Back to GetFilings.com





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1997

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

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) 802-6000
----------------------------------------------------
(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 March 31, 1998. Common stock, par value of $10
per share: 250,000 shares outstanding




PRUCO LIFE INSURANCE COMPANY
(REGISTRANT)

INDEX
-----
Item Page
No. No.
- - ---- ----

Cover Page --

Index 2

PART I

1. Business 3

2. Properties 3

3. Legal Proceedings 3

4. Submission of Matters to a Vote of Security Holders 3

PART II

5. Market for Registrant's Common Equity and Related
Stockholders' Matters 4

6. Selected Financial Data 4

7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 4

8. Financial Statements and Supplementary Data 11

9. Changes in and Disagreements with Independent
Accountants on Accounting and Financial Disclosure 11

PART III

10. Directors and Executive Officers of Registrant 12

11. Executive Compensation 13

12. Security Ownership of Certain Beneficial Owners
and Management 14

13. Certain Relationships and Related Transactions 14

PART IV

14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 14

Exhibit Index 15

Signatures 17



2



PART 1

ITEM 1. BUSINESS
- - ----------------

Pruco Life Insurance Company (the Company) is a stock life insurance company,
organized in 1971 under the laws of the state of Arizona. The Company markets
individual life insurance, variable life insurance, variable annuities, and
deferred annuities (the Contracts) in all states except New York, the District
of Columbia and Guam. In addition, the Company markets individual life insurance
through its branch office in Taiwan. The Company has two subsidiaries, Pruco
Life Insurance Company of New Jersey (PLNJ) and The Prudential Life Insurance
Company of Arizona (PLICA). PLNJ is a stock life insurance company organized in
1982 under the laws of the state of New Jersey. It is licensed to sell
individual life insurance and deferred annuities only in the states of New
Jersey and New York. PLICA is a stock life insurance company organized in 1988
under the laws of the state of Arizona. PLICA had no new business sales in 1997
and at this time will not be writing new business.

The Company is a wholly owned subsidiary of The Prudential Insurance Company of
America (Prudential), a mutual insurance company founded in 1875 under the laws
of the state of New Jersey. Prudential intends to make additional capital
contributions to the Company as needed to enable it to meet its reserve
requirements and expenses in connection with its business. Generally, Prudential
is under no obligation to make such contributions and its assets do not back the
benefits payable under the Contracts.

The Company is engaged in a business that is highly competitive because of the
large number of stock and mutual life insurance companies and other entities
engaged in marketing insurance products. There are approximately 1,900 stock,
mutual and other types of insurers in the life insurance business in the United
States.

ITEM 2. PROPERTIES
- - ------------------

Not applicable.

ITEM 3. LEGAL PROCEEDINGS
- - -------------------------

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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - -----------------------------------------------------------

No actions were taken during the fourth quarter of 1997. However, in an action
in lieu of an annual meeting, Prudential, the sole shareholder of the Company,
elected the following Directors of the Company, effective as of May 5, 1997.

William M. Bethke
Ira J. Kleinman
Mendel A. Melzer
Esther H. Milnes
I. Edward Price
Kiyofami Sakaguchi
William F. Yelverton

Upon the resignation of Mr. Yelverton, Prudential elected Mr. James J. Avery,
Jr. as a director of the Company effective as of June 27, 1997.


3




PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS'
MATTERS
- - ---------------------------------------------------------------------------

The Company is a wholly-owned subsidiary of Prudential. There is no public
market for the Company's common stock.

ITEM 6. SELECTED FINANCIAL DATA
- - -------------------------------


Pruco Life Insurance Company and Subsidiaries
For the Years Ended December 31,
--------------------------------
(In Thousands)



GAAP | Statutory
1997 1996 1995 1994 | 1993
---- ---- ---- ---- | ----
|
Revenues |
Premiums and other revenue $ 424,563 $ 408,154 $ 401,287 $ 303,627 | $ 591,660
Net investment income 259,634 247,328 246,618 241,132 | 260,939
------------- -------------- ------------- ------------- | --------------
|
Total revenues 684,197 655,482 647,905 544,759 | 852,599
|
Benefits and expenses |
Current and future benefits and |
claims 290,234 305,119 280,913 235,660 | 534,354
Other expenses 225,721 122,006 134,790 179,173 | 157,557
------------- -------------- ------------- ------------- | --------------
|
Total benefits and expenses 515,955 427,125 415,703 414,833 | 691,911
------------- -------------- ------------- ------------- | --------------
|
Income before income tax provision 168,242 228,357 232,202 129,926 | 160,688
|
Income tax provision 61,868 79,135 79,558 48,031 | 83,640
------------- -------------- ------------- ------------- | --------------
|
Net income $ 106,374 $ 149,222 $ 152,644 $ 81,895 | $ 77,048
============= ============== ============= ============= | ==============
|
Assets $12,851,467 $9,710,366 $8,471,638 $7,713,183 | $7,172,104
============= ============== ============= ============= | ==============




In 1996, the Company retroactively adopted, as of January 1, 1995, applicable
accounting pronouncements to present its financial statements in conformity with
generally accepted accounting principles.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
- - -------------------------------------------------------------------------------

The Company markets individual life insurance, variable life insurance, variable
annuities, and deferred annuities primarily through Prudential's sales force in
the United States, and in Taiwan.

The Company markets its products in the life insurance and annuity sectors of
the insurance industry. These markets are faced with an increased tightening of
the regulatory environment with particular emphasis placed on company solvency
and sales practices. The legal barriers which have historically segregated the
markets of the financial services industry are being challenged through both
legislative and judicial process. Regulatory changes which opened the insurance
industry to other financial institutions, particularly banks and mutual funds,
heightened competition in investment type products since those institutions were
positioned to deliver the same products through large, stable distribution
channels.


4



The Company held $12.8 billion in assets at December 31, 1997 compared to $9.7
billion at December 31, 1996, of which $8.0 billion and $5.3 billion were held
in Separate Accounts in 1997 and 1996, respectively, under variable life
insurance policies and variable annuity contracts. The remaining assets were
held in the general account for investment primarily in bonds, short-term
investments and policy loans.

1. RESULTS OF OPERATIONS

Net income for the year ended December 31, 1997 amounted to $106.4 million, a
decrease of $42.8 million or 28.7% compared to the $149.2 million earned in the
year ended December 31, 1996. Net income for the year ended December 31, 1995
amounted to $152.6 million.

(a) 1997 versus 1996

Total insurance revenues, consisting of premiums and policy charges and fee
income increased $3.3 million for the year ended December 31, 1997 to $379.8
million from $376.5 million for the year ended December 31, 1996. This increase
in insurance revenues consists of an increase of $5.3 million in policy charges
and fee income offset by a decrease in premiums of $2.0 million. These
fluctuations are due to an increased emphasis in the domestic market place on
investments in retirement type products, rather than in life insurance
protection products. This was partially offset by an increase in premiums for
traditional insurance products generated from our Taiwan branch, which has
continued its growth throughout 1997.

The Company's consolidated net investment income increased $12.3 million for the
year ended December 31, 1997 to $259.6 from $247.3 million for the year ended
December 31, 1996. Increase in cash flows from insurance operations and average
assets as well as the asset allocation strategies, produced favorable investment
results in 1997. Fixed maturity income increased in 1997 due to higher
investment returns as a result of a shift to higher yielding securities. Income
from short term investments increased because of higher fixed maturity assets
available to lend to third parties as part of the Company's securities lending
program. Offsetting these increases was a decline in income on the mortgage loan
portfolio, a result of declining asset base due to loan prepayments and
repayments exceeding origination levels.

Other income increased $13.0 million for the year ended December 31, 1997 to
$33.8 million from $20.8 million for the year ended December 31, 1996. This
increase is due to an increase in advisory fees attributable to the Discovery
Preferred and Discovery Select Separate Account products.

Policyholders' benefits decreased $7.5 million for the year ended December 31,
1997 to $179.4 million from $186.9 million for the year ended December 31, 1996.
This decrease is attributable to better mortality experience associated with the
Company's products.

Interest credited to policyholders' account balances decreased by $7.4 million
for the year ended December 31, 1997 to $110.8 million from $118.2 million for
the year ended December 31, 1996. This decrease is primarily attributable to a
decrease in interest crediting rates, partially offset by increased fund values
due to new sales of Separate Account products.

Other operating costs and expenses increased $103.7 million for the year ended
December 31, 1997 to $225.7 million compared to $122.0 million for the year
ended December 31, 1996. The increase reflects factors including the refinement
of estimated gross profit margins used to amortize deferred policy acquisition
costs (DAC). Favorable mortality experience and reduction in cost of insurance
charges contributed to a change in net amortization. Favorable sales in 1997
were a partial offset. Also, increased operating costs resulted from higher
sales activity of Discovery Select and Discovery Preferred annuity products, and
technological advancements made in annuity processing, customer service, and
product development.

Investment Results

The Company's investment portfolio supports its insurance and annuity
liabilities and other obligations to customers for which it assumes investment
related risks. The portfolio was comprised of total investments amounting to
$3.9 billion at December 31, 1997, versus $3.5 billion at December 31, 1996. A
diversified portfolio of publicly traded bonds, private placement securities
commercial mortgages and equities is managed under strategies intended to
maintain optimal asset mix consistent with current and anticipated cash flow
requirements of the related obligations. The risk


5



tolerance reflects the Company's aggregate capital position, exposure to
business risk, liquidity, and rating agency considerations.

