-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LEEkSQ5M0sqEmTzXY4Hs7p2YbhfNNLoewgBg5JFFN2KQh1JZDswAaBKOlZvFaHsQ mgGVWoQToNMUg6sNRZKDmw== 0000950116-03-004518.txt : 20031114 0000950116-03-004518.hdr.sgml : 20031114 20031114114542 ACCESSION NUMBER: 0000950116-03-004518 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRUCO LIFE INSURANCE CO CENTRAL INDEX KEY: 0000777917 IRS NUMBER: 221944557 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-37587 FILM NUMBER: 031001560 BUSINESS ADDRESS: STREET 1: 213 WASHINGTON ST STREET 2: 111 DURHAM AVENUE CITY: NEWARK STATE: NJ ZIP: 07102 BUSINESS PHONE: 2018026000 MAIL ADDRESS: STREET 1: 213 WASHINGTON STREET CITY: NEWARK STATE: NJ ZIP: 07102 10-Q 1 tenq.txt 10-Q ================================================================================ 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 September 30, 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 ----------------------------------------------------------------- (Address of principal executive offices ) (Zip Code) (973) 802-3274 ----------------------------------------------------------------- (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 X NO --- --- State the aggregate market value of the voting stock held by non-affiliates of the registrant: NONE Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of November 14, 2003. 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. ================================================================================ 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 September 30, 2003 and December 31, 2002 3 Consolidated Statements of Operations and Comprehensive Income Three and Nine months ended September 30, 2003 and 2002 4 Consolidated Statements of Stockholder's Equity Periods ended September 30, 2003 and December 31, 2002 and 2001 5 Consolidated Statements of Cash Flows Nine months ended September 30, 2003 and 2002 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 4. Controls and Procedures 21 PART II - Other Information --------------------------- Item 1. Legal Proceedings 22 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 24 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 September 30, 2003 and December 31, 2002 (in thousands) - --------------------------------------------------------------------------------
September 30, December 31, 2003 2002 ------------- ------------ ASSETS Fixed maturities available for sale, at fair value (amortized cost, 2003: $5,608,017; 2002: $4,921,691) $ 5,909,870 $ 5,158,106 Policy loans 851,822 879,506 Short-term investments 181,014 214,342 Other long-term investments 96,571 91,021 ----------- ----------- Total investments 7,039,277 6,342,975 Cash and cash equivalents 241,549 436,182 Deferred policy acquisition costs 1,279,866 1,152,997 Accrued investment income 99,569 86,125 Reinsurance recoverable 470,793 393,171 Receivables from Parent and affiliates 50,263 61,099 Other assets 87,735 41,581 Separate account assets 14,378,264 12,696,758 ----------- ----------- TOTAL ASSETS $23,647,316 $21,210,888 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities Policyholders' account balances $5,417,933 $4,855,761 Future policy benefits and other policyholder liabilities 1,028,028 934,546 Cash collateral for loaned securities 311,992 225,518 Securities sold under agreement to repurchase 214,848 400,507 Income taxes payable 340,366 245,252 Other liabilities 149,798 130,411 Separate account liabilities 14,378,264 12,696,758 ----------- ----------- Total liabilities 21,841,229 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 467,080 466,748 Deferred compensation (907) - Retained earnings 1,220,820 1,161,136 Accumulated other comprehensive income 116,594 91,751 ----------- ----------- Total stockholder's equity 1,806,087 1,722,135 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $23,647,316 $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 and Nine Months Ended September 30, 2003 and 2002 (in thousands) - --------------------------------------------------------------------------------
Three months ended Nine months ended September 30, September 30, 2003 2002 2003 2002 ------------ ------------- ------------- ------------- REVENUES Premiums $ 38,410 $ 35,313 $121,108 $ 76,579 Policy charges and fee income 144,088 128,310 420,100 387,058 Net investment income 86,302 85,488 255,050 249,284 Realized investment gains (losses), net 1,093 (22,788) (3,159) (55,094) Asset management fees 3,425 2,981 9,677 8,113 Other income 1,883 2,095 5,775 9,728 -------- -------- -------- -------- Total revenues 275,201 231,399 808,551 675,668 -------- -------- -------- -------- BENEFITS AND EXPENSES Policyholders' benefits 75,019 60,268 245,943 177,197 Interest credited to policyholders' account balances 58,555 53,783 166,644 150,455 General, administrative and other expenses 112,629 181,072 315,532 412,649 -------- -------- -------- -------- Total benefits and expenses 246,203 295,123 728,119 740,301 -------- -------- -------- -------- Income (loss) from operations before income taxes 28,998 (63,724) 80,432 (64,633) -------- -------- -------- -------- Income tax expense (benefit) 9,827 (35,170) 20,744 (38,286) -------- -------- -------- -------- NET INCOME (LOSS) 19,171 (28,554) 59,688 (26,347) -------- -------- -------- -------- Other comprehensive (loss) income, net of tax (14,788) 32,323 24,843 44,329 -------- -------- -------- -------- TOTAL COMPREHENSIVE (LOSS) INCOME $ 4,383 $ 3,769 $ 84,531 $ 17,982 ======== ======== ======== ========
See Notes to Consolidated Financial Statements 4 Pruco Life Insurance Company and Subsidiary Statements of Stockholder's Equity (Unaudited) Periods Ended September 30, 2003 and December 31, 2002 and 2001 (in thousands) - --------------------------------------------------------------------------------
