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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended March 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
Commission file number 33-37587
PRUCO LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
Arizona 22-1944557
------------------------------ --------------------------------
(State or other jurisdiction, (IRS Employer Identification No.)
incorporation or organization)
213 Washington Street, Newark, New Jersey 07102
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(Address of principal executive offices ) (Zip Code)
(973) 802-3274
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(Registrant's Telephone Number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
--- ---
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 May 14, 2003. Common stock, par value of $10
per share: 250,000 shares outstanding
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1
PRUCO LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
Page No.
--------
Cover Page -
Index 2
PART I - Financial Information
Item 1. (Unaudited) Financial Statements
Consolidated Statements of Financial Position
As of March 31, 2003 and December 31, 2002 3
Consolidated Statements of Operations and Comprehensive Income
Three months ended March 31, 2003 and 2002 4
Consolidated Statements of Stockholder's Equity
Periods ended March 31, 2003 and December 31, 2002 and 2001 5
Consolidated Statements of Cash Flows
Three months ended March 31, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II - Other Information
Item 2. Changes in Securities and Use of Proceeds 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
Certifications 22
Forward-Looking Statement Disclosure
Certain of the statements included in this Quarterly Report on Form 10-Q,
including but not limited to those in the Management's Discussion and Analysis
of Financial Condition and Results of Operations, constitute forward-looking
statements within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Words such as "expects," "believes," "anticipates," "includes,"
"plans," "assumes," "estimates," "projects," "intends", or variations of such
words are generally part of forward-looking statements. Forward-looking
statements are made based on management's current expectations and beliefs
concerning future developments and their potential effects upon Pruco Life
Insurance Company ("the Company"). There can be no assurance that future
developments affecting the Company will be those anticipated by management.
These forward-looking statements are not a guarantee of future performance and
involve risks and uncertainties, and there are certain important factors that
could cause actual results to differ, possibly materially, from expectations or
estimates reflected in such forward-looking statements, including without
limitation: general economic, market and political conditions, including the
performance of financial markets, interest rate fluctuations and the continuing
negative impact of the current economic environment; various domestic or
international military or terrorist activities or conflicts; volatility in the
securities markets; reestimates of our reserves for future policy benefits and
claims; changes in our assumptions related to deferred policy acquisition costs;
our exposure to contingent liabilities; catastrophe losses; investment losses
and defaults; changes in our claims-paying or credit ratings; competition in our
product lines and for personnel; fluctuations in foreign currency exchange rates
and foreign securities markets; risks to our international operations; the
impact of changing regulation or accounting practices; adverse litigation
results; and changes in tax law. The Company does not intend, and is under no
obligation to, update any particular forward-looking statement included in this
document.
2
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Financial Position (Unaudited)
As of March 31, 2003 and December 31, 2002 (in thousands)
- --------------------------------------------------------------------------------
March 31, December 31,
2003 2002
----------- -----------
ASSETS
Fixed maturities available for sale,
at fair value (amortized cost, 2003: $5,146,263; 2002: $4,921,691) $ 5,407,733 $ 5,158,106
Policy loans 871,587 879,506
Short-term investments 132,445 214,342
Other long-term investments 93,748 91,021
----------- -----------
Total investments 6,505,513 6,342,975
Cash and cash equivalents 636,449 436,182
Deferred policy acquisition costs 1,190,744 1,152,997
Accrued investment income 94,685 86,125
Reinsurance recoverable 387,554 393,171
Receivables from Parent and affiliates 66,369 61,099
Other assets 53,990 41,581
Separate account assets 12,416,759 12,696,758
----------- -----------
TOTAL ASSETS $21,352,063 $21,210,888
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 5,127,772 $ 4,855,761
Future policy benefits and other policyholder liabilities 943,927 934,546
Cash collateral for loaned securities 261,142 225,518
Securities sold under agreement to repurchase 390,744 400,507
Income taxes payable 335,222 245,252
Other liabilities 124,496 130,411
Separate account liabilities 12,416,759 12,696,758
----------- -----------
Total liabilities 19,600,062 19,488,753
----------- -----------
Contingencies (See Footnote 2)
Stockholder's Equity
Common stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding 2,500 2,500
Paid-in-capital 466,748 466,748
Retained earnings 1,179,920 1,161,136
Accumulated other comprehensive income: 102,833 91,751
----------- -----------
Total stockholder's equity 1,752,001 1,722,135
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $21,352,063 $21,210,888
=========== ===========
See Notes to Consolidated Financial Statements
3
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Three Months Ended March 31, 2003 and 2002 (in thousands)
- --------------------------------------------------------------------------------
Three months ended
March 31,
2003 2002
--------- --------
REVENUES
Premiums $ 41,249 $ 18,298
Policy charges and fee income 136,244 127,033
Net investment income 84,553 81,471
Realized investment losses, net (9,659) (6,226)
Asset management fees 2,904 2,252
Other income 2,209 1,208
--------- --------
Total revenues 257,500 224,036
--------- --------
BENEFITS AND EXPENSES
Policyholders' benefits 86,461 57,813
Interest credited to policyholders' account balances 51,502 47,186
General, administrative and other expenses 96,381 94,356
-------- --------
Total benefits and expenses 234,344 199,355
--------- --------
Income from operations before income taxes 23,156 24,681
--------- --------
Income tax expense 4,444 5,210
--------- --------
NET INCOME 18,712 19,471
--------- --------
Net unrealized investment gains (losses) on securities,
net of reclassification adjustment and taxes 11,082 (19,141)
--------- --------
TOTAL COMPREHENSIVE INCOME $ 29,794 $ 330
========= ========
See Notes to Consolidated Financial Statements
4
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Stockholder's Equity (Unaudited)
Periods Ended March 31, 2003 and December 31, 2002 and 2001 (in thousands)
- --------------------------------------------------------------------------------
Accumulated
other Total
Common Paid-in- Retained comprehensive stockholder's
stock capital earnings income (loss) equity
------ -------- ---------- -------------- -------------
Balance, January 1, 2001 $2,500 $466,748 $1,361,924 $ 1,410 $1,832,582
Net income - - 67,582 - 67,582
Policy credits issued to eligible
policyholders - - (128,025) - (128,025)
Dividends to Parent - - (153,816) - (153,816)
Change in foreign currency
translation adjustments, net of taxes - - - 3,168 3,168
Change in net unrealized investment
