Form: 10-Q

Quarterly report [Sections 13 or 15(d)]

10-Q: Quarterly report [Sections 13 or 15(d)]

Published on

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UNITED STATES
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, 2001

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
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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, 2001.
Common stock, par value of $10 per share: 250,000 shares
outstanding

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PRUCO LIFE INSURANCE COMPANY

INDEX TO FINANCIAL STATEMENTS



Page No.
-------


Cover Page -

Index 2


PART I - Financial Information
------------------------------

Item 1. (Unaudited) Financial Statements

Consolidated Statements of Financial Position
As of June 30, 2001 and December 31, 2000 3

Consolidated Statements of Operations and Comprehensive Income
Three and Six months ended June 30, 2001 and 2000 4

Consolidated Statements of Changes in Stockholder's Equity
Periods ended June 30, 2001 and December 31, 2000 and 1999 5

Consolidated Statements of Cash Flows
Six months ended June 30, 2001 and 2000 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

Pruco Life Insurance Company and Subsidiaries



Consolidated Statements of Financial Position
As of June 30, 2001 and December 31, 2000 (In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------

(Unaudited)
June 30, December 31,
2001 2000
------------ ------------

ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 2001: $3,978,883; 2000: $3,552,244) $ 4,011,508 $ 3,561,521
Held to maturity, at amortized cost (fair value, 2000: $320,634) - 324,546
Equity securities - available for sale, at fair value (cost, 2001: $268; 2000: $13,446) 486 10,804
Investment in affiliate 39,358 -
Mortgage loans on real estate 8,791 9,327
Policy loans 859,271 855,374
Short-term investments 99,007 202,815
Other long-term investments 90,266 83,738
------------ ------------
Total investments 5,108,687 5,048,125
Cash and cash equivalents 495,247 453,071
Deferred policy acquisition costs 1,112,790 1,132,653
Deferred ceding commissions 69,786 -
Accrued investment income 76,863 82,297
Reinsurance recoverable 192,781 31,568
Receivables from affiliates 33,593 51,586
Other assets 54,284 29,445
Separate Account assets 15,489,884 16,230,264
------------ ------------
TOTAL ASSETS $ 22,633,915 $ 23,059,009
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 3,792,116 $ 3,646,668
Future policy benefits and other policyholder liabilities 736,765 702,862
Cash collateral for loaned securities 230,479 185,849
Securities sold under agreement to repurchase 64,110 104,098
Income taxes payable 268,431 235,795
Other liabilities 165,299 120,891
Separate Account liabilities 15,489,884 16,230,264
------------ ------------
Total liabilities 20,747,084 21,226,427
------------ ------------
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 466,748 466,748
Retained earnings 1,403,457 1,361,924

Accumulated other comprehensive income
Net unrealized investment gains 14,126 4,730
Foreign currency translation adjustments - (3,320)
------------ ------------
Accumulated other comprehensive income 14,126 1,410
------------ ------------
Total stockholder's equity 1,886,831 1,832,582
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 22,633,915 $ 23,059,009
============ ============

See Notes to Consolidated Financial Statements

3


Pruco Life Insurance Company and Subsidiaries



Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Three and Six Months Ended June 30, 2001 and 2000 (In Thousands)
- -----------------------------------------------------------------------------------------------------------------------------

Six months ended Three months ended
June 30, June 30,

2001 2000 2001 2000
-------- --------- --------- --------

REVENUES

Premiums $ 47,354 $ 60,728 $ 23,936 $ 33,477
Policy charges and fee income 240,330 229,407 121,226 114,526
Net investment income 174,803 167,975 84,493 83,501
Realized investment gains (losses), net 307 (13,994) (10,570) (3,683)
Asset management fees 3,869 34,852 1,716 18,331
Other income 740 410 70 207
-------- --------- --------- --------
Total revenues 467,403 479,378 220,871 246,359
-------- --------- --------- --------
BENEFITS AND EXPENSES

Policyholders' benefits 115,490 117,720 58,585 55,388
Interest credited to policyholders' account balances 98,033 79,451 49,225 41,288
General, administrative and other expenses 201,061 212,548 97,522 100,689
-------- --------- --------- --------
Total benefits and expenses 414,584 409,719 205,332 197,365
-------- --------- --------- --------
Income from operations before income taxes 52,819 69,659 15,539 48,994
-------- --------- --------- --------
Income tax provision 11,286 23,537 2,645 16,305
-------- --------- --------- --------
NET INCOME 41,533 46,122 12,894 32,689
-------- --------- --------- --------
Other comprehensive income, net of tax:

