<PAGE>
================================================================================
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 September 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
------------------------------------- ---------------------------------
(State or other jurisdiction, (IRS Employer Identification No.)
incorporation or organization)
213 Washington Street, Newark, New Jersey 07102
-----------------------------------------------------
(Address of principal executive offices ) (Zip Code)
(973) 802-3274
-----------------------------------------------------
(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 14, 2000. Common stock, par value of
$10 per share: 250,000 shares outstanding
================================================================================
<PAGE>
PRUCO LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page No.
--------
Cover Page -
Index 2
PART I - Financial Information
------------------------------
Item 1. (Unaudited) Consolidated Financial Statements
Consolidated Statements of Financial Position 3
As of September 30, 2000 and December 31, 1999
Consolidated Statements of Operations and Comprehensive Income
Nine and Three months ended September 30, 2000 and 1999 4
Consolidated Statements of Changes in Stockholder's Equity
Periods ended September 30, 2000 and December 31, 1999 and 1998 5
Consolidated Statements of Cash Flows
Nine months ended September 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
2
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Financial Position
As of September 30, 2000 and December 31, 1999 (In Thousands)
-------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
2000 1999
--------------- --------------
<S> <C> <C>
ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 2000: $3,359,031; 1999:
$3,084,057) $ 3,315,978 $ 2,998,362
Held to maturity, at amortized cost (fair value, 2000: $346,033; 1999: $377,822) 353,579 388,990
Equity securities - available for sale, at fair value (cost, 2000: $7,822 ; 1999: $3,238) 7,657 4,532
Mortgage loans on real estate 9,645 10,509
Policy loans 844,680 792,352
Short-term investments 509,692 207,219
Other long-term investments 88,352 77,769
------------- ------------
Total investments 5,129,583 4,479,733
Cash 70,046 76,396
Deferred policy acquisition costs 1,138,699 1,062,785
Accrued investment income 79,148 68,917
Other assets 110,894 48,228
Separate Account assets 16,996,687 16,032,449
------------- ----------
TOTAL ASSETS $ 23,525,057 $ 21,768,508
============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 3,452,178 $ 3,116,261
Future policy benefits and other policyholder liabilities 693,401 635,978
Cash collateral for loaned securities 174,645 87,336
Securities sold under agreement to repurchase 50,691 21,151
Income taxes payable 233,933 145,600
Payables to affiliate 24,011 487
Other liabilities 138,685 59,427
Separate Account liabilities 16,996,687 16,032,449
------------- ------------
Total liabilities 21,764,231 20,098,689
------------- ------------
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 1,335,041 1,258,428
Accumulated other comprehensive loss
Net unrealized investment losses (14,093) (28,364)
Foreign currency translation adjustments (2,204) (2,327)
------------- -------------
Accumulated other comprehensive loss (16,297) (30,691)
------------- -------------
Total stockholder's equity 1,760,826 1,669,819
------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 23,525,057 $ 21,768,508
============= ============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Nine and Three Months Ended September 30, 2000 and 1999 (In Thousands)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
2000 1999 2000 1999
--------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 87,695 $ 68,794 $26,967 $ 27,892
Policy charges and fee income 350,779 304,593 121,372 98,227
Net investment income 248,495 209,508 80,520 71,911
Realized investment losses, net (15,222) (17,916) (1,228) (4,116)
Asset management fees 53,702 40,863 18,850 15,347
Other income 685 1,005 275 160
-------- -------- -------- --------
Total revenues 726,134 606,847 246,756 209,421
-------- -------- -------- --------
BENEFITS AND EXPENSES
Policyholders' benefits 181,172 142,125 63,452 35,392
Interest credited to policyholders' account balances 123,490 93,697 44,039 31,448
General, administrative and other expenses 304,903 298,183 92,354 106,525
-------- -------- -------- --------
Total benefits and expenses 609,565 534,005 199,845 173,365
-------- -------- -------- --------
Income from operations before income taxes 116,569 72,842 46,911 36,056
-------- -------- -------- --------
Income tax provision 39,956 25,494 16,419 12,619
-------- -------- -------- --------
NET INCOME $76,613 $ 47,348 $ 30,492 $ 23,437
-------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities, net of
reclassification adjustment 14,271 (27,867) 13,696 (8,369)
Foreign currency translation adjustments 123 790 1,550 260
-------- -------- -------- --------
Other comprehensive income (loss), net of tax 14,394 (27,077) 15,246 (8,109)
-------- -------- -------- ---------
TOTAL COMPREHENSIVE INCOME $ 91,007 $ 20,271 $ 45,738 $ 15,328
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity (Unaudited)
Periods Ended September 30, 2000 and December 31, 1999 and 1998 (In Thousands)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
other Total
Common Paid-in- Retained comprehensive stockholder's
stock capital earnings income (loss) equity
-------- ---------- ---------- --------------- -------------
<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 - - - (7,227) (7,227)
reclassification adjustment
and taxes
------- --------- ----------- -------- -----------
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 - - - (38,266) (38,266)
reclassification adjustment
and taxes
------- --------- ----------- -------- -----------