gains, net of reclassification
adjustment and taxes - - - 29,988 29,988
------ -------- ---------- -------- ----------
Balance, December 31, 2001 2,500 466,748 1,147,665 34,566 1,651,479
Net income - - 13,498 - 13,498
Adjustments to policy credits
issued to eligible policyholders - - (27) - (27)
Change in foreign currency
translation adjustments, net of - - - 149 149
taxes
Change in net unrealized investment
gains, net of reclassification
adjustment and taxes - - - 57,036 57,036
------ -------- ---------- -------- ----------
Balance, December 31, 2002 2,500 466,748 1,161,136 91,751 1,722,135
Net income - - 18,712 - 18,712
Adjustments to policy credits
issued to eligible policyholders - - 72 - 72
Change in foreign currency
translation adjustments, net of taxes - - - - -
Change in net unrealized investment
gains, net of reclassification
adjustment and taxes - - - 11,082 11,082
------ -------- ---------- -------- ----------
Balance, March 31, 2003 $2,500 $466,748 $1,179,920 $102,833 $1,752,001
====== ======== ========== ======== ==========
See Notes to Consolidated Financial Statements
5
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2003 and 2002 (in thousands)
- --------------------------------------------------------------------------------
2003 2002
---------- ----------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 18,712 $ 19,471
Adjustments to reconcile net income to net cash from
(used in) operating activities:
Policy charges and fee income (24,218) (15,451)
Interest credited to policyholders' account balances 51,502 47,186
Realized investment losses, net 9,659 6,226
Amortization and other non-cash items (117) 33,345
Change in:
Future policy benefits and other policyholders' liabilities 9,381 8,387
Accrued investment income (8,560) (3,143)
Receivables from Parent and affiliates (5,270) (12,531)
Policy loans 7,919 (4,406)
Deferred policy acquisition costs (37,747) (68,154)
Income taxes payable/receivable 89,970 (3,711)
Other, net (12,634) (20,477)
---------- ----------
Cash Flows From (Used in) Operating Activities 98,597 (13,258)
---------- ----------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities available for sale 707,245 582,868
Payments for the purchase of:
Fixed maturities available for sale (946,530) (733,030)
Cash collateral for loaned securities, net 35,624 39,770
Securities sold under agreement to repurchase, net (9,763) 2,265
Other long-term investments, net (4,197) (2,017)
Short-term investments, net 81,897 110,891
---------- ----------
Cash Flows (Used in) From Investing Activities (135,724) 747
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 417,928 495,828
Withdrawals (180,534) (272,976)
Cash payments to eligible policyholders - (114,755)
---------- ----------
Cash Flows From Financing Activities 237,394 108,097
---------- ----------
Net increase in Cash and cash equivalents 200,267 95,586
Cash and cash equivalents, beginning of year 436,182 374,185
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 636,449 $ 469,771
========== ==========
See Notes to Consolidated Financial Statements
6
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q on the basis of
accounting principles generally accepted in the United States. These interim
financial statements are unaudited but reflect all adjustments which, in the
opinion of management, are necessary to provide a fair presentation of the
consolidated results of operations and financial condition of the Pruco Life
Insurance Company ("the Company") for the interim periods presented. The Company
is a wholly owned subsidiary of The Prudential Insurance Company of America
("Prudential Insurance"), which in turn is a wholly owned subsidiary of
Prudential Financial, Inc. ("Prudential Financial"). All such adjustments are of
a normal recurring nature. The results of operations for any interim period are
not necessarily indicative of results for a full year. Certain amounts in the
Company's prior year consolidated financial statements have been reclassified to
conform with the current year presentation. These financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
2. CONTINGENCIES AND LITIGATION
Contingencies
On an ongoing basis, our internal supervisory and control functions review the
quality of our sales, marketing and other customer interface procedures and
practices and may recommend modifications or enhancements. In certain cases, if
appropriate, we may offer customers remediation and may incur charges, including
the cost of such remediation, administrative costs and regulatory fines.
It is possible that the results of operations or the cash flow of the Company in
a particular quarterly or annual period could be materially affected as a result
of payments in connection with the matters discussed above depending, in part,
upon the results of operations or cash flow for such period. Management
believes, however, that the ultimate payments in connection with these matters
should not have a material adverse effect on the Company's financial position.
Litigation
The Company and Prudential Insurance are subject to legal and regulatory actions
in the ordinary course of their businesses, including class actions. Pending
legal and regulatory actions include proceedings relating to aspects of the
businesses and operations that are specific to the Company and Prudential
Insurance and that are typical of the businesses in which the Company and
Prudential Insurance operate. Class action and individual lawsuits involve a
variety of issues and/or allegations, which include sales practices,
underwriting practices, claims payment and procedures, premium charges, policy
servicing and breach of fiduciary duties to customers. We are also subject to
litigation arising out of our general business activities, such as our
investments and third party contracts. In certain of these matters, the
plaintiffs are seeking large and/or indeterminate amounts, including punitive or
exemplary damages.
The Company and Prudential Insurance have been subject to substantial regulatory
actions and civil litigation, including class actions, involving individual life
insurance sales practices from 1982 through 1995. As of January 31, 2003, the
Company and Prudential Insurance have resolved those regulatory actions, its
sales practices class action litigation and virtually all of the individual
sales practices actions filed by policyholders who "opted out" of the sales
practices class action. Prudential Insurance has indemnified the Company for any
liabilities incurred in connection with sales practices litigation covering
policyholders of individual permanent life insurance policies issued in the
United States from 1982 to 1995.
The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted. It is possible that the
results of operations or the cash flow of the Company in a particular quarterly
or annual period could be materially affected by an ultimate unfavorable
resolution of pending litigation and regulatory matters. Management believes,
however, that the ultimate outcome of all pending litigation and regulatory
matters should not have a material adverse effect on the Company's financial
position.
7
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
3. RELATED PARTY TRANSACTIONS
The Company has extensive transactions and relationships with Prudential
Insurance and other affiliates. It is possible that the terms of these
transactions are not the same as those that would result from transactions among
wholly unrelated parties.
Expense Charges and Allocations
Many of the Company's expenses are allocations or charges from Prudential
Insurance or other affiliates. These expenses can be grouped into the following
categories: general and administrative expenses and agency distribution
expenses.