Unrealized gains (losses)on securities,
net of reclassification adjustment 9,396 575 (7,215) (5,914)

Foreign currency translation adjustments 3,320 (1,427) - (1,461)
-------- --------- --------- --------
Other comprehensive income (loss) 12,716 (852) (7,215) (7,375)
-------- --------- --------- --------
TOTAL COMPREHENSIVE INCOME $ 54,249 $ 45,270 $ 5,679 $ 25,314
======== ========= ======== ========



See Notes to Consolidated Financial Statements

4


Pruco Life Insurance Company and Subsidiaries



Consolidated Statements of Changes in Stockholder's Equity (Unaudited)
Periods Ended June 30, 2001 and December 31, 2000 and 1999 (In Thousands)
- ---------------------------------------------------------------------------------------------------------------

Accumulated
other Total
Common Paid-in- Retained comprehensive stockholder's
stock capital earnings income (loss) equity
-------- --------- ----------- ------------- -------------

Balance, January 1, 1999 $ 2,500 $ 439,582 $ 1,202,833 $ 8,317 $ 1,653,232

Net income - - 55,595 - 55,595

Change in foreign currency
translation adjustments,
net of taxes - - - (742) (742)

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 - - 103,496 - 103,496

Contribution from Parent - 27,166 - - 27,166

Change in foreign currency
translation adjustments,
net of taxes - - - (993) (993)

Change in net unrealized
investment losses, net of
reclassification adjustment
and taxes - - - 33,094 33,094
------- --------- ----------- --------- -----------

Balance, December 31, 2000 $ 2,500 $ 466,748 $1,361,924 $ 1,410 $ 1,832,582

Net income - - 41,533 - 41,533

Change in foreign currency
net of taxes - - - 3,320 3,320

Change in net unrealized
investment gains, net of
reclassification adjustment
and taxes - - - 9,396 9,396
------- --------- ----------- --------- -----------

Balance, June 30, 2001 $ 2,500 $ 466,748 $ 1,403,457 $ 14,126 $ 1,886,831
======= ========= =========== ========== ===========


See Notes to Consolidated Financial Statements

5


Pruco Life Insurance Company and Subsidiaries



Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2001 and 2000 (In Thousands)
- ----------------------------------------------------------------------------------------------------------

2001 2000
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 41,533 $ 46,122
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Policy charges and fee income (39,033) (33,005)
Interest credited to policyholders' account balances 98,033 79,451
Realized investment (gains) losses, net (307) 13,994
Amortization and other non-cash items (12,227) 4,426
Change in:
Future policy benefits and other policyholders' liabilities 33,903 40,605
Accrued investment income 5,434 (4,487)
Receivables from affiliates 24,651 (22,065)
Policy loans (25,851) (33,770)
Deferred policy acquisition costs and ceding commissions (49,923) (58,669)
Income taxes payable 38,364 63,359
Other, net 15,242 48,725
------------ ------------
Cash Flows From Operating Activities 129,819 144,686
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 1,767,648 1,065,356
Held to maturity - 20,871
Equity securities 274 251
Mortgage loans on real estate 536 585
Payments for the purchase of:
Fixed maturities:
Available for sale (1,980,148) (1,327,324)
Equity securities (176) (4,155)
Cash collateral for loaned securities, net 44,630 43,765
Securities sold under agreement to repurchase, net (39,988) 85,444
Other long-term investments (2,717) (5,834)
Short-term investments, net 103,855 (64,289)
------------ ------------
Cash Flows Used In Investing Activities (106,086) (185,330)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 731,505 1,432,001
Withdrawals (647,426) (1,254,729)
Cash provided to affiliate (65,636) -
------------ ------------
Cash Flows From Financing Activities 18,443 177,272
------------ ------------
Net increase in Cash and cash equivalents 42,176 136,628
Cash and cash equivalents, beginning of year 453,071 198,994
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 495,247 $ 335,622
============ ============


See Notes to Consolidated Financial Statements

6


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 2001 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, 2000.