Accumulated other Total Common Paid-in- Retained Deferred comprehensive stockholder's stock capital earnings Compensation income 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 taxes - - - - 149 149 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 - - 59,688 - - 59,688 Adjustments to policy credits issued to eligible policyholders - - (4) - - (4) Stock-based compensation programs - 332 - (907) - (575) Change in net unrealized investment gains, net of reclassification adjustment and taxes - - - - 24,843 24,843 ------ -------- ----------- ------- --------- ----------- Balance, September 30, 2003 $2,500 $467,080 $ 1,220,820 $ (907) $ 116,594 $ 1,806,087 ====== ======== =========== ======= ========= ===========
See Notes to Consolidated Financial Statements 5 Pruco Life Insurance Company and Subsidiary Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2003 and 2002 (in thousands) - --------------------------------------------------------------------------------
2003 2002 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 59,688 $ (26,347) Adjustments to reconcile net income to net cash from (used in) operating activities: Policy charges and fee income (78,453) (53,458) Interest credited to policyholders' account balances 166,644 150,455 Realized investment losses, net 3,159 55,094 Amortization and other non-cash items 819 (73,506) Change in: Future policy benefits and other policyholders' liabilities 93,482 56,223 Accrued investment income (13,444) (8,325) Receivables from Parent and affiliates 10,836 (31,413) Policy loans 27,684 (6,246) Deferred policy acquisition costs (126,869) 32,286 Income taxes payable/receivable 95,114 (13,569) Other, net (104,964) (67,973) ----------- ----------- Cash Flows From Operating Activities 133,696 13,221 ----------- ----------- CASH FLOWS USED IN INVESTING ACTIVITIES: Proceeds from the sale/maturity of: Fixed maturities available for sale 1,865,707 1,253,266 Payments for the purchase of: Fixed maturities available for sale (2,579,066) (1,815,193) Cash collateral for loaned securities, net 86,474 77,007 Securities sold under agreement to repurchase, net (185,659) 246,220 Other long-term investments, net (7,713) (9,899) Short-term investments, net 33,423 132,193 ----------- ----------- Cash Flows Used in Investing Activities (786,834) (116,406) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Policyholders' account balances: Deposits 1,573,209 1,382,000 Withdrawals (1,114,700) (790,967) Cash payments to eligible policyholders (4) (115,989) ----------- ----------- Cash Flows From Financing Activities 458,505 475,044 ----------- ----------- Net (decrease) increase in Cash and cash equivalents (194,633) 371,859 Cash and cash equivalents, beginning of year 436,182 374,185 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 241,549 $ 746,044 =========== ===========
See Notes to Consolidated Financial Statements 6 Pruco Life Insurance Company and Subsidiary 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 of America ("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. 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. NEW ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS 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 has developed the SOP to address the evolution of product designs since the issuance of SFAS No. 60, "Accounting and Reporting by Insurance Enterprises," and SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments" and 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 most significant accounting implications of the SOP are as follows: (1) reporting and measuring assets and liabilities of separate account products as general account assets and liabilities when specified criteria are not met; (2) reporting and measuring seed money in separate accounts as general account assets based on the insurer's proportionate beneficial interest in the separate account's underlying assets; (3) capitalizing sales inducements that meet specified criteria and amortizing such amounts over the life of the contracts using the same methodology as used for amortizing deferred acquisition costs, but immediately expensing those sales inducements accrued or credited if such criteria are not met; (4) recognizing contractholder liabilities for: (a) modified guaranteed (market value adjusted) annuities at accreted balances that do not include the then current market value surrender adjustment, (b) two-tier annuities at the lower (non-annuitization) tier account value, (c) persistency bonuses at amounts that are not reduced for expected forfeitures, (d) group pension participating and similar general account "pass through" contracts that are not accounted for under SFAS No. 133 at amounts based on the fair value of the assets or index that determines the investment return pass through; (5) establishing an additional liability for guaranteed minimum death and similar mortality and morbidity benefits only for contracts determined to have mortality and morbidity risk that is other than nominal and when the risk charges made for a period are not proportionate to the risk borne during that period; and (6) for contracts containing an annuitization benefits contract feature, if such contract feature is not accounted for under the provisions of SFAS No. 133 establishing an additional liability for the contract feature if the present value of expected annuitization payments at the expected annuitization date exceeds the expected account balance at the expected annuitization date. The provisions of the SOP are effective for fiscal years beginning after December 15, 2003, and, as such, the Company will adopt the SOP effective January 1, 2004. The effect of initially adopting this SOP will be reported as a cumulative effect of a change in accounting principle. The Company is currently completing an assessment of the impact of the SOP on its operations; however, we do not believe that the implementation of the SOP will have a material effect on the Company's consolidated financial position. 7 3. 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 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. 