The Company's general and administrative expenses are charged to the Company
using allocation methodologies based on business processes. Management believes
that the methodology is reasonable and reflects costs incurred by Prudential
Insurance to process transactions on behalf of the Company. The Company operates
under service and lease agreements whereby services of officers and employees,
supplies, use of equipment and office space are provided by Prudential
Insurance.
The Company is allocated estimated distribution expenses from Prudential
Insurance's agency network for both its domestic life and annuity products. The
estimate of allocated distribution expenses is intended to reflect a market
based pricing arrangement. The Company has capitalized the majority of these
distribution expenses as deferred policy acquisition costs.
Affiliated Asset Management Fee Income
In accordance with a revenue sharing agreement with Prudential Investments LLC,
which began on February 1, 2002, the Company receives fee income from
policyholder account balances invested in the Prudential Series Funds ("PSF").
These revenues are recorded as "Asset management fees" in the Consolidated
Statements of Operations and Comprehensive Income.
Corporate Owned Life Insurance
The Company has sold four Corporate Owned Life Insurance ("COLI") policies to
Prudential Insurance. The cash surrender value included in Separate accounts was
$872.0 million and $835.6 million at March 31, 2003 and December 31, 2002,
respectively.
8
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Reinsurance with Affiliates
The Company currently has four reinsurance agreements in place with Prudential
Insurance and affiliates. Specifically, the Company has a reinsurance Group
Annuity Contract, whereby the reinsurer, in consideration for a single premium
payment by the Company, provides reinsurance equal to 100% of all payments due
under the contract. In addition, there are two yearly renewable term agreements
in which the Company may offer and the reinsurer may accept reinsurance on any
life in excess of the Company's maximum limit of retention. The Company is not
relieved of its primary obligation to the policyholder as a result of these
reinsurance transactions. The effect these agreements had on net income for the
periods ended March 31, 2003 or 2002 is reflected in the statement of
operations. The fourth agreement is described below.
On January 31, 2001, the Company transferred all of its assets and liabilities
associated with the Company's Taiwan branch including Taiwan's insurance book of
business to an affiliated Company, Prudential Life Insurance Company of Taiwan
Inc. ("Prudential of Taiwan"), a wholly owned subsidiary of Prudential
Financial, Inc.
The mechanism used to transfer this block of business in Taiwan is referred to
as a "full acquisition and assumption" transaction. Under this mechanism, the
Company is jointly liable with Prudential of Taiwan for two years from the
giving of notice to all obligees for all matured obligations and for two years
after the maturity date of not-yet-matured obligations. Prudential of Taiwan is
also contractually liable, under indemnification provisions of the transaction,
for any liabilities that may be asserted against the Company. The transfer of
the insurance related assets and liabilities was accounted for as a
long-duration coinsurance transaction under accounting principles generally
accepted in the United States. Under this accounting treatment, the insurance
related liabilities remain on the books of the Company and an offsetting
reinsurance recoverable is established.
As part of this transaction, the Company made a capital contribution to
Prudential of Taiwan in the amount of the net equity of the Company's Taiwan
branch as of the date of transfer. In July 2001, the Company dividended its
interest in Prudential of Taiwan to Prudential Insurance.
Premiums ceded for the periods ending March 31, 2003 and 2002 from the Taiwan
coinsurance agreement were $19.1 million and $17.6 million, respectively.
Benefits ceded for the periods ending March 31, 2003 and 2002 from the Taiwan
coinsurance agreement were $3.8 million and $3.2 million, respectively.
Included in the reinsurance recoverable balances were affiliated reinsurance
recoverables of $349.6 million and $362.0 million at March 31, 2003 and December
31, 2002, respectively. Of these affiliated amounts, the reinsurance recoverable
related to the Taiwan coinsurance agreement was $323.8 million and $311.3
million at March 31, 2003 and December 31, 2002, respectively.
Debt Agreements
The Company has a revolving line of credit facility of up to $800 million with
Prudential Funding, LLC, a wholly owned subsidiary of Prudential Insurance. The
total of asset-based financing and borrowing under this credit facility cannot
be more than $800 million. As of March 31, 2003 and December 31, 2002, there was
$652 million and $626 million, respectively, of asset-based financing. There was
no debt outstanding to Prudential Funding, LLC. as of March 31, 2003 or December
31, 2002.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the consolidated financial condition of Pruco Life
Insurance Company as of March 31, 2003, compared with December 31, 2002, and its
consolidated results of operations for the three month periods ended March 31,
2003 and March 31, 2002. You should read the following analysis of our
consolidated financial condition and results of operations in conjunction with
the Company's MD&A and audited Consolidated Financial statements included in the
Company's Report on Form 10-K for the year ended December 31, 2002.
The Company sells interest-sensitive individual life insurance, variable life
insurance, term life insurance, individual variable annuities, and a
non-participating guaranteed interest contract ("GIC") called Prudential Credit
Enhanced GIC ("PACE") primarily through Prudential Insurance's sales force in
the United States. These markets are subject to regulatory oversight with
particular emphasis placed on company solvency and sales practices. These
markets are also subject to increasing competitive pressure as the legal
barriers, which have historically segregated the markets of the financial
services industry, have been changed through both legislative and judicial
processes. Regulatory changes have opened the insurance industry to competition
from other financial institutions, particularly banks and mutual funds that are
positioned to deliver competing investment products through large, stable
distribution channels. The Company also had marketed individual life insurance
through its branch office in Taiwan. The Taiwan branch was transferred to an
affiliated Company on January 31, 2001, as described in the Notes to the
Financial Statements. Beginning February 1, 2001, Taiwan's net income is not
included in the Company's results of operations.
Generally, policyholders who purchase the Company's products have the option of
investing in the Separate accounts, segregated funds for which investment risks
are borne by the customer, or the Company's portfolio, referred to as the
General account. The Company earns its profits through policy fees charged to
Separate account annuity and life policyholders and through the interest spread
for the GIC and General account annuity and life products. Policy charges and
fee income consist mainly of three types, sales charges or loading fees on new
sales, mortality and expense charges ("M&E") assessed on fund balances, and
mortality and related charges based on total life insurance in-force business.