The asset management strategy for the portfolio is set in accordance with an
investment policy statement developed and coordinated within The Prudential by
the Portfolio Management Group and agreed to by senior management and approved
by the Board of Directors. In managing the investment portfolio, the long term
objective is to generate favorable investment results through asset/liability
management, strategic and tactical asset allocation and asset manager selection
based on performance. Asset mix strategies are developed with criteria intended
to match asset structure to product liabilities considering the underlying
income and return characteristics of investment alternatives, seeking to closely
approximate the interest rate sensitivity of the asset portfolio with the
estimated interest rate sensitivity of the product liabilities. Other objectives
include maintenance of broad diversification across asset classes, issuers and
sectors; effective utilization of capital while maintaining liquidity funds
believed to be adequate to satisfy cash flow requirements; and achievement of
competitive performance. The major categories of invested assets, quality across
the portfolio, recent activities to reduce risk and more carefully manage the
portfolio are discussed below.

Fixed Maturities

The fixed maturity portfolio is diversified across maturities, sectors and
issuers. The Company has classified all publicly traded securities and
approximately 50% of privately traded securities as "available for sale" and the
remainder of the privately placed fixed maturities as "held to maturity".
"Available for sale" securities are carried in the Consolidated Statements of
Financial Position at fair value, with unrealized gains and losses (after
certain related adjustments) recognized by credits and charges to equity
capital. Securities "held to maturity" are carried at amortized cost, and
unrealized gains or losses on these securities are not recognized in the
financial statements.

At December 31, 1997, the net unrealized capital gains on the "available for
sale" fixed maturity portfolio totaled $37 million compared to $27 million at
December 31, 1996. The increase in the net unrealized gain position is primarily
attributable to declining interest rates. The following table details the
amortized cost and estimated fair value of the fixed maturity portfolio as of
December 31:




1997 1996
------------------------------------------ -----------------------------------------
NET NET
AMORTIZED ESTIMATED UNREALIZED AMORTIZED ESTIMATED UNREALIZED
COST FAIR VALUE GAINS COST FAIR VALUE GAINS
-------------- ------------- ------------- ------------- ------------- -------------
(In Millions)


FIXED MATURITIES -
AVAILABLE FOR SALE
Publicly traded $ 2,158 $ 2,188 $ 30 $ 1,955 $ 1,977 $ 22
Privately traded 369 376 7 255 260 5
-------------------------------------------------------- ------------- -------------
Total Fixed
maturities -
available for sale $ 2,527 $ 2,564 $ 37 $ 2,210 $ 2,237 $ 27
-------------------------------------------------------- ------------- -------------
FIXED MATURITIES -
HELD TO MATURITY
Privately traded 339 350 11 406 416 10
-------------------------------------------------------- ------------- -------------
TOTAL $ 2,866 $ 2,914 $ 48 $ 2,616 $ 2,653 $ 37
======================================================== ============= =============


At December 31, 1997, the Company's holdings of private placement fixed
maturities had an estimated fair value totaling $726.1 million and constituted
25% of total carrying value of fixed maturities. These investments generally
offer higher yields than comparable quality public market securities, increase
the diversification of the portfolio, and contain more restrictive covenants
than public securities. In particular, private placement securities offer
greater call protection, a key feature for assets backing longer term guaranteed
products.

The private placement fixed maturity portfolio decreased more than $49 million
from year ended December 31, 1996, primarily as a result of prepayment and sales
activity relative to 1997 origination levels.


6



The public fixed maturity portfolio increased from $2.0 billion at December 31,
1996 to $2.2 billion at December 31, 1997. Investment grade fixed maturities
comprised approximately 94% and 93% of total publicly traded fixed maturities at
December 31, 1997 and 1996, respectively.

The Company reviews all fixed maturities quarterly and identifies potential
problem assets which require additional monitoring. These assets, while not
currently impaired, are believed to present default risk associated with future
debt service obligations and are therefore managed more actively.

Mortgage Loans

As of December 31, 1997, the Company's mortgage loan portfolio totaled $22.8
million, a decrease of $24.1 million from $46.9 million as of December 31, 1996.
The portfolio is comprised of commercial mortgage loans. The overall decline in
the portfolio was a result of maturities, sales and repayments.

The Company monitors the mortgage loan portfolio quarterly and through that
process identifies loans which require additional monitoring. Loans with
estimated collateral value less than the outstanding loan balances, loans
demonstrating characteristics indicative of higher than normal credit risks, are
reviewed by management. The underlying collateral values are based upon
discounted property cash flow projections or external appraisals.

(b) 1996 versus 1995

Premiums increased by $9.4 million in 1996 from $42.1 million in 1995 to $51.5
million for the same period in 1996. This change is primarily due to increased
sales of $6.2 million related to traditional life insurance products in our
Taiwan branch which continued to expand its business throughout 1996.

Policy charges and fee income increased approximately $5.9 million during the
current year as compared to 1995. This is primarily attributable to the
increased sales of new variable annuity products and fees earned on policyholder
withdrawal and surrender activity.

Other income decreased $6.2 million for the year ended December 31, 1996 from
the year ended December 31, 1995. This decrease is due to a reduction in
separate account net gains.

Policyholders' benefits increased $32.9 million during the current year to
$186.9 million. Approximately $10 million of this increase is attributable to
the mortality costs associated with the Company's products. The additional $22
million results from the increase in reserves associated with new and existing
contracts at December 31, 1996.

Interest credited to policyholders' account balances decreased by $8.7 million.
This decrease is primarily attributable to the decrease in policyholders'
account balances due to the Company experiencing increased policyholder
withdrawals and slightly lower interest rates.

Other operating expenses decreased $12.8 million for the year ended December 31,
1996 compared to the same period for 1995. This is attributable to a decrease in
the amortization of deferred policy acquisition costs and a company wide
initiative to reduce expenses.

2. LIQUIDITY AND CAPITAL RESOURCES

The Company's liquidity requirements include the payment of sales commissions
and other underwriting expenses and the funding of its contractual obligations
for the life insurance and annuity contracts it has in-force. The Company has
developed and utilizes a cash flow projection system and regularly performs
asset/liability duration matching in the management of its asset and liability
portfolios. The Company anticipates funding all its cash requirements utilizing
cash from operations, normal investment maturities and anticipated calls and
repayments, consistent with prior years. As of December 31, 1997, the Company's
assets included $2.4 billion of cash, short-term investments and investment
grade publicly traded fixed maturity securities that could be liquidated if
funds were required.


7



In order to continue to market life insurance and annuity products, the Company
must meet or exceed the statutory capital and surplus requirements of the
insurance departments of the states in which it conducts business. Statutory
accounting practices differ from generally accepted accounting principles
("GAAP") in two major respects. First, under statutory accounting practices, the
acquisition costs of new business are charged to expense, while under GAAP they
are amortized over a period of time. Second, under statutory accounting
practices, the required additions to statutory reserves for new business in some
cases may initially exceed the statutory revenues attributable to such business.
These practices result in a reduction of statutory income and surplus at the
time of recording new business.

Insurance companies are subject to Risk-Based Capital (RBC) guidelines,
monitored by insurance regulatory authorities, that measure the ratio of the
Company's statutory equity with certain adjustments ("Adjusted Capital") to its
required capital, based on the risk characteristics of its insurance liabilities
and investments. Required capital is determined by statutory formulae that
consider risks related to the type and quality of invested assets,
insurance-related risks associated with the Company's products, interest rate
risks, and general business risks. The RBC calculations are intended to assist
regulators in measuring the adequacy of the Company's statutory capitalization.

The Company considers RBC implications in its asset/liability management
strategies. Each year, the Company conducts a thorough review of the adequacy of
statutory insurance reserves and other actuarial liabilities. The review is
performed to ensure that the Company's statutory reserves are computed in
accordance with accepted actuarial standards, reflect all contractual
obligations, meet the requirements of state laws and regulations and include
adequate provisions for any other actuarial liabilities that need to be
established. All significant reserve changes are reviewed by the Board of
Directors and are subject to approval by the Arizona Department of Banking
and Insurance. The Company believes that its statutory capital is adequate for
its currently anticipated levels of risk as measured by regulatory guidelines.

The National Association of Insurance Commissioners recently approved a series
of codified statutory accounting standards for consideration by the various
state regulators. Certain of the proposed standards, if adopted by insurance
regulatory authorities, could have an impact on the measurement of statutory
capital which, in turn, could affect RBC ratios of insurance companies. At the
present time, the Company cannot estimate the potential impact of these proposed
standards on its RBC position.

3. RISK MANAGEMENT

As a direct subsidiary of Prudential, the Company benefits from the risk
management strategies implemented by its parent.

Risk management includes the identification and measurement of various forms of
risk, establishment of acceptable risk thresholds, and processes intended to
maintain risks within these thresholds while maximizing returns. Prudential
considers risk management an integral part of its core businesses.

The risks inherent in the Company's operations include product risk, market
risk, credit risk, liquidity risk, and operating risk. These risk categories,
and Prudential's strategies relative to each, are discussed below.

Prudential's risk management is centrally controlled through a Corporate Risk
Management Unit (CRMU) which sets standards for risk identification, policies
and procedures, and limits, as well as standards for measurement and management
reporting. CRMU interfaces with the Company's business groups through an
enterprise level Financial Controls Council and Enterprise Financial Management
Risk Management Committee, as well as through frequent informal meetings. Risk
limits are set at multiple levels throughout the Company, with different limits
at the desk, portfolio, subsidiary, and enterprise level. Risks are generally
managed as close as possible to their origin, subject to review and oversight by
CRMU to monitor compliance with established standards. Where appropriate, such
as with respect to credit concentration risk and foreign exchange risk,
exposures are aggregated and managed at the enterprise level.

Prudential's risk monitoring processes include preparation and review of risk
reports on a regular basis, with frequency based on the purpose of the report.
For example, desk-level reports are generally produced daily, while portfolio
level reports are typically semi-monthly or monthly and high level reports may
be quarterly or semi-annually.

