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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, 2004
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) 802-6000
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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 13, 2004. Common stock, par value of
$10 per share: 250,000 shares outstanding
PRUCO LIFE INSURANCE COMPANY MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION (H) (1) (A) AND (B) ON FORM 10-Q AND IS THEREFORE FILING
THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
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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, 2004 and December 31, 2003 3
Consolidated Statements of Operations and Comprehensive Income
Three months ended March 31, 2004 and 2003 4
Consolidated Statements of Stockholder's Equity
Periods ended March 31, 2004 and December 31, 2003 and 2002 5
Consolidated Statements of Cash Flows
Three months ended March 31, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 4. Controls and Procedures 11
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 14
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 SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
AS OF MARCH 31, 2004 AND DECEMBER 31, 2003 (IN THOUSANDS)
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
2004 2003
----------- -----------
ASSETS
Fixed maturities available for sale,
at fair value (amortized cost, 2004: $6,108,585; 2003: $5,682,043) $ 6,466,870 $ 5,953,815
Policy loans 851,016 848,593
Short-term investments 174,784 160,635
Other long-term investments 63,557 89,478
----------- -----------
Total investments 7,556,227 7,052,521
Cash and cash equivalents 230,377 253,564
Deferred policy acquisition costs 1,376,853 1,380,710
Accrued investment income 108,553 96,790
Reinsurance recoverable 558,295 517,410
Receivables from Parent and affiliates 43,846 53,138
Deferred sales inducements and other assets 102,680 88,736
assets 15,894,652 15,772,262
----------- -----------
TOTAL ASSETS $25,871,483 $25,215,131
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Policyholders' account balances $ 6,019,840 $ 5,582,633
Future policy benefits and other policyholder liabilities 1,185,826 1,068,977
Cash collateral for loaned securities 422,162 431,571
Securities sold under agreement to repurchase 63,491 97,102
Income taxes payable 349,493 335,665
Other liabilities 80,874 111,865
Separate account liabilities 15,894,652 15,772,262
----------- -----------
TOTAL LIABILITIES 24,016,338 23,400,075
----------- -----------
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 459,779 459,654
Deferred compensation (1,995) (850)
Retained earnings 1,268,454 1,246,065
Accumulated other comprehensive income 126,407 107,687
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 1,855,145 1,815,056
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $25,871,483 $25,215,131
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (IN THOUSANDS)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
2004 2003
---------- ---------
REVENUES
Premiums $ 27,825 $ 41,249
Policy charges and fee income 155,835 136,244
Net investment income 92,484 84,553
Realized investment gains (losses), net 5,969 (9,659)
Asset management fees 3,827 2,904
Other income 8,372 2,209
--------- ---------
TOTAL REVENUES 294,312 257,500
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BENEFITS AND EXPENSES
Policyholders' benefits 68,045 86,461
Interest credited to policyholders' account balances 61,161 51,502
General, administrative and other expenses 125,190 96,381
--------- ---------
TOTAL BENEFITS AND EXPENSES 254,396 234,344
--------- ---------
Income from operations before income taxes 39,916 23,156
Income tax expense 8,377 4,444
--------- ---------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 31,539 18,712
Cumulative effect of change in accounting principle, net of tax (9,150) -
--------- ---------
NET INCOME 22,389 18,712
--------- ---------
Change in net unrealized investment gains, net of taxes 14,690 11,082
Cumulative effect of accounting change, net of taxes 4,030 -
--------- ---------
Other comprehensive income, net of tax 18,720 11,082
--------- ---------
TOTAL COMPREHENSIVE INCOME $ 41,109 $ 29,794
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (UNAUDITED)
PERIODS ENDED MARCH 31, 2004 AND DECEMBER 31, 2003 AND 2002 (IN THOUSANDS)
ACCUMULATED
OTHER TOTAL
COMMON PAID-IN- RETAINED DEFERRED COMPREHENSIVE STOCKHOLDER'S
STOCK CAPITAL EARNINGS COMPENSATION INCOME (LOSS) EQUITY
--------- --------- ---------- ------------ -------------- --------------
BALANCE, JANUARY 1, 2002 $ 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
taxes - - - - 149 149
Change in net unrealized investment
gains, net of taxes - - - - 57,036 57,036
------- -------- ---------- -------- ---------- -----------
BALANCE, DECEMBER 31, 2002 2,500 466,748 1,161,136 - 91,571 1,722,135
Net income - - 84,933 - - 84,933
Adjustments to policy credits
issued to eligible policyholders - - (4) - - (4)
Purchase of fixed maturities from
an affiliate, net of taxes - (7,557) - - 7,557 -
Stock-based compensation programs - 463 - (850) - (387)
Change in net unrealized investment
gains, net of taxes - - - - 8,379 8,379
------- -------- ---------- -------- ---------- -----------
BALANCE, DECEMBER 31, 2003 2,500 459,654 1,246,065 (850) 107,687 1,815,056
Net income - - 22,389 - - 22,389
Stock-based compensation programs - 125 - (1,145) - (1,020)
Cumulative effect of change in
accounting principle, net of taxes - - - - 4,030 4,030