Policyholder fund values are affected by net sales (sales less withdrawals)
changes in interest rates and investment returns. The interest spread represents
the difference between the investment income earned by the Company on its
investment portfolio and the amount of interest credited to the policyholders'
accounts. Products that generate spread income primarily include the GIC
product, general account life insurance products, fixed annuities and the
fixed-rate option of variable annuities.
The Company's Changes in Financial Position and Results of Operations are
described below.
1. Analysis of Financial Condition
From December 31, 2002 to March 31, 2003 there was an increase of $141 million
in total assets from $21,211 million to $21,352 million. Fixed maturities
increased by $250 million and short-term investments and cash and cash
equivalents increased by $118 million from December 31, 2002. These increases
are a result of investing general account policyholder deposits and positive
cash flows from insurance operations into these investments. A higher level of
securities lending activity also contributed to the increase in cash and cash
equivalents. Separate account assets decreased by $280 million primarily from
market value declines and higher policy charges, which are deducted from the
fund values. Deferred acquisition costs ("DAC") increased by $38 million, as
capitalization of commissions from new sales exceeded the amortization of DAC.
Other assets increased $12 million mainly from increases to prepaid expenses and
receivables resulting from sales of securities that had not settled at the
balance sheet date.
During this three-month period, liabilities increased by $111 million from
$19,489 million to $19,600 million. Policyholder account balances increased by
$272 million due primarily to positive net sales (sales less withdrawals) of
annuity products with fixed rate options and the PACE and life general account
products. Corresponding with the asset change, Separate account liabilities
decreased by $280 million, as described above. Income taxes payable increased by
$90 million as a result of current year tax expense and a tax refund received
from Prudential Financial. In accordance with the tax sharing agreement with
Prudential Financial, the Company was reimbursed $79 million for operating
losses utilized in the consolidated federal tax return. A higher level of
securities lending activity increased liabilities by $26 million.
10
2. Results of Operations
Net Income
Consolidated net income of $18.7 million for the first quarter of 2003 was
slightly less than the $19.5 million earned for the first quarter of 2002. Both
revenues and expenses increased as growth of the life in-force business resulted
in increased premiums, policy charges for life products and related policyholder
benefit expenses. The annuity products' results continue to be unfavorably
impacted by the weak equity markets resulting in lower policy fee income for
those products and higher guaranteed minimum death benefits. Further details
regarding the components of revenues and expenses are described in the following
paragraphs.
Revenues
Consolidated revenues increased by $33.5 million, from $224.0 million to $257.5
million. Premiums increased by $23.0 million from higher term insurance sales
and renewals of the Term Essential and Term Elite products of $14.0 million and
higher premiums on term insurance we issued, under policy provisions, to
customers who previously had lapsing variable life insurance policies with us
("extended term insurance"). Extended term life insurance increased as a result
of less favorable market performance in previous quarters, which caused an
increase in lapses.
Policy charges and fee income, consisting primarily of mortality and expense
("M&E"), loading and other insurance charges assessed on General and Separate
Account policyholder fund balances, increased by $9.2 million. The increase was
a result of a $15.5 million increase for individual life products offset by a
$6.3 million decrease for annuity products. Mortality and sales based loading
charges for life products increased as a result of growth in the in-force
business. The in-force business (excluding term insurance) grew to $66.0 billion
at March 31, 2003 from $60.0 billion at March 31, 2002 and $65.2 billion at
December 31, 2002. In contrast, annuity fees are mainly asset based fees which
are dependent on the fund balances which are affected by net sales as well as
asset depreciation or appreciation on the underlying investment funds in which
the customer has the option to invest. Annuity fund balances have declined as a
result of unfavorable valuation changes in the securities market over the past
several years.
Net investment income increased by $3.1 million as a result of increased income
from fixed maturities due to an increase in the portfolio balance, partially
offset by lower reinvestment yield rates. Realized investment losses increased
by $3.4 million mainly due to higher fixed maturity impairments of $12 million.
This was partially offset by lower trading losses based on credit quality and
higher gains on sales of fixed maturities in 2003.
Benefits and Expenses
Policyholder benefits increased by $28.6 million from increased reserve
provisions for life insurance reserves and increased death and surrender
benefits. The change in reserves for life products increased $16.1 million from
the prior year primarily as a result of higher term and extended term insurance,
as discussed in the premium section. Benefits paid on surrenders of reduced paid
up life policies increased by $3.0 million. Annuity death benefits were higher
by $7.6 million primarily due to higher guaranteed minimum death benefits.
Guaranteed minimum death benefit payments increased from $6.1 million in the
first three months of 2002 to $12.0 million in the first three months of 2003.
As of March 31, 2003, the death benefit coverage in force (representing the
amount that we would have to pay if all annuitants had died on that date) was
approximately $3.1 billion. The death benefit coverage in force represents the
excess of the guaranteed benefit amount over the account value. The guaranteed
minimum death benefit feature provides annuity contract holders with a guarantee
that the benefit received at death will be no less than a prescribed minimum
amount. This minimum amount is based on the net deposits paid into the contract,
the net deposits accumulated at a specified rate, the highest historical account
value on a contract anniversary, or more typically, the greatest of these
values, depending on features offered in various contracts and elected by the
contract holders. These contracts generally require payment of additional
charges for guarantees other than those based on net deposits paid into the
contract. To the extent that the guaranteed minimum death benefit is higher than
the current account value at the time of death, we incur a cost. This results in
increased annuity policy benefits in periods of declining financial markets and
in periods of stable financial markets following a decline. Current accounting
literature does not prescribe advance recognition of the expected future net
costs associated with these guarantees, and accordingly, we currently do not
record a liability corresponding to these projected future obligations for death
benefits in excess of annuity account values. However, we consider the expected
net costs associated with these guarantees in our calculations of expected gross
profits on variable annuity business, on which our periodic evaluations of
unamortized deferred policy acquisition costs are based. A proposed AICPA
Statement of Position, "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts" (the
"Proposed SOP"), would require the recording of a liability for the expected net
costs associated with these guarantees under certain circumstances, if adopted
as proposed. We are currently evaluating the impact of the Proposed SOP.
11
Interest credited to policyholder account balances increased by $4.3 million due
to growth in policyholder account balances.
General, administrative, and other expenses increased $2.0 million from the
prior year. The primary reason for the increase was an increase in DAC
amortization of $3.7 million due to the poor equity market results. Partially
offsetting this was a decrease in allocated general and administrative expenses,
mainly from lower salary related expenses.