Product Risk is the risk of adverse results due to deviation of experience from
expected levels reflected in pricing. Prudential, in its insurance and annuity
operations, sells traditional and interest sensitive individual insurance
products, individual annuity products, a variety of group annuity products, and
group life insurance products. Products are


8



priced to reflect the expected levels of risk and to allow a margin for adverse
deviation. The level of margins varies with product design and pricing strategy
with respect to the targeted market. Prudential seeks to maintain underwriting
standards so that premium charged is consistent with risk assumed on an overall
basis. Additionally, most of Prudential's policies and contracts allow the
Company to adjust credits (via crediting interest rates) and/or charges (in
contracts where elements such as mortality and expense charges are not
guaranteed), allowing the Company to respond to changes in experience. The
competitive environment is an important element in determining pricing elements
including premiums, crediting rates and non-guaranteed charges.

Mortality risks, generally inherent in most of the Company's life insurance and
annuity products, are incorporated in pricing based on the Company's experience
(if available and relevant) or industry experience. Mortality studies are
performed periodically to compare the actual incidence of death claims in
relation to business in force, to levels assumed in pricing and to industry
experience. Expense risk relates to all products and is influenced by management
practices as well as general price level changes. Persistency risk represents
the risk that the pattern of policy surrenders will deviate from assumed levels
so that policies do not remain in force for a sufficient period to allow the
Company to recover its acquisition costs. Certain products are designed, by
implementation of surrender charges and other features, to discourage early
surrenders and thus mitigate this risk to the Company. Periodic studies are
performed to compare actual surrender experience to pricing assumptions and
industry experience.

Market Risk is the risk of change in value of financial instruments as a result
of changes in interest rates, currency exchange rates, and securities market
conditions. The Company's asset/liability management strategies provide for
targeting of asset durations within specified ranges based on the estimated
durations of the associated product liabilities. Portfolio managers are directed
to maintain interest rate exposures within the established ranges, which are
subject to adjustment based on market conditions and product design. Prudential
uses statistical techniques such as duration and convexity analysis to measure
price sensitivity to interest rate changes. The Company also performs portfolio
stress testing annually as part of its cash flow testing in which various
interest-sensitive assumptions (such as asset calls and prepayments and contract
persistency) are evaluated under various severe interest rate environments. Any
shortfalls revealed by cash flow testing are evaluated to determine whether
there is a need to increase statutory reserves or change portfolio management
strategies such as alteration of asset duration and/or composition. For
fee-based (variable, separate account and mutual fund) products, equity risk is
borne primarily by the contractholders rather than the Company (subject to any
minimum guarantees). However, in the event of subpar performance, asset based
fees will be reduced and competitive factors may impede the Company's ability to
cultivate this business.

Credit Risk is the risk that counterparties may default or fail to fully honor
contractual obligations and is inherent in investment portfolio asset positions
including corporate bonds and mortgages, private placements and other
lending-type products, and various investment operations functions. The Company
attempts to manage risk associated with customer activities through proprietary
credit analysis, establishment of credit limits and by requiring maintenance of
margin and/or collateral in compliance with established internal control and
regulatory standards.

Liquidity Risk is the risk that the Company will be unable to liquidate
positions at a reasonable price in order to meet cash flow requirements under
various scenarios. As indicated above, the Company's asset/liability
management strategies seek to maintain asset positions that are consistent with
the expected cash flow demands associated with its liabilities under various
possible situations. Liquidity policies are formally managed at the enterprise
level, using various comparisons of asset liquidity to potential liability
outflows. Prudential believes that the comparison of its general account net
liquidity to individual policy net cash surrender value is key to the periodic
evaluation of its ability to meet policyholder claim requirements, and stress
tests are utilized to measure the expected liquidity situation under assumed
unusual events.

Operating Risk is the risk of potential loss from internal or external events
such as mismanagement, fraud, systems breakdowns, business interruption, or
failure to satisfy legal or fiduciary responsibilities. All financial
institutions, including Prudential, are exposed to the risk of unauthorized
activities by employees that are contrary to the internal controls designed to
managed such risks. Legal risk may arise from inadequate control over contract
documentation, marketing processes, or other operations. Internal controls
responsive to regulatory, legal, credit, asset stewardship and other concerns
are established at the business unit level for specific lines of business and at
the enterprise level for company-wide processes. Controls are monitored by
business unit management, internal and external auditors, and by an enterprise
level Management Internal Control unit and in certain instances are subject to
regulatory review.

Following revelations and negative publicity surrounding the issue of sales
practices, Prudential has implemented a strategy to emphasize ethical conduct in
the recruitment and training of agents and in the sales process. The Company has
also strengthened controls including the establishment of a client acquisition
program, in conjunction with the underwriting process, intended to ascertain the
appropriateness of insurance coverages sold and mitigate the risk of
inappropriate policy replacement activity.


9



Another aspect of operating risk relates to the Company's ability to conduct
transactions electronically and to gather, process, and disseminate information
and maintain data integrity and uninterrupted operations given the possibility
of unexpected or unusual events. The Company is implementing a business
continuation initiative to address these concerns. Considerations relative to
the impact of the Year 2000 on computer operations are discussed below.

4. REGULATORY ENVIRONMENT

The Company is subject to the laws of the State of Arizona as governing
insurance companies and to the regulations of the Arizona Insurance Department
(the "Insurance Department"). A detailed financial statement in the prescribed
form (the "Annual Statement") is filed with the Insurance Department each year
covering the Company's operations for the preceding year and its financial
condition as of the end of that year. Regulation by the Insurance Department
includes periodic examination to determine contract liabilities and reserves so
that the Insurance Department may certify that these items are correct. The
Company's books and accounts are subject to review by the Insurance Department
at all times. A full examination of the Company's operations is conducted
periodically by the Insurance Department and under the auspices of the NAIC.

A triennial financial examination, for the period Janury 1, 1994 through
December 31, 1996, is in progress by the Insurance Department as of December 31,
1997. We have included the effects of items known to date in our Reconciliation
of Statutory surplus on page F-18.

The Company is subject to regulation under the insurance laws of all
jurisdictions in which it operates. The laws of the various jurisdictions
establish supervisory agencies with broad administrative powers with respect to
various matters, including licensing to transact business, overseeing trade
practices, licensing agents, approving contract forms, establishing reserve
requirements, fixing maximum interest rates on life insurance contract loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. The Company is required to file the Annual Statement with
supervisory agencies in each of the jurisdictions in which it does business, and
its operations and accounts are subject to examination by these agencies at
regular intervals.

The NAIC has adopted several regulatory initiatives designed to improve the
surveillance and financial analysis regarding the solvency of insurance
companies in general. These initiatives include the development and
implementation of a risk-based capital formula for determining adequate levels
of capital and surplus. Insurance companies are required to calculate their
risk-based capital in accordance with this formula and to include the results in
their Annual Statement. It is anticipated that these standards will have no
significant effect upon the Company.

Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Certain insurance products of the Company are subject to
various federal securities laws and regulations. In addition, current and
proposed federal measures which may significantly affect the insurance business
include regulation of insurance company solvency, employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies and the tax
treatment of insurance products and its impact on the relative desirability of
various personal investment vehicles.

5. THE YEAR 2000 ISSUE

The Company is a direct subsidiary of Prudential; therefore, is impacted by the
enterprise focus on the Year 2000 Issue. The Year 2000 issue is best understood
as a computer hardware and software problem involving the way dates are stored
and processed in computers. Many computer systems are programmed to recognize
only the last two digits in a date. As a result, any computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. If this anomaly is not corrected, the year "00" could cause
systems to perform date comparisons and calculations incorrectly which could in
turn affect the accuracy and compromise the integrity of business records.
Business operations could be interrupted when companies are unable to process
transactions, send invoices, or engage in similar normal business activities.
The Year 2000 issue presents critical business risks for public and private
sector entities across the globe.

Prudential identified the Year 2000 issue as a critical priority in 1995 and
established a Company-wide Program Office (CPO) to develop and coordinate an
operating framework for the Year 2000 compliance activities. The CPO assessed
potential business impact, identified software and hardware components that will
require upgrading, renovating, or replacing, and developed a strategy for
renovation, replacement or retirement of all affected business applications. The
initial assessment, completed in 1995, provided an estimate of the magnitude of
the project and necessary resources.

Prudential's CPO has established quality assurance procedures including a
certification process to monitor and evaluate enterprise-wide conversion and
upgrading of systems for Year 2000 compliance. Prudential is utilizing both


10



internal and external resources to reprogram or replace and test software.
Prudential plans to complete its adaptation, testing and certification of
software for Year 2000 compliance by December 31, 1998 and to conduct additional
testing pertaining to the securities industry (in a scheduled industry-wide
effort) as well as complete its "business partner" analysis and contingency
planning during 1999. Prudential believes that it is well positioned to achieve
the necessary modifications and mitigate the Year 2000 risks.

Prudential has commenced contacting and communicating formally with major
suppliers and customers, including brokers, vendors, health care providers, and
institutions that pass electronic information to Prudential, to determine the
significance of the potential exposure that could result from their failure to
achieve Year 2000 compliance on a timely basis.

While, as indicated above, Prudential believes that it is well positioned to
mitigate its Year 2000 issue, this issue by its nature carries the risk of
unforeseen problems of internal or external origin. There can be no assurance
that the required systems modifications will be completed in accordance with
current estimates of timing and cost, or that the systems of other companies
with which some of Prudential's systems interface will be converted on a timely
and compatible basis. In the event that the required adaptations to mitigate the
Year 2000 issue are not completed on a timely basis, this issue could have a
material adverse impact on the Company's operations. 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.

6. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

Certain of the statements contained in Management's Discussion and Analysis may
be considered forward-looking statements. Words such as "expects," "believes,"
"anticipates," "intends," "plans," or variations of such words are generally
part of forward-looking statements. Forward-looking statements are made based
upon management's current expectations and beliefs concerning future
developments and their potential effects upon the Company. There can be no
assurance that future developments affecting the Company will be those
anticipated by management. There are certain important factors that could cause
actual results to differ materially from estimates or expectations reflected in
such forward-looking statements including without limitation, changes in general
economic conditions, including the performance of financial markets and interest
rates; market acceptance of new products and distribution channels; competitive,
regulatory or tax changes that affect the cost or demand for the Company's
products; and adverse litigation results. While the Company reassesses material
trends and uncertainties affecting its financial condition and results of
operations, it does not intend to review or revise any particular
forward-looking statement referenced in this Management's Discussion and
Analysis in light of future events. The information referred to above should be
considered by readers when reviewing any forward-looking statements contained in
this Management's Discussion and Analysis.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- - ---------------------------------------------------

Information required with respect to this Item 8 regarding Financial Statements
and Supplementary Data is set forth commencing on page F-4 hereof. See Index to
Financial Statements and Schedules elsewhere in this Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
- - -----------------------------------------------------------------

In connection with its audits for the two most recent fiscal years, there have
been no disagreements with Price Waterhouse LLP on any matter of accounting
principles, financial statement disclosure or auditing scope or procedure, which
if not resolved to the satisfaction of the independent accountant, would have
caused them to make a reference to the matter in their report.

On March 12, 1996, The Board of Directors of Prudential approved the
recommendation of the Auditing Committee to dismiss Deloitte & Touche LLP as the
independent accountants of Prudential and its subsidiaries, including the
Company.

On May 14, 1996, The Board of Directors of Prudential approved the
recommendation of the Auditing Committee to engage Price Waterhouse LLP as the
independent accountants of Prudential and its subsidiaries, including the
Company.


11



PART III
--------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- - -----------------------------------------------------------

Name Position Age
- - ---- -------- ---

James J. Avery, Jr. Chairman of the Board
and Director 46

I. Edward Price Vice Chairman of the Board
and Director 55

Esther H. Milnes President and Director 47

James Drozanowski Senior Vice President 55

Frank Marino Senior Vice President 53

Edward A. Minogue Senior Vice President 55

Hwei-Chung Shao Senior Vice President and
and Chief Actuary 43

Karen L. Shapiro Senior Vice President 42

James M. Schlomann Vice President, Comptroller
and Chief Accounting Officer 49

William M. Bethke Director 50

Ira J. Kleinman Director 50

Mendel M. Melzer Director 37

Kiyofumi Sakaguchi Director 54
- - --------------------------------------------------------------------------------

James J. Avery, Jr., age 46 was elected Chairman of the Board of Directors of
the Company on June 27, 1997. Mr. Avery joined the Prudential Insurance Company
of America in 1988 and has served as the Senior Vice President, CFO and Chief
Actuary for the Prudential Individual Insurance Group since 1997.

I. Edward Price, age 55, has been Senior Vice President and Actuary of
Prudential Individual Insurance since 1995. From 1994 to 1995, he was Chief
Executive Officer of Prudential International Insurance. From 1993 to 1994 he
was President of Prudential International Insurance. Prior to 1993, he was
Senior Vice President and Company Actuary of Prudential.

Esther H. Milnes, age 47, has been Vice President and Actuary of Prudential
Individual Insurance Group since 1996. From 1993 to 1995, she was Senior Vice
President and Chief Actuary of Prudential Insurance and Financial Services.
Prior to 1993, she was Vice President and Associate Actuary of Prudential.

James C. Drozanowski, age 55, has been Vice President and Operations Executive,
Prudential Individual Insurance Group since 1996; 1995 to 1996: President and
Chief Executive Officer of Chase Manhattan Bank; 1993 to 1995: Vice President,
North America Customer Services, Chase Manhattan Bank; Prior to 1993: Operations
Executive, Global Securities Services, Chase Manhattan Bank.

Frank P. Marino, age 53, has been Vice President, Policyowner Relations
Department, Prudential Individual Insurance Group since 1996; Prior to 1996:
Senior Vice President, Prudential Mutual Fund Services.

Edward A. Minogue, age 55, was elected a Senior Vice President of the Company on
September 1, 1997. Mr. Minogue has been a Vice President of the Prudential
Insurance Company of America since July, 1997. Prior to 1997, Mr. Minogue was a
director of Merrill Lynch, Pierce & Smith, Inc.


12



Hwei-Chung Shao, age 43, has been Vice President and Associate Actuary,
Prudential.

Karen L. Shapiro, age 42, has been Vice President, Prudential Individual
Insurance Group since 1996; Vice President and Associate General Counsel,
Prudential Securities Incorporated 1993 to 1996; Prior to 1993: Senior Associate
with Shaw, Pittman, Potts and Trowbridge.

James M. Schlomann, age 49, joined the Prudential in August of 1997 and was
elected the Vice President, Comptroller and Chief Accounting Officer of the
Company effective November 18, 1997. He was a Senior Executive Vice President
and Chief Financial Officer of USLIFE Corp. from 1993 to 1997. Prior, Mr.
Schlomann was a Senior Vice President & Comptroller of Frank B. Hall & Co., Inc.
from 1978 to 1993.

William M. Bethke, age 50, has been President, Prudential Capital Markets Group
since 1992.

Ira J. Kleinman, age 50, has been Chief Marketing and Product Development
Officer of Prudential Individual Insurance Group since 1995. From 1993 to 1995,
he was President of Prudential Select. From 1992 to 1993, he was Senior Vice
President of Prudential. Prior to 1992, he was Vice President of Prudential.

Mendel A. Melzer, age 37, has been Chief Investment Officer, Mutual Funds and
Annuities, Prudential Investments since 1996; 1995 to 1996: Chief Financial
Officer of the Money Management Group of Prudential; 1993 to 1995: Senior Vice
President and Chief Financial Officer of Prudential Preferred Financial
Services; Prior to 1993: Managing Director, Prudential Investment Corporation.

Kiyofumi Sakaguchi, age 54, has been President, Prudential International
Insurance Group since 1995; 1994 to 1995: Chairman and Chief Executive Officer,
the Prudential Life Insurance Co., Ltd.; Prior to 1994: President and Chief
Executive Officer, Asia Pacific Region-Prudential International Insurance, and
President, the Prudential Life Insurance Co., Ltd.

ITEM 11. EXECUTIVE COMPENSATION
- - -------------------------------

The following table shows the 1997 annual compensation, paid by Prudential and
allocated based on time devoted to the duties as an executive of the Company:



NAME AND PRINCIPAL OTHER ANNUAL
POSITION YEAR SALARY BONUS COMPENSATION
- - ---------------------------- -------- ---------------- ---------------- ----------------


Esther H. Milnes 1997 $ 18,660 $ 21,398 $ 0
President 1996 18,058 12,136 0
1995 17,158 8,384 0



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- - -----------------------------------------------------------------------

Not applicable.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - -------------------------------------------------------

Refer to Note 9 in the Notes to the Consolidated Financial Statements on page
F-20.

13



PART IV
-------

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- - ------------------------------------------------------------------------

(a) (1) and (2) Financial Statements and Schedules of Registrant and
its subsidiaries are listed in the accompanying "Index to Consolidated
Financial Statements and Financial Statement Schedules" on page F-1
hereof and are filed as part of this Report.

(a) (3) EXHIBITS
--------

REGULATION S-K
--------------

2. Not applicable.

3. Documents Incorporated by Reference

(i) The Articles of Incorporation of Pruco Life, as amended
October 19, 1993, are incorporated herein by reference to Exhibit
14 (3) of the Pruco Life Insurance Company Form 10-K for the
fiscal year ended December 31, 1993; (ii) Bylaws of Pruco Life,
as amended May 6, 1997 are incorporated herein by reference to
Form 10-Q, Registration No. 33-37587, filed August 15, 1997 on
behalf of the Pruco Life Insurance Company.

4. Exhibits

Modified Guaranteed Annuity Contract, incorporated by reference
to Registrant's Form S-1 Registration Statement, Registration No.
33-37587, filed November 2, 1990, on behalf of Pruco Life
Insurance Company.

Market-Value Adjustment Annuity Contract, incorporated by
reference to Registrant's Form S-1 Registration Statement,
Registration No. 33-61143, filed November 17, 1995, on behalf of
Pruco Life Insurance Company.

9. None.

10. None.

11. Not applicable.

12. Not applicable.

13. Not applicable.

16. Not applicable.

18. None.

21. Pruco Life Insurance Company of New Jersey, a stock life
insurance company organized under the laws of the state of New
Jersey, is a wholly owned subsidiary of Pruco Life. It is
licensed to sell life insurance and annuities only in the States
of New Jersey and New York.

The Prudential Life Insurance Company of Arizona, a stock life
insurance company organized under the laws of the State of
Arizona, is a wholly owned subsidiary of Pruco Life. It is
licensed to sell life insurance and annuities only in the State
of Arizona.

22. None.

23. Not applicable.


14



24. Powers of Attorney for I. Edward Price, Esther H. Milnes, William
M. Bethke, Ira Kleinman and Mendel Melzer are incorporated by
reference to Form 10-K, Registration No. 33-867880, filed March
28, 1997, on behalf of Pruco Life Variable Contract Real Property
Account. A Power of Attorney for Kiyofumi Sakaguchi is
incorporated by reference to Post Effective Amendment No. 8 to
Form S-6, Registration No. 33-49994, filed April 28, 1997 on
behalf of the Pruco Life PRUvider Variable Appreciable Account. A
Power of Attorney for James J. Avery, Jr. is incorporated by
reference to Post-Effective Amendment No. 9 to Form S-1,
Registration No. 33-20018, filed June 25, 1997 on behalf of the
Pruco Life of New Jersey Variable Contract Real Property Account.