Balance, December 31, 1999 $ 2,500 $ 439,582 $ 1,258,428 $ (30,691) $ 1,669,819
Net income - - 76,613 - 76,613
Change in foreign currency
translation adjustments, - - - 123 123
net of taxes
Change in net unrealized
investment gains, net of - - - 14,271 14,271
reclassification adjustment
and taxes
------- --------- ----------- -------- -----------
Balance, September 30, 2000 $ 2,500 $ 439,582 $ 1,335,041 $ (16,297) $ 1,760,826
======= ========= =========== ======== ===========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2000 and 1999 (In Thousands)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
-------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 76,613 $ 47,348
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Policy charges and fee income (50,971) (68,377)
Interest credited to policyholders' account balances 123,490 93,697
Realized investment losses, net 15,222 17,916
Amortization and other non-cash items (8,372) 48,808
Change in:
Future policy benefits and other policyholders' liabilities 57,423 7,549
Accrued investment income (10,231) (5,773)
Payables to/Receivables from affiliate, net 23,524 (212)
Policy loans (52,328) (24,844)
Deferred policy acquisition costs (75,914) (122,831)
Income taxes payable 88,333 (21,821)
Other, net 16,593 68,630
--------- ----------
Cash Flows From Operating Activities $ 203,382 $ 40,090
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 1,703,145 2,558,072
Held to maturity 35,180 38,903
Equity securities 1,147 5,189
Mortgage loans on real estate 864 683
Other long-term investments - 320
Payments for the purchase of:
Fixed maturities:
Available for sale (2,004,763) (2,732,358)
Held to maturity - (24,170)
Equity securities (5,503) (2,059)
Other long-term investments (4,137) (33)
Cash collateral for loaned securities, net 87,309 (8,354)
Securities sold under agreement to repurchase, net 29,540 505
Other long-term investments (6,446) (14,918)
Short-term investments, net (302,517) (40,558)
--------- ----------
Cash Flows Used In Investing Activities (466,181) (218,778)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 1,894,558 2,598,383
Withdrawals (1,638,109) (2,424,550)
--------- ----------
Cash Flows From Financing Activities 256,449 173,833
--------- ----------
Net decrease in Cash (6,350) (4,855)
Cash, beginning of year 76,396 89,679
--------- ----------
CASH, END OF PERIOD $ 70,046 $ 84,824
========= ==========
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
================================================================================
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. 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
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
--------------------------------------------------------------------------------
3. RELATED PARTY TRANSACTIONS (continued)
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 accordance with a profit sharing agreement with Prudential, the Company
receives fee income from policyholder account balances invested in the
Prudential Series Funds ("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.
On September 29, 2000, the Board of Directors for the Prudential Series Fund,
Inc. ("PSFI") adopted resolutions to terminate the existing management agreement
between PSFI and Prudential, and has appointed another subsidiary of Prudential
as the fund manager for PSF. The Company is currently assessing the effect of
these resolutions on its profit sharing agreement with Prudential.
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 $715.1
million and $725.3 million at September 30, 2000 and December 31, 1999,
respectively. The fees received related to the COLI policies were $4.0 million
for the nine months ending September 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 September 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 September 30, 2000 or December 31, 1999.
8
<PAGE>
Pruco Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
--------------------------------------------------------------------------------
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." SFAS 133 was amended by SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FASB Statement No. 133," issued June 1999, and by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities"
issued in June 2000. SFAS 133, as amended, requires that companies recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS 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 hedge of a net investment in a
foreign subsidiary, 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. Adoption of SFAS 133, as
amended, is not expected to have a material impact on the Company's financial
position or results of operations.
9
<PAGE>
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 sells 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.
The Separate Account annuity and life products are fee based, as compared to the
GIC and General Account annuity and life products which are primarily interest
spread products. 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 sells traditional individual life
insurance through its branch office in Taiwan.
The Company has entered into discussions with the Arizona Department of
Insurance and the Taiwan Ministry of Finance ("MoF") regarding the transfer of
the Taiwan business to Prudential Life Insurance Company of Taiwan, Inc.
("PLICT"), a subsidiary of Prudential. PLICT has received approval for an
Application for Incorporation with the Taiwan Ministry of Economic Affairs and
received its company license on November 4, 2000. PLICT has filed with the MoF
for its insurance business license. The Company is awaiting approval of the
transfer from the Arizona Department of Insurance. Once that approval is
received, the Company will submit its business transfer plan to the MoF. The
transaction is expected to be completed within the next few months.
