10-Q: Quarterly report [Sections 13 or 15(d)]
Published on
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 March 31, 1999
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
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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) 802-5740
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(Registrant's Telephone Number, including area code)
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 [_]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of May 17, 1999. Common stock, par value of $10 per share:
250,000 shares outstanding.
PRUCO LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
2
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
MARCH 31, 1999 AND DECEMBER 31, 1998 (IN THOUSANDS)
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (IN THOUSANDS)
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THREE MONTHS ENDED MARCH 31,
1999 1998
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REVENUES
Premiums $ 13,708 $ 11,707
Policy charges and fee income 93,013 77,905
Net investment income 69,813 64,115
Realized investment (losses) gains, net (5,023) 5,439
Asset management fee income 11,209 9,410
Other income 1,279 813
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TOTAL REVENUES 183,999 169,389
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BENEFITS AND EXPENSES
Policyholders' benefits 52,910 40,911
Interest credited to policyholders' account balances 31,262 25,359
General, administrative and other expenses 68,980 50,921
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TOTAL BENEFITS AND EXPENSES 153,152 117,191
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Income before income taxes 30,847 52,198
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Income taxes 11,279 19,058
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NET INCOME $ 19,568 $ 33,140
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Other comprehensive income, net of tax:
Unrealized (losses) gains on securities, net
of reclassification adjustment (9,870) (4,784)
Foreign currency translation adjustments (111) (119)
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Other comprehensive income (9,981) (4,903)
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TOTAL COMPREHENSIVE INCOME $ 9,587 $ 28,237
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND
THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (IN THOUSANDS)
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Pruco Life
Insurance Company (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, 1998 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 three months ended March 31, 1999 may not be indicative of
the results that may be expected for the year ending December 31, 1999.
Certain amounts in the prior years have been reclassified to conform to current
year presentation.
2. 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.
3. RELATED PARTY TRANSACTIONS
Prudential and the Company 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 the Company in the amount equal to a
portion of the gross investment advisory fees paid by the Prudential Series
Fund. This is recorded as "Asset management fee income" on the Statements of
Operations and Comprehensive Income.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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The following analysis should be read in conjunction with the notes to
Consolidated Financial Statements.
The Company markets individual life insurance, variable life insurance, variable
annuities, fixed annuities, and a group annuity program primarily through
Prudential's sales force in the United States and markets individual life
insurance through its branch office in Taiwan.
The Company markets its products in the life insurance and annuity sectors of
the insurance industry. 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 pressure as 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 have opened the insurance industry to competition
from other financial institutions, particularly banks and mutual funds that are
positioned to deliver competing investment products through large, stable
distribution channels.
The Company held $17.5 billion in assets at March 31, 1999 compared to $16.8
billion at December 31, 1998, of which $12.2 billion and $11.5 billion were held
in Separate Accounts in 1999 and 1998, respectively, under variable life
insurance policies and variable annuity contracts. The remaining assets
consisted primarily of general account investments and deferred policy
acquisition costs.
1. RESULTS OF OPERATIONS
Net income for the three months ended March 31, 1999 was $19.6 million, a
decrease of $13.5 million or 40.8% from $33.1 million earned in the three months
ended March 31, 1998.
Total insurance revenues, consisting of premiums and policy charges and fee
income, increased $17.1 million for the three months ended March 31, 1999 to
$106.7 million from $89.6 million for the three months ended March 31, 1998. The
Discovery Select Variable Annuity has been a successful product which continues
to generate significant sales. The Company also has a relatively new variable
universal life (VUL) insurance product, which provides an option to the customer
to select proprietary or non-proprietary mutual fund investments. Favorable
market conditions have provided a stimulus to investors to purchase mutual fund
shares and annuities, including the VUL and Discovery Select products. Increased
sales and appreciation in Separate Account asset values contributed to the
growth in assets under management and consequently on fees earned. For Discovery
Select, the growth in Separate Account assets under management surpassed March
31, 1998 balances by $2.6 billion for a total of $5.1 billion as of March 31,
1999. VUL assets under management also exhibited a dramatic increase from March
31, 1998, as these assets grew $308.0 million resulting in a March 31, 1999
balance of $352.0 million. In addition, the Company's Taiwan branch generated
continued growth in premiums for traditional insurance products. Sales and the
number of life planners grew by 20% and 31%, respectively.