General Account Investments
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
$6,505.5 million at March 31, 2003, versus $6,343.0 million at December 31,
2002. A diversified portfolio of publicly traded bonds, private placements, and
other long-term investments is managed under strategies intended to maintain a
competitive asset mix consistent with current and anticipated cash flow
requirements of the related obligations. The risk tolerance reflects the
Company's aggregate capital position, exposure to business risk, liquidity and
rating agency considerations.
As of March 31, As of December 31,
-----------------------------------------------------------
2003 % of Total 2002 % of Total
----------------------------- ----------------------------
($ in thousands)
Fixed maturities:
Public, available for sale, at fair value $4,309,863 66.3% $3,977,441 62.7%
Private, available for sale, at fair value 1,097,870 16.9% 1,180,665 18.6%
Short-term investments 132,445 2.0% 214,342 3.4%
Policy loans, at outstanding balance 871,587 13.4% 879,506 13.9%
Other long-term investments (1) 93,748 1.4% 91,021 1.4%
---------- ----- ---------- -----
Total investments $6,505,513 100.0% $6,342,975 100.0%
========== ===== ========== =====
- ------------
(1) Other long-term investments consist of investments in joint ventures and
partnerships, our interest in separate account investments, commercial
loans, equity securities and other miscellaneous investments.
The asset management strategy for the portfolio is in accordance with an
investment policy statement developed and coordinated within the Company by the
Asset Liability and Risk Management Group, 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. Asset management strategies take into account the need to
match asset structure to product liabilities, considering the underlying income
and return characteristics of investment alternatives and seeking to closely
approximate the interest rate sensitivity of the asset portfolio with the
estimated interest rate sensitivity of the product liabilities. Asset management
strategies also include broad diversification across asset classes, issuers and
sectors; effective utilization of capital while maintaining liquidity believed
to be adequate to satisfy cash flow requirements; and achievement of competitive
performance. The major categories of invested assets, the related quality of the
portfolio, and recent activities to manage the portfolio are discussed below.
As of March 31, 2003, our investment portfolio consisted primarily of $5,407.7
million of fixed maturity securities (83% of the total portfolio at March 31,
2003 versus 81% at December 31, 2002), and $1,097.8 million of other investments
(17% of the total portfolio at March 31, 2003 versus 19% at December 31, 2002).
The other investments were comprised of other long-term investments, policy
loans and short-term investments.
Investment Results
The overall income yield on our invested assets after investment expenses,
excluding realized investment losses, net was 5.60% for the first three months
of 2003 and 6.24% for the first three months of 2002. The decline in yield on
the portfolio in 2003 from 2002 is primarily attributable to reinvestment
activities in a declining interest rate environment.
12
Continuation of the low interest rate environment will result in our
reinvestment of maturing securities at lower rates and would reduce the yield we
are able to earn on our investments, which support our obligations for certain
products, including fixed annuities, and guaranteed investment contracts. This
reduction in yield would also have a corresponding impact on the "spread," the
difference between the yield on our investments and the amounts that we are
required to pay our customers related to these products, which would have a
negative impact on our future profitability.
The following table sets forth the income yield and investment income, excluding
realized investment losses, net for each major asset category of the Company for
the periods indicated.
For the period ended March 31,
--------------------------------------------------------------
2003 2002
--------------------------------------------------------------
Yield Amount Yield Amount
--------------------------------------------------------------
($ in thousands)
Fixed maturities 5.79% $72,342 6.77% $67,135
Policy loans 5.34 11,618 5.28 11,493
Short-term investments 2.37 2,358 2.96 3,290
Other long-term investments 7.77 1,776 8.29 2,033
------ ------- ------ -------
Investment income before investment
expenses 5.71 88,094 6.34 83,951
Investment expenses (0.11) (3,541) (0.10) (2,480)
------ ------- ------ -------
Total after investment expenses 5.60% $84,553 6.24% $81,471
====== ======= ====== =======
- --------------
(1) Yields are based on quarterly average carrying values except for fixed
maturities and securities lending activity. Yields for fixed maturities are
based on amortized cost. Yields for securities lending activity are
calculated net of corresponding liabilities and rebate expenses. Yields for
prior year are presented on a basis consistent with our current reporting
practices.
Fixed Maturity Securities
Investment Mix
We manage our public portfolio to a risk profile directed by the Asset Liability
and Risk Management Group. We seek to employ relative value analysis both in
credit selection and in purchasing and selling securities. To the extent that we
actively purchase and sell securities as part of portfolio selection and
portfolio rebalancing, the total return that we earn on the portfolio will be
reflected both as investment income and also as realized gains or losses on
investments.
We use our private placement and asset-backed portfolios to enhance the
diversification and yield of our overall fixed maturity portfolio. Our
investment staff directly originates approximately half of all of our private
placements. Our origination capability offers the opportunity to lead
transactions and gives us the opportunity for better terms, including covenants
and call protection, and to take advantage of innovative deal structures.
The Company has classified all private placements and publicly traded securities
as available for sale. "Available for sale" securities are carried in the
Consolidated Statement of Financial Position at fair value, with unrealized
gains and losses (after certain related adjustments) recognized by credits and
charges to equity capital. At March 31, 2003 the fixed maturities portfolio
totaled $5,407.7 million, an increase of $249.6 million compared to December 31,
2002.
Our fixed maturity securities portfolio consists principally of public and
private fixed maturities across an array of industry categories. As of March 31,
2003, we held approximately 83% of assets in fixed maturity securities (versus
81% as of December 31, 2002) with a total amortized cost of $5,146.3 million and
an estimated fair value of $5,407.7 million, compared to an amortized cost of
$4,921.7 million and estimated fair value of $5,158.1 million as of December 31,
2002. Our investments in public fixed maturities as of March 31, 2003 were
$4,104.5 million at amortized cost and $4,309.9 million at estimated fair value
compared to $3,793.0 million at amortized cost and $3,977.4 million at estimated
fair value as of December 31, 2002. Our investments in private fixed maturities
as of March 31, 2003 were $1,041.8 million at amortized cost and $1,097.9
million at estimated fair value compared to $1,128.7 million at amortized cost
and $1,180.7 million at estimated fair value as of December 31, 2002.