Change in net unrealized investment
gains, net of taxes - - - - 14,690 14,690
------- -------- ---------- -------- ---------- -----------
BALANCE, MARCH 31, 2004 $ 2,500 $459,779 $1,268,454 $ (1,995) $ 126,407 $ 1,855,145
======= ======== ========== ======== ========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (IN THOUSANDS)
- --------------------------------------------------------------------------------
2004 2003
--------- ---------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 22,389 $ 18,712
Adjustments to reconcile net income to net cash from
(used in) operating activities:
Policy charges and fee income (31,906) (24,218)
Interest credited to policyholders' account balances 61,161 51,502
Realized investment (gains) losses, net (5,969) 9,659
Amortization and other non-cash items (74,365) (117)
Cumulative effect of accounting change 9,150 -
Change in:
Future policy benefits and other policyholders'
liabilities 72,111 9,381
Reinsurance recoverable (40,885) 5,617
Accrued investment income (5,483) (8,560)
Receivables from Parent and affiliates 9,292 (5,270)
Policy loans (2,423) 7,919
Deferred policy acquisition costs 26,961 (37,747)
Income taxes payable/receivable 18,974 89,970
Deferred sales inducements and other assets (13,948) (12,409)
Other, net (34,629) (5,842)
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES 10,430 98,597
--------- ---------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities available for sale 480,139 707,245
Payments for the purchase of:
Fixed maturities available for sale (512,180) (946,530)
Cash collateral for loaned securities, net (9,409) 35,624
Securities sold under agreement to repurchase, net (33,611) (9,763)
Other long-term investments, net 5,527 (4,197)
Short-term investments, net (5,879) 81,897
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES (75,413) (135,724)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 590,904 417,928
Withdrawals (549,108) (180,534)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES 41,796 237,394
--------- ---------
Net increase in Cash and cash equivalents (23,187) 200,267
Cash and cash equivalents, beginning of year 253,564 436,182
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 230,377 $ 636,449
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
PRUCO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------------------
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
("GAAP") on a basis consistent with reporting interim financial information in
accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of
the Securities and Exchange Commission. 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.
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. 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, 2003.
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.
Prudential Insurance and its affiliates have received formal requests for
information relating to their variable annuity business from regulators and
governmental authorities. The regulators and authorities include, among others,
the Securities and Exchange Commission, the NASD and the State of New York
Attorney General's Office. Prudential Insurance and its affiliates are
cooperating with all such inquiries and are conducting their own internal
review.
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 is subject to legal and regulatory actions in the ordinary course of
its 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 that are typical of the businesses in which the
Company operates. 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'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 SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------------------
3. ADOPTION OF STATEMENT OF POSITION 03-01
In July 2003, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 03-01, "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts". AcSEC
issued the SOP to address the need for interpretive guidance to be developed in
three areas: separate account presentation and valuation; the accounting
recognition given sales inducements (bonus interest, bonus credits, persistency
bonuses); and the classification and valuation of certain long-duration contract
liabilities.
The Company adopted the SOP effective January 1, 2004. The effect of initially
adopting SOP 03-1 was a net of tax charge of $9.1 million, reported as a
cumulative effect of accounting change in the results of operations for the
three months ended March 31, 2004. This charge reflects primarily the net impact
of converting certain individual market value adjusted annuity contracts from
separate account accounting treatment to general account accounting treatment
and the effect of establishing reserves for guaranteed minimum death benefit
("GMDB") provisions of the Company's annuity contracts. In addition, the Company
recorded an increase in other comprehensive income of $4.0 million after tax
related to recording the cumulative unrealized investment gains, net of shadow
deferred acquisition costs ("DAC"), on fixed maturities reclassified from the
separate account to the general account as of January 1, 2004.
In April 2004, the FASB issued a Proposed FASB Staff Position ("FSP") clarifying
the accounting for unearned revenue liabilities of certain universal-life
contracts under the SOP. The Proposed FSP, if adopted as issued, would not
change the Company's accounting for these unearned revenue liabilities, and,
therefore, would have no impact on the charge recorded at adoption of the SOP.