27. Exhibit 27, Financial Data Schedule appended to this form in
accordance with EDGAR instructions.

28. Not applicable.

99. None.


15



SIGNATURES
----------

Pursuant to the requirements of Section 13, or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

PRUCO LIFE INSURANCE COMPANY

(Registrant)

Date: March 31, 1998 By: /s/ Esther H. Milnes
-------------- ------------------------
Esther H. Milnes
President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
- - --------- ----- ----

* Chairman of the Board March 31, 1998
- - ------------------------
James J. Avery


* Vice Chairman of the Board March 31, 1998
- - ------------------------ and Director
I. Edward Price


* President and Director March 31, 1998
- - ------------------------
Esther H. Milnes


/s/ James M. Schlomann
- - ------------------------ Vice President and Comptroller March 31, 1998
James M. Schlomann and Chief Accounting Officer


* Director March 31, 1998
- - ------------------------
William M. Bethke


* Director March 31, 1998
- - ------------------------
Ira J. Kleinman


* Director March 31, 1998
- - ------------------------
Mendel A. Melzer


* Director March 31, 1998
- - ------------------------
Kiyofumi Sakaguchi

* By: /s/ Thomas C. Castano
------------------------------
Thomas C. Castano
(Attorney-in-Fact)


16



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
ANNUAL REPORT

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997, 1996, AND 1995



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES


17



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------------------------------------




FINANCIAL STATEMENTS PAGE
- - -------------------- ----

PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES

INDEPENDENT AUDITORS' REPORTS F-2

CONSOLIDATED FINANCIAL STATEMENTS:

STATEMENTS OF FINANCIAL POSITION - DECEMBER 31, 1997 AND 1996 F-4


STATEMENTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1997, 1996,
AND 1995 F-5


STATEMENTS OF STOCKHOLDER'S EQUITY - YEARS ENDED DECEMBER 31,
1997, 1996, AND 1995 F-6

STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31, 1997, 1996,
AND 1995 F-7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - DECEMBER 31, 1997,
1996, AND 1995 F-8


F-1



Report of Independent Accountants
---------------------------------

To the Board of Directors of
Pruco Life Insurance Company


In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of changes in
stockholder's equity and of cash flows, appearing on pages F4 through F7 of this
report, present fairly, in all material respects, the financial position of
Pruco Life Insurance Company and its subsidiaries at December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's managememt; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ PRICE WATERHOUSE LLP
New York, New York
March 23, 1998


F-2


INDEPENDENT AUDITORS' REPORT

To The Board of Directors of
Pruco Life Insurance Company
Newark, New Jersey

We have audited the accompanying consolidated statement of operations, changes
in stockholder's equity, and cash flows of Pruco Life Insurance Company and
subsidiaries for the year ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated statements of operations, changes in
stockholder's equity, and cash flows present fairly, in all material respects,
the results of operations and cash flows of Pruco Life Insurance Company and
subsidiaries for the year ended December 31, 1995 in conformity with generally
accepted accounting principles.


/s/ Deloitte & Touche LLP
Parsippany, NJ
December 19, 1996

F-3




PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1997 AND 1996 (IN THOUSANDS)
- - ----------------------------------------------------------------------------------------------------------------------------

1997 1996
----------------- -----------------


ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 1997: $2,526,554;
1996: $2,210,150) $ 2,563,852 $ 2,236,817
Held to maturity, at amortized cost (fair value, 1997: $350,056; 1996:
$416,102) 338,848 405,731
Equity securities - available for sale, at fair value (cost, 1997: $1,289;
1996: $3,626) 1,982 3,748
Mortgage loans on real estate 22,787 46,915
Policy loans 703,955 639,782
Short-term investments 316,355 169,830
Other long-term investments 1,317 4,528
----------------- -----------------
Total investments 3,949,096 3,507,351

Cash 71,358 73,766
Deferred policy acquisition costs 655,242 633,159
Accrued investment income 67,000 62,110
Income taxes receivable - 7,191
Reinsurance recoverable on unpaid losses 25,882 27,014
Other assets 60,810 62,924
Separate Account assets 8,022,079 5,336,851
----------------- -----------------
TOTAL ASSETS $12,851,467 $9,710,366
================= =================
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Policyholders' account balances $ 2,282,191 $ 2,188,862
Future policy benefits and other policyholder liabilities 570,729 557,351
Cash collateral for loaned securities 143,421 -
Income taxes payable 71,703 -
Deferred income tax liability 138,483 148,960
Payable to affiliates 70,375 49,828
Other liabilities 120,260 88,930
Separate Account liabilities 7,948,788 5,277,454
----------------- -----------------
TOTAL LIABILITIES 11,345,950 8,311,385
----------------- -----------------
CONTINGENCIES - (SEE NOTE 10)
STOCKHOLDER'S EQUITY
Common stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding at
December 31, 1997 and 1996 2,500 2,500
Paid-in-capital 439,582 439,582
Retained earnings 1,050,871 944,497
Net unrealized investment gains 17,129 14,104
Foreign currency translation adjustments (4,565) (1,702)
----------------- -----------------
TOTAL STOCKHOLDER'S EQUITY 1,505,517 1,398,981
----------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $12,851,467 $9,710,366
================= =================



SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


F-4



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
- - ----------------------------------------------------------------------------------------------------------------------------

1997 1996 1995
----------------- ----------------- -----------------

REVENUES

Premiums $ 49,496 $ 51,525 $ 42,089
Policy charges and fee income 330,292 324,976 319,012
Net investment income 259,634 247,328 246,618
Realized investment gains, net 10,974 10,835 13,200
Other income 33,801 20,818 26,986
----------------- ----------------- -----------------

TOTAL REVENUES 684,197 655,482 647,905
----------------- ----------------- -----------------
BENEFITS AND EXPENSES

Policyholders' benefits 179,419 186,873 153,987
Interest credited to policyholders' account balances 110,815 118,246 126,926
General, administrative and other expenses 225,721 122,006 134,790
----------------- ----------------- -----------------

TOTAL BENEFITS AND EXPENSES 515,955 427,125 415,703
----------------- ----------------- -----------------

Income from operations before income taxes 168,242 228,357 232,202
----------------- ----------------- -----------------

Income taxes
Current 73,326 60,196 67,014
Deferred (11,458) 18,939 12,544
----------------- ----------------- -----------------

Total income taxes 61,868 79,135 79,558
----------------- ----------------- -----------------

NET INCOME $106,374 $ 149,222 $ 152,644
================= ================= =================



SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



F-5



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
- - ----------------------------------------------------------------------------------------------------------------------------

NET FOREIGN
UNREALIZED CURRENCY TOTAL
COMMON PAID-IN- RETAINED INVESTMENT TRANSLATION STOCKHOLDER'S
STOCK CAPITAL EARNINGS GAINS ADJUSTMENTS EQUITY
------------- ------------- ------------- ------------- ----------- -------------


BALANCE, JANUARY 1, 1995 $ 2,500 $ 439,582 $ 642,631 $(41,761) $ 650 $1,043,602


Net income -- -- 152,644 -- -- 152,644

Change in foreign
currency translation
adjustments -- -- -- -- (1,870) (1,870)

Change in net
unrealized
investment gains -- -- -- 73,817 -- 73,817
------------- ------------- ------------- ------------- ----------- -------------

BALANCE, DECEMBER 31, 1995 2,500 439,582 795,275 32,056 (1,220) 1,268,193

Net income -- -- 149,222 -- -- 149,222

Change in foreign
currency translation
adjustments -- -- -- -- (482) (482)

Change in net
unrealized
investment gains -- -- -- (17,952) -- (17,952)
------------- ------------- ------------- ------------- ----------- -------------

BALANCE, DECEMBER 31, 1996 2,500 439,582 944,497 14,104 (1,702) 1,398,981

Net income -- -- 106,374 -- -- 106,374

Change in foreign
currency translation
adjustments -- -- -- -- (2,863) (2,863)

Change in net
unrealized
investment gains -- -- -- 3,025 -- 3,025
------------- ------------- ------------- ------------- ----------- -------------

BALANCE, DECEMBER 31, 1997 $ 2,500 $ 439,582 $1,050,871 $ 17,129 $ (4,565) $1,505,517

============= ============= ============= ============= =========== =============



SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


F-6



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
- - ----------------------------------------------------------------------------------------------------------------------------


1997 1996 1995
--------------- -------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 106,374 $ 149,222 $ 152,644
Adjustments to reconcile net income to net cash provided by
operating activities:
Policy charges and fee income (40,783) (50,286) (56,637)
Interest credited to policyholders' account balances 110,815 118,246 126,926
Net increase in Separate Accounts (13,894) (38,025) (3,520)
Realized investment gains, net (10,974) (10,835) (13,200)
Amortization and other non-cash items (5,525) 26,709 (8,106)
Change in:
Future policy benefits and other policyholders' liabilities 13,378 56,151 22,877
Accrued investment income (4,890) (2,248) (480)
Payable to affiliates 20,547 16,519 10,569
Policy loans (64,173) (70,509) (75,411)
Deferred policy acquisition costs (22,083) (66,183) 31,318
Income taxes payable/receivable 78,894 (816) 12,031
Reinsurance recoverable on unpaid losses 1,132 900 750
Deferred income tax liability (10,477) 7,912 30,779
Other, net 34,094 7,564 (76,702)