The Company's Analysis of Financial Condition and Results of Operations are
described below.
1. Analysis of Financial Condition
From December 31, 1999 to September 30, 2000, there was an increase of $1.7
billion in total assets from $21.8 billion to $23.5 billion, the majority of
which relates to a $964 million increase in Separate Accounts from net cash
inflows as described below. General Account invested assets increased by $650
million, mainly due to net purchases and appreciation of fixed maturities of
$282 million, net purchases of short-term investments of $302 million and
increased policy loan lending of $52 million. Other assets increased by $63
million due to timing on the cash collection of receivables for securities sold.
During this nine-month period, liabilities also increased by $1.7 billion from
$20.1 billion to $21.8 billion. Corresponding with the asset change, Separate
Account liabilities increased by $964 million due to cash inflows to the
Separate Accounts of $1,902 million, net investment income (including unrealized
losses of $440 million) of $171 million, and surrenders, withdrawals and
disbursements of $1,109 million. General Account policyholder balances increased
by $336 million during this period mainly from new sales of GICs of $157
million, and Discovery Select annuity product ("Discovery Select") sales. Net
sales (sales less withdrawals) and exchanges of Discovery Select were
approximately $1,092 million in the first nine months of 2000 for the General
and Separate Accounts. There was also an increase in future policy benefits and
other policyholder benefits of $57 million mainly due to increase in the Taiwan
business. The remaining increases in liabilities relate to increases in
securities lending of $116 million, taxes payable of $88 million, and other
liabilities. Other liabilities increased by $79 million mainly due to timing on
the cash payment for purchases of securities.
10
<PAGE>
2. Results of Operations
For the nine months ended September 30, 2000 and September 30, 1999
--------------------------------------------------------------------
Consolidated income before income taxes of $116.6 million is $43.7 million more
than for the first nine months of 1999, with after tax income of $76.6 million,
an improvement of $29.3 million from the prior year. Revenues grew by $119.3
million, an increase of 19.7% from the prior year, while benefits and expenses
grew by $75.6 million, or 14.1%, from the prior year.
Policy charges and fee income, consisting primarily of mortality and expense
("M&E"), loading and other insurance charges assessed primarily on Separate
Account policyholder fund balances, increased by $46.2 million as a result of
the growth in Separate Account fund balances. Separate Account fund values have
grown $3.1 billion from $13.9 billion at September 30, 1999 to $17.0 billion at
September 30, 2000. The increase primarily results from $2.54 billion of net
sales (sales less withdrawals) and market appreciation of Discovery Select, and
$521 million of net sales and market appreciation on life products, mainly
Variable Universal Life ("VUL"). Although fund values have increased from the
prior period, there has been a decline in net sales year over year of the
Company's largest product, Discovery Select, due to the termination of the
Exchange Program on May 1, 2000 and increased surrenders. The Exchange Program
provided the contractholders of older Prudential or Pruco Life annuity products
an opportunity to convert to Discovery Select. Net sales of Discovery Select are
$1,022 million lower than the prior year, $648 million of this decrease is from
lower exchange sales. The remainder of the decrease is primarily from increased
surrenders as the business ages and as there are waivers of surrender charges on
policies acquired through the Exchange Program. The Company launched a new
variable annuity product, Strategic Partners One, on September 22, 2000. The
Exchange Program may be reinstated in the future with this new product.
The increase in premiums of $18.9 million is primarily from Taiwan premiums
which grew $14.1 million due to increased persistency rates and growth in the in
force business of 16%. Premiums from annuitizations of Discovery Select
contracts also contributed to the growth in premiums.
Asset management fees, which are charged on policyholder accounts invested in
the PSF, a portfolio of mutual fund investments, increased by $12.8 million.
This increase is also due to the growth in the Separate Account fund balances,
as described above.
Net investment income increased by $39.0 million from the prior year, as total
fixed maturities and short-term investments increased $659 million since
September 30, 1999, mainly due to cash inflows from sales of the Prudential
Credit Enhanced ("PACE") product, a GIC product, and General Account annuity
sales. An increase in investment yields accounted for approximately $7 million
of this increase.
Realized investment losses improved by $2.7 million from the prior year as
increases in gains recognized on swaps and forward contracts of $12.7 million
offset increased losses on fixed maturities of $11 million. Losses on fixed
maturities were a result of higher writedowns for other than temporary
impairments of $8.0 million in 2000 versus $4.2 million in 1999. The remainder
of the fixed maturity losses arose from sales of fixed maturities in a higher
interest rate environment.
Policyholder benefits, including changes to reserves, increased by $39 million.
Reserves increased by $27 million due to higher Taiwan life insurance sales and
premiums from Discovery Select annuitizations in the amount of $10.3 million and
$5.6 million, respectively. In addition, reserves for life insurance products
increased by $11 million due to increases for extended term and disabled waived
premium reserves and increases to the unearned revenue reserve due to modeling
refinements. Policyholder benefits are $12 million higher due to increased death
claims and growth in the business.