On the Statement of Cash Flows, the cumulative effect of the SOP is shown on one
line rather than on the individual asset and liability lines that were affected.
The major components of this line are increases in fixed maturities of $403
million and policyholder account balances of $ $387 million related to the
reclassifications of annuity contracts from the separate account to the general
account. In addition the establishment of the GMDB reserves of approximately $45
million and the increase in DAC of $23 million are also shown on this line.
Other balance sheet accounts that were affected include other long-term
investments and deferred taxes payable.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------------------------------------------------------------------------------
PRUCO LIFE INSURANCE COMPANY MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION H(1)(A) AND (B) ON FORM 10-Q AND IS FILING THIS FORM WITH REDUCED
DISCLOSURE.
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, 2004, compared with December 31, 2003, and its
consolidated results of operations for the three month periods ended March 31,
2004 and March 31, 2003. 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, 2003.
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. Beginning February 1, 2001, all
insurance activity of the Taiwan branch has been ceded to the affiliated
Company.
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 interest spread primarily include the GIC
product, general account life insurance products, fixed annuities and the
fixed-rate option of variable annuities.
Besides policy charges and fee income, the Company also earns revenues from
insurance premiums from term life insurance and asset management fees on the
separate account fund balances. The Company's operating expenses principally
consist of insurance benefits provided, general business expenses, commissions
and other costs of selling and servicing the various products we sell and
interest credited on general account liabilities.
The Company's Changes in Financial Position and Results of Operations are
described below.
1. ANALYSIS OF FINANCIAL CONDITION
From December 31, 2003 to March 31, 2004 there was an increase of $656 million
in total assets from $25,215 million to $25,871 million. Fixed maturities
increased by $513 million mainly as a result of the implementation of Statement
of Position 03-01 ("SOP 03-01"). SOP 03-01 requires among other things, that
certain individual market value adjusted annuity ("MVA") contracts be accounted
for under general account accounting treatment. As a result of the adoption,
approximately $400 million of fixed maturities were reclassified from separate
account assets to general account fixed maturities. Also contributing to the
increase in fixed maturities were unrealized gains. Separate account assets
increased by $122 million despite the reclassification of approximately $400
million of assets to the general account due to positive market performance of
approximately $400 million and positive net sales. Deferred acquisition costs
("DAC") decreased by $3.9 million from December 31, 2003. This change was driven
by a decrease due to "shadow DAC" of $71.0 million and amortization of $54.8
million, offset by $98.8 million in capitalization of expenses and a $23.1
9
million DAC impact from the implementation of SOP 03-01. The $71.0 million of
shadow DAC is shown in the amortization and other non-cash items line on the
Statements of Cash Flows.
During this three-month period, liabilities increased by $616 million from
$23,400 million to $24,016 million. Policyholder account balances increased by
$437 million due primarily to the reclassification of MVA contracts as described
above and positive net sales. Future policy benefits increased by $117 million
due to increased Taiwan reserves and the establishment of guaranteed minimum
death benefit reserves ("GMDB") of $45 million. Corresponding with the asset
change, separate account liabilities increased by $122 million, as described
above. Other liabilities decreased $31 million as accrued payables for year-end
bonuses were paid in the first quarter and there is a lower liability for
investments purchased but not yet paid for.
2. RESULTS OF OPERATIONS
NET INCOME
Consolidated net income of $22.4 million for the first quarter of 2004 was $3.7
million higher than for the first quarter of 2003. Net income before the
cumulative change in accounting principle related to the adoption of SOP 03-01
was $12.8 million higher than the prior year quarter. The effect of the
cumulative change in accounting principle was a charge to income of $9.1 million
after tax. This charge is caused primarily by an increase in reserves for
guaranteed minimum death benefits relating to our individual variable annuity
contracts and the impact of converting certain MVA contracts from separate
account accounting treatment to general account accounting treatment. Further
details regarding the components of revenues and expenses are described in the
following paragraphs.
REVENUES
Consolidated revenues increased by $36.8 million, from $257.5 million to $294.3
million. Policy charges and fee income, consisting primarily of mortality and
expense, loading and other insurance charges assessed on general and separate
account policyholder fund balances, increased by $19.6 million. The increase was
a result of a $10.3 million increase for individual life products and a $9.3
million increase for annuity products. Policy charges for life products
increased as a result of growth in the in-force business, the favorable impact
of increases in the market value of variable life insurance assets, and the sale
of newer interest-sensitive products that generally carry higher expense charges
in the first few years of the contract. The life in-force business (excluding
term insurance) grew to $72.7 billion at March 31, 2004 from $66.0 billion at
March 31, 2003 and $71.1 billion at December 31, 2003. 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
separate account fund balances are higher than in the prior year quarter as a
result of favorable market performance and positive net sales.