2. CONTINGENCIES AND LITIGATION

Prudential and the Company are subject to legal and regulatory actions in the
ordinary course of their businesses, including class actions. Pending legal and
regulatory actions include proceedings relating to aspects of the businesses and
operations that are specific to the Company and Prudential and that are typical
of the businesses in which the Company and Prudential operate. Some of these
proceedings have been brought on behalf of various alleged classes of
complaintants. In certain of these matters, the plaintiffs are seeking large
and/or indeterminate amounts, including punitive or exemplary damages.

Beginning in 1995, regulatory authorities and customers brought significant
regulatory actions and civil litigation against the Company and Prudential
involving individual life insurance sales practices. In 1996, Prudential, on
behalf of itself and many of its life insurance subsidiaries including the
Company entered into settlement agreements with relevant insurance regulatory
authorities and plaintiffs in the principal life insurance sales practices class
action lawsuit covering policyholders of individual permanent life insurance
policies issued in the United States from 1982 to 1995. Pursuant to the
settlements, the companies agreed to various changes to their sales and business
practices controls, to a series of fines, and to provide specific forms of
relief to eligible class members. Virtually all claims by class members filed in
connection with the settlements have been resolved and virtually all aspects of
the remediation program have been satisfied. While the approval of the class
action settlement is now final, Prudential and the Company remain subject to
oversight and review by insurance regulators and other regulatory authorities
with respect to its sales practices and the conduct of the remediation program.
The U.S. District Court has also retained jurisdiction as to all matters
relating to the administration, consummation, enforcement and interpretation of
the settlements.

As of June 30, 2001, Prudential and/or the Company remained a party to
approximately 50 individual sales practices actions filed by policyholders who
"opted out" of the class action settlement relating to permanent life insurance
policies issued in the United States between 1982 and 1995. In addition, there
were 40 sales practices actions pending that were filed by policyholders who
were members of the class and who failed to "opt out" of the class action
settlement. Prudential and the Company believe that those actions are governed
by the class settlement release and expects them to be enjoined and/or
dismissed. Additional suits may be filed by class members who "opted out" of the
class settlements or who failed to "opt out" but nevertheless seek to proceed
against Prudential and/or the Company. A number of the plaintiffs in these cases
seek large and/or indeterminate amounts, including punitive or exemplary
damages. Some of these actions are brought on behalf of multiple plaintiffs. It
is possible that substantial punitive damages might be awarded in any of these
actions and particularly in an action involving multiple plaintiffs.

Prudential has indemnified the Company for any liabilities incurred in
connection with sales practices litigation covering policyholders of individual
permanent life insurance policies issued in the United States from 1982 to 1995.

7


Pruco Life Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------

2. CONTINGENCIES AND LITIGATION (continued)

The balance of the Company's litigation is subject to many uncertainties, and
given the complexity and scope, the outcomes cannot be predicted. It is possible
that the results of operations or the cash flow of the Company in a particular
quarterly or annual period could be materially effected by an ultimate
unfavorable resolution of pending litigation and regulatory matters. Management
believes, however, that the ultimate outcome of all pending litigation and
regulatory matters should 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, supplies, use of equipment and office space are provided by
Prudential.

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. Beginning April 1, 2000, Prudential and the Company
agreed to revise the estimate of allocated distribution expenses to reflect a
market based pricing arrangement.

In accordance with a profit sharing agreement with Prudential that was in effect
through December 31, 2000, the Company received fee income from policyholder
account balances invested in the Prudential Series Funds ("PSF"). These revenues
were recorded as "Asset management fees" in the Consolidated Statements of
Operations and Comprehensive Income. The Company was charged an asset management
fee by Prudential Global Asset Management ("PGAM") and Jennison Associates LLC
("Jennison") for managing the PSF portfolio. These fees are a component of
"general, administrative and other expenses."

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 the PSF. The change was approved by the shareholders of
PSF during early 2001 and effective January 1, 2001, the Company no longer
receives fees associated with the PSF. In addition, the Company will no longer
incur the asset management expense from PGAM and Jennison associated with the
PSF.

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 $ 669.0
million and $685.9 million at June 30, 2001 and December 31, 2000, respectively.
The fees received related to the COLI policies were $4.4 million for the period
ending June 30, 2001.

8


Pruco Life Insurance Company and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------

Reinsurance
The Company currently has four reinsurance agreements in place with Prudential
and affiliates. Specifically, the Company has 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. In addition there are 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, 2001 or 2000. The fourth agreement which is new for 2001
is described below.