8 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements (Unaudited) - ------------------------------------------------------ 4. 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. Beginning in 2003, general and administrative expenses include allocations of stock compensation expenses related to a stock option program and a deferred compensation program issued by Prudential Financial. 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 $973.1 million and $835.6 million at September 30, 2003 and December 31, 2002, respectively. Fees related to the COLI policies were $9.1 million and $4.4 million for the periods ended September 30, 2003 and 2002, respectively. 9 Pruco Life Insurance Company and Subsidiary Notes to Consolidated Financial Statements (Unaudited) - ------------------------------------------------------ Reinsurance with Affiliates Pruco Reinsurance Ltd. reinsurance agreement During September 2003, the Company implemented an agreement to reinsure its term life insurance policies known as Term Elite and Term Essential with an affiliated company, Pruco Reinsurance Ltd. ("Pruco Re"). The Company will reinsure with Pruco Re ("THE REINSURER") a significant portion of the risks under such policies through an automatic and facultative coinsurance agreement ("Agreement"). This Agreement covers all significant risks under the policies reinsured. The Company is not relieved of its primary obligation to the policyholder as a result of these reinsurance transactions. This coinsurance agreement replaces the yearly renewable term agreements with external reinsurers that were previously in effect on this block of business. The initial cost of this transaction of $7.5 million will be amortized over the life of the underlying insurance policies. Reinsurance recoverables related to this transaction are $18.4 million. Other affiliated reinsurance agreements In addition, the Company currently has three other 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. Taiwan branch reinsurance agreement 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 ended September 30, 2003 and 2002 from the Taiwan coinsurance agreement were $56.7 million and $56.4 million, respectively. Benefits ceded for the periods ended September 30, 2003 and 2002 from the Taiwan coinsurance agreement were $10.2 million and $10.6 million, respectively. Included in the total reinsurance recoverable balances for both domestic and Taiwan agreements were affiliated reinsurance recoverables of $413.2 million and $362.0 million at September 30, 2003 and December 31, 2002, respectively. Of these affiliated amounts, the reinsurance recoverable related to the Taiwan coinsurance agreement was $360.9 million and $311.3 million at September 30, 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 September 30, 2003 and December 31, 2002, there was $527 million and $626 million, respectively, of asset-based financing. There was no debt outstanding to Prudential Funding, LLC as of September 30, 2003 or December 31, 2002. 10 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 September 30, 2003, compared with December 31, 2002, and its consolidated results of operations for the three and nine month periods ended September 30, 2003 and September 30, 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, all of the premiums and benefits of the Taiwan branch are ceded to an 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 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 September 30, 2003 there was an increase of $2,436 million in total assets from $21,211 million to $23,647 million. The largest increase was in Separate account assets, which increased by $1,682 million primarily from market value appreciation as a result of recoveries in the equity markets and from positive net sales (sales less withdrawals). Fixed maturities increased by $752 million mainly as a result of investing general account policyholder deposits and positive cash flows from insurance operations into fixed maturities. Also contributing to the increase in the fixed maturity balance was unrealized appreciation and a reallocation of cash and shorter-term investments into fixed maturities. Deferred acquisition costs ("DAC") increased by $127 million, as capitalization of distribution expenses from new sales exceeded the amortization of DAC. Reinsurance recoverable is higher by $78 million due to increases in the Taiwan branch reinsurance recoverable and the Pruco Re reinsurance recoverable for term insurance. Cash and cash equivalents are lower by $195 million resulting from lower security lending activities and a higher allocation of cash into long-term fixed maturities as compared to shorter-term investments. During this nine-month period, liabilities increased by $2,352 million from $19,489 million to $21,841 million. Corresponding with the asset change, Separate account liabilities increased by $1,682 million, as described above. Policyholder account balances increased by $562 million due primarily to positive net sales of annuity products with fixed rate options and life general account products. Income taxes payable, which is a net number comprised of payables and receivables, increased by $95 million as a result of income tax expense and a tax refund received from Prudential Financial. In accordance with the tax sharing agreement with Prudential Financial, the Company was reimbursed for operating losses utilized in the consolidated federal tax return. Future policy benefits increased by $93 million due to increased reserves for the transferred Taiwan business and increases to life reserves as a result of sales and renewals of term insurance. A lower level of securities lending activity decreased liabilities by $99 million. 