13
Fixed Maturity Securities and Unrealized Gains and Losses by Industry Category
The following table sets forth the composition of our fixed maturity securities
portfolio by industry category as of the dates indicated and the associated
gross unrealized gains and losses.
------------------------------------------------ ----------------------------------------------------
As of March 31, 2003 As of December 31, 2002
------------------------------------------------ ----------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
(1) Cost Gains Losses Fair Value Cost Gains Losses Fair Value
------------------------------------------------ ----------------------------------------------------
(in thousands)
Industry
- --------
U.S. Government $501,586 $9,277 $74 $510,789 $600,385 $11,906 $1 $612,290
Manufacturing 1,024,448 61,671 1,476 1,084,643 1,029,622 59,334 4,476 1,084,480
Utilities 498,182 36,095 1,931 532,346 509,444 29,199 6,128 532,515
Finance 986,178 59,255 651 1,044,782 705,019 52,722 724 757,017
Services 585,911 29,094 839 614,166 538,604 25,344 2,827 561,121
Mortgage Backed 114,229 3,155 0 117,384 120,425 3,242 14 123,653
Foreign
Government 48,076 5,057 61 53,072 45,981 4,707 44 50,644
Retail and
Wholesale 309,304 20,485 179 329,610 279,750 20,093 477 299,366
Asset-Backed
Securities 632,178 13,581 1,535 644,224 642,771 14,667 2,096 655,342
Transportation 221,749 10,937 234 232,452 218,649 12,303 390 230,562
Energy 216,752 18,959 24 235,687 218,269 19,224 35 237,458
Other 7,670 908 - 8,578 12,772 886 - 13,658
---------- -------- ------ ---------- ---------- -------- ------- ----------
Total $5,146,263 $268,474 $7,004 $5,407,733 $4,921,691 $253,627 $17,212 $5,158,106
========== ======== ====== ========== ========== ======== ======= ==========
- -------------
(1) Investment data for 2003 has been classified based on industry accepted
Lehman categorizations for public holdings and similar classifications by
industry for all other holdings. Prior year data has been reclassified to
conform to current year presentation. This table includes redeemable
preferred stock.
As a percentage of amortized cost, fixed maturity investments as of March 31,
2003 consist primarily of the following sectors: 20% manufacturing, 19% finance,
12% asset-backed securities, 11% services and 10% U.S. Government compared to
21% manufacturing, 14% finance, 13% asset-backed securities, 12% U.S.
Government, and 11% services as of December 31, 2002. Nearly 95% of the
mortgage-backed securities were publicly traded agency pass-through securities.
Collateralized mortgage obligations represented less than 6% of total
mortgage-backed securities.
The gross unrealized losses related to our fixed maturity portfolio were $7.0
million as of March 31, 2003 compared to $17.2 million as of December 31, 2002.
The gross unrealized losses as of March 31, 2003 were concentrated primarily in
the utilities, asset-backed securities and manufacturing sectors while gross
unrealized losses as of December 31, 2002 were concentrated in the utilities,
manufacturing, and services sectors. Non-investment grade securities represented
62% of the gross unrealized losses as of March 31, 2003 versus 65% of gross
unrealized losses as of December 31, 2002.
Fixed Maturity Securities Credit Quality
The NAIC evaluates the investments of insurers for regulatory reporting purposes
and assigns fixed maturity securities to one of six categories called "NAIC
Designations." NAIC designations of "1" or "2" include fixed maturities
considered investment grade, which include securities rated Baa3 or higher by
Moody's or BBB- or higher by S&P. NAIC Designations of "3" through "6" are
referred to as below investment grade, which include securities rated Ba1 or
lower by Moody's and BB+ or lower by S&P. The fixed maturity securities
designated as NAIC 6 include securities that are not rated.
The amortized cost of our public and private below-investment grade fixed
maturities totaled $473.0 million, or 9%, of the total fixed maturities as of
March 31, 2003, compared to $526.8 million, or 11%, of total fixed maturities as
of December 31, 2002.
14
Public Fixed Maturities - Credit Quality
The following table sets forth our public fixed maturity portfolios by NAIC
rating as of the dates indicated.
------------------------------------------------ ----------------------------------------------
As of March 31, 2003 As of December 31, 2002
------------------------------------------------ ----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
------------------------------------------------ ----------------------------------------------
($ in thousands)
NAIC Rating Agency
Designation Equivalent
- ----------- -------------
1 Aaa, Aa, A $2,535,183 $121,201 $413 $2,655,971 $2,377,674 $116,244 $438 $2,493,480
2 Baa 1,296,824 78,010 1,341 1,373,493 1,152,329 71,903 4,152 1,220,080
3 Ba 156,666 6,334 1,861 161,139 162,210 5,224 2,201 165,233
4 B 92,133 4,331 1,391 95,073 75,167 2,381 2,987 74,561
5 C and lower 8,051 590 283 8,358 10,391 412 2,057 8,746
6 In or near
default 15,573 267 11 15,829 15,195 481 335 15,341
---------- -------- ------ ---------- ---------- -------- ------- ----------
Public Fixed Maturities $4,104,430 $210,733 $5,300 $4,309,863 $3,792,966 $196,645 $12,170 $3,977,441
========== ======== ====== ========== ========== ======== ======= ==========
Private Fixed Maturities - Credit Quality
The following table sets forth our private fixed maturity portfolios by NAIC
rating as of the dates indicated.