--------------- -------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES 192,435 144,321 153,838
--------------- -------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 2,828,665 3,886,254 1,886,687
Held to maturity 138,626 138,127 144,898
Equity securities 6,939 7,527 5,557
Mortgage loans on real estate 24,925 19,226 7,395
Other long-term investments 3,276 288 1,559
Investment real estate -- 4,488 2,926
Payments for the purchase of:
Fixed maturities:
Available for sale (3,141,785) (4,008,810) (1,741,139)
Held to maturity (70,532) (114,494) (135,092)
Equity securities (4,594) (4,697) (4,279)
Other long-term investments (51) (657) (1,674)
Cash collateral for loaned securities, net 143,421 -- --
Short-term investments, net (147,030) 58,186 (36,482)
--------------- -------------- ------------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES (218,140) (14,562) 130,356
--------------- -------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 2,099,600 536,370 95,039
Withdrawals (2,076,303) (633,798) (365,578)
--------------- -------------- ------------
CASH FLOWS FROM (USED IN)FINANCING ACTIVITIES 23,297 (97,428) (270,539)
--------------- -------------- ------------
Net (decrease) increase in Cash (2,408) 32,331 13,655
Cash, beginning of year 73,766 41,435 27,780
--------------- -------------- ------------
CASH, END OF YEAR $ 71,358 $ 73,766 $ 41,435
=============== ============== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes (received) paid $ (7,904) $ 61,760 $ 53,107
=============== ============== ============




SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


F-7



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1. BUSINESS

Pruco Life Insurance Company (the Company) is a stock life insurance company,
organized in 1971 under the laws of the state of Arizona. The Company markets
individual life insurance, variable life insurance, variable life insurance,
variable annuities, and deferred annuities (the Contracts) in all states except
New York, the District of Columbia and Guam. In addition, the Company markets
individual life insurance through its branch office in Taiwan. The Company has
two subsidiaries, Pruco Life Insurance Company of New Jersey (PLNJ) and The
Prudential Life Insurance company of Arizona (PLICA). PLNJ is a stock life
insurance company organized in 1982 under the laws of the state of New Jersey.
It is licenced to sell individual life insurance and deferred annuities only in
the states of New Jersey and New York. PLICA is a stock life insurance company
organized in 1988 under the laws of the state of Arizona. PLICA had no new
business sales in 1977 and at this time will not be issuing new business.

The only reportable industry segment of the Company is "Life Insurance."

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company, a
stock life insurance company, and its subsidiaries. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles ("GAAP"). All significant intercompany balances and transactions have
been eliminated.

USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from those estimates.

INVESTMENTS
FIXED MATURITIES classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the positive intent and
ability to hold to maturity are stated at amortized cost and classified as "held
to maturity". The amortized cost of fixed maturities are written down to
estimated fair value when considered impaired and the decline in value is
considered to be other than temporary. Unrealized gains and losses on fixed
maturities "available for sale", net of income tax, the effect on deferred
policy acquisition costs and participating annuity contracts that would result
from the realization of unrealized gains and losses are included in a separate
component of equity, "Net unrealized investment gains."

EQUITY SECURITIES, available for sale, comprised of common and non-redeemable
preferred stock, are carried at estimated fair value. The associated unrealized
gains and losses, net of income tax, the effect on deferred policy acquisition
costs and participating annuity contracts that would result from the realization
of unrealized gains and losses, are included in separate component of equity,
"Net unrealized investment gains."

MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal balances,
net of unamortized discounts

POLICY LOANS are carried at unpaid principal balances.

SHORT-TERM INVESTMENTS, including highly liquid debt instruments purchased with
an original maturity of twelve months or less, are carried at amortized cost,
which approximates fair value.

OTHER LONG-TERM INVESTMENTS primarily represent the Company's investments in
joint ventures and partnerships in which the Company does not have control.
These investments are recorded using the equity method of accounting, reduced
for other than temporary declines in value.

REALIZED INVESTMENT GAINS, NET are computed using the specific identification
method. Costs of fixed maturity and equity securities are adjusted for
impairments considered to be other than temporary

CASH
Cash includes cash on hand, amounts due from banks, and money market
instruments.

DEFERRED POLICY ACQUISITION COSTS
The costs which vary with and that are related primarily to the production of
new insurance business are deferred to the extent such costs are deemed
recoverable from future profits. Such costs include certain commissions, costs
of policy issuance and underwriting, and certain variable field office expenses.
Deferred policy acquisition costs are subject to recoverability testing at the
time of policy issue and loss recognition testing at the end of each accounting
period. Deferred policy acquisition costs are


F-8



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

adjusted for the impact of unrealized gains or losses on investments as if these
gains or losses had been realized, with corresponding credits or charges
included in equity.

Acquisition costs related to interest-sensitive life products and
investment-type contracts are deferred and amortized in proportion to total
estimated gross profits arising principally from investment results, mortality
and expense margins and surrender charges based on historical and anticipated
future experience. Amortization periods range from 15 to 30 years. Amortization
of deferred policy acquisition costs was $149,851 thousand, $9,309 thousand, and
$54,371 thousand for the years ended December 31, 1997, 1996, and 1995,
respectively. Deferred policy acquisition costs are analyzed to determine if
they are recoverable from future income, including investment income. If such
costs are determined to be unrecoverable, they are expensed at the time of
determination. The effect of revisions to estimated gross profits on unamortized
deferred acquisition costs is reflected in earnings in the period such estimated
gross profits are revised.

FUTURE POLICY BENEFITS AND POLICYHOLDERS' ACCOUNT BALANCES

Future policy benefits includes reserves for annuities in payout status as well
as reserves for riders and supplemental benefits. Reserves for annuities in
payout status are generally calculated as the present value of estimated future
benefit payments and related expenses, using interest rates ranging from 6.5% to
11.0%. The mortality assumption is generally the 1983 Individual Annuity
Mortality Table. Reserves for riders and supplemental benefits are calculated
using interest rates ranging from 2.5% to 7.25% and various mortality and
morbidity tables derived from company or industry experience. Reserves for
business in the Company's Taiwan branch are generally calculated using interest
rates ranging from 6.25% to 7.5% and the 1989 Taiwan Standard Ordinary
Experience Mortality table with modifications.

For the above categories, premium deficiency reserves are established, if
necessary, when the liabilities for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for expected
future policy benefits and expenses.

Policyholders' account balances for interest-sensitive life and investment-type
contracts are equal to the policy account values. The policy account values
represent an accumulation of gross premium payments plus credited interest, less
expense and mortality charges and withdrawals. Interest crediting rates on life
insurance products range from 4.2% to 6.5% and on investment-type products range
from 3.15% to 7.9%.

SECURITIES LOANED are recorded at the amount of cash received as collateral. The
Company obtains collateral in an amount equal to 102% of the fair value of the
domestic securities. The Company monitors the market value of securities loaned
on a daily basis with additional collateral obtained as necessary. Non-cash
collateral received is not reflected in the consolidated statements of financial
position. Substantially, all of the Company's securities loaned are with large
brokerage firms.

These transactions are used to generate net investment income and facilitate
trading activity. These instruments are short-term in nature (usually 30 days or
less) and are collateralized principally by U.S. Government and mortgage-backed
securities. The carrying amounts of these instruments approximate fair value
because of the relatively short period of time between the origination of the
instruments and their expected realization.

SEPARATE ACCOUNT ASSETS AND LIABILITIES
Separate Account assets and liabilities are reported at estimated fair value and
represent segregated funds which are invested for certain policyholders, pension
fund and other customers. The assets consist of common stocks, fixed maturities,
real estate related securities, and short-term investments. The assets of each
account are legally segregated and are not subject to claims that arise out of
any other business of the Company. Investment risks associated with market value
changes are generally borne by the customers, except to the extent of minimum
guarantees made by the Company with respect to certain accounts. The investment
income and gains or losses for Separate Accounts generally accrue to the
policyholders and are not included in the Consolidated Statement of Operations.
Mortality, policy administration and surrender charges on the accounts are
included in "Policy charges and fee income."

Separate Accounts represent funds for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the
policyholders, with the exception of the Pruco Life Modified Guaranteed Annuity
Account. The Pruco Life Modified Guaranteed Annuity Account is a non-unitized
separate account, which funds the Modified Guaranteed Annuity Contract and the
Market Value Adjustment Annuity Contract. Owners of the Pruco Life Modified
Guaranteed Annuity and the Market Value Adjustment Annuity Contracts do not
participate in the investment gain or loss from assets relating to such
accounts. Such gain or loss is borne, in total, by the Company.


F-9



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INSURANCE REVENUE AND EXPENSE RECOGNITION
Amounts received as payment for interest-sensitive life, investment contracts
and deferred annuities are reported as deposits to "Policyholders' account
balances." Revenues from these contracts are reflected as "Policy charges and
fee income" and consist primarily of fees assessed during the period against the
policyholders' account balances for mortality charges, policy administration
charges, surrender charges, and interest earned from the investment of these
account balances. Benefits and expenses for these products include claims in
excess of related account balances, expenses of contract administration,
interest credited and amortization of deferred policy acquisition costs.

FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Assets and liabilities of the Taiwan branch reported in other than U.S. dollars
are translated at the exchange rate in effect at the end of the period.
Revenues, benefits and other expenses are translated at the average rate
prevailing during the period. Translation adjustments arising from the use of
differing exchange rates from period to period are charged or credited directly
to equity. The cumulative effect of changes in foreign exchange rates are
included in "Foreign currency translation adjustments."

DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives include futures subject to market risk, all of which are used by the
Company in other than trading activities. Income and expenses related to
derivatives used to hedge are recorded on the accrual basis on the Statement of
Financial Position. Gains and losses relating to derivatives used to hedge the
risks associated with anticipated transactions are Realized in realized
investment gains, net, if it is determined that the transaction will not close,
such gains and losses are included in "Realized investment gains, net."

Derivatives held for purposes other than trading are primarily used to hedge or
reduce exposure to interest rate and foreign currency risks associated with
assets held or expected to be purchased or sold, and liabilities incurred or
expected to be incurred. Additionally, other than trading derivatives are used
to change the characteristics of the Company's asset/liability mix consistent
with the Company's risk management activities.