11 2. Results of Operations September 2003 to September 2002 Three Month Comparison Net Income Consolidated net income of $19.2 million for the third quarter of 2003 was an improvement of $47.7 million from the loss of $28.5 million incurred in the third quarter of 2002. The third quarter of 2002 included higher DAC amortization of approximately $80.8 million primarily from an additional charge for DAC amortization for our annuity products that did not recur in the current quarter. In addition, there were higher realized investment losses of $23.9 million in the third quarter of 2002. The continued growth of the in-force business resulted in increases in policy charges and fees, offset by increases in policyholder benefits, expenses and taxes during the current quarter. Further details regarding the components of revenues and expenses are described in the following paragraphs. Revenues Consolidated revenues increased by $43.8 million, from $231.4 million to $275.2 million. Realized investment gains increased by $23.9 million mainly due to lower fixed maturity losses of $20.1 million, lower derivative losses of $2.5 million, and a mortgage prepayment gain in 2003 of $1.7 million. The third quarter of 2002 had fixed maturity impairments and credit related losses of $20.6 million versus losses of $.5 million in 2003. Policy charges also increased by $15.8 million, as is described in the following paragraph. 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 $15.8 million. The increase was a result of a $13.8 million increase for individual life products and a $2.0 million increase for annuity products. Mortality and sales based loading charges for life products increased as a result of growth of the in-force business 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 $69.1 billion at September 30, 2003 from $62.5 billion at September 30, 2002 and $65.2 billion at December 31, 2002. Annuity fees are mainly asset-based fees, which are dependent on the fund balances. Fund balances 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 have increased as a result of a positive market recovery in the current year. Premiums increased by $3.1 million primarily as a result of growth in premiums of $14 million on term products. Partially offsetting this is a decrease in premiums from customers who previously had lapsing variable life insurance policies with us ("extended term insurance"). Extended term life insurance premiums decreased $10.6 million as a result of the favorable market performance in the previous quarter resulting in fewer lapses. Benefits and Expenses Policyholder benefits were higher than the prior year quarter by $14.8 million resulting from increases to change in reserves of $11.5 million and increases to death benefits of $3.3 million. Higher reserves for term insurance sales were mostly offset by lower reserves for extended term insurance. There was also an increase in the unearned revenue reserve of $11.6 million as a result of higher deferrals of upfront life insurance charges. More fees are being deferred in the current quarter, which is recorded as an increase to reserves, than the prior year quarter due to continued sales of newer interest-sensitive life insurance products. These products defer substantial charges during the first five years of the policy. Death claims and surrenders of life insurance products increased by $7.2 million due to growth of the in force business. Death benefits for annuity products decreased by $3.9 million primarily from lower guaranteed minimum death benefits, as described below. Guaranteed annuity minimum death benefit payments for annuities decreased from $10.7 million in the third quarter of 2002 to $6.1 million in the third quarter of 2003 as the equity markets improved. As of September 30, 2003, the annuity death benefit coverage in force (representing the amount that we would have to pay if all annuitants had died on that date) was approximately $2.3 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 12 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. AICPA Statement of Position 03-01, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts" (the "SOP"), will require the recording of a liability for the expected net costs associated with these guarantees under certain circumstances. The provisions of the SOP are effective for financial statements for fiscal years beginning after December 15, 2003, and, as such, we will adopt the SOP effective January 1, 2004. The effect of initially adopting this SOP will be reported as a cumulative effect of a change in accounting principle with restatement of prior financial statements prohibited. We are currently evaluating the impact of the SOP. Interest credited to policyholder account balances increased by $4.8 million due to growth in policyholder account balances, especially for the annuity products. General, administrative, and other expenses decreased by $68.4 million from the prior year quarter. The primary reason was a decrease in DAC amortization of $80.8 million as the prior year quarter included a charge for additional DAC amortization for our annuity products to reflect our lower estimate of future gross profits based on asset value declines as of September 30, 2002. Partially offsetting this was an increase in allocated distribution expenses and general and administrative expenses, mainly due to increased new business and a growing in-force. September 2003 to September 2002 Nine Month Comparison Net Income Consolidated net income of $59.7 million for the nine months of 2003 was an improvement of $86.0 million from the $26.3 million loss for the nine months of 2002. The nine months of 2002 included additional DAC amortization of approximately $119.7 million and higher realized investment losses of $51.9 million. The current year continued to show increases to policyholder benefits, interest credited and general and administrative expenses (other than DAC amortization) offset partially by higher policy charges and fee income as a result of growth of the business. Income tax expense also increased by $59.0 million due to the increase in income. Further details regarding the components of revenues