The Company's consolidated net investment income increased $5.7 million for the
three months ended March 31, 1999 to $69.8 million from $64.1 million for the
three months ended March 31, 1998. The increase was a result of higher beginning
of year fixed maturity portfolio assets resulting from sales of a new
non-participating guaranteed investment contract product, Prudential Credit
Enhanced (PACE) during 1998. In addition, income carried on the General Account
for net gains on Separate Accounts have also contributed to the increase.
Consolidated net realized investment gains decreased $10.4 million for the three
months ended March 31, 1999 to a $5.0 million loss from a $5.4 million gain for
the three months ended March 31, 1998. This decrease was primarily due to net
sales of fixed maturities during a period of increasing interest rates. These
sales are a result of a strategic decision to reallocate money to short term
investments.
Asset management fee income increased $1.8 million for the three months ended
March 31, 1999 to $11.2 million from $9.4 million for the three months ended
March 31, 1998. The portfolio of mutual fund investments related to the
Company's Separate Account products are known as The Prudential Series Fund. The
Company receives an allocated portion of investment management fees that
Prudential earns from The Prudential Series Fund. The increased sales and
appreciation in the Separate Account products have generated an increase in the
asset management fee income.
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Policyholders' benefits increased $12.0 million for the three months ended March
31, 1999 to $52.9 million from $40.9 million for the three months ended March
31, 1998. This change is attributable to an increase in death claims reflecting
the overall aging of the business in force as well as an increase in disability
reserves and Taiwan new business reserves.
Interest credited to policyholders' account balances increased by $5.9 million
for the three months ended March 31, 1999 to $31.3 million from $25.4 million
for the three months ended March 31, 1998. Accounting for more than half of this
quarter's increase is the new PACE product. The remaining increase is
attributable to the rise in policyholder account balances, largely due to
Discovery Select and VUL, as well as increased interest credited pertaining to
policy loans.
General, administrative and other expenses increased $18.1 million for the three
months ended March 31, 1999 to $69.0 million compared to $50.9 million for the
three months ended March 31, 1998. The primary reason for the higher level of
expenses in 1999 is an increase in deferred policy acquisition costs
amortization. The level of deferred policy acquisition costs and, consequently,
the amortization of such costs, increased significantly over the past year
reflecting strong growth in sales of VUL and the Discovery Select Variable
Annuity. In addition, amortization of deferred policy acquisition costs in 1998
was reduced as a result of a refinement in estimated gross profit margins.
2. THE YEAR 2000 ISSUE
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 the Prudential. Refer to management's discussion of the Year 2000 issue
in the December 31, 1998 Form 10-K for the steps taken by Prudential to mitigate
the Year 2000 risks.
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 projects may not meet their
targeted completion dates, it is anticipated that these projects will be
completed by September 1999 so that any delays, if experienced, would not have a
significant impact on the timing of the project as a whole.
Prudential is enhancing existing business contingency plans to mitigate Year
2000 risk. These responses are being reviewed and are expected to be finalized
by June 1999 to ensure that they are workable under the special conditions of a
Year 2000 failure. The contingency plans are substantially on schedule and will
be implemented prior to year-end.
The Year 2000 costs allocated to Pruco Life to date are not material to its
operations and financial position. 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. The discussion of the Year 2000 issue herein, and
in particular the Company's plans to remediate this issue and estimated costs
thereof, are forward-looking in nature. See cautionary statement below relating
to forward-looking statements.
3. 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 position 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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The Company's exposure to market risks and the way these risks are managed, are
summarized in Item 7a of the 1998 Form 10K.
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PART II
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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(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:
(vii) Not applicable.
(viii) Not applicable.
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PART II
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) EXHIBITS
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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
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None
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SIGNATURES
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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
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/s/ ESTHER H. MILNES President and Director May 17, 1999
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Esther H. Milnes
/s/ DENNIS G. SULLIVAN Principal Financial Officer and May 17, 1999
- -------------------------- Chief Accounting Officer
Dennis G. Sullivan
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