INCOME TAXES
The Company and its subsidiaries are members of a group of affiliated companies
which join in filing a consolidated federal income tax return in addition to
separate company state and local tax returns. Pursuant to the tax allocation
arrangement, total federal income tax expense is determined on a separate
company basis. Members with losses record tax benefits to the extent such losses
are recognized in the consolidated federal tax provision. Deferred income taxes
are generally recognized based on enacted rates when assets and liabilities
have different values for financial statement and tax reporting purposes. A
valuation allowance is recorded to reduce a deferred tax asset to that portion
which management believes is more likely than not to be realized.

NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125"). The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
and provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS 125
became effective January 1, 1997 and is to be applied prospectively. Subsequent
to June 1996, FASB issued SFAS No. 127 "Deferral of the Effective Date of
Certain Provisions of SFAS 125" ("SFAS 127"). SFAS 127 delays the implementation
of SFAS 125 for one year for certain provisions, including repurchase
agreements, dollar rolls, securities lending and similar transactions. The
Company will delay implementation with respect to those affected provisions.
Adoption of SFAS 125 has not, and will not have a material impact on the
Company's results of operations, financial condition and liquidity.

In June of 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for years beginning after December 15, 1997. This statement
defines comprehensive income as "the change in equity of a business enterprise
during a


F-10



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

period from transactions and other events and circumstances from non-owner
sources, excluding investments by owners and distributions to owners" and
establishes standards for reporting and displaying comprehensive income and its
components in financial statements. The statement requires that the Company
classify items of other comprehensive income by their nature and display the
accumulated balance of other comprehensive income separately from retained
earnings in the equity section of the Statement of Financial Position. In
addition, reclassification of financial statements for earlier periods must be
provided for comparative purposes.

RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform to current
year presentation.


F-11



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

3. INVESTMENTS

FIXED MATURITIES AND EQUITY SECURITIES:
The following tables provide additional information relating to fixed maturities
and equity securities as of December 31,:



1997
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
------------------ ---------------- ------------- ----------------
(In Thousands)


FIXED MATURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 177,691 $ 1,231 $ 20 $ 178,902

Foreign government bonds 83,889 1,118 19 84,988

Corporate securities 2,263,898 36,857 2,017 2,298,738

Mortgage-backed securities 1,076 180 32 1,224
------------------ ---------------- ------------- ----------------
Total fixed maturities available for sale $2,526,554 $ 39,386 $ 2,088 $2,563,852
================== ================= ============== ===============

------------------ ---------------- ------------- ----------------
EQUITY SECURITIES AVAILABLE FOR SALE $ 1,289 $ 802 $ 109 $ 1,982
================== ================= ============== ===============

------------------ ---------------- ------------- ----------------
FIXED MATURITIES HELD TO MATURITY
Corporate securities $ 338,848 $ 11,427 $ 219 $ 350,056
------------------ ---------------- ------------- ----------------
Total fixed maturities held to maturity $ 338,848 $ 11,427 $ 219 $ 350,056
================== ================= ============== ===============

1996
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
------------------ ---------------- ------------- ----------------
(In Thousands)

FIXED MATURITIES AVAILABLE FOR SALE
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 32,055 $ 30 $ 174 $ 31,911

Foreign government bonds 90,447 857 205 91,099

Corporate securities 2,087,250 30,365 4,206 2,113,409

Mortgage-backed securities 398 -- -- 398
------------------ ---------------- ------------- ----------------
Total fixed maturities available for sale $2,210,150 $ 31,252 $ 4,585 $2,236,817
================== ================= ============== ===============

------------------ ---------------- ------------- ----------------
EQUITY SECURITIES AVAILABLE FOR SALE $ 3,626 $ 819 $ 697 $ 3,748
================== ================= ============== ===============

------------------ ---------------- ------------- ----------------
FIXED MATURITIES HELD TO MATURITY
Corporate securities $ 405,731 $ 10,947 $ 576 $ 416,102
------------------ ---------------- ------------- ----------------
Total fixed maturities held to maturity $ 405,731 $ 10,947 $ 576 $ 416,102
================== ================= ============== ===============



F-12



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

3. INVESTMENTS (CONTINUED)

The amortized cost and estimated fair value of fixed maturities, categorized by
contractual maturities at December 31, 1997, are shown below:



AVAILABLE FOR SALE HELD TO MATURITY
---------------------------------- -----------------------------------
ESTIMATED ESTIMATED
FAIR FAIR
AMORTIZED COST VALUE AMORTIZED COST VALUE
----------------- ---------------- ----------------- -----------------
(In Thousands) (In Thousands)


Due in one year or less $ 29,759 $ 29,731 $ 13,736 $ 13,838

Due after one year through five years 1,738,532 1,758,946 204,298 212,050

Due after five years through ten years 555,194 567,928 98,192 101,143

Due after ten years 201,993 206,023 22,622 23,025

Mortgage-backed securities 1,076 1,224 -- --
----------------- ---------------- ----------------- -----------------
Total $2,526,554 $2,563,852 $ 338,848 $ 350,056
================= ================ ================= =================


Actual maturities will differ from contractual maturities because issuers have
the right to call or prepay obligations.

Proceeds from the sale of fixed maturities available for sale during 1997, 1996,
and 1995 were $2,796,306 thousand, $3,667,062 thousand, and $1,807,584 thousand,
respectively. Gross gains of $18,635 thousand, $22,078 thousand, and $25,909
thousand and gross losses of $7,990 thousand, $17,718 thousand, and $13,907
thousand were realized on those sales during 1997, 1996, and 1995, respectively.
Proceeds from the maturity of fixed maturities available for sale during 1997,
1996, and 1995 were $32,359 thousand, $219,192 thousand, and $79,103 thousand,
respectively. During the years ended December 31, 1997, 1996 and 1995, there
were no securities classified as held to maturity that were sold.

The following table describes the amortized cost and estimated fair value of
fixed maturity securities by rating agency equivalent as of December 31, 1997:




AVAILABLE FOR SALE HELD TO MATURITY
-------------------------------- -------------------------------

AMORTIZED ESTIMATED FAIR AMORTIZED ESTIMATED FAIR
COST VALUE COST VALUE
--------------- ---------------- --------------- ---------------
(In Thousands) (In Thousands)


AAA/AA/A $ 1,319,527 $ 1,334,823 $ 187,692 $ 194,797

BBB 1,047,203 1,062,641 128,481 131,820

BB 80,136 83,293 20,540 21,264

B 73,717 76,781 2,132 2,172

CCC or lower 5,943 6,288 -- --

In or near default 28 26 3 3
--------------- ---------------- --------------- ---------------

Total $ 2,526,554 $ 2,563,852 $ 338,848 $ 350,056
=============== ================ =============== ===============


The NAIC rates certain public and private placement securities as "in or near
default" if they are currently non-performing or believed subject to default in
the near term. The Company's holdings of these securities, in the aggregate,
comprised less than 1% of total invested assets at December 31, 1997 and 1996.


F-13



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

3. INVESTMENTS (CONTINUED)

MORTGAGE LOANS ON REAL ESTATE
The Company's mortgage loans were collateralized by the following property types
at December 31,

1997 1996
---------------------- -----------------------

(In Thousands)

Office buildings $ 4,607 20% $ 18,497 39%

Retail stores 8,090 35% 8,731 19%

Apartment complexes 6,080 27% 11,771 25%

Industrial buildings 4,010 18% 7,916 17%

---------------------- -----------------------
Net carrying value $ 22,787 100% $ 46,915 100%
====================== =======================


The mortgage loans are geographically dispersed throughout the United States
with the largest concentrations in Washington (29%) and Pennsylvania (27%).

SPECIAL DEPOSITS
Fixed maturities of $8,302 thousand and $8,744 thousand at December 31, 1997 and
1996, respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws.

OTHER LONG-TERM INVESTMENTS
The Company's "Other long-term investments" of $1,317 thousand and $4,528
thousand as of December 31, 1997 and 1996, respectively, are comprised of
non-real estate related interests. The Company's share of net income from these
entities is $2,158 thousand, $1,434 thousand and $345 thousand for the years
ended December 31, 1997, 1996 and 1995, respectively, and is reported in "Net
investment income."

F-14



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

3. INVESTMENTS (CONTINUED)

INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES

NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:




1997 1996 1995
----------------- ----------------- -----------------
(In Thousands)


Fixed maturities - available for sale $ 161,140 $ 152,445 $ 160,740
Fixed maturities - held to maturity 26,936 33,419 33,458
Equity securities 76 44 104
Mortgage loans on real estate 2,585 5,669 7,757
Investment real estate - 613 647
Policy loans 37,398 33,449 29,775
Short-term investments 22,011 16,780 15,092
Other 14,920 9,438 3,949
----------------- ----------------- -----------------
Gross investment income 265,066 251,857 251,522
Less: investment expenses (5,432) (4,529) (4,904)
----------------- ----------------- -----------------
Net investment income $ 259,634 $ 247,328 $ 246,618
================= ================= =================




REALIZED INVESTMENT GAINS ,NET including charges for other than temporary
reductions in value, for the years ended December 31, were from the following
sources:




1997 1996 1995
----------------- ----------------- -----------------
(In Thousands)


Fixed maturities - available for sale $ 9,039 $ 9,036 $ 11,359
Fixed maturities - held to maturity 821 - -
Equity securities 8 781 2,020
Mortgage loans on real estate 797 1,677 (90)
Investment real estate - 487 (99)
Other 309 (1,146) 10
----------------- ----------------- -----------------

Realized investment gains, net $ 10,974 $ 10,835 $ 13,200
================= ================= =================



NET UNREALIZED INVESTMENT GAINS on securities available for sale are included in
the consolidated statement of financial position as a component of equity, net
of tax. Changes in these amounts for the years ended December 31, are as
follows:




1997 1996 1995
----------------- ----------------- -----------------
(In Thousands)