and expenses are described in the following paragraphs. Revenues Consolidated revenues increased by $132.9 million, from $675.7 million to $808.6 million. Realized investment losses decreased by $51.9 million mainly due to lower fixed maturity losses of $43.4 million, lower derivative losses of $7.2 million, and a mortgage prepayment gain in 2003 of $1.7 million. The prior year had fixed maturity losses of $44.3 million consisting of $20.5 million of impairments and $23.8 million of credit related losses. The current year has fixed maturity losses of $.9 million consisting of $12.4 million of impairments and $11.5 million of gains on sales. Premiums increased by $44.5 million mainly from higher term insurance sales and renewals of approximately $41 million. Extended term insurance premiums also increased by $3 million. Policy charges and fee income increased by $33.0 million. The increase was a result of a $42.6 million increase for individual life products offset partially by a $9.6 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 and the sale of newer interest-sensitive products that generally carry higher expense charges in the first few years of the contract. In contrast, annuity fees are mainly asset-based fees, which are dependent on the fund balances. Although Annuity separate account fund balances have increased during the current year as a result of favorable market performance, the average balance for the current year is lower than the prior year average balance resulting in a decrease in policy charges and fee income for annuity products. Net investment income increased by $5.8 million as a result of increased income from fixed maturities due to an increase in the portfolio balance, partially offset by the effect of lower reinvestment rates on fixed maturities and short-term investments. Other income decreased by $4.0 million as the prior year contained an expense allowance from a reinsurance agreement which did not recur in the current year. Benefits and Expenses Policyholder benefits increased by $68.7 million primarily from increased reserve provisions of $39.4 million mainly for life insurance reserves and higher death claims for life and annuity products of $29.3 million. 13 The change in reserves increased $39.4 million from the prior year primarily as a result of an increase of $23.5 million in the change in the unearned revenue reserve compared to the prior year. The increase is primarily due to higher deferrals of upfront policy charges partially offset by increased amortization. Deferrals are higher than last year due to continued sales of newer variable life insurance products, which defer substantial charges during the first five years of the policy. The growth in term insurance sales also contributed to the increase in reserves. Benefits increased by $29.3 million primarily from a higher volume of death claims on interest-sensitive products and increased surrenders of life policies due to the growth of the in force business. Guaranteed minimum death benefit payments for annuity products increased slightly by $1.7 million from $24.3 million in 2002 to $26.0 million for 2003. Interest credited to policyholder account balances increased by $16.2 million due to growth in policyholders' account balances, especially for the annuity products. General, administrative, and other expenses decreased by $97.1 million from the prior year. The primary reason was a decrease in DAC amortization of $119.7 million as the prior year included an additional charge for DAC amortization due to lower estimated future profits as a result of the equity markets as of September 30, 2002. Partially offsetting this was an increase in allocated distribution and general and administrative expenses, mainly due to increased new business and a growing in-force. 14 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 $7,039.3 million at September 30, 2003, versus $6,343.0 million at December 31, 2002. A diversified portfolio of publicly traded bonds, private placements, and other long-term investments is managed under strategies intended to maintain a competitive asset mix consistent with current and anticipated cash flow requirements of the related obligations. The risk tolerance reflects the Company's aggregate capital position, exposure to business risk, liquidity and rating agency considerations.
As of September 30, As of December 31, --------------------------------------------------------- (1) 2003 % of Total 2002 % of Total ---------------------------- --------------------------- ($ in thousands) Fixed maturities: Public, available for sale, at fair value $4,809,207 68.3% $3,977,441 62.7% Private, available for sale, at fair value 1,100,663 15.6% 1,180,665 18.6% Policy loans, at outstanding balance 851,822 12.1% 879,506 13.9% Short-term investments 181,014 2.6% 214,342 3.4% Other long-term investments (1) 96,571 1.4% 91,021 1.4% ------------ --------- ---------- ------ Total investments $7,039,277 100.0% $6,342,975 100.0% ============ ========= ========== ======
- ----------------- (1) Other long-term investments consist of investments in joint ventures and partnerships, our interest in separate account investments, mortgage 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 quality of the portfolio, and recent activities to manage the portfolio are discussed below. As of September 30, 2003, our investment portfolio consisted primarily of $5,909.9 million of fixed maturity securities (84% of the total portfolio at September 30, 2003 versus 81% at December 31, 2002). The remaining investment portfolio, comprised of policy loans, short-term investments and other long-term investments, represents 16% of the total portfolio at September 30, 2003 versus 19% at December 31, 2002. Investment Results The following table sets forth the income yield and investment income, excluding realized investment losses and gains, net for each major asset category of the Company for the periods indicated.