------------------------------------------------ ----------------------------------------------
As of March 31, 2003 As of December 31, 2002
------------------------------------------------ ----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
------------------------------------------------ ----------------------------------------------
($ in thousands)
NAIC Rating Agency
Designation Equivalent
- ----------- -------------
1 Aaa, Aa, A $382,412 $16,017 $824 $397,605 $338,539 $12,348 $1,351 $349,536
2 Baa 458,852 31,114 56 $489,910 526,384 34,430 45 560,769
3 Ba 152,076 9,454 315 $161,215 212,917 9,197 3,089 219,025
4 B 8,129 - 126 8,003 9,637 - 196 9,441
5 C and lower 37,989 1,156 338 38,807 39,616 1,007 253 40,370
6 In or near
default 2,375 - 45 2,330 1,632 - 108 1,524
---------- ------- ------ ---------- ---------- ------- ------ ----------
Private Fixed Maturities $1,041,833 $57,741 $1,704 $1,097,870 $1,128,725 $56,982 $5,042 $1,180,665
========== ======= ====== ========== ========== ======= ====== ==========
Unrealized Losses from Fixed Maturity Securities
The following table sets forth the amortized cost and gross unrealized losses of
fixed maturity securities where the estimated fair value had declined and
remained below amortized cost by 20% or more for the following timeframes:
---------------------------------- ----------------------------------
As of March 31, 2003 As of December 31, 2002
---------------------------------- ----------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Losses Amortized Cost Losses
---------------------------------- ----------------------------------
($ in thousands)
Less than six months $3,545 $832 $9,605 $3,488
Greater than six months but less than nine
months - - 982 424
Greater than nine months - - - -
------ ---- ------- ------
Total $3,545 $832 $10,587 $3,912
====== ==== ======= ======
Gross unrealized losses of fixed maturity securities where estimated fair value
has been 20% or more below amortized cost were $0.8 million as of March 31,
2003, compared to $3.9 million as of December 31, 2002. The gross unrealized
losses at March 31, 2003 were primarily concentrated in the manufacturing,
utilities, and finance sectors while the gross unrealized losses at December 31,
2002 were concentrated in the utilities, manufacturing, and transportation
sectors.
15
Impairments of Fixed Maturity Securities
Our credit and portfolio management processes help ensure prudent controls over
valuation and management of the private portfolio. We have separate pricing and
authorization processes to establish "checks and balances" for new investments.
We apply consistent standards of credit analysis and due diligence for all
transactions, whether they originate through our own in-house origination staff
or through agents. Our regional offices closely monitor the portfolios in their
regions. We set all valuation standards centrally, and we assess the fair value
of all investments quarterly.
We maintain separate monitoring processes for public and private fixed
maturities and create watch lists to highlight securities which require special
scrutiny and management. Our public fixed maturity asset managers formally
review all public fixed maturity holdings on a monthly basis and more frequently
when necessary to identify potential credit deterioration whether due to ratings
downgrades, unexpected price variances, and/or industry specific concerns. We
classify public fixed maturity securities of issuers that have defaulted as
securities not in good standing and all other public watch list assets as
closely monitored.
Our private fixed maturity asset managers conduct specific servicing tests on
each investment on an ongoing basis to determine whether the investment is in
compliance or should be placed on the watch list or assigned an early warning
classification. We assign early warning classifications to those issuers that
have failed a servicing test or experienced a minor covenant default, and we
continue to monitor them for improvement or deterioration. In certain
situations, the Company benefits from negotiated rate increases or fees
resulting from a covenant breach. We assign closely monitored status to those
investments that have been recently restructured or for which restructuring is a
possibility due to substantial credit deterioration or material covenant
defaults. We classify as not in good standing securities of issuers that are in
more severe conditions, for example, bankruptcy or payment default.
We classify our fixed maturity securities as available for sale. As a result, we
record unrealized gains and losses to the extent that amortized cost is
different from estimated fair value. All available for sale securities with
unrealized losses are subject to our review to identify other-than-temporary
impairments in value. In evaluating whether a decline in value is
other-than-temporary, we consider several factors including, but not limited to,
the following:
1. whether the decline is substantial;
2. the duration (generally greater than six months);
3. the reasons for the decline in value (credit event or interest rate related);
4. our ability and intent to hold our investment for a period of time to allow
for a recovery of value; and
5. the financial condition of and near-term prospects of the issuer.
When we determine that there is an other-than-temporary impairment, we record a
writedown to estimated fair value which reduces the cost basis. The new cost
basis of an impaired security is not adjusted for subsequent increases in
estimated fair value. Estimated fair values for fixed maturities, other than
private placement securities are based on quoted market prices or prices
obtained from independent pricing services. Estimated fair values for private
placement fixed maturities are determined primarily by 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 type of issue, its
current credit quality and its remaining average life. The estimated fair value
of certain non-performing private placement fixed maturities is based on amounts
estimated by management.
Impairments of fixed maturity securities totaled $12.1 million for the first
three months of 2003 and $0.3 million for the first three months of 2002.
16
3. Liquidity and Capital Resources
Sources and Uses of Liquidity
Our principal cash flow sources are premiums and fund deposits, investment and
fee income and investment maturities and sales. These cash inflows may be
supplemented by financing activities either directly through asset-based
financing or through borrowing from an affiliated company, Prudential Funding,
LLC. We actively use our balance sheet capacity for financing activities on a
secured basis through securities lending and repurchase transactions to earn
additional spread income.
Cash outflow requirements principally relate to benefits, claims, and payments
to contract holders as well as amounts paid to policyholders and contract
holders in connection with surrenders, withdrawals, and net policy loan
activity. Uses of cash also include commissions, general and administrative
expenses, and purchase of investments. We regularly monitor our liquidity
requirements associated with our policyholder and contract holder obligations so
that we manage cash inflows to match anticipated cash outflow requirements. We
utilize a cash flow projection system and regularly perform asset/liability
duration matching in the management of our asset and liability portfolios.
We believe that cash flows from operating and investing activities of our
insurance, annuity and guaranteed products operations are adequate to satisfy
liquidity requirements of these operations based on our current liability
structure and considering a variety of reasonably foreseeable stress scenarios.
The continued adequacy of this liquidity will depend upon factors including
future securities market conditions, changes in interest rate levels and
policyholder perceptions of our financial strength, which could lead to reduced
cash inflows or increased cash outflows. As of March 31, 2003 and December 31,
2002 we had cash and short-term investments of approximately $768.9 million and
$650.5 million, respectively, and fixed maturity investments classified as
"available for sale" with fair values of $5.408 billion and $5.158 billion at
those dates, respectively.
Financing Activities
Our financing principally consists of an affiliated revolving line of credit
with Prudential Funding, LLC, a wholly owned subsidiary of Prudential Insurance,
and asset-based or secured forms of financing. Our total capacity to borrow is
$800 million, which includes both the asset-based financing and borrowings from
Prudential Funding, LLC. There was no outstanding debt relating to the
Prudential Funding LLC credit facility as of March 31, 2003 or December 31,
2002. The secured financing arrangements include transactions such as securities
lending and repurchase agreements, which we generally use to finance portfolios
of liquid securities and earn additional spread income.
