management Services LLC.
(iii) Market-Value Adjustment Annuity Contracts (also known
as modified guaranteed annuity contracts).
(iv) Securities registered and sold for the account of
the Company:
<TABLE>
<S> <C>
Amount registered*: $ 500,000,000
Aggregate price of the offering amount registered: $ 500,000,000
Amount sold*: $ 312,261,725
Aggregate offering price of amount sold to date: $ 312,261,725
</TABLE>
* Securities not issued in predetermined units
No securities have been registered for the account of
any selling security holder.
(v) Expenses associated with the issuance of the
securities:
<TABLE>
<S> <C>
Underwriting discounts and commissions** $ 10,929,160
Other expenses** $ 15,939,843
--------------
Total $ 26,869,003
</TABLE>
** Amounts are estimated and are paid to
affiliated parties.
<TABLE>
<S> <C>
(vi) Net offering proceeds: $ 285,392,722
</TABLE>
(vii) Not applicable.
(viii) Not applicable.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(i)(a) The Articles of Incorporation of Pruco Life Insurance Company
(as amended through October 19, 1993) are incorporated by
reference to the initial Registration Statement on Form S-6 of
Pruco Life Variable Appreciable Account as filed July 2, 1996,
Registration No. 333-07451.
3(ii) By-Laws of Pruco Life Insurance Company (as amended through
May 6, 1997) are incorporated by reference to Form 10-Q as
filed by the Company on August 15, 1997.
4(a) Modified Guaranteed Annuity Contract is filed herewith
(previously filed as an exhibit to the Company's Registration
Statement on Form S-1 as filed November 2, 1990, Registration
No. 33-37587).
4(b) Market-Value Adjustment Annuity Contract is incorporated by
reference to the Company's registration statement on Form S-1,
Registration No. 333-18053, as filed November 17, 1995.
27 Financial Data Schedule is filed herewith in accordance with
EDGAR instructions.
(b) Reports on Form 8K
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)
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
President and Director August 14, 2000
--------------------------------
Esther H. Milnes
Principal Financial Officer and August 14, 2000
-------------------------------- Chief Accounting Officer
Dennis G. Sullivan
</TABLE>
16