For the three months ended September 30, -------------------------------------------------------------- 2003 2002 -------------------------------------------------------------- (1) Yield Amount Yield Amount -------------------------------------------------------------- ($ in thousands) Fixed maturities 5.54% $74,223 6.70% $70,055 Policy loans 5.61 11,957 5.60 12,723 Short-term investments 2.44 1,509 2.94 3,695 Other long-term investments 6.30 1,534 9.06 2,561 ---------- ----------- -------- ----------- Investment income before investment 5.49 89,223 6.40 89,034 expenses Investment expenses (0.10) (2,921) (0.11) (3,546) ---------- ----------- -------- ----------- Total after investment expenses 5.39% $86,302 6.29% $85,488 ========== =========== ======== ===========
- ----------------- (1) Yields are based on quarterly average carrying values except for fixed maturities and securities lending activity. Yields for fixed maturities are based on amortized cost. Yields for securities lending activity are calculated net of corresponding liabilities and rebate expenses. Yields for prior year are presented on a basis consistent with our current reporting practices. 15 The overall income yield on our invested assets after investment expenses, excluding realized investment losses, net was 5.39% and 6.29% for the third quarter of 2003 and 2002, respectively. The change in yield between periods is primarily attributable to reinvestment activities and investment of new funds in a declining interest rate environment.
For the nine months ended September 30, -------------------------------------------------------------- 2003 2002 -------------------------------------------------------------- (2) Yield Amount Yield Amount -------------------------------------------------------------- ($ in thousands) Fixed maturities 5.75% $218,093 6.45% $205,424 Policy loans 5.49 34,949 5.83 36,132 Short-term investments 2.19 6,137 3.22 10,155 Other long-term investments 7.91 5,490 10.80 6,417 ------- ---------- ------ ---------- Investment income before investment expenses 5.65 264,669 6.31 258,128 Investment expenses (0.11) (9,619) (0.10) (8,844) ------- ---------- ------ ---------- Total after investment expenses 5.54% $255,050 6.21% $249,284 ======= ========== ====== ==========
- ----------------- (2) 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. The overall income yield on our invested assets after investment expenses, excluding realized investment losses, net was 5.54% and 6.21% for the first nine months of 2003 and 2002, respectively. The change in yield between periods is primarily due to reinvestment activities and investment of new funds in a declining interest rate environment. 16 Fixed Maturity Securities Investment Mix We manage our public portfolio to a risk profile directed by the Asset Liability and Risk Management Group, consistent with the investment policy statement agreed to by senior management and approved by the Board of Directors. We seek to employ relative value analysis both in credit selection and in purchasing and selling securities. To the extent that we purchase and sell securities as part of credit 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 September 30, 2003 the fixed maturities portfolio totaled $5,909.9 million, an increase of $751.8 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 September 30, 2003, we held approximately 84% of assets in fixed maturity securities (versus 81% as of December 31, 2002) with a total amortized cost of $5,608.0 million and an estimated fair value of $5,909.9 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 September 30, 2003 were $4,568.0 million at amortized cost and $4,809.2 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 September 30, 2003 were $1,040.0 million at amortized cost and $1,100.7 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. 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 September 30, 2003 As of December 31, 2002 ------------------------------------------------ ---------------------------------------------------- (1) Gross Gross Gross Gross Amortized Unrealized Unrealized Amortized Unrealized Unrealized Cost Gains Losses Fair Value Cost Gains Losses Fair Value ------------------------------------------------ ---------------------------------------------------- (in thousands) Industry - -------- U.S. Government $ 256,247 $ 5,589 $ 7 $ 261,829 $ 600,385 $ 11,906 $ 1 $ 612,290 Manufacturing 1,216,330 73,598 2,389 1,287,539 1,029,622 59,334 4,476 1,084,480 Utilities 653,728 44,497 2,452 695,773 509,444 29,199 6,128 532,515 Finance 