On January 31, 2001, the Company transferred all of its assets and liabilities
associated with the Company's Taiwan branch including Taiwan's insurance book of
business to an affiliated Company, Prudential Life Insurance Company of Taiwan
Inc. ("Prudential of Taiwan") , a wholly owned subsidiary of Prudential.

The mechanism used to transfer this block of business in Taiwan is referred to
as a "full acquisition and assumption" transaction. Under this mechanism, the
Company is jointly liable with Prudential of Taiwan for two years from the
giving of notice to all obligees for all matured obligations and for two years
after the maturity date of not-yet-matured obligations. Prudential of Taiwan is
also contractually liable, under indemnification provisions of the transaction,
for any liabilities that may be asserted against the Company. The transfer of
the insurance related assets and liabilities was accounted for as a
long-duration coinsurance transaction under accounting principles generally
accepted in the United States. Under this accounting treatment, the insurance
related liabilities remain on the books of the Company and an offsetting
reinsurance recoverable is established.

As part of this transaction, the Company made a capital contribution to
Prudential of Taiwan in the amount of the net equity of the Company's Taiwan
branch as of the date of transfer. As of June 30, 2001, the Company retains an
ownership interest of 12% in the stock of Prudential of Taiwan. The Company has
dividended its interest in Prudential of Taiwan to Prudential in July 2001.

Premiums and benefits ceded for the period ending June 30, 2001 from the Taiwan
coinsurance agreement were $41.3 million and $6.0 million, respectively.

This transaction reduced the Company's 2001 effective tax rate due to a decrease
in the deferred tax liability which had previously been established relating to
the Taiwan branch.

Debt Agreements
In July 1998, the Company established a revolving line of credit facility of up
to $500 million with Prudential Funding LLC, a wholly owned subsidiary of
Prudential. There was no outstanding debt relating to this credit facility as of
June 30, 2001 or December 31, 2000.

4. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
a replacement of FASB Statement No. 125". The Company has adopted the provisions
of SFAS No. 140 relating to transfers and extinguishments of liabilities which
are effective for periods occurring after March 31, 2001. The adoption did not
have an effect on the results of operations of the Company. The Company has
adopted disclosures about collateral and for recognition and reclassification of
collateral required under the statement for fiscal years ending after December
15, 2000.

9


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, term life insurance, individual variable and fixed annuities, and a
non-participating guaranteed interest contract ("GIC") called Prudential Credit
Enhanced GIC ("PACE") primarily through 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 pressure as the legal barriers which have
historically segregated the markets of the financial services industry have been
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 that are positioned to deliver competing
investment products through large, stable distribution channels. The Company
also had marketed individual life insurance through its branch office in Taiwan.
The Taiwan branch was transferred to an affiliated Company on January 31, 2001,
as described in the Notes to the Financial Statements. Beginning February 1,
2001, Taiwan's net income is not included in the Company's results of
operations.

Generally, policyholders who purchase the Company's products have the option of
investing in the Separate Accounts, segregated funds for which investment risks
are borne by the customer, or the Company's portfolio, referred to as the
General Account. The Company earns its profits through policy fees charged
primarily to Separate Account annuity and life policyholders and through the
interest spread for the GIC and certain annuity and individual life products.
Policy fees are assessed on the policyholder fund balances. These fund values
are affected by net sales (sales less withdrawals), changes in interest rates
and investment returns. The interest spread represents the difference between
the investment income earned on the Company's investment portfolio that supports
the products and the amount of interest credited to the policyholders' accounts.
Products that generate spread income primarily include the GIC product, general
account individual life insurance products, fixed annuities and the fixed-rate
option of variable annuities. The majority of the fund balances and new sales,
except for the GIC product, are in the Separate Accounts rather than the General
Account.

The Company's Changes in Financial Position and Results of Operations are
described below.

1. Analysis of Financial Condition

From December 31, 2000 to June 30, 2001 there was a decrease of $425 million in
total assets from $23,059 million to $22,634 million, the majority of which
relates to a $740 million decrease in Separate Accounts primarily from stock
market declines, as described below. Excluding the Separate Accounts, total
assets increased by $315 million primarily due to an increase in the fixed
maturity portfolio resulting from unrealized appreciation from declining
interest rates and from positive cash inflows. The transfer of the Company's
Taiwan branch reduced investments and other assets but is offset by the
establishment of a reinsurance recoverable. The Company also reclassified
held-to-maturity securities, amounting to $324.5 million at January 1, 2001 to
the available-for-sale category.