Balance, beginning of year $ 14,104 $ 32,056 $ (41,761)
Changes in unrealized investment gains
(losses) attributable to:
Fixed maturities 10,631 (43,853) 110,932
Equity securities 571 1,403 68
Participating group annuity contracts 1,292 (3,855) 5,092
Deferred policy acquisition costs (8,412) 17,321 (25,214)
Deferred federal income taxes (1,057) 11,032 (17,061)
----------------- ----------------- -----------------
Balance, end of year $ 17,129 $ 14,104 $ 32,056
================= ================= =================



F-15



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

4. INCOME TAXES

The components of income taxes for the years ended December 31, are as follows:




1997 1996 1995
--------------------- --------------------- ---------------------
(In Thousands)

Current tax expense:
U.S. $71,989 $59,489 $65,131
State and local 1,337 703 1,876
Foreign -- 4 7
--------------------- --------------------- ---------------------
Total 73,326 60,196 67,014
--------------------- --------------------- ---------------------

Deferred tax (benefit) expense:
U.S. (11,458) 18,413 12,196
State and local -- 526 348
--------------------- --------------------- ---------------------
Total (11,458) 18,939 12,544
--------------------- --------------------- ---------------------

Total income tax expense $61,868 $79,135 $79,558
===================== ===================== =====================



The Company's income tax expense for the years ended December 31, differs from
the amount computed by applying the expected federal income tax rate of 35% to
income from operations before income taxes for the following reasons:




1997 1996 1995
--------------------- --------------------- --------------------
(In Thousands)


Expected federal income tax expense $58,885 $79,925 $81,271
State income taxes 869 1,229 2,224
Other 2,114 (2,019) (3,937)
--------------------- --------------------- ---------------------
Total income tax expense $61,868 $79,135 $79,558
===================== ===================== ====================



F-16



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

4. INCOME TAXES (CONTINUED)

Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:




1997 1996
-------------------- --------------------
(In Thousands)


Deferred income tax assets
Insurance reserves $ 40,896 $ 38,532
-------------------- --------------------
Total deferred income tax assets 40,896 38,532
-------------------- --------------------

Deferred income tax liabilities
Deferred acquisition costs 168,702 173,785
Net investment gains 8,161 12,502
Other 2,516 1,205
-------------------- --------------------
Total deferred income tax liabilities 179,379 187,492
-------------------- --------------------

Deferred federal income tax liabilities $ 138,483 $ 148,960
==================== ====================



Management believes that based on its historical pattern of taxable income, the
Company will produce sufficient income in the future to realize its deferred tax
assets after valuation allowance. Adjustments to the valuation allowance will be
made if there is a change in management's assessment of the amount of the
deferred tax assets that are realizable.

The Internal Revenue Service (the "Service") has completed examinations of the
consolidated federal income tax returns through 1989. The Service has examined
the years 1990 through 1992. Discussions are being held with the Service with
respect to proposed adjustments. However, management believes there are adequate
defenses against, or sufficient reserves to provide for, such adjustments. The
Service has begun their examination of the years 1993 through 1995.


5. REINSURANCE

The Company assumes and cedes reinsurance with Prudential and other companies.
The effect of reinsurance for the years ended December 31, is summarized as
follows:

1997 1996 1995
----------- ----------- -----------

Life insurance premiums

Gross Amount $ 51,851 $ 53,776 $ 44,357
Ceded to other companies (3,724) (3,379) (2,268)
Assumed from other companies 1,369 1,128 --
----------- ----------- -----------
Net amount $ 49,496 $ 51,525 $ 42,089
=========== =========== ===========

1997 1996 1995
----------- ----------- -----------

Life insurance in force
Gross Amount $47,328,495 $47,430,580 $47,822,892
Ceded to other companies (1,292,395) (1,172,449) (822,619)
----------- ----------- -----------
Net amount $46,036,100 $46,258,131 $47,000,273
=========== =========== ===========


F-17



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

6. EQUITY

RECONCILIATION OF STATUTORY SURPLUS AND NET INCOME

Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following table
reconciles the Company's statutory net income and surplus as of and for the
years ended December 31, determined in accordance with accounting practices
prescribed or permitted by the Arizona Department of Banking and Insurance with
net income and equity determined using GAAP.




1997 1996 1995
------------------ ------------------ ------------------
(In Thousands)


STATUTORY NET INCOME $ 12,778 $ 48,846 $ 113,565

Adjustments to reconcile to net income on a GAAP basis:
Statutory income of subsidiaries 18,553 25,001 44,186
Deferred acquisition costs 38,003 48,862 (6,103)
Deferred premium 1,144 1,295 (743)
Insurance liabilities 26,517 28,662 32,665
Deferred taxes 11,458 (7,780) (27,669)
Valuation of investments 506 365 5,480
Other, net (2,585) 3,971 (8,737)
------------------ ------------------ ------------------
GAAP NET INCOME $ 106,374 $ 149,222 $ 152,644
================== ================== ==================




1997 1996
-------------------- --------------------
(In Thousands)

STATUTORY SURPLUS $ 853,130 $ 901,645

Adjustments to reconcile to equity on a GAAP basis:

Valuation of investments 97,787 95,411
Deferred acquisition costs 655,242 633,159
Deferred premium (14,817) (11,859)
Insurance liabilities (107,525) (124,781)
Deferred taxes (113,461) (124,823)
Other, net 135,161 30,229
-------------------- --------------------
GAAP STOCKHOLDER'S EQUITY $ 1,505,517 $ 1,398,981
==================== ====================



The New York State Insurance Department ("Department") recognizes only statutory
accounting for determining and reporting the financial condition of an insurance
company, for determining its solvency under the New York Insurance Law and for
determining whether its financial condition warrants the payment of a dividend
to its stockholders. No consideration is given by the Department to financial
statements prepared in accordance with GAAP in making such determinations.


F-18




PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values presented below have been determined using available information
and valuation methodologies. Considerable judgment is applied in interpreting
data to develop the estimates of fair value. Accordingly, such estimates
presented may not be realized in a current market exchange. The use of different
market assumptions and/or estimation methodologies could have a material effect
on the estimated fair values. The following methods and assumptions were used in
calculating the fair values (for all other financial instruments presented in
the table, the carrying value approximates fair value.)

FIXED MATURITIES AND EQUITY SECURITIES
Fair values for fixed maturities and equity securities, other than private
placement securities, are based on quoted market prices or estimates from
independent pricing services. Fair values for private placement securities are
estimated using a discounted cash flow model which considers the current market
spreads between the U.S. Treasury yield curve and corporate bond yield curve,
adjusted for the type of issue, its current credit quality and its remaining
average life. The estimated fair value of certain non-performing private
placement securities is based on amounts estimated by management.

MORTGAGE LOANS ON REAL ESTATE
The fair value of the mortgage loan portfolio is primarily based upon the
present value of the scheduled future cash flows discounted at the appropriate
U.S. Treasury rate, adjusted for the current market spread for a similar quality
mortgage.

POLICY LOANS
The estimated fair value of policy loans is calculated using a discounted cash
flow model based upon current U.S. Treasury rates and historical loan
repayments.

DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of futures is estimated based on market quotes for a transactions
with similar terms.

The following table discloses the carrying amounts and estimated fair values of
the Company's financial instruments at December 31,:




1997 1996

ESTIMATED ESTIMATED
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
------------------ ------------------ ------------------ -------------------
(In Thousands)


Financial Assets:
Fixed maturities:
Available for sale $ 2,563,852 $ 2,563,852 $ 2,236,817 $ 2,236,817
Held to maturity 338,848 350,056 405,731 416,102
Equity securities 1,982 1,982 3,748 3,748
Mortgage loans 22,787 24,994 46,915 46,692
Policy loans 703,955 703,605 639,782 623,218
Short-term investments 316,355 316,355 169,830 169,830
Cash 71,358 71,358 73,766 73,766
Separate Account assets 8,022,079 8,022,079 5,336,851 5,336,851

Financial Liabilities:
Policyholders'
account balances $ 2,282,191 $ 2,282,191 $ 2,188,862 $ 2,188,862
Cash collateral for loaned
securities 143,421 143,421 -- --
Separate Account liabilities 7,948,788 7,948,788 5,277,454 5,277,454
Derivatives 653 653 -- --



F-19



PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

8. DERIVATIVE INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

The fair value of liability positions in future instruments, which represents
the Company's current exposure to credit loss from other parties'
non-performance, was $653 thousand at December 31, 1997. This includes the
estimated fair values of outstanding derivative positions only and does not
include the fair values of associated financial and non-financial assets and
liabilities, which generally offset derivative notional amounts. The fair value
amounts presented also do not reflect the netting of amounts pursuant to right
of setoff, qualifying master netting agreements with counterparties or
collateral arrangements.

9. RELATED PARTY TRANSACTIONS

SERVICE AGREEMENTS
Prudential, and Pruco Securities Corporation, an indirect wholly-owned
subsidiary of Prudential, operate under service and lease agreements whereby
services of officers and employees (except for those agents employed by the
Company in Taiwan), supplies, use of equipment and office space are provided.
The net cost of these services allocated to the Company were $139,489 thousand,
$101,662 thousand and $98,119 thousand for the years ended December 31, 1997,
1996, and 1995, respectively.

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 years ended December 31, 1997, 1996,
and 1995.

10. 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.

11. DIVIDENDS

The Company is subject to Arizona law which limits the amount of dividends that
insurance companies can pay to stockholders. The maximum dividend which may be
paid in any twelve month period without notification or approval is limited to
the lesser of 10% of statutory surplus as of December 31 of the preceding year
or the net gain from operations of the preceding calendar year. Cash dividends
may only be paid out of surplus derived from realized net profits. Based on
these limitations and the Company's surplus position at December 31, 1997, the
Company would be permitted a maximum of $15,260 thousand in dividend
distribution in 1998, all of which could be paid in cash, without approval from
The State of Arizona Department of Insurance.


F-20