1,130,618 67,020 303 1,197,335 705,019 52,722 724 757,017 Services 818,821 50,235 860 868,196 538,604 25,344 2,827 561,121 Mortgage Backed 95,280 2,302 5 97,577 120,425 3,242 14 123,653 Foreign Government 44,198 5,816 31 49,983 45,981 4,707 44 50,644 Retail and Wholesale 331,145 20,079 767 350,457 279,750 20,093 477 299,366 Asset-Backed Securities 756,609 18,216 1,064 773,761 642,771 14,667 2,096 655,342 Transportation 186,986 14,231 65 201,152 218,649 12,303 390 230,562 Energy 111,483 8,133 491 119,125 218,269 19,224 35 237,458 Other 6,572 571 - 7,143 12,772 886 - 13,658 ---------- --------- ------- ---------- ---------- -------- ------- ---------- Total $5,608,017 $ 310,287 $ 8,434 $5,909,870 $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. 17 As a percentage of amortized cost, fixed maturity investments as of September 30, 2003 consist primarily of the following sectors: 22% manufacturing, 20% finance, 15% services, 13% asset-backed securities and 12% utilities compared to 21% manufacturing, 14% finance, 13% asset-backed securities, 12% U.S. Government, and 11% services as of December 31, 2002. Approximately 95% of the mortgage-backed securities were publicly traded agency pass-through securities. Collateralized mortgage obligations represented less than 5% of total mortgage-backed securities. The gross unrealized losses related to our fixed maturity portfolio were $8.4 million as of September 30, 2003 compared to $17.2 million as of December 31, 2002. The gross unrealized losses as of September 30, 2003 were concentrated primarily in the utilities, manufacturing, asset-backed securities and services sectors while gross unrealized losses as of December 31, 2002 were concentrated in the utilities, manufacturing, and services sectors. Non-investment grade securities represented 28% of the gross unrealized losses as of September 30, 2003 versus 65% of gross unrealized losses as of December 31, 2002. Fixed Maturity Securities Credit Quality The Securities Valuation Office (SVO) of 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. As a result of time lags between the funding of investments, finalization of legal documents, and completion of the SVO filing process, the fixed maturity portfolio generally includes securities that have not yet been rated by the SVO as of each balance sheet date. Pending receipt of SVO ratings, the categorization of these securities by NAIC designation is based on the expected ratings indicated by internal analysis. The amortized cost of our public and private below-investment grade fixed maturities totaled $503.5 million, or 9%, of the total fixed maturities as of September 30, 2003, compared to $526.8 million, or 11%, of total fixed maturities as of December 31, 2002. Public Fixed Maturities - Credit Quality The following table sets forth our public fixed maturity portfolios by NAIC rating as of the dates indicated.
---------------------------------------------- --------------------------------------------- As of September 30, 2003 As of December 31, 2002 ---------------------------------------------- --------------------------------------------- (1) Gross Gross Gross Gross Amortized Unrealized Unrealized Amortized Unrealized Unrealized Cost Gains Losses Fair Value Cost Gains Losses Fair Value ---------------------------------------------- --------------------------------------------- ($ in thousands) NAIC Rating Agency Designation Equivalent - --------------------------- 1 Aaa, Aa, A $ 2,544,783 $ 127,732 $2,100 $2,670,415 $2,377,674 $116,244 $ 438 $2,493,480 2 Baa 1,731,887 99,619 3,012 1,828,494 1,152,329 71,903 4,152 1,220,080 3 Ba 165,883 10,084 680 175,287 162,210 5,224 2,201 165,233 4 B 111,552 7,579 1,415 117,716 75,167 2,381 2,987 74,561 5 C and lower 8,594 3,060 151 11,503 10,391 412 2,057 8,746 6 In or near default 5,310 575 93 5,792 15,195 481 335 15,341 ----------- --------- ------ ---------- ---------- -------- ------- ---------- Public Fixed Maturities $ 4,568,009 $ 248,649 $7,451 $4,809,207 $3,792,966 $196,645 $12,170 $3,977,441 =========== ========= ====== ========== ========== ======== ======= ==========
(1) Includes, as of September 30, 2003 and December 31, 2002, respectively, 36 securities with amortized cost of $19 million (fair value, $20 million) and 6 securities with amortized cost of $3 million (fair value, $3 million) that have been categorized based on expected NAIC designations pending receipt of SVO ratings. 18 Private Fixed Maturities - Credit Quality The following table sets forth our private fixed maturity portfolios by NAIC rating as of the dates indicated.