Realized investment gains increased by $15.6 million mainly due to lower fixed
maturity impairments of $11.5 million. The current year had impairments of $0.6
million compared to $12.1 million last year. Gains on sales of fixed maturities
increased by $2.3 million in the current year while losses on derivatives
decreased by $1.6 million. Derivatives are entered into as economic hedges
although they may not qualify for hedge accounting treatment.
Net investment income increased by $7.9 million as a result of increased income
from fixed maturities due to an increase in the portfolio balance from positive
cash flows and the reclassification of fixed maturities from the separate
account to the general account. This was partially offset by the effect of
slightly lower reinvestment rates for fixed maturities and short-term
investments.
Other income increased by $6.2 million due to an expense recovery allowance
received from the Pruco Re term coinsurance agreement. This agreement was not in
effect in the prior year until the end of September.
Premiums decreased by $13.4 million from the prior year. Gross term insurance
premiums are $22.9 million higher than the prior year, however ceded premiums
are $28.0 million greater as a result of the Pruco Re coinsurance agreement.
Extended term premiums decreased by $6.2 million due to lower policy lapses as a
result of favorable market conditions. Premiums for annuity contracts with life
contingencies decreased by $2.5 million due to decreased annuitizations.
BENEFITS AND EXPENSES
Policyholder benefits decreased by $18.4 million as a result of lower changes to
reserve provisions for life insurance and annuity reserves of $12.0 million and
decreased death and surrender benefits of $6.4 million.
10
The change in reserves for life products decreased $9.8 million from the prior
year primarily as a result of a decrease in term and extended term insurance
premiums, net of reinsurance as discussed in the premium paragraph above. The
change in annuity reserves decreased by $2.2 million primarily due to decreased
annuitizations, as discussed in the premium section. There was relatively no
change during the first quarter in the GMDB reserves that were established as of
January 1, 2004. Increases to GMDB reserves based on gross profits were mostly
offset by decreases due to benefit payments described below.
Annuity death benefits were lower by $7.1 million primarily due to lower
guaranteed minimum death benefits driven by higher fund values as a result of
market appreciation. Policyholder benefits for life insurance products increased
by $0.7 million as higher death benefits of $7.8 million due to an increasing
in-force business offset lower surrenders of reduced paid up policies of $6.8
million.
Interest credited to policyholder account balances increased by $9.7 million due
to growth in policyholder account balances primarily from the reclassification
of the MVA annuity products from separate account to policyholder account
balances. Partially offsetting the increase from the annuity products was a
decrease of $2.5 million in interest credited for guaranteed investment
contracts ("GIC") as the GIC policyholder account balances decreased during 2004
due to scheduled withdrawals.
General, administrative, and other expenses increased $28.8 million from the
prior year. The primary reason for the increase was an increase in DAC
amortization of $20.3 million. DAC amortization for life products increased by
$12.6 million as a result of the growing in-force business and increased
profits. DAC amortization for annuity products was higher by $7.7 million due to
increased gross profits. There was also an increase in commission expense and
general and administrative expenses of $8.5 million due to growth in the
business.
ITEM 4. CONTROLS AND PROCEDURES
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In order to ensure that the information we must disclose in our filings with the
Securities and Exchange Commission is recorded, processed, summarized, and
reported on a timely basis, the Company's management, including our Chief
Executive Officer and Chief Financial Officer, have reviewed and evaluated the
effectiveness of our disclosure controls and procedures, as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e), as of March 31, 2004. Based on such
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of March 31, 2004, our disclosure controls and procedures
were effective in timely alerting them to material information relating to us
required to be included in our periodic SEC filings. There has been no change in
our internal control over financial reporting during the quarter ended March 31,
2004, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
The Company is subject to legal and regulatory actions in the ordinary course of
its 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 that are typical of the businesses in which the
Company operates. 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'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.
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
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 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.
31.1 Section 302 Certification of the Chief Executive Officer
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31.2 Section 302 Certification of the Chief Financial Officer
32.1 Section 906 Certification of the Chief Executive Officer
32.2 Section 906 Certification of the Chief Financial Officer
(b) REPORTS ON FORM 8-K
-------------------
NONE
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
PRUCO LIFE INSURANCE COMPANY
(Registrant)
By: /s/ William J. Eckert, IV
---------------------------------------------------
William J. Eckert, IV
Vice President and Chief Financial Officer
(Authorized Signatory and Principal Financial Officer)
Date: May 13, 2004
14