Interest credited to policyholder account balances increased by $29.8 million
mainly due to the increase in GIC policyholder account balances and General
Account annuity accounts from sales as mentioned in the net investment income
section above.
11
<PAGE>
General, administrative and other expenses increased by $6.7 million from the
prior year. There was $7.4 million more 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 PGAM for managing the
Separate Account portfolios increased by $5.6 million as the Separate Account
portfolios upon which these fees are assessed have grown. 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 (net
of capitalization) by $5.9 million. Reductions in salary related and consulting
expenses due to reduced staff counts in 2000 of approximately $7 million were
offset by increased expenses of approximately $7 million for annuities and the
Taiwan business due to business growth.
In addition, DAC amortization, which is a component of general, administrative
and other expenses, was lower by $.7 million as a decrease in the DAC
amortization of life products of $13.5 million was mostly offset by increases in
annuity and Taiwan DAC amortization of $9.7 million and $3.1 million,
respectively. DAC amortization for life products decreased as the prior year
included write-offs of DAC for policies that were rescinded as a result of the
Company's policyholder remediation program, as described in the Notes to the
Financial Statements. Annuity DAC amortization increased due to growth in
profitability of the annuity business, changes made late in 1999 to the
assumptions used in the amortization model, and the release of DAC due to
Discovery Select lapse experience. Taiwan DAC amortization increased due to
growth in the business.
For the three months ended September 30, 2000 and September 30, 1999
--------------------------------------------------------------------
Consolidated income before taxes for the three months ended September 30, 2000
was $46.9 million, an increase of $10.8 million from $36.1 million earned for
the three months ended September 30, 1999. Accordingly, after tax income of
$30.5 million is higher than the prior year by $7.1 million. Total revenues are
higher by $37.3 million, or 17.8%, while benefits and expenses have risen $26.5
million, or 15.3%.
Policy charges and fee income increased by $23.1 million, primarily due to
increased M&E fees, and asset management fees increased by $3.5 million,
primarily as a result of the growth in the Separate Account fund balances upon
which these fees are assessed.
Net investment income increased by $8.6 million from the prior year, as total
fixed maturities and short-term investments increased $659 million since
September 30 1999, mainly due to GIC and General Account annuity sales.
Investment yields have also increased.
Realized investment losses have improved by $2.9 million as there have been
fewer losses realized on sales of fixed maturities in 2000.
Policyholder benefits, including changes to reserves, increased by $28.1
million. Life product reserves and benefits increased by $22.7 million from the
prior year. The increase in life policyholder benefits from the previous year is
$9.8 million, mainly due to larger than expected death claims. Also contributing
to this increase from the prior year, is a 1999 adjustment that reduced
policyholder benefits for the term conversion premium credit, creating a $4.1
million variance to this line. Life reserves increased by $12.9 million due to
increases to extended term and disabled waived premium reserves, and increases
to the unearned revenue reserve due to modeling refinements. In addition,
reserves increased due to higher Taiwan life insurance sales and premiums from
Discovery Select annuitizations in the amount of $2.1 million and $3.3 million,
respectively.
Interest credited to policyholder account balances increased by $12.6 million
mainly due to the increase in GIC policyholder account balances from sales as
mentioned above.
General, administrative and other expenses decreased by $14.2 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 $4.1 million (net of
capitalization). In addition, there was lower DAC amortization of $14.9 million,
as 1999 rescissions related to the remediation program increased write-offs of
DAC for life products in the prior year creating a $9.6 million positive
variance, and annuity DAC amortization was $5.6 million less due to modeling
refinements. Salary and consulting expenses were approximately $2 million lower
due to reduced staffing. Offsetting these decreases was an increase to the
reserve for unbeknownst modified endowment contracts ("UMEC") for $6.3 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 $23.5 billion of assets at September 30, 2000 compared to $21.8
billion at December 31, 1999, of which $17.0 billion and $16.0 billion were held
in Separate Accounts at September 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. 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:
Amount registered*: $500,000,000
Aggregate price of the offering amount registered: $500,000,000
Amount sold*: $319,319,033
Aggregate offering price of amount sold to date: $319,319,033
*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:
Underwriting discounts and commissions** $ 11,176,166
Other expenses** $ 16,915,718
------------
Total $ 28,091,884
**Amounts are estimated and are paid to affiliated parties.
(vi) Net offering proceeds: $291,227,149
(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)
Signature Title Date
--------- ----- ----
_____________________ President and Director November 14, 2000
Esther H. Milnes
_____________________ Principal Financial Officer and November 14, 2000
William J. Eckert, IV Chief Accounting Officer
16