----------------------------------------------- ------------------------------------------- As of September 30, 2003 As of December 31, 2002 ----------------------------------------------- ------------------------------------------- (1) Gross Gross Gross Gross Amortized Unrealized Unrealized Amortized Unrealized Unrealized Cost Gains Losses Fair Value Cost Gains Losses Fair Value ----------------------------------------------- ------------------------------------------- ($ in thousands) NAIC Rating Agency Designation Equivalent - --------------------------- 1 Aaa, Aa, A $ 391,796 $15,589 $521 $ 406,864 $ 338,539 $12,348 $1,351 $ 349,536 2 Baa 436,093 27,580 427 463,246 526,384 34,430 45 560,769 3 Ba 136,260 14,379 9 150,630 212,917 9,197 3,089 219,025 4 B 16,561 2,198 12 18,747 9,637 - 196 9,441 5 C and lower 23,163 1,303 - 24,466 39,616 1,007 253 40,370 6 In or near default 36,135 589 14 36,710 1,632 - 108 1,524 ---------- ------- ---- ---------- ---------- ------- ------ ---------- Private Fixed Maturities $1,040,008 $61,638 $983 $1,100,663 $1,128,725 $56,982 $5,042 $1,180,665 ========== ======= ==== ========== ========== ======= ====== ==========
(1) Includes, as of September 30, 2003 and December 31, 2002, respectively, 45 securities with amortized cost of $152 million (fair value, $156 million) and 10 securities with amortized cost of $21 million (fair value, $22 million) that have been categorized based on expected NAIC designations pending receipt of SVO ratings. Unrealized Losses from Fixed Maturity Securities The following table sets forth the amortized cost and gross unrealized losses of fixed maturity securities where the estimated fair value had declined and remained below amortized cost by 20% or more for the following timeframes:
---------------------------------- ---------------------------------- As of September 30, 2003 As of December 31, 2002 ---------------------------------- ---------------------------------- Gross Gross Unrealized Unrealized Amortized Cost Losses Amortized Cost Losses ---------------------------------- ---------------------------------- ($ in thousands) Less than six months $2,479 $726 $9,605 $3,488 Greater than six months but less than nine months - - 982 424 Greater than nine months 9 5 - - --------- ------ --------- ---------- Total $2,488 $731 $10,587 $3,912 ========= ====== ========= ==========
Gross unrealized losses of fixed maturity securities where estimated fair value has been 20% or more below amortized cost were $.7 million as of September 30, 2003, compared to $3.9 million as of December 31, 2002. The gross unrealized losses at September 30, 2003 were primarily concentrated in the manufacturing, retail and wholesale, and utilities sectors while the gross unrealized losses at December 31, 2002 were concentrated in the utilities, manufacturing, and transportation sectors. 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. 19 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 $12.4 million for the first nine months of 2003 and $20.5 million for the first nine months of 2002. 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 distribution expenses, 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 September 30, 2003 and December 31, 2002 we had cash and short-term investments of approximately $422.6 million and $650.5 million, respectively, and fixed maturity investments classified as "available for sale" with fair values of $5.910 billion and $5.158 billion at those dates, respectively. 20 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 September 30, 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.
September 30, December 31, 2003 2002 ------------------------------ (in millions) Borrowings: General obligations $ - $ - Total asset-based financing 527 626 ----- ----- Total borrowings and asset-based financings $ 527 $ 626 ===== =====
Item 4. Controls and Procedures - ------------------------------- 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 September 30, 2003. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2003, our disclosure controls and procedures were effective in timely alerting them to material information relating to us (and our consolidated subsidiaries) 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 September 30, 2003, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 21 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 5. Other Information - ------------------------- Recently, the Company received a formal request for information from the New York Attorney General's Office in connection with its variable annuity business. The Company is cooperating with this inquiry and is conducting its own internal review. 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-3, Registration No. 333-104036, filed March 26, 2003. 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. 22 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 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 23 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: /s/ Andrew J. Mako ----------------------- Andrew J. Mako President
Signature Title Date - --------- ----- ---- /s/ Andrew J. Mako President November 14, 2003 - --------------------- (Authorized Signatory) Andrew J. Mako /s/ William J. Eckert, IV Vice President and November 14, 2003 - -------------------------- Chief Financial Officer William J. Eckert, IV (Principal Accounting Officer)
24 EX-31 3 ex31-1.txt EXHIBIT 31.1 Exhibit 31.1 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ Andrew J. Mako --------------------------- Andrew J. Mako Chief Executive Officer EX-31 4 ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ William J. Eckert --------------------------- William J. Eckert, IV Chief Financial Officer EX-32 5 ex32-1.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION Pursuant to 18 U.S.C. Section 1350, I, Andrew J. Mako, Chief Executive Officer of PRUCO Life Insurance Company (the "Company"), hereby certify that the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2003 /s/ Andrew J. Mako ------------------------------ Name: Andrew J. Mako Title: Chief Executive Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. EX-32 6 ex32-2.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION Pursuant to 18 U.S.C. Section 1350, I, William J. Eckert IV, Chief Financial Officer of PRUCO Life Insurance Company (the "Company"), hereby certify that the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2003 /s/ William J. Eckert, IV ------------------------------ Name: William J. Eckert, IV Title: Chief Financial Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. -----END PRIVACY-ENHANCED MESSAGE-----