During this six-month period, liabilities also decreased by $479 million from
$21,226 million to $20,747 million. Corresponding with the asset change,
Separate Account liabilities decreased by $740 million due to net investment
losses of $760 million, expense disbursements and other changes of $110 million,
offset by net sales of $130 million. Current year net sales of $130 million
($775 million of contributions less $645 million of surrenders and withdrawals)
are $771 million lower than the prior year net sales of $901 ($1,461 million of
contributions less $560 million of surrenders and withdrawals) primarily related
to a decrease in Discovery Select annuity product ("Discovery Select") exchange
sales resulting from the discontinuation of the Exchange Program on May 1, 2000.
Policyholder account balances increased by $145 million primarily attributable
to interest credited of $98 million and positive cash inflows from the PACE GIC
and from the Variable Universal Life ("VUL") product. Future policy benefit
liabilities increased by $34 million resulting from sales of term insurance,
additional extended term insurance, and increases to Taiwan reserves. Net taxes
payable increased by $33 million due to the current year tax provision and the
receipt of tax refunds. Other liabilities increased by $44 million as a result
of an increase in payables for securities purchased.

10


2. Results of Operations

For the six months ended June 30, 2001 versus 2000
- ---------------------------------------------------

Net Income
Consolidated net income of $41.5 million for the first six months of 2001 was
$4.6 million lower than for the first six months of 2000. The largest factor
affecting net income, was a decline in net asset management fee revenue of $15.8
million ($31.0 million in revenues less $15.2 million of expenses) as the
Company ceased receiving fee income or paying asset management fee expenses
related to the Pru Series Fund ("PSF") as of January 1, 2001, as described in
the Notes to Consolidated Financial Statements. In addition, as a result of the
transfer of the Company's Taiwan branch, net income for the Taiwan branch
decreased by $3.8 million. Partially offsetting this decrease was an improvement
in realized gains of $14.3 million as gains on sales of fixed maturities in 2001
offset an increase in permanent impairment writedowns, as described below.
Variances by income statement line item are described in the following
paragraphs.

Revenues
Consolidated revenues decreased by $12 million, from $479.4 million to $467.4
million. As discussed above, the elimination of PSF asset management fees
reduced revenues by $31.0 million. Premiums decreased by $13.4 million from the
prior year. The ceding of premiums pursuant to the transfer of the Company's
Taiwan branch caused a $34.1 million decline in premiums. This was partially
offset by higher term insurance sales of the Term Essential and Term Elite
products and an increase in extended term premiums. These decreases were
partially offset by increases in policy charges and fee income, realized capital
gains and net investment income. 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 $10.9 million. The increase was a result of a $13.6 million increase for
domestic individual life products due to new business offset by a decline of
$2.7 million for the individual annuity products as average fund balances have
declined due to unfavorable valuation changes in the securities market. Realized
gains improved by $14.3 million from the prior year mainly due to gains on sales
of fixed maturities of $14.9 million in 2001 compared to losses of $17.2 million
in 2000 as interest rates declined in 2001 increasing the fair value of the
bonds. However, writedowns on fixed maturities that were deemed permanently
impaired increased from $5 million in 2000 to $18.2 million in 2001. In addition
realized gains on derivative instruments were $4 million higher in 2000. Net
investment income increased by $6.8 million from the prior year as income from
fixed maturites rose $15 million as a result of a fixed maturity balance that is
$396 million higher than June 30, 2000, mainly due to GIC sales. A decrease of
$9 million in Separate Account seed money gains somewhat offset the net
investment income increase.

Benefits and Expenses
Policyholder benefits decreased by $2.2 million mainly due to decreases in
reserve provisions and benefits for the Company's Taiwan branch of $24.6 million
mostly offset by increases in domestic individual life products reserves of
$17.3 million from sales of term insurance and extended term premiums. There
were also increased death benefits of $3 million on Discovery Select, which
represents minimum guaranteed death benefits on variable annuities. There were
also increased surrender benefits on domestic individual life products. Interest
credited to policyholder account balances increased by $18.6 million as
policyholder account balances grew by $445 million from June 2000 mainly due to
the increase in GIC policyholders' account balances from sales as mentioned
above.