March 31, December 31,
2003 2002
------ ------
Borrowings: (in millions)
General obligations $ - $ -
Total asset-based financing 652 626
----- -----
Total borrowings and asset-based
financings $ 652 $ 626
===== =====
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Risk Management, Market Risk and Derivative Instruments
Market risk is the risk of change in the value of financial instruments as a
result of absolute or relative changes in interest rates, foreign currency
exchange rates or equity or commodity prices. To varying degrees, the investment
activities supporting all of our products and services generate market risks.
There have been no material changes in our market risk exposures from December
31, 2002, a description of which may be found in our December 31, 2002, Annual
Report on Form 10-K, Item 7A, "Quantitative and Qualitative Disclosures About
Market Risk," filed with the SEC.
Item 4. Controls and Procedures
Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. No significant changes were made in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
18
PART II
Item 2. Changes in Securities and Use of Proceeds.
(d) Information required by Item 701(f) of Regulation S-K:
(1) The Company offers a market value adjustment option as a
companion product to several of its variable annuities.
Specifically, the Company offers such an option along with the
following: (a) the Discovery Preferred variable annuity, in a
Form S-3 registration statement that was first declared
effective on November 22, 1995 (file no. 33-61125) (b) the
Discovery Select variable annuity, in a Form S-3 registration
statement that was first declared effective on September 12,
1996 (file no. 33-61143) (c) the Strategic Partners Select
variable annuity, in a Form S-3 registration statement that
was first declared effective on April 23, 2001 (file no.
33-61143) (d) the Strategic Partners Annuity One 3 variable
annuity, in a Form S-3 registration statement that was first
declared effective on April 25, 2003 (333-103474), and (e) the
Strategic Partners FlexElite variable annuity, in a Form S-3
registration statement that was first declared effective on
April 25, 2003 (file no. 333-103474).
The Company also offers a market value adjustment
annuity as a stand-alone product. The Strategic Partners
Horizon market value adjustment annuity was first registered
with the SEC on a Form S-1 (file no 333-89530), which the SEC
declared effective on October 4, 2002. In 2003, the Company
received an "investment grade" rating of this product from a
nationally recognized statistical rating organization, which
allowed it to refile the registration statement on Form S-3
(file no. 333-104036). The SEC declared the Form S-3
registration statement effective on May 1, 2003. (In the past,
the Company offered a stand-alone market value adjusted
annuity called Future Value Annuity, file no. 33-37587).
(2) Offering commenced immediately upon effectiveness of the
registration statement.
(3) Not applicable.
(4) (i) The offering has not been terminated.
(ii) The managing underwriter of the offering is Prudential
Investment Management Services LLC.
(iii) Market-Value Adjustment Annuity Contracts (also known
as modified guaranteed annuity contracts).
(iv) Securities registered and sold for the account of the
Company:
Amount registered*: $500,000,000
Aggregate price of the offering amount registered: $500,000,000
Amount sold*: $399,603,247
Aggregate offering price of amount sold to date: $399,603,247
* Securities not issued in predetermined units
No securities have been registered for the account of any selling security
holder.
(v) Expenses associated with the issuance of the
securities:
Underwriting discounts and commissions** $ 12,101,019
Other expenses** $ 24,768,327
------------
Total $ 36,869,346
** Amounts are estimated and are paid to affiliated parties.
(vi) Net offering proceeds: $362,733,901
(vii) Not applicable.
(viii) Not applicable.
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(i)(a) The Articles of Incorporation of Pruco Life Insurance Company
(as amended through October 19, 1993) are incorporated by
reference to the initial Registration Statement on Form S-6 of
Pruco Life Variable Appreciable Account as filed July 2, 1996,
Registration No. 333-07451.
3(ii) By-Laws of Pruco Life Insurance Company (as amended through
May 6, 1997) are incorporated by reference to Form 10-Q as
filed by the Company on August 15, 1997.
4(a) Modified Guaranteed Annuity Contract is incorporated by
reference to the Company's Registration Statement on Form S-1
as filed November 2, 1990, Registration No. 33-37587.
4(b) Market-Value Adjustment Annuity Contract (Discovery Preferred
Select variable annuity) is incorporated by reference to Form
N-4, Registration No. 33-61125, filed July 19, 1995, on behalf
of the Pruco Life Flexible Premium Variable Annuity Account.
4(c) Market-Value Adjustment Annuity Contract (Discovery Select
variable annuity) is incorporated by reference to Form N-4,
Registration No. 333-06701, filed June 24, 1996, on behalf of
the Pruco Life Flexible Premium Variable Annuity Account.
4(d) Market-Value Adjustment Contract (Strategic Partners Select
variable annuity) is incorporated by reference to Form N-4,
Registration No. 333-52754, filed December 26, 2000, on behalf
of the Pruco Life Flexible Premium Variable Annuity Account.
4(e) Market-Value Adjustment Annuity Contract (Strategic Partners
Horizon annuity) is incorporated by reference to the Company's
registration statement on Form S-1, Registration No.
333-89530, filed September 27, 2002.
4(f) Market-Value Adjustment Annuity Contract Endorsement
(Strategic Partners Annuity One 3 variable annuity) is
incorporated by reference to the Company's registration
statement on Form S-3, Registration No. 333-103474, filed
February 27, 2003.
4(g) Market-Value Adjustment Annuity Contract (Strategic Partners
FlexElite variable annuity) is incorporated by reference to
Post-Effective Amendment No. 1 to Form N-4, Registration No.
333-75702, filed February 14, 2003, on behalf of the Pruco
Life Flexible Premium Variable Annuity Account.
(b) Reports on Form 8K
Form 8-K, Commission file number 33-37587, filed on March 24,
2003.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
PRUCO LIFE INSURANCE COMPANY
(Registrant)
By: Andrew J. Mako
--------------
Andrew J. Mako
President
Signature Title Date
- --------- ----- ----
Andrew J. Mako President May 14, 2003
- -------------- (Authorized Signatory)
Andrew J. Mako
William J. Eckert, IV Vice President and May 14, 2003
- --------------------- Chief Accounting Officer
William J. Eckert, IV (Principal Accounting Officer)
21
CERTIFICATIONS
I, Andrew J. Mako certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pruco Life Insurance
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
Andrew J. Mako
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Andrew J. Mako
Chief Executive Officer
22
I, William J. Eckert, IV, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pruco Life Insurance
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003.
William J. Eckert
---------------------
William J. Eckert, IV
Chief Financial Officer
23