General, administrative, and other expenses decreased $11.5 million from the
prior year. Commission and distribution expenses after capitalization are $ 18.4
million lower due to a change in the allocation of distribution expenses to a
market based pricing arrangement as of April 1, 2000. The elimination of PGAM
asset management expenses lowered expenses by $15.2 million. The transfer of the
Company's Taiwan branch resulted in an expense reduction of $7.5 million.
Partially offsetting these reductions was an additional $18 million of expenses
from higher allocations charged to the Company for salary, consulting, and data
processing costs due to new product sales. Deferred acquisition cost ("DAC")
amortization increased by $11.6 million from increases in deferrable expenses as
a result of sales, and increased amortization associated with a decline in
expected future profits from stock market declines.

11



For the three months ended June 30, 2001 versus 2000
- ----------------------------------------------------

Net income
Consolidated net income for the three months ended June 30, 2001 is $19.8
million lower than the prior year comparable three month period. One main driver
is the elimination of PSF net asset management fee income of $ 8.0 million
($16.6 million in revenues less $8.6 million of expenses). The other major
factor was an increase in realized losses on fixed maturities of $6.9 million
due to permanent impairment writedowns partially offset by realized gains on
sales. In addition, the transfer of the Company's Taiwan branch lowered net
income by $2.6 million.

Revenues
Consolidated revenues are $25.5 million lower than in the prior year comparable
period. The elimination of PSF asset management fees decreased revenues by $16.6
million. Premiums decreased $9.5 million from the prior year. The ceding of
premiums pursuant to the transfer of the Company's Taiwan branch decreased
premiums by $22 million. This was partially offset by higher premiums from sales
of term insurance and extended term premiums. Realized losses on fixed
maturities worsened by $6.9 million as $17.5 million of permanent impairment
writedowns were recorded in second quarter 2001 compared to only $ .9 million in
the prior year. Partially offsetting the increase in writedowns were gains on
sale of fixed maturities in 2001 compared to losses in the prior year. Policy
charges and fee income increased $6.7 million due to an increase from domestic
individual life products of $9.1 million from new business slightly offset by a
decrease in individual annuity charges due to declining fund values as a result
of the securities market. Net investment income is $1 million higher due to a
higher fixed maturity portfolio as a result of cash inflows from the PACE GIC
offset by lower gains on Separate Account seed money.

Benefits and Expenses
Policyholder benefits are $3.2 million higher due to an increase in reserves for
term insurance and extended term premiums of $14.5 million, increased domestic
individual life surrender benefits of $ 3.3 million and higher individual
annuity death benefits of $1.8 million. Partially offsetting this are lower
benefits and reserve changes of $16.5 million resulting from the transfer of the
Company's Taiwan branch. Interest credited to policyholders' account balances
increased $7.9 million as a result of increases to GIC fund balances and general
account fund balances of the individual annuity and domestic individual life
products.

General, administrative and other expenses decreased $3.2 million. The
elimination of PGAM asset management expenses accounted for $8.6 million of the
decrease. The transfer of the Company's Taiwan branch decreased expenses by $5.3
million. Partially offsetting these decreases were higher salary, consulting,
and data processing costs allocated to the Company because of higher sales. DAC
amortization increased by $3.9 million due to increases in deferrable expenses
as a result of sales, and increased amortization associated with a decline in
expected future profits from stock market declines.

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 $22.6 billion of assets at June 30, 2001 compared to $23.1
billion at December 31, 2000, of which $15.5 billion and $16.2 billion were held
in Separate Accounts at June 30, 2001 and December 31, 2000, respectively, under
variable life insurance policies and variable annuity contracts. The remaining
assets consisted primarily of investments and deferred policy acquisition costs.


12


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 2000 Form 10K.






13


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 24, 2001 and declared effective May 1, 2001.

(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*: $ 367,015,915
Aggregate offering price of amount sold to date: $ 367,015,915

* 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** $ 10,100,741
Other expenses** $ 20,213,689
--------------
Total $ 30,314,430

** Amounts are estimated and are paid to affiliated parties.


(vi) Net offering proceeds: $ 336,701,485

(vii) Not applicable.

(viii) Not applicable.



14


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 incorporated by
reference to the Company's Registration Statement on Form
S-1, Registration No. 33-37587 as filed November 2, 1990.

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.


(b) Reports on Form 8K
------------------

None

15




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
- --------- ----- ----




_______________________________ Senior Vice President and Director August 14, 2001
Esther H. Milnes


_______________________________ Principal Financial Officer and August 14, 2001
William J. Eckert, IV Chief Accounting Officer






16